The next time you drive across town, count the number of Blockbuster stores you see.
We've come a long way from the time when there seemed to be a Blockbuster on every corner and in every strip mall. In 2004, Blockbuster had more than 9,000 stores. Ten years later, Blockbuster had closed, its customers lured away by the convenience, selection and low prices offered by competitors providing streaming access to video entertainment.
It is incredibly difficult to be a store-based business in the United States today. Blockbuster, Borders, Barnes & Noble, Best Buy, Office Depot, Radio Shack and many others have struggled to compete with companies that think in an entirely different way about interacting with consumers. These competitors have a huge array of products, low prices, convenient online ordering and a detailed understanding of each consumer's preferences. In the case of videos, books, games and software, these companies even have done away with the physical products, instead providing them digitally. These types of innovations leave traditional store-based retailers with very few possible value propositions on which to base their businesses.
Hospitals are the stores of health care. And if we are to be candid, they are not very customer-friendly. The hospital store has high prices, limited locations, inconvenient parking and long wait times, plus it can be difficult to find your way around. Hospitals are a very appealing target for competitors that can deliver convenient care at low prices and are committed to reaching consumers as close to home as possible — including through a smartphone.
These well-funded nontraditional competitors are looking to take a significant chunk of low-acuity health care business and transform health care into an outpatient- and online-focused model. That process is being markedly accelerated by incentives for patient comparison shopping arising from high-deductible health plans, along with the movement toward providers' sharing financial risk for the health of the populations they serve.
Consider just a few examples of nontraditional competitors. The iTriage app allows you to learn possible causes of your symptoms and schedule an appointment with an appropriate specialist from your mobile phone. The Doctor On Demand app connects you with a physician for a 15-minute video chat for $40. One Medical Group operates primary care clinics in urban areas that offer mobile scheduling of same-day appointments, 95 percent on-time starts, on-site lab services and email follow-up with physicians. And Walgreens is offering lab testing at some of its walk-in clinics through a partnership with Theranos, using a technique that can deliver results of complex lab tests quickly and economically with just a few drops of blood.
Few legacy companies have constructively transformed their business models in the face of this type of market upheaval. Given such a track record, hospital executives need to focus thoughtfully and intently on how they will avoid the fate of Blockbuster and other struggling store-based businesses.
Evolution or Revolution
There are two basic approaches to large-scale organizational change: evolution or revolution.
The evolutionary approach is often ascribed to Harvard Business School professor Michael Porter, who recommends that successful organizations focus their innovations on honing a distinct existing competitive advantage — an approach that brings success when the current business model is sound.
The revolutionary approach is often ascribed to another Harvard Business School professor, Clay Christensen, who coined the phrase "disruptive innovation." Christensen encourages companies that are faced with disruption to disrupt themselves first, rather than wait to be disrupted by others.
For hospitals, the evolutionary approach has understandable appeal. It appears to allow hospitals to leave in place the current organizational structure and processes that have brought success in a world of fee-for-service payment and first-dollar insurance coverage, while migrating carefully to new developments such as value-based payment contracts.
The complication to the evolutionary approach is that the organizational structures, physical assets, processes and resources needed for the new business model are fundamentally different from those needed for the current business model. Blockbuster couldn't compete with Netflix by offering a better DVD, and hospitals can't prepare for an outpatient and Web-based health system by building new inpatient towers.
The evolutionary approach also supposes that hospital executives can time the arrival of the new business model in their market and step into that new model at just the right moment. However, disruption by definition is rapid and unpredictable. For example, over the past five years, franchise-model urgent care companies have been doubling and tripling their number of clinics, with venture capital and private equity backers knocking on the door to invest. It's highly unlikely that hospitals can either time this transition or make the fundamental changes needed in a way that allows for a rapid pivot to an entirely new way of doing business.
The revolutionary approach requires that executives envision where the market will be in the future and transform the organization as rapidly as possible for that future. In this scenario, hospitals would experience disruption, but it would be disruption controlled by the hospital community rather than inflicted by outside forces.
The difference between the evolutionary and revolutionary approaches to change is illustrated by the way Kodak and Fujifilm confronted digital photography. Both companies saw digital photography coming more than two decades before it gained consumer acceptance. Both companies reacted by diversifying their businesses. But Fujifilm diversified much more rapidly and aggressively. Kodak held onto the old business model for longer, still introducing innovations to film as late as 2005. Kodak filed for Chapter 11 bankruptcy in January 2012.
What It Takes
Once they have committed to change, health care executives need to realistically assess the infrastructure, skills, resources and processes necessary for a community-focused, value-based business model. Consider just four examples:
Ability to stratify the population according to health risk.To control the cost of care, hospitals and health systems will need to identify health care consumers most at risk for costly services. This requires information from all sites of care, from insurance claims, and perhaps even from a consumer's everyday life. Some hospitals are contracting with data brokers to access information about consumer spending to identify high-risk patients, such as an asthma sufferer purchasing cigarettes.
Community outreach to intervene with high-risk consumers.Care management staff will need to support high-risk patients in their homes and through schools, employers, public health agencies and religious organizations. Care management can include activities such as helping patients to understand a medication regimen and test their blood sugar levels as well as addressing environmental factors like transportation, diet or living conditions.
Coordinated networks of primary, secondary, post-acute and ancillary care providers.Hospital-based providers will need to fundamentally restructure their physical assets and delivery network. They will need to own or partner with a network of conveniently located facilities that provide primary care, specialty care, urgent care, same-day surgery, lab tests, imaging and post-acute care. That network will need to function with uniform care protocols and be connected by an integrated information system.
Web and mobile access for administrative and clinical interaction. Hospitals will need to provide patients with the ability to get health information, identify appropriate providers, schedule appointments, monitor health, receive treatment, interact with care managers and follow up with providers through kiosks, computers and smartphones, essentially setting up a network allowing contact and care in any location.
The Conundrum of Disruption
The disruptive environment presents health care executives with a strategic conundrum. On one hand, disruptive innovation is a daunting business proposition. It invariably attacks the revenue model, and there is no established playbook for replacing that revenue. On the other hand, only a very small number of health care organizations have a truly "distinctive advantage" that can carry them through market upheaval without a basic change to their business models.
This level of ambiguity makes it all the more important for health care executives to promptly and thoughtfully assess their organization's strategic direction while they still have the time and financial resources to make the necessary transition.
Ultimately, it is a business imperative for hospitals to re-examine their role in a health system that no longer focuses on inpatient care. But there is an equally compelling mission imperative.
Health care professionals devote their careers to improving their communities' health. For too long, these professionals have been trapped in a system that undermines that mission — a system that rewards high volume and sickness rather than low volume and wellness, a system that pays more for care that results in complications than for fostering healthy behaviors that help to avoid acute care.
Health care executives have an opportunity to shape a system that focuses not on facilities for sickness care, but community networks for wellness. It's an opportunity that our nation's dedicated health care executives should seize.
Kenneth Kaufman is the chair of Kaufman Hall in Skokie, Ill.