Digital healthcare investing has gone through several waves: 2013 was the year of consumer wearables, 2014 of healthcare big data, 2015 of virtual care delivery and 2016, so far, has been about payer disruption. 2017 will be a return to the core practice of medicine: technology that enables providers and biopharma to extend their reach and take greater risk for outcomes.
In 2016, the VC market has rewarded digital health startups that are disrupting traditional carriers. In the last 12 months, we’ve seen startups, like Bright Health (new carrier, $80 million raise in April), Clover Health (new Medicare Advantage plan, $165 million raise in May), Collective Health (TPA/ASO replacement, $80 million raise in late 2015), Hixme (migrating covered lives from large group to the individual market) and Oscar (new carrier, $400 million raise in February) raise tens to hundreds of millions of dollars in venture financing at substantial Series B and C valuations.
Why? Because payers have been an easy target.
Carriers were born in an era where fee-for-service reimbursement rewarded coverage, so they built large networks of contracted providers, leveraged economies of scale in volume and rented access to these networks to self-insured employers. That compact is fraying.
Providers are taking risk and competing upstream (with the help of companies like Evolent Health), employers are building their own narrow networks to steer volume to high-quality/low-cost centers of excellence (with the help of companies like Imagine Health) and medical loss ratios (which dictate the percentage of carrier premium revenues that need to be spent on clinical services) are squeezing carrier margins.
Large carriers have responded by consolidating, seeking even more scale. However, survival through size has its limits. The DOJ has drawn the line at Anthem’s $54 million bid for Cigna and Aetna’s $37 billion bid for Humana on antitrust grounds.
Our view is the business of insuring lives at scale is labor and capital-intensive. There is substantial operational complexity required to contract with 5,600 hospitals and 800,000 physicians in the U.S., issue membership cards, verify eligibility, process claims and engage consumers when they call. It’s hard to achieve venture level returns at Series B and C valuations approaching $1 billion.
We’ve seen this story before: Investors putting tens of millions to work into Fitbit and Jawbone in 2013, chasing the consumer wearables story.