POLICY/TECH: Harvard business school prof #3 doesn’t understand economics

And following up on Reggie Herzlinger and Michael Porter in my continued series beating up on Harvard Business School professors who don’t understand health care, I move onto a relative newcomer.

CHCF’s President Mark Smith interviews  Mr Disruptive Innovator himself Clayton Christensen in Health Affairs. Mark asks his a bunch of sensible questions about how disruption can work in health care (as compared to computers and high tech) with our different payment structure, concentration of diseases/costs amongst a few people and (implicitly) the long term non-episodic nature of the care required for chronic disease. And what does Christensen do? He ignores the parts that don’t make sense to him. The best example is this extract.

HSAs And The Individual MarketSmith: <snip> After all, if you’re choosing between a $150 doctor visit and a $39 MinuteClinic visit, this choice might drive your behavior and help develop a market for MinuteClinic. But the 20 percent of people who are responsible for 80 percent of the costs are often choosing between a $47,000 hospital bill and a $45,000 hospital bill–neither of which is something they can pay out of pocket. Can you think of anything that will result in similar pressure being applied to the high-cost segments of the markets, where we pay though an insurance mechanism and are likely to continue doing so?

Yes. You have a little bit of a chicken-and-egg problem there, Mark.
Another analogy: When RCA made vacuum tube-based televisions and
radios, most people couldn’t afford them, and they were sold through a
distribution channel: appliance stores. The appliance stores made most
of their money not by selling the TVs and the radios themselves, but
through the repair of the burned-out vacuum tubes in the appliances
they already had sold. Sony came along with this simple transistor
radio. It was disruptive relative to RCA. Sony tried to get
distribution through the appliance stores because that’s where radios
and TVs were sold. The appliance stores wouldn’t give Sony products the
time of day because they didn’t have vacuum tubes in them, and
therefore the stores couldn’t make money if they sold the Sony
products. Thank goodness for Sony, K-Mart was arising just at the time
Sony was trying to disrupt the industry, and K-Mart wasn’t able to sell
vacuum tube-based products because it couldn’t service them. And so a
whole new system emerged, so that it wasn’t just Sony that disrupted
RCA, it was K-Mart that disrupted the appliance stores. Almost always
that’s the way it works. It’s not just a product-for-product or
service-for-service disruption. It’s a system disrupting a system. So
you can see why health policy people get indigestion when all you do is
to say, Let’s substitute health savings accounts for the current
reimbursement system. You just give people money and say, Now, you go
pursue your own health care. And the person to whom you just gave money
has strep throat, and they’re looking at going to a regular doctor’s
office and facing a three-hour wait and then it’s going to cost them
$150, or maybe that person is going to say, I just won’t go to the
doctor. And maybe that’s all right, maybe it’s not, you know? But you
can see why the health policy people would worry about this.
along with HSAs there were companies like MinuteClinic, then you could
see how, oh my gosh, I’ve got my own money and I can choose whether I
go to a doctor’s office and get soaked $150 to get diagnosed for my
strep throat, or I could go to a MinuteClinic and for $39 in fifteen
minutes, they’re going to not only give me a diagnosis, but a
prescription for the medication. You can see how people would actually
be delighted to have the HSA solution and a MinuteClinic, because they
can get the job done cheaper, faster, and more conveniently. So if
there were a totally different system out here that could disrupt the
existing system and enable these types of choices, then HSAs might be
seen as good news. But when we just present it as HSAs in the old
system, it really is a pretty ambiguous thing.


Where was the answer about the people with the huge hospital
bills—the ones who are not paying out of pocket—who actually cost all
the money? Well it doesn’t fit the mold, so Christensen ignores it.
Obviously what we need is a disruptive change in the financing system
for the expensive cases that can incent the cost-efficient innovations
like the transistor radio for those expensive cases. No one can believe
that no matter how well Minute Clinic does (and by the way it’s NOT
getting most of its business from HSA-holding patients as far as I can
tell), it has anything to do about those expensive cases. Of course
being a responsible outfit it refers them straight off to the

Christensen also talks alot about the Toyota kaizen quality
improvement model for hospitals. But that’s been common knowledge in
heath care since c.1990. The reason is hasn’t gotten implemented is
that, unlike Toyota, hospitals don’t make more money by delivering a
better quality product at a lower cost. In fact it’s been well shown
that those that go down that path (e.g. InterMountain, Virginia Mason) find it very hard to get their payers to reward them for doing it. As the WSJ said

With each MRI that Aetna and the employers avoided
at around $850, Virginia Mason lost about $450 in profit. The payment
system of government-sponsored Medicare, which private health plans
also use as a template, tends to reward the big capital expenses of
buying high-tech machines such as MRIs. The more the machines are used,
the bigger profit margin they pack

What does Christensen say about that issue?

