In 1997, Clayton Christensen introduced “principles of disruptive
innovation” in his book, The Innovator’s Dilemma. Several
years later, in 2009, Christensen applied these disruptive principles
to healthcare in The Innovator’s Prescription. Recent stories in
numerous periodicals and newspapers have made it clear to me the disruptive
process Christensen has described is underway in healthcare and probably
started more than a decade ago.
So what, you say? First, the industry incumbents and leaders were not the
leaders of the disruption. Second, after the disruptive innovations were
established new industry leaders emerged.
One industry example used to illustrate the process of disruption was steel
making. Integrated steel mills were the predominant producers of all forms
of steel in the U.S. until the 1960’s. U.S. Steel and Bethlehem
Steel sat atop the steel making world. In the 1960’s new competitors,
called “minimills”, arrived on the scene using different technology
and much more efficient processes. Christensen points out the minimills
went from zero market share in 1965 to 40 percent by 1995. To mark the
impact on U.S. Steel, they were removed from the Dow Jones Industrial
Average list of companies in 1991.
To shorten a thirty year story, the minimills entered the steel making
business at the very bottom by producing rebar. At the time, rebar was
both the lowest quality and cost steel being produced and also the least
profitable. At the other end of the steel product line was sheet steel.
During the thirty year time horizon of the steel industry transformation,
the incumbent steel makers focused on improving the profitability and
production capacity of sheet steel and eliminated the production of lower
quality and lower profitability steel products. Starting with rebar, these
products became the domain of the minimills. Not surprisingly, once established
in the making of rebar the minimills continued to look upstream for the
next opportunity in the chain of steel products. Step by step the minimills
garnered a larger and larger piece of the overall steel making business.
This all was largely made possible by the minimills having newer technology,
more efficient, less costly, processes and most importantly no predetermined
relationships with existing customers.
Let’s fast forward to today and take a look at healthcare. There
are circumstances that are eerily similar to what took place in the steel
industry occurring in healthcare. As I reflected upon the last decade,
health systems got out of the home health business, unwound primary care
physician employment arrangements, jettisoned long term care facilities,
sold health maintenance organizations, established centers of excellence
in cardiac care, neurosurgery, organ transplants, orthopedics (hips, knees),
and cancer care. These strategies were well intended and focused on improving
the performance of the organizations. Governing boards affirmed these
strategies. Rating agencies typically rewarded the initiatives with higher
ratings. During this same time period smaller hospitals have been closed
and merged with more tertiary facilities. Technology innovation continues
to minituarize and mobilize equipment that used to only be found in major
hospital settings. The parallels of incumbents focusing on high profit
specialties and eliminating low margin products is the same.
I have noticed more and more healthcare providers located in the neighborhoods
with unfamiliar names. Will one of these companies emerge to be the Nucour
or Chaparral Steel of healthcare? What will healthcare look like if 40%
of the current market would shifts to “new” entrants in delivering care.
Imagine what cost competition in healthcare will look like that involves
new entrants? Who is making the healthcare rebar?