About the Authors: @DanGebremedhin is a Principal at Flare Capital Partners, an early stage Health Technology and Services focused VC Firm. He is a practicing physician at the Massachusetts General Hospital, previously served as a Medical Director at the Harvard Pilgrim Health Plan, and spent five years as an entrepreneur in the Health IT Industry.
@KaraLWerner is a current member of the 2017 Flare Capital Scholars Program. While completing her MBA at the Kellogg School of Management, she interned at Healthbox and athenahealth MDP. Prior to Kellogg, Kara was a strategy consultant at Accenture, specializing in brand strategy and commercial model redesign for pharmaceutical companies.
In Part 1 of this article, we addressed the more than $100 billion US nonadherence epidemic and the health tech companies developing solutions to solve it. In evaluating several early stage companies for potential investment, we’ve been impressed with the range of technology and solutions attacking the market. However, many of these companies are in the early days of commercial adoption, having conducted several pilot studies with commercial partners, or are in negotiations for staged rollouts across populations. Despite significant awareness of the problem of medication adherence, there has been a disconnect between funding, activity, and commercial adoption in the space.
Our hypothesis for the source of the disconnect between activity and adoption is the slow emergence of viable commercial models for adherence tech. Startups are still trying to answer two fundamental questions about their business models: Who pays? And how much? Several competing stakeholders along the value chain make the landscape complex and nuanced. In this competitive background, these stakeholders require clear indication of positive bottom line impact before allocating resources to unproven technologies.
In the below sections, we will profile the motivations of the key industry stakeholders in the medication adherence conversation. We then contemplate a model for assessing adherence tech product-market fit and how to achieve it. Finally, we will outline commercial model characteristics that will allow winners to breakthrough in this dynamic and crowded market.
Key Industry Players
Medication distribution landscape
It is vital to understand consumer/patient needs as they are the end users of most adherence tech. The willingness to “self-pay” for adherence tech however, is limited by the reasons of non-adherence itself. It is unlikely that a patient would be incented to pay out of pocket to achieve a task they have consciously or unconsciously avoided. Companies that have utilized other entities such as enterprises or family members as the paying customer, in turn subsidizing or eliminating cost for the patient have gained the most traction. Solutions that have received interesting consumer traction in this fashion are those targeting cost, forgetfulness, and convenience of fulfillment.
Providers (non-risk bearing):
For provider systems not taking on significant financial risk, there is a less direct line between adherence solutions and the financial bottom line. While physicians understand the importance of medication adherence on patient outcomes, the economic pressures of productivity prevent them from investing significant time in counseling patients on adherence. Even if a physician is managing a patient’s adherence effectively, it is often happening at the individual physician level and is difficult to scale across systems.
In turn, expecting non-risk bearing providers to pay for medication adherence solutions is a tall order, as there is little economic benefit to altering existing practice and workflow. The most attractive products to this segment require little time investment and workflow alteration to increase patient satisfaction and outcomes. Examples of solutions that meet the above characteristics are turnkey, patient facing solutions like discount cards provided by GoodRx and Blink Health or workflow augmentation solutions like Cover My Meds and ZappRx.
Payers (and other at-risk entities):
At-risk entities, such as health plans, self-insured employers, and risk-bearing providers, are a prime customer target for adherence tech. These entities are financially responsible for the medical costs of their populations and are incented to prevent costly downstream complications that result from medication non-adherence. Recent data suggests this continues to be a challenge for even forward thinking payer/providers, as ACOs do not necessarily have higher adherence rates despite significant effort in improved care coordination. The largest US payer, CMS, has attempted to tie health plan payments to Medication Therapy Management (MTM) activities measures through its CMS Stars Program. This program has led to more payers, specifically those insuring Medicare advantage populations, to drive more adherence intervention efforts.
