Which customers should the disruptors in health care target?

In discussing disruptive innovations in health care, we generally focus our attention on the new enabling technologies or the new business models. While the technology and the business model define the disruptive solutions, customers who adopt the innovations are the ones who bring disruption to reality. As we have pointed out, disruptive innovation is the only way to curb skyrocketing health care spending. Then, finding the most willing customers for disruption is critical to applying the brakes to this spending crisis.

In this pursuit, the first challenge rests with the term “customer” as it is differently defined for various stakeholders. For clinicians and hospitals, the customers are patients, but for manufacturers, service providers, and insurers, the customers could be physicians, hospitals or other enterprises. As often is the case, historical categorizations of “attractive” customers are not necessarily the best targets for disruptive solutions.

If we ranked everyone in the U.S. by how much they spend on health care annually, the highest spending 1% (think 80-something chain smoker with multiple illnesses) of the population accounts for nearly 23% of spending; the top 10% accounts for nearly 70% of spending. Moreover, elderly and chronic-care patients are viewed as the industry’s most expensive consumers. Naturally, the entire health care ecosystem is focused on these high-expense groups to find savings, but looking at expenditures is not the most effective way to lower overall costs. Why not? Because those groups are simultaneously being targeted by enterprises focused on growth and profits. Hospitals are highly motivated to keep treating chronic-care patients who also have good private insurance. Drug and device manufacturers are aggressively pursuing next generation products for the elderly, as well as chronic disease and comorbid patients.

This is the beauty of disruptive innovations: they quietly creep up on the established enterprises. Sometimes, much like the citizens of Troy welcoming the wooden horse left behind by the retreating Greeks, many market leaders welcome disruptors to share the market. Incumbents looking to improve their margins are often happy to hand-off less profitable markets to entrants. By the time the incumbents realize the tide has turned against them, it is often too late. Then, how can the disruptors creep up on the incumbents without getting noticed? How can the disruptors make the incumbents welcome them with open arms?

Disruptors are successful because they target customers who are either (1) consuming very little, or (2) have been rejected by the incumbent enterprises as less valuable. In America, customers who are ready for new-market disruptions are those who contribute less than 3% to total health care expenditures—about 150 million Americans. Those who need low-end disruptions are the Medicare and Medicaid patients whom many physicians and hospitals are reluctant to treat.

With nearly a third of Americans suffering from chronic diseases, the exiting health care system has neither the time nor the interest to compete against new entities offering new value propositions to these currently low-cost (but eventually high-cost) health populations. Although there are already many wellness and health-oriented products and services targeting these “nonconsumers”, what many in this group really need are innovative therapies addressing progressive chronic diseases, such as diabetes, heart diseases, and mental and behavioral disorders. They need customized medical care that can help them remain low-contributors to the overall health spending. This new market opportunity has not been much addressed, and we need more disruptors to take on the challenge.

With the Affordable Care Act expanding the coverage for Medicaid and increasing cost pressure on Medicare, many providers will be more than happy to farm out Medicare patients. Low-end disruptors who can consistently be profitable with Medicaid and Medicare patients will have discovered the transformative delivery model. Once validated, the new model could replace many of the established systems that are inefficient and unprofitable – the beginning of a new paradigm. Regulatory issues, risk management, and underlying cost structure make this a tall order. But, to solve current crisis, an inspired innovator’s touch is needed.

Looking at potentially disruptive ideas from customers’ perspectives is an important exercise for innovators. Because of health care’s unwieldy size and complexity, it’s critical to identify the segments of the population who will seriously consider alternative care options. The mission then, if innovators choose to accept, is to find medical and clinical products and services that are simple and affordable for either those who are consuming very little care or those whom the current system cannot wait to off-load.