Regina Herzlinger: Why it is important to champion innovation in healthcare

Regina Herzlinger, the Nancy R. McPherson Professor of Business Administration at the Harvard Business School, has long been a champion of innovation in healthcare, and she has been prolific in her writings and support of new and creative ideas for improving the financial, operational and quality performance of the nation’s healthcare system.

In this Q&A, Herzlinger shares her insights and perspectives about why healthcare organizations should approach innovation with an understanding of its necessity and how to make it happen. And she describes what has motivated her own desire to promote and support educational and healthcare organizations that have effectively embraced innovation.

Q

You are recognized for being passionate about promoting education and innovation in health and healthcare. What lessons have you learned from your experience that have helped shape your perspectives and path forward in promoting them?

Herzlinger

Although our healthcare system is terrific, my interest is in helping healthcare organizations to make it even better — to improve the quality, to control the cost, to improve access, to make it more convenient and usable by patients.

But to make these improvements, you must also understand why organizations all too often stumble in such efforts. Everything that people think about making healthcare better, more cost-controlled, more accessible and friendlier sounds wonderful, but frequently it’s just not feasible.

I have observed successes and failures over the years in four organizational stages.

The first is organizations’ evaluation stage regarding growth opportunities. One thing I have observed in this stage is that organizations often stray from their skill set. CVS is an example of a company that’s perhaps now having such an experience.

CVS — a pharmacy, PBM [pharmacy benefit manager] and deliverer of urgent and some chronic healthcare — thought it could build a complete healthcare system when it bought the insurer Aetna. But it mispriced insurance premiums and has struggled with its consumer ratings. CVS thought of a good idea, but it wandered away from its skill set, which arguably is running pharmacies and PBMs.

Smart people too often fall in love with their ideas, and they don’t analyze what the competition and financing might be like, what technology they might need. what public policy would go along with it, what accountability they need to have and whether consumers will like it. That lack of attention to these six exogenous forces is pretty ubiquitous in healthcare innovation.

I don’t blame the firms for falling in love with their ideas. They’re good ideas. If Amazon, when it bought One Medical, could be as good at healthcare as they are in mail order purchasing, that would be wonderful. But they can’t — they don’t have the skills to do it.

The second stage is when new firms start up. There was a firm in Tennessee, for example, that did value-based [VB] pricing of physicians for Medicaid, under the auspices of a big academic medical center [AMC] in Tennessee. Convincing physicians of the value in VB pricing takes a tremendous amount of education, which requires a tremendous amount of capital. But their sponsor was Medicaid, which is not flush with capital. And when value-based pricing really didn’t take off, the sponsor AMC fired them.

There are two lessons here.

A general lesson is that VB pricing is a great idea, but the cost of implementing it — because it’s such a massive cultural change, and so different from fee-for-service — is, in my view, greatly underestimated.

And the second lesson is when you innovate, it is terribly risky to start with only one buyer — in this case, it was Medicaid — and one provider of your supplies, which was the AMC. You need to have a portfolio of revenue and supply sources.

The third stage is scaling an innovation after it has been evaluated and started. Healthcare is massive and has such great needs, so it is important to have innovations that aren’t just one-offs but can be widely scaled. Here, in my mind, you have two common technology-related errors.

One is the belief that AI will rescue healthcare: It will control the cost, make it more accessible, make it friendlier and improve the technology. But of those four things that AI could do, the one I think it might do is to improve technology.

And the second error is the belief that apps for dealing with diseases or problems virtually in place of face-to-face service are a great cure-all. As one recently published report has very convincingly argued, that’s far from true.^a

The fourth stage of organizational innovation is determining how or whether to exit. Judy Faulkner, CEO and founder of Epic Systems, is contemplating how to exit because, genius that she is, she is over 80 years old. Who will replace her? And how? Should she sell the firm to its employees? Should she go outside? Do an IPO? Donate it to a charity?

But it’s not just about leadership of exit strategy. I think a poor exit strategy has been the mergers of hospitals, insurers and PBMs. To me, the evidence is overwhelming that they have primarily raised costs because they’re oligopolistic and don’t have much competition with all these mergers, and sometimes quality is diminished because they are so huge.

Q

What do you see as the most critical enablers for sustaining innovation, including scaling it and broadening its reach?

Herzlinger

There are three critical enablers.

First, there is technology in the vision. And by technology, I mean information technology, or computer science. I also think we are lucky to be living in an age of miracle medicine because of the unraveling of the genome and the development of the instruments, tests, drugs and medical technology that came from that unraveling, which will likely make medicine much more powerful.

We do not know the origin of most diseases, and yet we treat them somewhat successfully. I think we will soon treat them much more successfully — maybe not in my lifetime, but in in the 21st century, it will happen. So I think technology is tremendously important.

Second, I think that learning how to control costs also is very important. But everything that’s been tried has been a failure, from the HMO movement to the current focus on mergers.