Despite acknowledging that medication adherence is a priority and opportunity, payers have been slow to adopt medication adherence tech. We believe there are three main reasons for this slow uptake. First, payers are hesitant to adopt solutions that require upfront reimbursement and do not have proven savings. Startups who present potential “cost savings” figures tend not to be true cost utility analyses that factor in the cost of deployment of the intervention. Second, payers insure broad populations that have variable medication adherence needs. When faced with blanket PMPM vendor contracts, payers doubt the cost effectiveness of paying for services not utilized by segments of the population. Finally, some industry veterans will float a cynical maxim that increased medication adherence is a slippery slope that drives utilization and increases drug costs, creating a negative incentive for payers. We believe by tackling these three issues head on when marketing to payers, startups can improve their targeting and advocacy for tech-based solutions.
Retail pharmacies represent the last mile of the pharmaceutical value chain. As the last of a long line of distributors, retail pharmacies have narrow gross margins in the 20 to 25 percent range. This margin structure requires pharmacies to maintain high prescription volume, which is endangered by the fact that one third of prescriptions never get filled. To combat this statistic, pharmacies have transitioned from phone call reminders to deploying elaborate IVR (interactive voice response) systems and text message platforms to prompt patients to refill their prescriptions.
Because refill rate, and not true adherence, is the real KPI for a traditional pharmacy, there is limited incentive to track outcomes and maintain constant patient engagement. Adherence tech companies selling into traditional retail pharmacies have found frustration as incumbents have optimized around driving refill rates and are more focused on workflow technology to maintain their high volume, low margin business. By understanding and qualifying a pharmacy’s KPIs, startups can effectively target their solutions to the appropriate customer segment in this fragmented group.
There is a segment, though, of more enterprising retail pharmacies who aim to play a larger role in MTM, both as an additional revenue driver, and because payments for Medicare patients are increasingly tied to adherence rates. A handful of tech companies such as Digital Pharmacist and PrescribeWellness are attempting to fill the technology voids for pharmacies that need to maintain engagement with populations for the first time.
A relatively new and rapidly growing entrant into the industry landscape is the Specialty Pharmacy. This player serves as a distributor of higher cost “specialty” drugs that require a unique skill set given the often-biologic nature and high cost of these drugs. This player is growing in prominence given that specialty drugs are expected to account for 50 percent of all medication spending by 2020, even though specialty drugs make up less than 5 percent of total script volume. Specialty pharmacy firms work very closely with manufacturers, and enjoy a trusted relationship and healthy margin, to distribute and manage costly drugs that boost a manufacturer’s bottom line.
Given the complexities around specialty medications, which are often biologic and require IV infusion, specialty pharmacies have medication adherence and education as a core competency. These pharmacies have historically used nurse/pharmacist call centers and home visits to meet their goals, but are moving quickly to incorporate adherence tech into their workflows. Given the cost per prescription, these pharmacies can afford to invest in more costly adherence tech solutions such as ingestible sensors, in home care coordination services, or directly observed therapy. This category is an underpenetrated segment of the market that is ripe for adoption of adherence tech.
Wholesalers are likely the most obscure stakeholder in the medication value chain. Their business model is to purchase drugs at scale from manufacturers then distribute these drugs to retail and specialty pharmacies. In exchange for this distribution function, they retain a margin of 5 to 20 percent on the total cost of the drug. The top three wholesalers control over 85 percent of the market: AmerisourceBergen, Cardinal, and McKesson, combining for a revenue total of over $300 billion annually.
The wholesaler business model focuses on scale and relationships: manufacturers are their suppliers and pharmacies are their customers. To enhance these relationships, wholesalers have expanded their product offerings to provide adherence solutions to both ends of the market. Cardinal Health has been out front in these efforts after recently acquiring OutcomesMTM, a full stack MTM provider that markets services to over 40 health plans. Both the other major wholesalers have internal adherence initiatives, but we predict that they will soon look to the market to bolster these capabilities and are an attractive customer target for market entrants.
Recent months have seen Pharmacy Benefit Managers (PBMs) come under increasing scrutiny in the press. Several articles have been written about atypical accounting practices, suggesting perhaps the PBMs are a main culprit in rising drug prices. As a result of growing discontent, PBMs are now feeling pressure to provide more value to their health plan and employer customers in addition to the standard value proposition of negotiated “rebates”. While PBMs have long tried to control costs through custom formularies and utilization management, playing a larger role in medication adherence is an opportunity for PBMs to provide continued value to their customer base.
