The battle of 5 armies — the next decade of health competition

The battle over who controls digital health will be bloody. (John Blanche illustration for The Hobbit)

We are currently in the midst of a digital goldrush, with funding for digital health companies doubling year on year. In my last article, I covered how the history of American healthcare over the past half-century led to where we are today. Now that

• most health information is now at least rudimentarily digitized (in part thanks to the HITECH Act of 2009),
• advances in digitization and technology in every other industry have both created new digital tools, as well as increased consumer/patient expectations,
• public and private payers are finally getting serious about value-based reimbursement, and
• the Covid-19 pandemic has forced care online much more quickly than it otherwise would have;

the real work of digitization can finally begin.

5 different types of healthcare providers have emerged, including two representing legacy providers trying to reinvent themselves (Big and Small Medicine), as well as three new care paradigms (Direct to Consumer, Corporate Health and Wellness Vendors and Value-Based Care). Each of these 5 groups have evolved strikingly different views of what an “ideal” healthcare delivery system would look, and are already competing to set the rules for the digitization of healthcare over the coming two decades.

• Big Medicine wants to own everything. For politically connected hospital-based health system, the ideal way to deliver care is through large and sophisticated Integrated Delivery Networks. When a patient’s care is managed under one roof, fragmented and disjointed care can (theoretically) be replaced with a unified comprehensive high-quality experience. However, high overheads, legacy infrastructure, and bureaucratic decision making will prevent all but the most forward-thinking large institutions from implementing real change. The most complex and capital-intensive care will be maintained by Big Medicine, but all of the other players will be trying to lure away their least complicated and most lucrative patients.
• Small Medicine wants to bring back the doctor-patient relationship as the defining aspect of healthcare delivery. For private practice and local clinic doctors, it is deep knowledge of patients and communities that makes healthcare excellent, and which neither bureaucratic hospital systems nor corporatized tech-startups can provide. Community oriented clinics, including FQHCs and CMHCs have a particular niche here, where a combination of deep local relationships and special reimbursement rules, give them a protected position in local communities, albeit not none that supports growth or scale. Small Medicine is already starting to use technology and business model innovations to claw back some of their losses to Big Medicine. The growing Direct Primary Care model is creating a “concierge medicine for normal people,” promising personalized access and attention to patients, and a sustainable lifestyle to burnt-out PCPs. A set of SAAS type vendors, is helping these practices increase revenue and manage administrative burden, whether through streamlined EHRs like Elation and DrChrono, or full service ACO support companies like Aledade, who provide a combination of technology, financing, and consulting services for a combined practice and revenue transformation.
• Benefits style healthcare offerings are carving out new verticals that used to be cared for by Big or Small Medicine. Using a disruptive approach, they have already started the march from digital Urgent Care to Diabetes, Musculoskeletal Care, Hypertension, Women’s Health and other fields. By combining algorithms, remote sensing, automation, and actual clinicians, these companies will target less complex patients to deliver a more convenient care experience at a fraction of the price of traditional healthcare (Big or Small Medicine).
• Consumer oriented healthcare firms will try to expand both by becoming truly national consumer brands in their existing markets (aesthetic dermatology, sexual health, etc), but also by moving upstream into more traditional healthcare, especially in primary care. The proliferation of CDHPs will in theory support this, as families who have to shop for their basic healthcare look to get convenient care at a bargain price.
• Value Based startups focused on complex patients will continue to expand. These companies are currently caring for a minuscule fraction of the patients who could benefit from a more comprehensive tailored approach. Growth to date has been stalled by the need to negotiate specific Value-Based Contracts with insurers and employers, but expansions of Managed Medicare and Medicaid contracts, as well as new payment codes and capitation arrangements from CMS, will make it much easier for these companies to attract patients (and their associated revenue streams) at scale.

And how they will compete

Today the Lion’s share of healthcare is delivered by Big Medicine, a Lamb’s Share by Small Medicine, and a Mouse’s Share by the new entrants. However, a surprising amount of the US’s $2T healthcare budget will be up for grabs in the coming era, in a competitive dynamic few people want to talk about today. Technology companies will have to decide which of these delivery options they want to serve/support, either as entrants or as customers. Finding product market fit is particularly complicated here, as the product has to be a good fit for both the healthcare delivery institution and the patient population.

The most complex healthcare will remain “safe spaces” for Big Medicine. Especially when there is a possibility of intensive care or complex surgery, areas like trauma, cancer, and cardiac disease will remain in the hospital. On the other end of the spectrum, the least complex areas of outpatient primary and specialty care will be an intense battleground between 4 out of 5 care categories.

Big Medicine will work hard to defend its incumbent position. These payers and providers have extremely strong local brands, especially among the middle-aged and older patients who have most of the actual care needs, but this advantage will slowly erode as the millennial generation ages into needing significant healthcare. A small number of institutions will be able to defend their position through a combination of strong branding and actual digital transformation, but they will be rare, as legacy costs and operating structures make real change extremely slow and difficult. Still, there will be huge opportunities for companies who want to help big medicine digitize. Big medicine has deep pockets, but the sales and implementation cycles will remain painfully slow.

Small Medicine will make a partial comeback. Small practitioner groups are more capable of change than hospital behemoths, and doctors are realizing the enormous price they paid, in terms of autonomy and financial bargaining power, in becoming employed by these large institutions. Americans place a great deal of value on the doctor-patient relationship, and providers who can make patients feel that “my doctor knows me” will command real loyalty. Small groups can also make purchasing decisions much faster than large hospital networks and require much less implementation and support. A large set of modern EHR and Remote Population Monitoring companies are targeting this space — it is competitive for products seen as commoditized, but has the potential for explosive growth for truly unique and differentiated offerings.