So those kinds of innovations would be implemented
in the tertiary care hospitals that care for medically complex
individuals. I think that there are better ways to run those hospitals,
and we know how to do it. We just haven’t implemented these solutions.

No shit,  Sherlock. The reason “we just haven’t implemented those solutions
is that hospitals’ incentives are like those of defense contractors.
They operate in a cost-plus add-on environment where doing something
wrong and re-doing it gets them more money. The model isn’t Toyota,
it’s Halliburton. And like Halliburton it’s very profitable to push the
envelope on doing more and more, and just hope you don’t get caught.

We know that rational business actors in any field will develop and
use the technology that maximizes their revenue according to the
incentive structure in place. That’s where the incentives for
technology innovation comes from, including the disruptive types like
transistor radios. Sony figured out that if they could get a cheap
radio to the market, Americans had the financial appetite to buy enough
that they’d make a huge amount of money off them. There was no need for
a change in business incentives, and transitor radios weren’t
complicated by the fact some of them cost (or some of their purchasers
had to pay) 20 times what others did for the same product. And even if
they had, it would have been OK for the consumers who had to pay more
just not to have one instead. Sony still made bank.

But that is the situation in health care. And the reason
that we have third party payment is because it’s impractical to get the
people who use the most resources to pay for it all directly, and we
don’t appear (usually) to be prepared to let them all just die on the

So the innovation required is in changing that incentive system.

What health care needs is a change to its financing systems to get
it out of the mode where most of the money is paid over like defense
contracting dollars (i.e. no politicians dare investigate or question
its value less they fear the wrath of the contractors), to a system
where someone—consumers, the government, employers—is forced to make a
real choice between a marginal dollar spent on health care and one
spent elsewhere. Enthoven has a system to do that (consumers would be
forced to pay real dollars to buy a more expensive health plan) which
is basically how it works in Holland. The single payer countries have a
system for that—the health budget must be weighed up as part of an
overall government budget that relates directly to spending on other
services and overall taxes. And although they only have a solution for
the cheap, below the deductible stuff so far, even the free-marketeers
are groping towards some kind of a solution for that. (Or at least some
of them like Arnold Kling have mentioned it).

But suggesting that a technological innovation that doesn’t maximize
revenue for anyone, and doesn’t hit at the heart of the problem is
going to change much of anything is just not helpful. So exactly what
value is Christensen’s analysis adding? Beats me. At the least I don’t
find it very innovative.

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Charlie HubbardloboTom LeithMike Feehangjudd Recent comment authors
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Charlie Hubbard
Charlie Hubbard

Disruptive technologies don’t fix things overnight. The discount store has been disrupting the department store since 1960. Disruption is a slow and evolving process, but it does have downward pressure on price and improves quality, and it takes a long time. The people with high cost health bills are at the top of the value chain buying the most expensive products. The people going to the minute clinics are at the bottom of the value chain. Minute Clinics, at this point in time as we understand their value, have nothing to do with the value chain at the top. Once… Read more »


In a recent stay in the hospital, I noticed that it was harder to be truthful to healthcare workers that were more attractive or perceivably more attractive than others. My point is that it’s hard to tell Dr. Katherin Z. Jones or nurse Klume, that you’re a sick worn old bastard and their isn’t much left about me that I feel real good about. Do the women that have Dr. George Clooney, coronary analyst B. Pitt, or neurosurgeon Cruise,tell them all of their faults? I think not. . Study this. I think it needs to be considered. Live On, Lobo


Matthew, your enthusiasm is, as always, invigorating. As you say, changing incentives for care purveyors would (more positively, will) greatly accelerate uptake of valuable health tech. Large employers – the end payers for a goodly share of pricey health care – are lumbering in the direction of addressing the issues you raise here: “If we reformed how the health care purchaser market was structured so that people/payers were really incented to buy cost-effective higher quality care, then you’d see the right type of disruptive technology/process popping up all over the place. But currently we pay the system to do more… Read more »

Matthew Holt

Good discussion all. However, Barry/JD, in the end customers were happy to buy the new cheaper steel/airlines. It didn’t require a restructuring of their “demand function”–they got something better, cheaper and bought it. Which meant that those vendors expanded and took over the market.
There is no mechanism–yet–whereby health care customers, especially those spending money on the minority of expensive people, can switch their spending to the more efficient and better product….because for lots of political and structural reasons the end payers don’t care enough about receiving cheaper, better services to overcome the structural impediments against it.

