Reverse Innovation in Health Care

How to Make Value-Based Delivery Work

Vijay Govindarajan, Ravi Ramamurti

• Publisher: Harvard Business Review Press
• Year: 2018
• Print ISBN:
  9781107659414
  9781591397588
• eBook ISBN:
  9781633693678
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Health-Care Solutions from a Distant Shore

Health care in the United States and other nations is on a collision course with patient needs and economic reality. For more than a decade, leading thinkers, including Michael Porter and Clayton Christensen, have argued passionately for value-based health-care reform: replacing delivery based on volume and fee-for-service with competition based on value, as measured by patient outcomes per dollar spent.

Though still a pipe dream here in the United States, this kind of value-based competition is already a reality--in India. Facing a giant population of poor, underserved people and a severe shortage of skills and capacity, some resourceful private enterprises have found a way to deliver high-quality health care, at ultra-low prices, to all patients who need it. This book shows how the innovations developed by these Indian exemplars are already being practiced by some far-sighted US providers--reversing the typical flow of innovation in the world.

Govindarajan and Ramamurti, experts in the phenomenon of reverse innovation, reveal four pathways being used by health-care organizations in the United States to apply Indian-style principles to attack the exorbitant costs, uneven quality, and incomplete access to health care. With rich stories and detailed accounts of medical professionals who are putting these ideas into practice, this book shows how value-based delivery can be made to work in the United States. This "bottom-up" change doesn't require a grand plan out of Washington, DC, agreement between entrenched political parties, or coordination among all players in the health-care system. It needs entrepreneurs with innovative ideas about delivering value to patients. Reverse innovation has worked in other industries. We need it now in health care.

Part One

Health-Care Solutions from a Distant Shore

Value-Based Competition in India

1.

An Unhealthy Problem Meets an Unlikely Solution

One spring day a few years back, a fifty-something man named George found himself short of breath. His wife drove him to the emergency room at the University of Texas Southwestern Medical Center, where he was diagnosed with pneumonia. When George was released from the hospital four months later, he was presented with a 161-page bill of $474,064 as his share of the costs.

George survived the pneumonia, but he didn’t know if he could survive the bill. His room alone cost $73,376, and respiratory services, oxygen, and breathing tests added up to $94,799. “Special drugs,” most of which were listed as “Sodium Chloride .9%,” otherwise known as IV saline solution, came to $108,663.

George hired a billing advocate, a woman who had worked as a claims processor for Blue Cross Blue Shield until she was sent an astronomical bill for a daughter’s emergency-room visit and decided to go over to the other side. She helped a bit, and the hospital, the president of which was paid $1,244,000 a year, agreed to revise the bill downward to “only” $313,000.

Roughly ten thousand miles away, in a small farming village a couple of days’ drive from Bangalore, India, an eighteen-month-old boy named Deep was keeping his parents awake with worry. Deep had a heart condition. He was smaller than other children his age, and he didn’t have much interest in eating, or in anything else for that matter. But Deep’s parents knew there was hope. They had been in these worry shoes before, five years earlier, when they learned that their daughter would need an operation on her heart. So they took their son to the same hospital, Narayana Health in Bangalore, a private for-profit cardiac hospital that specialized in pediatric heart surgeries, performing sixteen a day—half of its total practice.

Narayana was famous throughout India, not only for its excellent surgical outcomes but for its prices. A typical heart surgery at Narayana cost only about $2,100, tens of thousands of dollars less than the same procedure would cost at hospitals in the United States. More important for families like Deep’s, 60 percent of the pediatric surgeries were provided free or at a discounted price. And yet, Narayana was a profitable company, and in December 2017 had a market valuation of over $1 billion.

Deep’s parents paid just a fraction of the full price for Deep’s heart procedure. “Don’t worry about the money,” the hospital told them. “Just take Deep home and see if his appetite improves.” It did, and the boy flourished.

These two stories raise an interesting question: What can all countries, rich and poor, learn from organizations like Narayana Health about how to deliver world-class health care affordably? In the United States, the question is timely, because Americans are at a pivotal—perhaps decisive—moment in health-care policy. But the question is relevant in every country. In the United Kingdom, for instance, the National Health Service (NHS) struggles with issues of costs, quality, and access. Jim Mackey, head of its statutory watchdog group, says bluntly: “The NHS is in a mess.”¹ In France, the health-care system is believed to be near bankruptcy.² And in poor countries, the problem is worse: America and Europe may have millions of people who need better care, but the developing world has billions of people with no care.

