Is health care ready for disruptive innovation? (part three)

Trends making health care vulnerable to disruption.

In part one and two of our three part series on ‘disruptive innovation’ in health care, we looked at (1) what, exactly, disruptive innovation is and (2) the obstacles disruptive innovation meets in the health care industry. As promised, part three looks at the trends that may force industry stakeholders—every one, basically—to overcome those obstacles and allow disruptive innovation to make waves in health care.

It’s a common trope—countless articles discuss ‘disruptive’ technology and the trends in health care that may finally cause real disruption. In one such article, Sean Koon, MD of Kaiser Permanente in California addressed three trends which make healthcare “especially vulnerable to disruptive innovation.”

The trends Dr. Koon identified were as follows:

  1. Shift from episodic to continuous care and monitoring
  2. Multi-directional flow of information
  3. Increasingly specific knowledge used in decision-making

In part two, we saw one 2008 review from Clayton M Christensen and Jason Hwang, MD that suggested that disruption would likely increase the fragmentation of health care, so sophisticated health information technology was critically important to innovation.

Dr. Koon suggests, with his first and second trends, that this obstacle no longer exists—or rather, that the technology to overcome it certainly does. “Technology enables easy and frequent exchanges between patient and providers,” he writes. “The doctor is always in… Now electronic information is moving in greater volumes from different directions. Patients are interacting with each other and creating massive datasets (i.e. PatientsLikeMe).”

Dr. Koon packs a lot of information into these first two trends. Basically, the technology is there. However, as we discussed in part two—the term disruptive innovation is often used to mean new technology, but if it was just a question of technology, we’d have a lot more disruption in health care, already.

While it may seem a bit out of left field, patients interacting with each other and taking control of their own data is a particularly important point in the innovation discussion. If disruptive innovation were to increase the fragmentation of the health care system (even more so than it already is!), patients’ collection of their own data or even patient-controlled electronic health records could solve that problem.

By the way, patient-controlled health records are possible, “and the benefits are huge,” reads the headline of a Health IT News story from 2016. And additional fragmentation is far from being the only problem patient-controlled health data could solve. But the incentives aren’t there.

The more I thought about the obstacles to disruptive innovation and the trends that may overcome those obstacles, the more and more incentives kept coming up. So, stepping away from technology or data, I realized this topic required me to look at different kinds of trends—macro trends that are likely to change incentives in health care.

I have to start with some basics, again—a fundamental problem with incentives in health care from an economic standpoint, the concept of information asymmetry.

The information asymmetry problem and the trends tearing it down.

Disruptive innovation is all about economics—and frankly, how economics and health care don’t necessarily get along—so we’re going back to 1963 and a classic article by the economist Kenneth Arrow. Arrow argued that the health care market is not like other markets, largely due to uncertainty—when one might need health care and when one might recover, for example—and information asymmetry.

In other words, because the doctor has more information than the patient, and because there’s a great deal of uncertainty for the patient and to some degree for the doctor, the doctor can recommend unnecessary tests, care or a particular drug over another out of their own self-interest. And patients, due to their limited knowledge, cannot reliably analyze the quality of the doctor’s advice.

I’m simplifying, of course, but Arrow’s argument suggests that information asymmetry and uncertainty cause a major market failure—that the market cannot act like a competitive market due to these conditions, and that competitive forces like disruptive innovation, (though the term didn’t exist at the time), couldn’t work.

Remember, in part two we discussed a major barrier to disruptive innovation being the need for patients to be rational consumers and select the cheapest care that meets their needs? Arrow basically says that can’t really happen in the health care industry.

Any one following the health care industry knows there’s been significant push back on unnecessary tests, but that involves an outside influence on doctor’s incentives via regulations, restrictions or changes in payment structures from a third party payer—all of which, to some degree, may restrict competition and raise the barriers to disruptive innovation (which is necessarily a competitive market force).

To many, Arrow’s full argument may still hold a great deal of water—it’s worth a good read and consideration. And while uncertainty and asymmetry aren’t the only things Arrow says get in the way of health care acting like a market, they are core considerations of his argument. However, there are many trends closing those gaps between patients and providers.

  1. Providers and groups better educating consumers.
    Changes in payment models have tied incentives to patient satisfaction—and many studies have found that successful and individualized patient education has a significant impact on satisfaction. Providers are catching on—and a continued proliferation of better patient education will start to close the uncertainty and asymmetry gaps. That might be part of why collaborative groups tackling cost, like the Kentuckiana Health Collaborative we mentioned last blog, have identified patient education as an important part of their missions, as well.
  2. Patients sharing data.
    It’s not just providers or collaborative groups providing more and better patient education—patients are also sharing data with each other, through innovative platforms like PatientsLikeMe, mentioned above by Dr. Koon. This isn’t like googling your symptoms, (to which the internet replies, “It’s probably cancer,”) these are sophisticated data solutions that are educating patients and reducing uncertainty and information asymmetry.
  3. Easy-breezy second opinions?
    In writing these blogs I’ve walked a fine line between describing the extent of the problems facing disruptive innovation and trying to explain that there has been some disruptive innovation—like the Houston-based company 2nd.MD. This disruptive company contracts with employers and arranges virtual consultations for their employees with top doctors around the country. The consulting doctors get paid handsomely for the consult, but they’re not technically “practicing medicine,” which gets around a lot of State laws and regulations. They also have no personal financial interest in recommending additional or unnecessary care, which removes the incentives problem from the equation. And patients get better information. It’s more of a work-around than a tidy solution, but innovative nonetheless—and an innovation that solves fundamental incentive problems.

Discussing information asymmetry is somewhat granular and theoretical, but these trends are illuminating. Fundamental arguments against the possibility of allowing market forces like disruptive innovation in health care are taking hits, i.e. patients are already pretty rational and educated, and that’s trending upwards.

