Diabetes should have been vanquished by now.
In my work with healthcare tech companies, I hear excitement about the opportunities for slaying dragons like the dreaded diabetes with big data analytics, patient engagement apps, internet of things (IoT) solutions and other tools, as healthcare transitions from a fee-for-service (FFS) to a value-based care (VBC) model. I am also struck by how similar many of the offerings sound, and how they all seem to solve for similar problems.
Diabetes is a case in point. As a high-profile chronic condition, it has attracted the attention of big technology firms such as Google (glucose-in-tear-drop sensing contact lenses) and IBM Watson Health/Medtronic (SugarIQ) to any number of Silicon Valley VC-funded startups. Some of these startups focus on a single aspect of treating and managing diabetes (such as remote monitoring), others have developed mobile apps that aim to improve patient engagement and compliance with treatment protocols to keep their diabetic condition in check. Yet others offer entire technology stacks and frameworks that can take data and provide algorithmic insights (give us any data on any condition, we will give you back insights correspondingly to manage the disease at a patient and population level).
While the choice of solution is a matter for healthcare enterprises (we know that diabetes has not been vanquished yet), the question I have been grappling with more recently is whether healthcare as a whole is ready for the slew of innovative new products and platforms that are emerging from VC-funded startups as well as established technology firms.
Strategic positioning considerations for digital health companies
It’s worth spending a minute to understand the size of the addressable market for tech firms, especially digital health startups, in the healthcare provider space. The U.S has over 5,500 hospitals. Most are not-for-profit operations, including community hospitals, that have outdated information technologies and often do not even have a dedicated IT function. Needless to say, they have limited financial resources for anything other than keeping the lights on for business. Through a process of elimination, the addressable market shrinks to somewhere between 150 and 200 hospitals comprising large health systems, academic medical centers and for-profit institutions. Every healthcare B2B tech firm is addressing this market, which makes this highly competitive for incumbents and new entrants alike.
To add complexity, multiple buying centers exist within these institutions, in addition to a centralized technology function — making it that much more difficult to target and navigate the environment for smaller, resource-constrained tech firms trying to find a toehold.
Assuming that they do find an entry point, the question is this: What are we trying to offer, and how does it align with the institution’s priorities and funding availability ?
A recent workforce survey by HIMSS offers some clues. The survey, which covered healthcare executives as well as IT vendors, shows us interesting contrasts in views between the two communities representing opposite sides of the table on a range of issues, starting with whether IT budgets are going up or not (vendors believe they are, hospital execs are not so sure). While there is broad alignment on the top three priorities (patient safety and quality, privacy and security, care coordination and population health), there are starkly divergent views on many other important themes. Hospitals considered electronic health records (EHR) to be a much higher priority than vendors, and they considered alternate payment models to be a much lower priority compared to vendors.
These head-scratching discrepancies have some basis in findings from other surveys. A recent NEJM survey states that EHR data will remain the most important data source by far in the clinical context in the next five years, and another by Premier Inc., a company representing nearly 4,000 hospitals, places the move from “meaningful use to meaningful insights” as a top priority in the C-suite.
The message is simple: Most health systems are focused on extracting value from the millions invested in implementing EHR systems over the past several years, and this is where most IT budget dollars are likely being allocated.
The EHR market is dominated by a handful of companies, so the strategic choice for emerging tech firms is to find a viable space that aligns with spending priorities to increase value from EHR investments and avoid being crowded out for scarce investment dollars.
Following the money
It is tempting for digital health companies to focus on the transition to VBC as the main opportunity landscape. Solutions that align themselves to this transition are considered to be “disruptive” and “transformative” and are naturally considered winning bets. Hence the billions in VC money being poured into digital health startups.
However, all is not necessarily well in the digital health market. Funding levels, while remaining high, are increasingly concentrated in fewer companies raising money for later rounds of financing, squeezing out new startups (no wonder prominent healthcare tech VC firm Venrock’s prognosis suggests an impending consolidation in the digital health market).
While alternate payment models (APM) are at the core of the transition to a VBC era, the fact is that over 75% of the current healthcare reimbursements are based on the traditional FFS model (I discussed this in an earlier blog post). This means, among other things, that new digital health solutions have to find a way to be eligible for payment under the dominant payment model, which requires payers to approve the use of these solutions in a clinical setting. Behavioral health startups, for instance, have been challenged to crack the “code” for reimbursement eligibility, despite addressing a $280 billion market that has recently received funding commitment under the 21st Century Cures Act. I know of several digital health startups that now rely on demonstrating ROI for their solutions on a stand-alone basis — however, the sales cycles are long, competition is fierce and ticket sizes are small.
All of this doesn’t yet factor in serious disconnects within health systems as to the priorities for technology investments. Clinicians and C-suite executives seem to disagree on even a seemingly obvious use case such as telehealth, according to a survey by NEJM Catalyst.
Eventually, as the needle moves in the direction of VBC and alternate payment models, the flow of investment dollars toward innovative solutions will increase among early adopters in the healthcare provider community, and will likely penetrate hospitals further down in the technology and innovation curve. After all, the adoption of EHR systems took several years to reach the near total penetration levels that we see today in the provider space. In the interim, unless tech firms are ready to play the long game and have deep pockets, they may better off aligning with the near-term priorities for their target markets.