Innovative new technology companies are likely the best hope for reversing spiraling costs in the $3.5 trillion healthcare market, according to industry experts.
However, finding the likely winners among the array of startups and established technology players presents formidable challenges. Investors who are looking for the one single innovation, such as how Uber Technologies and Lyft disrupted the transportation industry or Amazon.com disrupted the retail market, are likely to be disappointed in the healthcare market, noted panelists at the Association for Corporate Growth’s 11th Annual Healthcare Conference last week in New York, noting that its myriad subsectors are all ripe for change.
Overall US healthcare expenditures rose nearly 4% to $3.5 trillion in 2017 from 2016, comprising about 18% of the gross domestic product, according to the Centers for Medicare and Medicaid Services (CMS). Major spend categories like hospital care and physician services rose higher than that average, CMS said.
“It really takes a number of different strategies” to find companies that achieve cost-savings and better patient outcomes, said Andrew Adams, co-founder and partner at Oak HC/FT, a $1.1 billion healthcare venture fund. “There is no silver bullet.”
Investors should seek companies that “look 10 years ahead on how they will interact with the healthcare ecosystem,” said Ankur Agrawal, a partner in McKinsey & Co.’s healthcare systems and services practice. Efforts to rein in costs through innovation will be ever more imperative as the population ages and chronic diseases like hypertension and diabetes surge, he said.
Oak HC/FT, for instance, is scouring the healthcare landscape to find innovations that reduce the “social determinants” of poor health among various populations, such as elderly people who may lack proper nutrition, housing and transportation, said Adams.
Hospital admission rates can be dramatically reduced with technologies that can augment housing, transportation and nutritional care for such populations, thus reducing costs, said Adams.
Recent vertical consolidations, such as UnitedHealth buying Surgical Care Affiliates for $3.4 billion and Humana buying hospice care provider Curo Health Services for $1.4 billion are likely to be a net positive for cutting the cost of patient care through overhead reductions and referrals, panelists said.
But smaller innovations, particularly in patient transportation, will also be an important factor for reducing overall costs, panelists said.
Todd Rudsenske, a Cain Brothers healthcare banker, said Uber and Lyft are already becoming significant players in medical transportation for patients unable to drive. But companies like SafeRide Health, a medical transportation startup, which received a recent investment from Fresenius Medical Care, could reduce hospital admission rates among dialysis patients by preventing regular treatment from being interrupted by a lack of transportation, he said.
Companies that tackle burdensome employer pharmaceutical costs, now largely negotiated through an opaque, “black box” system involving pharmacy benefit managers (PBMs), drug makers and insurance companies, is also a ripe area for cost-cutting innovation, according to Oak’s Adams.
The fund recently led a $20 million investment into a Boston-based startup called WithMe Health, a “medication guidance company” which aims to replace PBMs for employers, said Adams. Oak also looked at Pillpack, another innovative company in the drug supply chain, that was bought last year by Amazon.com, he added.
Another ripe area for controlling costs is to align incentives for insurance payers and doctors to deliver care based on overall quality rather than the quantity of services, a much-discussed “fee for value versus fee for care” model.
Oak, for instance, has invested in tech-enabled companies including Paladina Health, VillageMD and One Medical, all three of which look to incentive quality care regimes among various constituents. “Tighter integration and aligned incentives will drive better outcomes,” said Adams.
Although Travelocity helped transform airline and hotel pricing and Quicken Loan supended mortgage lending, the healthcare system is unlikely to ever be fully driven by consumers, panelists at the conference said.
“One view is that consumers will drive healthcare, but another is that it will always be driven by physicians,” said Agrawal. Because of the specialist knowledge that physicians bring, “I don’t foresee it ever being a Travelocity model.”
Dane Hamilton is healthcare editor in New York for Mergermarket and Dealreporter.