The Coming Golden Age of Disruptive Innovation in Health Care

Eyal Zimlichman, MD, MSc1 and Jeffrey Levin-Scherz, MD, MBA2

1Division of General Medicine, Harvard Medical School, Brigham & Women’s Hospital, Boston, MA, USA; 2Department of Health Policy andManagement, Harvard School of Public Health, Boston, MA, USA.

KEY WORDS: innovation; health care reform; Affordable Care Act;

medical technologies; payment reforms.

J Gen Intern Med 28(7):865–7

DOI: 10.1007/s11606-013-2335-2

© Society of General Internal Medicine 2013

I nnovation in both manufacturing and service industriesoften leads to increased functionality with lower prices.

Cellular telephones today have more capabilities thancomputers that cost thousands a decade ago, and taxpreparation software priced under $50 can prepare mostdocuments as effectively as high-priced accountants.

Innovation in health care has offered us dramaticimprovements in the quality and quantity of life. Anangioplasty early in a heart attack can prevent mostcardiac damage, and human immunodeficiency virus hasbeen transformed from a rapid death sentence to achronic disease. But health care advances have not beenaccompanied by the cost improvements we see in otherU.S. industries, in part because health care has not beenfertile ground for disruptive innovation. Disruptiveinnovation makes a good or service simpler, allows useof lower skilled workers, and initially requires somesacrifice of functionality compared to the incumbentgood or service.1

In the health care delivery system, we have ratherpreferred to adopt “accretive” innovation—new technologyor services that are added to existing services, thusadding new revenue streams without jeopardizing existingprovider or supplier income. We promote ever moresensitive scanners, build unproven proton beam radiationcenters, and purchase brand name drugs with tinybenefits over existing generics. Accretive innovation canyield better outcomes, and causes little dislocation in thehealth care sector, but does not dramatically increasevalue. We will enumerate why disruptive innovation hasnot yet taken hold in American medicine, and the factorsthat make it more likely to gain traction in the comingyears, listed according to stakeholder groups influenced(see Table 1).

Third party payment for most health care in the UnitedStates has historically meant that consumers with healthinsurance paid only a small portion of health care costs

unrelated to the total medical expenditure. Patients andproviders have therefore been relatively insensitive to price.That is changing rapidly, however, as employers scale backcoverage in response to medical cost inflation. Highdeductible health plans have increased by a third in just ayear, and more patients face coinsurance instead of copay-ments. Patients in high deductible health plans use lesshealth care, demonstrating that exposure to costs encourageslower utilization. Providers that can offer care for lower costwill have a substantial competitive advantage as patient out-of-pocket costs increase.

Federal legislation will promote price sensitivity ofproviders through substantial decreases in Medicare feeschedule increases for inpatient services. Hospitals face aloss of over $415 billion from Medicare, Medicaid andChildren’s Health Insurance Program payments over10 years from the Affordable Care Act (ACA),2 which willforce them to decrease resource costs.

Still, providers have consistently found ways to lowerresource costs when faced with lower reimbursements.Surgeons in capitated arrangements perform surgery muchless frequently than those in fee-for-service,3 and radiol-ogists, ophthalmologists, gastroenterologists and othershave been able to change processes when faced withsubstantial professional fee schedule decreases.

Payment reform will also encourage disruptive innova-tion. Fee-for-service reimbursement encourages high utili-zation and the use of high margin procedures, which oftenuse new technology. Health care providers are increasinglyaccepting financial responsibility for care, and AccountableCare Organizations (ACOs) are likely to be far moresensitive to the cost of medical goods or services sincethey will have to pay the bill. Bundling payments lowersutilization and resource cost. Hospitals dramatically reducedhospital days when diagnosis-related group payments wereinstituted by Medicare in the 1980s. Hospitals that oncebarely winced at multimillion dollar purchases of surgicalrobots are now likely to tolerate a magnetic resonanceimaging (MRI) scanner with lesser resolution if it is muchless expensive.

Physicians are increasingly moving into employedsettings, where they practice in multispecialty groupsfinancially integrated with hospitals. Hospital and physicianintegration means that a single entity is responsible for alarge portion of all care needed by a population, whichfacilitates bundled payment.Published online January 18, 2013

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The movement away from private practice means thatmore physicians are paid through salary. This decreasesprincipal-agent conflict, where individual physician’sincomes have historically varied depending upon theclinical recommendations they offered their patients. Physi-cians often earn higher incomes in legacy private practicesif they order many laboratory tests or imaging studies thatare performed by their practices. Physicians are unlikely tobe paid extra for test ordering by delivery systems, whichwould fear violating the “Stark” anti-kickback regulations.Physicians are less likely to aggressively order expensivenew technology if they gain no increase in personal income.

