In 1998 I was forming my first venture fund with a focus on healthcare IT and healthcare services. It was an interesting time to be undertaking such a mission. The Internet boom was in full swing and the money was flooding away from healthcare. Few were yet talking about rising healthcare costs the disastrous state of healthcare errors, or the need to share data to improve the management of chronic disease, much less the operating efficiency of payers or providers. One seasoned VC, whose firm was in the process of laying off all of its healthcare partners in 1998, told me that my firm’s strategy was “quaint.” In other words, maybe I should consider a career in plastics.
Fast forward 17 years and the times have changed, to say the least. Everyone is talking about the fiscal crisis wrought by healthcare cost escalation. Even at cocktail parties you can hear people discussing mishaps they have experienced while colliding with our dysfunctional healthcare industry. And in a particular twist, healthcare IT, or its new more hipster moniker, digital health, has become THE place to invest for many. Digital health is viewed as a potential panacea for our healthcare woes, shedding light on the healthcare system darkness through a magical blend of mobile technology, sensors, data, analytics, interoperability and consumer engagement.
Since 2010, investment in the sector has grown by 400% to over $4 billion in 2014. So compelling is digital healthcare that even those VCs who fled the field in the late 90’s are back, which would be interesting if they could even be heard above the drumbeat of hooves created by the tech investors now coming into the sector to place their bets. The digital health gold rush is on and while the stagecoach has been replaced by the Tesla, there is widespread recognition that the healthcare industry can and must dramatically benefit from the technology advances that have brought virtually every other business sector into the 21st Century.
But here’s the rub. While investment dollars have poured in like Niagara Falls and company valuations defy gravity, there are a few things missing when we look behind the proverbial curtain. With few exceptions we have not seen meteoric revenue growth to match those valuation metrics, nor has the IPO market looked kindly on many digital health offerings that have made it out the door. Mainstream medical technology and pharma have been dabbling but rarely committing. Health systems and payers love digital health conceptually, but too often sponsor a series of pilots that never land. And, like those early days of the Internet, entrepreneurs are just too busy fundraising to develop a reliable business model.
Not all digital health is created equal and there are some real challenges as we enter healthcare’s digital age. All too often companies are built around technologies looking for a problem to solve. The transition from technology-driven product development to marketing-driven product delivery has barely begun, too frequently forgoing user-centered design and a deep understanding of payment and stakeholder motivations.
Further, we are still stuck in the middle of the market disruption cycle in healthcare, straddling multiple worlds that make it hard to deliver useful solutions. We are driving from the oft-discussed land of volume to the nirvana of value, but we have yet to arrive there. Most providers still make their money the old-fashioned way and get stalled implementing change that suits only the value-based world. And while we all believe that much of healthcare delivery will move to the home, we are still looking at the map to see how to get there.
Payers are undergoing massive change, consolidating and finding their way into exchanges in a world where insurance product profits are capped. As such there is an opening for digital health solutions to help them manage costs while diversifying into new business areas, but change is slow, particularly while the giants enter into marriages that will take them out of the innovation game while they negotiate whose furniture gets to stay.
And furthermore, as payers (government and commercial, including employers), providers and even consumers start evaluating digital health offerings through money-colored glasses, we are more and more hearing the refrain that evidence matters. Proof of real efficacy, value, and achievement of key goals is fast becoming the currency of the realm. The entrepreneur may think her technology is slick as can be, but if she can’t prove ROI within 12 months or less to a target customer, few are going to part with their money. ROI can come in many forms–cost-savings, quality improvement, improved experience, better access, you name it—but no one is taking anyone’s word for it anymore. The discipline of clinical trials and objective outcome research is the canary in this gold mine. If customers can’t hear it singing, they are going to look for a new canary.
One thing is certain: she who owns the patient owns the market in digital health. Patient engagement and intimacy are evolving as core concepts. This is the product of the increasing cost burden placed on individuals, amplified by the expectations of the great customer experience to which they have become accustomed at Amazon and Starbucks. It is also ever more obvious that if people don’t start participating in keeping themselves healthy, the game is for naught. While still nascent, citizen science is becoming real. So are consumers’ interests in better understanding themselves as their own personal science experiment. It is not universal and it isn’t consistent, but the desire to access personal data for personal health improvement is a trend we can’t ignore.
Those companies who will end the game with the biggest prizes will be those that have embraced the idea of engaging with patients in product conceptualization, clinical trial design and, especially, through creating a continuous feedback loop with consumers/patients through monitoring, personalization and responsiveness to patient-reported outcomes. The ones sitting on piles of gold at the end of this race will be those who have risen to the leadership challenge of partnering with their customers in a deep and meaningful way.
Given all this, the high impact investment opportunities are those that master the use of data for actionable behavioral or operational change; which use technology for just-in-time resource management; and which understand the importance of convenience, value and empathy, particular for products that touch the consumer. Some of the areas that serve the triple aim and the trifecta of stakeholders (patient, payer and provider) include:
- Consumer tools to optimize cost, convenience and coverage
- Remote diagnostics and monitoring to turn home into medical home
- Behavioral modification tools to prevent and manage illness
- Clinical analytics that create actionable interventions and leverage EMR installed base
- Business analytics for health systems transition to value-based world
- Tools to turn IOT (Internet of Things) into IOV (v for value), especially for companion diagnostics/therapeutics
- Analytics to enable the brave new world of precision medicine
Many of the best investments are hybrids of IT, services and devices and/or drugs. Such integrated offerings add greater value to the customer, are harder to copy, create a platform bigger than any one product, and lend themselves to premium pricing.
The new healthcare economy has arrived and it is demanding significant innovation. Old business models are being disrupted and new players are emerging, as are weird and wonderful new partnerships. The promise of digital health to play a key role in this world is real, but we are on the 20 yard line with a long way to go. While new, cheap technology makes the previously impossible possible, we are still on the front end of major changes in our insurance market, the shift from volume to value, and realizing the worth of the now installed base of EMRs, among other things. As we get to true interoperability we will unleash a whole other level of potential.
It will be interesting to see if healthcare’s existing big players can rise to the occasion or whether we will see a new generation of companies best capitalize on changing industry dynamics to become the next generation of healthcare leaders. The new rules of healthcare supremacy are being written as we speak and technology plays a huge role in this transition.. And as everyone knows, those who have the gold make the rules.