With the first month of 2020 in the books, and J.P. Morgan Healthcare Conference behind us, it's that time of year to share our expectations for the healthcare industry and what we think will be accomplished. First, let’s evaluate how well we did with our 2019 predictions. Overall, about five out of our six predictions took steps towards realization. Below we provide additional color on where our predictions came true and where we’re excited to see things play out in the new year.
If you want to go straight to our 2020 predictions, here they are:
- Vertically-focused companies will move laterally.
- Hospitals will reposition technology as an opportunity rather than an obstacle.
- Care delivery might be an opportunity where Amazon follows Walmart
- Healthcare is battening down the hatches as institutions will focus on security.
- The appetite for pharma tech companies is on the rise.
- Direct-to-consumer is no longer DOA in healthcare.
- Biotech bankers will be busy for the first half of 2020.
- Biotechs built for M&A will come back in vogue.
Looking back on our 2019 predictions
1. Healthcare entrepreneurs are tackling more complex problems and patient populations.
Over the last few years, a plethora of companies have emerged with novel care management models focused on addressing challenges previously thought to be intractable in healthcare. In many instances, these companies have infused the latest evidence-based guidelines for clinical care with emerging technology and wraparound services to provide holistic and culturally competent care.
For example, Ready Responders, focused on the Medicaid population, provides primary and urgent care services via in-home and telemedicine-enabled care. Ready’s combination of a lightweight home health infrastructure with specialist telemedicine support unlocks solid unit economics, all while caring for some of the most at-risk patients in their markets, and their emerging success has been exciting to witness.
We also learned of Uno Health, which serves low income seniors by delivering targeted cash assistance based on state and federal government Medicare program eligibility, such as the Medicare Savings Program.
While we anticipated more focus on more complex and at-risk populations in 2019, we didn’t expect to see such vibrant activity in the pediatrics space, where companies are not only re-imagining the patient-provider relationship, but are also grappling with how exactly to provide family-centered care for children.
For example, Blueberry Medical and Brave Care have redesigned the pediatric urgent care experience and Emilio Health, a new company focused on the pediatric behavioral health space, will open its doors in late 2020. There are also a number of companies operating in stealth mode that are focused on pediatric behavioral health and are rethinking autism care for both patients and their families.
2. AI and ML is transforming the industry, although it’s first focus is on the back office.
Last year, we were energized by a number of exciting, front office applications of AI and our belief that these technologies would proliferate.
While we are still bullish on applications of AI to improve clinical decision support, imaging, and genomics, AI actually made the biggest impression on the back office, as 2019 saw a meteoric rise of companies focused on all areas of the revenue cycle management (RCM) stack.
Many of these companies, such as our portfolio company, Verata Health, as well as Itiliti Health, Glidian, PriorAuthNow, Voluware and Olive.ai, gained traction in automating prior authorization and other major workflows in the back-office, including claims status checks and eligibility.
The next generation of medical coding is taking shape, too; for example, our portfolio company Nym, leverages computational linguistics and natural language processing to fully automate coding for providers. We even saw services-oriented RCM incumbents such as Waystar make acquisitions of early stage AI companies, validating that there’s a massive opportunity in RCM automation.
With all this momentum in the back office, we still don’t expect the industry to retire the fax machine any time soon. We expect the fax will be employed as far out as 2023. Nevertheless, investment in back office automation suggests that the industry will begin to see less paper and more “e-faxes.” We hope this will translate into fewer paper cuts (and headaches) for patients, providers, and administrators in 2020.
3. The rise of the multilingual healthcare professional.
As founders tackle more complex problems in healthcare, such as caring for underserved populations or developing computational approaches for identifying novel drug targets, we anticipated that “multilingual” teams would become the new norm and healthcare companies would leverage more diverse, cross-industry expertise.
"Multilingual" expertise is necessary for teams leveraging computational approaches and breaking down disciplinary silos.
