Understanding Control, Teamwork, and Innovation as the Value Chain Consolidates

The rise of Wintel (Windows + Intel) during the 1990s was characterized by hyper modularization of computing. Apple’s integrated business model was doomed because they could never effectively compete with the modularized PC industry on cost, scale, or component quality. As the PC industry boomed, Apple simply couldn’t keep up. Apple was intrinsically structured such that it couldn’t.

Over the past 10 years, we’ve seen a massive resurgence of integrated business models in technology, led obviously by Apple, but also by Google. Google started at the end of the value chain – the application layer (search) – and has systematically worked its way down the value chain, into all layers of operating system design, device design, and even many aspects of component design and fabrication through the acquisition of Motorola.

Samsung and Amazon are also trying to expand their reach throughout the value chain; Samsung from the bottom up and Amazon from the top down. Microsoft has also made strong moves over the past few years to broaden its reach across the throughout the value chain. Steve Ballmer has repeatedly stated that Microsoft is a devices and services company.

All of the mega technology power houses have come to realize that software is a means to an end. Software alone is not enough. They must control the entire value chain. They’re all vying to become the same mega technology company.

The technology power houses are trying to integrate across the entire value chain and morph into the same mega-company as a matter of cooperation and teamwork. As technology gets exponentially more complicated and the lines separating the layers of the value chain blur, erecting artificial corporate boundaries stifles teamwork, and thusly ability to execute and innovate. That’s one of the many reasons why Microsoft missed the smartphone and tablet waves even though they started pursuing the mobile computing dream over a decade ago.

It’s clear that medicine is getting more complicated, not less. We’re still developing new specialties and subspecialties of medicine. As we develop deeper understandings of genetics, it’s clear that many prior assumptions were wrong. We still only understand a fraction of the human body and virtually nothing about the brain. As our understanding grows, our healthcare delivery system must reflect that. Patient care delivery will continue to get more complicated as we develop deeper and more nuanced understandings of medicine.

The US healthcare system is undergoing a massive shift as the value chain consolidates. Most people cynically attribute consolidation to a need to negotiate better terms with payers. That’s true, but incomplete. Consolidation is driving integrated delivery models. Healthcare must consolidate to drive control, teamwork, and accountability across the system. Doctors don’t and shouldn’t exist in the bubble of their own practice. They are an integral part of the patient care delivery and should participate in a coordinated integrated delivery system. There are a vast array of talents and skills across all of the different flavors of healthcare professionals. They need to be at least somewhat centrally coordinated as patients move through the system.

As software continues to eat the world, technology continues to perpetuate through the US healthcare industry, much of it in the name of integration, cooperation, and information exchange. Hence the rise of Epic. Despite all of its shortcomings, Epic is driving massively integrated healthcare systems. The benefits are profound and felt through the healthcare delivery enterprise. Perhaps most importantly, integrated IT systems are a form of control. They empower the mothership to enforce rules throughout the empire that were simply not feasible before. Those rules can be implemented in the name of cost savings and better coordination.

Medication orders are a simple example. Doctors may prescribe more expensive medications because they don’t know cheaper alternatives are available. The CMIO of the health system may realize this and remove the more expensive medication from CPOE. This is a simple example, but it lends itself to understanding the power of centralized control. It can take years, if not decades, to propagate practices throughout the healthcare system. With centralized IT systems, we can easily expedite propagation by multiple orders of magnitude. In a fixed-revenue, at-risk, ACO world, centralized IT will drive enormous cost savings.

There are downsides to centralized delivery and IT structures. Entrepreneurs are trying to deliver all kinds of new solutions. Selling into healthcare is becoming harder as there are by definition fewer, larger organizations to sell into. It also means that, generally speaking, startups need to raise more money to get a foot in the door.

There’s a flurry of innovation going on at the fringes. Many of those spaces are quickly becoming overcrowded as Silicon Valley entrepreneurs turn towards healthcare. There are going to be enormous opportunities for startups inside the healthcare system. Startups that can genuinely improve communications, teamwork, and process control will be positioned to do well. They can compete with the legacy players asymmetrically on dramatically lower cost structures. The opportunities inside the system are tremendous, though harder to break into.

Although the barriers to starting businesses continue to plummet, the barriers to success in healthcare are rising. It will be interesting to see which startups can really take advantage of the consolidation of the value and disrupt from the inside out.


Kyle Samani is a healthcare technology entrepreneur who is passionate about healthcare and technology startups.

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