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If You Can’t Beat Them, Fund Them!

Posted on September 2, 2014 I Written By

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at

In Where Does It Hurt, Athenahealth CEO Jonathan Bush explicitly calls out a number of businesses that are disrupting hospitals. Specifically, these businesses are performing a single function – e.g. labs, imaging, birthing, urgent care – at a much lower cost with higher quality than general-purpose hospitals. These modular businesses are disrupting hospitals by ruthlessly focusing all of their operations around a single service line to optimize quality and reduce costs. This stands in stark contrast to hospitals, which generally try to be all things to all people (the antithesis of entrepreneurship and general business practices).

I’ve previously outlined how healthcare providers are struggling as they shift to risk-bearing reimbursement models. They’re straddling two dramatically different business models as they try to transform their businesses from fee-for-service to risk-bearing. Inverting a business with thousands of employees and billions of dollars worth of assets and processes is nearly impossible. This is even more challenging in a highly uncertain and fast-changing regulatory environment.

But what if there was a better way?

In the Innovator’s Solution, author Clayton Christensen describes how multi-billion dollar companies such as Apple, IBM, Johnson and Johnson, and Intuit have disrupted themselves. When faced with disruptive changes in their respective businesses, these incumbents disrupted themselves by:

  • Funding a separate operating division with its own P&L
  • In physically removed location
  • With dedicated employees who have no responsibilities to the old business model.

This formula by no means guarantees success, but it creates an environment in which the disruptive division can potentially save the business as a whole, so long as the disrupting business has the operating freedom to disrupt the parent. Employees shouldn’t be bound to the processes, assets, and values of the old business model.

How can providers disrupt themselves?

How can providers, in particular large hospitals and health systems, adopt Christensen’s disruption framework? By funding their disruptors! This strategy drives value across a number of dimensions:

1) Hospital management will have the opportunity to learn about the operational expertise necessary to modularize their existing operations at a lower cost

2) Hospital management will have access to insider information about their own disruption that they would otherwise lack. They can in turn use this information to make smarter decisions about their own businesses, and potentially buy out the disruptees if they become too disruptive.

3) Drive inbound referrals from the periphery to the hubs

4) Generate a financial return

A practical example

My company, Pristine, recently spent some time learning about urgent care centers. We wanted to sell urgent care centers a lightweight telehealth platform so they could beam specialists and hospitalists into the urgent care center. This would allow the urgent care center to generate more revenue by avoiding “leakage” while also generating more revenue for the consulting specialist, guaranteeing more referral traffic to the host hospital, and providing the patient a more convenient experience. All parties would win. The idea was perfect in theory, except…

We discovered that non-hospital owned urgent care centers generally dislike hospitals, and are in fact too proud of the quality of care they provide to patients at much lower cost. These urgent care centers know that they’re disrupting hospitals, but are holding that against the hospitals as a reason not to align interests. Similarly, the hospitals view the urgent care centers as a competitive threat and have no desire to do business with them.

The more I think about this situation, the more I’m convinced that hospitals should invest in their disruptors. A financial tie will massage the hard feelings that exist and create an opportunity in which community resources can be most effectively coordinated across the continuum of care. As we move towards risk-based models, hospitals will need to drive patients to the most capitally efficient cost center that can diagnose and treat the patient.

What are your thoughts? Do you know of any major health systems investing in their disruptors? Or of any health systems that are outright trying to disrupt themselves by establishing modular service lines themselves? (Banner Health and University of Arizona are doing this to some extent!)

You Better Stay Healthy, or Else…

Posted on June 23, 2014 I Written By

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at

As I read Jonathan Bush’s new book, Where Does It Hurt? the most salient problem that Bush discusses is that hospitals can’t effectively measure or attribute their costs. As a result, they can’t make good decisions since they don’t know how to attribute costs and revenues.

Although this has been widely known for sometime, the implications of this are particularly interesting. Since hospitals don’t know how much it costs to actually deliver care (especially multi-faceted, complicated care), their various revenue streams are effectively subsidizing their expenses in an almost random manner. Accounting for costs and attributing revenue is nearly impossible.

Bush notes that more focused care centers – such as standalone labs, imaging centers, and minute clinics – can afford to offer many of the same services as hospitals with equal or greater quality at a lower cost. They can achieve this because they have dramatically less operational overhead than hospitals and have staff performing the same core basic functions repetitively. Indeed, practice makes perfect.

There are hundreds of companies all over the country building healthcare practices based on this very premise: labs, imaging, procedures, home health agencies, ASCs, birthing centers, cath labs, urgent care, retail clinics, and more. Focused-centers are slowly eating away at hospitals by providing better services at lower costs.

Today, hospitals make enormous profits by dramatically marking up routine procedures and services. But that won’t continue forever. As the ACA pushes patients towards high-deductible plans so that patients act more cost consciously, they will seek the more affordable alternatives. Patients will not agree to pay a $300 ER copay and $2000 MRI when the urgent care center down the street offers a $99 copay and $400 MRI. As patients make better decisions, hospitals will lose some of their easiest, most profitable revenues: extremely marked up lab tests, images, procedures, etc.

What will hospitals be left to do when their easiest, most profitable revenue vanishes? They will shift focus to what they do best: performing miracles. Hospitals will compete for high-end services such as-complex surgeries and intensive care. However, because routine services subsidize the hospital’s overhead, they currently offer surgeries and intensive care at a “discount.” When hospitals can no longer subsidize their complex care with routine care, hospitals will raise prices for the highest acuity services that can’t be performed elsewhere. If you thought acute sickcare was unaffordable, think again. The cost of complex care is going to grow dramatically in the coming years.