On the Digital Health Conundrum (Part II)

This is a continuation of the ideas laid out in Part I of this post. In this part, I’ll talk about how to think about changing healthcare and lay out my framework for the kinds of companies that can disrupt it. If you don’t want to read the first part, here’s a quick tl;dr of my thoughts:

1. Digital health companies thus far have been pretty incremental in terms of changing the cost and UX of the healthcare system.

2. Payors and Providers are brutal customers because of their internal and external incentives.

3. Healthcare isn’t the same as other legacy businesses in terms of its ability to support change as a digital ecosystem.

Therefore, we really need to reconsider our approaches to driving change in healthcare.

How do we change healthcare?

For over three years, I’ve spent the bulk of my time thinking about how to bring large scale change to healthcare. What I’ve come to believe is we need systems-level thinking about how to catalyze change, not singular focus on individual players and their needs. The complex interplay between healthcare players has caused this approach to fail. We call it the healthcare system yet our approaches try to solve for the individual pieces.

Creative solutions to cracking this problem exist. Perhaps the most successful go to market approach has been through Self-Insured Employers (SIE’s). This was pioneered by companies like GrandRounds and Livongo that noticed incentive alignment in SIE’s. While this was great for a time, what we’ve seen is targeting the SIE as a customer has toughened as the market has become saturated. They’ve heard the pitch “we’re going to use data and technology to increase the efficiency of care” hundreds of times. CFO’s and heads of HR’s are novices at analyzing healthcare costs and their internal incentives are to avoid paying for extraneous benefits that could get them fired. The burden of proof that you’re going to save costs has become high. They’re asking their Third-Party Administrators (TPA’s) to handle these deals for them — and then you’re back to dealing with large insurance co’s. This is a market I’m less bullish on than most.

Full-Stack approaches have also lessened the burden of the complex interplay of incentives. While it’s early, I believe these can be some of the most disruptive companies in healthcare. Companies like Omada, One Medical, etc. have had some success removing the challenges of provider adoption of tools by hiring their own providers and selling directly to SIE’s and insurers. One of the challenges for these companies remains navigating an enterprise sales cycle and a consumer marketing challenge at the same time. More importantly, because of the focus on the enterprise, these businesses often lead with sales and marketing instead of product.

Digital Health has also struggled with finding the balance between virtualization and high touch. One set of companies have focused on delivering efficient services to low cost, low complexity patients who don’t need more care or change the underlying cost in the system (think Hims, Roman, etc.). Another set has focused on high cost, high complexity patients (i.e. multiple chronic conditions needing a lot of treatment, management, etc.) but run more or less completely manual services. Consider the class of new primary care/medical management companies: ChenMed, Iora, Landmark, etc. These are some of the most interesting companies in healthcare but ironically they’ve been successful by being more intensive and manual in their care workflows. Instead of progressing towards less manual service, we’re progressing towards more! I will give this whole class of companies credit for developing innovative care models that improve quality of care and costs, but it’s a step forward in one direction and backward in another.

Other companies going full stack (Virta, Omada, etc.) are also heavily manual. The industry’s dirty little secret is that “tech enabled service” means “service where we built some software that hardly makes a difference.” They still have a person doing most of the talking directly to the patient. Almost every company in the space is guilty of this. This is another form of rampant incrementalism. People haven’t charted a path to dramatically changing the underlying cost structure of care delivery. One of the key questions is how we make the service of care delivery a good that we can mass manufacture. This is a key idea to unlocking an equitable and efficient future economy: the “goodification of services.” We need to dramatically scale healthcare expertise, especially when it comes to complex patients who need more access. We need near-zero marginal cost medicine.

There’s a lesson here though: you can drive change in healthcare if you’re willing to think about how the parts fit together. There’s a fundamental misunderstanding when people say health care is slow. Yes, the timelines are slow due to healthcare’s local nature and natural rate of change. The reality is when disruptions come to the healthcare system, they come fast. My questions: Can we find examples of that change? Can we understand their underlying causes? How can we recreate this change going forward?

1. Policy Changes

Ahhhhhhhhhh, everybody run for your life! I’ve just screamed Voldemort in the middle of Sand Hill Road.

Now back to reality. In healthcare, policy changes can drive massive change and disruptive companies have benefited from this. Some good examples of this include Epic and Cerner. Cerner’s market cap is over $20B and Epic has about half Cerner’s revenue. Both companies have been around since 1979 but didn’t become behemoths until the last 10 years or so. This timing reflects the growth of the EMR industry, which has erupted over the last decade. Look at the table below which shows EMR adoption in hospitals in a 6-year span. Massive change. Venture scale companies. Fast.

Why did this happen? In 2008, the Obama administration enacted the HITECH Act that gave financial incentives (read: lump sums) to provider groups that adopted EMR’s and also required adoption on certain timelines. Many companies have turned healthcare policy changes into large economic opportunities. I’ll point out Oscar Health, which sprung up around Obamacare, and Medicare Advantage startups as a category.

2. Existential Threats

If you don’t want to wait around for the federal government to figure things out, I’ve got good news for you: there’s another way to change the system. I like to call it existential threats. The other way people have been able to build venture scale businesses is by scaring the shit out of the healthcare establishment. As discussed, the incentive for the system as a whole is to resist change, let the costs of care go up, and continue to profit from that over time. Thin margin corporations with large revenue streams resist change until there’s a black swan that represents, in practice or perception, an existential threat to their business. Turns out they start moving fast when they see this. What are some good examples of this? My favorite is urgent care.

