Steve Kraus, Bessemer Venture Partners, on Healthcare Predictions for 2021

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Steve Kraus, Partner at Bessemer Venture Partners

In this episode, we interview Steve Kraus, Partner at Bessemer Venture Partners. At Bessemer, Steve focuses exclusively on healthcare, where he’s made investments in and holds seats on the boards of some of the most successful companies in this space, including Bright Health, Ginger, Hinge Health, Aspen RxHealth, and, most recently, Folx Health.

Each year, Steve and his team publish their healthcare predictions for the next 12 months. Bessemer’s “2021 Healthcare Predictions” just came out, and on this episode Steve and I covered:

• How the annual predictions relate to Bessemer’s investment approach
• A deep-dive into a few of the predictions for 2021
• Advice for entrepreneurs in healthcare

Start to 18:00: Healthcare at Bessemer and the story behind annual predictions

• Bessemer’s healthcare team consists of three people who are focused on this industry alone: Steve, Andrew Hedin (a Wharton alum!), and Morgan Cheatham.
• Roadmapping strategy: Bessemer’s strategy is one driven by forward-looking “roadmaps”. For example, the firm’s “Roadmap: 10 Laws of Healthcare” lays out the principles guiding Bessemer’s current thinking around what companies need to do to become successful in the space, like “make regulation an asset, not just a liability” and “services save lives, software saves time”.

“Wayne Gretzky said ‘you don’t skate to where the puck is, you skate to where the puck is going to be’, and that’s what we try to do at Bessemer. Where do we think the tectonic shifts are going to happen within healthcare. Let’s lay out some theses and then let’s go after those theses.”

• The first predictions: A few years ago at the annual J.P. Morgan Health Care Conference*, the team decided to write down and share their key take-aways in the spirit of the roadmapping for which Bessemer is known. Long story short, this became the first set of annual predictions they published, and the tradition continues today. [*Note: for those less familiar, “JPM” (as it’s often referred to) is a huge conference in San Francisco that spans multiple areas of the industry and is considered a “must attend” event for many executives in healthcare.]

2020 was a wild year to say the least, shaped by a global pandemic, further recognition of systematic racism and disparities in our communities, and perhaps one of the most important elections of our lifetimes. Healthcare took center-stage. Not only did our already resource-constrained system need to transition to new forms of care delivery seemingly overnight, but also it needed to do this while going to war against a pandemic.

Bessemer’s predictions for 2021 (full article here) are a recognition of both the events of 2020 and the on-going evolution of healthcare (e.g., moving towards value-based care, digitization). Without further ado, below are Bessemer’s 8 predictions for 2021 and a deep-dive into a few of those with Steve.

Graphic from 2021 Healthcare Predictions article, with permission obtained from Bessemer

18:00 to 28:00: “BidenCare brings more value-based experimentation”

Steve lists three things that can help bend the cost curve in healthcare:

1. Digitization
2. Consumerization
3. Changing the incentive structure

• Having a consistent regulatory framework encourages entrepreneurs to work on innovation across these dimensions. Companies that were ahead of the curve and emerged years ago rely on consistency to continue growing and improving new models in healthcare.
• Building upon the work of past administrations: Though some people (Steve included) were initially worried that Obama-era innovation work coming out of the Center for Medicare & Medicaid Innovation (CMMI) would end under the Trump administration, this was not the case at all. Despite a political shift in 2016, CMMI has continued to spearhead new programs around value-based care. Steve expects this to continue under the Biden administration.
• Kidney care as a model for future value-based care programs: I am eager for a simple, all-encompassing value-based care model. Realistically, this may be overly optimistic. Steve believes the Biden administration will continue a vertical-by-vertical approach and suggests initiatives like those for kidney care as a model for how things might play out.
• As a consequence of legislation President Nixon signed into law in 1972, Medicare has paid for care related to end-stage renal disease (ESRD) regardless of the patient’s age. Reimbursed under a fee-for-service model, this benefit has led to perverse incentives encouraging dialysis over prevention and leading to the rise of a duopoly run by Fresenius and DaVita. To address this, in 2019 the Centers for Medicare & Medicaid (CMS) announced several new initiatives to reduce costs and improve the quality of care for these patients.
• Nudge towards value-based care: The government’s ESRD initiatives encouraged the entire kidney care ecosystem to transition toward value-based care. Steve envisions more experimentation like this to slowly nudge various stakeholders towards the holy grail of high-quality, low-cost care.

“Now you see companies like Strive, Somatus, Cricket, Monogram — you even see DaVita and Fresenius, the fat happy duopolies who live off the fee-for-service system — actually trying to counteract with their own value-based care systems… It’s a beautiful example of how the government can nudge the industry to actually look at and pay for things in a different way.”