It is time to consider some unconventional remedies to the problem, and that is what we attempt in this book. It isn’t just hospital leaders, doctors, consultants, and policy makers who should be interested in innovative solutions to the health-care conundrum. We hope this book will also interest insurers; CEOs of companies that spend a fortune on employee benefits; suppliers of drugs, devices, and services to the health-care industry; and entrepreneurs looking to disrupt the industry. We hope there will be more experiments of the kind announced in January 2018 by three big employers—Amazon, Berkshire Hathaway and JPMorgan Chase—to form an independent company to disrupt health care for their million-plus employees.³ We further hope this book will help mobilize grassroots support for deep and lasting reforms of the health-care sectors in all countries.

Let’s begin by taking a closer look at the situation in the United States.

An Unhealthy Problem

The story of the American health-care system involves the good, the bad, and the ugly. The United States is home to the world’s best hospitals and the world’s best doctors, and it has produced more health-care miracles than any other country in the world. Americans and American universities dominate the Nobel Prize in Medicine. US pharmaceutical companies develop new drugs that save countless lives. And US medical-device companies produce a steady stream of innovations. Americans get to choose their doctors and insurers, and they don’t have to deal with care rationing or long waiting times for procedures. The care that Deep was lucky to get in India is routinely available to most Americans, if more expensively. That’s the good.

Now for the bad and the ugly. In 2016, the United States spent a staggering $3.3 trillion, or almost 17.9 percent of its GDP, on health care—that’s $10,348 per person, at least twice as much as any other country in the industrialized world spent. Between 2000 and 2015, US health-care costs rose at twice the rate of the Consumer Price Index.⁴ This has caused health-insurance premiums, copayments, and coinsurance payments to soar for people like George. The collateral damage is widespread. Today’s health-care costs add an estimated 15 percent to the cost of every American-made automobile. They cannibalize paychecks by diverting company funds to employer-sponsored health plans.⁵ And they crowd out discretionary government spending in important areas such as infrastructure, research, and education. By 2030, when 20 percent of the US population will be over sixty-five years old, the upward pressure on health-care costs will be unprecedented, and US national and household budgets will be looking for life support.

Despite this record spending, the quality of American health care is uneven, with frequent medical errors, failures, and a great many inefficiencies. A 2017 Commonwealth Fund report on health in eleven industrialized nations ranked the United States first in spending and last in overall health-care performance.⁶ American life expectancy ranked forty-third in the world, medical errors were the third-leading cause of hospital deaths, and three-quarters of health-care spending was on chronic diseases, many of which could be better managed or even prevented. The thirty-day hospital readmission rate for Medicare patients was a discouraging 15 percent to 16 percent, and it was costing taxpayers $17 billion a year. Access to health care was also spotty: Even after the Affordable Care Act helped twenty million Americans obtain health insurance, twenty-eight million remained uninsured. Underinsurance was also widespread, affecting 23 percent of Americans. And persistent racial, ethnic, and income disparities haunted health-care access and outcomes.⁷

Reflecting on the state of US health care, the Institute of Medicine concluded in a now famously scathing report: “Between the health care we have and the care we could have lies not just a gap but a chasm.”⁸ That was seventeen years ago, and while there has been a lot of talk—seemingly endless talk—about health-care reform in the intervening years, not all that much has changed.

How can that possibly be true? For one thing, there are many special interests in play. Insurers, regulators, doctors’ groups, the pharmaceutical industry, workers’ unions, political parties—all these players have interests to protect, and those interests put a drag on change.

But the real reason the health-care debate hasn’t gotten anywhere is that would-be reformers are debating about the wrong things. It’s not about who pays for what. Skyrocketing health-insurance premiums are just a symptom of the underlying problem. The problem with American health care is that it costs too much, the quality is uneven, and too many people can’t get the care they need.

When we look at the problem primarily in this way, as a crisis of health-care delivery and not as an issue of who pays for what, we can begin to see new solutions from unexpected places.

Reverse Innovation in Health-Care Delivery

Reverse innovation refers to the case in which an innovation flows from a poor country to a rich country rather than the other way around. We have been studying this phenomenon for over a decade, and for the past five years we have wrestled specifically with the question of how it might apply to health-care delivery. (See the sidebar “About Our Research.”)

