Reverse Innovation in Health Care: How to Make Value-Based Delivery Work

Vijay Govindarajan & Ravi Ramamurti

288 pages, Harvard Business Review Press, 2018

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We’ve known each other for more than four decades, though our intellectual journeys followed separate trajectories for many years. One of us (VG) was studying strategy and innovation in large US multinationals; the other (Ravi) was doing the same for firms in emerging markets. Around 2010, we began to collaborate around the topic of “reverse innovation”—in which innovations flow from a poor country to a wealthier one rather than the other way around—and then zeroed in on its relevance in a very important industry: Healthcare. In 2013 we published the Harvard Business Review article “Delivering world class health care, affordably,” which showed how some Indian hospitals were able to provide world-class health care at ultra-low prices.

That was the foundation of this book, which explores the potential for reverse innovation of value-based practices from India to the US. When we looked for US organizations that had adopted practices similar to those of Indian exemplars to improve quality, lower cost, and expand access to health care, we discovered that such examples existed even under the prevailing fee-for-service regulatory environment. Our research took us to more than two dozen hospitals; we interviewed over 125 executives in India and the US. Now, we bring together all of our research on reverse innovation in health care to show how revolutionary practices in India can help improve health-care delivery everywhere. —Vijay Govindarajan (VG) and Ravi Ramamurti

Promoting Reverse Innovation and Value-Based Care: How to Get Started

Having spent years studying innovation and, more recently, the health-care industry, we predict that American health care is about to change radically—the same way that Ernest Hemingway famously described the way he went broke: “Gradually and then suddenly.”

And value-based innovations will drive that change.

But a top-down, legislated solution alone is unlikely to suffice—and may not be forthcoming anytime soon. Rather, the answer lies in innovations that start at the bottom and work their way to the top. Our research shows us that innovation can come from just about anywhere: a telemedicine network in rural Mississippi built by the sheer determination of one ER nurse; the pioneering use of health coaches spearheaded by a doctor with one foot in Harvard Medical School and the other in medical missions to the Dominican Republic, Haiti, and Malaysia; and steps taken toward greater access, higher quality, lower costs, and greater profits in a giant health system built from once-struggling Catholic community hospitals in the Midwest.

If bottom-up change can come from anywhere, maybe it can come from you.

It Always Starts with a Visionary Leader

Why isn’t more value-based health care already happening here? We’ve heard many explanations. The usual formulation goes like this: “US health care has many competing self-interests, which are locked in an escalating zero-sum game. Change is hard because no one feels empowered to change the entire system, and everyone thinks an advance in one sector of the industry will entail losses in other sectors. The result is protectionism and inertia.”

Many people are overawed by the complexity of the system and think they can’t change it. Others never doubt that they can. They are the doers, people like Kristi Henderson, a Mississippi-bred force of nature, who drove thousands of back-road miles to sell small-town nurses and state legislators on a telemedicine network. People like the leaders of Ascension, who flew halfway around the world to Bangalore to find better ways to run a Catholic health system in America. People like Rushika Fernandopulle, who reinvented primary care to save hundreds of thousands of dollars in secondary- and tertiary-care costs. And Devi Shetty, whose single-minded mission to serve the poor drives Narayana Health and its Cayman operation, HCCI.

All the innovative companies we studied, both in India and in the US, had one thing in common: a visionary leader who was thoroughly committed to the cause. Purpose is the most important of the five principles of Indian value-based health care that we identified. It’s the alpha driver, and you cannot innovate without it. The good news is that there is plenty of purpose to be found in health care, an industry that literally deals with life and death.

The other core principles of value-based health care are:

  1. A hub-and-spoke configuration. A hub-and-spoke design, with the scarcest expertise and equipment concentrated in a hub, serves as a “focused factory” for advanced procedures. Spokes, connected to the hub by telecommunication links, serve as gateways and as service points for simpler procedures. This simultaneously drives up the quality of care while driving down costs.
  2. An enthusiastic use of technology. Technology improves patient engagement, satisfaction, and quality of care. Innovators use it to build telehealth networks, conduct remote diagnosis and treatment, create electronic-medical-record and information-technology systems, track and analyze costs, provide home-based care (especially for the chronically ill), and develop low-cost alternatives for expensive, imported devices and supplies.
  3. Task-shifting and continuous process improvements. Everyone in the organization must be involved in continuous process improvements, like creating protocols for procedures and using task- shifting to optimize the roles of surgeons, doctors, nurses, and other medical professionals. Where they see gaps, they create entirely new job categories and encourage self-service by patients and their families.
  4. A culture of ultra-cost consciousness. Value-based health care innovators push frugality throughout their organizations. They avoid needless waste and unnecessary procedures, offer bundled pricing, aggressively control fixed and variable costs, are frugal in capital expenditures, and train doctors to think about the financial consequences of every decision. They invest in medically important areas—but no more than necessary—and conserve spending in nonmedical areas.

Each principle of this business model contributes to the goal of providing high-quality care at ultra-low prices to all, but each has its greatest impact when applied with all the others—like the synergy of five cylinders firing at once.

Finding the Loose Bricks

Of course, there are obstacles to incorporating these principles. The markets in India and the US are very different. In India, hospitals treat, patients pay cash. Both providers and patients can know exactly how much a particular procedure costs. Transparency speeds payment, reduces confusion and anxiety, and makes medical bankruptcy less likely. It also encourages extremely competitive pricing. In fact, innovations in India are most often driven by concerns about cost. In the US, medical innovations have historically been driven by efforts to improve quality and safety. Cost savings, if any, are seen as a bonus.

