How to build a Healthcare Unicorn?
There is a joke in healthcare: everything revolves around the 3Ps: Provider, Payer & Pharma. If you include the P in Patient, then its not a joke anymore!
Healthcare is the biggest, baddest wolf in town and represents the largest chunk of GDP after defense spending, so naturally, it attracts its fair share of intrepid entrepreneurs who think they can solve America’s “healthcare is too damn expensive” problem.
The challenge: very few succeed!
There has been much investment in digital health in the past decade but very few proportional wins to show for it. Here are some challenges that are typical to healthcare startups and examples of it done right. It is informed by my stint working and failing on healthcare ideas on Peter Thiel’s dime.
Challenge: Show me the money, honey?
It’s tough to get paid in healthcare. Your typical end-user might be the patient, your channel to reach them is the provider: a small clinic or a large university healthcare system and the reimbursement comes from an insurance company — or any permutation thereof. This diffusion of responsibility means you are juggling multiple stakeholders at any given time and nobody seems eager to foot the bill.
Oscar’s founders realized that building a better healthcare experience started with actually being able to control and direct the dollars flowing into it. This meant building an insurer from scratch. And the rapidly changing regulatory scenario around the Affordable Care Act made the timing excellent.
Before ACA, bigger insurance companies used their larger distribution networks of brokers and agents as a competitive advantage to browbeat new entrants. ACA made sure that all individual health insurance was sold online on an open exchange. With distribution online, everyone was playing on the same footing and Oscar with a better brand could shine.
Another challenge for Oscar was provider alignment — hospital systems work at cross purposes to insurers because there is no incentive to save money. They solved this by co-branding plans with large healthcare systems like the Cleveland Clinic and sharing profit equally. Aligning with a well-known brand has benefits outside of simply incentive alignment, it helps in gaining consumer trust for an upstart brand. Once you see Cleveland Clinic | Oscar — you don’t care much about the no-name hospital closer to your home not being part of the network. This allows for plans with much narrower provider networks, funnel more people into a single relationship and build economies of scale.
As an insurer, Oscar’s masterplan is to be the revenue layer to healthcare — a platform for other health tech startups to build on, with a simple pitch: plug into our population, drive results and share in the upside.
Challenge: How to scale and avoid trenches?
Healthcare is notorious for the slow nature of sales, especially when it comes to dealing with large provider systems. Each relationship could take more than a year to materialize and there is no true “viral” app in a clinical setting given the challenges of EHR integrations, building stakeholder trust, changing default behavior to name just a few. This means most healthcare companies can take decades to scale as they continually get drawn into World War-I like trench battles.
Nobody gives ground, and everyone hangs around stamping their boots to get rid of the frostbite and continue a stalemate which ultimately kills more people than actual bullets. That’s how most healthcare startups die, venture rounds are raised in 18-month intervals while groundbreaking healthcare companies take decades to create.
Nat Turner and his co-founder Zach Weinberg were both second-time founders having sold their online advertising company, Invite Media to Google for $84M in 2010. They had been scoping out the cancer space for a while before leaving Google to launch Flatiron Health in 2012.
They realized that only a small % of cancer treatment data was collected systematically for research, the rest of it remained siloed out of reach. Unlocking all of that data could potentially lead to a cure faster. Flatiron’s initial product, OncoCloud, was a dashboard tool for cancer hospitals to connect billing and clinical data into a combined overview. On the other side, were pharma companies who wanted to learn what sort of treatments were being used in a real-world setting and connect that data to clinical trials they were running.
This by itself was a killer product — they were in 20 cancer centers in a short span of two years. But that wasn’t enough for their pharma customers. They simply did not have enough patient data for what essentially was a big-data company. To get more data they would have to scale to hundreds of cancer centers rapidly which if you understand healthcare sales, is no mean feat. Their response — if you can’t build it, buy it!
They went out and raised $130 million from their investors and spent $100 million of that in acquiring Altos Solutions — the maker of OncoEMR, an oncology-specific electronic medical record. The folks at Altos had started in 2004 and over a decade, had built a suite of products that powered 1300 cancer clinicians who saw over 550,000 unique cancer patients annually.
The acquisition of OncoEMR gave Flatiron scale in no time. All of the data in these medical records now flowed through Flatiron’s insights engine. They were able to take a decade’s worth of work and show immediate results to their Pharma clients which ultimately led the Swiss Pharma Giant Roche to acquire Flatiron Health for $1.9 Billion in 2018.
Challenge: How to measure your true impact?
Insurers are numbers people, they run a highly choreographed actuarial dance based on ROI aka “return on investment” on dollars spent. The challenge for any digital health startup is proving that you are making a difference. In a crowded and chaotic healthcare setting with multiple interventions, you have to establish that your particular tool improves outcomes in a significant manner and put an exact dollar value on those outcomes. For us at GlucoIQ, it was A1C levels — if we could show that customers who get an intervention from us, test well and in the long run live better lives — meant we are in the money. This put us in a chicken and egg situation where getting adoption meant quantifying metrics, but pilots are complicated to pull off as a young startup!
Startups can learn from Pharma companies in that regard — have a clear easy-to-understand value proposition based on rigorously assessing and quantifying efficacy. As an aside, drug pricing is a fascinating technical topic with huge societal implications.
Roivant is a new kind of Pharma startup — a holding company that has a family of ventures spun out of the parent. They operate on a hub and spoke model where each of the ‘vants’ works on a specific drug or disease area while simultaneously sharing resources and ideas across the ecosystem. This portfolio approach leads to a lower risk for Roivant, as it can absorb losses on approaches that don’t work out with the ones that do.
The insight for Roivant came to Vivek Ramaswamy from his time as a pharma investor. He noticed that most drug companies do a good job on the discovery bit — the actual science of figuring out candidate molecules for a specific disease and a biological target. But, they fail tremendously on taking these drugs to market — shepherding them through clinical trials takes forever and billions of dollars which ultimately leads to increased prices for us. Thousands of potential cures lie on the shelves at any of the Big Pharma companies and never see the light of the day. Roivant scoops up promising candidates and builds a small entrepreneurial team with skin in the game to take it to market — potential upside if the drug works out, and if not the downside protection of a bigger Roivant family.
Investors agree, Roivant has raised more than $1.9B in funding from the likes of Softbank and recently closed a $3B sale of some of its subsidiaries to a Japanese Pharma Giant.
A bit of a mea culpa!
My first attempt at starting a company in a space as entangled as healthcare left me dazed and confused. I left the Thiel Fellowship midway and went back to college. It felt like a hasty retreat at that time — I was running away and betraying the trust of people who expected great things from me. What kept me sane was the support of my then co-founder and now great friend, Adithya Ganesh and the wonderful folks at the Fellowship.
So what am I doing now?
They say entrepreneurs never fail, they simply bide their time. I have been fascinated by the rise of what Bill Gurley calls “consumer first healthcare”. More and more of the first dollar burden is on the consumer with ever-rising deductibles and co-pays. Today, a check-up means a quick walk to a neighborhood Urgent Care center, not a long wait at the ER. You have startups that will deliver anything from generic Viagra to teeth aligners straight to your door! All of this is out of pocket by skirting insurers altogether!
Think of what all you can do when you combine the trend of out-of-pocket healthcare with a mode of payment i.e a debit card!
We are building that future at betterbank.app!
