The relentless pace of innovation and boundary-pushing in healthcare technology has shown few signs of slowing. Even with tremendous uncertainty in Washington, the value-based care boulder is already rolling down the proverbial hill, and investors – if even a tad more cautiously – are still finding value and opportunity in the space.
We are fortunate to have hundreds of conversations each week with leaders across the industry, from CEOs and VC’s to sales leaders and marketers. The ebb and flow of these conversations tells a story, and when taken together, allows us to form some opinions about where our industry has been, and where it might be going. If nothing else, it’s a humbling exercise trying to keep up, but we have a lot of fun attempting to keep our fingers on the pulse. Here, we’re trying to encapsulate some of what we’re seeing.
The Re-humanization Of Healthcare IT
Over the last decade, the floodgates opened in the healthcare industry as technological advancement in other industries attempted to find its way into ours. And with the promise of a digital utopia came vast quantities of investment capital, and perhaps a little bit of ‘irrational exuberance,’ to borrow a fun cliché. Technology was viewed as a silver bullet that could solve all of our healthcare woes, prompting many in the space to apply the managerial and operational strategies of tech firms to the healthcare industry. Unfortunately, two realities soon hit home:
1) It’s hard to be successful in the healthcare ballgame using another industry’s playbook. Healthcare is a massive, complex, and fragmented industry, with unique cost drivers, engines of growth, regulatory hurdles, even its own vernacular. The strategic principles that apply to technology firms don’t necessarily resonate in healthcare. For example, you don’t get viral adoption of a population health platform the way you do with Instagram. And the value of Salesforce.com’s CRM doesn’t need clarification in the same way a complex clinical decision support engine’s does. You simply can’t play baseball with a hockey stick.
2) The human element of healthcare is a critical piece of the puzzle. When a diabetes patient has trouble figuring out how to take his or her insulin, that patient needs a human to connect with, not a robot. While there do exist links in the healthcare supply chain that can certainly be optimized through mechanization, to remove the human element entirely omits a valuable function of healthcare. After all, ours is an industry that touches people at their most vulnerable stages in life; there isn’t yet an app for that.
As recognition of these realities begins to take hold, the pendulum is now swinging back to the middle. That is to say, firms are incorporating technology into their offerings, but they’re not doing so at the expense of humans. Instead, the happy middle ground seems to be tech-enabled services, where the goal is to enhance the human experience through technological innovation, rather than replace it altogether.
To that end, tech-enabled service providers often focus on a specific problem demographic within Healthcare IT. For example, Wellframe overlays a health plan’s existing care management organization and connects patients to a care management dashboard via mobile app, increasing the frequency of their interactions with care providers, and encouraging greater communication. Their outcomes have been nothing short of amazing. Fit4D is geared specifically to diabetes patients, and delivers personalized solutions via tech-enabled health coaching from Certified Nurse Diabetes Educators. By honing in on niche demographics, these startups are able to deliver bespoke solutions that larger, broadly-focused healthcare corporations have trouble addressing. That leads to better experiences, better results, and more investment down the road.
The future of healthcare tech lies in the ability of firms – startups and incumbents alike – to find the right balance of technological innovation and human compassion. There will continue to be bumps along the way, as these growth stage companies attempt to walk that line. The key is to be mindful of the fact that technology should enhance the human experience, not replace it. Businesses that leverage technology to make people more efficient will succeed in the long run, especially as we continue to shift more and more accountability onto the consumer.
The Rise Of The Self-Funded Employer
There is lots of talk about risk-bearing entities these days, with plenty of complex lexicon to go along with it – sub-capitation, capitated risk, gain sharing, etc. Lots of organizations tout a risk-bearing revenue model, but one group, by its very nature, truly does own it – self-insured (or self-funded) employers. They shoulder the cost of insurance premiums, employee and dependent care utilization, and suffer the cost of lost productivity if their employees can’t stay healthy. They’re burning the candle at both ends.
As more businesses transfer to the self-funded model (thanks to rising healthcare costs), they are beginning to recognize that it is in their best interest to keep employees as healthy as possible, in order to avoid those aforementioned hard and soft costs. In other words, self-funded employers are incentivized to innovate rapidly, as they seek novel approaches to managing their heightened risk pools. This emphasis on strategic healthcare investment has led to greater purchasing power in the marketplace for self-funded employers, which in turn, has given way to a rising trend: an increased targeting of employers as customers by healthcare technology vendors.
