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What’s happening in digital health: Drivers, trends and opportunities

Lerer Hippeau
Sep 12, 2019 · 5 min read

In this series, we dive into technologies and industries we’re excited about, going deep into their change drivers and stakeholders while exploring investment trends and opportunities through an early-stage lens.

By: Andrew Cheung, Summer Associate

Sector: Digital Health

In a sentence: Digital health refers to the use of digital technologies to provide more efficient, cost-effective, and scalable interventions to improve health and wellness for individuals and populations.

Size and scope: Healthcare accounts for a massive portion of the U.S. economy with total healthcare expenditures estimated to be around $3.5 trillion a year or about 18% of total GDP. By 2027, this figure is projected to reach almost $6 trillion a year and over 19% of total GDP.

Stakeholders: Healthcare is comprised of a number of different value chains. Many players are involved in each of these chains, delivering medical devices, healthcare services, pharmaceuticals, and more.

Change drivers: This industry is also undergoing a number of significant changes, including evolving regulations, data digitization, and the consumerization of healthcare.

Evolving regulation: The Affordable Care Act (ACA) ushered in a set of new programs designed to reduce the uninsured population, improve health outcomes, and slow the growth in healthcare expenditures. An overarching goal of the legislation was to realign incentives in pushing for value-based care rather than traditional fee-for-service remuneration. More recently, the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015 continued the shift to rewarding providers for value rather than volume. And, while certain aspects of the ACA have been recently revised, ninety-percent of payers believe that value-based payment will continue to grow.

Transition to value-based care. FFS: fee-for-service, FFS-QV: fee-for-service link to quality and value. (Source: Healthcare Payment Learning and Action Network (LAN) brief)

Data digitization: Healthcare originally lagged in digitalization. Given the costs associated with moving to electronic systems, there was significant resistance to using EHRs, despite the gains in convenience and data management. In 2009, the Health Information Technology for Economic and Clinical Health (HITECH) Act was passed to encourage greater electronic health record (EHR) adoption and implementation. The HITECH act provided incentives for healthcare providers to adopt EHRs, and we’ve since seen a rapid increase in the number of health systems using EHRs.

Rapid EHR adoption. COMP: Comprehensive, BAS-notes: Basic EHR with clinical notes, BAS-no notes: basic EHR without clinical notes. (Source: Office of the National Coordinator for Health IT brief)

Consumerization of healthcare: Customers have also seen higher out-of-pocket costs when using health services due to increasing enrollment in high-deductible health plans (HDHPs). These options have become increasingly prevalent as insurance premiums have continued to rise and employers try to shift the burden of risk to their employees. People in HDHPs generally use healthcare services less often and are more cost-conscious when doing so, often opting to shop around for more optimal prices. In addition, consumers have started to spend more toward their general mental and physical wellness.

Rise in HDHPs and HSAs. HDHP: High deductible health plan, HDHP-HSA: HDHP with health savings account. (Source: CDC)

Where our portfolio fits: A number of Lerer Hippeau’s investments have converged on these trends, such as AI-powered primary care platform K Health, health insurance provider Oscar, and digital pharmacy Medly.

Investment trends: Venture capital investment in digital health companies has exploded since 2010, increasing by over seven-fold in the past eight years. This uptick is partly in response to the rapidly changing health regulatory environment and opportunity provided by greater health data and digitization. Notable recent exits include New York-based Flatiron Health, acquired for $1.9 billion by Roche, and Teladoc via $157 million IPO. Twenty-eight percent of digital health deals were at the seed stage.

Digital health investment. (Source: Startup Health, Startup Health Insights: Global digital health funding report: 2018 year end review)

What to look for: Companies that make it easier to pay for healthcare and those that support value-based care.

Paying for healthcare: Out-of-pocket expenditures account for about $365.5 billion or 10.5% of overall healthcare expenditures and are projected to reach $585.8 billion by 2027. Given that 60% of Americans cannot afford an unexpected $1,000 expense, surprise health issues pose a potential financial burden and some choose to delay care because of cost. In fact, more than 1.4 million Americans are traveling internationally in search of more affordable options.

Supporting value-based care: In order to succeed in a world with value-based care, healthcare providers need to bolster their capabilities in four main areas: data analytics, population health management (identifying and treating high-risk patients), patient outreach/engagement, and revenue cycle management (billing and invoicing systems).

How to evaluate opportunities: In addition to assessing technical features, usability and pricing, it’s paramount for investors evaluating opportunities in digital health to consider key stakeholders, realized impact, and regulatory concerns.

Stakeholder analysis: Given the breadth of stakeholders involved in healthcare, it’s important for companies to understand who their primary customer is, what part of the value chain is touched, and how to navigate the different partners in the process.

Realized impact: Many digital health startups at this time do not consistently and transparently demonstrate benefit, although expectations are escalating rapidly. As we enter the age of digital therapeutics, digital health companies will need to demonstrate objective evidence of value in order to obtain FDA approval. The ability to demonstrate true value will become increasingly important in winning customers and selling to enterprises as the space becomes more crowded. Increasingly, we are seeing digital health companies conduct clinical trials and adopt pay-for-performance contracts to support their claims.

Regulatory considerations: Until recently, there was little regulatory oversight for many digital health interventions. The FDA released their Digital Health Innovation Action Plan, which outlines new guidelines for assessing digital health technologies and their desire to expand their expertise in digital health. Software intended for medical purposes is now labelled software as a medical device (SaMD) and is often regulated through similar mechanisms.

Seed considerations: Early indicators of well-positioned digital health startups at the seed stage include an experienced team with a broad skill set covering areas such as sales, healthcare backgrounds, and technical expertise. Prior experience working or engaging with the target customer is a major asset, while understanding whether or not you need to proceed through regulatory oversight is vital.

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Lerer Hippeau

Lerer Hippeau is an early-stage venture capital fund based…

Lerer Hippeau

Written by

Lerer Hippeau is an early-stage venture capital fund based in New York City. As founders and operators ourselves, we see returns in relationships.

Lerer Hippeau

Lerer Hippeau is an early-stage venture capital fund based in New York City. As founders and operators ourselves, we see returns in relationships.

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