P e r s p e c t i v e : In n ovat i o n

Perspective
Disruptive Innovation In Health Care Delivery: A
Framework For Business-Model Innovation
Coupling technological advances with appropriately matched
business models is the right prescription for our ailing health system.
by Jason Hwang and Clayton M. Christensen

ABSTRACT: Disruptive innovation has brought affordability and convenience to customers

in a variety of industries. However, health care remains expensive and inaccessible to many
because of the lack of business-model innovation. This paper explains the theory of disrup-
tive innovation and describes how disruptive technologies must be matched with innova-
tive business models. The authors present a framework for categorizing and developing
business models in health care, followed by a discussion of some of the reasons why dis-
ruptive innovation in health care delivery has been slow. [Health Affairs 27, no. 5 (2007):
1329–1335; 10.1377/hlthaff.27.5.1329]

I
t i s a l m o s t r e q u i s i t e that any dis- ness models to deliver increasingly affordable
cussion about the future of health care be- and accessible products and services. We call
gin with a reference to the unsustainable the process that drives these advances “disrup-
growth rate of U.S. medical spending. Charts tive innovation,” and we believe that it is a nec-
and graphs expound on health care’s acceler- essary component to creating a high-perform-
ating share of gross domestic product (GDP), ing health care system that is available to all.
depicting a voracious beast that threatens to
swallow what little money remains for other Defining “Disruptive Innovation”
vital services. And yet, although deliberations The theory of disruptive innovation helps
about how to curb this dramatic increase in explain how complicated, expensive products
spending are imperative, a related, but and services are eventually converted into sim-
equally important, question is often lost amid pler, affordable ones.1 Exhibit 1 portrays the
these debates. performance of a product or service, which
In this paper we attempt to address this gradually improves over time. However, there
other side of the coin. Instead of asking how are actually two different trajectories of per-
we can afford health care, we instead ask how formance improvement in every market, de-
we can make health care more affordable. We picted in the graph by the solid and dotted
present a conceptual framework from the lines.
world of business administration that explains The solid lines depict the continual im-
how other industries have coupled cost- provement of a product or service that is intro-
reducing technologies with innovative busi- duced by companies over time. Although these

Jason Hwang (jhwang@innosightinstitute.org) is executive director of the Healthcare Practice at the Innosight
Institute in Watertown, Massachusetts. Clayton Christensen is the Robert and Jane Cizik Professor of Business
Administration at the Harvard Business School in Boston.

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DOI 10.1377/hlthaff.27.5.1329 ©2008 Project HOPE–The People-to-People Health Foundation, Inc.
P e r s p e c t i v e s

innovations can be either small and incremen- new product is usually simpler, more conve-
tal or dramatic breakthroughs, we have chosen nient, and more affordable, it enables the par-
to call them all “sustaining innovations” be- ticipation of a new set of customers who were
cause they sustain the existing trajectory of previously ignored by the market or shut out
performance improvement. Sustaining innova- completely. As shown in the exhibit, not only
tions result in better products that can be sold does this type of innovation take root in a por-
for higher profits to the best customers—a tion of the market that is least demanding or
prevailing mantra of the business world that not consuming at all, but it also targets cus-
can offer prudent guidance for businesses and tomers who are least attractive to the market
entire industries for many years. leaders. Successful incumbent firms will al-
However, the dotted lines in Exhibit 1 re- most always choose instead to focus on offer-
flect a different trajectory: customers’ demand ing sustaining products to their higher-paying,
for and usage of ever-improving products and performance-hungry tiers of customers.
services. The spectrum of customers’ desire for Because disruptive products do not appeal
increased performance is represented by the to the best customers paying the highest
multiple dotted lines, but what is interesting is prices, they are almost always introduced by
that these lines, beginning with the least- new entrants rather than the dominant in-
demanding tier of customers, eventually inter- cumbents of an industry. Yet once the disrup-
sect with the trajectory of product improve- tive product establishes a foothold in the mar-
ment. These points of intersection are the ket, it too begins to improve over time, and,
graphic representation of the fact that compa- one by one, customers of the sustaining com-
nies upgrade their products with features pany find that their needs can be met by the
much more quickly than most customers can disruptive innovation. Before long, the leaders
use them. And when products begin to pack in find themselves bereft of customers.
more functionality than customers need or de-
sire, a different type of innovation occasionally Impact Of Disruptive Innovation On
emerges—a disruptive innovation. Value
In contrast with sustaining innovations, a Disruptive innovation explains how up-
disruptive product is actually not as good as start companies, in an effort to deliver more-
what existing customers are already using, and affordable and -accessible solutions, are able to
hence it does not appeal to many customers in sweep away once-dominant firms with alarm-
the existing market. However, because the ing regularity, often before the incumbents

