Ben Wanamaker and Devin Bean of the Christensen Institute have a new paper on how the Affordable Care Act might help or hinder disruptive innovations with the potential to make medical care more accessible and affordable. I discuss the paper at greater length in my new Reuters Opinion column, but I’ll share Wanamaker and Bean’s quick overview of the concept of disruptive innovation, which is a very useful lens through which to view the health-system reform debate:
The term “disruptive innovation” was coined by Harvard Business School professor Clayton M. Christensen to describe the process by which new entrant competitors can successfully employ disruptive technologies, steadily move upmarket, and eventually replace much larger, well-heeled competitors. There is a simple three-ingredient formula for successful disruptive innovation:
1. Simplifying Technology. Every disruptive innovation requires a simplifying technology. These technologies are not necessarily simple (e.g., the Intel microprocessor was a simplifying technology that required incredibly sophisticated design and production expertise). Rather, they enable people with less money and less skill to utilize products and services that were previously reserved for people who had more money and greater skill.
2. Disruptive Business Model. Technology alone is never enough. Simplifying technologies must be nested within business models that effectively utilize and prioritize the simplifying technology. This is most easily accomplished by new entrants, as they are not locked into existing models. Industry incumbents hoping to disrupt themselves must set up an autonomous business unit, target new or different customers, or develop new or different channels. Finally, disruptive business models are always targeted at the low-end of a market (representing the least attractive, least profitable customers to incumbents) or at nonconsumers—new customers who previously did not buy products or services in a given market.
3. Coherent Value Network. For a disruptive innovation to steadily move upmarket it must be part of a value network where upstream and downstream suppliers, partners, and customers are all better off when the disruptive technology prospers than they were before. The value network determines the costs and incentives that an organization faces. In insurance companies, for example, the value network consists largely of underwriters, employers, insured populations, and health care providers. In this value network, insurance providers make money by charging more in premiums than they pay out in claims. Win-lose dynamics abound where value networks are incoherent. These dynamics usually prevent disruptive technologies and business models from growing.
There is a wide array of new technologies that promise to transform medical care. Earlier this month, Joseph Rago of the Wall Street Journal profiled Elizabeth Holmes, a young entrepreneur who has devised a series of low-cost diagnostic tools that promise to greatly reduce the cost of identifying various ailments. Yet as Wanamaker and Bean make clear, simplifying technologies can’t do much good if they’re not incorporated into a disruptive business model. The U.S. health sector is very resistant to disruptive business models, as incumbent medical providers have a great deal of political influence that they use to shape the regulatory environment to the detriment of new entrants.
In theory, the ACA promotes disruptive innovation by providing large numbers of “people with less money and less skill to utilize products and services that were previously reserved for people who had more money and greater skill” — that is, the uninsured can be understand as “non-consumers” of medical services (not exactly, but you get the idea), and the ACA brings these non-consumers into the fold, and in the process spurs demand for simpler, easier-to-use products. Primary care, for example, is time-intensive, and to the extent we rely on expensive physicians to provide it, it can be pretty inaccessible. Retail health clinics run by nurse practitioners are one alternative that can make primary care more accessible.
At the same time, however, the ACA tightly regulates the kind of health plans available to less affluent consumers. The Medicaid expansion promises to increase consumption of medical services, but it also expands the reach of the existing Medicaid business model. The exchanges are open to private health insurance providers, yet they also impose very tight constraints on them, as Wanamaker and Bean explain:
The Essential Health Benefits created by the ACA limit disruptive innovation by placing requirements on the services that must be covered by any health insurance plan. This mandated level of coverage exceeds what customers need in many cases and will make it more difficult for innovators to bring truly low-end disruptive health insurance plan designs to market.
Disruptive innovation is further limited by the Insurance Exchanges, online marketplaces that will allow individuals and small companies to compare health insurance alternatives. Although these exchanges will improve transparency in terms of coverage options and pricing, the ACA’s tight restrictions around coverage requirements essentially put a floor on the low end of coverage, thus limiting opportunities for entrants to provide different types of coverage and methods of care delivery.
The Cost-Sharing requirement imposed by the ACA—although created with the good intention of making quality health insurance affordable to low-income individuals and families— actually discourages disruptive innovation in ways similar to the Essential Health Benefits and Insurance Exchange provisions. By funneling low-income consumers into Silver-level plans via government subsidies, this provision will reinforce status quo plan designs and artificially constrain demand at the low end of the market (i.e., Bronze-level plans).
The bias towards more generous plans reflects a desire to protect the financial security of low-income households. Yet Wanamaker and Bean remind readers that the government could make a deposit in HSA accounts for those who choose Bronze-level plans.
The ACA’s Medical Loss Ratio provision, which requires that participating insurers spend at least 80 percent of premiums on medical care, gives incumbent insurance providers that already have large membership bases and economies of scale a big advantage over start-ups experimenting with new business models:
MLR regulations constrain innovations that rely on increased insurance company overhead to reduce the cost or increase the efficacy of care. While federal regulations allow for wellness programs to count as health care expenditures, certain restrictions narrow the scope of these programs, including strict limits on accepted clinical practice, reliance on criteria issued by professional medical associations, and accounting regulations for cost-cutting activities. New entrants attempting to implement disruptive technologies that fall outside the narrow scope of insurance-sponsored wellness programs are thus further hindered.
Wanamaker and Bean offer advice to would-be health care entrepreneurs aimed to disrupt health sector incumbents — specifically, they recommend that start-ups focus on working with employers seeking to offer low-cost health options to their employees, and that they offer off-exchange insurance products. I was particularly dismayed by their take on the new insurance exchanges:
As implemented, regulations imposed on exchange participants limit low-end entrants and discourage disruptive competition. We predict, therefore, that exchange marketplaces will mimic the current market except for a limited number of Bronze-level plans. Insurance prices will likely remain static or drop minimally due to competition on the exchanges, and sustaining competition could even encourage prices to rise as companies offer more services. Businesses and entrepreneurs aiming to disrupt insurance should instead focus outside of the exchanges. In addition, as we suggested when discussing the employer mandate, employers are one good off-exchange candidate to disruptively lower insurance costs. [Emphasis added]
Alas, we’re not talking about these real weaknesses of the ACA and making the case for a replacement that would do more for consumers by encouraging business-model innovation. Rather, we are having a debate about defunding the ACA and the debt limit.