Initially, we saw how multilingual expertise became necessary for teams leveraging computational approaches in healthcare, however, the need for breaking down disciplinary silos extends beyond this category. For example, to bring a truly consumer-centric health plan to market, our portfolio company, Bright Health, fuses best-in-class consumer talent hailing from Amazon, RetailMeNot, and Wayfair and more, with seasoned health plan executive talent from UnitedHealthcare, Anthem, Magellan, and athenahealth.
We also saw this trend play out among healthcare cybersecurity companies such as Medigate, Cynerio, CyberMDX, and Asimily, as they bring together best-in-class cryptography engineering with clinical data expertise to secure the healthcare enterprise. In the next decade, we hope to see more teams with multilingual DNA, leaning on the expertise of other industries to bring best-in-class technology to healthcare.
4. The FDA was as a bright spot, including the CMS and CMMI.
The FDA saw significant change in the form of innovation and leadership in 2019. After nearly two years of service, Dr. Scott Gottlieb stepped down from his post as FDA Commissioner this past spring. In his place, Dr. Ned Sharpless from the National Cancer Institute served as acting director and by the end of the year, Dr. Stephen Hahn, the former Chief Medical Executive at The University of Texas MD Anderson Cancer Center, was sworn in.
Despite a multitude of changes at the most senior level, the FDA approved 48 new drugs in 2019, which was 11 fewer than 2018 but 10 more drugs than the trailing decade average for the agency. The FDA was particularly aggressive in supporting accelerated approval timelines for drugs focused on areas of high unmet need, such as Oxbryta’s approval for sickle cell disease in November. Overall, 44% of drugs approved in 2019 were for orphan indications and 60% of approvals leveraged one of four pathways for expediting drug development and review.
Our 2019 predictions failed to acknowledge two other federal agencies that delivered in 2019: The Center for Medicare and Medicaid Services (CMS) and the Center for Medicare and Medicaid Innovation (CMMI). Together, these organizations announced a series of value-based payment models, most notably Kidney Care First (KCF) and Primary Care First (PCF), that offer providers voluntary alternative payment models that incentivize better chronic disease management. The great leadership of both Adam Boehler and now Brad Smith cannot be overlooked.
5. Big tech has continued to push into healthcare, including big box!
While big tech made several splashy announcements in 2019 such as Microsoft’s partnership with Nuance and Amazon’s partnership with J.P. Morgan and Berkshire Hathaway, big box may have a more material impact on care delivery before their cloud-first comrades as we will highlight in our 2020 predictions.
Still, as executives at Fortune 500 companies sit in boardrooms and discuss opportunities for expansion, they can no longer ignore the massive and growing share of GDP represented by healthcare.
Unexpected players such as Best Buy made waves in the healthcare arena with a new remote monitoring initiative focused on seniors, playing to their strengths in consumer electronics. Big box veterans such as Walmart, CVS, and Walgreens offered health services including primary care, counseling, home care, and even dentistry.
6. The era of the healthcare OS.
The one prediction we are still waiting to see play out is the “era of the healthcare OS.” Health Catalyst, a leading data and analytics platform for the industry, went public in 2019. However, we are still waiting to see ecosystems flourish on top of existing healthcare IT systems like Health Catalyst as we have observed with SAP, Oracle, and Salesforce in the B2B cloud software market. While the Epic App Orchard remains an attractive opportunity for many companies, the economic relationship for read/write access isn’t always compelling for early stage businesses.
Perhaps the OS is yet to be built in healthcare.
Perhaps the OS is yet to be built in healthcare. We are encouraged by companies laying the foundation, such as Datavant, which provides middleware infrastructure for connecting healthcare data across the ecosystem.
Voice-enabled digital assistants for providers, including Suki, Saykara, and Sopris, also show promise of becoming systems of engagement that contribute to and pull data from existing healthcare information systems and we can’t forget about patient-centric approaches such as Abridge.ai.
2019 was an exciting and productive year for the healthcare industry. We are excited to share what we think 2020 has in store, setting the tone for a new decade of healthcare innovation.
Our predictions for 2020
1. Vertically-focused companies will move laterally.
Our experience as vertical software investors has taught us that it is easy to underestimate the TAM for vertical SaaS opportunities.