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and their leaders realize that their days are quelled shows how long we have tried to an-
numbered. Canon did it to Xerox by bringing swer the wrong question. When embedded
slower but less costly tabletop photocopiers to within disruptive business models that capi-
the market. Toyota did it to General Motors by talize on increased convenience and afford-
introducing less stylish but cheaper models, ability, new technologies can deliver tremen-
and now Korean, Chinese, and Indian automo- dous value. We next address the critical step of
bile manufacturers are disrupting Toyota by business-model innovation that must be
doing the same thing. paired with these technologies.
One of our favorite examples was the dis-
ruption of the mainframe and minicomputer Disruptive Technologies And
by the less powerful but more affordable per- Business-Model Innovations
sonal computer (PC). Only a few decades ago, We are often asked why, with so many so-
access to computing power was very expen- phisticated medical technologies introduced
sive, and computers were complicated to use. every year, health care has not been disrupted
To compute, one had to bring a stack of punch to a significant degree already. The reason is
cards to a corporate mainframe center or to a that technology has almost always been imple-
university, where highly skilled computer sci- mented in a sustaining manner in health
entists and technicians could help process the care—primarily to help hospitals and doctors
jobs. With the introduction of the PC, how- solve the most complex problems. There is
ever, many more people could afford to com- nothing wrong with this, of course, but it does
pute in their own offices and homes without little to make health care more affordable and
the intervention of specially trained experts. accessible. To understand why this happens,
As PCs became more powerful themselves, we must start by analyzing what constitutes a
fewer individuals and businesses needed the business model.
expensive computing power of a mainframe. The starting point of a successful business
And although we spend far more today on model is its value proposition: a product or
computers than we did in the past, hardly any service that helps customers get a job done
of us ever questions the fact that we are all more effectively, conveniently, and affordably
better off. (Exhibit 2). Managers then bring together a
The widespread belief that increased set of resources—including people, supplies,
spending in health care, particularly on new intellectual property (IP), equipment, and
technologies, is something that must be cash—required to deliver the value proposi-

EXHIBIT 2
The Four Components Of A Business Model

Profit formula: Processes:

Assets and fixed cost structure, and the Ways of working together to address
margins and velocity required to cover them recurrent tasks in a consistent way: training,
development, manufacturing, budgeting,
planning, etc.

SOURCE: Authors’ analysis (with Mark Johnson).

