John Hoffmire: Fighting increasing health care costs with reverse innovation

Published: Monday, Dec. 9 2013 8:55 a.m. MST

Reverse innovation reverses the direction of innovation flow. Whereas poor, developing nations used to be exclusively followers in technology and advances, reverse innovation occurs when a technological solution created in a developing country gains traction abroad and is adopted by developed countries.

Mustafa Quraishi, Associated Press

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Editor's note: Ben Young wrote the vast majority of this article.

When you think of the word innovation, what comes to mind? For those in the U.S. and other developed nations, innovation is usually thought of in the context of expensive technology. In the past two decades, high-tech gadgets have changed the way the world views transportation, health care, entertainment and communication. These innovations usually debut at an incredibly high price, touting new features and functionality to justify the investment, and then slowly decrease in cost as the technology ages.

One common example is the rise of smartphones. Each year industry giants like Samsung, Apple and Google launch the latest versions of their devices that cost hundreds of dollars. Another example is in the health care industry. Hospitals and doctors are in a constant race to acquire the latest and greatest machines to improve care and diagnostics for their patients, as well as create a better brand for their practice. These machines can cost tens of thousands of dollars, a cost that often ends up being passed on to the patients and insurance providers.

However, with the rise of globalization and greater interaction with developing nations, a new field of innovation has emerged that has the potential to disrupt these trends: reverse innovation.

Originally labeled blowback innovation, reverse innovation does just as its name implies: it reverses the direction of innovation flow. Whereas poor, developing nations used to be exclusively followers in technology and advances, reverse innovation occurs when a technological solution created in a developing country gains traction abroad and is adopted by developed countries. In essence, rich countries learn and adopt affordable solutions from poor countries.

Nowhere is this more relevant than health care. Despite a recent reduction in the rate of increases in spending, health care costs in the United States are still rising at a faster rate than wages. This puts a heavy burden on workers and employers as paying for health care requires a larger percentage of income. Coupled with the recent time of austerity and economic hardship, the need for low-cost medical solutions continues to grow.

One example of reverse innovation has been piloted by General Electric with electronic imaging devices, specifically cardiograms and ultrasounds. Developed mainly in India and China, GE has produced some of the lowest-cost devices in the world. For example, GE developed a portable electrocardiogram machine that costs only $800, down from the typical $5,000 non-portable version common in the United States.

This technology has already started to make its way back to the U.S. in ambulances, providing better care as diagnostics can be run on the road rather than waiting to reach the hospital.

Another example is the case of mPedigree.net, a website implemented in Africa to combat the challenge of fake prescriptions. Using existing cellphone technology, mPedigree has created a way to compare identification codes on medicines against a database of authenticated products over text messages. A patient simply texts the code on the medicine he receives to mPedigree and receives a confirmation about whether or not the medicine is valid. This simple solution has great potential and is rapidly spreading in Africa as well as several developed nations in Europe.

A last example is an approach to surgery used by Devi Shetty, India’s most celebrated heart surgeon, which draws on mass production principles pioneered by Henry Ford. Shetty has financed and built hospitals with 1,000 beds, compared to only 160 at the average American heart hospital, focused solely on heart surgery. This specialization and concentration of surgeons provides ample opportunity for new doctors to learn, develop, and be tutored. These facilities are able to provide world-class expertise, as well as avoid several challenges of administration stemming from providing large numbers of services. Because of these factors, Dr. Shetty is able to charge an average of $2,000 for open-heart surgery, compared to $20,000-$100,000 in the U.S.

The most impressive aspect of reverse innovation is that the results are comparable to more expensive products’ performance in developed nations, and sometimes better. This applies not only to surgery as with Shetty, but to diagnostics and fraud protection.

As it stands, reverse innovation is an emerging field that could change the way business is done worldwide. Similar to any new idea or innovation, it faces the challenge of early failures, which discourage future investment. Also, the flow of innovations from developing nations to developed ones is underdeveloped at best. However, reverse innovation provides exciting opportunities that hold great promise and potential for businesses to help the common good through lower-cost, high-quality products, especially in the field of health care.

John Hoffmire teaches at SaÏd Business School at the University of Oxford.

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