By Kenneth Kaufman
Legacy healthcare organizations see innovation as a crucial path to staying relevant in a fast-changing world.
Innovation has the promise to solve longstanding problems with the healthcare system, and to move legacy organizations into a digital world and help them discover new revenue channels as volumes and payments from traditional channels soften. Adding to the momentum for innovation is the rise of competitors—from start-ups to tech giants—that have innovation in their DNA.
72% of larger hospitals and health systems have built or are in the process of building innovation centers.
Structurally, hospital innovation programs range from projects or departments housed within a hospital, to subsidiary companies, to partnerships with tech companies. Traditionally, hospital innovation programs have focused on developing internal ideas to be used within the hospital to improve issues like operational efficiency or utilization management. In the face of new competition and rapid change, these programs increasingly develop and fund start-up companies aimed at selling new products to new markets.
As the need for innovation intensifies, so does the need for a new orientation toward innovation. The capabilities, culture, and mission that support ongoing operations of a legacy healthcare organization are not those that drive successful innovation. For innovation to generate ideas that become commercial successes, it must be backed by an entrepreneurial culture with characteristics that are different from—and even antithetical to—the characteristics of legacy organizations.
8 Characteristics of Entrepreneurial Leaders
An innovation center cannot simply be an add-on to the ongoing operations of a legacy healthcare organization. It must be rooted in a culture of entrepreneurialism, led by individuals who demonstrate eight critical characteristics.
1. Have really good ideas.
Breakthrough ideas are the foundation of a successful entrepreneur. Such ideas are transformational. They offer solutions to needs that may not even be previously recognized. They are the product of thinking differently about how important tasks can be done, and how important goals can be achieved. They open up new demand from the largest possible markets.
2. Work hard in a different way.
Legacy healthcare organizations are full of hard workers, but entrepreneurial organizations need people who work hard in a different way. In legacy organizations, people work hard at doing their best within existing workflows. In entrepreneurial organizations, people work hard at disrupting those workflows in search of something better. They will be relentless in asking questions, conceptualizing solutions, and making them successful.
3. Tolerate risk.
Healthcare organizations have a reputation for being averse to risk. They are not alone in this. All companies are subject to organizational forces and natural biases that make their leaders reluctant to take on risk. In contrast, innovation and entrepreneurialism are by definition about taking risks. They require leaders who can recognize these forces and biases, and move beyond them.
In part because legacy healthcare organizations tend to avoid risk, they have little experience with meeting unexpected problems or confronting failure. Instead, they develop processes and protocols designed to avoid failure. Surgical procedures, for example, can’t go bad because a surgeon wants to go down an unknown path that may or may not produce a better outcome for the patient. Entrepreneurial organizations encounter obstacles and outright failures regularly.
They need to develop perseverance as a business emotion that enables them to get over obstacles and failures and keep going.
In 2014, when Amazon’s introduction of the Fire smartphone failed, Fortune magazine reported that the company “is now left scrambling, and it’s unclear whether it can recover from its flop.” Amazon persevered, recovered fully, and continues to grow.
5. Feel a sense of urgency.
Because hospitals want to be careful, methodical, and tactical, they don’t want to rush. Entrepreneurial organizations face forces that push them in the opposite direction. These forces have grown only stronger in the internet economy. In a phenomenon that has been called “big-bang disruption,”innovation can now “come out of nowhere and instantly be everywhere.” Being first to market with a new idea is more important than ever. Adding to this pressure is the fact that entrepreneurial organizations typically make their run at innovation with limited funds. They have neither time nor money to waste.
6. Integrate disassociated ideas.
Netflix did not invent the technology for streaming video. It realized that existing video compression technology could be deployed to deliver movies through lines that internet service providers had already run to consumers’ homes—and it continues to refine this strategy as it expands internationally across varying digital infrastructures. Uber combined existing geolocation, texting, and digital payment technologies to transform an untapped supply of independent drivers into a worldwide fleet that has disrupted the taxi business and threatens legacy automakers. An entrepreneur takes two ideas that are disassociated and puts them together, creating a new idea and a new product or service for sale.
7. Develop strategic intuition.
Legacy healthcare organizations and entrepreneurs share a commitment to numbers and data. But entrepreneurs are dealing with the new. They can’t know in advance if their innovations will become game changers, so they must be willing to go beyond data and market research and trust their intuition. When Steve Jobs introduced the iPhone, predicting that it would be a “revolutionary product… that changes everything,” he was met with skepticism from many. Microsoft’s then-CEO Steve Ballmer said, “There’s no chance that the iPhone is going to get any significant market share.” Ultimately, it was an innovation that did indeed change the world.