Over decades of investing in cloud, however, we’ve learned that with a good product and efficient sales, vertical software companies can become large, monopolistic businesses despite operating in what may seem like a niche market.
Vertical SaaS has the potential to become monopolistic businesses despite operating in what seems like a niche market.
Historically, in the employer channel, healthcare companies have run the vertical software playbook, focusing on specific indication areas such as insulin-dependent diabetes (Livongo), pre-diabetes (Omada Health), musculoskeletal diseases (Hinge Health), and insomnia (Big Health).
For Livongo, their vertical approach paid dividends during their 2019 IPO as they sold investors on a two-part growth story by first deepening their moat in diabetes, and then expanding into other indications.
In 2020, as employer-facing digital health companies crack engagement and outcomes for their initial indications, they will launch novel products in net new verticals that have similar characteristics to the ones in which they started:
- Top areas of employer medical spend;
- High cost episodes of care or medications;
- Chronic disease;
- Co-morbid with other indications, such as anxiety and depression.
We view this expansion as inevitable from a business perspective and essential for demonstrating sustained clinical outcomes.
Ultimately, to be successful clinically, digital health companies must not only address single diseases in isolation. Instead, they must consider other comorbidities that may affect an individual’s ability to manage their disease and respond to treatment. AbleTo is a great example of a company that embodies this multi-faceted approach as they provide comprehensive behavioral healthcare to patients living with chronic diseases.
2. Hospitals will reposition technology as an opportunity rather than an obstacle.
We’ve seen a significant amount of technology-focused activity from health systems over the last several years in the form of technology spin-outs, investments into companies off of the health system balance sheet, dedicated dedicated fund structures, LP investments, as well as direct collaborations with the tech industry. We view these activities as not only exciting for the industry, but essential for our transition to value-based care.
When fully realized, value-based care is positioned to disrupt the core economics of the hospital.
Moreover, healthcare’s competitive pressures from new market entrants such as Walmart, CVS, and Walgreens are heating up, meaning that healthcare systems will need to diversify their revenue streams. While more innovative hospitals have always diversified their revenues with other sources such as clinical trials, we see technology and data as keys to unlocking more revenue for all hospitals.
Hospitals have the potential to diversify revenue streams as value-based care becomes the new reality.
In 2019, Mayo led the pack with the launch of their new data platform business powered by Google Cloud, which has allowed them to centralize their internal data assets for research and commercial use. We’ve also seen hospitals become hotbeds of opportunities and business spin-offs, such as Memorial Sloan Kettering’s Paige.ai, as well as Providence’s Health.
While we don’t anticipate hospitals will become “tech companies that also provide care delivery services”—in the way that financial institutions like Goldman Sachs have attempted— we believe that hospitals have the potential to diversify revenue streams as value-based care becomes the new reality.
3. Care delivery might be an opportunity where Amazon follows Walmart.
This is definitely a hot take, but we think 2020 is the year for big box retailers to make a more immediate impact on healthcare delivery and cost, more than big tech, because of big box’s inherent distribution power.
While big tech won the marketing game in 2019, it’s unclear whether the partnerships forged, such as Microsoft and Nuance collaborating on an ambient digital scribe for providers, will bear fruit in four months or four years.
With decades of capex investment behind them, big box retailers are pursuing innovative care delivery models that leverage what was formerly considered a failing strategy in the era of e-commerce: physical access to consumers.
With 90% of Americans living within 10 miles of a Walmart, we are bullish on the expansion of Walmart’s full service, in-store clinic model that launched in Georgia, South Carolina, and Texas last year.
We do not underestimate the role the big tech will play in healthcare for both enterprises and consumers over the long term; however, healthcare is a local business, and as such, it might be one of the only industries in the very near-term where brick-and-mortar moves faster than the cloud.
