Entrepreneurs & Investors Should no Longer be “Patient” About Consumerism in Health Care

November 2012
Authors: Stephen Kraus
Related Strategies: Healthcare

 

Last week I wrote a blog on how the election results clarified the path to health care reform, how they will lead to an increase in innovation, and where BVP sees market opportunity. Then I was asked by a reporter who read my piece, “Why are you so optimistic that now is the time for rapid and innovative change in health care?”
 
It was a great question and one that got me thinking.  The reporter was basically asking what forces are different in this era of reform that will actually accelerate the pace of change in an industry that is historically slow on almost everything.   
 
My answer, you ask?  .  . .  CONSUMERISM.
 
Now, to be fair, consumerism is an idea long trumpeted by health care policy makers (particularly those on the right) as the obvious missing element in the health care equation:  if the consumer were only empowered, all would instantaneously be better in the world.   Unfortunately, it’s not that easy.  Empowering the health care consumer in the complex industry in which we operate is much easier said than done.  (More on this below.)
 
That said, there are a number of reasons why I remain optimistic and why I believe consumerism will be a more powerful force in reforming the system in the coming decade than it has been in the past.
 
The Consumer Era Is Here . . .  But Why Now?
 
For too long, health care has ignored the voice of the consumer.  In fact, I would argue that in no other industry—with the exception, possibly, of education—has the consumer’s voice and interests been so dismissed.  
 
There are a number of historical and structural reasons for the lack of consumerism in health care.  Consumers’ decisions to purchase or utilize health care services and products often hinge on the recommendations of medical experts who have specialized knowledge and skill to diagnose health problems and identify treatment options. Equally as important is the fact that most consumers don’t pay for the majority of their care so they really have no real incentive to understand the actual cost and value trade-offs typically made when purchasing most other economic goods and services.   
 
We at Bessemer Venture Partners believe this traditionally paternalistic view of consumer irrelevance in health care is changing because of two major reasons:
 
1) Consumers are feeling the burden of the rising cost of health care – Due to federal tax policy, employers have historically paid for the bulk of the health care provided in the United States.   In the good old days of rising GDP and corporate profits, employers were willing to absorb these costs without passing them onto their employees.  But those days are gone.   Increasingly, employers are changing benefit policies to increase co-pays, deductibles, and other out-of-pocket expenditures such that employees now bear a significantly larger portion of the costs of health care.  In fact, expenditures for personal consumption of health care are now the second-highest household expense after housing/utilities.   The graph below says it all:  Individuals’ contributions to health care are rapidly outpacing their earning power and overall inflation. 
 
 
And while health care decision making will continue to be complex for a long time to come, nothing makes consumers more active, more engaged, more demanding participants than the power of the  purse or, more appropriately in this case, a shrinking of their wallets.   
 
2) Obamacare is here to stay and consumer empowerment is a major tenet of PPACA – While Obamacare has been a political punching bag, the truth of the matter is that there are a number of policy efforts within the bill that promote increased consumerism (an ideological favorite of the Republican party) in the health care system.    To our mind, the entire construct of PPACA is based on three main tenets for reform;  they are: 1) provider-facing reforms that seek to restructure our system from one that rewards fee-for-service care provision to one focused on payment-for-value, 2) payor-facing reforms that attempt to decrease the amount of money spent on non-medical costs and decrease the number of un/under-insured in our country, and 3) consumer-facing reforms which seek to engage consumers more directly in decisions regarding their health care.   
 
Within the 1,000 or so pages of the bill, there are a number of consumer-centric themes that resonate, including:
 
The creation of health care exchanges – the idea of individual health exchanges has long been discussed amongst public policy makers and, in fact, was first promoted by more conservative think tanks as the only way to truly drive down costs.  Exchanges are now a reality (thanks to PPACA) and it is expected that by 2017 as much as $172 billion of health care premiums will be funneled through exchanges!
 
The shift from a fee-for-service to a fee-for-value payment and provision system – in a fee for service world, there is little to no financial incentive for a doctor to take the time or effort to care about the patient beyond the four walls of their office or once they are discharged from the hospital.  That’s not a critique of doctors as people, there are many good and caring professionals in this industry. It’s just the cold hard fact driven by the profit incentives in a fee-for-service world.  The problem is that this often leads to a terrible customer (let’s call patients for what they are – customers) experience.  PPACA attempts to change all of this by promoting new payment models (Accountable Care Organizations, bundled payments, readmission penalties) which incent doctors to care for patients in a more holistic way . . . some could even say a more consumer-centric way!
 
Providing patients with more data about the quality and cost of their health care and capturing/measuring data related to their satisfaction – To be fair, a lot of these patient-centric data initiatives are part of the administration’s 2009 HITECH which actually includes patient engagement of data as a key measure of “meaningful use.” But PPACA also has a number of legislative elements that focus on measuring consumerism, including mandating that both providers and insurers measure patient/member/customer satisfaction.    
 
 
What BVP is Looking for When Investing in Consumerized Health Care 
 
It’s an exciting time to be a health care investor for many of the reasons I have cited above and in my previous post.  But I’ve neglected to mention one of the most exciting aspects of this period: the fact that there are a whole host of new entrepreneurs who share our belief that now is the time to start and build the next great health care company.  Many of these innovators come from consumer tech backgrounds and will bring new ideas to the field. We LOVE this trend and the infusion of energy, intellect, and cutting edge ideas and talent that are being brought to the industry.  
 
But a word to the wise:  While your company may be consumer-focused, your success in the health care industry depends greatly on how well you play with others in the healthcare industry sandbox, if you will.   The health care ecosystem is extremely complex and filled with many different stakeholder groups:  payers, providers, patients, regulators, the government – the list goes on and on.   So while you may have built a killer consumer-facing product or service, whether or not you have thought about and planned for how it interacts and affects these other stakeholders can literally determine the success or failure of your company.    Paul Keckley, one of my favorite thought leaders in health care, said it best when he wrote in a Wall Street Journal op-ed article: “For many industry stakeholders, consumerism in health care is problematic. Although inevitable, it is disruptive to “standard operating procedure” — in some cases, requiring massive overhaul of business models and personnel.”
 
The idea that, on one hand, you are building something to disrupt the traditional system but, on the other, you need to think about the incumbent interests within the system may seem counter-intuitive at first.  But we have drawers full of business plans that never panned out because companies blatantly ignored or ran afoul of too many of these related interest groups in the health care ecosystem.  Our internal analysis has demonstrated that the types of companies who put thought into these questions generally yield better returns for their investors.    
 
BVP’s commitment to this space is clear:  We’ve put our money where our mouth is with recent investments in three companies (Liazon, GetInsured, and HealthEssentials) that provide services and technology that help the consumer with decision-making and purchasing of health care.   With these investments, we backed entrepreneurs and executives who have thought deeply about how their business model impacts other important stakeholders in the ecosystem.   
 
So, if you are a health care service or HCIT entrepreneur, BVP would love to meet with you to learn more about your company and business plan.  Come prepared to answer questions not just on how your product or service helps the consumer but also how it helps the payor, the provider, and the government. 
 
This blog is the second in a series in which I will address topics around healthcare. Do you agree/disagree with our views? Do you have an opportunity for BVP? Follow me @stephenkraus to continue the discussion. 

 

1 The sad thing of today’s state of affairs is that payers and providers will find that they rank at the bottom of all American industries (except for pharmaceutical companies) in ratings of customer satisfaction with quality and cost of services provided.   Hopefully this will change with the new era of consumerism!
2 I will detail this analysis and discuss a framework we have developed in a future blog so please follow me @stephenkraus and visit www.bvp.com