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About Our Research

Five years ago, we began a project to understand how some Indian hospitals were able to provide world-class health care at ultra-low prices. We thought these hospitals could offer lessons not only for other poor countries but also for rich countries, because India seemed to have a form of value-based competition.

In the first phase of the research, we screened over forty Indian hospitals that appeared to be pursuing innovative business models and then selected sixteen for in-depth study through field interviews with their founders, administrators, doctors, patients, technical staff, and investors. We examined their prices, medical outcomes, patient volumes, and financial results. Based on the first-round investigations, we identified seven “exemplars” that consistently delivered world-class care at ultra-low prices and offered their services to all (see table 1-1 later in the chapter). We wrote about their breakthrough business models in numerous Harvard Business Review blogs, followed by the November 2013 Harvard Business Review article “Delivering World-Class Health Care, Affordably.” This body of work fed into part one of this book.

In the second phase of research, we explored the potential for reverse innovation of the value-based practices from India to the United States. We looked for US organizations that had adopted practices similar to those of the Indian exemplars to improve quality, lower cost, and expand access to health care. We discovered that such examples existed even under the prevailing fee-for-service regulatory environment. To assess the opportunities and limitations for reverse innovation, we selected four of these organizations for in-depth study, each of which attacked a core problem of US health care. We then circulated the findings, which are reported in part two of this book, among two dozen health-care reformers and policy makers to get their feedback.

In all, we conducted over 125 interviews in India and the United States with CEOs, hospital administrators, doctors, patients, medical staff, investors, and industry experts.

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What Is Reverse Innovation?

The locus of innovation in the global economy is changing, and so are patterns of dissemination. Poor countries no longer just borrow innovations from developed countries.⁹ They also contribute innovations to the rest of the world, including developed countries. We call this transfer of new ideas and innovations from poor regions to rich “reverse innovation.”

Innovations arising in poor countries typically involve practices that maximize value (i.e., the ratio of benefits to price), by making products extremely affordable and easy to use, while also keeping quality high. Although these innovations arise from conditions of poverty and scarcity, they can address needs in conditions of wealth and abundance perfectly well.

Reverse innovation can take on many forms. An American multinational corporation could develop a product for its consumers in poor countries and then turn around and sell the product back home, as an entry-level product or to a niche market. For example, General Electric developed an extremely low-cost, portable ultrasound machine in China and later sold it in many countries, including the United States.

Alternatively, an emerging-market firm could develop products tailored to the unique requirements of poor countries and then market such products to rich countries. Reverse innovation can also occur indirectly through knowledge transfer. For instance, an established company or a startup in the United States might be inspired by business models and management innovations adopted in poor countries and could bring those models to the United States, disrupting the industry.

Reverse innovation in health-care delivery is still a nascent phenomenon. It is a “next practice,” the importance and significance of which will grow in the next decade as the United States and other rich countries confront the challenge of maximizing value by dramatically lowering costs.

Few American hospitals operate internationally, and none has a subsidiary in India. As such, reverse innovation in health care must occur indirectly through knowledge transfer, which requires that leaders of US health-care organizations cultivate a global mindset. Leadership requirements for developing a global mindset include:

• Curiosity about health-care innovations in poor countries;
• Willingness to acquire knowledge about such innovations through immersion experiences in poor countries;
• Ability to modify and adapt such innovations to suit the unique US context.

Reverse innovation first came to our attention in our work with General Electric, a multinational company that took a product developed in China for the Chinese market—an inexpensive and portable, high-quality ultrasound device—and marketed it successfully in the United States. What began as a defensive move to counter Chinese competitors in China became a big hit for GE not only in other emerging markets but also in the United States, particularly in rural and far-flung areas, where the nearest large clinic or hospital was hours away. The low-cost ultrasound also pioneered new applications for situations in which portability was critical or space was constrained, such as at accident sites and in operating suites. We wrote our findings up as a...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Part One: Health-Care Solutions from a Distant Shore: Value-Based Competition in India
• Part Two: Reverse Innovation in Health-Care Delivery: Four New Models for the United States
• APPENDIX A: India? Really?: Countering Skepticism about Transferring Practices from India to Developed Countries
• APPENDIX B: Health-Care-Delivery-Innovation Diagnostics
• Notes
• Index
• Acknowledgments
• About the Authors