6 Reasons Why Digital Health Startups Will Fail

It’s a confusing time for digital health startups. In the wake of a campaign that heatedly debated the value of Obamacare, many are now wondering what the potential repeal of the American Care Act will mean for health tech entrepreneurs.

In a Trump administration, where do we stand? The President-elect has stated that he wants to keep the “good” parts of Obamacare, or the Affordable Care Act. The “good,” according to Trump’s transition team, includes coverage of pre-existing conditions and the option for young adults to stay on their parents’ insurance plans until age 26.

It’s difficult to see how a populist president could take away health coverage from 20 million Americans. But I believe that the ACA didn’t sufficiently address some of the major systemic issues driving up the cost of care, and that replacing or reducing the “bad” parts of ACA — like the mandate and taxes — will allow us to address systemic cost issues that disproportionately impact large incumbents like big pharma and big insurance companies.

Upon the appointment of Tom Price as Health and Human Service Secretary, I looked at his Bill H.R.2300–the “Empowering Patients First Act” — to get a sense of Price’s priorities. This bill provides tax incentives for maintaining insurance coverage, enables market forces in healthcare by empowering individuals, provides for lower premiums for patient participation in wellness progress, proposes medical lawsuit abuse reforms, and increases competition among insurance companies by proposing an interstate market for health insurance. In short, it prioritizes addressing cost issues. The catalyst for digital health startups, in other words, is only getting stronger.

The Time Is Now

There has never been a better time to be a digital health entrepreneur. Some of that is, of course, owed to the same innovations driving the rest of tech: connected devices, mobile, cloud, big data, machine learning, and so forth. Additionally there are advancements unique to health, like developments in genomic research and hardware for gene sequencing, and CRISPR’s role in advancing computational chemistry and biology.

But new technologies are only part of what makes the current environment favorable for digital health startups. The 2009 stimulus turned digital patient information from a nice-to-have into the law and supported it with handsome subsidies. The payers have finally moved to payments for outcomes rather than procedures, and they now support preventative care. Self-insured employers have emerged as the faster route to market for new innovations and care about user engagement and cost reductions. Medicare cost information is finally enabling price transparency, laying the groundwork for increased competition. Recently, we’ve seen a regulatory approval uptick for digital therapeutics.

In 2015 alone, digital health saw $4.5 Billion in venture funding — and yet so many of those well-intentioned startups have been unsuccessful. That is because healthcare has challenges that no other industry faces.

Below are 6 mistakes digital health entrepreneurs frequently make that prevent them from turning their lofty mission into a scalable business.

#1: You’re Blind to How Healthcare Is Different.

Healthcare provides unique business challenges, and the best intentions won’t get you very far if you don’t understand how the system works. In the United States, 70% of the hospitals are non-profits, with the government accounting for 40% of expenditures. Entrepreneurs too often don’t understand how selling to a non-profit is different, and how the process and needs of this customer are different.

Every sector has its share of regulations to deal with, and healthcare is more regulated than most. And yet despite that regulation, it’s far from transparent: bureaucracies are opaque, and patients rarely actually see the costs that are being accrued. Most of the decision-makers for technology products here are not technologists and most users of the solutions are also not technologists. This is a special kind of playing field, and entrepreneurs need to learn the terrain.

#2: You Fail to Follow the Money.

Consumers are the end-user of health care, but they aren’t necessarily going to be a company’s direct customer. Entrepreneurs need to understand who is paying for healthcare, including large enterprises, insurance companies, and Medicare. you need to map how your company will interface with service providers, from hospitals to pharmacies to medical device companies. Tech businesses talk about “ecosystems” a lot, but it’s especially true with healthcare: a health startup will exist as part of a large, complex system that at times will seem ossified. A lot of startups have gone belly-up by thinking they could somehow bypass all of this and sell directly to the consumer. You have to understand the money flow: who is the user, who is paying for it, and who has the incentive?

#3: You Don’t Grok the Stakeholders’ Priorities.

