Healthcare Blog

Doctors Without State Borders: Practicing Across State Lines

By bkocher2013

This article was first published in the HealthAffairs Blog.

Note: In addition to Robert Kocher, this post is authored, by Topher Spiro, Vice President, Health Policy, Center for American Progress ; Emily Oshima Lee, Policy Analyst, Center for American Progress; Gabriel Scheffler, Yale Law School student and former Ford Foundation Law Fellow at the Center for American Progress with the Health Policy Team; Stephen Shortell, Blue Cross of California Distinguished Professor of Health Policy and Management and Professor of Organization Behavior at the School of Public Health and Haas School of Business at the University of California-Berkeley; David Cutler, Otto Eckstein Professor of Applied Economics in the Faculty of Arts and Sciences at Harvard University; and Ezekiel Emanuel, senior fellow at the Center for American Progress and Vice Provost for Global Initiatives and chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania.

In the United States, a tangled web of federal and state regulations controls physician licensing.  Although federal standards govern medical training and testing, each state has its own licensing board, and doctors must procure a license for every state in which they practice medicine (with some limited exceptions for physicians from bordering states, for consultations, and during emergencies).

This bifurcated system makes it difficult for physicians to care for patients in other states, and in particular impedes the practice of telemedicine. The status quo creates excessive administrative burdens and like contributes to worse health outcomes, higher costs, and reduced access to health care.

We believe that, short of the federal government implementing a single national licensing scheme, states should adopt mutual recognition agreements in which they honor each other’s physician licenses.  To encourage states to adopt such a system, we suggest that the federal Center for Medicare and Medicaid Innovation (CMMI) create an Innovation Model to pilot the use of telemedicine to provide access to underserved communities by offering funding to states that sign mutual recognition agreements.

The Current System And Its Drawbacks

State licensure of physicians has been widespread in the United States since the late nineteenth century.  Licensure laws were ostensibly enacted to protect the public from medical incompetence and to control the unrestrained entry into the practice of medicine that existed during the Civil War.  However, it no longer makes sense to require a separate medical license for each state.  Today, medical standards are evidence-based, and guidelines for medical training are set nationally through the Accreditation Council for Graduate Medical Education, the Centers for Medicare and Medicaid Services’ Graduate Medical Education standards, and the Liaison Committee on Medical Education.  All U.S. physicians must pass either the United States Medical Licensure Examinations or the Comprehensive Osteopathic Medical Licensing Examination.

Although the basic standards for initial physician licensure are uniform across states, states impose a patchwork of requirements for acquiring and maintaining licenses. These requirements are varied and burdensome and deter doctors from obtaining the licenses required to practice across state lines.  For example, in all states, applicants must show proof of graduation from an accredited medical school and completion at least one year of a residency program, provide information about malpractice suits, and pay a fee to the state for initial licensure (usually several hundred dollars) and for license renewal (which in some states must be done annually).

In addition, some states require that applicants undergo further testing, complete specific course work, submit to a criminal background check, participate in a face-to-face interview, or provide proof of participation in other training programs or a log of continuing medical education courses.  Once applicants have fulfilled the initial license requirements, state agencies can take several months to process their applications.

Not only does this system impose direct costs on physicians who must decipher and comply with multiple states’ licensure requirements, but also it creates substantial indirect costs for both physicians and patients by preventing some physicians from practicing in those locations where they would be most productive and where the need for providers is greatest.  For instance, specialist shortages in rural areas are endemic, and patients must often travel long distances and endure lengthy waits in order to be seen by a doctor.

During public health emergencies, such shortages, in conjunction with state licensure requirements, can have especially harmful consequences.  As of 2008, 18 states did not permit exemption from licensure or expedited licensure for volunteer physicians during disasters.  In these states, any out-of-state private practitioners who render voluntary aid must in effect practice medicine without a license, potentially placing themselves at risk for civil and/or criminal penalties.

The impact on telemedicine.  State licensure has had a marked effect on telemedicine in particular, effectively stifling its growth as an industry.  For decades, telemedicine has been touted as a potentially groundbreaking innovation which could benefit providers (lowering administrative costs, reducing barriers to relocating), patients (lowering the cost of care, increasing access, improving health outcomes), and payers (exerting downward price pressure on providers).  While the extent of these benefits is disputed, telemedicine has had success in several areas where it has been promoted.

A Better Path Forward

For years, various organizations have advanced proposals for relaxing the regulation of telemedicine and making it easier for physicians to practice across state borders.  For example, the Federation of State Medical Boards (FSMB) has endorsed and taken steps toward implementing a system of “expedited endorsement,” which offers qualifying doctors a simpler and more standardized licensure application process, but which still requires doctors to obtain a separate license for each state.

The Center for American Progress recommends that, short of the federal government implementing a single national licensing scheme, states should go further by adopting mutual recognition agreements in which they honor each other’s physician licenses (as they now do, for example, with driver’s licenses). Mutual recognition has already been adopted in Europe and Australia and has been successfully utilized by the Veterans Administration, the U.S. military, and the Public Health Service.  In addition, twenty-four states have signed on to a similar agreement for registered nurses and licensed practical/vocational nurses, called the Nurse Licensure Compact.

To spur action and help defray the costs associated with implementation, the federal government should encourage states to adopt mutual recognition agreements for physicians.  For instance, as noted above, the Center for Medicare and Medicaid Innovation (CMMI) could create an Innovation Model to pilot the use of telemedicine to provide access to underserved communities by offering funding to states that sign mutual recognition agreements. Because similarly complex and burdensome licensing systems also deter advanced practice registered nurses (APRNs) from providing needed health services across state lines, CMMI should consider including incentives in the innovation model for states that include APRNs in their mutual recognition agreements.

Proponents of the current system may object that adopting mutual recognition would compromise patient safety or reduce the revenues that states derive from licensure fees.  Yet because standards for physician treatment, training, and testing already apply nationwide, requiring physicians to obtain separate licenses for each state in which they practice confers little additional protection on patients.  Mutual recognition could actually be designed in such a way as to raise overall standards, for example by requiring that participating states conduct physician background checks.  Similarly, states could offset potential lost revenue by increasing fees for multi-state licenses.

The reality is that state medical licensure is a vestigial system that imposes significant costs on society without furnishing any kind of commensurate benefit.  We can and should do more to address this problem.

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A Management Tool I Learned While Skiing

By brianascher

The team members all seemed this happy

The other weekend while enjoying some rare snow this season, in Utah, I had the chance to listen to Bob Wheaton the President of Deer Valley Resort Company give a talk about his management techniques.  Bob started his career at Deer Valley as a ski instructor in 1981 and worked his way up through a variety of positions.  He came across as a humble, straight shooting leader, and many of the techniques he mentioned were what you would expect from a modern business leader.  He makes sure to hit the slopes daily to ask customers and employees how things are going.  He has weekly stand-up meetings with his senior executive direct reports to synch up on operational issues.  He sends regular broadcasts to all of Deer Valley Resort Co.’s roughly 2,800 employees and he routinely holds open office hours.  One tool, however, struck me as relatively unique and powerful even though it is quite simple.  It is a weekly meeting Bob calls the Managers Meeting.

This meeting is for all of his direct reports’ direct reports, about 60 managers in all.  Interestingly, Bob’s own direct reports are not there, so the middle managers are free from having their own bosses in the room.  This serves to remove inhibitions about upsetting or upstaging your supervisor.  The minutes of these meetings, however, are carefully transcribed and distributed to ALL company employees so the senior leaders are not in the dark or suspicious about what occurred in the meeting.  The meeting is also large enough that it would be inappropriate and self-destructive  to air personal grievances about one’s boss.  It does, however, give middle managers a chance to be heard by the President in their own voice on a routine basis, and hear directly from the top rather than always through the filter of their supervisor.  The fact that the meeting is held weekly means that issues get dealt with promptly and the frequency keeps Bob in touch with operational details he otherwise might not be exposed to.  The weekly cadence means they get past the high level and into tangible and actionable topics.  It struck me as an elegantly balanced yin-yang leadership method that is both effective and efficient, and would probably work in many other industries.  I can say that the level of professionalism and smiling attitude of the Dear Valley team feels palpably different than most other resorts, and I suspect Bob’s leadership, and this particular tool, play a big part in that.

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Goldilocks and the 3 SaaS Go-To-Markets Models

By brianascher

Software as a Service (SaaS) is having its moment.  Customers, entrepreneurs, and capital markets are all enamored with the SaaS model– with good reason.  For customers, software as a service can yield dramatic reductions in total cost of ownership, quicker time to value, and pricing models which let you pay for only what you need and as you go versus all up-front.  For entrepreneurs, the recurring nature of subscription pricing gives more forward revenue and cash flow visibility, enables new customer acquisition models (such as Freemium), and the single code base for all customers is significantly easier to support than custom installs on-premise or supporting multiple generations of packaged software releases (and the Operating  Systems they run on.)  Investors love the predictable revenue, high margins and high growth rates.  This love affair with the SaaS model is likely to continue for a very long time. The vast majority of business software is still custom and/or on-premise license based, so there is more than a decade of disruption and growth ahead.

When we dive one fathom deeper into the SaaS model, however, we quickly discover that there is not one single model but at least three very distinct Go-To-Market archetypes.  At one end of the spectrum are the high-volume, low priced offerings such as Dropbox, Evernote, and Cloudflare that often deploy Freemium models, providing value to millions of individual users at no charge and converting some small percentage of them to premium paid accounts.    Workgroup collaboration and social/viral features are often built in to these products to help turbo-charge organic growth and online acquisition characterized by self-service signup and setup.  There are many entrepreneurs and investors who believe the whole point of SaaS is to get away from expensive direct selling in favor of these “self-service” models.  As an example, I was recently asked by an entrepreneur if I was in the “pro-sales or anti-sales camp.”  I am pretty sure they were referring to the need for salespeople, not sales themselves.  For the record, I like sales very much.

At the opposite end of the spectrum are sophisticated enterprise offerings such as Workday, Veeva and Castlight Health that are used by large enterprises and can justify pricing of millions of dollar per year.  There solutions are usually sold by experienced field sales teams, skilled in solution selling and navigating long and complex sales cycles.  These products are feature rich in terms of end-user capabilities but also in terms of security, administration and ability to integrate with legacy systems.

In the middle are solutions that usually charge tens of thousands of dollars to low hundreds of thousands per year and are sold largely over the phone by an inside sales team and can be reasonably configurable.  Customers may be medium sized companies or departments or business units of larger companies.  Examples of this model are Salesforce, Netsuite, Hubspot, and Smartling.

So which of these three models are best?  Is there one “just right” answer as there was for Goldilocks?  Or do we take the Three Bears perspective that as long as you line up the size of the chair, temperature of the porridge and firmness of the bed with the needs of your target market, all three models can be equally successful.   Clearly the latter, as one can point to several highly successful billion dollar market cap SaaS providers deploying each of the three models.  The key is to line up product/market fit, sales and support, and price in a consistent and appropriate fashion.

It should be noted that it is possible to expand across models over time, such as Salesforce.com who both sells over the phone to mid-market customers and also deploys a field sales teams to sell bigger deals to large enterprises.  Another example is Box.com which can be used by individuals, small teams, and large enterprises with pricing, feature sets and support options appropriate to each tier.

But what happens when the product, Go-To-Market strategy, and price are misaligned?  Here are the most common mistakes we tend to see:

Market too small or product too narrow for Freemium: Free is a very compelling price, especially when trying to entice consumers to try something new, and this model can certainly lead to lots of users relatively quickly.  However, employing this model in too small a market or with a product that lacks broad appeal faces the problem of there not being enough “top of funnel” free users from which some single digit percentage (typically) will convert to paying users to grow a sustainable business.  In B2B markets free can be a red herring as there ought to be enough ROI (return on investment) enjoyed by customers using your product, such that they will happily pay at least some minimal monthly payment.  Those business customers that don’t see such value likely won’t remain engaged over the long term as free users anyway.  Switching to a paid-only offering, perhaps with a brief free trial period or money back guarantee, can be an accelerant to SaaS companies if they make the change early enough to avoid the messiness of taking away a free service from your early adopters.  Some interesting case studies of SaaS offerings that saw their businesses grow rapidly when they dropped Freemium can be found here and here.  Even large SaaS companies in big horizontal markets such as DocuSign and 37Signals have greatly downplayed their free versions over time, in some cases removing them from the pricing pages of their websites, though customers can still find these free options offered if you search a little.

Underpowered and underpriced for large enterprise: We sometimes see impressive Fortune 500 logos on a customer list only to discover that the price points and deployments are quite modest.  These customers were acquired via heroic in-person selling efforts by the Founders and below market price points for non-strategic use cases.  The hope is usually  that this will catalyze “land and expand” proliferation, but unfortunately oftentimes the product is not sophisticated enough to deploy enterprise-wide or the sales team is incapable of selling at a price point that can ultimately sustain field sales efforts or a product roadmap necessary to serve large enterprise accounts.   While these “lighthouse” accounts are meant to serve as references upon which future inside sales efforts can draw credibility, the fundamental problem space can sometimes be too complex for effective phone sales to customers of any sizeAria Systems is a SaaS subscription billing provider that serves large enterprises and has found that to truly handle the needs of core business units within Fortune 500 customers requires a field sales team, sophisticated product feature sets, high touch support, and price points that can sustain such service levels.  Aria has left the opposite end of the market, serving small developers with an inexpensive and simple online billing service, to competitors that are better tuned to the broad low-end of the market and cannot compete with Aria for the narrower high-end of the market.

