While software nibbles, services are eating the healthcare world
Health IT may be dead, but tech-enabled services are thriving
Recently, a debate has been waging about whether digital health is dead. Undoubtedly, a lot of capital has been invested in technology startups with high hopes yet dim prospects. Nevertheless, I remain optimistic about the sector; in particular, I believe tech-enabled services are a bright spot in what is otherwise a bleak digital health landscape.
Trust me, I never expected to make this claim; back in my venture days, my response to service business pitches was swift: “Not what our LPs agreed to” is what I politely said, but really, it was the low margins and limited scalability that made it hard to imagine services generating venture returns.
Now, as an entrepreneur building a service business, I am convinced that tech-enabled services are the most likely to make an impact and generate venture returns in healthcare. As I’ll make the case below, the ability of these businesses to take risk in value-based care, improve productivity through technology, and shorten sales cycles results in attractive venture fundamentals and growth prospects.
Countering Conventional Criticisms of Service Businesses
Low Margins: Most healthcare services businesses max out at 15–20% margins, in part due to high labor costs and limited pricing power (reimbursement rates are RVU-driven and established regionally)
Tech-enabled services increasingly use analytics and automation to deliver productivity gains; however, the greatest margin expansion comes from companies taking risk — since savings generated outside one’s doors accrue to the risk-bearing entity, and managing risk is largely a data and analytics function. This combination of increased productivity and risk-taking results in net margins that meet or exceed many pure software companies.*
Limited Scalability: Scaling human operations and the long lead-times of physical spaces underpin concerns about growth velocity
By deeply integrating product into workflows, tech-enabled businesses are standardizing operations and thus mitigating scaling challenges. Furthermore, analytics-savvy organizations are able to accurately forecast growth needs and plan accordingly.
Additional Advantages of Tech-Enabled Service Businesses
When housed within service companies, technology teams are better able to control both consumer and provider experiences at every step; this powerful alignment enables rapid product iteration and guarantees product uptake. I’ve seen too many health-tech companies fail or see their impact diluted because of breakdowns at the last mile (poor provider adoption, communication gaps, delays between insights and actions, etc.).
Though abysmally long (12–24 month) enterprise sales cycles will starve even the most lean technology startups, the path to revenue for services businesses is often already established (i.e., reimbursement codes, capitation agreements) and companies can routinely acquire consumers from day one. Moreover, health systems align around patients, so service businesses with customers bring a lot more leverage to sales/partnership discussions than technology companies can.
The era of technology defensibility is over: feature-rich hosting platforms, sophisticated open-source ML/AI tools, and developer-friendly APIs have virtually ensured that even small technical teams can create or replicate what was previously only the purview of large enterprises. As a result, companies must look to other sources of defensibility, especially customer lock-in (patient experience, data aggregation, etc.) and brand, which are more readily achievable in service businesses.
Numerous tech-enabled service companies have demonstrated that they can generate substantial market value and investor returns in healthcare: Teladoc ($1.9B), Evolent Health ($1.4B), Lumeris ($1.1B), One Medical ($860M), Privia Health ($400M), PillPack ($360M), Omada Health ($320M), Iora Health ($220M), Crossover Health ($185M), and Quartet Health ($150M), to name a few.
Moreover, a robust pipeline of companies are lined up behind them. While at a “health+data” dinner of select startup executives last week, I was surprised to see that two-thirds of the companies were tech-enabled services. Clearly, others have arrived at similar conclusions about where they can build high growth businesses. These innovators make me optimistic about the future of healthcare and the change that tech-enabled services can bring.
* Operating margin is a poor proxy for operational efficiency in certain types of risk contracts; I believe productivity measures (i.e., contribution margin per employee) may be a better fit, but welcome others’ thoughts
Abhas Gupta is the CEO and Co-Founder of Calyx Health, a network of primary care clinics exclusively for seniors. He was formerly a VC @ Wildcat & Mohr Davidow Ventures where he invested across financial services and digital health companies.