Understanding the Broader Context for Innovation in Health Care
Two flows define innovation in health care. One is the new products coming from suppliers. The other is funds coming from payers. "These two flows collide right in the middle at provider institutions," said Lawton Robert Burns, James Joo-Jin Kim Professor and director of the Wharton Center for Health and Management Economics. Addressing a session on health care technology at the Johnson & Johnson-Wharton Nurse Fellows Program, Burns pointed out that the challenge for providers is that "there is only so much money from payers and a seemingly endless stream of innovations from suppliers."
In addressing both the demand for technology and tight resources, CEOs and other health care executives need to become "ambidextrous," said Burns, who is author of The Health Care Value Chain and The Business of Healthcare Innovation. "You have to focus on downstream as well as upstream."
The Technological Imperative
Over the past two decades, there has been an explosion of new technologies and equipment in health care. Biotechnology has emerged only in the past 35 years and equipment companies such as Medtronic did not appear until the late 1980s. Innovations in pharmaceuticals, biotechnology, proteomics, medical devices, imaging, and other areas have been emerging rapidly.
"There is only so much money from payers and a seemingly endless stream of innovations from suppliers." —Lawton Robert Burns, Professor of Health Care Systems and Management
The percentage of health care spending going toward non-payroll expenses, including medical devices and pharmaceuticals, is increasing. "Within a few years, we are going to be spending more on products than we do on people," Burns said. "We are spending more and more on products and technology. This is the technological imperative."
Understanding the Health Care Value Chain
Every health care innovation occurs in the context of a health care value chain involving purchasers, providers, and producers of health care products and services, as well as payers and distributors.
Physicians have an important role to play in adopting new technologies. "You have to deal with very powerful clinicians whose relationships with sales reps are often closer than their relationships with your own institution," Burns said.
This leads to "stickiness" in health care relationships, despite a steady stream of new products and technologies. Although technology changes rapidly, physicians buy 70 to 80 percent of their products from one vendor in certain device-product categories. These relationships remain stable over time. The market shares of the top five companies for hip and knee implants, for example, have remained remarkably stable even as products have changed rapidly. This is not due simply to personal relationships that physicians have with salespeople, but also because doctors have experience with one type of product. "Putting in a knee replacement from one manufacturer is different from using one from another manufacturer. Doctors ask: Are you going to indemnify me if I switch over?"
By the Morgue
Supply chain decisions are not given a high priority in most hospitals. They are typically viewed as operations, and relegated to the "materials management" department. These departments are often located in the basement, next to a loading dock or near the morgue. "Operations is considered a second-class citizen by CEOs," Burns said.
The "personnel office" used to be viewed in a similar light a few years ago. Now, it has been elevated to "human resources," as health care executives have recognized the cost and importance of people in running a successful enterprise. "The same thing has to happen to materials management," Burns said. "There is almost no training in supply chain management, yet supplies constitute the last and largely unexplored frontier of hospital cost containment efforts."
Demand and Cost
Payers play a vital role in the adoption of health care innovations. Given the high cost of technology, insurance coverage rules are crucial for innovations to take off. Implantable cardioverter-defibrillators (ICDs), a device that is the size of a cigarette lighter and costs $25,000 to $35,000, is an example of how insurance affects demand. Demand rose by fivefold after national coverage rules were established for certain conditions. "The government pays for it and there is more demand." In fact the demand is so high, there is a shortage of electro-physiologists to implant the devices.
More reimbursement leads to more innovation. One such example is a knee implant created by Zimmer that is tailored to women. This improves care, but raises the question of who pays the bill for the resulting high-priced innovations. The price tag for innovations such as hip implants, stents, heart valves, defibrillators, and artificial disks now totals $95 billion.
In addition to consumer demand, technology companies themselves also need to have new products in their pipelines. While the drug life cycle is 10 to 20 years, for a new technology it can be one to three years. "There is continuous product churning and enhancement."
Managing the Innovation Process
To better manage the innovation process, hospitals can encourage physicians to collaborate with them in working with suppliers.
Hospitals also are using outside evaluators to assess the impact of new technology, employing "evidence-based medicine" to make better decisions about implementing technology. This helps to ensure that choices are based less upon relationships and more upon results.
One example of the role of outside evaluations is a test of endo-mechanical products used in laparoscopic surgery. Clinicians in animal labs evaluated 45 different products from eight vendors based on performance. "This gives clinicians information about how to purchase products in a cost-effective way, based on performance and scientific information," Burns said. "They can look at clinical results and cost-quality tradeoffs by vendor, and then offer feedback for making more cost-effective purchasing decisions."
This critical evaluation can help to offset the powerful forces that would otherwise take over the value chain. "What you want is head-to-head comparisons, to get clinicians involved and have credible results," Burns said. "It is critical to confront the marketing literature you get from these companies and take more ownership of the process."
© 2007 The Wharton School, University of Pennsylvania
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