Procedures that once required years of training can oftenbe automated to increase reliability and safety, but this onlyleads to cost savings if these innovations can be deployedby lower-skilled (and lower-paid) personnel. Historically,regulations promoted by physicians and nurses have made itdifficult to utilize lower-skilled personnel for procedures; inmany states medical assistants are not even allowed to giveimmunizations. We often require pathologist supervisioneven for fully automated laboratory tests. While Japan haslong had nurses perform gastrointestinal endoscopies, thishas been proposed but not allowed in the United States.Recent manpower shortages have led to some expandednursing scope of primary care practice in many states, andthe political influence of professional societies has waned.Nonetheless, efforts to protect professional “turf” willcontinue to delay the advance of disruptive innovation.

Transparency through better reporting to a populationwith a higher personal stake in avoiding waste in health careis likely to lead to improved physician and hospitalpractices. Public reporting of outcomes and cost favorsdisruptive innovation to improve value by lowering cost ofcare, rather than improving quality with no attention to costimpact.

The rapid adoption of electronic medical records sim-plifies collection of provider data. Computerized recordsmake it far easier to track resource use—and even to tracktime and motion to improve accounting. Better accountingfor medical costs will make it easier to cut out wastefulsteps and improve the value equation in health care delivery.

The ACA’s Centers for Medicare and Medicaid InnovationCenter can also promote disruptive innovation by supportinginitiatives that fulfill the “triple aim” of improving quality,patient-centeredness, and cost-effectiveness. The Patient Cen-tered Outcomes Research Institute (PCORI) authorized by theACA will give health care providers and patients access tobetter evidence about what new drugs, devices, or proceduresdeliver better patient outcomes. Comparative effectivenessresearch can help decrease the attractiveness of accretiveinnovations, which offer small incremental advantages, oftento a small minority of patients at high cost. The incrementaleffectiveness of rosuvostatin offers far less benefit than themore effective use of existing generic statins to prevent heartdisease,4 and comparative effectiveness research makes itmore likely we will not pay the incremental cost of this newerbranded medication.

Disruptive innovation doesn’t always lead to lower totalhealth care costs, especially within a fee-for-service systemthat encourages greater resource use. New, less expensiveprocedures are often less invasive, which increases thenumber of patients who could benefit from the intervention.Laparoscopic cholecystectomies meant that more patientshad their gallbladders removed, and it took years afterangioplasties were introduced before the rate of coronaryartery bypass decreased in the population.5 Large capitalinvestments in incumbent technology encourage its contin-ued use; hence, some cardiologists continued to performcardiac fluoroscopy to assess heart function even afterechocardiographs became widely available.

Slower economic growth and diminished Medicare andMedicaid payments will decrease provider reimbursement,and higher out-of-pocket payments will make patients moresensitive to health care prices. Providers, faced with price-sensitive patients, bundled payments, better outcome dataand increased transparency, will gain financial success bylowering input costs, rather than by maximizing allowablecharges. Recent and emerging market changes will requirehealth systems and physicians to rethink work flows, makemore efficient use of capital, and discontinue technologyand processes that no longer provide substantial value topatients. We believe that the right elements might be fallinginto place for the health care delivery system to finallyembrace disruptive innovation, and increase the value ofhealth care delivered.

Acknowledgements: None.

Funders: None.

Table 1. Factors Influencing Disruptive Innovation

Factors that havehistorically discourageddisruptive innovation

Factors that willincrease disruptiveinnovation in thefuture

Stakeholderinfluenced

Low price sensitivity,due in part to thirdparty payment

Increasing price sensitivitydue to higher patient costsharing

PatientsProvidersPayers

Fee-for-servicepayment mechanism

Move to bundledpayments andAccountable CareOrganizations

ProvidersPayers

Provider profitincentives

Decline in physicianprivate practice

Providers

Regulations whichprotect professional turf

Decreasing influence ofprofessional societies

Providers

Lack of transparency Increasingly transparentprices, quality andoutcomes

PatientsProvidersPayers

866 Zimlichman and Levin-Scherz: Moving From Accretive to Disruptive Innovation JGIM

Prior presentations: None.

Conflicts of Interest: Eyal Zimlichman, MD reports receiving anindustry grant from Earlysense Inc. (Waltham, MA) to conductresearch (2009–2012).

Jeffrey Levin-Scherz MD reports being employed as ChiefMedical Officer at One Medical Group, San Francisco (2012-current),and reports being employed by Towers Watson (2009–2012). Healso reports holding IBM stock.

Corresponding Author: Eyal Zimlichman, MD, MSc; Division ofGeneral Medicine, Harvard Medical School, Brigham & Women’sHospital, 1620 Tremont St, Boston, MA 02120, USA (e-mail:ezimlichman@partners.org).

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4. Woolf SH, Johnson RE. The break-even point: when medical advancesare less important than improving the fidelity with which they aredelivered. Ann Fam Med. 2005;3:545–52.

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