Overbuilding for long tail markets:  The opposite mistake from that just mentioned is trying to serve long tail markets with a product too complex and expensive for widespread appeal, leaving oneself vulnerable to much simpler, cheaper, easier to use products.  This is particularly true when marketing to developers where “cheap and cheerful” is more than adequate for most applications.  Stripe and Twilio have done a nice job of providing appropriately simple developer-centric solutions at the low ends of their respective markets, payments and voice/messaging services, stealing this opportunity from incumbent providers who were too expensive, too complicated, and too hard to do business with.

Too many flavors all at once: While true that established vendors like Cornerstore OnDemand and Concur can serve the spectrum from small business up to global enterprise, generally young startups lack the resources to serve multiple audiences at once.  Those that allow themselves to be pulled thin in multiple directions find they serve no segment particularly well and have cost structures that are unsustainable.  Better to nail one of the three basic models and let the market pull you emphatically up or down market as a means of successful expansion.   When are you ready to broaden?

My advice is to wait until you are sure that you are sufficiently up the Sales Learning Curve, that you are sure you can recoup your paid sales and marketing expenses in an appropriately short timeframe (usually a year or less) given your particular customer churn rate, margin profile and price points.  Once you are happy with your Customer Acquisition Costs (CAC) Payback  period, you can respond to market signals pulling you up or down market.  Likewise, I recommend making sure that your product is optimized for easy onboarding and support of the mid-market before adding sophisticated enterprise features to go upmarket or your development team may be overwhelmed and your user experience compromised.  In general there seem to be more examples of moving up market than down market.  It is fundamentally easier to add features and sales people to serve more sophisticated needs up market than to make a product simpler and master indirect channels to go down market.   When cooking porridge you can add salt, sugar and spice, but is much harder to take them away.

It’s a great time to build, buy or invest in Software-as-a-Service.  Recognizing that there are multiple, distinct Go-To-Market models, each equally valid in the right circumstances, enables a clear-eyed and internally consistent strategy that avoids the mistakes describe above and captures the high level benefits of SaaS.

Slide1Note:  Companies in italics are Venrock portfolio companies.  

 

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Hot Spots in Health IT

By bkocher2013

This article was first published in VentureBeat.

Health IT is hot…and it’s about time.  Investors and entrepreneurs alike are flocking to the sector that once seemed insurmountable, yet is desperately in need of imagination, creation, and disruption.

Digital health funding is up 12% in the first half of the year¹and the momentum continues. With so many opportunities for entrepreneurs to disrupt the status quo this growth is warranted, but it is not an easy space to navigate. Investors are working hard to understand the dynamics, drivers, parties and roadblocks so they can make informed investment decisions. Venrock has been investing in the space for over a decade, but understanding the combined dynamics of healthcare and technology is very new to most.

The mass influx of entrepreneurs to the space means there is a wealth of companies for venture capitalists to invest in, but not all of these companies are poised for success. At Venrock, we have identified three areas that we find particularly exciting, from an investor perspective:

  1. Improving market efficiency
  2. Improving labor productivity
  3. Substantially improving clinical outcomes or patient experience

We think there’s a real opportunity for new entrants to build great businesses tackling these challenges.  Common across each is the ability for startups to rapidly demonstrate ROI for customers and, in many cases, the ability to create a positive network effect. In addition, each capitalizes on the three factors driving change:  policy changes, demand growth, and cost pressures.

 Translating Opportunities into Businesses

 Improving market efficiency

Healthcare markets are highly inefficient, and a fundamental problem is the lack of useful data transparency.  Without knowing what care will cost and what outcomes and experiences are delivered, it is impossible for patients to act as rational consumers no matter how much cost sharing they are asked to manage. Consumers have been left in the dark.

Today, the Health Data Initiative and health IT startup pioneers have been breaking down the barriers to provide price transparency. This is crucial since:

  • Commercial prices vary for every service in every market by more than 300%
  • Price and quality and experience are rarely correlated to prices

Therefore, for almost everything, it is possible to both get higher quality and pay lower prices.  Not surprisingly, when patients are empowered with this knowledge, they move their care to higher value providers.  As more and more commercial patients gain access to this data, we expect prices to fall and value to be correlated to price as it is in other, more competitive markets.

Data and data transparency are rocket fuel for a promising ecosystem of start-ups and high growth companies, including Castlight Health, iTriage, Kyruus, as well as New York City’s flagship healthcare start-up ZocDoc.

Improving labor productivity

Shockingly, unlike the rest of the US economy, healthcare labor productivity has declined by 60 basis points each year over the last 20 years while other sectors have large gains.² This is illustrated by the fact that non-clinical labor has grown by 50% over this same period. Today, for every doctor there are 16 other healthcare workers, and more than half of these are non-clinical workers.³ This equates to about $850,000 of labor cost per doctor.  Even more surprising is that the majority of these workers are administrators.  This is exactly the opposite of what you would hope for and expect.  In other industries, the proportion of administrative labor to productive labor compresses over time with productivity gains. This is how and why prices fall and products improve in other sectors.

We think how we use labor can be reimagined everywhere in healthcare. Companies like Vocera, Awarepoint, AirStrip, and Sotera Wireless are making hospitals more efficient, and others, like athenahealth are making doctor offices more productive by taking the pain out of the reimbursement process.

Substantially improving clinical outcomes and patient experience

The current care system is not designed to achieve consistently successful clinical outcomes for the patients when the outcomes are averting complications, preventing diseases, and keeping people working, playing, and exercising as well as they were when they were young.

This is illustrated starkly by how we manage high blood pressure:

  • We diagnose only 50% of patients
  • Of those diagnosed, only 50% of them fill their prescriptions for medication
  • Of those patients, only 50% of them achieve blood pressure control
  • Of the other 50% who take their medications, more then 90% could be controlled if doctors adjusted the dosing and medications, but this rarely occurs
  • Overall, we control only about 15% of all high blood pressure patients.  And this is for a disease where we have low cost drugs that work well

Opportunities to improve clinical outcomes exist for every other chronic condition too.  Over the next decade, more lives will be saved if we focus as much effort on redesigning care delivery and patient engagement, as we do investing in new treatments.  Start-ups like Proteus and RxAnte offer interesting new approaches to improve adherence and deliver better outcomes and cost savings.  We think that new care delivery models to fully deliver on the clinical results possible with existing treatments, through better processes, shared financial risk, and product designs that warranty and guarantee outcomes.

Fortunately, new primary care models like One Medical and ChenMed / JenCare are growing fast and delivering better care, far better patient experiences, and lower costs.  The recent acquisitions of CareMore and Healthcare Partners offer promising signs that these two models will gain greater scale to help more patients get much better care. 

Bottom Line

We think healthcare is getting better, sooner in America. We see cost growth slowing, an influx of talented entrepreneurs, large incumbents demonstrating receptivity to partnering with growth companies and large employers beginning to flex their market power.  The intersection of healthcare and technology presents a tremendous opportunity for entrepreneurs and investors alike.

But… this sector is not for the faint of heart. It is complex, evolving and increasingly crowded. Fortunately for us, entrepreneurs love a challenge.

(Disclosure: Awarepoint, Castlight Health, Kyruus and Vocera are Venrock portfolio companies.)


¹ RockHealth Digital Health Mid-Year Funding Report

² Kocher, R and N. Sahni. 2011.  Rethinking Healthcare Labor.  NEJM.  365:1370-1372

³ Kocher, R.   2013.  The Downsides of Healthcare Job Growth.  HBR Bloghttp://blogs.hbr.org/2013/09/the-downside-of-health-care-job-growth/

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The Downside of Health Care Job Growth

By bkocher2013

This article was first published in the Harvard Business Review.

While the growth of health care costs has slowed over the past few years, lowering costs over the long term will depend on improving health care labor productivity. Over half of the $2.6 trillion spent on health care in the United States in 2010 was wages for health care workers, and labor productivity has historically worsened at a rate of 0.6% per year. Simultaneously, the individual mandate, subsidized coverage, and Medicaid expansion in the Affordable Care Act (ACA), along with an aging population, will drive up the demand for health care. Reducing the rate at which health care costs grow, and the proportion of U. S. gross domestic product and public sector budgets that are consumed by health care over the long term, therefore, will require either increasing labor productivity or substantially lowering workforce salaries. The early signs are worrisome. With health care viewed as a jobs source and jobs being added faster than demand is growing, we appear to be on a path toward more workers and lower salaries, not necessarily more productivity, unless something changes dramatically.

Using data from the Bureau of Labor Statistics (BLS) and the American Medical Association, my colleagues and I found that from 1990 to 2012, the number of workers in the U.S. health system grew by nearly 75%. Nearly 95% of this growth was in non-doctor workers, and the ratio of doctors to non-doctor workers shifted from 1:14 to 1:16. On the basis of BLS median wages, this equates to $823,000 of labor cost per doctor. Demand and supply are not growing in tandem: from 2002 to 2012, inpatient days per capita decreased by 12% while the workforce in hospitals grew by 11%. This misalignment underlies some of the productivity decline we have observed in health care. Fortunately, we anticipate demand for health care to grow in 2014, so to the extent that jobs are not added, productivity gains are possible. Unfortunately, health care as an industry continues hiring far faster than demand is growing, adding 119,000 new workers in the first half of 2013, for example, with little increase in patient volume.

So, what are all these people doing? Today, for every doctor, only 6 of the 16 non-doctor workers have clinical roles, including registered nurses, allied health professionals, aides, care coordinators, and medical assistants. Surprisingly, 10 of the 16 non-doctor workers are purely administrative and management staff, receptionists and information clerks, and office clerks. The problem with all of the non-doctor labor is that most of it is not primarily associated with delivering better patient outcomes or lowering costs. Despite all this additional labor, the most meaningful difference in quality over the past 10 years is the recent reduction in 30-day hospital readmissions from an average of 19% to 17.8%, which arguably was driven by penalties imposed by the ACA and not by organic improvements in care models. While one could interpret the expansion of non-doctor clinical labor as a source of leverage for doctors, the number of patients doctors are seeing and whose care they are managing hasn’t increased.

This trend is troubling as we enter a phase of transformation in health care. Today, more than 60% of labor is nonclinical and is fragmented across various provider organizations, payer systems, and delivery models. It is highly unlikely that we can reorganize these jobs in a way that meaningfully improves productivity. This difficulty is compounded by regulations that limit the corporate practice of medicine, Stark laws, state nurse and physician assistant scope-of-practice and licensure rules, and billing requirements that physicians physically see patients to receive full reimbursement. Reducing regulatory hurdles represents a substantial opportunity to improve productivity by reducing fragmentation of clinical labor and delegating care to lower-cost qualified providers, but the most immediate goal should be to eliminate many nonclinical jobs through standardizing and simplifying revenue-cycle processes, credentialing, supply chains, regulatory compliance, and information technology systems, which will then allow us to reengineer administrative systems.

On the clinical side, care delivery must be designed so that the 6 clinical workers per doctor substantially contribute to a patient’s care. Today, too much clinical labor is diverted from direct patient care to lower-than-license roles such as payer utilization-management roles, staffing of underutilized diagnostic centers, administrative roles, and uncoordinated care activities. In practice, little of the existing clinical labor is actually organized into patient-care teams, and few have clarity about what outcomes they are specifically working to achieve and who is responsible. Reorganizing clinical labor around direct patient care and creating unambiguous accountability for clinical outcomes together have the potential to substantially alleviate the predicted shortage of clinicians as coverage is expanded and to improve system-level productivity, outcomes, and patient experience.

Lessons can be learned from sectors such as manufacturing. Through a significant revolution, manufacturing was able to transition from direct labor to a more productive, efficient industry, and this happened over a century, from 1855 to 1975. In addition, both production and administrative labor decreased as processes were redesigned to become more reliable, error-free, and efficient. In health care, although, the optimal relationship among doctors, other clinical staff, and administrative labor is uncertain, it is certainly the case that there should not be more administrators than doctors and all other clinical labor combined. Rather, one would expect the ratio of nonproductive to productive labor to decline over time in health care as it has in all other productive sectors of the economy. We can also surmise that the improvement needed will take decades and must be sustained by economic incentives that are aligned with productivity far more strongly than they are today.

To reverse the decline in health care labor productivity, we must transform the system both on the supply and on the demand side. As Ari Hoffman and Ezekiel Emanuel argue in the Journal of the American Medical Association, reengineering is very different from implementing new technologies. For example, new innovative reimbursement models aim to reward providers for lowering health care costs on the supply side. Consider, for example, the sorts of models being tested in Arkansas (where health care providers are given a fixed budget and a set of quality measures to achieve for an entire course of care from diagnosis to recovery) and Pioneer accountable care organizations (where providers are paid a lump sum and given a set of quality goals for year of care for a patient). With these payment models, providers make more money when they invent more cost effective approaches to delivering high-quality care. Simultaneously, more transparency in price and quality data can direct patients to more productive settings, intensifying the incentive for providers to improve on the demand side.

In the interim, workers in the health system will need to worry about their wages as more jobs are added — unless care and costs are substantially reengineered in the systems in which they work. Health care practitioners should take pride in delivering consistent and excellent clinical outcomes with fewer labor hours and lower total costs, just as leaders have in other industries. Moreover, health care leaders should also focus on replicating other sectors of the economy when it comes to reducing nonproductive labor. Finally, health care leaders and practitioners should seek to remove labor that is not directly contributing to better outcomes or delivering a hard return on investment through reductions in the cost of care. It is conceivable that shared services can emerge for processes such as credentialing, compliance, and data management and that, along with ACA-mandated revenue-cycle simplification they can substantially reduce administrative labor. In a health system where costs, out of fiscal necessity, grow more slowly, it is far more desirable to reduce nonproductive administrative labor than to reduce clinician wages.