And this is a good jumping-off point into the macro trends that might give disruptive innovation the shove it needs to make waves in the health care industry:

1. Patient education & consumerism.

The three trends just identified as bridging the theoretical uncertainty and information asymmetry gaps are all related to patient education & consumerism. We’ve run into another buzzword, but consumerism is a trend that’s poised to have a huge impact as the costs of care for individuals continue to rise and patients are required to foot more of their own bills out-of-pocket through higher deductibles or co-pays.

We talked above about how patient education is taking off, so let’s look more closely at consumerism.

Data points from 2016: More than 20 million Americans took advantage of the benefits offered by health savings accounts. 43 percent of ACA marketplace enrollees had an average deductible of at least $2,500. Since 2010, deductibles for workers with employer-sponsored health insurance have risen three times as fast as premiums to an average of $1,318 for single coverage. In a survey, 74 percent of employers said that consumer-directed health plans—high deductible insurance paired with a health savings account—are a “major component” of their future health benefits strategies.

The result? More out-of-pocket costs force patients to act like consumers. “Health savings accounts, in combination with high-deductible health plans, are perhaps the best vehicle available today to encourage rational health care purchasing decisions,” write Christensen and Dr. Hwang in Health Affairs.

But remember, while these conditions are an important pre-requisite of disruptive innovation, they don’t do the trick by themselves. “It is important to recognize that the health care system comprises highly interdependent business models, and one cannot simply plug in a new component and expect it to work,” write Christensen and Dr. Hwang. Forcing consumers to pay more out-of-pocket without meaningful changes facilitating cost innovation? Not the best idea.

However, higher deductibles and co-pays could result in big pressure from constituents on policy makers to lower barriers to cost innovation in health care. It’s not necessarily an admirable means to an end, but it’s an important trend—one that could put patients in the driver’s seat changing incentive structures.

2. Employers setting incentives & trends (like telemedicine).

On the other side of the consumerism coin is employers sponsoring employee health insurance benefits—they wield a tremendous amount of influence on the health care industry and have the ability to change incentives from multiple directions.

We’ve already talked about some of the effects—employers are switching employees to higher deductible plans (potentially combined with health savings accounts), digging into collaborative efforts like the Kentuckiana Health Collaborative and turning to work-around solutions like 2nd.MD to tackle costs.

Employers also wield a lot of influence on patient education, specifically with regards to health consumerism. “There’s a lot of concern that as high-deductible plans have become more prevalent, we have to teach our employees how to make better health care choices,” said Kim Buckley of DirectPath in an interview with the Society for Human Resource Management. “Many studies show how employees look to employers for guidance and information on this.”

Employers have a lot of tools in their toolbox. They can (1) improve patient education and remove incentive problems with workaround solutions, (2) direct health consumerism by providing their employees with their own incentives and penalties, and (3), large employers could wield a lot of influence on regulations at the State level—they can always threaten to leave.

Essentially, employers could drive our first major trend and others, like a wider acceptance of telemedicine and virtual care—a decidedly disruptive innovation.

Data points: Employers are directing employee consumerism via incentives and costs—making outpatient surgery cheaper and emergency room co-pays higher, for example, plus wellness incentives are on the rise with almost half of employers providing them in some form. Regarding telemedicine, almost two-thirds of employers are either offering telemedicine services or planning to do so by 2018. According to the American Telemedicine Association’s 2016 gap analysis, twenty-two states had a failing grade for parity laws for private insurance coverage of telemedicine, but two of those states passed new parity laws in 2017 and eight have proposed or pending legislation.

Employers sponsoring employee health benefits have become a big player in the health care industry, and we can reasonably expect that influence to grow with the cost of care.

3. Drug list prices continuing to increase.

Now, this is a complicated issue I can’t even begin to cover in a reasonable amount of space—but it’s a downright explosive trend that could exacerbate the other trends we’ve discussed—fast.

We’ve talked about higher out-of-pocket costs for health care consumers, and that trend seems even worse when it comes to paying for drugs. List prices are continuing to rise at double digit percentages, and while pharmaceutical companies may rightly explain that rebates and negotiations result in a “net price” rise of a smaller, single digit percentage—well, list price still matters to the consumer.

Why? Out-of-pocket costs are often determined based on a percentage of the list price, not the negotiated price. If that isn’t outrageous enough, more and more often the co-pay is higher than the negotiated price of the drug, especially with generics. That’s called a “clawback,” the savings don’t get passed on to consumers but rather the intermediaries negotiating drug prices, and coming full circle, clawbacks are possible because of information asymmetry caused by a complete lack of transparency.

That may be only one piece of the drug price puzzle, and while it might take complex math to understand the entire issue, we’re looking at another force driving up health consumerism and creating backlash that should lead to significant disruption in the health care industry.

What do you think?

There’s my three trends—but I’m sure I haven’t covered all the trends that could influence disruptive innovation in health care. So please, leave a comment, below, and let me know what you think! 


A hard look at trends affecting your association.

At the Health Professions Network, we dig deep into the trends affecting the health care industry, and we’ve called a summit to dig into the trends affecting associations of allied health professionals.

We really hope you’ll be able to join us Wednesday, July 26 and Thursday, July 27 for our fly-in, fly-out summit addressing the state of the industry for allied health associations. We’ll be working together to find opportunities and solutions at a critical time for both health care and its professionals.

URGENT: It’s your last chance to reserve a room.

It’s time to make your decision—our reserved rooms are about to be released. Make your reservations by tomorrow, July 11 to ensure you’ll be able to join us. Don’t miss out on this limited opportunity, don’t miss out on the next big thing for your organization.

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