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What’s disruptive and what’s not? Three criteria for identifying disruptors in healthcare

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May 18, 2016

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Over 20 years ago, Clayton Christensen coined the term disruptive innovation to describe the phenomenon of simpler and less expensive new products or services replacing established solutions from market leaders. Today, as one of the most popular terms in the global business world, it is often overused and misunderstood to mean “market domination” and “super growth,” both of which are also possible via other types of innovations. Recently, Christensen and others have provided additional explanations regarding what constitutes disruptive innovation, in the hopes of providing clarity.

Healthcare is no exception to this growing obsession with disruption, partly because it badly needs solutions that are simpler, more affordable and more accessible. At the same time, there is also much confusion in healthcare about what disruption is and is not. In reality, most innovations in healthcare are sustaining- incremental improvements of existing solutions that become more expensive. Big data analytics, advanced surgical procedures, drugs with better clinical efficacy and value-adding medical services are all such examples. By utilizing existing business models, they provide better, safer, and more effective care for customers. In turn, customers pay more through their insurance for these products and services. Disruptive innovations, on the other hand, are more than just technologies or breakthroughs that dominate the market. Although technology is an integral part, their uniqueness is found in the way they transform the practice of medicine, much like how hand-held devices are changing the way computers are used. Disruptive innovations cost less, and over time, do more.

Given such broad misunderstanding of disruptive innovation in healthcare, a quick outline of what is disruptive and what is not might serve as a useful reference for entrepreneurs and practitioners. Indeed, healthcare’s unique make up- third party reimbursement, heavy regulation, universal access, etc.- makes disruption a relatively sporadic phenomenon, but when it does occur, its impact can be far reaching.

  1. Disruptive innovations in healthcare cure diseases.

 Most of the drugs in today’s market are designed to treat symptoms or syndromes, whose causes are not clearly understood. Good examples of syndromes are cancer, diabetes, heart diseases, and many neurological and psychological disorders. Treating syndromes can become very complex and expensive over time, since technology and science tend to improve at dealing with symptoms rather than eradicating their causes. This is how sustaining innovations work. They become better, but they also become more expensive.

A disruptive innovation, on the other hand, makes the solution simpler and less expensive. A good example of a disruptive drug is Sovaldi/Harvoni, a drug that fights Hepatitis C Virus (HCV). Until this drug was introduced, there had been no good treatment option for HCV. As one of the main causes of liver cirrhosis, liver cancer, and death, treating HCV and its related diseases was incredibly costly. But, now that Sovaldi can cure 80-90% of all those who have been infected, the overall cost of care will go down, despite the drug’s hefty price of more than $80,000 per 12-week treatment.

  1. Disruptive innovations in healthcare transform the way medicine is practiced.

Disruptive innovations fundamentally change the practice of medicine. Drug eluting stents, for example, were disruptive, not only because they made heart surgery less invasive, but because they also enabled treatment of elderly patients who were too weak to undergo open heart surgery. As a result, elderly patients are now able to access this lifesaving procedure for coronary artery disease. Similarly, vaccines for infectious diseases were disruptive by treating diseases such as polio and small pox at a substantially reduced cost with highly effective outcome.

Diagnostic tools that can screen and monitor new diseases have also proven to be disruptive, because they often lead to a discovery for an effective treatment. For example, HIV diagnostics have been critical to containing and preventing the disease worldwide. When the disease was first discovered in the 1980s, early investments in diagnostics were critical to transforming HIV from a fatal disease to a manageable chronic illness at a reasonable cost. While many chronic diseases such as Alzheimer’s and cancer are still in need of better diagnostics, HIV diagnostics is an important example of how a good diagnostic tool can transform care.

  1. Technology can be either disruptive or sustaining depending on how it is applied in practice.

People often point to new technologies as potential disruptors in the market. However, technological solutions such as big data, sensors, software, and communication tools are disruptive only if they can lower the overall cost of care by making care more affordable to consumers. Otherwise, the technology is only perpetuating the existing way of delivering care, albeit more efficiently. For example, telemedicine solutions that allow patients to be consulted in the comfort of their own homes are considered as sustaining when they cost just as much as a visit to doctor’s office. On the other hand, a telemedicine solution that targets behavioral health problems where the current care model falls short could be potentially disruptive, as it could significantly reduce the cost of care. Similar rationale applies to sensors, communication tools, and technology aids that could improve patients’ overall care experience. They must somehow reduce the cost of care in order to be disruptive.

So, next time a new healthcare product or service is introduced and labeled “disruptive”, let’s make sure that it satisfies one of the three criteria we’ve outlined above. Entrepreneurs, investors, and corporate leaders should recognize that disruptive solutions in healthcare must (1) cure or identify the causes of a disease, (2) completely transform the delivery and payment for care, and (3) target those consumers who are currently either not buying healthcare solutions or consuming very little. Most innovations in today’s healthcare system do not fall within these boundaries, and this is why the cost of healthcare continue to grow. Indeed, disruptions in healthcare are still few and far between.

Spencer Nam

Spencer researches disruptive innovation in the healthcare industry. He has over 15 years of professional experience working with U.S. and international healthcare enterprises, most recently as an equity research analyst covering medical technology companies.