Case Study
Designing for the Innovator’s Dilemma
Building a New Model Without Breaking the Old One
A Disruptive Model Meets a Traditional One
In 2014, a mid-size community health system faced a challenge common to many hospitals: how to pursue a disruptive innovation without undermining its existing business. The hospital— 212 beds, more than 200 physicians, and roughly 2,400 employees — was preparing to launch the region’s first Medicare Shared Savings Program (MSSP).
The goal was to improve outcomes for primary care patients while lowering costs through preventive care and better coordination across the continuum. But this new value-based reimbursement model ran directly counter to the industry’s fee-for-service incentives. As Clayton Christensen’s research has shown, innovations that disrupt an incumbent model often fail not because they lack merit, but because they conflict with the parent organization’s identity and economics.
To succeed, this health system would have to build something new without the weight of the old pulling it back.
The Tension Between Two Logics
Leaders quickly recognized that this wasn’t simply a financial or operational problem. It was an identity conflict. The hospital’s existing model rewarded inpatient volume, while the new model required reducing it. Many executives and department heads—whose roles, authority, and budgets depended on utilization — were wary of a program that might erode revenue or control.
At its core, the challenge was behavioral: How do you lead an innovation that, by design, could disrupt the legacy system and its leaders?
The answer was to design the new organization as a separate system — structurally and culturally — so it could develop its own logic, norms, and sense of identity before being integrated into the larger enterprise.
Building Structural and Cultural Separation
Three deliberate design choices helped protect the fledgling enterprise and give it the autonomy it needed to thrive:
The new physician network was structured as an LLC, with the hospital as sole member. Its board composition was intentionally disruptive: only two hospital executives—the CEO and Chief Medical Officer—served, while the majority of seats were filled by independent physicians. The CFO, COO, and Chief Nursing Officer were intentionally excluded to minimize conflicts tied to the fee-for-service business.
Meetings were never held in hospital facilities. Instead, the board met in physician offices, community spaces, or hotel conference rooms. This physical separation signaled psychological freedom: this was not a hospital committee; it was a new enterprise with its own culture and purpose.
All care guidelines, quality metrics, and protocols were developed by physicians themselves—many from private practices rather than employed roles. These were shared peer-to-peer, fostering mentorship and credibility across a distributed network.
Together, these design elements created the conditions for innovation: governance autonomy, environmental distance, and professional and clinical autonomy.
From Structure to Movement
Once established, the board’s early focus was to operationalize its purpose—to improve quality and reduce unnecessary utilization among attributed Medicare beneficiaries.
The network’s physician-led Quality Committee became its engine of change. Members identified high-performing physicians, researched and codified their unique approaches, and coached peers to adopt proven workflows.
Physicians began to model new norms of shared accountability—something rarely seen in independent practice. The sense of peer belonging replaced the sense of hospital oversight.
Meanwhile, executives continued to protect the network’s independence. The CEO and CMO acted as sponsors, not supervisors, ensuring the fledgling organization could operate with freedom until it matured enough to “sit at the table” as a true peer within the system.
Bending the Cost Curve Without Breaking Trust
Over its first three-year contract cycle, the network achieved measurable results:
- 2.1% reduction in total cost of care for attributed Medicare patients.
- Significant declines in ED utilization, inpatient admissions, and readmissions.
- Top decile performance on preventive care metrics and quality measures.
Perhaps just as important was what changed culturally. Physicians began to see themselves not as extensions of a hospital system, or even as independent practitioners, but as leaders of a shared clinical movement.
Autonomy, long the hallmark of private practice, was retained while the hospital provided the financial and administrative support to organize, something the regional practices could not have afforded to do on their own.
It also reinforced an overlooked reality: physician professional and clinical autonomy can be a strategic asset, not an obstacle, when it is respected and empowered.
Protecting the New From the Old
This experience offered a powerful lesson in organizational design.
When innovation threatens the core, the instinct is often to control it. But true innovation—especially disruptive innovation—requires protection, not assimilation. This is not an easy lesson for many leaders to learn. By isolating the new model structurally and culturally, leaders gave it room to develop its own identity before integrating it into the larger system.
In three years, the network not only improved the quality of care and reduced unnecessary, high-cost utilization, it also established credibility as a peer voice in hospital leadership.
This is a prime example of how structure, identity, and human design can resolve the Innovator’s Dilemma. You can’t innovate your way out of a legacy model with the same governance, incentives, and culture that created it. Design the space for the future to grow.
Want a Clearer Starting Point?
If you’re preparing to launch a new strategy — or wondering why execution feels harder than it should — start with a Shift Diagnostic. You’ll gain clarity, confidence, and a precise roadmap for where to focus next.