There’s No Magic in Venture-Backed Home Care
In September, 2016 my family held funeral proceedings in Los Angeles to say goodbye to my grandmother, Flavor Bell Booker, who was only a few weeks away from her 99th birthday. Until that time, she was our first and longest-standing client, dating back to 2013 when HomeHero was nothing more than a paper checklist of screening requirements for the mixed bag of caregivers my dad would find on Craigslist. But today, in what seems like the most bizarre strokes of fate, it brings me great sadness to announce that Flavor will also be one of our last clients at HomeHero.
Almost exactly one year ago, HomeHero lost its core identity when we were effectively forced to terminate our working relationships with 95% of our 1099 caregivers and required to adopt an inferior employment business model. In the process, HomeHero also lost a majority of its competitive differentiators in price, speed and scalability that allowed us to be so disruptive in 2014 and 2015, and it had nothing to do with competition.
HomeHero, for the better half of the last year, has been caught in one of the toughest dilemmas a startup can be in: to A) keep building an “evolutionary business”, or B) hit the reset button and use the remaining capital to take a swing at building the “revolutionary business”.
While this may come as a surprise to a lot of people, today we are announcing that HomeHero has decided to cease all operations and remove itself entirely from the industry of home care to focus on a new healthcare venture. This article should help people understand the forces that led us to this decision.
Early Days
When we started HomeHero in 2013 our vision was very ambitious — to build the fastest, most affordable way to find quality in-home care, and disrupt the $30 billion home care market. For many years I watched with shock and sadness the struggles my father went through finding reliable caregivers for my grandmother in Seattle. So I decided to dedicate my life to fixing one of the biggest (and hardest) problems facing our generation today. For me, HomeHero has always been very personal.
Coming into HomeHero, my cofounder (Mike Townsend) and I had a taste of success and failure in startups. Mike founded a web-based point-of-sale company called ZingCheckout in 2012 that I joined and left before it was acquired by BigCommerce ahead of their IPO. After that, we started a mobile ordering and payments company together called Flowtab, where we made it a lot further on $100k than I ever thought possible in San Francisco. But we knew healthcare would be a lot harder than anything we did before.
Science Incubation
In May 2013, Mike and I packed everything we owned into a small sedan and we moved from San Francisco to Santa Monica for an opportunity to work with Mike Jones at Science, one of the top incubators in Los Angeles. We had the vision to tackle a big problem in the home care industry and Jones was crazy enough to do it with us. As you may know, home care is a large and fragmented industry with over 25,000 franchises nationwide. We saw agencies as being grossly inefficient, as evidenced by caregivers only taking home 40% of the hourly rates paid by families.
It felt inevitable that a company would introduce a disruptive technology model to improve access to affordable home care. We even published an article “10 reasons a marketplace for senior care is inevitable”, citing other factors such as highly-recurring needs, high number of unhappy caregivers and lack of trust and quality.
Marketplace Model
We launched with a workforce of vetted independent contractor (1099) caregivers, who we endearingly referred to as “Heroes”. We created a more user-friendly client intake flow, equipped with beautiful online profiles. Our marketplace grew quickly due to our lower prices and our ability to match caregivers with clients so quickly.
We protected the marketplace by offering the support of a care management team, the personalization of profiles with photos and video interviews, a robust algorithm to control matching and dispatching, lengthy reviews from past clients, and a rating system to ensure quality. We were bringing transparency to a market that was notorious for lack thereof.
Scaling Friction
By the Summer of 2015, we had onboarded over 1,200 Heroes, provided care to a few hundred clients and we expanded to Orange County, San Diego and San Francisco (and the entire Bay Area). In June 2015, we raised a $20 million Series A, bringing total funding to $23 million.
One distinct advantage of HomeHero was our ability to expand to different geographies quickly, whereas most agencies could only keep a 10–15% buffer on supply above their expected billable hours. Still, while our new markets showed early signs of growth via online acquisition, we found ourselves competing with local home care agencies who were staffing experienced teams of field marketers whose primary purpose was to grow leads and coordinate discharges of patients from acute care facilities — such as hospitals, skilled nursing facilities, senior centers and outpatient facilities. They were willing to drive across town to meet a family, bring them coffee and pastries, conduct a free home safety inspection and a two-hour consultation.
We were very reluctant to add the additional headcount, but we realized the best way to win the highest net worth clients (spending over $3k per month) was not to build faster and fancier technology, but to engage in the hand-holding and spend long hours with the family. Friction builds trust.
