As I discussed in my post “Clay Christensen, Jerome Grossman and Jason Hwang on the Three Basic Types of Business Models,” Clay Christensen and his coauthors in all his business strategy books use a model of three basic types of business models:

• solution shops
• value-added processing (VAP)
• facilitated networks.

In The Innovator’s Prescription (location 375), Clay Christensen, Jerome Grossman and Jason Hwang point out how these different types of business models default to different types of payment structures. Adding some headings:

Solution Shops 

Payment almost always is made to solution shop businesses in the form of fee for service. We’ve observed that consulting firms such as Bain and Company occasionally agree to be paid in part based upon the results of the diagnosis and recommendations their teams have made. But that rarely sticks, because the outcome depends on many factors beyond the correctness of the diagnosis and recommendations, so guarantees about total costs and ultimate outcomes can rarely be made. …

Value Added Processing

VAP businesses typically charge their customers for the output of their processes, whereas solution shops must bill for the cost of their inputs. Most of them even guarantee the result. They can do this because the ability to deliver the outcome is embedded in repeatable and controllable processes and the equipment used in those processes. Hence, restaurants can print prices on their menus, and universities can sell credit hours at guaranteed prices. Manufacturers of most products publish their prices and guarantee the result for the period of warranty.

Since they operate in the realms of empirical and precision medicine, VAP businesses in the health-care industry can do the same thing. MinuteClinic posts the prices of every procedure it offers. Eye surgery centers advertise their prices; and Geisinger’s heart hospitals can specify in advance not just the price of an angioplasty procedure, but can guarantee the result. In a new and remarkable agreement with several European governments, Johnson & Johnson has guaranteed that its new drug Velcade will effectively treat a specific form of multiple myeloma that can be diagnosed with a particular biomarker—or it will refund to the health ministry the cost of the full course of therapy. J&J can do this because the treatment is undertaken after a definitive diagnosis has been made. …

Facilitated Networks

Facilitated network business models in health care can be structured to make money by keeping people well; whereas solution shop and VAP business models make money when people are sick. 

In particular, facilitated networks often work on some kind of subscription or annual fee for payment. 

Clay, Jerome and Jason argue that there are two key steps to making health care less expensive:

1. separating out the components of health care according to the most appropriate type of business model, and
2. developing better ways of doing things within each category, building on that higher level of focus within each part of health care. 

Here is how they say it (with my headings):

The need to separate out components of health care according to appropriate business model:

Many who have written about the problems of health care decry the fact that the value of health-care services being offered by hospitals and doctors is not being measured. To them, we would explain that the reason isn’t that these providers don’t want to provide measurable value; they simply can’t, because under the same roof they have conflated fundamentally different business models whose metrics of output, value, and payment are incompatible with one another. …

Using the clear metrics within each category of health care to innovate further:

The reason why this basic segregation of business models must occur from the outset of disruption is that it will enable accurate measurements of value, costs, pricing, and profit for each type of business. A second wave of disruptive business models can then emerge within each of these three types. Powerful online tools can walk physicians through the process of interpreting symptoms and test results to formulate hypotheses, then help them define the additional data they need to converge upon definitive diagnoses. This will enable lower-cost primary care physicians to access the expertise of—and thereby disrupt—specialist practitioners of intuitive medicine. Likewise, ambulatory clinics will disrupt inpatient VAP hospitals. Retail providers like MinuteClinic, which employ nurse practitioners rather than physicians, need to disrupt physicians’ practices.

Avoiding the trap of thinking everything needs to be done in the solution shop business model: 

Hospitals and physicians’ practices have long defended themselves under the banner, “For the good of the patient.” Yet, for the good of the patient, do we really need to leave all care in the realm of intuitive medicine? Much technology has moved past this point, and health-care business models need to catch up. Two landmark reports from the Institute of Medicine—Crossing the Quality Chasm and To Err Is Human—shattered the myth that ever-escalating cost was the price Americans must pay to have the high-quality care that only full-service hospitals staffed by the best doctors can provide.

I find Clay, Jerome and Jason’s indictment of our current health care system as mixing together care appropriate to different business models trenchant. I wish this insight made it into more of the commentary about health care reform.  

You can see the rest of my posts tagged “Clay Christensen” here.