Creative Destruction

Big business spends a lot of time and money on research and development in the hopes that some of the investments will help create an economic moat for the company. They then own a proprietary product or service built around what they do well. They can charge comparatively more for such items or services, and they spend still more copious amounts of time and money protecting those products or services from competitors' encroachments.

"Of course they do," you say. "That's how business works."

Well, here's how it also works. The smarter big companies that want long-term success don't want to be overly dependent on just a few products that can be easily copied, thus throwing their business into a tailspin. Anyone seen Crocs' stock performance lately?

To help fight this complacency, smart leaders spend considerable effort on creative destruction—that is, working to figure out how to make obsolete a product, service, or business model that they've spent so much time developing and protecting. Seems counterintuitive, but it works. If you can destroy your own product, the thinking goes, you can keep from having your company destroyed out from under you—you can innovate before innovation is done to you, making the entire business stronger.

Hospitals haven't had to innovate for many years now. I'm not talking about innovations in patient care or in the kinds of technologies hospitals employ to help diagnose and treat more efficiently so patients live longer and recover better. Those aren't your products. Your hospital doesn't receive the incremental financial boost from using them—in fact, many new diagnostic and treatment technologies do nothing but drag on your bottom line as reimbursements don't match up with the cost of these products. Drug-coated stents come to mind as the best example of this. In this case, the innovations don't result from, nor are they attributable to, the hospital.

No, the hospital's product is patient care, and the stagnation of the hospital's business model has been one reason (before you start writing, I said one reason) hospitals are losing business to outpatient centers, wellness centers, and other outside influences. Let's leave out, for a moment, the issue of physician self-referral. Hospitals' business model hasn't kept up with their customers' desire for more convenience and better customer service, among other innovations these facilities often boast. That's because until recently, they haven't had to innovate in this area. They haven't had to put a high priority on destroying themselves because reimbursements depended on procedures, not outcomes. Slowly but surely, that's changing.

One hospital CFO I know kind of stumbled upon creative destruction, but he's happy it's shaking things up because it's making his local system more competitive. It stemmed from an internal discussion his organization's leaders were having about price transparency. His system faced pressure from a powerful payer to disclose its prices through the payer's Web site. Concerned that the payer was going to disclose prices to its customers only where it served the payer's interest, such as getting price concessions on diagnostic imaging, the hospital's leaders opted for full transparency, putting all its prices on its own Web site where anyone could browse them. These are not only prices for certain goods or services. In some cases, it's for an entire procedure, including follow-up care.

By playing that card, the hospital system has created certain tensions because it's actually shifting business away from its own higher-cost, hospital-based outpatient environment to freestanding ambulatory centers. But there's no reason the hospital can't shift its priorities to capitalize on what its customers want. And this hospital has figured it out well before it would have been forced to otherwise. "It's intentional disruption," he says.

That's the tension they have created in their own market, to their own hospital. It sounds counterintuitive, but the market is going to do it anyhow, so they're trying to lead instead of follow.

Creative destruction indeed.