Tech

Disruptive Innovation and the Affordable Care Act

This post highlights the findings of a paper released today by the Clayton Christensen Institute, “Seize the ACA: The Innovator’s Guide to the Affordable Care Act.

Since its passage in 2010, the Patient Protection and Affordable Care Act (ACA) has been analyzed by experts from nearly every political, economic, and health policy angle possible. Yet in the noisy debate about whether the legislation is good or bad and whether to implement or repeal it, we think there’s something missing: a rigorous but practical discussion of the innovation opportunities created by the legislation and the barriers to innovation it imposes.

To facilitate that goal, we analyzed the ACA through the lens of the theory of disruptive innovation. First articulated by Harvard professor Clayton M. Christensen, disruptive innovation theory explains how innovations that decrease cost and increase accessibility transform entire industries.

As existing products increase in performance and begin to exceed customer needs (think of next year’s biggest Cadillac model), low-cost, lower-performance alternatives created by new entrants take root in the low end of the market (think of next year’s smallest Kia model).

These new products are initially inferior in comparison to established products, but they become better and better until they “disrupt” and eventually topple larger incumbent competitors.

So how does the ACA affect the pace of disruptive innovation in health care? What opportunities does it create for innovators? What barriers does it inadvertently erect? Here are a few thoughts from our recent paper.

ACA provisions that encourage disruptive innovation

  • Individual Mandate
    • The individual mandate requires every person to carry health insurance. The influx of previously uninsured patients will overwhelm the current primary care system, likely creating the need for new disruptive care delivery models at the low end of the market.
  • Employer Mandate
    • The employer mandate requires all employers with 50 or more full-time employees to offer health insurance benefits.  Due to the specific form of the penalties for not providing insurance, this provision creates incentives for employers to disaggregate true insurance from routine reimbursement and manage day-to-day care. Employers will have opportunities to disruptively integrate around employees’ health care needs.

Discourages disruptive innovation

  • Essential health benefits
    • This provision requires all health care plans to provide, at a minimum, a package that includes access to certain types of care and services. This provision discourages disruptive innovation by essentially establishing a floor on the low end of the market, making it even more difficult for disruptive entrants to gain market share.
  • Insurance exchanges
    • These online insurance marketplaces are themselves a disruption-neutral idea. The regulations that accompany the exchanges, however, are barriers to disruptive innovation. By mandating health plan actuarial values and forcing insurance providers to offer plans at Silver and Gold levels, the exchanges force new entrants to compete against incumbents and put a value floor on the market that discourages innovation.

None of these provisions will transform healthcare, for better or for worse, on their own. Although some of the provisions of the ACA may open doors for disruptive innovation, the onus rests upon the health care sector—existing players and new innovators alike—to seize the disruption opportunities and create products and services that make health care more affordable and accessible.

Despite the vitriol about the ACA, one objective nearly everyone can agree on is that health care in the United States needs to become more affordable and accessible without compromising quality. For that to happen it is crucial for innovators and policymakers to understand and seize the disruption opportunities presented by the ACA and navigate around the barriers imposed by it. In this way we are convinced brilliant individuals and companies can innovate within the framework of the ACA to make care more affordable and accessible for all.

Ben Wanamaker is the executive director of health care at the Clayton Christensen Institute.

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19 replies »

  1. At the risk of stating the obvious, your article expresses confidence in America’s penchant for innovation. Like a grain of sand in an oyster creates a pearl, at first I’m sure surprisingly, the ACA provokes innovative breakthroughs. You’re not advocating for the ACA as a model disruptive innovation in and of itself.

    That said, several innovations have been emerging: Home care solutions to avoid ED visits and SNF usage; Physician leadership taking responsibility for forging alliances to achieve their ACO goals; Ambulance team interventions in the home, replacing the ED for some emergency cases; disease specific community care pathways; and more.

    This is not to agree that the ACA is good legislation, just to point out creative solutions that have emerged when healthcare was presented with an irritant, producing pearls of new models of care.

  2. If there were going to be a “2b.” on Lisa Suennen’s list of areas for investment in Health Information Exchanges, it would be clinical area-specific HIXs.

    For example: the Prehospital Health Information Exchange model that the State of California has begun developing, with a goal to have all EMS providers able to submit and receive data from hospital EHRs by the end of 2014. A summit on this topic is being held in Los Angeles in November.

    The happy news for those of us working to contribute to the positive disruption made possible by HIXs: presently there is only ONE firm that is technically capable of achieving the state’s goals for Prehospital Health Information Exchange….and that company is Beyond Lucid Technologies.

    (Disclosure: It’s always my honor to say that Lisa is on our Board, too.)