The 1099 independent contractor model, below, is very attractive as it removes excess cost and restrictions for employers. We were charging clients 30–40% less than industry average, and we were paying caregivers 25% higher than industry average. Both sides were winning. Our first million dollars in revenue in Los Angeles came mostly through SEO, SEM and light marketing efforts from part-time brand ambassadors.
Regulatory Challenges
On Oct 15th 2015, the entire home care industry got rocked. The Department of Labor upheld a federal ruling stating that over 2 million home care workers would qualify for the Fair Labor Standards Act —essentially requiring all home care workers to be treated as W-2 employees and receive overtime benefits. This was viewed as a huge win by the controversial and outspoken labor union SEIU, as well as the “Fight for $15” crowd in California.
This ruling would immediately and sharply increase home care prices — especially for live-in rates — and eventually cause hundreds of domestic referral home care agencies to shut down.
The biggest implication of the ruling was that the DOL removed the caregiver overtime exemption for all home care workers — mandating that all caregivers must be paid overtime. While the intentions were likely positive, the result was immediately negative for every party involved.
- In a survey we conducted internally, the cost for live-in/24-hour care doubled from $250 to $550 per day average in Los Angeles, pushing the price above a skilled nursing facility on a per day basis.
- Families were forced to reduce caregiver hours or fire their agency completely (and go under the table).
- Hundreds of thousands of caregivers who were unable or unwilling to be employed as W-2 workers were either removed from their families or let go by their domestic referral agency.
- Seniors struggled with “continuity of care” issues as agencies started rotating multiple caregivers in and out of houses throughout the day to avoid overtime costs. This had an especially negative impact on Alzheimer’s and dementia patients.
- The additional rotations in shifts increased gas, parking and transportation costs and added a layer of complexity to scheduling.
- Caregivers saw their working hours and income reduced, seniors weren’t able to get the 24/7 care they needed, and home care agencies saw a significant a decline in revenue from live-ins.
- By the end of 2016, the nation’s largest 1099 home care agency, Griswold Home Care, closed down most of its California locations.
I’ve heard this ruling described by industry veterans as the “death of the live-in care”, a classic example of regulation having huge unforeseen consequences on the same people it’s intended to protect.
Shift to Enterprise
This court ruling put a huge target on our backs, especially with prominent agencies like Griswold Home Care closing all California operations. We also acknowledged the growing threat of class action lawsuits — which have become far too familiar for startup marketplaces. Our contractor model was under attack and we felt intense pressure to change.
From any angle, the W-2 model is not very attractive. The switch to W-2 would increase our caregiver onboarding costs by 10X. The additional costs of payroll taxes, overtime, paid sick leave, minimum wage regulations, benefits and health insurance, unemployment tax, workers comp insurance, and potential for lawsuits in a highly litigious industry put us in heavy handcuffs. We would also be forced to implement a 4-hour minimum and raise our prices by 32% — much closer to industry average.
This was the same model we had been publicly shaming for almost three years, but we really didn’t have any other choice. According to Federal law, these caregivers had to be employed by someone.
Making the model even less attractive, in mid-March 2016, California legislators moved toward an agreement with labor unions to gradually increase the statewide minimum wage until it reached $15 in 2022, meaning our prices would have to increase $1 per year over the same period. If our goal was to make home care more affordable to families, we were headed in the wrong direction.
The silver lining was that moving to a W2 model would finally give us the opportunity to contract with enterprise health systems — who were mostly blocked from working with us due to the 1099 contractor relationship.
In spite of the added costs, in March 2016 we launched our enterprise initiative and declared that we were moving our Heroes from 1099 to W-2 and becoming a HIPAA-compliant, state licensed home care agency.
We hired a Chief Medical Officer, Chief Nursing Officer, Patient Safety Advocate and named a HIPAA Security Officer. We hired an ex-Cambia healthcare investor as VP of Strategy, Kiel Dowlin, to help navigate the transition and assemble an impressive advisory board (including ex-hospital CEO and “healthcare futurist” Josh Luke). We partnered with one of the world’s leading experts in readmission prevention, Andrey Ostrovsky, MD (who later went on to become the Chief Medical Officer of Medicaid) and started building our own predictive insights algorithm to help predict and prevent adverse events in the home.
We now had the ability to manage and train our Heroes, although practically this didn’t change much. More importantly, we could now get paid directly from hospitals and other risk-bearing entities.
