The Innovation Trap in Health Care Organizations

Although health care systems represent 33% of the total US health care expenditures, they spend less than 1% of the total R & D in health care; the majority being led by biopharmaceutical and medical device companies. This disproportionate balance between the proportion of health care systems as part of the total health care in the US and their meager contribution to health care innovation reflects a striking lack of innovation within one of the most fundamental components of the health care ecosystem, namely the institutions delivering care to patients and the channel through which most of the innovation taking place in medicine and life sciences gets delivered. Most health care systems struggle navigating the innovation landscape, and they rarely are aware that they are (or should be) in the technology business.

At a recent event I attended which was hosted by a AVIA, a health care innovation consortium in Chicago, the Global CIO of McDonalds, Daniel Henry shared how McDonalds has shifted its core mission around - what he coined - the 3 Ds: Delivery, Digital and Drive-Thru Experiences. Daniel's central message to several attendees - who are in the driver's seat of the digital initiatives of many health care systems, is that the technology has been continuously and significantly reshaping the core business of McDonalds which had to disrupt itself or otherwise be disrupted by fierce competition from incumbents and new entrants alike. For McDonalds, it was not anymore just about having the most tasty burger and the most operational global footprint; it had to achieve an excellent customer experience primarily supported by the blend of the digital and the physical. In other words, Technology is not the medium, it has become an integral part of the message. To several attendees, the overall response was that Daniel's comments were unrelatable and surprising. This is best exemplified by the Q&A session when one of the attendees shared a text message exchange he had with a C-suite executive from his health care system during the keynote. The message was something along these lines:

I'm listening to the CIO of McDonalds and he was saying "Disrupt or Get Disrupted." What do you think? … "I don't think that it applies to health care systems."

Virtually no one was surprised by the exchange, the majority of people in the audience found it rather amusing, and laughed… except perhaps for Daniel. More profoundly, the exchange was a glimpse of what almost everyone in the room acknowledged, which is that the majority of health care executives don't believe that technology is a strategic asset to grow the business. After all, health care systems are in the care delivery business, not technology.

This stance is a sharp contrast to what innovators, entrepreneurs, venture capitalists, and digital health advocates believe health care should be. It is even the opposite of what others have learned about the role of technology within their own industries, where technology has literally eaten the world. This contrast is not to no effect for several digital health startups, with whom we interact often, as they all shared how painful and excruciating it is to do business with health care systems. The conclusion most commonly held - whether by an executive of a health care system or by a founder of a digital health startup- is that the lack of a technological maturity is inherent to health care itself, being an industry of its own kind.

After years of experience in developing digital health products, and engineering culture in health care, we contemplate a different story. The innovation performance of health care systems is the outcome of the positioning of a given health care organization along the following three fundamental dimensions:

• Culture: whether you are a builder or an operator;
• Structure: whether you follow a hierarchical waterfall approach or a structure in cross-functional units by team topology.
• Financing: whether you are looking at technology as cost or as an asset.

In this blog post, I will focus on the first dimension, namely the cultural balance between being an Operator vs a Builder.

Culture: builder or operator

The majority of health care systems' executives - understandably - are overwhelmed with running the business as usual. Constantly facing rising supply-chain costs, personnel shortage, M&A acquisitions, prospects of an economic downturn, it is difficult to imagine how health care systems can spare time, and resources to invest in innovation and build a disruptive business. Although many have established some sort of digital innovation group, many still do not consider the idea of building an engineering team and creating a technology stack as sufficiently relevant to the business of providing care. Most delegate the task of developing technology to the EHR vendors, other enterprise vendors, digital health startups, consultants, outsourcing agencies, in-house innovation groups or indirectly to new competitors from payvidors to new digital-first care entrants.

A way to explain the current prevailing "operator" model is to think of health care systems as corporate structures that are in the assembly business of providing care. They assemble supply chain, facilities, administration, accounting, IT, and employ providers to deliver diverse and complex care services ranging from primary care, pharmacy, laboratory, imaging, to specialty care. Because they act as operators, success is primarily driven by their operational excellence and efficiency. This holds for operators in other industries. General Motors, Audi, or Renault, are all operators that are in the assembly business of selling cars. Hewlett Packard, Lenovo (formerly IBM), and Acer are all operators that are in the assembly business of selling computers. Typically, operators across all industries rely on the same management principles and focus on operational excellence and efficiency in managing supply-chain, manufacturing, distribution, regulatory requirements, accounting, and employ factory workers to sell products.

Some operators might argue that they are investing in innovation. But upon further inspection, we can quickly realize that what they consider innovation is often to keep business as usual. It is what Christensen calls sustaining innovation which looks at leveraging effective, high-margin, and proven tools and technologies for the most profitable and demanding customer's segments. Operators work constantly on understanding the market dynamic (as it is), and build strategy to adapt to it. Under the lenses of an operator, risk is considered a market feature to contain and standardized processes are put in place to the largest extent possible: hence the term Risk Management being often used by health care executives. Innovation - even if it happens - is fixed on "sustaining innovation" rather than "disruptive innovation".

