The digital health cat is finally out of the bag: The long-heralded transformation of healthcare led by consumer-focused digital health startups may have stalled. A recent study by Rock Health tells us that over 60% of digital health companies that started as B2C companies have pivoted to B2B models, which now dominate digital health. Healthcare enterprises to seem to be in control of patients’ digital experiences after all.
So it’s a B2B world. Not that it’s a bad thing.
It’s an important moment for digital health, and we need to understand how we got here. A 2016 QuintilesIMS Health study found that of the 165,000 or so mobile health apps in the Apple and Android marketplaces, a very small number were clinically approved. At the time, digital health startups, flush with venture capital, seemed unable or unwilling to navigate the regulatory landscape which was — and is — a prerequisite for doing business in a clinical environment where patient lives are at stake. Going directly to the consumer seemed like a way to disrupt the stodgy healthcare sector, and the timing seemed right as insurance premiums and healthcare costs rose, forcing consumers to take more control over healthcare spending choices.
Hoping that consumers (and their physicians) would make healthcare decisions based on an algorithm and a slick user interface clearly hasn’t worked. Venture capitalists, tired of waiting for the promised growth, have slowed their funding for new start-ups, choosing to focus instead on later-stage funding rounds for companies that have demonstrated scale and growth.
In addition to several important dynamics that the Rock Health study addressed, there are a few other structural and organizational aspects that determine success in B2B healthcare IT.
It’s not a homogeneous market. It all starts with market segmentation. If we broadly categorize healthcare as payers, providers, and life sciences companies, each of these has its own industry structure (consolidated vs. fragmented, local vs. international) and a corresponding set of drivers and dynamics for technology decisions. Even within a segment such as providers, there are multiple layers that digital health companies have to peel back to identify their target market. For instance, the American Hospital Association (AHA) tells us that of the 5,564 registered hospitals in the U.S. at the beginning of 2017, an overwhelming majority (4,862, or 85%) are considered community hospitals. Many of these hospitals are in poor financial condition, especially in rural areas, and are at risk of closing, not least because of underpayment by the government for healthcare services (in 2015, these underpayments amounted to $58 billion). If the vast majority of hospitals in the U.S. are not viable targets, the addressable market can dramatically shrink for new technology solutions.
Align with buyer funding priorities. The biggest challenge for digital health solutions is to align to customer priorities and reimbursement models. Notwithstanding the shift towards value-based care (VBC) models, healthcare is predominantly a fee-for-service (FFS) environment today, and any new solution that’s looking for enterprise-wide adoption must align with a hospital’s reimbursement models. Many digital health companies also mistakenly assume that having a business case for the solution translates into a business model for the company. The reality is that even if there is a business model, there may not be a revenue model. For most digital health companies stuck in this zone, it becomes a race against time to find a revenue model within their client base before running out of cash. Having said this, many healthcare technology companies — such as those in behavioral health — never had an FFS reimbursement model to start with and have built economic models over time that are delivering benefits on a stand-alone basis.
Build solutions with — not for — clients. Chief digital officers and chief innovation officers bemoan the “vaporware” presentations they have to endure from digital health startups that claim to have a new solution but fail to deliver even the most basic functions in the product. The Rock Health study highlights the challenges of going to market too early with what is euphemistically referred to as “pre-MVP,” jargon for a product that is not ready for market (MVP stands for minimum viable product, an inside-out definition that puts the product, instead of a solution to a problem, at the center of startup thinking). The flip side to this is that some startups spend time and money building out a product to a point where changing direction becomes difficult due to financial or time-to-market considerations. Products built out too quickly without client validation often lose out to others that are willing to be molded into workable solutions with active support from clients. The most successful startups seem to go through these important “pivots” early in their journeys by collaborating closely with their pilot-phase clients.
Keep up with shifting policies. Digital health companies must also address where they stand in the fluid policy environment. Currently, there are questions around the continuation of individual insurance exchange subsidies that can fatally impact solutions built for this market. On the other hand, the 21st Century Cures Act passed in 2016 not only sets aside funding for long-neglected areas such as mental health and substance abuse programs but has also recently initiated programs to accelerate innovation, such as the recent launch of the FDA pre-certification program for software as a medical device (SaMD).
Most digital health startups are new to B2B enterprise sales and are unfamiliar with the long sales cycles, complex decision-making processes, and murky lines of authority among economic and technical buyers in large institutions. The transition from a B2C to a B2B mindset can be especially difficult for those companies led by teams with a DNA of building consumer apps that rely on individual user adoption to let the product sell itself.
The good news is that there is an enormous opportunity for digital health start-ups willing to commit themselves to the B2B landscape. The digitalization of the healthcare sector is just beginning, and there are plenty of worms for the early birds.