December 2, 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 Innovator’s 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 then cell phones, the destruction of retail shopping by Amazon and of video rental 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 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 in the venture and private equity worlds.   No one seemed to be asking how great a trade for the society was, say, tiny Craigslist taking down the newspaper business by drying up its classified ad revenues.   

Disrupting a $4 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 with 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. 

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 practices (MDVIP, which Proctor and Gamble acquired in 2007 and sold to Summit Partners in 2014), telehealth and subscription-based practices like Teladoc, 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 rolled up by private equity firms and subsequently engulfed by mega-corporations like Amazon or CVS–few having reached actual black ink. Disruption, presumably, will follow directly. 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 reached 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 improvements as defensive “sustaining” innovations by incumbents. But sustaining innovation has had an impressive record in healthcare. Consider the stunning progress in joint replacement. When I first witnessed this procedure in the late 1970’s, it was massively invasive, required a three-week hospital stay, and a six-month rehabilitation. Hip replacement is now an ambulatory procedure, as are shoulder 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 industry refined or reinvented mature technologies, markedly reducing both cost and risk 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 2019-21 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 Medicare coverage, the power of healthcare incumbents to influence the regulatory and political process, industry fragmentation, and the pivotal role of physicians in technology adoption.

The Internet-related disruptions such as those instigated by Amazon, Google and Facebook were one-in-a-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 consistently hitting the strategic single or double, strike out with discouraging frequency. Investor insistence that new companies disrupt a trillion dollar sector like the hospital or health insurance industries has led to continuing disappointment and poor returns on the part of 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. Instead, it is that the imperative to disrupt focused management and investor attention on the incumbent 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, which focusses on removing friction or barriers between the customer and satisfaction of their needs, but also exploits asymmetries and discontinuities in industry structure or demography. Businesses 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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