Is American Healthcare Disruptible?

Healthcare blogs lit up last week to dissect the latest demise of a flashy health tech startup. Forward Healthcare was founded by former Google and Uber executives with a goal of “disrupting primary care.” They placed space-ship like pods in shopping malls where patients could talk with AI chatbots about their medical problems and have their blood drawn by little robots. Founder Adrian Arun told Axios, "If Elon has the self-driving car, well, this is the autonomous doctor's office.”  

Like most sci-fi visions, the reality was messier. 

As Rebecca Torrence and Rob Price wrote for Business Insider, “Automated blood draws routinely failed. Lab test offerings were withdrawn. And patients kept getting trapped inside the CarePods.” Ouch.

This story isn’t a new one. A few years back, a young Stanford dropout named Elizabeth Holmes was trying to disrupt healthcare with miniaturised testing devices. We know how that one turned out. A less-well-known story is that of Jim Clark and Healtheon. Clark had founded both Silicon Graphics and Netscape, and was now a billionaire thanks to the Netscape IPO that arguably launched the first dot-com bubble. Clark reasoned correctly that the healthcare industry was a mess, and hypothesised that the internet could be used to disrupt it. But to disrupt, you have to first understand the industry you’re disrupting. There’s a scene in Michael Lewis’s book The New New Thing where Clark’s first hires were sitting around a conference table trying to figure out what their first product should look like. This being Silicon Valley, all of these brilliant, successful software engineers turned out to be immigrants who had never even been patients in the American healthcare system, let alone have insider knowledge of how it worked. 

How did Healtheon turn out? Better than either Forward or Theranos, but not through disruption. Clark raised around $1B from investors on the strength of his own reputation and the vacuous bubble diagram at the top of this newsletter. But unlike both Arun and Holmes, Clark wasn’t wedded to his own fantasies. And so when Healtheon’s first products flopped, he pivoted and bought Medical Manager, a very traditional (read: boring) health IT company, and put Medical Manager’s CEO in charge  of the whole company. Healtheon then acquired WebMD and was basically just WebMD from there on out.

What do entrepreneurs — and their investors — keep getting wrong about disrupting healthcare?

1. Flashy tech doesn’t equal disruption. (Remember how Segway "disrupted" transportation?) As Clayton Christensen explained in his classics including The Innovator’s Dilemma and Seeing What’s Next, successful disruptors almost always use technology that is in most respects inferior to what the incumbents use. What makes it disruptive is using it to open the door to some new business model that the incumbents aren’t interested in, usually because the potential market size is too small or the potential margin is too low.
2. Vertically integrated incumbents can be incredibly hard to disrupt. Christensen used the cell phone industry to illustrate this. The incumbent telecom giants including AT&T and MCI were theoretically ripe for disruption, given the enormous capital tied up in infrastructure to support landlines and long distance calling. Why weren’t they disrupted by any of the cell phone startup companies that came along in the early 1990s? Because the incumbents used their control over key chokepoints to prevent these upstarts from being able to connect to landline networks, at least until the incumbents were able to establish their own cell infrastructure. And the healthcare industry is far more interconnected and vertically-integrated right now than telecom ever was. 

The bottom line is that what Arun, Holmes, and Clark were trying to do was less disruption and more frontal assaults on parts of the incumbent healthcare industry. Which all failed, just as Christensen’s theory would have predicted.

Is disruption even possible in American healthcare?

I think it is, but probably not without major regulatory change to weaken the monopoly effects. Remember that the business cases in The Innovator’s Dilemma — computer disk drives, excavators, and steel mills — were all set in relatively pure free markets with robust competition. Healthcare is a completely different story.

For disruption to occur in American healthcare, you’d have to have a customer base willing and able to go completely off-grid, i.e. divorce itself from the incumbent system, long enough to allow the disrupting system to grow to the point that it could replace the incumbents. Now, there are plenty of individual consumers willing to ditch modern medicine, but the “alternative” medicine most of them embrace doesn’t actually offer a scientifically efficacious alternative for the rest of us. So that approach is never going to disrupt mainstream healthcare. Other consumers will go off-grid in areas where traditional medicine doesn’t have much to offer, such as chronic fatigue, but return when a serious illness comes along where the mainstream system does have effective (if often expensive) treatments. So that approach isn’t going to be disruptive either.

The only disruption scenario I can envision would be if healthcare purchasers in a single geographic region (remember, healthcare delivery is fundamentally local in nature) were to collectively cobble together a complete array of primary care, specialty care, hospital care, and pharmacy, together with some form of an insurance plan. All of it would have to be de-coupled from the established system. It would have to be significantly less expensive. And it would have to be comprehensive enough to meet the full range of health needs of the individuals and families being covered. Some of these pieces exist today, such as direct primary care, the Surgery Center of Oklahoma, and the Mark Cuban Cost Plus Drug Company. But no one is (yet) combining all of these into a single comprehensive offering that an employer could use to replace their traditional health plans.

Unfortunately, right now, both the health insurance industry and the hospital industry have amassed more than enough power to kill any potential disruption, particularly given the layers and layers of federal regulation that these industries have helped craft.

All of which is why I'm bearish on disruption as a route to US healthcare reform. Though I'd love to be proven wrong.