Being a builder on the other hand, focuses on a different set of principles in order to transform a business. With building as a mindset, flexibility becomes more important than efficiency, and operational experimentation more critical than operational excellence. As a builder, the structure of the teams, the autonomy of the product leads, the flow of decision making, and the velocity of deploying services are all architected to optimize for discovery and developing the business model and technology to deliver value to the customer. Uncertainty and risk are then not avoided but rather accounted for. From implementing Agile methodology, incorporating A/B testing to experiment, to conducting user testing to validate assumptions, new approaches are put in place to support building products. One of the pitfalls we often observe is health care systems implementing Agile while actually continuing to be operators, is that they miss the entire point: agile is in and itself not an end but rather an approach that has demonstrated good success in enabling product teams succeed. Within operators, agile is often a waterfall process disguised under two-week meeting cycles.

Hence, the critical challenge for health care systems is how to balance the builder's approach and the operator's constraints. The former is key to surviving in the long-run. The latter is key to deliver today's services and survive in the short and mid-term. This is known in game theory as the Exploitation-Exploration trade-off. An agent - a bacteria, a mammal species, a reinforcement learning model, or in this case a health care organization - must be able to optimize their activities between exploiting current resources with a known reward value vs exploring new options with an unknown or uncertain reward. In both situations, there is a cost to both activities. However, if you solely exploit, you run the risk of exhausting your current resources and each cycle will have diminishing returns. If you only explore, you run the risk of spending all your resources on high risk explorations and faulting to generate enough outcomes. In game theory, depending on the environment, there is an optimum balance between exploration and exploitation that lead in the long run to the maximum return to a given entity if it can optimize its exploration and exploitation activities wisely.

This balance is often used in Reinforcement Learning methods to train machine learning models and is encoded in our genes and reflected in our behaviors. Health Care systems and in general corporate organizations are not different. So, the question is whether health care systems today are making the right balance between exploiting and exploring. If we look at the rising cost of health care spending and the lack of new modalities of care beyond brick-and-mortar (not discarding some real innovation in the space by some amazing group of people and startups), we are still as an environment locked in a sub-optimal maxima fueled by exploitation and desperately lacking enough exploration. If you look at the margin of the health care cost, it is abysmally low (less than 3% on average) while the cost of health care is only increasing. We can but question how health care systems with the management practice of today can shift the tides towards less expensive health care systems while keeping the lights-on if the operator culture prevails. We must expand our resources to explore better maxima (e.g. new opportunities with better outcomes) that could improve efficiency and cost in the long run.

If so, the challenge that follows is how to shift the balance between building and operating, e.g. exploring and exploiting. Some health care systems create a separate structure from the mothership such as an innovation hub or a center of excellence. The idea is to compartmentalize the innovation and the builder's approach while keeping business as usual for the core business. The challenge in this case emerges at the interface between the builders' group and the operators' group within the health care system. The interface almost systematically becomes a bottleneck and a problem in and of itself to scale innovation. This phenomenon becomes a catch-22 for most innovators who "build" but then are limited when "implementing" and "scaling". And because the value is not building but actually impacting the care delivery and improving the experience of care, the trend creates a vicious cycle where most innovations and novel digital health tools become synonymous with proof-of-concepts and nice-to-have rather than critical assets.

Finding the balance: shifting along the dimensions rather than reshaping

While this perspective might seem biased towards innovation (it is), the bottom line is that efficiency through a culture of an operator and innovation through a culture of a builder should not be antagonists. They should be supportive of each other. In other words, supporting an environment where Efficiency and Innovation can co-exist and more importantly supported at the right rate, requires a very difficult balance between supporting the business activities and at the same time being bold to disrupt it.

The point here is that health care systems should think about innovation from a viewpoint that is different from the current dogma that it must be a different thing. We must think of it as a shift. A shift in a sense is more subtle, it is strategic in nature, and more importantly it is deliberately smoothed out to accommodate for the change and the long-tail required to adjust the culture of the organization. Another key aspect, shift requires alignment and time. It is not a one-off investment in a trendy product that can send cool messages to patients or automate a billing workflow. A shift is pulling the pieces together to make "disruptive innovation" happen sustainability for the long-term and for the benefit of the patients and the community. Otherwise, if innovation is constrained to the current operating model of a health care system, it would more certainly lead to marginal benefit which is very hard to justify the investment for.

Reflecting back on McDonalds, the 3 Ds are not just supportive of the business of selling burgers but it is actually the way around; they are at the core of what defines the McDonalds's experience itself. In Health Care, that requires a shift of the culture towards building. It is what will make the difference between disrupting or being disrupted.