Editor’s note: This is the second article in a four-part series on innovation. In Part 1, the author defined the relevance and value of five vectors of innovation: new processes, services, networks, science and business models. These vectors will be increasingly valuable as the care delivery system evolves. In this article, the author explores the economic and strategic value of the different vectors of innovation. Parts 3 and 4 will discuss strategy execution and strategy innovation, respectively.

Innovation will recharge quality and standards of care, cost and value of care, and the access channels that enable patients and providers. Boards play a significant role in supporting and leading innovation in their organizations. However, there is more to this than first appears, and board leaders need to gather a practical view of health care innovation. That view includes three areas of effort:

  • assessments of new opportunities;
  • appropriation of resources to plans;
  • accountability of people and programs.

Boards invest time and effort on the oversight work that is associated with compliance and operations. More intentional work on the strategy and innovation front must be part of the process going forward.

Boards must play a lead role moving their organizations from the past into the future: from futurist Ian Morrison’s first- and second- curve realms to a future state we could think of as the third curve. That third curve horizon is not so distant. Looking out a decade brings a different set of technical, market and economic realities for providers and the patients they serve. Trustees and their executive teams are duty-bound to get these matters on the agenda now.

Vectors of Innovation

There are different types of innovation. In the context of health care delivery and resources, we can approach innovation as five vectors: process, service, network, science and business model, or model 9.

Process innovation is perhaps the most familiar work in health care today and it gets most of the resource and priority attention. Some of this process work is focused on improving or sustaining the common methods of care, the sequence or protocol for care, or the components of a care process. The work of process innovation revolves around a number of concerns:

  • quality of care
  • safety and reliability
  • variability of care
  • standards of care
  • resource elements
  • risk management
  • eliminating waste
  • patient experience

While these concerns are part of the general health care fabric, there are cultural and process norms that often stand in the way of innovation. As such, the innovation track record often is a little gray.

Over the last decade, the disciplines and capabilities for process innovation have taken great leaps forward, but huge opportunities still lie ahead. These opportunities have economic power and tension behind them. While estimates abound, we estimate the value of process innovation at $150 billion and probably have room to spare. To the average hospital board, this might be factored into the economic value of admissions and ambulatory care. Going forward, we will be pressed to explore this kind of measure relative to broader indicators reflecting total patient care across acute and ambulatory settings. In any event, process innovation is a major value driver, and a subject that board members are coming to appreciate.

Service innovation has a handful of meanings. First, there are vertical service line concerns that relate to primary care and specialty service depth and scope. Service lines involve several resource, access, cost and value, quality, support and leadership elements. Service lines are economic engines. They comprise the relative capacity and throughput of care delivery systems, set limits and provide advantages to an organization, and shape the cultures and subcultures of primary and specialty care within networks and across provider tribes.

Second, there is the lateral side of service lines, which refers to the reach and access of patients to standards of care and quality of service. Lateral service line efforts most often are geared toward coordinating care and setting normative expectations for patients, providers, technicians, employees and managers at different levels of the health care system. While boards have a 25-year history of exposure to service line strategy, the advanced disciplines of service line management have been slow to emerge. Chronic disease management is an opportunity to drive significant value. As provider interests have evolved with the times, the board conversation has shifted from staffing and credentials to access, integration, quality, experience, outcomes, resources and the capacity to attract, convert, serve and sustain patients.

Service innovation is a big deal for governance. It involves the revenue engines, the resource engines and the market relevance of the entities for which we are responsible. Without service innovation in both vertical and lateral terms, hospitals and systems stand still in a world that continues to evolve. The development of second-curve and third-curve competence depends on service innovation, the leadership of service innovation, a portfolio of priorities for service innovation and, of course, the support of governance working with the executive team to drive innovation programs.

Better, smarter, cheaper and faster services and service line assets are difficult to appraise. However, for the sake of argument, let’s aim for better access for 30 million underserved patients, and better coordination of care for 30 million patients in the general population. Service innovation that helps shape $100 billion in better access and $100 billion in better coordination of care drives $200 billion in new revenue and resource leverage. While these numbers are hypothetical, service innovation should have the full attention of the board.

Network innovation refers to different forms, structures, incentives and channels for service delivery. Networks may be formed around patient groups, insurance plans, benefit groups, provider groups, care groupings, geography, access points, employee groups, employer groups, technical assets and other resources defined as node and link assets of the health care demand and supply system.

Boards are probably most familiar with payment-defined networks and their roles in the commerce of providers and patients engaged in those networks. Boards and executive teams have wrestled with network issues in financial, political and organizational terms.

Reform-era thinking on networks brings new elements into the conversation. One of those elements is hospital consolidation, with both nonprofit and corporate interests in play. Another element is the evolution of medical homes and accountable care interests that take on different levels of integration and new forms of risk management. Access to care through retail venues, via telemedicine and web-enabled systems will continue to percolate in new forms, with new levels of value for providers, patients, payers and influencers.

