The Healthcare Opportunity

March 14, 2014

When I was in college just a couple years ago, very few of my friends were interested in healthcare as a space for technology disruption. It wasn't so much that people didn't believe that there was room for disruption, but most health care entrepreneurship at the time was being driven into biotech which required specific technical backgrounds and long development lead times (not attractive to the impatient). Healthcare was messy and hard to understand, while consumer tech seemed to guide the path down the yellow brick road to the promise of entrepreneurial success. 

Today, the story looks much different. Entrepreneurs and investors have eagerly begun to dive head-first into the digital health space. Venture funding was up almost 40% in 2013 from the year prior, and almost 120% from 2011, at $1.9 billion in new investments in 2013, according to a recent report from Rock Health (a healthcare focused start-up accelerator). Furthermore, only 9% of those companies funded in 2013 had MDs as CEOs. The opportunity in digital health, unlike med devices and biotech, has lowered the bar for entrepreneurs with limited healthcare background but strong problem solving abilities with a keen outsider's perspective. This doesn't mean that one doesn't need to be familiar with the industry or seek out industry experts/practitioners to partner with, but a medical degree is no longer a strict requirement. And although U.S. healthcare spending is slowing slightly, it still conservatively accounts for more than $2.5 trillion dollars a year and between 15 - 20 percent of the U.S. economy (those numbers should make any aspiring entrepreneur pause and relish its enormity). 

As an entrepreneur, there is clearly a lot of momentum and a large opportunity, but where do you start? Healthcare remains a complex business with multiple moving parts and misaligned incentives. The Affordable Care Act and the HITECH Act have started to move things in the right direction, but where does the real opportunity lie for traditional Silicon Valley innovators?

Defining the Future of Healthcare

Much has been written about and discussed regarding the direction of healthcare, and I don't pretend to be an expert or the definitive source on this topic by any stretch. However, there are two important trends that I believe will shape the digital health opportunities in years to come:

First, the healthcare industry will become industrialized. This will most heavily be felt by consumers via healthcare delivery as their care will become more specialized and standardized. For instance, in today's world, when the average individual in America feels sick, they either visit their primary care physician or the ER room. This function will shift to nurse practitioners housed in your local CVS, WallMart, or online platform (hello, HealthTap), delivering care based on data algorithms diagnosing your symptoms and prescribing you necessary prescriptions as Emergency Rooms return to their intended functions and primary care physicians become more specialized or swallowed up into the broader hospital system. Similarly, uber-specialized practices will continue to spring up focusing on niche care verticals as different elements of the care delivery chain becomes segmented, treating patients like widgets (in the best possible sense). This in turn, will increase the burden on interoperability standards and on prevention/wellness management. Startups like Wellframe, which supports discharged patients in managing their health/recovery plans, or Maxwell Health, which provides employers an operating system to manage employee benefits including incentives to keep employees healthy, are already creating companies that take advantage of emerging opportunities and necessities stemming from industrialization (ZocDoc, Omada Health are other great examples). 

Second, we will witness a consumerization of healthcare IT. In the past few years, we've witnessed startups (now grown companies) like Box and Asana take on legacy IT providers like Microsoft and Oracle, challenging the traditional status quo and taking large market share by developing more agile and user friendly products. In the same way, I believe there is high demand for better alternatives to existing legacy healthcare IT software, especially as we train a new generation of practitioners who grew up using Facebook and iPhones and expect a higher level of usability, as well as hospitals systems looking to reduce costs and realizing cloud solutions as better alternatives to multi-million dollar rigid, legacy systems. 

Opportunities in Digital Health

A lot is clearly changing, and opportunities will remain abound and change in form as time progresses. Many opportunities that bring together a better practical operating model with the intersection of digital health also exist -- such as innovating around new payor models like Oscar Health or developing new accountable care organizations and models of delivery like One Medical Group. However, below are a few areas situated more purely within the digital health space that I find exciting and believe await disruption: 

Patient Data

The need for interoperability has never been clearer, driven by an increasingly industrialized healthcare delivery model, high switching costs, desire for better outcome-drive diagnoses, and a need for a more informed patient population to drive prevention methods. The ability for patients to not only transfer but own their data is paramount.

