can business model innovation help health care delivery?

© Professor Stephen Chick, Technology and Operations Management, INSEAD (2014) 1

Can Business Model Innovation Help

Health Care Delivery?

Webinar

25 September 2014, 4pm KSA time

Steve Chick Professor of Technology and Operations Management

Novartis Chair of Healthcare Management

[email protected]

INSEAD


Health Sector Trends

• Medical and Technological innovation

• Information: availability, generation versus consumption, privacy

versus open data, variation versus averages, tons of data

• Demographics: aging, “bubbles” in age pyramid, chronic mix, number

of children, dispersion of families, rising incomes and expectations

• Economics, demand and supply: health budgets stretched, aging

of care givers, training delays, multinational flows of patients and providers

• Increased specialization: not just clinically: ministries of finance,

education, health, environment; broader scope and service offer

• Other sectors go beyond “lean”, health is moving but is behind. Is

there consistency in outcomes and is there effective coordination?

• Volatility and globalization: mix of culture, social norms, isolation

of individuals and social groups

Map source: http://ancientworldmaps.blogspot.co.uk/

© Professor Stephen Chick, Technology and Operations Management, INSEAD (2014) 3 WHO Report on diabetes estimates 1995-2025

109,000

1995

439,000

2007

982,000

2025

Diabetes in UAE

Source: Dr. Ali Bin Shakar


What to do next?

• Efficiency?

• Rationing?

• Lower expectations?

• Do things very differently?


The IOM Quality report: A New

Health System for the 21st Century

“The current care systems cannot do the job.”

“Trying harder will not work.”

“Changing care systems will.”

If the problem is the system, and not

individual “bad apples,” then the focus for

practice improvement needs to shift.

Need to make the right thing to do the easy

thing to do… or….


…is innovation the solution?

Devices, diagnostics, genetic testing, gene therapy, pharmaceuticals

and vaccines, telemedicine, IT enablers, mHealth, technology that

deskills, avalanche of medical trials, RFID, online patient communities,

patient experience design, reverse innovation from developing markets,

patient-driven innovation, personalized medicine, …


What are the greatest innovations?


Needs Markets

Solutions Technology

OPPORTUNITY

New match between a solution (Technology) and a need (Market)

WINNING OPPORTUNITY

New value-creating match between a solution and a need delivered to

a customer (user/stakeholder).

THE CONVENTIONAL THEORY OF INNOVATION

Source: Girotra, Netessine


Innovating through new products is hard…


DOES R&D SPENDING DRIVE FINDING OF

OPPORTUNITIES?

Technology Innovation is notoriously hard!


Huge variation in spending … link to outcomes in developed countries is not clear

Source: OECD


An Alternative Approach:

Business Model Innovation


Build-to-order in the computer industry

Assortment

planning

Production Sales Discounts and

liquidation

Time

Production

Sales Time

Assortment

planning for

components

► Results: no underproduction or overproduction

Source: Girotra, Netessine


Inventory turns=COGS/Inventory

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

Year

Inven

tory

tu

rns

Inventory performance with build-to-order…

DELL

Gateway

IBM

Compaq


Build-to-order model cost advantage

Inventory carrying costs (assume 20%)

Component obsolescence

Turns: 4 8 24 48

Inventory holding

cost as % of COG

(20% / turns): 5.0% 2.5% 0.8% 0.4%

Annual price

decrease 4 8 24 48

25% 6.3% 3.1% 1.0% 0.5%

40% 10.0% 5.0% 1.7% 0.8%

Turns

Obsolescence cost as

% of COG (Price

decrease / turns)

Why build-to-order is the right strategy for desktop PCs but not always

for other products

Inventory is very expensive - component prices can fall by 40% each year!

Assembly is fast and easy - one person assembles a PC in 3 minutes.

Customers want variety/customized solutions and are willing to wait.

Shipping costs are not excessive relative to the value of the product.


Zara’s value chain is more like Dell’s value

chain than “traditional” garment value chains

Scan fashion shows

Simplify ‘hits’ into library of

designs

Purchase raw material

Final Design

Manufacture Distribute

Shopping Experience

Feedback and orders from store managers

Slow

(Seasonal)

Fast

(Biweekly)


Dell and Zara innovated their business models

and changed the computer and fashion worlds


More business model innovators

See also: www.renaissanceinnovator.com


Business model innovations:

• Retail medicine concept adapted from USA to Finland and Sweden.

• Focus (common acute primary conditions with clear protocols)

• Telemedicine concept

• Quality, cost (!), convenience, thoughtfulness

https://www.youtube.com/watch?v=GmAJKyw968U


THE LONG

TAIL

EFFECT

Innovating The Value Creation Formula: Attacking Underserved Long-Tail Segments

THE INNOVATION

• Identify underserved market segments that you can address by mass-customization, Sell less of more.