    If this area is of interest, please contact me anytime. Cheers,

    Jonathon

    ______________________

    Beyond Lucid Technologies, Inc.
    Delivering the Next Generation of
    Emergency Response Technology

    Jonathon S. Feit, M.B.A., M.A.
    Co-Founder & CEO
    (310) 625-0979 cell
    _______________________

  3. From an health information technology perspective, the listed forces will effect innovation based on the numbers of new entrants into the insured population and their ability to direct their discretionary health care spend.

    But, I agree they won’t transform health care themselves. The Affordability of Care Act is intended to not only make insurance affordable, but to make the true cost of care affordable. Only when we shift from pay for illness and services to pay for wellness and outcomes will true disruption occur. This will require the provisions effecting the way health care is reimbursed. The fee for service model must be disrupted by compelling incentives for quality and outcomes. Health care delivery will be transformed and we will seen disruptive innovation in care collaboration, continuity and costs.

  4. I don’t often get to say this, but what I find fascinating about this article is that it doesn’t go quite far enough – it sidesteps a chance to call out innovations that fit beneath the following headline question: “How does the ACA affect the pace of disruptive innovation in health care? What opportunities does it create for innovators?”

    The ACA is like a forest fire (and as one who considers himself a naturalist while working in the Fire/EMS business, I have some grounding here): it’s lit up cable news networks like so many flames setting the skies aglow….but it will leave both destruction (of an existing business model) and much-needed room for ancillary growth in its wake.

    This may sound like jargon or an esoteric analogy. It is not.

    Consider the Emergency Medical Services: in electronic health records, ONCHIT, Meaningful Use, AND Medicare / Medicaid reform efforts are coming together. The result will be a little-discussed but practically critical “perfect storm” of technology being mapped onto the nitty-gritty practice details that ultimately make so much difference in terms of clinical outcomes and process efficiencies.

    Few people know that the EMS industry is facing the exact same mandate to adopt technology and justify its billings as the rest of the healthcare system. The State of California recently announced that it is will require EMS agencies to submit electronic transport (clinical + billing) records by the end of 2014. (For those among you who don’t know, most transport records are still created on paper in the U.S.)

    ** I just wrote an article about these requirements for the California Ambulance Association: http://www.the-caa.org/docs/siren/CAA-Siren-13-3.pdf **

    The opportunity to innovate in the communication of patient care records to care facilities and beyond is not accidental; it is a corollary of the ACA’s broader package of reforms, which will cascade into play over time.

    Hospitals and personal care physicians are the most publicly visible nexuses of change under the ACA, but sparks are being thrown in every direction by the burning remnants of the medical establishment’s “old way of doing business.” These will start local fires in every corner of the industry.

    Then-unstoppable changes will incubate and open the skies to tomorrow’s game-changers, which had been in the shadows but can now see the sun (as demonstrated by incoming interest from the healthcare providrs that their technologies impact). It’s truly an exciting, optimistic time to be an entrepreneur in the health IT industry’s niches.

  5. I’m eager to see those two developments you mention continue to gain traction. Each is good on their own, and also likely helps proliferate the use of transparent pricing.

  6. Normally I really love Claytons work and there is no question that we need innovation in healthcare

    The very first assumption is wrong – “The influx of previously uninsured patients will overwhelm the current primary care system,”

    we know that the vast majority of people without insurance are in fact the young and healthy so they won’t overwhelm the system since they in fact don’t “need” it yet. Most of the rest have only been uninsured for less than 18 months and finally just because someone lacks health insurance doesn’t mean they don’t go to the doctor or the ER.

    We have more than enough doctors and more than enough resources (we already spend 50% more than most industrialized countries).. The real innovation will come from cutting costs and eliminating services not finding ways to provider more of the same to a new market

  7. There are two developments in health care which could be far more disruptive than the ACA itself:

    a. domestic medical tourism

    and

    b. reference pricing on all discretionary care

    These are related of course. It amounts to the Priceline.com approach to health care.

    If an insured patient is facing hip surgery, the insurer gets three bids from around the country. They pay only the amount of the lowest bid. The patient may have to travel from New York to Tennessee for the surgery.

    This would bankrupt some of the largest hospitals, who have had a large effect on rising medical costs for the last three decades.

    Same thing would be true if we had an international market for drugs.

    (by the way, isn’t it ironic that the same Congressmen who want to see
    ‘insurance sold across state lines’ go rather silent when anyone calls for
    ‘drugs to be imported from Canada.’)

  8. Well this has surely confused me. While there may be some business opportunities presented here, it’s not necessarily sustainable nor affordable. There needs to be some more evidence based studies conducted to reach a formidable conclusion based on facts and not just opinions!

  9. Am completely swayed by Dave’s argument.

    Christensen’s work is essential and thought-provoking, but I wonder if trying to make components of the ACA (when so much remains to be determined, as several readers have pointed out) into this framework makes sense.