8. Obsess over sales.
Legacy hospitals are concerned with market share, but their focus is on referrals: How can we get clinicians to bring their cases to us? Entrepreneurs are starting with an idea that needs to be sold to bring in revenue that covers expenses and allows further growth. First, they need to convince people to try their idea, and then to pay money for it. Because innovations are new, consumers will not have heard of them, and may not even understand why they might need them.
Entrepreneurial organizations need people who not only are excited by the innovation, but also obsessed with bringing it to the attention of others.
Creating an Entrepreneurial Culture
Because the characteristics of entrepreneurs and entrepreneurial organizations can differ so much from the characteristics of legacy hospitals and health systems, healthcare leaders who are thinking about adding an innovation vertical at their organizations face some challenges.
First, they should be willing to make the work of the innovation center completely separate from the work of the legacy organization. Without this separation, the work of innovation will too easily be set aside in favor of work that sustains a current business model.
Second, they should understand that even though innovations may seriously disrupt the legacy organization’s current business models, innovators need free rein to pursue disruption. If they don’t do it, there are others who will.
Third, and most important, they must be sure that the capabilities of those who are given the task of pursuing innovation are compatible with the characteristics of entrepreneurial organizations. Some of these capabilities may be found within the legacy organization.
More often, the legacy organization will need to look beyond its existing talent if it wants to create an entrepreneurial culture that will drive innovations from ideas to commercial success.
Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success!
By Kenneth Kaufman
Warren Buffett famously said that if a farsighted capitalist were present for the Wright brothers’ first flight, that person “would have done his successors a huge favor by shooting Orville down.” Historically, operating an airline profitably has been one of business’ biggest challenges. Between 1979 and 2016, 57 airlines filed for bankruptcy.
Southwest Airlines has been the exception to this grim track record, as pointed out in a Slate article. For 44 consecutive years, Southwest has been profitable. The reason: Southwest thinks about running an airline in a very different way from its competitors, and the foundation of that thought process is containing costs.
Where competitors use a hub-and-spoke model for their routes, Southwest uses direct flights, resulting in shorter travel times. Shorter travel times allow higher density seating, which results in lower per-seat costs. Where competitors use a variety of aircraft, Southwest uses only variants of the Boeing 737, which reduces costs for training and maintenance. Where competitors use major airports, Southwest prefers less-expensive secondary airports. Where other airlines book flights through third parties, Southwest sells directly to consumers.
Each of these choices radically lowers the airline’s cost structure, allowing lower fares, a more streamlined consumer experience, higher market share, and higher profitability.
The degree of uncertainty in healthcare is higher than ever. Under the Trump Administration and the 115th U.S. Congress, uncertainty surrounds health policy, tax policy, and payment levels. Uncertainty surrounds the trajectory and structure of value-based payment. Uncertainty surrounds the influence of new healthcare models such as direct primary care and medical homes. Uncertainty surrounds the effect of new technology such as artificial intelligence and genomics. Uncertainty surrounds the potential influence of new competitors, from giants like IBM and Apple to digital health start-ups.
It is natural for people to want to reduce uncertainty, to base strategy on a clear sense of the future. Amazon CEO Jeff Bezos says that people frequently ask him what will change in the next 10 years. A more important question, he says, is what’s not going to change, “because you can build a business strategy around the things that are stable in time.” For example, Bezos said, “It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff, I love Amazon, I just wish the prices were a little higher.’”
What will not change in healthcare is the need for lower costs—dramatically lower costs. The central role that healthcare plays in the U.S. budget deficit demands dramatically lower healthcare spending. Constrained government budgets demand dramatically lower healthcare expenses. Employers burdened by double-digit increases demand dramatically lower health insurance premiums. And consumers, who are experiencing premiums and out-of-pocket expenses rising far faster than wages, demand dramatically lower healthcare costs. These demands will only get more intense as healthcare’s share of the gross domestic product—already at record highs—continues to increase. As one small-business owner recently told The New York Times, “People can’t afford the healthcare they need, and that’s becoming a crisis.”
In a time of uncertainty, a no-regrets strategy for hospitals is to reduce costs—dramatically. Imagine the competitive advantage of a provider being able to approach a large employer and offer, for example, direct contracting for treating their highest-cost conditions along with top-quality outcomes at 30 percent lower costs.
However, for an industry that has been working on costs for decades with limited success, the question is: how?
