Regina E. Herzlinger is the Nancy R. McPherson Professor of Business Administration at the Harvard Business School. She was the first woman to be tenured and chaired at Harvard Business School and is widely recognized for her innovative research in health care, including her early predictions of the unraveling of managed care and the rise of consumer-driven health care.
Health care in the United States and in most other developed countries is ailing, says Regina E. Herzlinger. A chaired professor of business administration specializing in health care at Harvard Business School, Herzlinger says that although the world has witnessed astonishing advances in medical treatment in recent years, the packaging and delivery of health care is still inefficient, ineffective, and not very consumer friendly.
Examples of such inadequacies are not hard to find. Medical errors, by some accounts, are the sixth leading cause of death in the United States. Health care costs are soaring around the world. In 2011, according to The World Health Organization, the percentage of U.S. gross domestic product spent on health care rose to 17.9%; The Netherlands was 12%; France spent 11.6%; and Germany 11.1%. Such problems, argues Herzlinger, call for innovative solutions in every aspect of health care, from delivery to consumers, to technology to business models. Government and private investors have been searching for solutions as they invest tens of billions of dollars into the research and development of pharmaceuticals, biotechnology, medical devices, and health services. And yet, says Herzlinger, for all the money being spent, too many innovation efforts fail. Often, this is because innovators are unprepared for the barriers they face in getting their inventions adopted and are uncertain how to overcome these obstacles. Here, Herzlinger shares her insights into some of the impediments to health care innovation and how to overcome them.
IEEE Pulse: Back in 2006, you wrote a piece for the Harvard Business Review in which you described the six forces that you say affect innovation. Can you recap them for us here?
Regina E. Herzlinger (RH): Certainly. They are: industry players, funding, public policy, technology, customers, and accountability. Each of these factors can help or hinder efforts at innovation. Unless the impact of these six forces is acknowledged and managed intelligently by innovators, any one of them can prevent a new treatment, business model, drug, or device from making it to hospitals, clinics, or consumers.
For example, when it comes to players, the health care sector has many stakeholders, each with an agenda. Often, these players have substantial resources and the power to influence public policy and opinion by attacking or helping an innovator. Hospitals and doctors, for instance, sometimes blame technology-driven product innovators for the health care system’s high costs. Medical specialists wage turf warfare for control of patient services, and insurers battle medical service and technology providers over which treatments and payments are acceptable. Unless innovators recognize and try to work with the complex interests of the different players, they will see their efforts stymied.
As far as public policy goes, it is important for innovators to understand the extensive network of regulations that may affect a particular innovation and how and by whom those rules are enacted, modified, and applied. Knowing the politics behind public policy is critical. For instance, officials know they will be punished by the public and politicians more for underregulating—approving a harmful drug, say—than for tightening the approval process, even if doing so delays a useful innovation.
Consumers have become an increasingly empowered force affecting innovation as well. Not only are they more engaged and less passive than they have been in the past, but they have the Internet as a resource in choosing treatments and providers. Both patients and providers are demanding accountability from health care innovators by, for example, requiring that technology innovators show cost-effectiveness and long-term safety, in addition to fulfilling the shorter-term efficacy and safety requirements of regulatory agencies.
These are just a few examples, but of course funding and knowing who is going to pay what for a treatment or product, as well as knowing when is the right moment to introduce a new technology to consumers and providers is vitally important, especially as we move away from technocratic fee-for-service payments to market-based payments for bundles of care. Each of the six factors affecting innovation can result in an innovation failure if ignored by innovators.
IEEE Pulse: When it comes specifically to technological innovation, what are the most typical barriers to seeing a particular idea realized?
RH: The obstacles to technological innovations are numerous. On the accountability front, an innovator faces the complex task of complying with a welter of often murky governmental/payer regulations, which increasingly require companies to show that new products and perhaps services not only do what’s claimed safely, but also cost-effectively.
As for funding, the innovator must work with insurers in advance of a launch to see to it that the product will be eligible for reimbursement (usually easier if it’s used in treatment than if it’s for diagnostic purposes). In seeking this approval, the innovator will typically look for support from industryplayers—physicians, hospitals, and an array of powerful intermediaries, including group purchasing organizations (GPOs), which consolidate the purchasing power of thousands of hospitals. GPOs typically favor suppliers with broad product lines rather than a single innovative product. The intermediaries also include pharmaceutical benefit managers (PBMs) that create “formularies” for health insurers—that is, the menu of drugs that will be made available at relatively low prices to enrollees.
Innovators must also take into account the economics of insurers and health care providers and the relationships among them. For instance, insurers do not typically pay separately for capital equipment. Payments for procedures that use new equipment must cover the capital costs in addition to the hospital’s other expenses. So, for example, a vendor of a new anesthesia technology must be ready to help its hospital customers obtain additional reimbursement from insurers for the higher costs of the new devices.
Even technologies that unambiguously reduce costs—by substituting capital for labor or shortening the length of a hospital stay—face challenges. Because insurers tend to analyze their costs in silos, they often don’t see the link between a reduction in hospital labor costs and the new technology responsible for it. They see only the new costs associated with the technology. For example, insurers may resist approving an expensive new heart drug even if, over the long term, it will decrease their payments for cardiac-related hospital admissions.