    Given the consensus opinion that ACA should be viewed on the macro level, and not by individual provisions, might be interesting to review various health reform laws over the years and see which ones were ultimately disruptive and which merely bolstered the status quo. Part D, EMTALA, HIPAA, HITECH, etc.

  10. The question is, will the “preservatives” drag the business the way of the Detroit auto industry for so many years? The non-sustainable systems were so deeply entrenched that they brought the whole industry down as a cancer kills its host. The same could easily happen to the incumbents in the system as they cling to two huge legacy items: 1. The “do more, pay more” problem/procedure based system that would crumble should they achieve the stated end of “health care”: health. 2. The information systems built to allow unreasonably complex requirements for documentation and coding to be the service for which providers continue to be paid. Information systems have allowed the cancer of the payment system to spread even more, keeping the patient alive to only to have them be ravaged more by the disease.

    I don’t think anything short of a total shift of the things the system rewards will right the wrong. The problem is, this would cause those most invested in success in the current system to suffer the biggest losses. Can the system really disrupt itself, or will it require someone on the outside (like Japan for the Auto industry) to do the disrupting? I am betting on a simpler, better system disrupting this mess. The reason I left that mess behind is that I was convinced that change would not and could not come from congress. They continue to prove my decision to be wise.

  11. Outside of new devices and drugs, I’d argue that the mainstream of healthcare has been bereft of significant change for a long time. Whether one agrees with the tenets of Obamacare or not, for those of us starting businesses in healthcare, it’s absolutely indisputable that Obamacare has introduced a level of change and chaos that will have lots of winners and losers. Speaking for myself only, I think this has helped entrepreneurs. When things were in stasis, there was little motivation for providers to work with startups. Astute providers recognize incumbent vendors are optimized for the old model so it helps the startups.

    Overall the shift from the “do more, bill more” fee-for-service disaster towards fee-for-value is the biggest shift to help entrepreneurs as it introduces many new requirements. Fee-for-value has been demonstrated in the private sector and it’s only logical that Obamacare or any healthcare legislation learn from that. The fact that Medicare is shifting to fee-for-value has a big signaling effect to the market as a whole. Fee-for-value (aka value-based-purchasing) isn’t a “D” or a “R” concept so it should be embraced by all political stripes. The only ones opposing it are the “preservatives” who have 2.8 trillion reasons they want to protect status quo. After all, one person’s waste is another’s revenue.

    I have long said that DIY Health Reform is where much of the most interesting work is going on. By virtue of the shortcomings of the legislative process, anything that gets through the legislative sausage making tips its hat more to the “preservatives” (i.e., incumbent orgs trying to preserve status quo) than disrupters. Thus, those unshackled are coming up with great innovations.

    Healthcare’s trillion dollar disruption has macro view: http://ow.ly/hamJx
    Examples of DIY health reformers: http://ow.ly/kAm98

  12. Jardinero1,

    Thanks for your comment. It’s important to note that we don’t claim any provision of the law is of itself disruptive (or not). Rather, the law changes the framework within which to innovate. We believe certain provisions of the law will either encourage or erect barriers to disruptive innovations and have tried to articulate those views in our paper. But you’re absolutely right, the employer or individual mandates are not of their own accord disruptive innovations.

  13. I’m curious what people think about an exchange based health plan like Oscar. Does this look like a disruptive innovation to you? If not – why not?

    Oscar background on Forbes here: http://lnkd.in/XHa8tb

  14. Great comments thus far.

    ACA clearly presents many new business opportunities. But whether or not any are “disruptions” is TBD.

    Ben — Above semantics aside, very nice analysis and framework. Thank you!

  15. Christensen’s disruptive innovation is a powerful analytical tool, yet clearly often abused and misunderstood. I wonder if you done any work analyzing “disruption failure” – so to speak – that is the ways in which we get tend to disruption wrong. People keep coming up with new technologies and ideas that sound very much as though they should change everything, but end up falling flat. I suspect we can learn a great deal from our definition.

  16. You characterize the employer and individual mandates as disruptive innovations. Several assumptions lie beneath that assertion which remain to be proven. You assume that the mandates will increase the number of insured individuals. Maybe not. You also assume that because more people are insured that they will purchase more healthcare. Maybe not. Do people consume healthcare because they are sick or because they are insured? You assume that providers will accept these supposed new patients at whatever reimbursement levels the carriers provide. Maybe not.

    For the sake of argument, say the assumptions are true and the demand for healthcare is increased. What then? At the macro level whenever the demand curve moves out, prices should rise, ceteris paribus. Pricess can’t move because reimpbursement rates are determined through a political process not a market process. Disruptive innovation occurs on the supply side. The supply side of healthcare is a highly regulated market where every change is validated first through a political process. Healthcare providers have very little room for movement to change or innovate.

    I just don’t see any disruptive innovation.

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