28:00 to 33:00: Diagnostics recovers from Theranos

• General challenges with investing in diagnostics: Steve likens the diagnostics space to the medical device space. Entrepreneurs have to go through the pre-clinical, scientific discovery, development, regulatory, and customer acquisition stages before an exit opportunity is within reach. This adds a lot of risk for potential investors.
• The Theranos “Scarlet Letter”: On top of the challenges above, the rise and fall of Theranos added an additional layer of risk to investing in diagnostics. While there have been significant advances in nanotechnologies and delivery modalities enabling point-of-care diagnostics, this has been overshadowed by the mistrust surrounding Theranos.
• The COVID inflection point: COVID has renewed appreciation for diagnostics as both a key tool in care and an investable opportunity. For example, over the last year companies like Exact Sciences (early detection of certain cancers) and Everlywell (direct-to-consumer testing) have been gaining prominence in the public and private markets, respectively. This is expected to continue in 2021.
• GTM strategies: Some companies in this space (e.g., Exact Sciences, Grail) have pursued enterprise sales, which requires connecting with medical thought leaders and going through the usual reimbursement hurdles. On the other hand, direct-to-consumer diagnostics have not needed to build out as robust of a strategy for working with the medical establishment. Instead they have been focused on building consumer demand. Steve hypothesizes that, although it’s still too early to know how things will play out, eventually these DTC companies may need to circle back with the establishment to build trust and open new channels.

33:00 to 37:00: Providers working at the top of their license

• There has been a physician shortage for a long time, and it’s been growing. While the pandemic has exacerbated the gap between supply and demand, it has also helped accelerate efforts to increase utilization of other providers, like pharmacists.

“Prior to COVID, there actually wasn’t a pharmacist shortage. [Despite being] a profession with some of the most highly trained, lowest paid people, there was a large abundance of them. Now with COVID, and we’ve seen this through our investment in Aspen RxHealth, there’s a real demand for pharmacists because people have appreciated that they can do things other than stand behind the counter and fill your scripts.”

• Especially as virtual care models continue to proliferate and as there continues to be a shortage of doctors, Steve expects that we will see more provider types (e.g., nurse practitioners, physician assistants, and social workers) work at the top of their license. He also anticipates some regulatory relaxation to allow these providers to take on new roles.
• Scaling: Telemedicine largely started as a marketplace business where doctors saw patients virtually at nights and weekends in addition to their main practice. Over time, and even before the pandemic, telemedicine became a more meaningful component of care models offering lower-cost, convenient care. Steve argues that care through ancillary providers may scale in a similar way. As restrictions on these providers relax, companies like Medallion will help ancillary providers with credentialing so they can perform new roles.

37:00 to 43:00: A renewed focus on underserved populations

• Bessemer underscores the importance of using the correct terminology to recognize how things like systemic racism and unconscious bias pervade healthcare. Hopefully, this recognition will continue throughout 2021 (see table below from Bessemer’s article).

Graphic from prediction #5 , with permission obtained from Bessemer

• If BidenCare leads to further expansion of Medicaid, Steve believes we could see another wave of interest in companies that target underserved populations.
• I posed a question as to whether companies that invest in specific populations might be likely to partner / merge to expand, or if they would be more likely to build out new capabilities internally. For now, Steve believes there is a lot of room to pursue the latter.
• For example, today Folx Health (a recent Bessemer investment) focuses on providing virtual primary care for the LGBTQ+ community, but looking ahead they may expand into new offerings like family planning. While a company like Folx might still opt to partner with best-in-class organizations for some services, it would likely do so in a way where it could retain more control over the patient experience.

43:00 to 49:00: Advice to entrepreneurs

With the predictions for 2021 in mind, Steve has 3 pieces of advice for entrepreneurs:

1. Read the regulatory framework to find areas of untapped potential

“Go read the regulatory framework, because in some little line is billions of dollars of market opportunity.”

On that note, Steve highlighted recent rules that will enable a second wave of interoperability and digitization. Because it was announced in March, this legislation was largely drowned out by COVID news.

2. Make sure your team is “bilingual”

“It’s a hard journey, and you want lots of different experiences to get through it.”

The team needs to have both healthcare and technical expertise. Teams that focus on just one side often struggle to grow and scale within the existing healthcare ecosystem.

3. Nail the product-market fit

“Nothing is better than customer love and early adoption engagement… Nailing that and getting those loops that allow for higher engagement — it’s just critical in the early stages and it’s really hard to do in healthcare.”

Engagement drops off quickly, so getting it right from the beginning is essential. As companies chart out their product and engagement journeys, they need to be thinking about how this will fit into the larger clinical model to achieve the best-in-class outcomes that will enable future growth. Entrepreneurs should also understand where their products stand within the journeys of not only the provider and patient but also a payer or self-insured employer.

For more the full 2021 predictions, be sure to check out Bessemer’s article here!