Wed. Dec 7th, 2022

BY JEFF GOLDSMITH

If you read the business press, as I do every day, It is impossible to escape the “disruption” meme.  Clayton Christiansen’s  1997 Innovators Dilemma explored how established businesses are blindsided by lower-cost competitors that undermine their core products, and eventually destroy their businesses.   Classic examples were the displacement of film-based cameras by digital cameras and, now, cell phones, the destruction of retail shopping by Amazon and video rental outlets by streaming video services.

A Civic Religion

Perhaps because Christiansen’s analysis arrived at the peak of the first Internet boom, it generated a high level of anxiety in the corporate world.     It did not seem to matter that Christiansen’s original analysis was riddled with flaws, meticulously detailed in Harvard colleague Jill Lepore’s takedown in the New Yorker in 2014.

By then, the disruption thesis had become a cornerstone of a kind of civic religion, an article of faith and an indispensable staple of fundraising pitches both on the buy and sides of venture and private equity businesses.   No one seemed to be asking how great trade for the society was, say,  tiny Craigslist taking down the newspaper business by drying up its classified ad revenues.   

Disrupting a $4.1 Trillion Health System

I believe that twenty-five years on,  the notion of disruptive innovation has reached its “sell-by” date,    At least in healthcare, the field of commerce I follow most closely,  it is now doing more harm than good.  The healthcare version of the disruption thesis was found in Christiansen’s “Innovator’s Prescription”, written by health industry maverick Dr. Jerome Grossman, in 2009.  Christiansen and Grossman forecast that innovations such as point-of-care testing, retail clinics, and special purpose surgical hospitals threatened to take down healthcare incumbents- physicians and hospitals.  

 A swarm of breathless (and reckless)healthcare disruption forecasts shortly followed.  In 2012, Vinod Khosla wrote that 80% of physicians would be replaced by AI,  memorably suggesting that medical diagnosis was less challenging than the self-driving car.   In 2014,  Eric Topol predicted that the cell phone and a swarm of diagnostic apps would shortly replace the physician as the patient’s principal source of diagnostic wisdom.  

We have seen waves of attempts to “disrupt” the 1950’s-esque physician office, a care site in dire need of renovation to be sure.   This began with so-called concierge practice (MDVIP, which Proctor and Gamble acquired in 2007 and sold to Summit Partners in 2014),  telehealth and subscription-based practices like TeleDoc, American Well,  Iora and One Medical, and later, Cano, Oak Street Health etc., and store-based retail clinics like Minute Clinic (now CVS). Fifteen years on,  these “disruptive” physician models are now being devoured by mega-corporations seeking to control large patient populations (and paying 8-15X revenues to do so).   Someone surely got paid, if not the actual docs doing the dirty work.  A cynic would say:  “Where are the practitioners Gulfstreams?”.  

After almost two decades of hype and billions in investment, retail clinic volume appears to have crested at 50 million visits nationally, compared to around 145 million hospital emergency room visits, 900 million physician office visits, and 800 million hospital outpatient visits.

After twenty years, retail clinic volume is still a gnat on the rump of a very large critter. 

Christiansen belittled incremental product or service improvements as defensive “sustaining” innovations by incumbents, But the sustainers have had an impressive record in healthcare.  Consider the stunning progress in joint replacement.  When I first witnessed this procedure in the late 1970s, it was massively invasive and required a three-week hospital stay and a six-month rehabilitation.    Hip replacement is now, unbelievably, an ambulatory procedure, as are shoulders and knee replacements.  Some 80%  of heart valve replacements are now catheter delivered. Interventional care for strokes, and nerve ablation procedures for arrhythmia, also delivered by catheter, are very short-stay inpatient procedures and will likely be ambulatory in the near future.     

 All these are clearly “sustaining”, not disruptive, innovations.  They have unfolded over decades, as clinicians and their partners in the industry refined or reinvented mature technologies, markedly reducing over time both cost and damage to patients.  This collaboration is unglamorous “pick and shovel” work.  It has gone out of fashion in an investment climate geared to unrealistic expectations of explosive growth and 100X investor returns, which reached a zenith during the 2020-21 digital health bubble

Blindfolded Home Runs

In her 2006 Harvard Business Review article on why innovation in healthcare is so hard, Regina Herzlinger pointed to a complex regulatory environment, particularly the hurdles to obtaining FDA approval and insurance coverage, the power of healthcare incumbents to influence the regulatory and political process, industry fragmentation and the pivotal role of physicians in technology.  

The Internet-related disruptions such as those instigated by Amazon, Facebook, and Craigslist were 1 in ten thousand events, the equivalent of a blindfolded ballplayer hitting a 500-foot line drive home run over the centerfield fence. .  Ballplayers who swing for the fences, as opposed to looking for the strategic single or double, strike out with discouraging frequency, even if they are looking at the ball!   Investor insistence that new companies disrupt a trillion-dollar sector o like the hospital or health insurance industries has led to continuing disappointment and poor returns on the part of the venture and private equity investors and the squandering of many billions in limited partners’ capital.   

Losing Sight of the Customer

To me, the most objectionable aspect of the obsession with disruption is not that it set the bar too high for most innovations to meet.  It is that imperative to disrupt focused management and investor attention on the incumbent competitor, and how to dismantle their franchise, rather than tuning in to customer wants and desires and how to meet them. 

 In his enduring 1985 classic, Innovation and Entrepreneurship, Peter Drucker argued for a more multi-faceted model of innovation, one which pivots around removing friction or barriers between a customer and satisfaction of their needs, but also exploits asymmetries and discontinuities in industry structure or demography. Industries preoccupied with outsized returns often do not listen acutely enough to customers as much as to the siren song of growth.  

As Drucker says, “an entrepreneurial strategy has more chance of success the more it starts out with the users- their utilities, their values, their realities . . . the test of innovation is always what it does for the user.”  Drucker’s advice is an important antidote to the burned-out disruption industry, and the key to better returns for investors and society from healthcare innovation.  

Jeff Goldsmith is President of Health Futures, Inc. & a long time THCB Contributor.



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