Show Me the Money: How To Get Paid In Healthcare (Part 4 Bonus!)

Healthcare is one of the only industries where the consumer of the product / service is usually not the one who pays for it. Understanding who pays for healthcare is important in bringing innovation to the space that’s lasting.

This is a series that aims to help start-ups, in particular those with tech founders who are entering healthcare for the first time, get up to speed on the basics of healthcare commercialization.

To review, healthcare services and medical devices are sold to three major categories:

1. B2C: the consumer (the smallest)
2. B2B: the provider
3. B2B: the payer

So what’s part 4? Today I will describe business models that sell to medical device companies. Ultimately this is really a corollary to the above 3 to enable said distribution / channel / product partner to sell their products better and gain more market share

Let’s dig into this last segment

The “4th” Buyer: Medical Device

This is not a market segment by itself as it’s really a channel ultimately to providers or payers, but start-ups can create significant value either directly or using these as channels to get to market.

What they care about: increasing revenues on existing products and getting new products to market better, safer, faster, and cheaper

• Medical device companies may partner with start-ups that can help them increase their market share by either identifying more eligible patients, better targeting of patients, or providing a better integrated solution to those patients.

Examples:

• Some of the largest companies in the world have targeted healthcare and life sciences as a segment to achieve their goals, such as Salesforce, AWS, and Apple (see this example of MyMobility launched by Zimmer)

• Start-ups can do the same by providing solutions that help hospitals understand which patients would most benefit from the medical device company’s solutions, or help with post surgical recovery for example.

Limitations: While start-ups can scale with partnerships, cementing these partnerships can take 12–18 months. For any deals that are distribution centered, where the company is a channel to the end customer, scale is not guaranteed as you still need to convince the sales team to keep you top of mind amongst their bag of many products, and ultimately the provider needs to have a great experience managed through a third party.

• It is important as a start-up to not be “crushed” by these large deals, which sound like a great opportunity but requires significant scale-up ahead of revenue. It can also remove the start-up from the end customer, where in the early days the customer obsession is hugely important to obtain feedback and iterate quickly to get product market fit.

• I’ve heard a large device company say that they don’t mean to “crush” their partners, but like an elephant playing with an ant, sometimes it happens despite the best intentions on both sides. This is especially true if the start-up has to scale up costs for operations or support in order to meet the demands of its partner. What might be a quick decision making process could be ages in a start-up’s time table, and a decision by a large company to delay a potential project by quarters could be a death blow to their start-up partners if they were counting on that revenue.
• Ways to mitigate this include

1. Have multiple sources of revenue and traction and not being tied to one exclusive partner
2. Be close to the end customer yourself especially in the beginning, expect to do 90% of the sales and for the first few deals to not be scalable in terms of sales and support effort
3. Discuss product and ramp of product or support services with commitments from the partner, so you’re not incurring risky costs alone
4. Ramp up the partnership slowly, select one region or group of customers where you can mutually show success first
5. Dive deep into the sales compensation and structure of the larger company, to ensure you’ll be on the top of their “bag”

Opportunity: While start-ups should tread carefully, the opportunity is of course scale and the backing of a significant brand. Oftentimes these may also come with investments, examples being the Intuitive Surgical fund or Medtronic Ventures. In fact, according to CB Insights, 16 of the world’s 20 largest medical device companies have invested in at least 1 healthcare startup since 2016.

Pharma Addendum

In the beginning I said I specifically left pharma off for this article, but I would be remiss not to mention the huge trend in data that is fueled by pharma as an end customer (examples include Tempus, Flatiron Health — acquired by Roche, etc.) However, “get enough data until I’m big enough to sell to pharma” is not a 101 strategy, but rather a level up growth that can be designed and engineered for the future. Ultimately, start-ups need to execute the first level value and service well — to one of the three segments above, in order to get to a place of having enough data to matter

I’d be interested to hear from you different examples of companies that have been successful in each of these categories, or perhaps ones that broke the mode and charted a new path.