Sunday, January 30, 2011

Driving Disruption in Healthcare

After a rather long hiatus (for a long variety of boring reasons), I'm going to try to catch up with quite a few new posts.
To be in an industry that is being disrupted can be anything from disquieting to distressing to downright terrifying.  Most people in such an industry will respond disruption with denial.  So how do you get them past denial?  Creep up on them with a story from a different industry, so they can understand the concepts and hope they recognize the application to their own industry. 

There’s a story Christensen tells of how this happened at Intel.  Christensen described how the conventional integrated steel industry was disrupted by mini-mills making inferior steel cheaply.  The mini-mills captured the rebar market, bits of steel which are embedded within concrete, a market that needed only low quality and exhibited great price sensitivity.  Since the integrated mills considered this the least interesting segment of the market –  `nuisance´ customers who were the smallest market segment with the lowest profit margin – big steel almost welcomed loss of their rebar customers to the new mini-mills.  Moreover, they disdained these new mini-mills who could only produce steel good enough for the lowly rebar market, and assumed they could never produce steel good enough for any part of the market except rebar. 

But the mini-mills moved quickly up the technological improvement curve and peeled off one segment after another of the steel market, each one bigger and with a better profit margin than the last.  Eventually, the conventional steel mills were left defending their best customers, the car makers.  The car market represented the biggest part of the market, and the most lucrative by far, with the best profit margins.  So conventional steel looked seemed to be doing very well, as their profit margins had steadily increased with the departure of the lower-margin customers.   Until, that is, the mini-mills figured out how to make automotive steel, and conventional steel was wiped out. 

The conventional steel companies had known about the mini-mills for years; they simply didn’t consider them a threat, because of their `crummy' products.  They were complicit in mini-mills taking over the steel market, because they were happy to yield small markets, with low margins and cranky customers in order to focus on bigger markets, with higher profit margins and customers who valued their quality. 

When he heard Christensen tell this story, Andy Groves, Intel’s brilliant CEO, exclaimed, “That’s what’s happening to Intel.  We’re losing the low end of the chip market, and we’ve been complacent about it because they’re the lowest margin segment of the market.  But those low-end chip makers will keep peeling off low-end segments of the market, until they attack our core business”.  Groves acted decisively and built a new low-end chip business for Intel.

And Christensen’s message to the OHA was that the hospital industry was about to be disrupted – in fact had to be disrupted if we are ever to get healthcare costs under control.   And one way they will be disrupted is by simpler hospitals, those without the incredible sophistication of high end acute-care teaching hospitals.

To bring home his point, Christensen describe a company that made axles.  Their oldest plant was about to be closed down because they had the highest per-unit cost, due to high overhead costs.  The manager sought Christensen’s analytical help.  As she and Christensen compared this plant to all the rest, they realized that this was the only plant that offered to build any sort of axle.  The plant layout looked like this:

 When orders came in, they followed different paths through the plant.  This put a high burden of overhead costs on the plant.  Other plants had essentially laid out the different departments in a straight line, and only accepted certain orders, that fit their pre-arranged pattern.  Christensen likened the axle factory to today’s general hospital, whose main costs are due to their very general nature; patients take totally individual paths through the hospital.

Christensen compared this to the Shouldice Hospital in Toronto, which has done the equivalent of those newer axle factories.  They deliver only one treatment, hernia repair, basically in an assembly line.  Thirty patients operated on daily, a full briefing for everybody the night before, walk away from the operating table after their local anaesthetic, and home after a good night's sleep.  When you compare the cost of hernia repair at Shouldice versus a typical acute-care teaching hospital, it's hugely cheaper at Shouldice.  The direct costs are slightly less, but the overhead costs are massively less.  This also follows the pattern of medical services drifting to the simplest - and cheapest - locale possible, as described in the previous post.