For anyone outside of healthcare, a major goal of the Affordable Care Act was to reduce readmissions and the overall costs of post-acute care. One way of doing that was to change the way hospitals got paid by Centers for Medicare & Medicaid Services (CMS). Instead of paying them on a volume basis (fee-for-service), CMS is now paying them based on the quality of care they deliver to patients (fee-for-value).
This created enormous opportunities for companies like HomeHero to partner with hospitals and help them find more cost-effective options for post-acute care and reduce their reliance on skilled nursing facilities and medical home health. We doubled down on the belief that the big winner in this space would be the one who could win the largest contracts with hospitals and health systems.
Hospital Education
In April 2016, we joined the Cedars-Sinai Healthcare Accelerator (in partnership with Techstars) to learn from the top minds in healthcare about the operations and inner-workings of a world-renowned hospital. Cedars-Sinai, the largest non-profit academic medical center in the western United States, helped us launch the Safe Transition Home program to provide safe transitions out of the hospital and they worked with us to build evidence-based home care products for health systems.
Thanks to its adoption of the HomeHero iOS app, Cedars-Sinai became the nation’s first hospital system to successfully integrate with Apple’s CareKit platform and extend their healthcare system into the home.
One thing we learned about enterprise was that our growth would be somewhat limited due to the lack of financial incentive for certain health systems across the country to pay for non-medical home care, especially if they are only at-risk for a few thousand patients.
We also faced challenges in the mandated screening requirements for our caregivers — such as measles, mumps, rubella, TB, Live Scan fingerprinting, state registration fees, state mandated training and drug screening.
Nevertheless, the education and mentorship we gained from the accelerator program proved to be invaluable. We met with hundreds of executives at large health systems and payors and we were able to successfully define larger pilot opportunities.
We made incredible progress in a very short period of time, and in October 2016 we were chosen to lead a ~$1 million pilot opportunity with a large health system in Southeastern Michigan.
This was an exciting opportunity, but we had one important decision to make… and perhaps, the biggest decision of our lives.
Pilots ≠ Contracts
One danger working with large health systems on pilots is being dragged out in the middle of an ocean and abandoned.
The seemingly logical thing to do after winning a pilot of this size is to ramp up spend, start hiring in the new city and design technology sprints to support the new contract. However, it became evident that this particular health system, like many others we were talking to, had a genuine desire to conduct pilots to prove the actuarial value of home care, but there was no long term financial incentive to pay for home care in the same capacity.
It became evident that most of our pilots were being constructed solely for case studies and had slim chances of turning into sustainable contracts. We were still going to be reliant on private pay for the foreseeable future. This gentle realization was the straw that broke the camel’s back.
So in Q1 2017, with significant capital left in the bank, we made the difficult and heart-wrenching decision to shut down all home care operations, transition our clients to local home care agencies and start executing on an entirely new business venture.
Simply put, despite serving thousands of patients since 2013, we do not believe a technology-enabled W-2 home care agency is our most attractive business opportunity going forward. Rather than continuing to push the boulder up the hill and risk a spectacular failure, we will attempt to leverage our talented team, unique experience and technology IP to build a more sustainable healthcare business outside of home care.
In Retrospect
Looking back, our three learnings were as follows:
1. We underestimated the timing, effects and intensity of state and federal regulatory changes in home care.
The only thing worse than losing a fight is being told you can’t even compete anymore. And there’s nothing more painful as a CEO than losing vision for your company, especially if you’ve been holding onto that vision for years.
2. We overestimated the ability for health systems and insurance companies to pay for non-medical home care.
We knew we were in for an uphill battle when we shifted our focus to enterprise contacts. The “what ifs” of this decision will likely haunt me for the rest of my life. Was there a way to avoid the W-2 agency model and pass along employment responsibilities to families and still ensure they comply with all state and federal laws? Could we have kept the 1099 model? Will the Republicans’ repeal and replace of Obamacare somehow result in more money being allocated for post-acute care? Most of these questions we will never know for sure.
3. We underestimated the ability for home care agencies to adopt new technology.
A majority of the 20,000 home care agencies are financially efficient, software enabled and have entrenched relationships within their local communities. While file cabinets are still popular, they are not sitting in the stone ages with technology.
Venture-Backed Home Care
From an outsider’s perspective, home care is a big and attractive market. As evidence, investors poured almost $200 million into various home care companies in the last 16 months. However, this is also an industry built on relationships at a hyper-local level, which isn’t exactly the M.O. of startups. And since 2013, the industry moved from lightly regulated to heavily regulated, making the economics challenging (if not untenable) for any company with huge growth expectations.
