Digital Infrastructure for the Unbundled Hospital
What is digital health?
In the US, an important trend is taking place, often called the ‘unbundling of the hospital.’ This can be thought of as a plethora of new companies taking a specific care vertical, from maternity to cardiovascular care, and proving the case for doing this better in a virtual-first, tech-enabled, patient-centric manner.
These digital health companies, like Oak Street Health and Virta, use a combination of software and virtual-first delivery models to materially drive down service cost of goods sold (COGS) in their respective verticals. Doing so often allows prices to drop, increasing access whilst providing a high quality of care. As such, these models are preferred by many patients and payors alike, and we believe this ecosystem represents a more sustainable future for US healthcare.
Moreover, many of these digital health companies are built for a ‘value-based care’ (VBC) world from the ground up and remove much of the insurance complexity associated with legacy hospital systems, given their simpler payment models and pricing. We believe the shift towards VBC is one of the most exciting and sustainable trends in healthcare today. It’s perhaps no surprise, then, that large amounts of venture capital are being deployed behind the digital health companies: in 2021 US-based digital health start-ups raised $29bn across 729 deals, with an average deal size of $40m.1
Where does infrastructure come into it?
Setting up a digital health company is no mean feat. This is where infrastructure comes in. At Generation, we think of digital health infrastructure as the plumbing required to power all the excellent work these digital health companies do, from enabling telehealth to managing billing and providing interoperability across different systems.
Whilst Oak Street and Virta address the needs of quite different groups — poorer elderly patients in Chicago and those seeking diabetes reversal — their tech stacks are similar. As with many industries, it does not make sense for multiple service companies to build the same core infrastructure. They should differentiate on their end workflows / UX / UI around service provision versus, for example, their accounting software. As such, the duplicated healthcare-specific tech stack for the emerging digital health industry is being extracted, with a suite of new tools coming to market, namely the cloud-based and API (application programming interface) first infrastructure tools required by modern digital health companies.
What’s the tech stack?
We have insight into this trend via our investment in Elation Health. Elation has a core business of selling primary care electronic medical record (EMR) software to smaller independent clinics and digital health companies.
But EMR is only one part of the tech stack. Our research suggests there are several other emerging (and overlapping) layers of the digital health tech stack which it makes sense to outsource:
We believe the most exciting companies in the sector will extract and automate large parts of the COGS and operating costs of emerging digital health companies. In doing so, they will not only provide high ROI services to their customers, but also unlock a huge addressable market and potential for long-lasting revenue streams.
So… what’s next?
To explore the sector and what comes next, we recently convened a roundtable hosted by Al Gore, our Chairman, with CEOs of leading companies in this nascent space and representatives from digital health companies. Some of our key takeaways:
- Building plumbing for digital health companies is just scratching the surface: To effect substantial change, new digital infrastructure must integrate back into the “system.” The potential tension is that if you do this too soon, you are dead in the water, as the ‘system’ is not always innovation friendly.
- Some things are difficult, or impossible, to solve with good plumbing alone: Physician burnout has moved from being a real concern to a looming catastrophe which smart digital tools alone might struggle to solve. Likewise, no one has yet ‘solved’ what best practice care should look like in a hybrid world or the infrastructure for it. We see value to bridging the online/offline and ensuring seamless clinician-patient experiences. And that is saying nothing of the difficulties around ‘solving’ the social determinants of health: if a patient does not have good broadband or cannot afford an adequate data package, what is the use to them of good telehealth infrastructure?
- There is value in re-bundling the system, but in bundling it back better: The value of plumbing continues to be overlooked by companies looking to ‘own the patient.’ We see potentially huge value to unlock a better connected system. Many smaller digital health infrastructure companies know they are only one piece of the puzzle and are partnering together: we believe they should do so further. From a consumer perspective, the plethora of offerings the ‘unbundling’ of the system has unlocked can be confusing or, worse, detrimental to care if clinicians serving them do not have the ‘full picture’ of their history and care they are receiving.
- “Data is key”: We hear this repeatedly — but the second (and as/more important) step is getting the data into the workflow. Healthcare is too busy, chaotic and understaffed to invest in building new processes — so to be successful here, it needs to be extremely easy, hence why the focus of most of this new digital health infrastructure has been built outside the ‘system’ first. Further, if data is key, so is its governance and regulation — another unsolved area that can unlock value.