After following the money, you should have a sense of who is paying for and using you product or service. Now you need to understand what the priorities of the business decision-makers are. Delivering better medical care and addressing cost pressures is universal. The four main areas I’ve seen in healthcare are as follows:

  • Efficacy: it drives reputation, patient satisfaction, and insurance payments (see Syapse’s precision oncology platform as an example).
  • Efficiency: it allows for a greater number of patients to be served with the same resources, as well for error reduction (see companies like analyticsMD, DrChrono, and Zocdoc as examples).
  • Risk management: companies looking to become Accountable Care Organizations or Value-Based Care Providers need to know how to take on more of a stake in the patient’s outcome (see Evolent Health as an example).
  • User Engagement: self-insured employers and insurance companies are looking to build relationships with the consumers and influence their behaviors for better health that are sustained over a long period of time and not just some initial usage/activation (see companies like Brighter, Zipongo, and Solera as examples).

Each of the companies above have further honed their pitch to their business decision-makers.

#4: You Haven’t Prioritized Scalable Business Models.

The question about tapping into the money flow isn’t just about identifying the appropriate payers in the complex ecosystem of healthcare. It’s about understanding how to scale your business. If you are selling drug design tools and data to bio-informaticians, you must consider whether there are enough bio-informaticians who can buy your solution at a high enough price to build a scalable business. If you are selling to hospitals — and since there are only about 6,000 of them in the US — can you actually land your first deal within six months and then expand to over $500K per year?

Instead of having consumers pay individually, can you get large self-insured employers and insurance companies to pay you upfront on a subscription business model. For a new digital therapy, do you have the care provider educated to write the prescriptions and have you set them up for reimbursement? Instead of selling to an insurance company, can you use them as a channel to turbo-charge adoption of your solution with providers and self-insured employers? Can you find a way to have your solution paid for out of claims, which is practically uncapped, rather than administrative fees, which may be limited? Can you price and provide integrated care at a lower cost as a next-generation insurance company or an accountable-care organization? Do you provide a small component of the solution, or are you a complete solution for a big enough problem? Have you minimized the friction to revenue with fast, easy deployment that deals with their organizational and technology reality?

#5: You Don’t Know the Status of the Incumbent and the Ecosystem.

Someone has likely tried to solve the same problem you’re trying to solve. They may still be addressing it, and may even have a good business doing so. Who are the incumbents in your area, and what are their shortcomings? How are they falling behind the advances in technology? What can you learn from their mistakes? Do you really need to replace them, or can you find an insertion in complementing them in a white space that could be strategic but they are too slow to move on? What strengths do they have — do they have a strong brand identity, or are they perceived as enmeshed in the healthcare infrastructure? — and how will you counter them? Which are the incumbents that you can partner with to accelerate your adoption?

#6: You Haven’t Gotten Success Metrics Straight.

While it’s the case that healthcare is its own unique system, once you’ve taken into consideration everything above, your company is not going to be all that different from other tech companies. Your cost of customer acquisition, the revenue per customer, will look like your classic enterprise or consumer company. The above list was designed to normalize the peculiar realities of healthcare, and to help you take your mission and turn it into a product or service that can thrive. As with any tech company, these products need high customer engagement and solid return on investment to succeed. Without the right unit economics, it won’t cut it. As you develop your success metrics, focus on this: Is your first use case a big enough market? What is the velocity of the solution adoption? What is the customer time to value? Is it sustained for repeat usage/renewals? Unit economics: How quickly do you recover the customer acquisition cost?

Making Good on Your Mission

I’m always struck by just how broad and lofty the missions of digital health entrepreneurs are, and I am thrilled to see many of them successfully navigate the challenges. Using machine learning, analyticsMD reduces the cost of health care while increasing patient and caregiver satisfaction. That’s at the core of what they do. Brighter aims to make quality dental care available to all. Finrise is addresses elective healthcare for all, letting doctors provide low-cost loans for patients (humans and pets alike). Lantern makes quality mental healthcare available by providing a mobile platform; the majority of use is after office hours, when a traditional therapist is usually not available. Zipongo makes it easy for users to eat well and improve their health by offering a virtual food concierge to all. You need, in the end, to be able to articulate clearly how you are going to build a business. When you can do that, we want to talk with you about your lofty mission.

Originally published at medtechboston.medstro.com on January 9, 2017.

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