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10 Rules For Disruptors In The Financial Services Industry

By brianascher

Having worked in the FinTech space many years ago, invested in the space for over a decade, and met with hundreds of talented teams in this area, I have observed the following ten traits among the most successful companies:

Rule #1: Unlock Economic Value   Most traditional financial service firms have invested heavily in branch networks that create expensive cost structures which result in higher prices to customers. Mass-marketing channels and poor customer segmentation also result in higher costs and marketing expenses which translate to higher prices. Online-only financial services can unlock significant economic value and pass this along to consumers. Lending Club offers borrowers better rates and more credit than they can get from traditional banks, while offering lenders better rates of return than they can get from savings accounts or CDs. SoFi is disrupting the world of student loans with better rates to student borrowers and superior returns to alumni lenders relative to comparable fixed income investment opportunities.

Rule #2: Champion the Consumer   Consumers are disenchanted and distrustful of existing financial institutions. Let’s take this historic opportunity to champion their interests and build brands deserving of their love. The team at Simple has envisioned a new online banking experience that puts the consumer first via transparency, simplicity and accessibility. Its blog reads like a manifesto for consumer-friendly financial service delivery. LearnVest is another company on a consumer-first mission to “empower people everywhere to take control of their money.” Its low-cost pricing model is clear and free of conflicts of interest that are rampant in the financial sector.  There is plenty of margin to be made in championing the consumer. The speed at which consumer sentiment spreads online these days creates an opportunity to become the Zappos or Virgin Airlines of financial services in relatively short order.

Rule #3: Serve The Underserved  In my last post explaining why the FinTech revolution is only just getting started, I described how the global credit crunch left whole segments of consumers and small businesses abandoned.  Some segments at the bottom of the economic ladder have never really been served by traditional FIs in the first place. Greendot was one of the pioneers of the reloadable prepaid cards bringing the convenience of card-based paying online and offline to those who lacked access to credit cards or even bank accounts. Boom Financial is providing mobile to mobile international money transfer at unprecedented low rates and ultra-convenience from the US to poorly served markets across Latin America and the Caribbean, and eventually globally.   No need for a bank account, a computer, or even a trip downtown to dodgy money transfer agent locations.

Rule #4: Remember the “Service” in Financial Service  Just because you are building an online financial service does not mean that your service is only delivered by computer servers.  When dealing with money matters many people want to speak to a live person from time to time or at least have this as an option just in case. Personal Capital delivers a high tech and high touch wealth management service via powerful financial aggregation and self-service analysis tools, but also provides live financial advisors for clients who want help in constructing and maintaining a diversified and balanced portfolio. These advisors are reachable via phone, email, or Facetime video chat.  As a rule of thumb every FinTech company should provide a toll-free phone number no more than one click from your homepage.

Rule #5: Put a Face on It  Chuck SchwabKen FisherJohn BogleRic Edelman.  These stock market titans may have very different investment styles but they knew that consumers want to see the person to whom they are entrusting their money and as a result they each plastered their face and viewpoints all over their marketing materials, websites, and prolific publications. If your startup wants consumers to entrust you with their nest eggs, you ought to be willing to show your face too. This means full bios of the management team, with pictures, and clear location for your company as well as numerous ways to be contacted. It’s also a good idea to make sure that your management team have detailed LinkedIn profiles and that a Google search for any of them will yield results that would comfort a consumer.

Rule #6: Be a Financial Institution, not a vendor  The real money in FinTech isn’t in generating leads for FIs or displaying ads for them. That can be a nice business, but the real margin is in making loans, investing assets, insuring assets, or settling transactions. In just a few years Wonga has a become a massive online lender in the UK by instantly underwriting and dynamically pricing short term loans. Financial Engines and a new crop of online investment advisors make and manage investment recommendations for their clients.  You do not need to become a chartered bank or an investment custodian as there are plenty of partners that can provide this behind the scenes, but if you can brave the regulatory complexity and develop the technology and skills to underwrite and/or advise exceptionally well, the opportunities are huge.

Rule #7: Use Technology Creatively  The incumbents have scale, brand history, brick and mortar presence, and armies of lawyers and lobbyists. If FinTech startups are going to disrupt the incumbents, you will need to work magic with your technology. How clever of Square to use the humble but ubiquitous audio port on smart phones to transmit data from their swipe dongle and for using GPS and the camera/photo album to make everyone feel like a familiar local when using Square Wallet.  MetroMile is a FinTech revolutionary disrupting the auto insurance market by offering pay per mile insurance so that low mileage drivers do not overpay and subsidize high mileage drives who tend to have more claims.  They do this via a GPS enabled device that plugs into your car’s OBD-II diagnostic port and transmits data via cellular data networks in real-time.  Start-ups playing in the Bitcoin ecosystem such as Coinbase and BitPay are certainly at the vanguard of creative use of technology and are tapping in to the mistrust of central banks and fiat currencies felt by a growing number citizens around the world who trust open technologies more than they do governments and banks.

Rule #8: Create Big Data Learning Loops  Of all the technologies that will disrupt financial services, Big Data is likely the most powerful. There has never been more data available about consumers and their money, and incumbent algorithms like Fair Isaac’s FICO scores leave most of these gold nuggets lying on the ground. Today’s technology entrepreneurs like those at BillfloatZestCash, and Billguard are bringing Google-like data processing technologies and online financial and social data to underwrite, advise and transact in a much smarter way. Once these companies reach enough scale such that their algorithms can learn and improve based on the results of their own past decisions, a very powerful network effect kicks in that makes them tough to catch by copycats who lack the scale and history.

Rule #9:  Beware the Tactical vs. Strategic Conundrum  One challenge when it comes to financial services is that the truly strategic and important financial decisions that will impact a person’s financial life in the long run, such as savings rate, investment diversification and asset allocation, tend to be activities that are infrequent or easily ignored.  Activities that are frequent and cannot be ignored, like paying the bills or filing tax returns, tend to be less strategic and have inherently less margin in them for FinTech providers. Real thought needs to go into how you can provide strategic, life changing services wrapped in an experience that enables you to stay top of mind with consumers so that you are the chosen one when such decisions get made. Likewise, if you provide a low margin but high frequency services like payments you must find a way to retain customers for long enough to pay multiples of your customer acquisition cost.

Rule #10: Make it Beautiful, Take it To Go  A medical Explanation of Benefit is possibly the only statement uglier and more obtuse than a typical financial statement.  Incumbent FI websites are not much better and over the past ten years many large FIs have heavily prioritized expansion of their branch networks over innovating and improving their online presence.  As a FinTech startups  you have the golden opportunity to redefine design and user experience around money matters and daresay make it fun for consumers to interact with their finances.  Mint really set the standard when it comes to user experience and beautiful design, while PageOnce pioneered mobile financial account aggregation and bill payment.  To deliver a world class consumer finance experience online today one needs to offer a product that looks, feels, and functions world class across web, mobile and tablet.

There has never been a better time to be a FinTech revolutionary, and hopefully these rules for revolutionaries provide some actionable insights for those seeking to make money in the money business.

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Why The Financial Technology Revolution Is Only Just Getting Started

By brianascher

OccupyWallSt

The Occupy Wall Street protestors are gone (for now), but the real revolution against banking is still taking place at breathtaking speed, thanks to a new breed of technology entrepreneurs. The financial services industry, long protected by complex regulations, high barriers to entry and economies of scale, is ripe for disruption. Here’s my take on the macro environment, how consumer attitudes are changing and why technology and available talent make now the best time to challenge the status quo.

Global credit markets clamped shut in late 2008 and froze entire sectors of consumer credit. Mortgages became less available, millions of credit cards were revoked, lines of credit dried up, and banks essentially abandoned the small business and student loan markets. This left tens of millions of households in the position of “underbanked” (have jobs and bank accounts, but little to no credit) and the “unbanked” (no traditional banking relationship at all.)  This credit crunch fueled demand for startups like WongaBillfloat, and OnDeck Capital to establish themselves and grow rapidly, and the reloadable prepaid card market pioneered by GreenDot and NetSpend soared. While credit has eased for certain segments in certain markets, there are still big opportunities to fill credit voids, especially at the lower end of the market.

The last few years have seen significant changes in banking, payment, tax, investment and financial disclosure regulations. While complex legislation such as the Dodd–Frank Wall Street Reform and Consumer Protection Act is hardly intended to unleash entrepreneurial innovation, and virtually no single person can comprehend it in entirety, it does contain hundreds of provisions that restrict incumbent business practices, and typically when there is change and complexity there are new opportunities for those that can move quickest and are least encumbered by legacy. Other regulations such as the Check 21 Act which paved the way for paperless remote deposit of checks, and the JOBS Act crowd funding provision are examples of technologically and entrepreneurially progressive laws that create opportunities for entrepreneurs and tech companies. Inspired by the success of pioneers such as microfinance site Kiva and crowd funding sites like KickStarter and indiegogo, I expect that once the JOBS Act is fully enacted and allows for equity investments by unaccredited investors we will see a surge of specialized crowd funding sites with great positive impact on deserving individuals and new ventures.

Within a few weeks of Occupy Wall Street in Sept 2011, protests had spread to over 600 U.S. communities (Occupy Maui anyone?), hundreds of international cities (did I see you at Occupy Ulaanbaatar Mongolia?), and every continent except Antarctica. Regardless of what you think of such protests, it is safe to say that as a whole we are more skeptical and distrustful of financial institutions than virtually any other industry. Clay Shirky’s term “confuseopoly”, in which incumbent institutions overload consumers with information and (sometimes intentional) complexity in order to make it hard for them to truly understand costs and make informed decisions, is unfortunately a very apt term for the traditional financial services industry. There is thus a crying need for new service providers who truly champion consumers’ best interests and create brands based on transparency, fairness, and doing right by their customers.  Going one step further, peer-to-peer models and online lending circles enable the traditional practice of individuals helping one another without a traditional bank in the middle, but with a technology enabled matchmaker in the middle.  Perhaps the ultimate example of bypassing the mistrusted incumbents is the recent acceleration in the use of Bitcoin, a digital currency not controlled by any nation or central bank but by servers and open source cryptograpy.

As a Product Manager for Quicken back in 1995 I remember sweating through focus groups with consumers shaking with fear at the notion of online banking. Today it is second nature to view our bank balances or transfer funds on our smartphone while standing in line for a latte.  And while Blippy may have found the outer limit of our willingness to share personal financial data (for now), there is no doubt that “social” will continue to impact financial services, as evidenced by social investing companies eToro and Covestor. You can bet it will be startups that innovate around social and the incumbents who mock, then dismiss, then grope to catch up by imitating.

I think we will look back in 20 years and view the smartphone as a technical innovation on par with the jet plane, antibiotics, container shipping, and the microprocessor.  While the ever improving processing power and always-on broadband connectivity of the smartphone are the core assets, it has been interesting to see such widespread capabilities as the camera, GPS, and even audio jack used as hooks for new FinTech solutions.  While there are over a billion smartphones worldwide, the ubiquity of SMS service on virtually all mobile phones means that billions more citizens have mobile access to financial services 24×7 no matter how far they live from physical branches.  Cloud and Big Data processing capabilities are further fueling innovation in financial technology typified by the myriad startups eschewing FICO scores in favor of new proprietary scoring algorithms that leverage the exponential growth in data available to forecast credit worthiness.

Financial institutions have long employed armies of developers to maintain their complex back office systems but until recently the majority of these developers worked in programming languages such as COBOL which have little applicability to startups.  While COBOL has not gone away at the banks, more and more of the technical staff spend their time programming new features and interfaces in modern languages and web application frameworks that provide highly applicable and transferable skills to startups only too happy to hire them for their technical training and domain experience.  In addition, successful FinTech companies from the early days of the internet such as Intuit and PayPal have graduated experienced leaders who have gone on to start or play pivotal roles in the next generation of FinTech startups such as SquareXoom, Kiva, Bill.comPayCycleOutRight, Billfloat, and Personal Capital.

These are just some of the reasons now is a great time for financial technology startups and why venture capital is flooding in to the sector.  In my next post I will offer some suggestions for FinTech revolutionaries.

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Will The Readmission Rate Penalties Drive Hospital Behavior Changes?

By bkocher2013

This post first appeared in the Health Affairs Blog.

Since the development of the metric in 1984 by Anderson and Steinberg, inpatient hospital readmission rates have been used as a marker for hospital quality.  A good deal of attention is now being paid to the new readmission rate penalties in the Affordable Care Act (ACA).

While the penalties have garnered significant attention, it is unknown whether they will materially change hospital behavior.  In this post, after reviewing the mechanics of the penalties, we take a close look at how they are likely to affect hospital incentives.  We also suggest some refinements to the penalties that could help achieve the aim of reducing preventable readmissions.

How The Penalties Work

The readmission penalty in the ACA is based on readmissions for three conditions: Acute Myocardial Infarction (AMI), Heart Failure, and Community Acquired Pneumonia.  For each hospital, the Centers for Medicare and Medicaid Services (CMS) calculates the risk-adjusted actual and expected readmission rates for each of these conditions.  Risk-adjustment variables include demographic, disease-specific, and comorbidity factors.  The excess readmission ratio is the actual rate divided by the expected rate.

