Old School Business Models and the HIT Software Value Chain

I have recently been reviewing the Innovators Solution. I was interested to read about Dr. Christensen’s concepts of commoditization within mature markets. There has been some initially rumblings about healthcare IT software entering into a commoditization phase. Beginning with Neil Pappalardo at Meditech, and progressing through Neil, Rich, and Judy, we essentially have a mature electronic health record market for the acute enterprise environment. The main players have all become more effective, more efficient, and user friendly over the years. Despite these successes, however, there is still alot of unrest about the quality of currently available systems – including the very best enterprise EHR in the market.

There are multiple efforts underway to create a more standardized definition and feature set for what constitutes an acceptable EHR. The recent organization of the CCHIT will ensure that functionality will become even more standardized, more similar, and more rapidly commoditized. This is only accelerating the natural commoditization that happens because healthcare IT vendors are working on the same form of process problems, and the resulting solutions are highly similar in function as a result. Therefore, one persons CPOE system is not markedly different than another persons. Sure, the requisite “bells and whistles” will be touted by the slick salesperson, however, for the practical physician or hard working nurse on the floor, these differences are minimal. In fact, whatever differences do exist in functionality smooth out, or converge, over time due to the market forces listed above.

This convergence will continue to accelerate the commoditization of healthcare IT software. Commodization will continue to put real pressure on the price points of the software, as it will become increasingly difficult to command a premium for similar functionality. This will, in turn, put real pressure on the old school business models that depend on a software license revenue stream. We have only begun to see innovation around healthcare IT vendor business models, with some initial forays into subscription models, open source, and other forms of “shared success” or “at-risk” models. The end game for all these models will follow the trend that is happening within healthcare itself, ultimately resulting in an “outcomes-based” based business model.

Just as companies are forced to move up the “value chain” in terms of their product or service offerings, I believe there will be a movement up the business model food chain as well. This upward business model mobility can be understood within the context of the Software Value Chain Evolution:

Source: Scott Shreeve MD, 2006

Currently, we are only in the beginning stages of this movement with the introduction of open source business models. I believe the next big wave will be “no cost” deployments with vendors who can tie their clinical transformations to revenue cycle optimizations. The next wave will be working with organizations in a “shared success” fashion by completely eliminating all software related costs in a “utility” model – whereby the software becomes a predictable percentage of the healthcare organizations budget each year. The final wave, will be the vendors going “at risk” with the organization and tying their compensation to organizational outcomes.

Clearly we have a ways to go. However, I believe the new school bell of healthcare IT business models is about to ring.