Chris Klomp says incumbents should disrupt themselves. Is that good advice?

Maybe…but the devil is in the implementation details.

Photo by Theo Crazzolara on Unsplash

Over the past few months, I’ve listened to a number of webinars and podcasts featuring Chris Klomp, Director of Medicare and Chief Counselor at HHS. He’s undoubtedly well-spoken, an experienced health care entrepreneur, and exceedingly passionate about improving health and health care for every American. He also emphatically states that health care isn’t a blue or red issue, which is hard to argue. And the question he asked in his onboarding discussion with his predecessor deserves admiration: “What are the most important things that you’re working on right now that I need to be aware of so we make sure we keep them going and don’t drop the ball?”

He shared this and many more insights in a recent episode of the podcast The Heart of Healthcare by Michael Esquivel, Halle Tecco, and Steve Kraus. If you haven’t listened, I highly suggest it.

A few things Klomp said during this episode really stood out, and they left me with questions I can’t help but share, mostly because Clayton Christensen’s work has a lot to say about how to make Klomp’s suggestions effective in practice.

Should incumbents disrupt themselves?

The part of the podcast discussion that really made me pause was about CMMI’s new ACCESS model and the payment model that undergirds it. Klomp made a comment about the importance of lowering costs in chronic disease care and how the payment rates were developed to attract innovators to do things differently. He said, “Insurgents come in, and incumbents have a choice. They go out of business, or they become insurgents themselves, and they disrupt themselves.” (emphasis added)

Is this good advice?

I wish he’d gone a bit deeper, but the host immediately shifted the topic. In the absence of further comment, Christensen’s theory offers clear advice on how to (and not to) “disrupt” oneself effectively.

To start, it’s really easy to get wrong. And it’s easy to get wrong because most leaders don’t realize what they need to do to launch an inferior product for their lowest-margin customers or those who aren’t currently customers at all.

Disruptive opportunities look bleak to incumbents compared with improving the products or services they’re already offering to their best customers (i.e., their higher-margin customers). When faced with a choice among disruptive, sustaining, or even efficiency innovation, most incumbent leaders will choose sustaining or efficiency innovation because investments in those innovations align with their existing measures of success.

Disruptive markets, by nature, start out small. That makes them look like bad investments for incumbents used to operating in large, established, profitable markets.

Second, it’s easy to get wrong because not everyone knows how to diagnose their context and thus choose the right strategy to support a Disruptive Innovation. I recently wrote about how disruption alone isn’t a strategy. And that’s because you can’t develop a strategy without accounting for organizational context. As the matrix below reveals, the intersection between the type of organization you’re innovating from within (incumbent or innovator) and the type of innovation you’re launching determines the strategy required to innovate successfully.

Source: Adapted from an HBS Executive Education slide

While it’s fairly straightforward to determine your organization type, determining the type of innovation you’re launching is actually much harder. Frequent readers will be familiar with the Christensen Institute’s 6-question test for assessing disruptive potential. If you aren’t, the questions are shown below. Asking and answering these questions can help you determine whether your product or service is more likely to be disruptive or sustaining.

Third, once you determine your strategy (based on your context and innovation type), you have to fund and lead the innovation in line with that strategy. This is incredibly challenging because of how business models harden over time. (Read more about that process here.) As long as the original reason for a business model’s existence still prevails, the existing business model will fight back against anything that threatens the model’s ability to deliver on the original value proposition or to maintain required margins.

For this reason, it’s incredibly hard for a health care entity built on a fee-for-service chassis to simultaneously seek to deliver value-based care (VBC), unless the VBC entity is a completely separate business model, with autonomy to have different resources, processes, and priorities, and it reports directly to the CEO.

So, his advice isn’t bad; it’s just really easy to get the implementation wrong, which will sink the entire effort. But following Christensen’s recommendations can help set you up for success.

To regulate or not to regulate: that is rarely the (health care) question

After discussing the ACCESS model, Klomp addressed interoperability and the need for a “deregulatory set of requirements” and “guardrails so that AI can flourish where it is safe, efficacious, reasonable, and necessary.” The guardrails must protect patients and enable insurgents to come into the market and scale effectively.

He notes that this is extremely difficult to achieve, and iteration will not only be necessary but will take years. One of the things Christensen highlights in The Innovator’s Prescription is that regulations can make or break Disruptive Innovations. The visual below highlights what components are required for a Disruptive Innovation to succeed.

Health care is riddled with examples of how regulations have inhibited innovation, but perhaps the most stark is in health insurance. Many have tried to disrupt incumbent health insurers, and none have succeeded at scale. I’ve written at length about why that is (and what we can do about it) here.

Regulation is a big piece of the puzzle. The ACA imposed a legal requirement that all individual and small-group health insurance products cover 10 benefit categories, regardless of customer demand. This prevents innovators from entering the market with a lower-cost business model or one that is “not as good as” incumbent offerings. Effectively, it makes low-end disruption illegal in health insurance. That’s not a value judgment; it’s just a fact, and the nation, companies, and individuals are literally paying the price for regulations making disruption illegal.

The regulatory environment around AI is far more complex than that of essential benefits, and Klomp is right that it will take many iterations to get right. But as policymakers work to solve this problem, I hope they’ll keep Christensen’s requirements for Disruptive Innovation in mind, finding a sweet spot that balances the required regulation to protect humans with the ability for lower-cost business models to enter and thrive.

Klomp is in a challenging position, and Christensen’s theories offer great advice for both the innovators seeking to transform health care and the policymakers seeking to spur that transformation.

For the sake of the nation’s solvency and our population’s health, I hope we follow it.