Simplifying a little, the aggregate payments for excess readmissions is summed for all three conditions over the past three years, then divided by total base operating DRG payments for the past three years to calculate the penalty percentage.  Base operating DRG payments are IPPS payment less DSH, IME and outliers except for new technology.  The total penalty is the penalty percentage times total base operating DRG payments for that fiscal year, provided that the total amount does not exceed 1 percent of base operating DRG payments in fiscal year 2013, a cap that increases to 3 percent in fiscal year 2015.

According to calculations by CMS, the overall penalty in 2013 is likely to be 0.3 percent of inpatient reimbursements, or $280 million, with 8.8 percent of hospitals receiving the maximum penalty.

Changes in hospital performance are predicated on these values being significant for hospitals.  The natural benchmark to the penalties that providers face is the amount that hospitals earn from potentially avoidable readmissions.  Readmissions in 2010 were estimated by CMS to cost Medicare $17.5 billion.  Studies suggest the avoidable portion of total readmissions ranges from 5 percent to 79 percent, with the median being 27.1 percent.

Multiplying the excess readmission rate by the average hospital inpatient EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 2 percent suggests that the current profit from readmissions above the avoidable portion is about $95 million.  Thus, the penalties appear to be greater than the profits.  This will be increasingly true in the future as Medicare moves to more bundled payments for acute care or global payments on a patient basis.  In such a payment system, there will be no profits for readmission, so the only financial consequence for the hospital will be the penalty.

Of course, behavior change is not binary — changes will happen along a spectrum.  Consider the fixed and variable costs for a hospital to address readmission rates.  There are many fixed costs in reducing readmissions, including the need for electronic medical records (EMR), adding non-fungible labor for case management and discharge planning, and training employees in discharge planning.  If the penalty on the hospital is high enough, the fixed cost inertia can be overcome.  Related, legislation is helping to reduce the size of these fixed costs by incentivizing investment in EMRs.

For a hospital that has overcome the fixed costs, there are also variable costs necessary for reducing readmissions.  These may include more nursing time per admission, additional supplies and post-discharge medications, and care coordination costs.  Variable costs are potentially offset if beds are filled by another admission that generates higher margins.

Refining The Penalties

The interplay of the fixed and variable cost factors suggests that movement for hospitals will not start until the fixed cost is overcome, but once that threshold is surpassed, those readmissions most easily prevented will be taken out of the system.  Rapid downward movement will then slow, as the net benefit shrinks for each patient.  These types of costs suggest a policy modification of the economic incentives in the future: a sliding scale based on the number of readmissions to make each additional readmission increasingly more expensive.

Another important component of the readmission calculation is risk adjustment.  Currently, the risk adjustment in the CMS penalty program includes only two demographic factors: age and gender.  Butstudies suggest that higher readmission rates are linked with race and location.  If we assume that lower-income populations face higher readmissions for reasons that are harder to prevent, the penalty will disproportionally affect hospitals that cannot realistically match their expected readmission rate.

To estimate the magnitude of this effect, we assumed that the readmission rate difference of 3.5 percentage points between minority and non-minority hospitals was purely structural.  If a hospital which would otherwise be at the national average faces this type of difference, the calculated penalty would be 18 percent of revenue for those admissions.  This would be inequitable and likely ineffective in reducing readmission rates, since it is targeting those readmissions that are unavoidable.

The extent to which hospitals reduce readmissions will depend on other factors as well.  The organizational structure of the hospital — for example, whether it is part of an Accountable Care Organization (ACO) and who leads the organization — could matter a great deal.  The fixed-cost base is much higher for hospital-owned ACOs than for physician-owned ACOs; parts of a hospital cannot be shut down, even if the bed is not filled.  For this reason, hospital-owned ACOs may be less focused on readmission rate reductions in the short run, but more focused over time as they make capital allocation decisions.

Public perception, through increased transparency by efforts like Hospital Compare, may also push hospitals to change behavior.  Studies show that hospitals have been shamed into improving mortality rates when they become measured.

In all, the new readmission penalty holds a good deal of promise.  But to maximize benefits to patients, cost savings, and rate of improvement, future refinements are needed to better align incentives and adjust for more patient characteristics.

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A Different Strategy for Seed Investing

By Bryan Roberts

Spray and pray…. Try before you buy… Foot in the door… Take your pick, these describe the dominant seed investment strategy today in Silicon Valley.  The start-up world’s current angst around the “Series A crunch” is in great contrast to my seed experience, where most efforts progress to further financings and several are on their way to being standout successes in the Venrock portfolio.

For me, seed investing is not a low cost, little-time-required option on the A round.  It is a big investment of time and effort in order to be intimately involved in the formative stages of a company, despite the fact that the dollars-in and percentage ownership don’t hit usual venture fund metrics. Since the commitment front-runs the money and ownership, it is something we only do when we are so compelled by the people and the idea that we “have” to jump in long before it makes “traditional” sense.  Our mission is to help in whatever way we can, in hopes of increasing the company’s speed, likelihood and scale of success.  It also allows us to emphasize our approach as long term, supportive, performance oriented company builders.  Let’s face it, money is cheap, but time and effort are really expensive – for both entrepreneurs and venture capitalists.

A “deep involvement” approach requires making far fewer commitments than most others who have embraced seed investing in recent years – whether angels or venture funds. I have done about one a year across a variety of the more capital efficient healthcare subsectors – healthcare IT, diagnostics, and services.  Castlight Health and Ariosa Diagnostics are among several recent examples that illustrate our approach.

In mid-2008, I partnered with Todd Park (x Athenahealth, now CTO of the U.S.) and then Gio Colella (x RelayHealth), both of whom Venrock had funded previously, to explore the opportunity to create a company at the intersection of web – healthcare – consumer.  We worked for six months on the project and, in early 2008, seeded and incubated Castlight Health.  In that initial round, we invested $333,000 and proceeded to build the company brick by brick, eventually investing $17 million for nearly 20% ownership.  Over the last four years, Venrock has devoted every possible resource and connection possible – countless strategy sessions, customer meetings, management recruiting, follow on investor introductions, and the Board now includes a second Venrock partner in Bob Kocher, who still spends more than a day a week with the team.  Today, Castlight has the opportunity to become a pivotal participant in the creation of a functional healthcare delivery market, improving care while saving billions of dollars.

Ariosa is a similar story, but one whose roots are found in an unsuccessful Venrock seed investment.  We lost $300,000 after nine months in a diagnostic start-up when the CEO, John Stuelpnagel (x Illumina, a Venrock investment), came to the Board with the message that we all had better things to do than continue to push that particular rock uphill.  Soon thereafter, in 2009, we seeded the combination of a terrific first time entrepreneur/CEO in Ken Song, then at Venrock, with John as Executive Chairman to tackle new approaches to prenatal molecular diagnostics.  Three years later they are leading the race to provide an entirely new and improved standard of care to expectant mothers – where they can confidently assess genetic abnormalities with no risk to the baby at ten weeks of pregnancy.

Success in venture investing is really hard to come by, and with seed investing even more so. No matter what the strategy, there will be failures and even more pivots before those few that succeed become great. That said, as with Castlight and Ariosa, when it works, it is awesome.  You can assist in a company’s formative stage; create close and productive relationships with entrepreneurs; as well as build your ownership over subsequent financings. Early help in the project typically leads the team to want to work with no one else but you – in essence, you have become part of the family.   This month I made my seed investment for 2012 – a stealth company, also in the healthcare IT space. I think these entrepreneurs would tell you that our track record as active participants in prior seeds, as described by those CEO’s, was the over-riding factor in their decision to work with Venrock. We will do our best not to disappoint them.

In the end, our, and every VC’s, goal is to create great returns for our LP’s. We believe that a targeted, time intensive approach to seed investing is orthogonal to others’ and increases the chance of creating great companies by affording them resources early on that they would not get in other seed models.   But it requires a leap of faith and trust between entrepreneur and VC – a leap we are eager to take.

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How Three Federal Initiatives Are Set To Transform U.S. Health Care

By bkocher2013

This post first appeared in Forbes.

The U.S. health care system today is fraught with wasteful spending that does not contribute to better outcomes for patients. The U.S. spends more on health care than any other country in the world on a per capita basis. We spend more on healthcare alone than the entire GDP of France, however average patient outcomes in the U.S. are on par with Cuba and Slovenia, in spite of newer hospitals and more varied technologies.

Three federal initiatives — the HITECH Act, the Health Data Initiative (HDI) and the Affordable Care Act (ACA) — are designed to improve clinical quality and the patient experience, and make health care more affordable. As a result of these changes, several trends are emerging, including movement toward outcome-based payments, higher labor productivity, decreased demand for hospital-based care and better, more efficient consumer markets.

Four major trends are driving these benefits for consumers and employers:

Outcome-based payments

As we move from paper-based to digital, we are able to change what patients buy, how payors pay, and how doctors are reimbursed for care. Outcome-based payments increase the importance of care coordination, so providers will need increased technological capabilities to share data, form care teams, and perform predictive modeling to figure out which patients are at higher risk. Consumers benefit greatly from these models because a doctor’s success will be contingent on their patients doing better and spending less money on unnecessary services. It will also lead to more convenience for patients because doctors will want to see them on nights and weekends rather than send patients to the emergency room or readmit them to hospitals. Emails will also not go unanswered when it is in the doctor’s interest to make sure patients know what to do.

Higher productivity

Astonishingly, healthcare has not been able to replicate the productivity gains of the broader U.S. economy over the last twenty years. As we age and expand coverage in an era where prices cannot consistently increase faster than GDP, health care providers will need to creatively address and improve labor productivity. Almost every other sector of the U.S. economy has improved labor productivity, achieved better value and, in some cases, reduced prices. Health care providers who develop more productive ways to deliver care should improve margins, gain market share and improve the competitiveness of their businesses. This is good for patients, payors, and providers as waste is eliminated and reliability improves.

Lower demand for hospitals

Even considering the nation’s aging demographic, most hospitals will continue to have excess capacity. As reimbursement systems increasingly reward cost efficiency and reductions in readmissions and complications, many markets may become over-bedded. Additionally, alternative, less expensive treatment settings should become more common, including urgent care centers, high intensity primary care and extensivist models, and home-based care models as remote monitoring is perfected and new therapies continue to shift care from inpatient to outpatient settings. Those patients left in hospitals will increasingly be limited to the most complex patients.

Better functioning markets

Millions of newly covered health care consumers will join the ever-increasing numbers who already have high cost-sharing health plans. Even in subsidized Silver-level Exchange plans consumers will have 30% cost sharing up to their out-of-pocket maximum if their incomes are about 350% of the federal poverty level. This group will be sensitive to differences in price and value, resulting in a more engaged patient consumer base and will cause the health plan and provider marketplaces to become more competitive. Patients will have access to more data and new applications to help them shop for health care based on price, quality, and convenience; hospitals may compete on outcomes and experiences; doctors will seek to differentiate their services and likely further specialize around particular conditions and types of patients they are expert in caring for.

Health care reform will also cause the roles of health plans, hospitals and doctors to evolve in several ways:

Health plans will offer a more rewarding member experience

Health plans are already responding to these trends by creating more engaging, consumer-centric ways to get people to care about, and improve, their health, such as sponsoring wellness programs and member education; developing their own health care delivery systems which offer unique member care experiences; and offering analytic support for providers to help them better achieve population health goals cost effectively.

Hospitals will have to compete on care outcomes and total value

In a health care system where consumers have easy access to information on hospital cost, quality and patient experience, it may be difficult for hospitals to compete on factors such as the newness of the facility or the breadth of services offered and may instead need to compete on their ability to deliver superior outcomes at a better cost. We anticipate that all hospitals will want to take action to assure that their doctors adhere more often to evidence-based practices, comply with cost-effective care processes, and support efforts to reduce complications and readmissions.

There will be a race to employ doctors

Today, slightly more than half of all practicing doctors in the U.S. are employed by hospitals. Employing physicians helps hospitals by enabling them to better manage what happens to patients before and after the hospital, encourage the use of cost-effective supplies and medical devices, implement clinical pathways, and work well in team-based care models. Health plans are also beginning to employ doctors to better manage risk, enable population health management, and help create unique products and, perhaps, specialized delivery systems.

Bottom line: the ACA, the HITECH Act, and the HDI are moving the U.S. toward a health care system that can be more cost effective, more accessible, and deliver better outcomes. These initiatives, coupled with the new innovations emerging in health care IT, will help drive this change and are making it an exciting, and better, time in health care for consumers, entrepreneurs and investors alike.

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Creating Outcome-Driven Health Care Markets

By bkocher2013

This post first appeared in the Health Affairs Blog.

America’s health care market does not work well.  It is inefficient, asymmetric, and in most cases not particularly competitive.  The Affordable Care Act (ACA) legislated a myriad of changes to reform and improve insurance markets with exchanges as a centerpiece.  While exchanges and reforms like subsidies, guaranteed issues, age bands, community rating, reinsurance, and risk adjustment are all helpful, a huge opportunity remains to segment the health care market around different categories of patient demand.

Basic economic theory states that a well-functioning market is aligned between supply and demand.  Ideally, suppliers and customers align around the preferences of the customers – the unit of alignment is driven by the demand side.  When we examine health care, we see demand falling into three segments:  healthy people who have episodic needs, chronic disease patients with predictable needs, and highly complex patients with less predictable needs.  Given the high variance between the three submarkets, we believe that each of these segments should be thought of as a discrete market and served by different types of insurance products, payment models, and health care providers.