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tion. As employees and other resources repeat- languished in favor of proposals that offered
edly work together to generate the product, higher-end products for the company’s best
processes emerge and become ingrained in the customers. In contrast, IBM created a very dif-
business model. Finally, a profit formula mate- ferent business model in Florida, allowing it to
rializes, which defines the pricing, mark-ups, grow autonomously despite the threat of can-
gross and net profit margins, asset turns, and nibalizing sales of more-profitable products.
volumes necessary to profitably cover the DEC was disrupted away, along with all of the
costs of the resources and processes that are other minicomputer manufacturers, while
required to deliver the value proposition. IBM’s new business model, with the micro-
Over time, an established business model processor at its core, revolutionized the world.
begins to determine the types of value proposi- In health care, most technological enablers
tions an organization can and have failed to bring about
cannot deliver. In other lower costs, higher quality,
“In health care, most
words, once the pieces of a and greater accessibility. We
business model have co- technological believe that the primary rea-
alesced to deliver a particular enablers have failed son is a lack of business-
value proposition, the causal- to bring about lower model innovation, for a vari-
ity of events begins to work in costs, higher quality, ety of reasons that we postu-
reverse—only value proposi- and greater late at the close of this paper.
tions that fit the existing re-
accessibility.” A Typology Of
sources, processes, and profit
formula of the organization Business Models
can be successfully taken to market. In our re- Before describing what can and needs to be
search on disruptive innovation, the only in- done in health care, we present a construct for
stances when an original market leader suc- classifying and analyzing business-model in-
cessfully transitioned to becoming a leader in novation. In general, business models can be
the new disruptive plane of competition oc- categorized into three types: solution shops,
curred when the incumbent established an en- value-adding process businesses, and facili-
tirely autonomous business unit organized tated user networks.2
around the disruptive value proposition. This n Solution shops. Solution shops are in-
independent business was therefore allowed stitutions built to diagnose and solve unstruc-
to create its own profit formula, making tured problems. Consulting firms, advertising
money on lower margins than the parent com- agencies, research and development organiza-
pany could, while processes and resources tions, and many law firms employ this type of
were also markedly different because they business model. These solution shops deliver
were adopted under the new profit formula. value primarily through the people they em-
Many companies actually had disruptive ploy—experts who draw upon their intuition
technologies within their grasp but failed to and problem-solving skills to diagnose the
link those technologies with disruptive busi- cause of complicated problems and recom-
ness models. For example, as the PC market mend solutions—and successful firms are
was heating up, Digital Equipment Corpora- those that can attract the best talent. Solution-
tion (DEC), the leading manufacturer of mini- shop work tends to be unique for each cus-
computers, indeed had access to microproces- tomer, who is often quite willing to pay very
sors. In fact, given the company’s industry high prices in return.
expertise and experience, it made some of the n Value-adding process businesses.
best ones. But DEC’s business model could not These businesses transform inputs of re-
profitably make and sell computers for less sources, such as people, equipment, raw mate-
than $50,000, and internal business plans that rials, energy, and capital, into outputs of
featured microprocessor-based computers greater value. The business model is built to do