• Provide Recommendations, customization tools

• Increase Revenue and Cost

WORKS BEST WHEN

• High desire for variety, or high inherent demand variety

• Low cost of customization (postponement, modularity, production on demand)


Can this idea apply in health care delivery? Can we bend the cost curve?

• “Invert” the long tail idea: change from customers with

rare requests finding “us”, to “us” proactively finding rare

“high cost” customers?


Northgate I public housing

Visits Patients Charges Receipts Collected

Cooper 3,172 749 $42,144,097 $4,994,658 12%

Lourdes 811 337 $7,848,809 $1,028,611 13%

Virtua 805 331 $1,742,467 $345,092 20%

2005 838 370 $10,834,420 $1,269,373 12%

2006 738 355 $6,867,995 $881,549 13%

2007 790 369 $7,979,262 $901,181 11%

ED 3882 978 $6,150,592 $864,019 14%

Inpatient 906 408 $45,584,781 $5,504,342 12%

Total 4,788 1,070 $51,735,374 $6,368,361 12%

Primary Diagnosis

Rank ED Inpatient

1 abdominal pain (789.0) live birth (V3X.0)

2 acute URI NOS (465.9) chest pain (786.5)

3 chest pain (786.5) congestive heart failure NOS (428.0) Source: Camden Coalition of Healthcare Providers,

Dr Jeffrey Brenner


Innovating the Profit Formula:

User Generated Content

THE INNOVATION

• Use the crowd for a task in the business

• Leverage the internet, social media, mass-communication technologies

• Reduce costs with potential loss to profits (quality, exclusivity)

WORKS BEST WHEN

• Tasks benefit with wide search, rigorous work, distributed knowledge, massive parallelism

• Strong committed Community

• Marketing hype, etc. is valuable

http://www.nature.com/nbt/journal/v29/n5/abs/nbt.1837.html

http://www.patientslikeme.com/conditions/9-als-amyotrophic-

lateral-sclerosis


The Conventional Theory of Business Models

Revenue Model

Price

Volume (market Size)

Ancillary Sales

Cost Structure

Direct, Indirect costs

Economies of scale and scope

Resource Velocity

Rate of value output

Lead times, turns, throughput, utilization

► The key part of any Business Model is the Profit Formula.

► Conventional description of this Formula includes three parts: ► The Revenue Model (subscriptions, transactions, contingency fees).

► The Cost Structure (fixed, variable, linear/non-linear).

► The Resource Velocity (speed of turning over inventory, utilization of assets, workers, R&D intensity).


New Business Model Theory

Revenue Model

Price

Volume (market Size)

Ancillary Sales

Cost Structure

Direct, Indirect costs

Economies of scale and scope

Resource Velocity

Rate of value output

Lead times, turns, throughput, utilization

► The major missing piece: RISK.

► Building Business Models that are ROBUST to predominant risks in the industry (Business Process Innovation) offers significant innovation opportunities.

► The innovation may involve risk reduction and decrease in price OR risk increase and increase in price etc.

► Key to business model innovation lies in systemizing risk management opportunities.

Riskiness of Revenues, Costs and Resource Velocity

Sensitivity of profits to changes in price, volume, costs, resource utilization


Example archetypes for business model innovation

• Focus: Laastari

o Align product, process, market segment for clear value proposition

• Changing order of events: Dell, Zara

o Might be ‘higher cost’ but can create more value by lowering risk

• Going for the long tail: Amazon, Camden coalition

o Push the boundaries of the 80/20 rule, recognizing there is no

“average” customer

• Front office / back office balance

o Customer co-creates and participates (do with, not to). Laastari.

• User-generated content and crowdsourcing

o Platform: product & service, design & delivery, by & for end users


We will explore this more on November 3, 2014 in

the HPHO – 2 in Madinah, Saudi Arabia


INSEAD Abu Dhabi partners with Johnson & Johnson Trust:

Health delivery leadership, management and creative innovation

• Next opportunities at the INSEAD – Abu Dhabi Campus

o Middle East Health Leadership Programme (MEHLP)

• 28 Feb - 5 March 2015, Abu Dhabi

• Leading complex organizations like hospitals and health systems

o Innovators for Community Wellness (ICW)

• 14 - 19 November 2015, Abu Dhabi

• Leading, thinking and doing innovation like a start-up

• Application deadline: 2 months prior to programme

o Offered for many years with diverse and dedicated group of participants

• More information on content, benefits, eligibility is at:

o http://executive-education.insead.edu/middle_east_health_leadership

o http://executive-education.insead.edu/community-wellness