Yet today, this basic function is lacking. When I started graduate school this year, I could not enroll in classes for the first few days since I had to get my pediatrician from almost two decades ago to fax my immunization forms to Harvard Health Services. Even then, despite having chicken pox as a child, I could not prove that I had the disease and thus had to get a repeat inoculation and pay out-of-pocket for the basic consultation and procedure. This served as a simple and, fortunately, relatively painless reminder of the shear lack of infrastructure and technological ability to effectively track and transfer data between physicians (or often within the same hospital). The EHR debate has continued for quite some time as many in the industry call for national standards initiated by the government or large regional hospital systems, but companies such as EPIC and PracticeFusion continue to grow their market share indicating that the obstacles may not be in lack of standardization but rather lack of innovation. Additionally, once patient data is actually harnessed, there is a clear opportunity for companies to leverage big data analytics to create innovative applications. Imagine a Clever for healthcare that served as an enabler of a new wave of developer apps and analytic capabilities across disparate IT systems, or Healthtap being able to provide your entire medical history during your consultation improving the accuracy of your diagnosis. Bill Gates understood that owning the operating system would allow him to control the market, and in the same way I believe whoever ends up owning the platform for patient data, will own the digital healthcare space of the future. 

Hospital Management 

Given the trends of industrialization, hospitals will become increasingly complex to manage and hospital executives will need better tools to manage costs and efficiency. It certainly is not easy to track costs within a hospital currently, especially as patients are moved from different segments of the delivery chain and budgets are a highly political process in many hospitals where ambiguity may serve a purpose. Data driven dashboards to help managers tack and analyze metrics driving cost and efficiency in a granular fashion in hospitals are greatly lacking, especially as many hospital systems continue to use legacy enterprise servers where data is coded differently from hospital to hospital, often making existing data analysis tools difficult to employ. Ideally, a solution in this space would be a cross between Workday and Tableau, providing a flexible platform for managers at different levels of the organization to execute on administrative and managerial analyses. 

The Long Tail of Healthcare

Many IT solutions are often focused on large health care providers, but of the 1 million doctors in America, roughly 50% are in practices with 5 or less people. As we begin to consider potential innovations in healthcare, their remains a vast opportunity to provide solutions for the "long tail" of providers that are in private practice all across the nation, often quite removed from large cityscapes and thus serving a wide population of patients. Reimagining SaaS solutions for this segment at competitive costs provides an opportunity to capture a large market (PracticeFusion is a good example of this, as well as DocuTAP which focuses on providing urgent care clinics with practice management and EMR tools). Many doctors in this segment, despite monetary incentives from ACA to move towards a more digital practice, are less informed about solutions that exist or how they can help their practice without a large investment. Additionally, transition costs for this segment must remain low to be attractive since pay-offs via ACA incentives often do not counterbalance the investment into the platform or the business loss due to transition. Even more than hospitals (who escape this issue due to their top-down management), small practitioners are also weary of new solutions disrupting their workflow (especially for older doctors who have practiced in the same fashion for decades). Nonetheless, a user friendly and easy-to-deploy solution can capture a large market share by tackling the right vertical for this segment. 

Obstacles in Digital Health

Culture

The existing healthcare culture is often resistant to change, especially when it comes to workflow and care delivery. Just as in enterprise software, digital health faces immense challenges in breaking through hospital systems often tied up with legacy vendors. Furthermore, decisions around cost/efficiency and the use of data to make decisions around the type of care a patient receives is still a touchy subject for many doctors. The "art" of medicine, from many doctors I have spoken to, still involves seeing the patient and making your own diagnosis, not relying on an algorithm or virtual mediums to dictate diagnosis. I don't pretend to be a medical professional in order to debate this issue, but these concerns must be recognized by any aspiring entrepreneur looking to break through into the digital health space. Often times, nurses and front-line staff are seen to be early adopters of innovative techniques and may be used as an early access point to the larger organization.  

EPIC

EPIC continues to grow its market share of EMRs for large hospital systems, and may be the biggest provider in the United States, followed closely by Cerner. As one CTO of a large hospital system told me, "EPIC has become like Facebook -- people seem to be joining it just because everyone else is rather than for any outstanding merits". The dominance of EPIC in the EMR space should be cause for a cautionary pause. EPIC allows for little interoperability between its systems and others, adversely effecting the consumer in an increasingly industrialized space. Furthermore, their control over patient data limits the innovation that can occur by third-parties looking to analyze data for better outcomes and other uses that benefit the industry at large, stifling more opportunities for entrepreneurship. 

CMS / Government Policy

Lastly, government policy can be a great enabler for entrepreneurship in the space, or a large hurdle. It's ability to use CMS as a market making force (~50% of healthcare is paid for via Medicare or Medicaid) can drive down necessary changes to create a stronger foundation for innovation throughout the entire industry. For example, given the discussion of EPIC, if the government (i.e. CMS) decided to refuse to reimburse any provider not following a specific standard for EMR that enables open data exchange, this could instantly create a new marketplace for EMR solutions and big data companies. Similarly, the government issuing Meaningful Use provisions via the HITECH Act has given hospitals and private physicians millions of dollars in incentives to move towards a more digital practice, creating opportunities for startups to deploy new solutions leveraging these incentives for business development.