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this in repetitive ways so that the organiza- mixtures of multiple business models strug-
tion’s capabilities are embedded more in its gling to delivery value out of chaos, incorporat-
processes than in its resources. Although some ing indecipherable systems of cost accounting,
value-adding process businesses may be more excessive overhead, pervasive cross-subsidiza-
efficient than others, as a whole they focus tion, and an unacceptable amount of variability
their attention on process excellence that can and medical error.
deliver high-quality services and products Nevertheless, there are already examples of
consistently at a lower cost, and they are less business models in health care whose re-
affected than other types of businesses are by sources, processes, and profit formulae appro-
the variability that occurs when outcomes de- priately match the nature of their value propo-
pend on people’s intuition. Often, results can sitions. Many medical procedures, ranging
be guaranteed or redone free from having a nurse use a
of charge. Retailing, restau- rules-based diagnostic test to
“Legacy institutions
rants, automobile manufac- verify the presence of Group
turing, and petroleum refin- of health care A streptococcal pharyngitis
ing are examples of this type delivery are jumbled and then writing and filling a
of business model. mixtures of multiple prescription to cure it, to her-
n Facilitated user net- business models niorrhaphy and angioplasty,
works. User networks are en- struggling to delivery are value-adding process ac-
terprises in which the same tivities. This type of work is
value out of chaos.”
people buy and sell and de- possible only after a definitive
liver and receive things to and diagnosis is made first, often
from each other. In these types of businesses, by a solution shop. But when the value-adding
the companies that deliver value and make procedures are organizationally separated
money are those that facilitate the effective op- from the work of solution shops, the overhead
eration of the network and its user transac- costs of the value-adding activities drop so
tions. Mutual insurance companies are user- dramatically that focused value-adding proc-
network businesses—customers deposit their ess hospitals and clinics can deliver care at
insurance premiums into a collective pool, and prices that are 60 percent lower than those at
they take claims out of it. Telecommunications hospitals and physician practices in which the
companies, which facilitate calls and data business models of value-adding process busi-
transfers among their customers, as well as the nesses and solution shops are conflated. Insti-
online auction site eBay, stock exchanges, and tutions such as MinuteClinic, Shouldice Hospi-
many activities of banks are also user-network tal in Ontario, and certain focused cardiology
businesses. hospitals are examples of value-adding process
businesses in health care.3
Finding The Right Business Meanwhile, although facilitated user net-
Models For Health Care works remain underdeveloped and underused
The two dominant business models in in health care, they are an ideal business model
health care—those of general hospitals and for the care of many chronic diseases. Familiar
physician practices—are solution shops that examples include Weight Watchers and Alco-
emerged in an era when nearly all medical care holics Anonymous; dLife, which created a net-
relied on the intuition of highly skilled profes- work for diabetics and their families, is an-
sionals. But over time, these institutions have other example of a user-network business that
subsumed under their organizational umbrel- facilitates the exchange of information and
las many activities that are perhaps better care advice among its customers. Using a vast
suited to businesses based on value-adding array of patient and insurance carrier data,
processes or user-network models. The legacy Revolution Health is building a network that
institutions of health care delivery are jumbled will allow users to find matched cohorts, share

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data, and learn from one another. User net- such a system is critical, and the importance of
works will help shift much of the care of interoperable health information technology
chronic diseases out of the intuitive-based (IT) cannot be stressed enough. Health IT sys-
practice of hospitals and physician practices, tems must serve as the connective tissue join-
whose business models are poorly equipped to ing the various pieces of health care delivery
meet the needs of these people. Similar to into a coherent system that delivers continuity
value-adding process hospitals that can per- through safe, satisfying relationships. The role
form procedures with higher quality and at of care coordination can also be performed to
dramatically lower cost than traditional hos- varying degrees by a patient-centered medical
pitals, user-network businesses will also im- home (PCMH), telephonic services such as
prove the quality and reduce the cost of care Revolution Health’s Nightingale service, Web-
for many behavior-dependent chronic dis- based decision-making software, and personal
eases. health records (PHRs).
These disruptive business models attempt n Lack of a retail market. Disruptive in-
to deliver value propositions that are distinct novation requires that a market of consumers
from those of hospitals and physician prac- carry proper incentives to shop for products
tices. By embedding into their business models and services that best meet their needs. This
the technologies that have simplified the once- has long been the criticism of the third-party
complex work performed in solution shops, payer system, and dizzying combinations of
the disruptive entrants fit together their re- deductibles, coinsurance, copayments, and
sources, processes, and profit formulae in ways limits have failed to create the true retail mar-
that hospitals and physician practices cannot ket necessary to generate shopping behavior.
match—nor should they be expected to. Be- Health savings accounts (HSAs), in combina-
cause these disruptive businesses focus on tion with high-deductible health plans, are
specific, rules-based portions of health care, perhaps the best vehicle available today to en-
they can deliver care at lower cost and with courage rational health care purchasing deci-
higher quality than could the models of old. sions.
This is because the processes have such pre- However, it is important to recognize that
dictable variation that work can be transferred the health care system comprises highly inter-
from specialists to generalists, from generalists dependent business models, and one cannot
to nurses and other physician extenders, and simply plug in a new component and expect it
ultimately to patients themselves. to work. HSAs do create proper incentives for
Pairing technological enablers with disrup- healthy behavior, but as long as the health care
tive business models is what leads to greater delivery system remains costly and inconve-
affordability and accessibility, and this is nient, customers rationally avoid spending
where health care entrepreneurs and policy- their money on those services. In other words,
makers must focus their energy if the same de- until we see business-model innovation in
gree of innovation is to be brought to health health care delivery in conjunction with HSAs,
care that has already transformed numerous we will continue to see individuals paradoxi-
other industries. cally avoiding the healthy behavior that these
vehicles were meant to encourage.
Challenges To New Business n Regulatory barriers. Well-known bat-
Models In Health Care tles over federal moratoria on focused spe-
n Fragmentation of care. Carving fo- cialty hospitals, state certificate-of-need
cused facilities and user networks out of to- (CON) policies, and restrictions on physi-
day’s mixed models of health care delivery cians’ ownership of medical facilities have all
might indeed capture unrealized efficiencies involved impassioned claims by proponents of
and cost savings, but they also might fragment the status quo that disruptive change could
the delivery of care. Coordination of care in jeopardize public safety for the sake of higher

