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relatively constant. Efficiency innovation occurs when the same prod-
uct is produced more cheaply. The consumer may not notice any
change in the product other than the price being lower. Efficiency
innovation tends to free up resources for future investment.
Disruptive Innovation, on the other hand, occurs when a product
appears that initially is perceived as inferior and does not appeal to
high-end customers, but attracts low-end customers or new “non-
customers.” The product is typically cheaper, simpler, and more con-
venient. Over time, performance improves and meets the needs of
more customers, eventually replacing the existing product. Examples
would be how the mini mills disrupted the integrated steel mills in
the steel industry, how the cellular telephone disrupted the fixed-line provement is often cited as one of the main drivers for increased costs
telephone industry, or how the personal computer disrupted the
mainframe in the computer industry. Note in all of these cases the
end result was that more consumers had access to the product at a
cost that was lower than previously available, jobs were created, and
living standards arguable improved.
Disruptive innovation rarely occurs within the incumbent firms
in the industry, rather new entrants from outside the industry tend
to be much more open to this type of innovation. Christensen de-
scribes this as the innovator’s dilemma (1). Once the business model
for the incumbent is established to provide the existing product, the
change in the culture required to create a new business model that
produces a (initially) lower quality product at a lower margin is very
difficult. More often than not, when disruptive innovation occurs,
the incumbent firms are either driven to extinction or severely mar-
ginalized. A classic example of this is that Kodak was driven to bank-
ruptcy by the digital camera, despite the fact that the technology was
invented within Kodak (4). They recognized the value of the new
technology, but since the profit margins on digital cameras were very
thin while the margins Kodak enjoyed on traditional film were so
large, they were unable to change their culture to support this new
business model.
How does all this apply to health care? I would argue that most
innovation in health care has been sustaining — making existing
products or services better — and there has been very little true dis-
ruptive innovation. An exception to this has been the rise of retail
clinics in Walmart, CVS and other convenient locations. Initially
these clinics focused on very minor conditions such as strep throat,
sinus infections, sports physicals, etc., that tended to be low cost to incentivize the supply-side of the market to produce higher quality
treat and had relatively thin profit margins. The companies entering
this market were largely outsiders to heath care. As my colleague
Amer Kaissi discussed in a previous issue of this publication: “When
retail clinics first appeared in 2000, primary care physicians (PCPs)
were quick to dismiss them as a low-quality alternative to rigorous
physician care” (5). Physician groups and professional associations
expressed their strong opposition to them. Today these clinics are an
established part of the health care system and are a very common
treatment option for today’s busy consumer. Moving forward, these
companies are now looking to move up from very simple low
cost/low margin business into more complex higher margin business
such as imaging and chronic disease management (6).
The large majority of innovations in health care, however, have
been those that improved existing products and did not result in
lower costs or increased accessed to care — rather technological im-
in health care (7). Why has disruptive innovation been so difficult
in healthcare? One big reason has been the power of the incumbents
— what in economics are call barriers to entry. Health care is a dif-
ficult industry for an outsider to enter. In part this is due to the scale
and scope required in order to be successful. In today’s health care
market with the heavy reliance on traditional payer contracts, it is
very difficult if not impossible to enter a market as a small player.
Another reason is the large regulatory barriers that exist in health
care. Regulations exist to protect the best interests of the consumer,
but they also have a tendency to favor incumbents and keep new and
innovative entrants from the market. Health care is one of the most
highly regulated industries at both the federal and state levels. Finally,
the patient has largely been a passive player in the health care market.
Due to the wedge between the delivery of health care and the pay-
ment for health care cause by insurance coverage and the role of the
employer, the typical consumer has been largely unresponsive to tra-
ditional market forces in healthcare. As a result, true disruptive in-
novation has been very difficult to achieve in health care, and while
there has been lots of innovation, most of it has been sustaining —
replacing old technology or services with newer technology or services
catering largely to high profit (insured) customers. Much of this in-
novation has been very positive and has improved the lives of many,
however, it has not lead to the increased access and lower costs that
disruptive innovation promises.
Moving forward, is disruptive innovation more or less likely to
occur? There are two competing forces acting on the health care land-
scape, and the answer depends on which of these dominates. On the
one hand there is a push from CMS and from within the industry to
care at lower costs. These include pay-for-performance, bundled pay-
ments, ACOs, and other mechanisms that reward providers for pro-
ducing good health outcomes. This movement towards “population
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