Value-based pricing might succeed. The jury’s still out — I’m not sanguine about it.

But as technology improves, especially IT, there will be a greater ability to control the cost of healthcare delivery — not by saying “No, no, no, no.,” but by developing innovative ways for improving care, such as coordinating care, especially for chronic diseases or conditions. I think that will help to scale these innovations.

The good thing is that consumers are becoming more involved. That was a side effect of COVID, which forced consumers to become much more knowledgeable and proactive about healthcare than they had been before. And now the consumer’s voice is stronger in healthcare. They’re not just saying, “The doctor told me to do this and that.” People have good sources of information, but more than that, they’ve changed intellectually, so that they research it. The consumer movement, and the availability of information that consumers can understand, are crucial. But I think these big waves of change will improve healthcare, control its cost, and enable it to scale without increasing costs. In fact, I think costs will go down.

The third critical enabler is education. So much of management education in healthcare is hospital focused. hospitals are great, but they’re not great for everything. Yet education is primarily focused on how to improve things in the hospitals. A broader view would ask, “What can we do to innovate healthcare so that it becomes both better and more cost controlled?”

And whether that occurs in the hospital or in an ambulatory surgery center or at CVS or Amazon is not important. The important thing is to learn how to make it better and more cost controlled.

But the educational system doesn’t focus on that. As an example, when I judged some projects on innovation by students, one brilliant group had this marvelous idea. But when I asked, did you patent it? Well, they didn’t know anything about patents.

I’m not arguing for or against patents. I’m arguing for managerial education, which enables students of healthcare administration to know the varieties of patents, their pros and cons and how to obtain them.

Q

What about the obstacles that impede progress? How do you think we can address them?

Herzlinger

First of all, healthcare is already very consolidated, which makes it difficult to change. Hospitals are very consolidated. Even primary care physicians are integrated through their being owned by hospitals, insurers and private equity. And even firms like Alidade Technology, which don’t own primary care physicians, play a role by helping physicians to consolidate by using technology. Then there are pharmaceutical benefit managers — there are really only three of them. And there are only two big medical distributors.

You can look at any part of healthcare, whether it’s technology or care or insurance or information, and you’ll find it is integrated.

A sector that has such a powerful status quo is powerfully resistant to innovation that threatens it — that threatens to take care out of hospital, that innovates a way of insuring drugs that differs from how the pharmaceutical benefit managers do it or that develops new EMRs [electronic medical records].

So the existing status quo is a big barrier, not because they’re bad people or bad institutions, but because they’re so consolidated and so powerful that they can essentially stop many threatening innovations.

The second obstacle is the government. HHS and its various divisions, which could do so much to innovate healthcare, have been captured by the interests of these large, powerful status-quo organizations. They do not do as much as they can to help innovators.

An exception, in my view, is the FDA, which I think is a marvelous agency and has found a balance that ensures we have pretty quick access to safe and effective medical technologies without requiring decades and decades of experiments to prove it.

I think the NIH [National Institutes of Health] is generally very good, although it too is captured by powerful individuals who don’t like innovations to their ideas. One recent example of that is the woman, Katalin Karikó, who won the Nobel Prize for discovering the mRNA vaccine against COVID-19 with immunologist, Drew Weissman. Karikó previously could not get government funding, and she could not even get a tenure-track job at the University of Pennsylvania, because her idea of changing the RNA of viruses was so radical and threatened so many existing theories. She didn’t get anywhere until COVID, this terrible disease, actually led not only to innovations like telemedicine and hospital and home care but also to new theories about how to deal with viruses and how to use vaccines.

So, the big stumbling blocks are the big boys and the big girls. They’re great, but they really do not want somebody to innovate them in any way, unless they own them. And once they own them, they typically don’t do well with the innovator. The innovators need a different kind of environment in which to flourish — not a big company.

I’ve written for many years about how to encourage innovation. And I always have a chapter called “Is big beautiful?” And the answer is, “No, it’s not.” To a point, you get the economies of scale, but after that, you get lack of competition and suppression of innovation.

Q

What advice would you give to healthcare leaders on how best to think about these issues and what steps they can take to help improve the prospects for innovation?

Herzlinger

I can think of two examples of things for leaders to consider.

First, politically, you have had Lina Khan, who headed the FTC — a young lawyer who wants to break up the PBMs and other monopolistic and oligopolistic parts of healthcare. I think she’s great. But the leaders think, “Well, I’ve dealt with this hospital system now for 30 years, and if innovators like her come along, I’m going to have to change my business model to deal with them. It’ll be taxing.”

They shouldn’t think that way. They should support her and people like her who say this industry is so consolidated that innovation can be suppressed.

Second, when a big company wants to acquire an innovator, the only way they will succeed is to permit the innovator to work and function freely away from the big company, because the large companies are prone to be very bureaucratic. They have to have tons of checks and balances; but those checks and balances and their bureaucratic mentality are antithetical to the culture of innovation.

