Friday, November 27, 2015

Blue Startups and New Niches from Recently Aligned Incentives.

Blue ocean strategy can be described as creating a new market or tapping unmet demand in industries or products that are yet to exist. The creation, or identification, of such an ocean is not limited to new companies, and in fact the emphasis on incumbent player discovery of the blue oceans in this week’s article shows the how taking large organizations onto uncharted waters is profitable. Though an organization may not need deep R&D budgets, it doesn’t hurt.

Though blue ocean strategy is never the norm for large, established organizations, it is more often than not the (unstated) strategy of startup companies, usually from necessity rather than choice. Limited financial and personnel resources preclude new companies from seriously competing. Even in industries with what would be considered moderate barriers to entry are too high for new companies. A common mantra of startups is to create a new niche.

Many ‘Blue Ocean Strategies’ are discussed, but one that I would add is to look for recently aligned incentives across players within an industry. That is, a situation in which traditional value-leakage which has made entrance into a market traditionally unattractive. An example is medical technologies and interventions in the pre-hospital environment in the US.

The causes for the misalignment of incentives are multi-factorial, including the limited training of pre-hospital health providers and the fact that more value will inherently be captured with definitive treatment that is only appropriate in the hospital compared with temporary interventions that can generally only stabilize or triage a patient. But the main reason is payment. Ambulances, assisted living facilities, nursing homes, and long term rehabilitation facilities are only paid by insurance companies and government healthcare based on the number of miles traveled or the number of occupied bed days, not on interventions or on outcomes. (Severity of patient illness is grossly stratified into 3 or 4 groups in nursing homes, but still reimbursed solely on days, not on outcomes.) Therefore, the cost of adding any new technology, no matter how cheap and no matter how much it may improve health outcomes, is greater than the new revenue an ambulance or nursing home will ever recover. Even if a new piece of equipment cost $100 and could save 10 lives a year, an ambulance company has no incentive to buy it.

The municipal ambulances in Madrid, Spain can be seen as a counter-example, as what happens when incentives align. The government is financially responsible for the hospitals, the ambulances, and the care and outcome of the patients—i.e., the Spanish voters. Therefore, the cost of placing innovative techniques and technologies placed in the ambulances needs only to be balanced with the benefits to health outcomes. This is why ultrasound machines were placed on every ambulance in Madrid years ago. The machines had to be specially designed to fit and function in the new environment.

But there is a Blue Ocean opening before us in the US. Over the last decade, health systems have been buying up health verticals, and in so doing now own more than 10% of ambulances in the country. That means that one out of 10 ambulances is operated, either directly or indirectly, by the company that will have to pay for the acuter and long term healthcare of the patient that are being transported. A market is opening before our eyes for devices and other interventions. Intubation tubes, new imaging techniques and diagnostics, and new hyper-early medical treatments which would have found no market 10 years ago now may have a chance. Basically, there is a blue ocean of possibility for anything done in the ambulance that could save healthcare dollars.

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