4. Healthcare is battening down the hatches as institutions will focus on security.
In 2020, healthcare institutions will go on the offensive in cybersecurity. Just a few days ago, the FDA issued a warning regarding a cybersecurity vulnerability with GE Healthcare Clinical Information Central Stations and Telemetry Servers and the Google and Ascension’s collaboration called “Project Nightingale” has only brought increased public scrutiny of healthcare data management and security practices. Ransomware attacks, which represented over 70% of the malware attacks in healthcare last year, are becoming more frequent, severe, and sophisticated.
It’s easy to change your credit card, however it’s difficult to change your DNA.
It’s easy to change your credit card, however it’s difficult to change your DNA. As a result, health systems and payers are laser-focused on securing the healthcare enterprise. They will do this by partnering with leading infrastructure providers (GCP, Azure, Amazon) and by partnering with startups for point solutions (e.g. medical device security).
With the rise of data privacy regulation such as CCPA, the Senate Cybersecurity Caucus will likely introduce healthcare cybersecurity legislation, too. The Senate has pushed the healthcare sector on cybersecurity gaps and the need to strengthen cyber policies.
5. The appetite for pharma tech companies is on the rise.
We anticipate that 2020 will bring new companies selling to pharma. These companies will tap directly into the core P&L with technology infrastructure and help pharma operate their underlying business.
Pharma tech represented less than 3% of total VC dollars in digital health back in 2017 when we penned “Stop Ignoring This Healthcare Customer.” Since then, the macro trends have remained strong and multiple success stories, including Flatiron Heath’s $1.9 billion acquisition, Schrodinger’s recent filing for IPO, Concerto Health’s recent $150 million round, and many other emerging private companies gaining traction. All of which demonstrates the appetite for company creation focused on pharma services.
6. Direct-to-consumer is no longer DOA in healthcare.
2020 will bring entirely new consumer-facing business models to healthcare.
Historically, B2B business models have dominated digital health, with 85% of businesses focusing on the enterprise channel. Of those brave companies that start direct-to-consumer (D2C) models, nearly two-thirds pivot to a B2B2C model.
The rise of companies like Hims, Ro, and NuRx, which leverage telemedicine and strong consumer brands to deliver medications and wrap-around healthcare services, have validated the power of the consumer purse in healthcare.
While we don’t think that the “Hims for X” narrative is finished just yet, we anticipate the development of new and innovative D2C models to emerge in healthcare in 2020. We are even more certain that the new year will bring more clarity around where Hims, Ro, NuRx and others find homes as well as Amazon’s near-term plans for PillPack.
7. Biotech bankers will be busy for the first half of 2020.
With the election looming in Q4, “public ready” biotechs are preparing for a market freeze by the end of year.
With the election looming, “public ready” biotechs expect a market freeze by year end.
Without a crystal ball in hand to predict how the public markets will actually react to an unpredictable political environment, many biotechs will take the election risk off the table and attempt to go public well ahead of the November outcome.
This will lead to a particularly busy—and hopefully productive— first six months of the year for biotech bankers.
8. Biotechs built for mergers and acquisitions will come back in vogue.
As we’re a decade into the recent biotech boom, investors will look to the next decade and wonder if and when the IPO window will close (and for how long). Pair this with an election year freeze, and early stage private investors will be attracted to single asset, clinical stage biotech companies that are primed for M&A in the event the public markets shutter.
Capital efficiency and clinical data will be enough to sway more VCs to take on the “binary risk” of single asset companies and balance out their portfolio beyond preclinical high science platform deals. We have no reason to believe that the fundamentals of the biotech public markets will change any time soon, but given some post-decade long boom reflection and an uncertain political environment, we suspect to see more companies formed around advancing a single asset (or two) through clinical development.
Many of these companies will be focused on therapeutic areas where VCs can realistically put up enough capital to fund a Phase III trial as an alternative to an acquisition so buyers don’t have all the leverage if the IPO window shuts down.
What do you think of our predictions for 2020? Let us know what you think by emailing us. You can reach the Healthcare team via Steve Kraus (firstname.lastname@example.org), Morgan Cheatham (email@example.com), and Andrew Hedin (firstname.lastname@example.org).