So let’s say a big medical device firm buys a company that uses sensors to deal with musculoskeletal injuries. It should permit that company to exist almost as if it had not been purchased. Because once the innovators are integrated into the large system, they may start thinking, “They’ve taken our company away from us. The people are different, with their coats and ties, and they think differently. It’s just like a foreign species.”  Their creativity suffers because they do not have the same environment that originally fed their innovativeness.

So leaders should keep this idea in mind for the future of our healthcare system: Let the flowers bloom.

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Q

Your work supporting innovation and sustainability covers many areas from industry to education. What inspired your commitment to these areas and your desire to give back?

Herzlinger

I am an immigrant, and I feel very lucky to be in the United States. Very fortunately, I traveled widely in my work, and every time, even though there are so many wonderful other countries, I think, “Wow, I am lucky that my family immigrated to the United States.”

And I eventually was able to get my Doctorate at the Harvard Business School, and my thesis was in business administration. I thought, “Well, healthcare, it’s great, but it needs innovation! I’d love to give back.”

Q

This does bring me to ask you about the innovation award conferred by the Commission on Accreditation of Healthcare Management Education, or CAHME, which bears your husband’s and your name: The CAHME/George and Regi Herzlinger Innovation Education Award for the Development of Educational Skills Focusing on Invention, Evaluation, and Adoption of Innovation in Healthcare. Can you describe the award and how it came about?

Herzlinger

The award reflects my husband’s and my belief that healthcare needs innovation, especially now. It’s feasible, but it’s hard to implement because of the powerful political and organizational status quo and because, while students are educated in the need for innovation, they need to be better educated in how to make it happen.

Students do learn epidemiology. That’s very important. But they also need to know how to make innovation happen.

Innovation in education is nearly as hard to accomplish as innovation in healthcare. So, my husband, a PhD physicist who has invented life-saving medical devices, and I thought, “Let’s reward the schools that do teach innovation.”

We hope that those schools will set an example for others — that it’s doable and that it’s not only fun for the students but also opens the possibility of a broader set of careers, with the skills to go with it.

The first gold award winner was Trinity University in San Antonio. Trinity runs a countrywide business plan contest — they call it the “Tiger Tank” rather than “Shark Tank.” And it has a whole army of entrepreneurs and mentors who help the students shape their business plans, along with a series of courses that deal with how to be a good innovator. among them are topics like how to be an effective leader of the innovative company, what are the important reimbursement issues, how you get coverage for an innovation and how to get payment.

Another winner was Florida International, which is a university for working people who attend at night or when they can during the day. It’s a huge university and it serves a very worthy population. In Florida, the Cleveland Clinic is near them, and the students implement innovation projects with the clinic as part of their coursework.

The award committee and I both admire the school and its mission. It is so daring for this marvelous institution to work with the Cleveland Clinic and its student population around innovativeness.

And you would think that something like that could be done only in a big city like Miami, where Florida International is located. But one of the prizes we gave was to Boise State University in Idaho, which has taught innovation in a very rural area, and taught it very well.

And I am thrilled that you [HFMA] have been involved with it. Absolutely, I thought that was that was a huge plus, to boot, that a prestige organization like HFMA would be involved with innovation and financial education, and that you could do it in Boise.^b

And how about the University of Alabama at Birmingham, which turned all its healthcare schools into engines for innovation?

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Q

Just to clarify for our readers, this award is conferred on institutions of higher learning, and they apply for it. Is that right? Do you actively look for organizations that seem to be doing great things and encourage them to apply?

Herzlinger

The brilliant leader of CAHME, Anthony Stanowski, has assembled a blue-ribbon committee. In addition to George and me, it includes leaders of large hospitals; a major healthcare venture capitalist; Gene Schneller and Ed Schumacher, who brilliantly teach healthcare innovation; and some consultants and executive search people. It’s a small group, but it represents a very broad range of points of views and skill sets.

CAHME sends out an RFP. It gets responses to it. The committee reads the responses, and we decide who will win the award. It’s always an arduous process, because the applications are so good.

We were so fortunate to partner with CAHME, which accredits programs of healthcare management education. CAHME seems to be the perfect organization to award prizes for programs that do such a daring thing as to teach how to innovate healthcare.

Our hope is that CAHME’s recognitions of meaningful educational innovations will cause those innovations to be more widely adopted across the nation.

It’s about scaling. How do you scale innovations in education, given that educational institutions tend to be risk-averse and find it very hard to innovate? That’s where CAHME is a crucial agent of change.

Footnotes

a. Day, S., et al., “Assessing the clinical robustness of digital health start-ups: Cross-sectional observational analysis,” Journal of Medical Internet Research, June 2022.
b. To find out more about the Boise State educational program sponsored by HFMA, see, Filipek, D., “How HFMA/Boise State master’s degree cohort members are putting new knowledge to work,” hfm, June 2022.