We believe that this is necessary since each of these segments values providers differently.  For a healthy patient with periodic needs, convenience and experience are likely to matter more than continuity with a provider and care team.  Conversely, chronic disease patients are likely to value clinical outcome attainment, complication avoidance, and care coordination very highly.  And complex patients will need and value the customization, access to research, and specialization that the latest medical breakthroughs can deliver.  Not only are the sources of value different, but so are the delivery systems and payment models needed to align incentives for value.

Re-Envisioning The Health Care Market

Healthy patients.  For healthy patients with periodic needs, an episodic approach is also the most economically efficient.  These patients do not require the fixed cost of a large system of care and instead should purchase discrete specific services — ideally a bundle of care to deliver a specific pre-defined outcome.  In this model, a patient buys insurance and broad access to providers and, when a health need arises, receives a budget for his or her episode of care.  We favor reference-based pricing so the patient can purchase an episode outcome without additional cost sharing while retaining the option to pay more if he or she chooses.  The market is thus incentivized to manage to a specific outcome in the most cost-effective way and to compete on delivering extra value for those patients who are willing to pay more.

To meet demand for bundled payments organized around episode outcomes, the supply-side should realign into specialized care units that focus on a few procedures, organ systems, or disease areas — a broad PPO network.  This has historically proven successful for elective conditions: the Dartmouth Spine Center has a surgery rate of 10 percent –- lower than the national rate –- with 100 percent of patients reporting their needs were well met.  Other examples of episodic providers include ambulatory surgery centers, orthopedic and cardiovascular specialty hospitals.  We also foresee capitated systems managing population health procuring discrete episode services from specialty providers, since these providers should be able to offer equal or better outcomes at lower prices than an Accountable Care Organization (ACO), integrated delivery system, or multispecialty group.

Patients with chronic disease.  For chronic disease patients, the primary outcome goal is to minimize a condition’s short-term inconveniences and long-term complications.  The market should thus incentivize a long-term perspective centered on patient engagement, adherence, and side-effect prevention.  On the demand-side, customers should purchase care from a provider able to care for all aspects of a patient’s condition, which creates incentives for all players –- patients, doctors, providers, and drugmakers –- to manage cost.  The basis of competition should be the ability to deliver annual health and complication avoidance at lower costs.

In this model, incentives are most aligned when providers are paid using a risk-adjusted capitated payment.  To compete, providers should organize in organizations such as ACOs, Patient-Centered Medical Homes (PCMHs), multispecialty groups, or integrated delivery systems with strong capabilities in managing risk, population health, and costs.  Examples of these types of systems are Group Health, Geisinger, Kaiser Permanente, Healthcare Partners, and CareMore.  In this model, incentives for patients to adhere to treatment plans, and remain in the system of care, are reinforcing.

Complex patients.  Finally, there are certain conditions that are too complex to fit into either market, such as complex cancers, high acuity conditions, and rare diseases.  These conditions often exhibit both chronic condition and episodic characteristics and are best managed by academic medical centers or high-acuity specialty facilities like comprehensive cancer centers and children’s hospitals.

Our view is that the current fee-for-service system is the best approach for handling these cases.  To constrain inflation and encourage competition, fee for service should be coupled with utilization review, incentives to use evidence-based care, and transparency around risk-adjusted outcomes and expected out-of-pocket costs.  Paying for these as episodes will not work because high patient heterogeneity exists and the size of the market cannot support competition at the episode-level.  Moreover, it is hard to define quality and value for many of these types of patients and conditions.

The Way Forward: Turning Theory Into Practice

These payment models and provider organization approaches maximize value by encouraging healthy patients to get their conditions fully resolved for a fixed price, chronic disease patients to access a care team rewarded for avoiding complications, and complex patients to receive customized care and access from specialists.  Furthermore, each of the three submarkets –- healthy patients, chronic disease, and complex and rare conditions –- is large enough to be self-sustaining and attractive.  We estimate that the chronic condition market is $1.1 trillion, the episodic care market is $760 billion, and the residual fee-for-service complex and rare conditions market is $900 billion in 2011.

The three markets are growing at similar rates.  (See exhibit 1, click to enlarge.)  If the economics are aligned, they will also be able to create growing value for patients through productivity gains, falling prices, better outcomes, and far better patient experiences.  Fortunately, each of these markets and provider models exist today in many geographies.  They are just not widespread enough or coexistent.

Sahni-Kocher-Exhibit

Giving consumers more insurance options.  Transforming theory into a tangible system presents certain challenges, which we believe will be overcome in the next few years.  First, patients need insurance product choices.  The advent of state exchanges and community rating are catalytic events that could lead to this reorganization if exchanges permit reference-based pricing plans and allow integrated delivery offerings with narrow networks.  The employer market is already moving down this path with the marked increase in defined-contribution health benefits supported by private exchanges, where higher cost sharing and narrow network plans are often offered.  We are also seeing many more employers shifting to reference-based pricing and episode bundling approaches for elective conditions to rewards employees for selecting high-quality, lower-cost providers, and to encourage providers to offer a full course of care for a bundled price.

Provider restructuring.  On the provider side, theoretically overhead should not increase, but should decrease.  The largest providers that can pull in adequate populations will focus on patient and population health, a trend already being seen with groups like Partners Healthcare shifting to an ACO and capitated payment orientation.  Competition will also lead to emergence of more specialized providers for acute and episodic care among community hospitals.  Already for complex and rare conditions, regional centers like the Mayo Clinic and traditional academic medical centers exist.  The push to submarkets should accelerate the provider landscape transformation and reduce the extraneous providers that lack focus and a niche.

The biggest barrier today is linking benefit designs and reimbursement models with patient segments.  Once commercial payers approach providers with products that segregate patients into these segments with corresponding reimbursement, providers will rapidly reorganize to serve the segments that they are most competitive at supporting.  While this approach does generate more ACOs and PCMHs, the past year has shown that these can be formed relatively quickly to meet demand.  The emergence of retail-oriented primary care providers also indicates that episodic care models are able to proliferate and scale in response to demand.

Addressing changes in consumer health needs.  One additional challenge will be how patients react when health needs change mid-year.  All patients regardless of submarket will have certain basic aspects:  insurance, preventive care, and consumer protections.  The value in longitudinal care is irrespective of submarket and hugely valuable to reducing the growth of health care costs. As health needs adjust for patients during the year, we see two potential solutions. First, patients will still have access to other submarkets to receive the necessary care.  Second, the pool of patients who will need product adjustments will be significant, and the value cannot be ignored by payers. Thus, some supplemental plans may emerge that enable patients to gain access to additional types of providers.

Matching patient needs and demand with specific types of providers and reimbursement approaches is better for patients.  If incentives are aligned with the types of value desired by different types of patients, price increases should no longer outpace value creation, and providers will compete and differentiate in ways that are most valued by their core patient constituencies.   Doing this through the creation of well-functioning submarkets — instead of forcing a single, ill-functioning market — should also unleash productivity gains as providers specialize around narrower segments and stop investing in services that they do not do well, do at scale, or need.

Overcoming the barriers will be a significant challenge.  However, we are already seeing some shifting in the health care landscape, in addition to certain provisions in the ACA which will come online in the upcoming years and add further movement.

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Creating Outcome-Driven Health Care Markets

By Bob Kocher

(Post co-authored by Nikhil Sahni and Bob Kocher.  A version of this post also appeared at HealthAffairs Blog.)

America’s health care market does not work well.  It is inefficient, asymmetric, and in most cases not particularly competitive.  The Affordable Care Act (ACA) legislated a myriad of changes to reform and improve insurance markets with exchanges as a centerpiece.  While exchanges and reforms like subsidies, guaranteed issues, age bands, community rating, reinsurance, and risk adjustment are all helpful, a huge opportunity remains to segment the health care market around different categories of patient demand.

Basic economic theory states that a well-functioning market is aligned between supply and demand.  Ideally, suppliers and customers align around the preferences of the customers – the unit of alignment is driven by the demand side.  When we examine health care, we see demand falling into three segments:  healthy people who have episodic needs, chronic disease patients with predictable needs, and highly complex patients with less predictable needs.  Given the high variance between the three submarkets, we believe that each of these segments should be thought of as a discrete market and served by different types of insurance products, payment models, and health care providers.

We believe that this is necessary since each of these segments values providers differently.  For a healthy patient with periodic needs, convenience and experience are likely to matter more than continuity with a provider and care team.  Conversely, chronic disease patients are likely to value clinical outcome attainment, complication avoidance, and care coordination very highly.  And complex patients will need and value the customization, access to research, and specialization that the latest medical breakthroughs can deliver.  Not only are the sources of value different, but so are the delivery systems and payment models needed to align incentives for value.

Re-Envisioning The Health Care Market

Healthy patients.  For healthy patients with periodic needs, an episodic approach is also the most economically efficient.  These patients do not require the fixed cost of a large system of care and instead should purchase discrete specific services — ideally a bundle of care to deliver a specific pre-defined outcome.  In this model, a patient buys insurance and broad access to providers and, when a health need arises, receives a budget for his or her episode of care.  We favor reference-based pricing so the patient can purchase an episode outcome without additional cost sharing while retaining the option to pay more if he or she chooses.  The market is thus incentivized to manage to a specific outcome in the most cost-effective way and to compete on delivering extra value for those patients who are willing to pay more.

To meet demand for bundled payments organized around episode outcomes, the supply-side should realign into specialized care units that focus on a few procedures, organ systems, or disease areas — a broad PPO network.  This has historically proven successful for elective conditions: the Dartmouth Spine Center has a surgery rate of 10 percent –- lower than the national rate –- with 100 percent of patients reporting their needs were well met.  Other examples of episodic providers include ambulatory surgery centers, orthopedic and cardiovascular specialty hospitals.  We also foresee capitated systems managing population health procuring discrete episode services from specialty providers, since these providers should be able to offer equal or better outcomes at lower prices than an Accountable Care Organization (ACO), integrated delivery system, or multispecialty group.

Patients with chronic disease.  For chronic disease patients, the primary outcome goal is to minimize a condition’s short-term inconveniences and long-term complications.  The market should thus incentivize a long-term perspective centered on patient engagement, adherence, and side-effect prevention.  On the demand-side, customers should purchase care from a provider able to care for all aspects of a patient’s condition, which creates incentives for all players –- patients, doctors, providers, and drugmakers –- to manage cost.  The basis of competition should be the ability to deliver annual health and complication avoidance at lower costs.

In this model, incentives are most aligned when providers are paid using a risk-adjusted capitated payment.  To compete, providers should organize in organizations such as ACOs, Patient-Centered Medical Homes (PCMHs), multispecialty groups, or integrated delivery systems with strong capabilities in managing risk, population health, and costs.  Examples of these types of systems are Group Health, Geisinger, Kaiser Permanente, Healthcare Partners, and CareMore.  In this model, incentives for patients to adhere to treatment plans, and remain in the system of care, are reinforcing.

Complex patients.  Finally, there are certain conditions that are too complex to fit into either market, such as complex cancers, high acuity conditions, and rare diseases.  These conditions often exhibit both chronic condition and episodic characteristics and are best managed by academic medical centers or high-acuity specialty facilities like comprehensive cancer centers and children’s hospitals.

Our view is that the current fee-for-service system is the best approach for handling these cases.  To constrain inflation and encourage competition, fee for service should be coupled with utilization review, incentives to use evidence-based care, and transparency around risk-adjusted outcomes and expected out-of-pocket costs.  Paying for these as episodes will not work because high patient heterogeneity exists and the size of the market cannot support competition at the episode-level.  Moreover, it is hard to define quality and value for many of these types of patients and conditions.

The Way Forward: Turning Theory Into Practice

These payment models and provider organization approaches maximize value by encouraging healthy patients to get their conditions fully resolved for a fixed price, chronic disease patients to access a care team rewarded for avoiding complications, and complex patients to receive customized care and access from specialists.  Furthermore, each of the three submarkets –- healthy patients, chronic disease, and complex and rare conditions –- is large enough to be self-sustaining and attractive.  We estimate that the chronic condition market is $1.1 trillion, the episodic care market is $760 billion, and the residual fee-for-service complex and rare conditions market is $900 billion in 2011.

The three markets are growing at similar rates.  (See exhibit 1, click to enlarge.)  If the economics are aligned, they will also be able to create growing value for patients through productivity gains, falling prices, better outcomes, and far better patient experiences.  Fortunately, each of these markets and provider models exist today in many geographies.  They are just not widespread enough or coexistent.

Giving consumers more insurance options.  Transforming theory into a tangible system presents certain challenges, which we believe will be overcome in the next few years.  First, patients need insurance product choices.  The advent of state exchanges and community rating are catalytic events that could lead to this reorganization if exchanges permit reference-based pricing plans and allow integrated delivery offerings with narrow networks.  The employer market is already moving down this path with the marked increase in defined-contribution health benefits supported by private exchanges, where higher cost sharing and narrow network plans are often offered.  We are also seeing many more employers shifting to reference-based pricing and episode bundling approaches for elective conditions to rewards employees for selecting high-quality, lower-cost providers, and to encourage providers to offer a full course of care for a bundled price.

