Health Tech 2020 — Where We See Opportunity

By Maureen Klewicki, Crosscut Ventures

Published in

Crosscut Stories

6 min readJan 23, 2020

2019 was an active year for IPOs, and the HealthTech sector was no exception with companies like Livongo, Phreesia, Health Catalyst, Peloton and Change Healthcare debuting on the public markets. As an investor in the healthcare sector, I spend a lot of time thinking about changes in the US healthcare system that create room for new businesses. The more time I spend, the more I’m convinced that we’re at the cusp, or perhaps in the midst of an overhaul of the US healthcare system, especially as it relates to technological innovation. While there are many drivers of this change, I want to focus on five that are critical: the cost, the shift to value-based care, regulatory pressure, consumer expectations, and the presence of big tech companies in healthcare.

The Cost

If you’re paying premiums, or own a business, you know that healthcare costs keep rising. Total healthcare spending was $3.6 trillion in 2018 or 17.7% of GDP. Since 2009, average family premiums increased by 54% and workers’ contribution increased by 71%, several times that of wages (26%) and inflation (20%). On the provider side, hospital prices grew 42% from 2007 to 2014. It feels like every incumbent stakeholder in healthcare points to another to explain away the rising costs.

The primary reasons that healthcare costs keep rising, in my mind, are as follows: First, hospital markets are vulnerable to oligopolies and monopolistic behavior. If you look at large hospitals in big markets, you’ll find vertically integrated systems, but instead of economies of scale, you’ll see drastic price hikes. This is exacerbated by price opacity. Second, insurance profits are tied to the size of the premium pool. Therefore, there’s an incentive to make that pool bigger, by collecting more premiums or paying out less for care provided. Third, pharmaceutical companies can raise prices due to inelasticity in a patient’s willingness to pay for needed medication. Finally, patients often don’t feel the cost burden of their care due to employer-sponsored health insurance.

Value-Based Care

Thinking about healthcare costs necessarily leads us to value-based care. The (oversimplified) premise of value-based care is that healthcare providers get a pot of money to care for a group of patients. If they spend less to care for those patients, they keep the savings. If they spend more, their money is at risk. The alternative payment model is fee-for-service, where a provider gathers a fee for every procedure they perform, regardless of outcomes. The vast majority of healthcare is still paid for under the fee for service model. If we revisit the cost drivers mentioned above, value-based care hits providers the hardest — they don’t get paid for each procedure they perform, and they are on the hook if the care is ineffective. For payers, it caps the total amount that is reimbursed. And while this isn’t the case now, there’s talk of pharmaceutical companies sharing in the risk when drugs are ineffective.

I believe that the shift to value-based care is inevitable. First, because the costs have reached a breaking point. One in five working-age Americans with health insurance have problems paying medical bills, and fifty percent without insurance are struggling with medical debt. At a certain point, the bill just won’t get paid. Second, because providers are increasingly more willing to participate in risk. Tech companies like Cityblock Health are betting that they can drive better outcomes at a lower cost using innovative care delivery models. So much so that they are willing to take a risk on their patients, i.e. willingly participate in value-based care. Third, payers (namely the government) favor value-based care and have leverage.

If we take a step back and think about it, this move to value-based care is truly an enormous shift in the payment structure of a $3.6T industry. I think there’s a massive opportunity for startups, whether they are providing care, creating payment platforms, managing risk, etc, to capture and capitalize on this shift. I think they are far better suited to capture that value than the old guard.

Regulatory Shifts

Even in the current political moment, defined by gridlock, there’s activity in Washington targeted at bringing costs down. For example, The Center for Medicaid and Medicare Services (CMS) continues to propose reimbursement for new procedures taking place in Ambulatory Surgery Centers (ASC). ASCs are facilities providing same-day surgical care, that don’t have the overhead of large hospitals. I love this offline trend, and see parallels in digital clinics. Moreover, a mandate was recently issued (and is being challenged) requiring price transparency for hospitals. As for prescription drugs, there’s mounting pressure to cap prices. In November, a favored nations clause was proposed by the current administration, so that the US would pay the same price as the lowest price paid by other nations. As these constraints are put on the current system, I see a lot of opportunities for start-up companies to offer or enable care delivery, at a lower price tag. For example, Paloma Health (a Crosscut portfolio company), is working to improve the standard of care and cost associated with a specific condition, hypothyroidism.

The Consumer

It’s kind of amazing to think about the effect that tech companies have had on user experience and customer expectations. I expect two-day delivery because of Amazon. I expect three-minute pick up times because of Uber. I expect quick communication because of Slack. The generations of consumers that have come to demand this level of user experience, Millenials and Gen Z, are a huge part of the population — 72 and 90 million people, respectively. They will expect this in healthcare too. We are seeing and will continue to see healthcare innovation that makes the user experience in healthcare convenient and tailored to the individual. SteadyMD, another company within the Crosscut portfolio, does this as a personalized virtual primary care provider.

What’s more, healthcare consumers have more reason than ever to care about the level of service they are receiving, because they are feeling the burden of the cost. High deductible plans account for 47% of the commercially insured, though that seems to be tapering. This coupled with the increased cost of premiums means that patients want service worth paying for.

The industry that redefined customer experience is leading the charge in healthcare. Founders pedigreed from big tech companies are bringing that expertise into health.

Big Tech in Healthcare

Speaking of the tech giants — they are moving into healthcare in a big way. Amazon bought a pharmacy for a billion dollars, there’s talk that they are building electronic health records software, and they might even build their own healthcare system vis-a-vis Haven. This year, Apple’s Tim Cook said: “If you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind,’ it will be about health.” The first step towards that contribution appears to be putting health data on the patient’s phone. Google, despite recent blunders, is working closely with the government to allow for the interoperability of patient data.

When we look at the current landscape in healthcare, it’s made up of payers and providers who begrudgingly adopted technology when it was mandated by the government. It’s exciting (and arguably scary) to imagine what the future healthcare system could look like when the companies underpinning the system are first and foremost technology companies.

The Healthcare System of the Future?

So what will the healthcare system of the future look like? Hopefully, it will be predictive, transparent, convenient, and tailored. But there are truths about healthcare that will remain. There will be price inelasticity once a condition is acute enough. There will be a need and place for highly specialized care, human interaction, and research. The government will and should be deeply involved. So some semblance of the current system will remain. And as we shift toward consumer-focused healthcare, we’ll need to remember what we’re trying to do — deliver care. Insurance doesn’t reimburse for fancy lounges.

Finally, innovation isn’t only technical. We need care team innovation and business model innovation. With that, tech can help a lot. I’m hopeful that there’s room for many new companies.

As for 2020, I’ll be thinking about the relationship between the public and private sectors in healthcare — an industry where the stakes couldn’t be higher around issues like privacy, security, and accountability.

Sources + Additional Info

Health Tech 2020 — Where We See Opportunity

By Maureen Klewicki, Crosscut Ventures

Value-Based Care

Written by Maureen Klewicki