Amit Garg I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

How Do I Make Money? HealthTech Startup And Business Models

4 min read

4Ps, PPO, HMO, MCO, ACO, VFVB, CMS, PMPM, PBM – the list of acronyms is long, see Appendix. But cut through the jargon and you will see healthcare does follow certain principles when it comes to business models. While the topic is excruciatingly complex, below is an attempt to simplify it into a framework. One key difference between healthcare and other industries is the business models are rarely mutually exclusive; rather, companies frequently have multiple fundamentally different cash streams.

1) Get End Customer to Pay

This is classic B2C, perhaps 10% of healthcare dollars in the US. Importantly, this segment has historically enjoyed unencumbered optimism… and has experienced (perhaps) insurmountable challenges. Traditionally, customers receptive to B2C models include the “healthy and engaged” (in shorthand sometimes referred to as the “well and worried”), and it remains challenging to engage patients that have limited health literacy, education, and/or resources. coincidentally this latter group overlaps significantly with chronically ill and disproportionately expensive patients. This is important because, according to many estimates, the sickest 5% of patients drive 50% of healthcare costs. Compounded by profound information asymmetry and relative price-insensitivity, these factors have stymied the ability of B2C models to radically shift the needle.

a) sales – Sweet and simple, sell something, whether it is hardware or software. The plethora of devices out there from Pelton to Fitbit, as well as a multitude of digital apps would fall under this classification. When does this typically work? When you have a minimal or low regulation, plus raise a lot of cash to do marketing, plus a high volume of sales.

b) subscription – Sales are infrequent or maybe one-time, but can be a gateway for the user to engage long-term with a product. A device could be a loss leader as long as LTV > CAC i..e, the lifetime value is greater than the cost of acquiring the customer. Subscription models tend to be more resilient to economic swings, better for forecasting growth, and more likely to get funded.

c) physician-driven e-commerce – An emerging area where a healthcare professional, typically a physician, will provide personalized products. Paloma does for thyroid, Steady for diabetes, Hone for men’s health, among others. Common selling points: tests / consults done at home, with continuous monitoring, and data-driven decisions.

2) Get Someone Else To Pay

Perhaps 85% of the healthcare dollars in the US. Yes, there absolutely are moral prerogatives i.e., doing the right thing, what we will focus here are the powerful economic incentives.

a) provider – It’s typically much easier to convince a hospital you can lower costs than you can increase revenues. One motivation is to minimize expenses, for instance patients ending up in the ER will be far more expensive than treating them beforehand in primary care. Another motivation is to maintain reimbursements, for instance a patient coming back for the same condition within 30 days could mean insurance doesn’t cover the bill fully. 

b) payor – Kaiser is a payor that is also a provider and the consensus is that type of structure has more aligned incentives than keeping them separate. But if you are building a company relying on HMOs then good luck, since most insurances in the US are PPOs. How to break through long sales cycles of 9-18 months? Focus on smaller PPOs, or those that are more specialized, and obviously where you have relationships.  And keep in mind this is far from a perfect marketplace i.e., reimbursement rates are mostly different for different hospitals even for the same procedures.

c) employers – Much overlap with the payor category and fundamentally filling the same niche, however appetite has historically been for a slightly different genre of solutions. Employers are often more incentivized than payors to focus on their employee (i.e., patient/customer) experience and look for startups that offer benefits which do this – and ideally also promote healthier behaviors / drive down spend. Net result: often slightly quicker sales cycles than large insurers but a very highly competitive environment. 

d) pharma – They want increasingly closer access to end users so they can find out when and what they need. Consider that in the last 20 years ~80% of the profits of pharma have come from blockbuster drugs in rare diseases i.e., it’s increasingly harder for them to make money. Also consider that Americans are now accustomed to not pay out of pocket, in fact notwithstanding the growth of concierge medicine, ~80% of healthcare dollars in the US touch insurance and most of the rest is co-pay.

3) Don’t Charge Anything, Sell Data / Insights

Perhaps 5% of healthcare dollars in the US. After all, selling healthcare data doesn’t sound savory to most of us, even if anonymized and aggregated. But it’s growing, beyond its traditional refuge in pharma or pharma-adjacent companies. PatientsLikeMe has communities of people communicating around particular health conditions. Outcome Health did advertising based on healthcare data – before it imploded due to fraud.

Appendix: what the acronyms mean since even industry experts get confused

  • 4PS = the four pillars of healthcare in the US include patients / providers (hospitals and doctors / / payors (insurance) / pharma. Many would add in a fifth which is policymakers (or politicians).
  • PPO = preferred provider organization aka you can go see whichever healthcare professional you want that is within network
  • HMO = health management organization aka you can only see healthcare professional belonging to that organization
  • MCO = managed care organization aka PPO + HMO
  • ACO = accountable care organization aka groups of health care professionals who come together voluntarily to provide Medicare
  • CMS = Centers for Medicare & Medicaid Services aka a federal agency 
  • VFVB = virtual first value based aka where the world is going after fee for service (“pay for a procedure”) and capitation (“pay per patient”)
  • PMPM = per member per month aka what healthcare organizations still often charge / get reimbursed per patient per month
  • PBM = pharmacy benefits management aka manage drug prescriptions for insurers, an industry that is almost unique to the US

Thanks to Kush Gupta for his comments. Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.

Amit Garg I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

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