Innovators must also take pains to identify the best parties to target for adoption of a new technology and then provide them with complete medical and financial information. Traditionally trained surgeons, for instance, may take a dim view of what are known as minimally invasive surgery, or MIS, techniques, which enable radiologists and other nonsurgeons to perform operations. In the early days of MIS, a spate of articles that could be interpreted as an attempt by surgeons to protect their turf appeared in the New England Journal of Medicine claiming the techniques would cause an explosion of unneeded surgeries.
A little-appreciated barrier to technology innovation involves technology itself—or, rather, innovators’ tendency to be infatuated with their own gadgets and blind to competing ideas. While an innovative product may indeed offer an effective treatment that would save money, particular providers and insurers might, for a variety of reasons, prefer a completely different technology.
IEEE Pulse: Can you offer any examples of a technology innovation that got stalled due to these barriers?
RH: One technology-driven medical device firm saw a major product innovation foiled by several such obstacles. The company’s product, an instrument for performing noninvasive surgery to correct acid reflux disease, simplified an expensive and complicated operation, enabling gastroenterologists to perform a procedure usually reserved for surgeons. The device would have allowed surgeons to increase the number of acid reflux procedures they performed. But instead of going to the surgeons to get their buy-in, the company targeted only gastroenterologists for training, setting off a turf war. The firm also failed to work out with insurers a means to obtain coverage and payment—it didn’t even obtain a new billing code for the device—before marketing the product. Without these reimbursement protocols in place, physicians and hospitals were reluctant to quickly adopt the new procedure.
Perhaps the biggest barrier was the company’s failure to consider a formidable but less-than-obvious competing technology, one that involved no surgery at all. It was an approach that might be called the “Tums solution.” Antacids like Tums—and, even more effectively, drugs like Pepcid and Zantac, which had come off patent—provided some relief and were deemed good enough by many consumers. As a result, the technologically innovative device for noninvasive surgery was adopted very slowly, permitting rival firms to enter the field.
Similarly, a company that developed a cochlear implant for the profoundly deaf was so infatuated with the technology that it didn’t foresee opposition from militant segments of the hearing-impaired community that objected to the concept of a technological “fix” for deafness.
IEEE Pulse: What’s the best way for innovators to avoid these types of obstacles?
RH: A few simple steps can position a new technology-based venture to thrive, despite the obstacles. First, recognize the six factors. Next, turn them to your advantage, if possible. If not, work around them or, if necessary, concede that a particular innovative venture may not be worth pursuing, at least for now. Medtronic was one of the first makers of implantable heart pacemakers, but over the years, the Minneapolis-based company branched into other medical and surgical devices. The company’s success was partly based on its ability to avoid some of the barriers to technology innovation that beset the developer of the acid-reflux device. For example, when Medtronic expanded into implantable heart defibrillators, it worked directly with the surgeons who would be implanting them so that the company could identify problems and set procedures. It confirmed the devices’ safety and efficacy in clinical trials, which greatly simplified reimbursement approval from insurers. And, of course, there was no effective Tums equivalent as an alternative.
IEEE Pulse: You say the single-payer system hinders customer-focused innovation and seriously constrains technology-based innovation. And yet, these systems contain costs well, allow access to health care for all, and often boast superior health measures compared to private insurance systems.
RH: Health care expenditures follow Pareto’s law—20% of the users account for 80% of the costs. So a crass political calculation could take place in single-payer systems: “If I need to control costs, will I control them for the 80% of voters who account for 20% of the costs, or vice versa?” I do not mean to suggest that caring professionals involved in these systems are so crass, but the results are inescapable. Typically, for this reason, the middle class in these countries buy additional private-sector health insurance, creating a two-tiered system. The U.K. single-payer authority, to its great credit, has repeatedly acknowledged this but has not, as yet, effectively addressed this fact.
The single-payer government’s need to strictly control costs translates into less money to spend on care of the truly sick, who are the target of most technology-based innovation. Consequently, a large venture-capital community hasn’t grown up in Europe to fund new health technology ventures. Centralized health care systems, with their buying clout, also keep drug and medical device prices low—delighting consumers but squeezing margins for innovators. The centralized, long-term nature of these systems would seem to offer the potential for innovation in the treatment of diseases where a lot of integration and/or prevention is needed, but the record is not encouraging.
IEEE Pulse: This year we are seeing the adoption of the Affordable Healthcare Act. How is that likely to affect healthcare innovation? Will it erect new barriers or perhaps help to knock a few down?
RH: I have always supported universal coverage. Some people confuse single-payer systems with universal coverage, but the ACA, which relies on private-sector insurers, will clearly result in millions of people being newly insured. For technology innovators, the ACA has one clear benefit—it enlarges the market. But a very important ACA innovation is often ignored. By encouraging bundled payments—for example, payment for a total knee replacement bundle rather than for each of its component parts—ACA makes it possible for innovators who can demonstrate cost effectiveness to be included in the bundle. For example, telemedicine providers, say, for congestive heart failure monitoring, who were previously hampered in the U.S. market due to the lack of codes or coverage decisions, can now be included in bundles in which they can demonstrate cost effectiveness despite the absence of a code or coverage. Bundling also encourages investments in IT that will connect the disparate systems of the components for the bundles, another promising area which has too long been hampered by the absence of fee-for-service payments for IT.