PBMs' initial approach to improved adherence was the Mail Order pharmacy. Recent studies though have cast doubt on the relationship between adherence and mail order, and suggest that 90-day mail order can lead to higher costs and waste. Given this shift, PBMs have now shown strong interest in piloting and deploying various tech-based adherence tools. Express Scripts, for example, has shown willingness to partner with adherence startups, but their recent activity suggests there may be starts and stops on the road ahead between PBMs and adherence tech companies. The company has successfully launched a partnership and investment in Mango Health, but also has had a rocky relationship with other adherence startups such as PillPack and Blink Health.
Ultimately PBMs will need to determine whether they see adherence tech companies as competitive or complementary. Given the valuable platform and many captive customers PBMs retain, we anticipate that PBMs will wisely see themselves as aggregators of adherence tech. We believe that PBMs will actively survey the adherence tech landscape, and will be frequent collaborators and ultimate acquirers of technologies that show long term, meaningful engagement and adherence.
Pharmaceutical companies face the largest financial implications of non-adherence to medications. Pharma firms have long provided mass market blanket adherence programs focused on patient literacy, co-pay cards, and mail order delivery. Recent data suggests these traditional programs are largely ineffective, forcing pharma to rethink their strategies. Much has been written about pharmaceutical companies’ desire to go “beyond the pill”. It’s unclear what is precisely meant by this mantra, given the wide variety of experiments and pilots that pharma companies have engaged in. Many critics of this current activity note “beyond” activities have been an extension of traditional market access, and incumbents have not gone far enough to impact patient experience. We believe this is a temporary phenomenon, as most manufacturers now have dedicated resources committed to digital health, and will continue to invest in a steep learning curve to drive outcomes with digital interventions.
Pharma is rapidly learning, and three major developments in the diabetes space provide a preview for future pharma-tech partnerships. Roche, the world’s largest biotech conglomerate, made early investments into glucose management app developer MySugr, and recently acquired the company for nearly $100 million. Novo Nordisk and its large diabetes franchise, recently announced a joint digital development and marketing partnership with app developer Glooko. And not to be left out, Sanofi, the owner of the blockbuster Lantus franchise, recently partnered with Verily to launch Onduo, a digital health company focused on diabetes management.
A catalyst that will undoubtedly hasten pharma’s adoption of adherence tech is the advent of outcomes-based contracts (OBCs). With the aid of technology companies such as Flare portfolio company Aetion, payers and at-risk providers can track the real world evidence of medical outcomes of therapeutics in practice, and structure OBCs that attribute some financial risk to manufacturers. Market leaders have already pointed to the need for adherence programs to successfully execute on these emerging contracts. Though the model will vary, we predict manufacturers will bring their own chosen adherence tech vendors to the table, as Merck has recently done in a set of OBCs with Aetna. It is still early days for OBCs, as a recent study suggests that while only 24 percent of health plans have an OBC in place, 70 percent of plans view them favorably, and 30 percent are in active negotiations to deploy these value-based contracts.
Searching for Product-Market Fit in Adherence Tech
Despite exciting tech development and clear market interest, the adherence tech market is still searching for product-market fit. Given the wide variety of use cases and customer segments, the value proposition of an adherence tech solution will vary based on industry perspective. After conducting several industry interviews, we’ve learned there is a dichotomy between the two attributes stakeholders care about most: cost of deployment and patient activation. Most adherence solutions today are either too expensive or are not engaging enough for patients. The solutions providing the most yield are logistically complicated, labor intensive, and expensive. Likewise, the solutions that are the most cost effective to scale across a broad population have little corresponding patient activation and adherence lift. Based on this line of deduction, we developed the below framework to think about the “value” landscape in adherence tech:
To create this matrix, we pursued a three-step approach:
- Through Part 1 of this blog, we evaluated the breadth of adherence tech startups and categorized them as succinctly as possible.
