High costs and variable access to healthcare are drivers for change in the private healthcare sector. Disruptive innovation is inevitable, but collaboration also has an important role to play in delivering value to patients, providers and funders.

What is disruptive innovation?

Disruptive innovation, as defined by Harvard Business School Professor Clayton Christensen in 1995, is:

‘A process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market eventually displacing established competitors’

In his 1997 book, ‘The Innovator’s Dilemma’, Christensen went on to propose the theory that some companies innovate too quickly. They concentrate on the higher end of the market in a quest for higher fees and largely ignore the lower end, leaving the opportunity open for others to challenge them.  

Historical and daily practice is littered with examples of disruptive innovation – Canon’s portable desktop copier replacing Xerox’s very successful, but complicated and expensive machine; computer mainframe manufacturers put out of business by minicomputers and microcomputers; and free-to-use, constantly-updated Wikipedia supplanting the bulky and costly Encyclopaedia Britannica.

Disruptive innovation and private healthcare

The private healthcare sector is not immune to disruptive innovation. The major X-ray manufacturers largely ignored the concept that ultrasound could have any involvement in medical imaging and instead of collaborating, left themselves open to disruption. Only late in the game did the bigger companies have to use their financial clout to reclaim their position by buying out companies like Acuson and ATL/SonoSite. Other examples of disruptive innovation in the private healthcare sector include retail medical clinics challenging traditional doctors’ offices and standalone diagnostic facilities confronting conventional integrated ‘hospitals’.

According to Christensen, when some companies innovate too rapidly, they end up producing a service or product that’s complicated and simply too expensive. When a disruptive innovation comes along it initially looks like a poor contender. However, by providing value to the lower end of the market, the disrupter can gain a foothold and progressively work up into the higher level markets, in some cases completely eliminating the incumbent.

A good example of this is seen in the provision of diagnostic facilities. At the higher end of the market, there are companies, particularly in London, that are replacing all of their 1.5T MRI scanners with 3T MRI scanners, and others are using digital PET/CT rather than the standard. Medical insurers refuse to remunerate these scanners to any greater amount. The point here is that such expensive innovation isn’t necessary and insurers and patients should not have to pay for it.

Returning to the theory of business model, such companies often ignore the lower end of the market and the disrupter can get in. Disruptors offer value for money for a relatively underserved part of the population. Effectively, they make services more available to customers, in this case patients, who previously wouldn’t have had the means to achieve that. For example, they bring down the cost of scanners.

Value network

Rapid macro innovations such as expensive imaging scanners do not necessarily produce better results. A number of providers are now offering self-funding MRI packages that produce a ‘good enough’ scan but keep costs down by using methods such as short-notice booking, less sequences and avoiding the use of intravenous agents.

To get the cost of private healthcare down it is important to work with consultants and investments. The entire value network needs to be considered, i.e. the relationship between the patients, the providers and the funders. The key objective is to cut costs while improving healthcare; insurers and the self-pay market expect providers, doctors and hospitals to play a role in this and the equipment manufacturers must be encouraged to follow suit.

Facility stakeholders

All facilities, both new entrants such as Incorporated Health, One Healthcare, AmSurg and NHS PPUs, and established stakeholders such as BMI Healthcare, Ramsay Healthcare, HCA Group and Spire Healthcare, are under great pressure to innovate. The bigger, better funded companies tend to rush into building and providing the latest generation scanners that are simply not necessary and have to be paid for prior to distributing returns.

This is leaving the lower end of the market open for disruption, where some of the nevertheless well-funded companies are prepared to put in scanners, either independently or preferably in partnership with the bigger providers. A key point is that some of the bigger providers want to resist this collaboration.

Consultant partnerships and the CMA Final Order

The OFT’s referral of the private healthcare market to the Competitions and Markets Authority (CMA) resulted in a number of mandates in 2015, most notably that consultants must not hold more than 5% in equity participation schemes. The unforeseen benefit of this, was that many consultants became aware for the first time that they could invest in a healthcare business. That dividends and profit shares should be distributed pro rata was also attractive.

From the point of view of the providers, consultants are certified high-net worth investors – they are highly motivated, have a vested interest in quality and are measured in what they are prepared to spend. This potentially offers lower costs to members of the entire value network. The mutual benefits of such consultant partnerships are also governed by strict compliance.

An example of where this model has worked well is the BMI/IHL CT, MRI and Nuclear Medicine scanners at Mount Alvernia Hospital,Guildford, which have generated nearly £25m of revenues since 2009 and its PET CT scanner yielding nearly a 5000% return in three years.  Other successful ventures include the IHL/Parkside PET CT scanner in Wimbledon, South-West London, where a similarly successful mobile PET CT scanner is expected to be replaced with a fixed facility later this year.

In conclusion….

  • Joint ventures with consultants are good
  • Collaboration is good, although some of the big network hospitals are resistant
  • Disruptive innovation is real
  • Collaboration is preferred but disruptive innovation is powerful and good if it ends up delivering superior value

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