Both employers and service providers have begun to recognize the increased purchasing power that large, self-funded corporations wield. Those corporations, untethered to established convention, are free to exercise their agility in the healthcare market by tapping into opportunities not exploited by traditional insurers. Not to mention the speed at which they make decisions compared to the average health plan. Video game maker Activision is a prime example. In 2016, the self-funded employer partnered with San Francisco-based startup Collective Health to manage its benefits packages. Backed with more than $100M from investors such as Founders Fund and Google Ventures, Collective Health offers an innovative, streamlined, and data-driven approach to healthcare management. The company also pays large insurers to use their medical networks in-lieu of negotiating provider contracts, thus they are afforded the luxury of concentrating on the customer-service aspect of their business. That unique focus on the customer experience has reaped positive results for the firm’s clients. Milt Ezzard, Activision’s Senior Director of Global Benefits, claimed that the cost of members who are continually engaged with Collective Health’s services had decreased by roughly $800 per member in 2016.
It also stands to reason that self-funded employers are more inclined to view their healthcare investment as a retention strategy. If an employee is diagnosed with a disease such as cancer, they are comforted to know that their employer will be there for them every step of the way – including payment of their healthcare costs, and perhaps access to a platform like Robin Care, for example. And if the firm is able to present innovative solutions such as those offered by Collective Health and others, the link between employer and employee becomes strengthened. Once that employee returns to work, he or she is likely to become an even more fervent advocate for the company, due to the emotional bond that was formed during a precarious time.
It is estimated that 59% of all U.S. companies are self-funded, with the average plan covering just 300-400 employees. That is a far cry from the days when the term ‘self-funded’ was synonymous with ‘Fortune-500.’ As the market presence of these firms expands, so too will their purchasing power, and their eagerness to break from convention and adopt bold, innovative strategies has only just begun to transform the healthcare landscape.
We’re Already in a Much-Needed Period Of Consolidation
Over the last decade, we’ve witnessed an influx of investment into the healthcare space. That is partly the result of the aforementioned ‘irrational exuberance’ surrounding pure software, and partly due to Private Equity’s rise as an investment class (2017 is on track to be a record year for PE fundraising). The same goes for Venture Funding in HCIT. Yet despite all of the initial enthusiasm, an industry shakeout is already quietly underway, and – minus a few notable exceptions – the winners and losers of this brave new healthcare world have yet to clearly emerge.
This leads us to our third and final trend: Accelerated consolidation. Whether through increased M&A activity, or via closings once fundraising dries up, companies will either merge or throw in the towel as competition within market segments continues. According to a recent Capstone study, the number of M&A deals in the HCIT sector rose from 122 in 2013, to 152 in 2014, and then to 182 in 2015. That represents an increase of roughly 25% and 20%, respectively. Since 2015, the level of M&A activity has held strong, with 173 deals taking place last year, and 90 deals already occurring in the first half of 2017.
Lucro, an organization that has formed to help buyers of HCIT solutions filter through the noise, is a startup that serves as a vendor marketplace for hospitals and health providers. They essentially act as a back-end social network, allowing buyers to discuss, compare, rate, and analyze vendors across a range of metrics. So already we’re seeing heightened competition in the marketplace. Increased access to reliable vendor information means that buyers will soon be making more informed decisions, and as a consequence, the market will continue to consolidate. There are simply too many companies offering a similar suite of services across all verticals. It’s just not sustainable. And while we won’t speak ill of the dead, there have already been a number of notable closures in 2017.
But don’t feel too bad – this inevitable industry correction is actually a good thing: Startups benefit as consolidation leads to scale, and ultimately to the formation of a more mature industry. Healthcare providers benefit as costs decrease, and vendors grow more efficient and perceptive. Sales cycles compress, as buyers have more confidence that vendors will be around 12 months later to continue supporting their product. And of course, customers benefit from the rapid advances in technology. So the end result is one giant positive, as an irrationally exuberant sector transforms itself into a more rationally exuberant meritocracy.