A Legacy Company Tackles Costs
Southwest shows that low costs are best achieved when they are built into the company’s mission, business model, and operating model. However, Southwest had an advantage that legacy organizations, including America’s hospitals, do not have. Southwest built the company from the ground up around the principle of low cost. In contrast, legacy organizations need to make major changes in culture, structure, processes, skills, and technology to achieve a dramatically lower cost position. For large organizations in complex industries, this degree of change is incredibly difficult both to conceptualize and execute.
The experience of Ford shows what is involved. In 2006, Ford lost $12.7 billion. Testifying before Congress in 2008, Ford’s then-CEO Alan Mulally presented a veritable tutorial in how a legacy organization can transform its costs.
It used to be that we had too many brands. Now we have a laser focus on our most important brand: the Ford blue oval….It used to be that our approach to our customers was: If you build it, they will come. We produced more vehicles than our customers wanted….Now we are aggressively matching production to meet the true customer demand. It used to be that we focused heavily on trucks and SUVs. Now we are shifting to a balanced product portfolio, with even more focus on small cars and the advanced technologies that will drive higher fuel economy in all of our vehicles. It used to be that our labor costs made us uncompetitive. Now we have a ground-breaking agreement with the UAW to reduce labor costs….It used to be that we had too many suppliers and dealers. Now we're putting in place the right structure to maximize the efficiency and the profitability for all of our partners….We have moved our business model in a completely new direction, in line with the most successful companies—and competitors—around the world.
Between 2006 and 2008, Ford did the following:
In 2016, Ford’s net income was $4.6 billion.
Implications for Healthcare
The Southwest and Ford examples present three key lessons for healthcare:
The kind of dramatic cost reduction needed requires a more fundamental approach:
Reconfigure the portfolio. Health systems need to do a top-to-bottom review of demand and performance for every one of their facilities and services. They must be willing to make tough decisions about selling, converting, or closing facilities that do not have sufficient volume or are otherwise unable to perform up to necessary financial or clinical standards. They must be willing to divest service lines that are not delivering value for the organization and community. They must be willing to consolidate services that are performed at multiple locations in close proximity. Radical approaches to facility design should be considered to ensure a match between patient needs and appropriate levels of care. Older facilities have inherent inefficiencies and an inability to evolve with changes in care delivery, while newer facilities often are designed based on backward-looking perspectives. For most hospitals and health systems, facilities and services grow over time, often without a governing plan. Hospitals need to ask themselves what a completely redesigned system would look like—one that meets demonstrable community needs in the most streamlined manner possible. Then they must be willing to take action based on these insights.
Redesign the care model. Waste resulting from problems with care delivery design, coordination, and standardization cost the U.S. between $285 billion and $425 billion annually, according to a study by Donald Berwick and colleagues in JAMA. For healthcare organizations, redesign of care delivery holds great promise to both reduce costs and improve quality. This redesign should include the sites of care, who delivers the care, and standardization of clinical protocols and operations. For example, at Kaiser Permanente, more than half of primary care visits are performed virtually. Kaiser sees many hospital services in the future being performed in the home. The result of clinical care redesign will be greater efficiency and a better experience for both caregivers and patients, and reduction in unwarranted variation that can undermine quality and increase costs. These are perhaps the most difficult changes for a provider organization to make, but are at the core of making leaps in improving quality, patient experience, and efficiency.
Reconfigure use of labor. Hospitals need to leverage the highest cost (per unit and in total) resources to their highest and best use. The clinician workforce is highly trained and expensive. Unfortunately, the application of its skills often is inefficient at all levels (for example, physicians doing excessive paperwork, nurses transporting patients). Optimally matching expertise to the tasks at hand is inherently difficult in such a complex system, but the potential payoff is enormous.
A New Mindset
The existing culture of not-for-profit healthcare tends to value incrementalism, avoid political sensitivities, and allow autonomy. The kind of radical shift in costs that will truly distinguish an organization requires a new mindset. Health systems need to function as operating companies, rather than holding companies, with system executives having the authority necessary to implement changes and influence performance at the facility level. Throughout the organization, executives and physicians need to be held accountable to transparent measures of performance. Hospitals should be run as cost centers, with tight focus on operations. As with Ford and Southwest, there needs to be a leadership commitment to thinking differently about the purpose and design of the organization, and to making the major changes necessary.
In a time of great uncertainty, a no-regrets strategy for hospitals focuses on core principles. And for healthcare, the dominant principle is the need to reduce costs—dramatically.
Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success!