Provider restructuring.  On the provider side, theoretically overhead should not increase, but should decrease.  The largest providers that can pull in adequate populations will focus on patient and population health, a trend already being seen with groups like Partners Healthcare shifting to an ACO and capitated payment orientation.  Competition will also lead to emergence of more specialized providers for acute and episodic care among community hospitals.  Already for complex and rare conditions, regional centers like the Mayo Clinic and traditional academic medical centers exist.  The push to submarkets should accelerate the provider landscape transformation and reduce the extraneous providers that lack focus and a niche.

The biggest barrier today is linking benefit designs and reimbursement models with patient segments.  Once commercial payers approach providers with products that segregate patients into these segments with corresponding reimbursement, providers will rapidly reorganize to serve the segments that they are most competitive at supporting.  While this approach does generate more ACOs and PCMHs, the past year has shown that these can be formed relatively quickly to meet demand.  The emergence of retail-oriented primary care providers also indicates that episodic care models are able to proliferate and scale in response to demand.

Addressing changes in consumer health needs.  One additional challenge will be how patients react when health needs change mid-year.  All patients regardless of submarket will have certain basic aspects:  insurance, preventive care, and consumer protections.  The value in longitudinal care is irrespective of submarket and hugely valuable to reducing the growth of health care costs. As health needs adjust for patients during the year, we see two potential solutions. First, patients will still have access to other submarkets to receive the necessary care.  Second, the pool of patients who will need product adjustments will be significant, and the value cannot be ignored by payers. Thus, some supplemental plans may emerge that enable patients to gain access to additional types of providers.

Matching patient needs and demand with specific types of providers and reimbursement approaches is better for patients.  If incentives are aligned with the types of value desired by different types of patients, price increases should no longer outpace value creation, and providers will compete and differentiate in ways that are most valued by their core patient constituencies.   Doing this through the creation of well-functioning submarkets — instead of forcing a single, ill-functioning market — should also unleash productivity gains as providers specialize around narrower segments and stop investing in services that they do not do well, do at scale, or need.

Overcoming the barriers will be a significant challenge.  However, we are already seeing some shifting in the health care landscape, in addition to certain provisions in the ACA which will come online in the upcoming years and add further movement.

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Why The Supreme Court Decision On Health Care Reform Doesn’t Really Matter

By bkocher2013

This post first appeared in Forbes.

When the Supreme Court announces its decision on the constitutionality of the Affordable Care Act (ACA) it will kick off a storm of analysis around the political impact.  An outcome that upholds the law as a whole will be seen as a positive for the President whereas a decision that strikes down some or all of law down could be a boon for the Republicans and Governor Romney’s campaign.  The middle scenario results in parts of the law such as the individual mandate to being struck down, with the rest upheld.  While it is impossible to predict the outcome, it is a safe prediction that the decision will be followed by a lot of punditry on cable news channels.

This debate misses one essential fact:  the Supreme Court’s decision does not matter as much as political pundits think.  The American healthcare system is in the midst of intense experimentation and change that cannot, and will not be stalled by the whims of the judicial system.  The major forces behind the changes in our healthcare system—rising costs, an older, sicker population and technological innovation—show no signs of abating and do not depend on Federal legislation.  They are fuelled by private sector demand, not policy preferences in Washington.  So, while coverage may not come as soon as hoped for the uninsured, the systemic efforts to make our health system more affordable and higher quality will continue.

Some changes, like the widespread replacement of paper records by electronic medical records, are visible from a patient’s-eye-view; others, such as changes in the relationship between insurers and hospitals are not immediately visible.  These less-visible changes are potentially even more profound.

Some of the most important changes involve the financing of health care.  In the traditional way of doing business, insurers paid hospitals and physicians under a “fee for service” system; essentially they are paid for the quantity of medical services provided, regardless of the outcome.  Unfortunately, fee-for-service is inflationary, giving hospitals a perverse incentive to focus on driving up volumes and activity without regard for cost, value, or achieving better outcomes.  Even if a patient gets the wrong care or inadequate care, the hospital is paid to treat complications or readmissions rather than to prevent them.  Nobody—especially not the patient—wins and all of us pay.

HMOs grew in the 1990s in an attempt to fix these incentives by combining the insurer and the care provider, but patients hated their HMOs because they restricted choice without proving that they were delivering better care.  The current wave of experimentation, in flavors such as bundled payments for “episodes” of care (e.g., paying for everything associated with a diagnosis, procedure, and treatment in a single payment), accountable care organizations (ACOs), and new penalties for excessive hospital readmissions are all tactics to try to fix these misaligned incentives and aim to cut costs and improve care for the patient, while preserving choice.

Further proof that these reforms have staying power well beyond HMOs is the recent pledge by United Healthcare, the nation’s largest private insurer, to follow many of the regulations included in the ACA even if the law is repealed.  Other insurers, includingAetna and Humana quickly made similar pledges.

Even Congress’ current gridlock cannot completely choke off policy innovation at the federal level.  The Center of Medicare and Medicaid Services has used its authority to experiment with a variety of demonstration projects that do not require congressional approval.  One example is the current project to award bonus payments to Medicare Advantage plans which score well on the program’s Star rating system for providing better and more cost effective care.  While a repeal of the ACA would remove some of the agency’s authority, it would not prevent the agency from experimenting with a variety of demonstration projects that could lead to improved payment models.

Not to be left out—a great deal of experimentation is happening at the state level.  One of the cornerstones of the ACA is the requirement that each state create a “health insurance exchange” which serves as an online marketplace for individuals to purchase health insurance.  Eighteen states representing 42% of the US population are in the process or have already laid the legislative groundwork to establish exchanges.  Many of these states, including California, have indicated that they plan to continue with the exchanges regardless of the Supreme Court’s decision.

Patient attitudes are changing too.  Polling conducted by the West Wireless Health Institute shows that patients are increasingly worried about the costs of their care and taking steps to control it.  This means that they are more likely to scrutinize their health insurance benefits and opt for high-deductible health plans (HDHP).  While attitudes can be slow to change, the inexorable force of the millions of patients choosing health plans that reward shopping for lower cost and better quality care will not be stymied by the Supreme Court’s ruling.

So while it is uncertain how the Supreme Court will rule, or how the ruling will impact November’s results, it is a certainty that our health system will continue on the path of more affordability, more integrated care, and more focus on patients because consumers are demanding these changes. These unassailable trends are led by the private sector and, if anything, will accelerate regardless of the Supreme Court’s views of the meaning of the Commerce Clause.  Moreover, since the private sector contributes virtually all the profitability in the health system, it is a force far more powerful than politicians.

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Network Effects are Magical

By brianascher

ImageNetwork Effects are magical.  They are the pixie dust that makes certain Information Technology businesses, especially on the Internet, into juggernauts.  They can be found in both consumer and enterprise companies.  Network Effects are special because they:

  1. Provide  logarithmic growth and value creation potential
  2. Erect barriers to entry to thwart would-be competitors
  3. Can create “Winner Take All” market opportunities

Network Effects are like a flywheel–the faster you spin it the more momentum you generate and enjoy.  But not all markets lend themselves to Network Effects.  They are not the same as Economies of Scale where “bigger is better.”  To be certain, Economies of Scale can give strong competitive advantage and defensibility to the first to get really big (or Minimum Efficient Scale as the economists call it.)  For example, SAP and Oracle benefit from having massive revenue bases which enable them to employ armies of engineers who develop rich feature sets and also to hire huge sales forces.  However large these companies are today, though, their growth rates, especially in their early years, were far more modest compared to those Network Effect companies whose growth resembled a curved ramp off of which they launched into the stratosphere.

There are four main types of Network Effects:

  1. Classic Networks, in which the value of a product or service increases exponentially with the number of others using it.  Communications networks like telephones, fax, Instant Messaging, texting, email, and Skype are all examples.  Metcalfe’s Law captured this as a simple equation where the Value of a network = N², where N is the number of nodes.  Typically, each node in a classic network is similar to each other and possesses both send and receive capabilities.  This will become clear juxtaposed against the other network effects below where there are different types of nodes.  Other examples of classic Networks are social networks (eg Facebook) and payments (eg PayPal).
  2. Marketplaces, where aggregations of buyers and sellers attract each other.  Lots of sellers means variety, competition, and price pressure, which all serve to attract more customers.  And because the customers flock, more sellers are enticed to participate in the marketplace.  eBay, stock exchanges, and advertising networks are all examples.  One nuance of marketplaces, however, is they differ in terms of the scale required for acceptable liquidity.  For example, ad networks can achieve sufficient reach and liquidity at relatively low levels which is why you see thousands of online ad networks, where they each exhibit network effects but not in a winner take all fashion.  Stock exchanges and payment networks require far greater scale for network effects to operate, which is why you see much greater concentration in these industries.
  3. Big Data Learning Loops.  “Big Data” is all the rage in techland, but just having gobs of data is not necessarily a Network Effect, nor any sort of competitive advantage per se.  What you really need is unique data and algorithms that process that data into insights which then lead to decisions and actions.  A flywheel effect comes when you get a critical mass of data that you mine for insights; pump that value back in to your product or service; which attracts more users which get you more data.  And so on.   Venrock portfolio company Inrix is a good example, where they mine GPS data points to derive automotive traffic flow data.  The more commercial fleets, mobile app users, and car companies they can get data from, the better their traffic analysis becomes, which gets them more users and hence more data.  They turn data into an accuracy advantage that earns them the right to get even more data.
  4. Platforms are a very special and powerful form of network effects.  In Information Technology, a true “platform” is where other developers build technology and businesses on top of your technology and business because you offer them one or more of the following:
    1. Lots of users/customers, and you represent a distribution opportunity for them
    2. Compelling development tools, technology, and (sometimes) advantageous pricing
    3. Monetization opportunities

Example include Operating Systems like Microsoft Windows, Apple App Store, and Amazon Web Services.

Each of these four types of network effects can be extremely powerful on their own.  Yet, even more power is derived when a business can harness multiple types of network effects in synergistic ways.  Google, Apple and Facebook do this for sure, but a less well known example is Venrock portfolio company AppNexus that operates a real-time online advertising exchange and technology platform.  The exchange aggregates advertisers, agencies, publishers and ad networks for marketplace liquidity, but also offers a hosting and technology platform for other AdTech companies and ad networks to augment their own businesses.  And the vast troves of data AppNexus processes every millisecond flows back into the system as optimized and targeted ad serving.

Network Effects are what you want fueling your business.  Sometimes you just need to get clever about discovering and harnessing them.

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Meaningful Use Of Health IT Stage 2: The Broader Meaning

By bkocher2013

This post first appeared in the Health Affairs Blog.

On February 24, the Centers for Medicare and Medicaid Services (CMS) and the Office of the National Coordinator for Health Information Technology (ONC) issued the proposed “stage 2” rules for the meaningful use of electronic health records.   Stage 2 unequivocally lays out three bold requirements that are sure to be transformative to the United States healthcare system over time.  First, it standardizes data formats to dramatically simplify how information is both captured and shared across disparate IT systems.  This will make healthcare IT systems truly interoperable, one outcome of which will be greatly expanding patients’ abilities to choose where to receive care.

Second, it is emphatic that patients be able to access and easily download their healthcare records and images for their own use.  This will spawn an industry utilizing this “big data” to provide solutions to patients and providers that help manage care, shop for care, and even invent new models of care delivery. Third, it expands the scope of tracked quality metrics to include specialists and to reflect outcomes as well as care coordination.

Together, these three major requirements will drive the birth of new payment models and incentive structures leading to improved productivity and outcomes.  As a result, Stage 2 will fuel an ecosystem of companies attacking healthcare inefficiencies in ways that are not yet even imagined.

“Stage 2” commences in 2014 for providers who demonstrated stage 1 meaningful use in 2011.  For all others, it begins in year four of meaningfully using an electronic health record.  Providers who meaningfully use electronic health records will receive $44,000 in Medicare incentives over five years.  For those who do not meaningfully use electronic health records, penalties begin in 2015 that grow up to a 5 percent reduction in Medicare reimbursement over five years.

To qualify as a stage 2 “meaningful user” of electronic health records, providers need to comply with, and track, 20 functional metrics and 12 clinical quality measures. (See Exhibit 1 below, click to enlarge)  The functional metrics are very similar to stage 1 albeit with higher performance thresholds in many cases.   In keeping with the theme of stage 2, CMS emphasizes data sharing, patient engagement, and decision support in order to improve clinical quality measures.

Exhibit-1-Stage-23

Rationalizing quality metrics. The clinical quality measures represent a major advance, aligning quality scorecards across HHS’ programs.  A major burden for providers to date has been the checkerboard of clinical quality measures that HHS programs (PQRI, ACO, NCQA-PCMH, CHIPRA) ask providers to report.  Stage 2 aligns all of these programs to satisfy the clinical quality measure reporting requirements. Hopefully, private payors will also adopt these measures for their quality programs since they will be already incorporated into certified electronic health records.  If this occurs, it would radically reduce the complexity and burden of quality reporting for providers, and thereby increase clinicians’ focus on improvement.  Furthermore, by expanding the pool of potential metrics, specialists will be able to select logical sets of measures to track and report with required decision support.

Liberating data. While the mechanics are important, what makes stage 2 transformational is that big data sources and uses – likely across payors — will inevitably emerge.  This will be a byproduct of the requirement that all data be captured using the same standards, the expansion of quality measures to cover a majority of healthcare spending, and the ability for patients to download data.  The proposed rule requires providers to have at least 10 percent of their patients “view, download, or transmit to the third party their health information.”  In a short time, an enormous trove of data will flow outside the electronic health records of physician offices.