Barry Carol
Barry Carol

Regarding the emergence of mini-mills in steel production, their initial advantage was much lower capital intensity as a result of their process of melting scrap steel in electric arc furnaces as opposed to the integrated process of mining iron ore and coal, converting coal into coke, adding limestone and other chemicals, etc. to make steel. The mini-mills were also non-union shops. Even though they paid hourly wages that were comparable to what unionized steelworkers earned, work rules were much more flexible which made for superior productivity. They also did not have the legacy costs of large retiree health and pension… Read more »

Tom Leith
Tom Leith

There has been a great deal written about technology adoption in healthcare generally, with some attention to disruptive technology, so-called. The HBS has taken quite a beating here lately, but they have a very good case study (9-600-076 for the especially curious) of one such disruptive technology: a device from Aspect Medical Systems that helps an anesthesiologist (or an “anesthesia provider”) determine relative level of consciousness in general anesthesia cases. The idea that we identify technologies as “disruptive” only in retrospect has a lot of merit to it, but there are some prospective clues. A couple of things to look… Read more »


I might be able to clarify things, drawing again on the talk I heard him give. According to Christensen, a common form of disruptive innovation/technology is one that it initially seems impractical, does not produce superior quality goods, and is only marginally profitable. An example he likes to use is mini-mills for steel. These could produce steel more cheaply than traditional mills, but it was of lower quality and only came in one or two forms (rebar, I believe). The mills survived at the bottom of the steel industry, producing a commodity product with low margins. But the new process… Read more »

Mike Feehan
Mike Feehan

“if the customer has no incentive or no money with which to buy the new disruptive technology (or process), then they won’t. The technology/process will stay largely unused”
But is that a disruptive technology? Or just another idea that isn’t going anywhere because it’s impractical?

Matthew Holt

What you’re missing is the difference between latent demand and lack of demand. There is clearly latent demand for a cheap device that plays the currently available stream of music. Was in the 1950s with the tranny radio, is now with the iPod. In both cases 99.99% of consumers didn’t know what the thing was before it was invented, but as soon as it was packaged and priced right it took off…and it was a quantum leap/disruptive technology compared to what came before it (vacuum tube radios/CD Walkmans). The point is that it was disruptive to the then current market… Read more »

Mike Feehan
Mike Feehan

“So “logical demand”‘s presence or absence has zero to do with their emergence. They’re – y’know – [i]disruptive[/i].” True. I’d go further to suggest that truly disruptive technologies are often recognized for exactly what they are – and for that reason are stoutly resisted because they threaten the incomes of others who have an interest in status quo. Further, demand for a disruptive technology almost by definition can emerge only after it’s introduced. If demand were the driver, we’d all still be neighbors of Fred Flintstone. Any way one cuts this, IMO your conclusion is correct – – logical demand… Read more »


Matt writes: “Frankly I’m a little baffled about what’s a disruptive technology — in the absence of some logical demand for it” Matt, I’d aver that disruptive technologies are almost always recognized as such only in retrospect. So “logical demand”‘s presence or absence has zero to do with their emergence. They’re – y’know – [i]disruptive[/i]. I’m with you that Christensen sidesteps the role disruptive technologies might play in addressing difficult, expensive treatments that, in the current scheme of things, service providers have such compelling incentives to render. I don’t know his work, but he does not appear to lay claim… Read more »

Barry Carol
Barry Carol

jd, Excellent point. Along the same lines, suppose CMS or private insurers were able to develop much more accurate risk scoring techniques intended to predict how much healthcare an individual might need over the next year and the next five years. If the technique proved accurate to within a couple of percent across a population of say, a couple of thousand or more, there should be less incentive for insurers to try to attract the healthy and avoid the sick if they will receive risk adjustment payments that accurately reflect the medical costs that the population they actually wind up… Read more »


I saw Richards speak a few months ago, and he flat-out admitted that he knew very little about health care and simply assumed that the same phenomena that applied elsewhere in business applied here. So, it’s possible that he doesn’t get the cost drivers and incentive structure of health care, but that those of us who do can apply the notion of a disruptive innovation in a useful way. Here’s an idealized example: a hospital system that is struggling in a competitive market decides to insist on being paid only on a P4P basis, with no fees for medical mistakes.… Read more »

Matthew Holt

OK then Vince. Why won’t he answer the question Smith asks? And why is he puzzled that Kaizen-type operations haven’t happened in hospitals.
Frankly I’m a little baffled about what’s a disruptive technology — in the absence of some logical demand for it

Vince Kuraitis

I agree with you on Porter and Herzlinger — they are offering half baked concepts as proposals for systemic health reform (altho I do respect them for advancing the dialogue). I see Christensen in a very different light. Christen’s theory of disruptive of innovation is not offered as THE solution for systemic health care reform. The thesis of his Health Affairs interview is pretty straightforward — we need to put technology into 2 buckets. One bucket of technologicy raises costs; the other is potentially disruptive and can lower health care costs and improve quality. There is no pretense of a… Read more »