We’ve seen about 9,000 urgent care centers in the US since the early 1990’s (source). Guess how many Starbucks we’ve seen in a similar time period? About 14,000. Brick and Mortar healthcare growing at about 65–70% of consumer coffee. Take a moment to appreciate that. It’s bananas. Why did this happen? It started as incentive alignment: consumers loved the convenience and cost of urgent care and so did insurers. What kicked it into hypergrowth was when health systems realized that these little mom and pop centers were draining their profit-making ED’s. Today, every major health system in the US has its own urgent care or is associated with external urgent care. When these players get scared, they move.

Examples of fear prompting movement haven’t always been successful products. The best example was IBM Watson. Watson put ads on the New York City subway that spooked people into thinking cancer diagnostics and treatment were changed forever. Add in the Jeopardy narrative and it was a perfect storm. Watson Health had collaborations with the best oncology centers in the US: Memorial Sloan Kettering, MD Anderson, etc. MD Anderson spent $62m on the collaboration. Of course, this all came crashing down when people realized Watson was vaporware and the marketing hype was just that — hype. In the end, Watson was a selfish, unethical, and incompetent foray increasing long term skepticism towards technology in doctors and health systems.

Another great example is that of Intuitive Surgical. Intuitive has a $60B market cap and makes robots to improve surgical outcomes. The narrative is amazing. Robots are coming to replace your surgeon’s job with their steady motors and literal surgical precision. Intuitive has built a behemoth selling its Da Vinci robot into health systems. Here’s the catch: turns out, they might not be so good. Intuitive’s robots appear to worsen outcomes. They might have other serious issues too. And here’s the problem: nobody cares. If a patient goes to UCSF and says, “Hey, I’m considering getting this surgery at Stanford instead, they have these fancy new robots, do you?” and UCSF tries to cite a bunch of data saying their surgeons are better, it’s over. The patient is going to Stanford. The narrative is captivating and the threat it represents to surgical profit centers means adoption from health systems is necessary. The shared trait between Intuitive and Watson? Incredible marketing machines based on existentially threatening stories despite underwhelming technology.

Where are some of the existential threats we’re seeing in healthcare? One big area is D2C companies like Hims, Nurx, and Roman. Hims went 0 to 100m in revenue in their first year of operating selling erectile dysfunction and hair loss pills. That kind of growth doesn’t exist elsewhere in healthcare. While it remains to be seen where these companies go, it’s clear they’re creating a lot of buzz, attention, and fear. Incumbents are unhappy about them, arguing everything from “they are pill mills” to “patient safety” to “it’s a toy.” Ever heard that one before? In many ways, healthcare isn’t different than any other industry in its ability to resist digitalization. I’ve been asking deeper questions: What does the evolution of this kind of D2C model look like? How do we broaden the scope of these approaches to address serious and complex healthcare issues? What can we borrow from these models to spark large scale adoption and patient empowerment? We’ve been asking these questions at my company Curai and we think we’ve found the answer.

3. Inflation and Incrementalism

The third way people change the system is by introducing inflationary or incremental things. Inflationary things work great in healthcare. One of the challenges of reducing cost is you’re taking away somebody’s revenue. When you’re inflationary, everyone makes money so people will adopt.

Incrementalism reigns in healthcare. If you want to sell into large healthcare players, you’ve got to spoon-feed them. They can’t understand grand technological visions so take a simple, well-known problem and solve that in a way they can understand. It’s hard to isolate simple yet material problems, but this is the best approach for getting a foot in the door. Unlike other areas, people have struggled to expand out from that initial beachhead. PatientPing is an example of such a company. They’ve found an isolated, well-understood problem, and grown by solving it in a simple way.

The other way to simplify your story is to accumulate enough evidence that your solution works. Virta Health did this with published studies. This is hard and takes time, but it’s one way to paint something that’s not incremental as approachable to large players. These companies have long timelines and 7–8 year return cycles from venture investors don’t allow time for running a 2 year RCT. The best middle ground might be Omada Health’s approach. They commercialized a tech-enabled version of the pre-existing research behind the Diabetes Prevention Plan (DPP).

What now?

I’m tired of the same old conversations about long sales cycles and promising companies with good products dying. I want people to think systematically about how to drive change into a system that needs it. Investors need to start taking business model risk — if you agree the underlying business model of healthcare is broken, why are you investing in things that fit into it instead of having a plausible chance to change the model? Founders should be shooting for bigger, more impactful companies. You need vision and understanding of why your startup can make a material dent in a problem that threatens to bankrupt our society.

Payors and providers should establish sandboxes, creating environments where small companies can test rapidly and prove their solutions work. Understand many of these will fail. Focus on developing products not testing perfect ones. Use your pockets of capitated care to enable powerful solutions that don’t fit into your traditional business model. Those pockets don’t have to be large: 1% of your patient population. Make sure these projects retain velocity by supporting them with the right internal champions. Allow companies to test and iterate fast in a responsible way.

Policymakers need to really understand the second order impacts of the incentive systems they set up and to talk more to people in the valley about how technological change could be enabled by policy changes. Things as varied as reimbursement changes for digital health tools, Stark reform, data interoperability, deployment of AI technologies, and support for consumer first healthcare approaches could all unlock new business models. Digital health policy might be one of the most effective levers we have to spark change.

This quest to catalyze change in healthcare has dominated my life for the last 3 and a half years and it’s clear to me we’re on the precipice of big things. It’s time to stop thinking incrementally and being locked on what is. Let’s focus on what could be. There’s positive change coming to US healthcare and we need to make it happen.

Thanks to Nikhil Krishnan, Vinod Khosla, Sylvan Waller, and Kunal Sethy for feedback on this post.

This post was originally posted on Medium on December 12th, 2019 and reposted here.