Health care—in the United States, certainly, but also in most other developed countries—is ailing and in need of help. Yes, medical treatment has made astonishing advances over the years. But the packaging and delivery of that treatment are often inefficient, ineffective, and consumer unfriendly.
The well-known problems range from medical errors, which by some accounts are the eighth leading cause of death in the United States, to the soaring cost of health care. The amount spent now represents about one-sixth of the U.S. gross domestic product; it continues to grow much faster than the economy; and it threatens the economic future of the governments, businesses, and individuals called upon to foot the bill. Despite the outlay, more than 40 million people have no health insurance.
Such problems beg for innovative solutions involving every aspect of health care—its delivery to consumers, its technology, and its business models. Indeed, a great deal of money has been spent on the search for solutions. U.S. government spending on health care R&D, which came to $26 billion in 2003, is topped only by the government’s spending on defense R&D. Private-sector spending on health care R&D—in pharmaceuticals, biotechnology, medical devices, and health services—also runs into the tens of billions of dollars. According to one study of U.S. companies, only software spawns more new ventures receiving early-stage angel funding than the health field.
Despite this enormous investment in innovation and the magnitude of the opportunity for innovators to both do good and do well, all too many efforts fail, losing billions of investor dollars along the way. Some of the more conspicuous examples: the disastrous outcome of the managed care revolution, the $40 billion lost by investors to biotech ventures, and the collapse of numerous businesses aimed at bringing economies of scale to fragmented physician practices.
So why is innovation so unsuccessful in health care? To answer, we must break down the problem, looking at the different types of innovation and the forces that affect them, for good or ill. (See the sidebar “Six Forces That Can Drive Innovation—Or Kill It.”) This method of analysis, while applied here mainly to health care in the U.S., also offers a framework for understanding the health care problems of other developed economies—and for helping managers understand innovation challenges in any industry.
A Health Care Innovation Catalog
Three kinds of innovation can make health care better and cheaper. One changes the ways consumers buy and use health care. Another uses technology to develop new products and treatments or otherwise improve care. The third generates new business models, particularly those that involve the horizontal or vertical integration of separate health care organizations or activities.
Innovations in the delivery of health care can result in more-convenient, more-effective, and less-expensive treatments for today’s time-stressed and increasingly empowered health care consumers. For example, a health plan can involve consumers in the service delivery process by offering low-cost, high-deductible insurance, which can give members greater control over their personal health care spending. Or a health plan (or service provider) can focus on becoming more user-friendly. Patients, after all, are like other consumers: They want not only a good product—quality care at a good price—but also ease of use. People in the United States have to wait an average of three weeks for an appointment and, when they show up, 30 minutes to see a doctor, according to a 2003 study by the American Medical Association. More seriously, they often must travel from one facility to another for treatment, especially in the case of chronic diseases that involve several medical disciplines.
New drugs, diagnostic methods, drug delivery systems, and medical devices offer the hope of better treatment and of care that is less costly, disruptive, and painful. For example, implanted sensors can help patients monitor their diseases more effectively. And IT innovations that connect the many islands of information in the health care system can both vastly improve quality and lower costs by, for example, keeping a patient’s various providers informed and thereby reducing errors of omission or commission.
Health care is still an astonishingly fragmented industry. More than half of U.S. physicians work in practices of three or fewer doctors; a quarter of the nation’s 5,000 community hospitals and nearly half of its 17,000 nursing homes are independent; and the medical device and biotechnology sectors are made up of thousands of small firms. Innovative business models, particularly those that integrate health care activities, can increase efficiency, improve care, and save consumers time. You can roll a number of independent players up into a single organization—horizontal integration—to generate economies of scale. Or you can bring the treatment of a chronic disease under one roof—vertical integration—and make the treatment more effective and convenient. In the latter case, patients get one-stop shopping and are freed from the burden of coordinating their care with myriad providers (for example, the ophthalmologists, podiatrists, cardiologists, neurologists, and nephrologists who care for diabetics). Such “focused factories,” to adopt C. Wickham Skinner’s term, cut costs by improving patients’ health. Furthermore, they reduce the likelihood that an individual’s care will fall between the cracks of different medical disciplines.
The health care system erects an array of barriers to each of these valuable types of innovation. More often than not, though, the obstacles can be overcome by managing the six forces that have an impact on health care innovation.