Big data offers great potential.  In other sectors, mining large data sets has led to breakthroughs in productivity, consumer experience, and cost structure.  It is also needed to make approaches such as IBM’s Watson super computer practical for healthcare, as the quality of machine learning results depends substantially on the amount of data available.  It will not be long until patient level information is combined with large existing data sets like those being liberated by the Health Data Initiative.  These combinations will generate far more accurate predictive modeling, personalization of care, assessment of quality and value for many more conditions, and help providers better manage population health and risk-based reimbursement approaches.

Big data also enables payment reform.  Stage 2 solves the circular problem of needing big data to support non-fee-for-service payment models, and needing new payment models to stimulate the production of the data.  Stage 2 finally removes the barrier of lack of access to data through the ubiquitous reporting of so many quality measures and downloaded patient records.  The transparency facilitated by far deeper, richer, and more timely and specific information will enable payors, consumers, and employers to pay differently for care.

At a minimum and initially, huge variations in prices will be arbitraged, reaping savings for patients and payors.  Over the longer term, it is likely that many variations of episode-based payments will emerge that are tied to specific improvement in outcomes; geographic markets will expand for patients shopping for care, thereby increasing competition; and new lower-cost delivery models will emerge for lower acuity and chronic conditions.

The need for privacy and security. The big concern is rightfully privacy and security.  Nothing would stifle progress faster then misuse of data.  While the meaningful use program has specific security requirements for providers, it will be important for existing privacy rules and security requirements to be rigorously enforced.   The virtuous cycle of innovation enabled by data liberation depends on trust by patients and providers.  Patients will need confidence that the value they get from contributing their health data to datasets outweighs the risks.  Providers will need similar confidence to encourage their patients to access their data and use the tools that will emerge.  One hopes that a market quickly develops that has a high bar for privacy and security, engages patients in their health and healthcare, fairly represents provider performance, supports shared decision-making, and helps providers achieve clinical goals that increasingly are linked to reimbursement.

While the public comment period will inevitably surface many skirmishes over details, the final rule should inculcate a path towards 1) new reimbursement models that reward outcomes and coordination; 2) massively more data to support patients and providers; and 3) a far more dynamic marketplace.  Providers will be well served to view stage 2 not as a requirement to better use their electronic health records, but as a foreshadowing for how to compete and thrive in a future that is coming sooner then most anticipate or are prepared for: a future where a provider’s ability to deliver reliable outcomes, economic value, and exceptional patient experiences will soon be transparent to peers, competitors, payors, and, most of all, patients.

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“Great” is Tough to Pick out of the “Good” Crowd

By Bryan Roberts

(A version of this post also appeared at AllThingsD.)

The oldest adage in start-up’s, for entrepreneurs and VC’s alike, is “the key to success is the quality of the people.”  Markets and innovative approaches are important, but my experience supports this notion unequivocally. I have had the good fortune to be involved from an early stage with several billion dollar companies, and most found success after a material pivot from their original approach – Athenahealth, Ironwood Pharmaceuticals and Sirna Therapeutics to name a few.  “I invest in people” is the start-up ecosystem’s version of motherhood and apple pie, but how do you identify “Great” prospectively?

Whether explicitly or not, everyone has their own answer to this question, and based on the success rates, those answers by and large stink. I don’t have a Magic 8 Ball on the topic, but two things make this the issue I wrestle with most: (1) the often-unpredicted success or failure of “nobodies” or “sure things” respectively, and (2) the outsized rewards for locating great, juxtaposed with the probability of abject failure when settling for good. The A+ entrepreneurs with whom I have partnered have come in unusual packages – simply put, there has been no central casting: a biology post-doc who thought about opening a microbrewery B&B; a large animal veterinarian who went to business school in his late 30’s; an x EMT who was also nephew to the President among others.  The best VC’s seem to show the same diversity of background.

I now focus on these attributes:

  1. Great talent finds a way to win… and is relentlessly driven to do so with a real sense of urgency.  They follow through and complete the task – starting is easy, finishing takes real will.  It is not that they think out of the box, there simply is no box.  They view ambiguity as opportunity, not risk. When things get uncertain is when they really perk up and start to pay attention because that is when real change is possible.  Most of all, they exceed expectations. They bend the space-time continuum in some fashion and their accomplishments are extra ordinary.
  2. Experience is overrated. By and large, the world is changed by the young and the hungry. Experience can be enabling or constraining, but it is not even close to the silver bullet many believe it to be.  If you are seeking a VP marketing or head of sales at a 100+ person company, absolutely look at a resume.  But to find someone with the passion and uniqueness to actually create an early stage venture, you have to spend the time: watch them and see what they do, talk to them and see what they think, ask around and see how respected they are.
  3. Balance exploring/driving with learning/listening. Great people have a very clear grasp of the their vision, while understanding that the world has a lot to teach them. They are humble students of the game, but very confident in their abilities, and never “do what they are told.” They don’t avoid conflict and will always bet on themselves rather than shy away from risk.  They ask questions and argue on facts, balancing their gut with innumerable data streams to get to what they believe is the right answer.
  4. Great people are magnetic. They are not only smart and driven, they attract resources when all the data suggests they should not – whether capital, people or partners – and thereby become larger than just their singular efforts.

While potentially controversial today, I have come to believe that great entrepreneurs and great VC’s are two sides of the same coin.  Both embody these characteristics.  They are maniacally focused on changing the way we live with innovations others thought were not possible. They are passionate about building a great company and put the company before themselves.  No great VC takes solace in having a portfolio when an individual company struggles – like entrepreneurs, this is deeply personal and about so much more than just money.  Their roles are complementary, like looking down opposite ends a telescope, but those different perspectives to a problem can be extraordinarily synergistic.  Great future entrepreneurs can look like great young VC’s, and vice versa – three of my recent investments are stellar companies started by these “crossover” folks.

All venture firms are simultaneously never, and always, looking for team additions.  I believe this is a direct result of how elusive it is to identify those who will be not only smart, passionate, personable and high integrity, but also successful in this ever-changing, ambiguous entrepreneurial world where what worked last time is no recipe for future wins – and more likely charts a path to mediocrity.   In fact, my own difficulties in finding conviction around potential team additions for our firm is what spurred putting these thoughts on paper.

 

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How to Moderate a Panel That Doesn’t Suck

By brianascher

On April 14th I am moderating a panel at the Digital Healthcare Innovation Summit in New York City titled “The Hospital as Production Center:  Holy Grail or Impossible Dream?” [For anyone who wants a discounted registration rate, see the end of this post.]  In an effort not to suck, I’ve put some thought into what makes a great panel.  Like many conference junkies in the tech and finance worlds, I’ve sat through hundreds of panels, been on a bunch, and moderated a few handfuls over the years.  Here’s a list of a dozen suggestions that I plan to implement:

  1. Have at least one colorful character on the panel. Conferences can be a grind, and lots of people find the most value is in the lobby, meeting people.  For those willing to actually sit through your panel you want to entertain them as well as inform them if you expect them to pick their heads up from their smartphones and remember anything from the hour of so they give you of their (partial) attention.  Having at least one spicy rebel on the panel that is willing to share provocative views and mix it up with the other panelists is key.
  2. As the moderator, get your panelists on a call ahead of time to brainstorm and interact with each other. This is your opportunity to figure out if you’ve got the right mix of characters and also form a plan for what you’ll cover and set expectations.  Don’t procrastinate on this.
  3. Know your audience. Conference organizers purposely cast a wide net in their marketing and promotional materials so they can get the best turnout.  Find out for sure who the bulk of the audience is really likely to be.
  4. Send questions ahead of time. Your goal as panel moderator is to make your panelists look brilliant, not to try and stump them so you look like the smartest person on stage.  Give them the questions ahead of time and know who is likely to have the best answers for each of them.
  5. Keep intros brief.  Maybe not at all. Most intros take too long and are pretty boring.  If the conference materials have speaker bios, I personally don’t think there is any need to go into detailed introductions other than to identify who is who.
  6. Know the context of the rest of the conference.  Pay attention and make reference. Planning your topics and questions ahead of time is great, but you want to keep in mind the context of the rest of the conference so there is minimal duplication but appropriate linkages to other topics and speakers, etc.  If prior speakers or panels have covered topics relevant to your panel, make reference to them.  It shows the audience you were not sleeping through the earlier sessions, so maybe they won’t sleep through yours.  J
  7. Use social media to promote, distribute, and even moderate in real time. Twitter, LinkedIn, Facebook, your blog, are all great ways to promote your panel ahead of time.  SlideShare is a great way to distribute PowerPoint or materials afterwards.  Set up a Twitter hashtag to solicit questions ahead of time and from the audience during the event.  I’ll be using #hosprod as the Twitter stream for my panel.  Feel free to send me questions ahead of time, and check for comments during the panel.
  8. Hit the hard deck, dig for details and examples. Give the audience reasons to take notes by getting granular.  Force the panelists to get specific and give real information.
  9. Stir the pot.  Incite a riot. A panel where everyone agrees with every point is boring.  Elicit differing viewpoints and force the discussion to explore the conflicting opinions.  This will likely be the most useful content, as well as the most entertaining.  Avoid chair throwing.
  10. No crop dusting. It can be very monotonous when the moderator goes up and down the row asking each panelist each question.  Pick your respondents strategically and use them for different purposes.  Move on to the next question as soon as the topic has been sufficiently covered, regardless of whether everyone answered.
  11. Engage the audience, but moderate ruthlessly. Audience Q&A can be very useful and fun, but can also attract rambling questions, people shamelessly plugging their own company/viewpoint, or all manner of unexpected divots.  It’s your job to be respectful but firm in keeping the Q&A on track out of respect to the rest of the audience.
  12. Watch the clock. The ultimate respect for your audience is to finish on time.  Even if your panel is rockin’ and everyone is having a great time, you should finish within the allotted timeframe.  If they still want more, they can follow-up with you and the panelists afterwards.

If you are interested in attending the www.digitalhealthcaresummit.com enter the special key code VNRPR  to receive the discounted rate of $695.00.  You can also contact Cathy Fenn of IBF at (516) 765-9005 x 210 to enroll.

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Forget Super Bowl Commercials…these web companies know how to create awesome marketing videos.

By brianascher

By the time you read this post, Super Bowl XLV will be over and everyone will be talking about the … commercials.  Why?  Because most of them are entertaining, some are memorable, and the $2.5 million price tags (for air time alone) pique our curiosity.  Why are brands willing to pay so much?  Because it is one of the only ways to reach 100 million consumers simultaneously, and because a great 30 second video ad packs an emotional payload in support of your brand unlike virtually any other form of advertising.

Over the past few years I’ve noticed more and more web companies producing great videos to market their companies, often presenting them front and center on their homepage as the introduction to their company.  A great video overview can really help explain what you do for customers, how you do it, and present your brand in a flattering light.  The best videos go viral and bring you exponential attention and new visitors.   And web videos have never been cheaper to produce (at 1/2000th the cost of a super bowl commercial even a start-up can afford them.)  So, here are five thoughts on what makes a great marketing video for web companies, and a bunch of examples:

Answer WIIFM: A great marketing video should clearly and convincingly articulate a few simple benefits that customers care about.  Mint.com does a terrific job of this, as does Dropbox, both front and center on their homepage.  The Dropbox video is particularly noteworthy because it takes an esoteric concept and uses analogy to demonstrate user benefits everyone can relate to.

Show how it works: A great overview video shows just enough of the product and how it works to lend credibility to the benefit statement.  Word Lens does a terrific job of this for a product that truly needs to be seen to be believed.  A full blown demo would have been less effective than just these short glimpses of the product in action.

Be yourself: Video is such a rich and engaging medium it is perfect for showing the personality of your brand.  It is a great way to set tone and speak to your customers and prospects in an authentic voice.  Flavors.me does a terrific job of this through music and images alone, letting actions speak louder than words in convincing you that they can make your personal homepage look amazing because they do such a killer job of presenting themselves through this video.  Style personified.

Be fun, get remembered: Great marketing videos are fun to watch and somewhat memorable.  You don’t have to be knee slappin’ funny or so hip it hurts, just smile-inside funny will go a long way.  SalesCrunch and SolveMedia both take pretty dry categories (CRM SaaS and AdTech respectively) and rivet their viewers through entertaining use of cartoons and wit.

Be Brief: Even a great marketing video starts to feel long after two minutes.  Shoot for less.  This video from Smartling gets the job done in 38 seconds.  [Disclosure: Smartling is a Venrock investment.]

These are the five characteristics which I think make for a great marketing video for your web company.  If you think there are points I missed, or have other great examples, please comment and add to the list.  If you are the production agency responsible for making any of these videos please take a bow by claiming your work.  I’m sure others will want to contact you.  If you are looking for more of a live action marketing video, SmartShoot and other online videographer marketplaces can help produce custom video for ridiculously low rates.

Thank you to Ward Supplee, David Pakman, Dev Khare, Dan Greenberg, and Arad Rostampour for sharing some ideas for this post.

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The single best financial reporting tool ever

By brianascher

Today I faced a choice.  Should I go out and enjoy the beautiful weather and waves and go for a surf or should I blog about my favorite financial reporting tool?  Seems like a pathetic question for a surfer to ask, or maybe this financial reporting tool is really that great.  I’ll settle for an answer of “both”.