To break away with enough escape velocity in home care, a company needs to effectively leverage technology to deliver a faster and better experience at a drastically lower price. Currently, none of the venture-backed home care companies have been able to do that. Not one is price-disruptive.
In a recent interview with Home Health Care News, the CEO of one of the largest US home care franchises, Senior Helpers, chimed in on the state of “disruption” in the industry right now:
“In the last couple years you’ve seen Honor, Hometeam and HomeHero.
I’ve talked to all of them. I think everyone was worried that was going to be a big tech disruption that would change how home care is done. But I’ve seen they’ve all had to change their model. They’re now directly employing the caregivers. They’re still using tech to communicate with clients, but a lot of us were doing that already.
Now that Honor is converting itself to an employer model, they’re just like us. Maybe they’re using tech a little better than we are, and they might have some bells and whistles, but we feel confident that client acquisition is not an issue for us. We have great referral sources.
In this industry, you’re dealing with people on a community level, where 80% of your clients come from referrals and the rest from advertising or the internet. I think Honor’s a good company, I like the people managing it, but I look at them like I look at HomeInstead, Maxim or Bayada, just another competitor. I think Honor will do well over time, but they’re going to be just like us.”
As you can see, the incumbents are singing a different tune than taxi companies were in 2013 — three years after Uber‘s launch.
We spent the last three years keeping up with technology vendors like ClearCare in areas like scheduling, timesheet tracking, billing, reporting, analytics and readmission prevention. But what really set us apart was our price, massive geographic coverage of caregivers across 10,000 square miles, our 10-second matching speeds, caregiver video interviews, evidence-based predictive analytics, and most of all, our 1099 model. For obvious reasons, this was far more disruptive to the incumbents — we were offering the same quality caregivers for less than half the price.
It’s sad to say, but today only the very wealthy can afford home care prices of $25 per hour, which typically comes out to over $4,000 a month. Because home care is extremely fragmented, it’s the agencies who can establish long-lasting relationships and deliver highly-personalized experiences who ultimately win. It’s not a technology problem.
The Future of Home Care
Today, I would estimate 60% of transactions in the home care industry occur under the table, as caregivers are sourced through Craigslist, Care.com or within families and social networks. Home care agencies are left fighting for the top 40% of the market which can only be won by leveraging personal relationships and high-touch interactions — including field marketers, home safety auditors and care coordinators—all things that do not scale well for technology companies.
Because of this economic reality, it is our belief that the W-2 home care industry will remain hyper local and fragmented for the foreseeable future. This does not mean that home care is a bad industry to go into if you are looking for a rewarding lifestyle business, but don’t expect any massive scale beyond a few zip codes.
This announcement is by no means intended to be a death sentence to other venture-backed home care companies. I have the utmost respect for the founders of the other home care startups, and I definitely would’t bet against any of them. But Mike and I deeply believe families across the country need better access to affordable home care, and with increasing regulation and thriving B2B technology vendors, it would be irresponsible for us to continue down this path with unlikely probability of liquidation. We mustn’t assume big fundraising rounds are synonymous with market success, this is certainly not the case in home care.
What’s Next
It breaks our hearts to leave home care, as we still believe there needs to be better and significantly cheaper option for families to find quality home care. Unfortunately, we don’t see a path for HomeHero or any other current company to achieve that goal.
The good news is we are pulling out early enough, with significant cash remaining, so we can find a new path forward and continue our same mission of promoting health and wellness in the home.
We will share more details about our new strategy and venture within the coming months, but our goal is still to positively improve the lives of millions of patients.
The hardest part of this announcement is saying goodbye to not only our compassionate caregivers, but all the team members who I recruited and hand-picked. Many of them I convinced to leave their jobs, move across the country, and take time away from their families to fight this difficult battle with me and Mike. For over three years, they were our trusted team of soldiers who would bleed terracotta and follow us into a fireblaze in order to make HomeHero a success.
We will forever be thankful for your loyalty and sacrifices.
To all our family, friends, Heroes, patients, clients, partners, employees, investors and advisors who helped make HomeHero what it was over the past three years, we extend the most sincere gratitude. We are so proud of you and the progress we made together. Deep in my heart I know the world is a better place because HomeHero existed.
Get in touch: @kaleazy and @mikettownsend