Network innovation involves some power shifts in health care economics, enabling movement in the power and leverage of health care purchasers, as well as some movement for health care suppliers. What this means for health care boards depends on the nature of network innovation pressure in a given market area. The impact on economic and strategic value could be viewed in terms of: margin implications; volume and capacity; resource investment; collaboration plans; and revenue management.

Network innovation impacts the core business of hospitals and systems as well as related areas that affect health behavior. The options for preventive care, diagnostic services, post-acute care, cancer treatment, mental health care and other needs are subject to new forms of access and value through non-conventional networks. Money, need and ideas drive these networks. Again, for the sake of argument, we can conservatively estimate the value of network innovation at $100 billion in revenue and/or resource leverage.

Science-related innovation is broad, important and valuable because of its impact on access, cost/value and quality concerns. Science touches the span, type and value of care at every level.

Science and technology account for a significant part of the growth in health care costs over the past century. The expected cost of a lifetime of care has changed due to advanced diagnostics, disease intervention, tissue reconstruction, pharmaceutical options, and other general and specific innovations. Science touches the way we look at service line investment, standards of care, the coordination of care and outcomes.

Over the last 50 years, science and technology have tapped a growing portion of our capital and operating budgets, and changed the way we approach our board assessments, appropriation and accountability. Science-related innovation has put both promise and pressure on the governance table, posing choices that are not without conflict and decisions that tap our finances in a number of ways. The economic opportunity for science-related innovation is significant. If we estimated this vector’s value, $200 billion would be just a starting place.

The kind of innovation that pushes the frontiers of health care delivery in terms of the business model is what we call model 9 innovation. The convergence of second- and third-curve forces with changes in hospital and physician-driven activity, as well as new business stakeholders, will continue to shape business models for health care. This kind of innovation is likely to generate non-hospital points of service, approaches to population care and related economic options, and a host of human and technology interfaces that go well beyond the normal boundaries of hospital and physician control and distribution of services and resources. Some of the action in model 9 innovation will evolve in new health care enterprises and channels, including those that are highly focused on standardized services and resource collaboration.

There are several avenues for model 9 innovation, and in the context of strategy formation, integration and execution, this innovation appears with significant changes and transformation in: value proposition; products and services; market experience; resource platforms; revenue streams; resource streams; margin streams; and system structure.

Model 9 innovation injects other elements into the evolution of health care, especially the linkages and origins of process, service and network innovation. Science-related innovation can impact business models in many ways, and it adds to the potential impact of model 9 innovation, which, in some cases, pivots on changes in technology. Again, this vector is hard to evaluate at this point, but an estimated $150 billion in market impact is reasonable in a health care economy that will break through the $3 trillion ceiling in the next year or two.

Over the past half century, the typical hospital, medical practice, patient experience, cost of episodic care and standards of care have transformed. Moving out toward the third horizon, there is more transformation to unfold, emerge, embrace and adapt to by health care organizations.

Examples of Innovation

Every executive team and board has options for meaningful, valuable innovation programs. The opportunities in a smaller hospital will differ from those in a larger integrated system and the options for an academic medical center will be unique, as will options for a mid-sized system of affiliates. Regardless of scope or scale, focus or assets, there are examples of starting points that may be relevant in many settings. The table below sums up a practical variety of innovation program targets.

Common Initiatives Health care innovation

Advanced Initiatives Health care innovation

1. Process innovation

  • Lean management
  • High reliability

  • Experience design
  • Access modalities

2. Service innovation

  • Disease management
  • Service line plans

  • Vertical leadership
  • Lateral leadership

3. Network innovation

  • Primary care networks
  • Stakeholder network

  • Revenue leverage
  • Resource leverage

4. Science innovation

  • Clinical technologies
  • Standards of care

  • Advanced materials
  • Advanced technology

5. Model 9 innovation

  • Program partners
  • System structures

  • Patient behaviors
  • Predictive health

The key drivers of successful innovation come from an organization’s general capacity for innovation, which is built on appropriate structure, leadership at different levels, talent and markers, collaboration, cultural navigation, proper engagement, project management, strong discovery skills and persistence of vision.

Governance Impact

Does the board have a serious hand in the conversation on health care innovation? Does the board have the grounding and insight to bring value to the strategic agenda for health care innovation? For many experts, the answers to these questions is, obviously, yes. According to Ryan Armbuster, a professor of health administration at the University of Minnesota, the imperative for health care innovation draws heavily on the strategic orientation of the board and executive team, and boards must provide the ongoing support and temperament for the work of health care innovation. Others share that view, and as corporation and nonprofit cultures of board development merge together in new ways, effective board oversight of strategic assessments, appropriation and accountability will likely put more near-term and long-term emphasis on innovation.

Daniel Wolf (wolf@dewarsloan.com) is managing director of Dewar Sloan and chairman of the board of directors of Munson Healthcare, Traverse City, Mich. He is also a member of Speakers Express.