Some people think this difference means the American and Indian health-care systems are fundamentally incompatible, so reverse innovation cannot work. We disagree. The difference is interesting, but costs are now front and center in the American health-care debate. And for the innovator intent on transforming the health care system, the distinction is inconsequential. Why? Because the elements of value-based health care—lower costs, better quality, and greater access—all drive and reinforce each other. It’s a virtuous cycle, and it doesn’t matter where you step in.

More daunting is the regulatory landscape in US health care. Try to do the kind of task-shifting that is routinely practiced by Narayana, LV Prasad, and Aravind and soon medical boards, unions, professional societies, and government regulators will appear in your waiting room, armed for combat. In India, the industry has more freedom to innovate, because government regulation is much lighter, and professional associations are less organized to block innovative practices. Owing to those differences and others, Indian providers turn toward value-based competition, while US providers are mired in a strange market dynamic called “regulated competition,” which serves special interests first and patients second.

Remember, however, that few enterprises were as regulated as the US postal system or the taxi service—but FedEx and Uber found ways around regulatory barriers. What holds U.S. hospitals back is not regulation, but a lack of will and leadership and an organizational culture that is indifferent to costs. As Ellen Zane, CEO emeritus of Tufts Medical Center, told us: “We cannot sustain these kinds of year-over-year increases in insurance premiums—we need an Uber of health care!”

On the bright side, US health care is an ill-built system full of “loose bricks,” and each one presents an opportunity for change.

Rushika Fernandopulle found one in Atlantic City, where casino workers with chronic, high-cost health problems like hypertension, diabetes, and emphysema strained the resources of their union-provided health care. The union was self-insured and cared a lot about cost control, so it gave Fernandopulle room to innovate. He replaced an expensive system of referrals to medical specialists with a primary care practice that delivered much of its care through frontline health coaches with no prior medical training. Fernandopulle had seen community health workers like these on medical missions abroad; he took the innovation and adapted it, addressing regulatory issues and insurance requirements as they arose.

In some ways, Fernandopulle had it easy. He could implement a practice of radical task-shifting because Iora was his company and he made the rules. The physicians who joined him came with a commitment to a new kind of health care. Fernandopulle didn’t attempt to change a company’s culture. he invented a new one.

Changing an entrenched medical culture is much harder. Just ask Gary Kaplan, CEO of Seattle’s Virginia Mason Medical Center, one of the earliest health-care innovators in the US. In 2000 Virginia Mason was struggling financially, and Kaplan set out to turn his physician-driven organization into a patient-driven organization with the goal of providing high-quality care at low cost. Eighteen months later, Kaplan was still negotiating with physicians—one recalcitrant doctor at a time. Resistance to Kaplan’s effort wasn’t subtle, either. When the CEO asked one of his surgeons to go to Japan to learn about Toyota’s highly regarded system for quality control, the surgeon flatly refused to go. The doctor saw himself as an artisan-practitioner. Assembly-line medicine and penny-pinching were beneath his dignity. Many doctors still feel that way.

Kaplan knows from experience that changing a big US hospital is hard even before the effort really gets started. It’s not just legacy cultures that create difficulty but also the absence of organizational thinking. When he first looked for a good model of value-based health care, he surveyed the best of the best: The University of Michigan, Johns Hopkins, Mayo Clinic, Mass General, and Stanford. “Nobody even had a management system,” he told us. That’s how Kaplan ended up in Japan, taking lessons from Toyota. John Doyle tells a similar story, recalling that Ascension searched far and wide for an American health-care network that functioned as any kind of true system—for example, with a centralized supply chain, sophisticated inventory control, or coordinated quality-control protocols. Ascension created its own systems and borrowed ideas from Narayana in India.

These stories are important not only because they point out cultural and organizational barriers to value-based health care but also because they show us that those barriers can be overcome. Gary Kaplan finally did change the culture at Virginia Mason (only ten of the medical center’s 400 doctors left the group), and he improved the productivity of Virginia Mason by 44 percent. Ascension has made impressive gains in quality, efficiency, and cost control.

These successes are heartening, because there are so many obstacles to health-care reform in the US: government regulation, the fee-for-service payment system, skyrocketing insurance premiums, opaque billing practices, malpractice litigation, overbuilt hospitals, patent and drug protections, the FDA approval process, union rules and benefits costs, protectionist professional associations, the high cost of medical school. But if Virginia Mason, Ascension, Iora, and UMMC can effect changes, so can others—one loose brick at a time.

We like the loose-brick analogy because all of our innovators faced obstacles and found ways to get over them, but they didn’t do it by blowing things up. They worked within the system, collaborated with the vested interests, co-opted, cajoled, and planned like crazy. In Mississippi, Kristi Henderson took care, while expanding her telemedicine network, not to cannibalize the practices of rural doctors. When she lobbied state legislators for insurance coverage for telemedicine consults, she made sure the pitch touched every legislator’s agenda and benefited every district. At Virginia Mason, Gary Kaplan spent years talking to his staff about change, assuring them that no one would be left without a job.

We can’t guarantee our innovators a bright and profitable future. It’s far too soon to declare victory. The current crop of value-based healthcare experiments are but green shoots, glimpses of what might yet come. We think of them as faint signals coming to us from the future. Our goal is to amplify those signals to embolden others to launch new experiments.

What would a fully value-based health-care system look like in America, one that embodied all five of the principles from the Indian exemplars? We don’t yet know, but we believe such a system will arise from these promising “next practices,” culminating in sustainable best practices that will be adopted by health-care systems around the world.

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