High costs coupled with extreme inefficiency make healthcare a difficult industry to ignore — If you’re experienced in, say, financial services or energy, it’s easy to look at healthcare and see simply another vertical with amazing potential. Too often though, I see new entrants fail simply because they don’t understand our culture or the nuances that go along with it.
For all the returns it appears to offer investors and startups, healthcare is a complex industry to enter let alone successfully disrupt.
I can’t stress it enough — like no other industry, healthcare can burn through investment funding and even the most promising innovations can go down in flames — if you don’t understand the various players, the ways decisions are made, and our workflows. However, if you invest in understanding healthcare, you’ll have the opportunity to break into an industry that rewards (and needs) true value, new perspective, and insight.
At Eliciting Insights we help our start-up and investor clients refine business models that thrive within the complexities of healthcare. Based on our experience, here are five key questions to ask if you’re starting up or looking to invest in disruptive healthcare technology.
Was the Business Model Built on a Solid Sample Size?
Many startups set their sights on disrupting healthcare and smartly begin talking to doctors and healthcare leaders to understand their needs and challenges. This is something I absolutely encourage — so much so that I advise startups to talk to moreproviders.
Most entrepreneurs simply stop talking too soon and build their product models off responses from only a handful of physicians or executives. I’ve seen startups tout accomplishments like getting feedback from all of “three CFOs of the most prestigious academic medical centers in the country”. This is where I pass on a favorite saying of industry insiders — “If you’ve seen one provider’s workflow, you’ve seen one provider’s workflow.”
Would you personally invest $5M in business built on a sample size of three? As an investor especially, make sure you know how many providers a startup has spoken with.
Even when a startup does find a good sample number it frequently lacks diversity, focusing on for example, physicians inside a certain metro area, physicians with only one practice management system, or doctors within only one or two specialties. Tapping into a sample that aligns with strategic goals and allows for deep feedback will ensure the business model can truly succeed in, and disrupt healthcare.
“If you’ve seen one provider’s workflow, you’ve seen one provider’s workflow.”
Are Incentives Properly Aligned?
Part of what makes disrupting healthcare so challenging is the complexity of all the parties involved. A company that is ready to succeed in this vertical will understand that their products will offer incentives that align across provider, payor, patient, and employer spaces.
Take for example a payor that wants to drive surgery patients to lower cost of care options through the use of payment cost estimators. (With the trending increase in high deductibles and co-insurance, higher settings of care generally cost the patient and the payor/employer more.) On the surface, it seems that providing the patient with out of pocket information should be enough to encourage them to go to less costly ambulatory surgery centers over hospitals, but the reality is much different.
Imagine yourself as the patient just about to go under for surgery. Is cost important? Yes, but you’ll also be thinking about putting your life into the hands of physicians as well as post-operative questions (such as infection). Trust in a surgeon is a must for patients. In an industry that is still developing good transparency metrics patients must and do make their decisions based on the imperfect information they have.
Another paradoxical example I’ve seen is where hospitals decide against obviously (to outsiders) beneficial technologies or outsourcing. This is especially common if those solutions would significantly reduce their workforce. In many communities, a hospital is one of the largest employers and leadership knows that heavy reductions in labor could create negative community perceptions and could also drive up the number of uninsured patients using the hospital’s ER for primary care services.
Many components including community, emotional, relationship, quality, cost, and workflow, must be considered when addressing incentive alignment and consequently, disruption in this industry.
"On the surface, it seems that providing the patient with out of pocket information should be enough...but the reality is much different."
Does the Solution Work in a Proof of Concept?
This is a simple question that doesn’t get asked enough. Many ideas in healthcare seembrilliant on the surface, but until they’ve been tested, nothing should be assumed.
If a solution is highly complex and different parties in the healthcare process need to change their usual workflows, chances are the idea won’t work. Getting past this challenge is where a “unit model” can be amazingly helpful.
Unit models are the smallest model that can be built to prove that a business idea will work as intended. In a healthcare setting, this means building out a proof of concept that realistically tests what providers need, what payers require, and how members and patients are prompted to make behavioral changes.
Unit Models must consider important questions including:
Business models almost always make sense at first. People are almost always on board at first.
Pilots reveal what you might have missed at first and give you guidance to make the changes you need to build a successful healthcare offering. Many pilots fail in the beginning. This is a good thing. Rather than sinking millions into a challenging business model, unit models can allow entrepreneurs to fail fast so they can iterate a better solution.
Knowing whether a startup can roll out a unit model and prove that it works is a base requirement when doing due diligence.
Do You Understand Unintended Consequences?
The complexity of healthcare lends itself to “domino” or “unraveling” effects. Push one tile and others fall. Pull one thread and others are disturbed. It is entirely too easy in this vertical to resolve one problem and in the process, create a completely new one.
I once worked with a very high profile partnership between a financial services company and nation-wide insurer. They implemented a transaction processing system that should have led to increased profits and efficiency. Instead, it ended up generating a member phone call for every two transactions and customer service costs went through the roof. This happened largely because of a lack of transparency and reconciliation tools, but ultimately because neither party took the time to understand how healthcare providers post transactions.
Even healthcare veterans can get tripped up on the question of consequences. Startups especially need a guide.
"It is entirely too easy in this vertical to resolve one problem and in the process, create a completely new one."
Are Basic Investor Questions Being Answered?
I saved this for last because it’s specifically for investors. It is though, also useful for anyone leading a startup.
Any organization looking to disrupt healthcare and turn a profit should be able to answer some basic questions.
A question that deserves its own attention though, lies around sales teams. It’s easy to burn through cash with the wrong sales solution.
It is incredibly difficult to sell into hospitals as well as physicians’ offices. Channel partnerships through trusted vendors are an option and an expensive sales team with rolodexes is another, but you must make the choice that matches your goals.
Take the massive ambulatory market for example. You’ll be hard-pressed to find sales people with contact lists in this sector but a smart startup can build a successful sales strategy with the right input.
You’ll notice that a recurring theme through these points is relationships. Healthcare is, at its core, about a network of relationships. Startups that succeed and ultimately disrupt healthcare master that concept.
Launching Your Next Killer Healthcare Product