The tool in question is the Waterfall Chart.  It’s a way to compare actual results across time periods (months or quarters usually) against your original Plan of Record, as well as forecasts you made along the way as more information became available.  It packs a ton of information into a concise format, and provides management and Board members quick answers to the following important questions:

1.      How are we doing against plan?  Against what we thought last time we reforecast?

2.      Where are we most likely to end up at the end of the fiscal year?

3.      Are we getting better at predicting our business?

The tool works like this:

Across the top row is your original Plan of Record.  This could be for a financial goal like Revenue or Cash, or an operating goal like headcount or units sold.  Each column is representative of a time period.  I like monthly for most metrics, with sub-totals for quarters and the full fiscal year.  Each row below the plan of record is a reforecast to provide a current working view of where management thinks they will wind up based on all the information available at that time period.  Click the example below which was as of August 15, 2010 to see a sample, or click the link below to download the Excel spreadsheet.

click to enlargeWaterfall Report spreadsheet

Periodic reforecasting does not mean changes to the official Plan of Record against which management measures itself.  Reforecasts should not require days of offsite meetings to reach agreement.  It should be something the CEO, CFO, and functional leaders like the VP Sales or Head of Operations can hammer out in a few hours.  Usually these reforecasts are made monthly, about the time the actual results for the prior month are finalized.  When you have an actual result, say for the month of August, $2,111 in the example above, this goes where the August column and August row intersect.  On that same row to the right of the August actual you will put the new forecasts you are making for the rest of the year (September through December.)  In this fashion, the bottom cells form a downward stair step shape (a shallow waterfall perhaps?) with the actual results cascading from upper left to lower right.  You can get fancy and put the actuals that beat plan in green, and those that missed in red.  You can also add some columns to the right of your last time period to show cumulative totals and year to dates (YTD).  With or without these embellishments you’ve got some really powerful information in an easy to visualize chart.

Two questions an entrepreneur might ask about this tool:

By repeatedly comparing actual to plans and reforecasts, won’t my Board beat me up each month if I miss plan or even worse, miss forecasts I just made? If you are a relatively young company, most Board’s (I hope) understand that planning is a best-efforts exercise not an exact science.  Most Boards will react rationally and cooperatively if you miss your plan, as long as you avoid big surprises.  By giving the Board updated forecasts you decrease the odds of big surprises because the latest and best information is re-factored in to the equation as the year progresses.  They probably won’t let you stop measuring yourself against the Plan of Record, but at least you’ve warned them as to how results are trending month to month and course corrections can be made throughout the year.

Won’t this take a lot of time? Hopefully not a ton, but it does take effort.  However, it should be effort well worth it beyond just making the Board happy, because as a management team you obviously care about metrics like cash on hand, and this should be something you are constantly recalibrating anyway.  The waterfall is the perfect tool to organize and share this information.

Most of my companies using this tool track five to ten key metrics this way.  Typical metrics include:

  • Revenue
  • New bookings
  • Cash on hand
  • Operating expenses
  • Net income
  • Headcount
  • Units sold or new customers acquired
  • Some measure of deployed/live customers (if there is a lag between a sale and a live customer)
  • For internet companies, some measure of the “top of the funnel” such as Unique Visitors or Page Views

Whether or not you agree this is the single greatest financial reporting tool ever, I hope you give it a try and find it useful.  Now I’m going surfing….

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Why Are VCs So Scared of Hospitals?

By brianascher

There is much conventional wisdom in venture capital.  One such belief is that hospitals are a really horrible market for tech startups to pursue.  Back in 2002 when we invested in Vocera, an innovative communications system for hospitals (think Star Trek), many other firms had looked at the deal and passed.  Although this was the company’s third round of financing, the company was still pre-revenue and pre-launch, and this was the first round raised subsequent to their strategic shift from a horizontal solution to one vertically focused on hospitals.  Most VCs ran from it.  Following are some of the reasons potential investors gave for hating the hospital market then, most of which persist as concerns, often valid, today:

1.      Hospitals are highly budget constrained

2.      Most hospitals don’t have profits motives and are not subject to the same competitive forces as for-profit businesses

3.      Hospitals are complex political environments with many forces that influence decision making and purchase behavior that seem counter to rational business judgment.  Those who decide, those who approve, those who pay, use, benefit from, can all be different roles in the organization.

4.      Sales cycles are very long, often measured in years.

5.      Hospitals are technology laggards when it comes to adopting information technology.

6.      Hospitals are dominated by large technology vendors such as GE, Cerner and IBM.

There is some truth to each of these, but here’s the counter argument that led us to make a second investment in the hospital market, namely Awarepoint, an indoor GPS system for tracking people and assets in the hospital.

1.      There are lots of hospitals.  Over 5500 in the US alone, and there are little blue signs pointing you to each of them.  Given the annual budgets of your typical hospital, this translates into a very big market.  Vocera now serves over 650 hospitals and more than 450,000 daily users, and is still growing very rapidly, believing they have tapped less than 10% of their core market opportunity.

2.      Hospitals are sticky.  Once your product is adopted, and assuming it works well, they are reluctant to switch you out because solutions get so enmeshed in different processes and systems, and so many employees get used to them.  You can’t screw up, or raise prices dramatically, but you may not have to sing for your supper every time a competitor issues a press release.

3.      Hospitals are willing and able to spend on IT if it is a priority and they see an opportunity for a large return on investment.  This is one of the things helping Awarepoint penetrate the market, and they are not alone. Companies like Allocade , which creates dynamic patient itineraries to improve throughput, are also having success based on the ROI they can deliver.

4.      Because hospitals are underpenetrated by information systems, there is lots of low hanging fruit and relatively basic problems to be solved.  Electronic Medical Records vendors are having a field day, both because of stimulus incentives but because many hospitals, especially the 72% of all community hospitals with under 200 beds, still don’t have this basic form of digitizing their information.  The trend towards Accountable Care Organizations, and the related financial incentives, will require greater clinical integration of care across health care settings (inpatient, ambulatory), greater financial efficiency, and increased transparency and flow of information about the process, costs, and outcomes of health care, all of which will require better healthcare information technology.

5.      Hospitals are similar to each other and willing to serve as references to each other.  Yes, they do compete in some ways, and each has its unique attributes, but you find a higher degree of collegiality and similarity than most industries where competitors hate each other and each may have very different ways of doing their core activities.

There are a few reasons why the hospital market is ripening for startups and the VCs who love them:

1.      Hospitals are feeling financial pressures to run efficiently.  With healthcare reform there will be more patients coming in their door requiring services, while price caps will get tougher.  And there will be financial penalties for things like readmission rates that often correlate to operating inefficiently, and which technology can help prevent.

2.      With the EMR mandates and installations, the Chief Information Officer is now in an elevated position in the organization and even considered a revenue generator.  Many EMR installation projects are leading to ancillary projects and opportunities to automate and digitize other aspects of hospital operations.

3.      New IT paradigms like cloud based services, open data initiatives (thank you Todd Park @ HSS), APIs, and Open Source means that it is less expensive to build and deliver better products into the hospital.

4.      Wireless technologies, and relatively cheap and robust devices like iPhones and iPads, make it easier to reach caregivers on the go, whether nurses at the bedside or Doctors on the golf course.  Companies like AirStrip are getting real-time info to the caregiver wherever they are, and caregivers love it.  Also, WiFi and Zigbee in the hospitals means your equipment and monitors, and even staff, can transmit their info from wherever they are without wires and expensive, disruptive installations.

5.      This current generation of Doctors and are used to technology in their personal lives.  They use email, carry iPhones and Blackberries, shop online, etc.  And the residents entering hospitals today are Digital Natives.  There will be an increasing expectation that hospitals adopt these technologies that most other verticals have embraced.

While we fear the unexpected visit to the hospital as much as anyone, Venrock is looking forward to more investments in companies that serve them with compelling HCIT solutions.

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Building Healthcare IT Companies: 11 Insider Insights

By brianascher
This blog post was a collaboration with my Venrock colleague Bryan Roberts, who in addition to being a great bio-tech and medical device investor, was also an early lead investor in athenahealth, and currently on the Board of Coderyte and Castlight, two really hot HCIT companies.

Having participated in healthcare IT for the last 10+ years, we decided to collect and share some lessons learned. The list is by no means exhaustive, so let us know your thoughts – where you disagree, what you would add, etc.

  1. The product must be a true “have-to-have”, not a “nice-to-have”. Any healthcare IT product needs to solve an important problem for a defined customer base (providers, payors, patients) and this is where lots of companies go astray. The product needs to help someone enough for them to be compelled to adopt it, while they are busy worrying about a lot of other things, and it is not enough to have a product that helps out the “system”. If you can’t convince yourself that it is one of the top three things that your specific customer is concerned with, forget it.
  2. Healthcare is actually an aggregation of many small “markets”. While the overall healthcare market is measured in billions – if not trillions – very few needs, ideas or businesses can span the entirety. Many companies/ideas are only applicable to a subset (breast cancer, arthritis, heartburn, etc.) of healthcare or require significant re-work as one moves from one disease area to another – think content for different diseases. This dynamic also substantially impacts some of the revenue stream opportunities and the critical mass needed to make a business viable. For example, pharma advertising for a given drug is targeted at patients with a specific disease, not all healthcare consumers, and so the number of overall users needed to amass a specific target population and access that ad revenue, is many multiples of that target market.
  3. Start-up revenue streams and value propositions are elusive. There are lots of potential revenue streams in healthcare, but many are only accessible to a business that has hit scale (perhaps $100MM revenue) and critical mass creates an ecosystem such that the network has value above and beyond the interaction between the individual customer and the product. This is especially true for advertising and data revenues, but also for lead generation and others. It is much simpler to create viable revenue streams when your business reaches a substantial size than it is to find the revenue stream that gets you from $0 to $50MM… So think hard about the value proposition and revenue stream for the start-up phase of your business before you hit critical mass and dominate a space.
  4. Customers must have more money with your product, than without it. There is no room for broad adoption of products that are a financial drain. Remember that every participant in the healthcare system is strapped for cash – hospitals are lucky to run a profit, doctors’ earnings have decreased consistently over the last decade and patients are used to “free” healthcare. You have to offer hard, demonstrable ROI. You can get away without it for a small number of leading edge customers for a while, but the primary goal of those customer engagements must be to get the ROI data that will be necessary to support broader customer engagement. Adding another cost, even with a long-term ROI is very hard.
  5. Businesses with strong network effects are gold mines. Given that healthcare has complex problems and customers are tough to secure (long sales cycles), a network effect can solidify a first mover advantage and continually decrease sales cycles, as well as afford sub-5% annual churn rates. Happily, the healthcare industry is ripe to create businesses with network effects given the historical underinvestment in the space and the proliferation of “big data” business opportunities. Every customer should benefit from the cumulative customer base, with each subsequent customer deriving and creating more value than prior customers.
  6. The customer is mobile. Unlike many verticals, most health care providers do not sit at their desks all day; they are doing rounds and moving between exam rooms or even buildings. Meanwhile, consumers are making decisions that impact their health (eating choices, exercise, lifestyle) while out in the real world, living their lives. This situational complexity cuts both ways. On the one hand it makes some traditional enterprise strategies more difficult, while on the other, especially when combined with the proliferation of smart wireless devices, it creates opportunities for a new breed of mobile healthcare applications not seen previously.
  7. Expect to have a service component to your business, but avoid becoming a customized consulting shop. Healthcare is complicated and confusing, and although technology may solve a multitude of problems, it will require some handholding and take time. There is nothing approximating shrink-wrapped software in healthcare – and you want to use the service component of your business to help improve your software product. There is a virtuous cycle between the software and service. On the other extreme, the technology infrastructure should not be stove piped or custom-built for each individual client, even “marquee” clients. In healthcare, for a variety of reasons, there are significant pressures to bring your technology infrastructure directly under the thumb of the customer—the servers, the code, the management of the upgrade schedule, etc. Try to resist these pressures and ensure that you build a common chassis that you own with “plug-ins” for individual clients as needed.
  8. Beware of businesses dependent upon heroics…Make it easy. The healthcare sector is a notorious technology laggard, and for good reason. The environment can be chaotic, collaboration is complicated and staffing is convoluted. Simplicity is key with user interfaces and alerts are essential. For businesses targeting health systems, if your business depends on the brilliance, creativity and bandwidth of hospital IT, think again. Hospital IT is massively overworked and understaffed and has a list of number one priorities a mile long. The perfect solution for hospital IT is one that requires little or no effort on their part. For business targeting consumers, it’s dangerous to assume that consumers will wake up and start taking better care of themselves. Consumers will eventually start taking better care of themselves, but it is unlikely to occur before you run out of cash.
  9. Know your domain. Healthcare IT is neither healthcare nor IT. Concepts and actions that traditionally work in each of those established spaces can run afoul in Healthcare IT. Navigating this sector is complicated – from a regulatory perspective, privacy, relationships, etc.
  10. Secure customer references and studies. Winning “lighthouse” accounts, such as the prestigious clinics and teaching hospitals (Mayo or Johns Hopkins), can be great validation for your product or service. These customer references will earn you respect, but unfortunately many customers will look at those institutions as fundamentally different from their own situation (whether based on size, financial resources, scope, etc) and thus not relevant as case studies. Often you will need multiple, credible local references in each geography before you can enjoy the efficiencies of reference selling. Same goes for ROI and effectiveness studies.
  11. Do well by doing good. Healthcare can be viewed as a business or a calling, but the most successful ventures view it as both. It is hard to beat an entrepreneurial team that is powered by the dream of both financial and social rewards. So strive to create value across the board (customers, investors, community).

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