The Next Wave of Transformative Digital Health

By  Raj Ganguly, Eduardo Saverin as written on techcrunch.com


Digital healthcare investing has gone through several waves: 2013 was the year of consumer wearables, 2014 of healthcare big data, 2015 of virtual care delivery and 2016, so far, has been about payer disruption. 2017 will be a return to the core practice of medicine: technology that enables providers and biopharma to extend their reach and take greater risk for outcomes.
In 2016, the VC market has rewarded digital health startups that are disrupting traditional carriers. In the last 12 months, we’ve seen startups, like Bright Health (new carrier, $80 million raise in April), Clover Health (new Medicare Advantage plan, $165 million raise in May), Collective Health (TPA/ASO replacement, $80 million raise in late 2015), Hixme (migrating covered lives from large group to the individual market) and Oscar (new carrier, $400 million raise in February) raise tens to hundreds of millions of dollars in venture financing at substantial Series B and C valuations.
Why? Because payers have been an easy target.
Carriers were born in an era where fee-for-service reimbursement rewarded coverage, so they built large networks of contracted providers, leveraged economies of scale in volume and rented access to these networks to self-insured employers. That compact is fraying.
Providers are taking risk and competing upstream (with the help of companies like Evolent Health), employers are building their own narrow networks to steer volume to high-quality/low-cost centers of excellence (with the help of companies like Imagine Health) and medical loss ratios (which dictate the percentage of carrier premium revenues that need to be spent on clinical services) are squeezing carrier margins.
Large carriers have responded by consolidating, seeking even more scale. However, survival through size has its limits. The DOJ has drawn the line at Anthem’s $54 million bid for Cigna and Aetna’s $37 billion bid for Humana on antitrust grounds.


The payer disruption story has played out

Our view is the business of insuring lives at scale is labor and capital-intensive. There is substantial operational complexity required to contract with 5,600 hospitals and 800,000 physicians in the U.S., issue membership cards, verify eligibility, process claims and engage consumers when they call. It’s hard to achieve venture level returns at Series B and C valuations approaching $1 billion.

Healthcare innovation is the solution to rising costs and limited access.

We’ve seen this story before: Investors putting tens of millions to work into Fitbit and Jawbone in 2013, chasing the consumer wearables story. Similarly, 2014 was the year of using healthcare big data in vertical applications like price transparency, which resulted in Castlight’s controversial IPO. 2015 was all about telehealth — Doctor on Demand raising $63 million, MDLive raising $50 million and Teladoc raising $157 million in their IPO, all announced during an eight-week window last summer. Later-stage investors in many of those instances have not been able to generate returns at exit.


So what’s next? The funding market is returning to enabling the core practice of medicine

Our view is that in 2017, the market will reward innovative startups that are in the business of enabling providers and pharma companies to personalize care and participate in greater outcomes-based economics.
Several tailwinds are contributing to this. In the provider world, regulation with esoteric names like “Meaningful Use 1 and Meaningful Use 2” are largely behind us and providers will have more bandwidth to move on from EMR integration (plumbing) to the use of technology for expanding care (tools). Concurrently, advances in the fields of genomics and compound specialty pharmacy are enabling new ways for biopharma companies to personalize therapeutic delivery down to an individual patient, which is a building block for outcomes-based drug reimbursement.



VC investment into digital health will flow to startups in the business of provider and pharma enablement. It will start to happen in the back half of 2016.
Silicon Valley Bank predicts that $9-$9.5 billion will be invested in healthcare in 2016. MobiHealthNews recently reported that digital health companies raised $150 million in July 2016 alone. In the last month, Azalea Health raised a $10.5 million Series B to sell revenue cycle management software and mobile tools to providers. Akili Interactive raised a $11.9 million Series B to develop clinically validated video games for cognitive interventions. Caremerge, which markets a care coordination platform for assisted living facilities, raised a $14 million Series C. Docent Health raised a $17 million Series A to build patient engagement software for health systems.
Healthcare innovation is the solution to rising costs and limited access. We think of healthcare as a global economy, not just an industry — it is a $3 trillion market approaching 20 percent of GDP in the U.S. alone. Access to affordable, effective care is a universal challenge felt in both developed and developing markets. To the entrepreneurs out there — we look forward to funding the next wave of transformative digital health companies that enable greater access to quality, outcomes-based care.


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