Consumer-oriented startups will continue to grow in areas where convenience and privacy are more important than trust, and patients can immediately feel the experience and outcome of care. Lifestyle fields like sexual health/wellness and aesthetic dermatology are still vastly underpenetrated, but the competition in these areas will remain fierce. These companies will attempt to move into more complex areas of medicine, but establishing the trust and infrastructure required to provide primary care will be difficult. Americans still feel that “real” healthcare should be paid for by insurance, and will be slow to pay out of pocket for their more complex healthcare needs. These companies have shown that they can burn large amounts of VC money to gain customers at a high CAC, but maintaining a growth business with a sustainable LTV/CAC is an unproven challenge.

Benefits oriented startups will grow to become a meaningful threat to both Big and Small Medicine, but it will be a slow and challenging path, with many casualties on the way. In a strange inversion of an ideal situation, today it is (relatively) easy to raise VC for a benefits type startup, more difficult to sell into employers (whose HR-purchasers tend not to be healthcare sophisticated, have limited budgets, and long sales cycles), and most difficult to get patients to actually use the services on an ongoing basis. There are a huge number of healthcare benefits vendors making essentially the same pitch (“lower healthcare costs, better employee engagement and satisfaction”) based on dubious data. The most successful companies will build real relationships with patients using technology that is actually unique and engaging, while raising enough capital to ride through 18+ month sales cycles. While many of these businesses started focused on a single condition, they are consolidating rapidly, as employers/insurers would rather contract with a single multi-service line vendor, rather than manage a dozen point solutions. Especially if capital access tightens, expect lots of M&A as firms try to become a “one-stop shop” for employe health needs.

Value-Based Startups have the greatest opportunity to deliver real transformation for the most expensive and poorly-performing parts of the US healthcare system. (Disclaimer: I work for a venture backed Value-Based Care startup.) Like traditional medicine players, Value Based companies tap directly into the core $2T healthcare budget, rather than expanding from much smaller consumer-health and corporate HR budgets. But in their delivery and operational models they are much more like the Benefits and Consumer oriented companies, they are truly built for disruption, innovation, and meeting the needs of the patient, not the existing healthcare infrastructure.They also have the most complex challenges, so will require deeply skilled teams to deliver on their potential.

• Regarding patient acquisition, the target patients are often less technology literate and comfortable with change, and are used to thinking that their more complex needs can only be met by big institutions (even if the clinical quality and service experience is often mediocre at best). Successful entrants will have to develop a compelling value proposition, and then deliver it in a compelling way, often with the support of trusted partners.
• For revenue, these companies have to negotiate contracts with government and large insurance payers, or work within existing Value-Based payment systems like Medicare Advantage (MA) and ACOs. Negotiating unique contracts is a slow and arduous process, while the MA and ACO frameworks are highly constrained. Fixing many of the impediments to VBC often requires change in policy or regulation that is threatening to Big Medicine — who will continue to use their substantial lobbying clout to impede real change.
• Unlike the Consumer and Benefit companies (whose clinical model often consists of underemployed primary care doctors scheduled like Uber drivers, doing one-off Zoom visits), these firms have to build a sophisticated, mulidisciplinary care infrastructure, which is both complex and expensive.

Who exactly will win and lose remains TBD, but I predict:

• Big Medicine will hold its ground in high-intensity complex care, but lose many peripheral services to the 4 other groups. A few highly innovative and competitive health systems will adapt and thrive, but a larger number will either shrink or go out of business.
• Small Medicine will hold its own especially among patients who have moderately complex medical needs, but will still lose the least complex care to more Consumer and Benefits oriented companies who can deliver a slicker consumer experience at a lower price.
• Consumer companies will grow, in part at the expense of Big and Small Medicine’s peripheral customers, but also through supply induced demand. Lifestyle and high-convenience medical problems will be well-served here, but these firm will struggle to make inroads into complex healthcare. This will be a big challenge for VC backed companies, whose valuations and growth expectations assume that they will start delivering high volumes of “real” healthcare.”
• Benefits companies will make deeper inroads, especially in the employed population, focusing on prevention and the management of chronic disease. There will be massive consolidation — competition will narrow to an oligopoly of diversified providers who can offer a broad portfolio of services. Companies who can’t offer a complete, multi-product offering to HR purchasers, either through M&A or partnerships, will quickly go out of business.
• Value-Based firms will grow exponentially, taking on more and more of the complex care Big Medicine has been managing poorly. Due to the complexity of the business models growth will be slower than Consumer and Benefits-type companies, but these firms will be the biggest threat to both Big and Small Medicine. The most successful of these companies will develop a deep understanding of the arcane nature of US healthcare reimbursement, including the vagaries of risk-adjustment capitation, patient attribution, and the counterfactual accounting required to calculate cost savings.

Some companies will pursue multiple business models, or pivot from Consumer to Value or Benefits as they grow.

Thinking about what’s going to happen next, it’s important to note that very few companies to date have proven profitability, or even real ROI to the healthcare system or to their customers. Since it’s a matter of faith that healthcare needs to modernize many companies have raised large amounts of capital at astronomical valuations, relative to their actual user base. This has worked splendidly in a world awash with capital, but if investment funds dry up, these firms will have to show a much quicker road to profitability. Some will succeed, but many others will either go under, or get snapped up at fire-sale prices.