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A
profits. Interestingly, every company and in- s w e h av e t r i e d to emphasize in
dustry that was eventually disrupted has had this paper, the appropriate solution is
supporters who at one time lobbied against to encourage the development of dis-
change and argued that disruptive enterprises ruptive business models that can assume a
could never offer more than substandard per- greater share of the workload—not to force
formance and unacceptable quality. the old models of solution-shop medicine,
The firms that grew to become successful successful in their own right, to twist and
under specific regulatory conditions subse- conform. By coupling technological advances
quently worked very hard to make sure that with appropriately matched business models,
those conditions remained in their favor. It disruptive innovation has brought afford-
wasn’t very long ago that General Motors lob- ability and accessibility to industries ranging
bied for increased tariffs and quotas on Japa- from steel making to personal finance, and it
nese imports, arguing before Congress, is the right prescription for the ailing U.S.
“What’s good for General Motors is good for health care system—a treatment that is des-
America.” perately needed and long overdue.
However, although often written with good
intentions, these regulations unintentionally This work was supported in part by a grant from the
trap health care in high-cost models of care. California HealthCare Foundation.
For example, many states do not allow nurses
to interpret simple test results or write basic NOTES
prescriptions, leaving care delivery to be per- 1. For details about the research that underlies the
formed by physician-staffed solution shops. theory of disruptive innovation, see C.M.
This makes sense for complex illnesses that re- Christensen, The Innovator’s Dilemma: When New
quire the intuition of experts, but such regula- Technologies Cause Great Firms to Fail (Boston: Har-
vard Business School Press, 1997).
tions leave no room for value-added process
businesses such as nurse-staffed retail clinics 2. C.B. Stabell and Ø.D. Fjeldstad, “Configuring
Value for Competitive Advantage: On Chains,
that can deliver better and more cost-effective Shops, and Networks,” Strategic Management Jour-
care for a growing list of conditions. Health nal 19, no. 5 (1998): 413–437.
care policymakers must recognize the hidden 3. For further discussion about the value of focus,
cost of supporting and renewing regulations see R.E. Herzlinger, Market-Driven Health Care: Who
that inhibit innovation over the long run. Wins, Who Loses in the Transformation of America’s
n Reimbursement. Finally, returning to Largest Service Industry (Reading, Mass.: Addison-
Wesley, 1997), 157–199.
our original premise that it is a mistake to fo-
cus only on cutting costs when trying to fix
the health care system, regulators and payers
often direct their attention to cutting reim-
bursement rates as the primary solution. How-
ever, cutting reimbursement in an attempt to
force the solution-shop business models of
hospitals and physician practices to somehow
figure out a way to become more efficient does
little to improve health care delivery. With
lower reimbursement, hospitals and physi-
cians struggle even more to fulfill their value
propositions of providing complex, inherently
expensive medical care, and they become even
less inclined to hand off work to value-added
process businesses.

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