- We spoke with industry stakeholders to understand which solution parameters were most valuable when making a purchasing decision in the adherence space, finally settling on the axes of “Cost” and “Activation.” Cost was assumed to be cost of the deployment (product + implementation) of a technology from the perspective of the customer. Activation was interpreted to be a combined metric of adherence improvement and patient engagement.
- Our team extensively reviewed published academic and industry-sponsored research and clinical evidence to inform the relative degree of activation and cost each solution imposes. Admittedly, the analysis will be limited by the availability of reliable research on each solution category. Where limited data existed, we used our best judgement based on industry conversations held over the last two years. Although imperfect, we believe this landscape is an accurate depiction of the market, and will be useful to both customers and market entrants in navigating this dynamic space.
We believe the landscape can be used as a quick product-market fit guide when considering a target market to pursue or serve. Customers responsible for low needs populations (e.g., large commercially insured and employer populations) will favorably respond to the low cost and low or high activation solutions found in quadrants I and II. However, customers who serve high needs populations (e.g., Complex Care, Specialty Pharma) have a higher willingness to pay given the larger pharmacy budget and downstream financial implications associated with these groups. These stakeholders will be willing to invest in the higher cost solutions of quadrants II, III and IV, if activation can be realized. The adherence tech nirvana of quadrant II is currently sparsely populated in our opinion, but we are optimistic that existing solutions can migrate to this quadrant through further development of innovative tech and creative commercial models that offset upfront deployment costs.
Key Aspects of Winning Models:
Based on our survey of the adherence tech landscape, we have five recommendations on how to develop a commercial model that will meet the needs of customers in a replicable and scalable fashion:
1. Align Incentives by taking on Financial Risk: When considering adopting new technology, healthcare enterprise customers often flinch at the upfront cost of deployment and are doubtful of potential ROI advocated by start-ups. Startups can overcome this by putting a significant portion of their fees “at-risk,” contingent on a guaranteed savings or activation outcome.
2. Own End User Adoption: Health tech solutions broadly have struggled to gain user adoption rates above the low double digits. The main reasons for this are poor end user experience and ineffective marketing and onboarding strategies. Many startups will celebrate when they land an enterprise contract, only to bemoan non-renewals based on low ROI from a lack of organic traction in an organization. Market entrants must own end to end user onboarding to control their commercial destiny.
3. Develop a Platform of Capabilities that includes software and services solutions: To create large, market-leading companies, entrants should shift their focus from simply medication adherence to holistic management of medication regimens and end user and customer relationships. By building a platform that is a mix of evidence-based tech and activating and engaging services, entrants can tailor solutions to specific market needs and target long-term ROI collaborations with their customers.
4. Experiment with Commercial Models: Stakeholders want to see clear indication of positive bottom line impact before investing resources on new unproven technologies. Companies should test different commercial models to find the right mix of upfront costs and recurring revenue needed to ensure ROI for their customers. This may include successfully generating additional revenue streams to fund their business or innovative partnerships with other interested stakeholders. For example, we have seen companies using pharmacy revenue to subsidize their intensive medication reconciliation and care coordination programs.
5. Minimize Patient Responsibility: Technology reaches transcendence when you don’t know it is there. The more passive the solution for consumers/end users, the easier it is to gain high activation. Chronic disease populations are already burdened with their existing lifestyle adherence tasks, thus creating more work and cost for patients can become an untenable business model. By understanding end users’ current workflow/lifestyle and value system, entrants can design aligned solutions that reach high levels of adoption through seamless integration into end users' lives.
Our team has enjoyed learning more about the adherence tech market and we are indebted to the entrepreneurs and customer stakeholders for sharing their valuable perspectives. We believe the adherence tech industry is at a tipping point, and we hope the above work is a helpful guide to market access for companies looking to provide improved outcomes for patients who need it most. Please reach out and share your feedback with us on twitter @dangebremedhin and @karalwerner.Jordan Jumpman Pro AJ12.5