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Do You Know Who's Making the Rebar?

Do You Know Who's Making the Rebar?

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?