This is my first blog about healthcare and healthcare investing. When we started HPVP six years ago, we expected that 25 to 30% of our investing would be in healthcare IT. That didn’t happen because EMR adoption froze the market for the first four years of our existence. Every healthcare IT concept we saw had a 12 month to infinite sales cycles as practices and systems ignored other needs to focus on EMR compliance. That is largely behind us now, and in the past few years we’ve made investments in two HIT companies, Zipnosis and Upfront Healthcare. I expect more to come. It’s an exciting time to be investing in healthcare. Here’s why:
In the last 60 years, healthcare spending as a % of GDP has almost quadrupled according to the Centers for Medicare and Medicaid Services, but an ongoing change from fee-for-service to bundled and ultimately capitated payments creates a once-in-a-generation disruption for innovative technologies to change the way healthcare works. New technologies will both shift the supply curve down and stretch it out:
This story unfolds in three acts from today, to tomorrow and into the future:
Act 1 – today: In a fee for service model, the “back-of-the-house” is the biggest lever on profitability
Health systems get paid by seeing patients and providing as much treatment to them as possible, coding and billing those activities, contracting and managing claims/disputes with insurers and collecting co-payments from patients. This is a “back-of-the-house” paradigm – meaning non-care operations focused – with only some focus on middle-of-the-house implementation of EMRs, though mostly for the purpose of coding accuracy. EMRs bring little gain, if any, in efficiency or patient outcome. Ask your doc.
More visits, more revenue, more profit.
Obviously this is simplistic, and there are checks and balances in place on quality and fraud. The core issue is a misalignment of incentives on the marginal visit. The fee-for-service paradigm makes every marginal visit a profit opportunity for a healthcare systems but a cost to the payer and consumer in time and money, a concept discussed in detail by Robert Berenson of the Urban Institute.
As importantly, this misalignment and usage incentive clogs up the system such that demand outpaces supply. Filling the waiting room isn’t hard in this paradigm, so there is less expertise and focus on patient acquisition, satisfaction and retention in health systems. Poor consumer experiences and outcomes are exacerbated by growing local healthcare monopolies – a product of practices and health systems buying each other to maintain leverage in fee-for-service contract negotiations and to drive in-network referrals to highly profitable product lines and marginal visits.
Act 2 – tomorrow: Bundling and capitation shift focus to middle-of-the-house quality, cost and efficiency management
The only way to control costs is to realign incentives. This means pushing risk back on providers and systems through procedure/treatment bundling or full risk capitation, as with Medicare Advantage. Suddenly the marginal visit is a cost not a profit! This trend is real and is happening at increasing scale in the public and private healthcare markets.
With bundling and capitation come a new emphasis on middle-of-the-house care quality AND efficiency as the key levers that drive practice profitability. On the quality front, population health management emerges as a critical software need to optimize care procedures by patient demographics and indication. Meanwhile efficiency gains are achieved by transferring clinicians’ education burden to digital content on patients’ phones, and virtual medicine and connected devices allow delivery of care and monitoring outside of expensive healthcare settings. In the home, care can be delivered faster, cheaper and at greater satisfaction to the consumer. Each of these technologies will in time help to shifting down the healthcare supply cost curve.
There is another unintended and positive consequence of these efficiency measures. Within a healthcare practice and across the system, capacity increases. Population health management analytics and protocols reduce sick and emergency visits with fewer, shorter and cheaper preemptive visits. When sick visits are needed, a 20 minute treatment now takes 2 minutes of clinician time with a virtual medicine provider like Zipnosis; Upfront Healthcare, meanwhile, reduces visits wasted by unnecessary referrals, incomplete pre-work and no-shows; and educational and relationship management solutions like Well.be and Vidscrip scalably educate patients at home or on a mobile phone so that clinicians don’t have to spend precious time doing so. Together this stretches the supply cost curve.
Act 3 – the future: With excess capacities, front-of-the house patient acquisition and retention are the final frontier for profit
System efficiencies stretch the supply curve and slacken the tight supply market. Healthcare systems will need to be both great marketers for acquisition and skilled customer success managers for retention in order to pick up this slack. Both of these needs will be met with technology. Health systems are woefully behind in their adoption and successful use of CRM, marketing automation, social marketing and search marketing. Once acquired, customers will be retained through digital platforms for communication, scheduling, education and remote care management. Because of the nuances and regulation in healthcare, there are great opportunities for startups to focus and win in this huge vertical.
The ultimate example of the shift to front-of-house in healthcare is the concierge practice, a subscription service for the most important purchase in your life (your health!). It is not software-as-a-service, but service-as-a-software. Concierge practices provide subscription access to a dedicated clinician in-person and increasingly via mobile and desktop. While some decry the high cost of certain concierge models (eg, “executive” concierge services), lower cost tech-enabled models like SteadyMD are emerging with the potential to lower total system cost while greatly increasing patient wellness and satisfaction. For all concierge practices, the back-of-the-office barely exists – collecting one check per patient per year is easy. Their unique focus is on the middle and front office, keeping patients healthy, happy and retained.