The six forces—industry players, funding, public policy, technology, customers, and accountability—can help or hinder efforts at innovation. Individually or in combination, the forces will affect the three types of innovation in different ways.
Players.
The health care sector has many stakeholders, each with an agenda. Often, these players have substantial resources and the power to influence public policy and opinion by attacking or helping the innovator. For example, hospitals and doctors sometimes blame technology-driven product innovators for the health care system’s high costs. Medical specialists wage turf warfare for control of patient services, and insurers battle medical service and technology providers over which treatments and payments are acceptable. Inpatient hospitals and outpatient care providers vie for patients, while chains and independent organizations spar over market influence. Nonprofit, for-profit, and publicly funded institutions quarrel over their respective roles and rights. Patient advocates seek influence with policy makers and politicians, who may have a different agenda altogether—namely, seeking fame and public adulation through their decisions or votes.
The competing interests of the different groups aren’t always clear or permanent. The AMA and the tort lawyers, bitter foes on the subject of physician malpractice, have lobbied together for legislation to enable people who are wrongly denied medical care to sue managed-care insurance plans. Unless innovators recognize and try to work with the complex interests of the different players, they will see their efforts stymied.
Funding.
Innovation in health care presents two kinds of financial challenges: funding the innovation’s development and figuring out who will pay how much for the product or service it yields. One problem is the long investment time needed for new drugs or therapies that require FDA approval. While venture capitalists backing an IT start-up may be able to get their money out in two to three years, investors in a biotech firm have to wait ten years even to find out whether a product will be approved for use. Another problem is that many traditional sources of capital aren’t familiar with the health care industry, so it’s difficult to find investors, let alone investors who can provide helpful guidance to the innovator.
A frequent source of investor confusion is the health care sector’s complex system of payments, or reimbursements, which typically come not from the ultimate consumer but from a third party—the government or a private insurer. This arrangement raises an array of issues. Most obviously, insurers must approve a new product or service, and its pricing, before they will pay. And their perception of a product’s value, which determines the level of reimbursement, may differ from patients’. Furthermore, insurers may disagree. Medicare, whose relationships with its enrollees sometimes last decades, may see far more value in an innovation with a long-term cost impact, such as an obesity reduction treatment or an expensive diagnostic test, than would a commercial insurer, which typically sees an annual 20% turnover. An additional complication: Innovations need to appeal to doctors, who are in a position to recommend new products to patients, and doctors’ opinions differ. From a financial perspective, a physician who is paid a flat salary by a health maintenance organization may be less interested in, say, performing a procedure to implant a monitoring device than would a doctor who is paid a fee for such services.
Policy.
Government regulation of health care can sometimes aid innovation (“orphan drug” laws provide incentives to companies that develop treatments for rare diseases) and sometimes hinder it (recent legislation in the United States placed a moratorium on the opening of new specialty hospitals that focus on certain surgical procedures). Thus, it is important for innovators to understand the extensive network of regulations that may affect a particular innovation and how and by whom those rules are enacted, modified, and applied. For instance, officials know they will be punished by the public and politicians more for underregulating—approving a harmful drug, say—than for tightening the approval process, even if doing so delays a useful innovation.
A company with a new health care idea should also be aware that regulators, to demonstrate their value to the public, may ripple their muscles occasionally by tightly interpreting ambiguous rules or punishing a hapless innovator.
Technology.
As medical technology evolves, understanding how and when to adopt or invest in it is critically important. Move too early, and the infrastructure needed to support the innovation may not yet be in place; wait too long, and the time to gain competitive advantage may have passed.
Keep in mind that competition exists not only within each technology—among drugs aimed at a disease category, for example—but also across different technologies. The polio vaccine eventually eliminated the need for drugs, devices, and services that had been used to treat the disease, just as kidney transplants have reduced the need for dialysis. Conversely, the discovery of an effective molecular diagnostic method for a disease such as Alzheimer’s would greatly enhance the demand for therapeutic drugs and devices.
Customers.
The empowered and engaged consumers of health care—the passive “patient” increasingly seems an anachronistic term—are a force to be reckoned with in all three types of health care innovation. Sick people and their families join disease associations such as the American Cancer Society that lobby for research funds. Interest groups, such as the elderly, advocate increased funding for their health care needs through powerful organizations such as AARP. Those who suffer from various ailments pressure health care providers for access to drugs, diagnostics, services, and devices they consider effective.
What’s more, consumers spend tremendous sums out of their own pockets on health care services—for example, an estimated $40 billion on complementary medicine such as acupuncture and meditation—that many traditional medical providers believe to be of dubious value. Armed with information gleaned from the Internet, such consumers disregard medical advice they don’t agree with, choosing, for example, to shun certain drugs doctors have prescribed. A company that recognizes and leverages consumers’ growing sense of empowerment, and actual power, can greatly enhance the adoption of an innovation.
Accountability.
Increasingly, empowered consumers and cost-pressured payers are demanding accountability from health care innovators. For instance, they require that technology innovators show cost-effectiveness and long-term safety, in addition to fulfilling the shorter-term efficacy and safety requirements of regulatory agencies. In the United States, the numerous industry organizations that have been created to meet these demands haven’t fully succeeded in doing so. For example, a study found that the accreditation of hospitals by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), an industry-dominated group, had scant correlation with mortality rates.
One reason for the limited success of these agencies is that they typically focus on process rather than on output, looking, say, not at improvements in patient health but at whether a provider has followed a treatment process. However well intentioned, these bodies usually aren’t neutral auditors focused on the consumer but rather are extensions of the industries they regulate. For instance, JCAHO and the National Committee for Quality Assurance, the agencies primarily responsible for monitoring compliance with standards in the hospital and insurance sectors, are overseen mainly by the firms in those industries.
But whether the agents of accountability are effective or not, health care innovators must do everything possible to try to address their often opaque demands. Otherwise, innovating companies face the prospect of a forceful backlash from industry monitors or the public.
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From: Harvard Business Review, 2006
Regina E. Herzlinger ([email protected]) is the Nancy R. McPherson Professor of Business Administration at Harvard Business School in Boston. She is the author of “Let’s Put Consumers in Charge of Health Care” (HBR July 2002) and the editor of Consumer-Driven Health Care: Implications for Providers, Payers, and Policymakers (Jossey-Bass, 2004). She has written numerous Harvard Business School case studies on health care innovation, which she teaches in her course “Innovating in Health Care.”
