The healthcare field isn’t quite as complex as it’s made out to be, according Bryan Roberts, partner at Venrock. You just need to have the right ingredients.
“People talk about healthcare as being this complex minefield of insurers, and PBMs, and imaging centers, and providers, where unknowns crop up and unexpectedly stop you in your tracks ,whether you are an incumbent or an upstart trying to endeavor to create change in the system,” Roberts said at the keynote address of Accelerate Health’s second episode: Innovation and Investments: The Year That Tested Digital Health.
“It’s not this complex minefield. It really depends on two things: the availability of information to make good decisions, and the financial incentive to make good decision. If you have both of those you are going to get the results that you want. If not, you are totally stuck, no scale, no impact, no durability.”
The financial aspect is important in healthcare, where the profit margins are notoriously tight and the operating cost are high.
“For an enormous industry – $3.6 trillion of spend in 2019, the financial statement structure and margins of the business in the healthcare industry are terrible. Nobody makes any money. It all goes into labor and services. So, while you have these very large businesses, they actually create very little profit and economic value.
“It’s why most of these publicly-traded businesses, leave aside pharma and medical devices – that’s a different type of industry – but most of these businesses trade between a half X and a couple of X of revenue. This is like restaurants – not, like software businesses, SaaS business, where they trade a 20X revenue. As a result, the top several priorities of all of these businesses at any given time is how they create more profit, because their net margins hover distressingly around 0, so they either need to increase revenue or cut expenses.”
But cutting costs alone isn’t all that industry players should be looking at. Instead, Roberts urges innovators and providers to look at the intersection of information and financial incentives. He went on to note that the field of technology is improving in order to help data about patients become more readily available about patients.
However, this field is still emerging and has a long way to go. In the future, Roberts said that he sees technology being able to provide the right patient data at the right time in order for the doctor to make the best decision.
“Let me give you an example of the place where I think the intersection of those characters has made the most difference over the last decade in healthcare, and I think will continue to make a difference. In fact, it’s been decades of talk by healthcare academics and pundits about value-based care. It was purely a myth. In the last decade, it started to gain some traction. I think that is all because of the intersection of information and incentives. It all started out in Medicare Advantage.”
He went on to explain that Medicare Advantage is the private arm of Medicare, where the government will pay a specific amount of money to a risk bearer in order to take care of a patient. That amount is based on a few factors, including the patient’s condition and location.
“Insurers, globally capitated docs, have both the information they need in order to make good decisions, as well as, because of this county and patient risk-adjusted payment that the government pays them, the financial incentive.
"If they take care of a patient for much less than the benchmark payment, they get to keep the payment. If it costs more, it’s out of pocket for it. So, there are large profit- or loss-capabilities for the insurer or globally capitated patient.”
The other element that makes Medicare Advantage different from other health plans is that Medicare patients typically stay on one type of insurance longer than their peers on private insurance. This means the plan and provider may have a longer-term relationship with the patients.
“Those three things have resulted in longitudinal proactive care of these chronically multiple-comorbid elderly, which has led to dramatic decreases in hospitalization rates. That’s where all the savings – and profit and efficiency – end up coming. So, you take more preventative care, more longitudinal care, you decrease hospital rates – so they are in fact healthier.”
Today we are seeing an expansion of this kind of ideology through Accountable Care Organizations. These organizations receive financial incentives for keeping patients healthy. When an ACO succeeds in delivering high-quality care and lower spending, the ACO will share in the savings it achieves for the Medicare program.
Roberts said that in the future, as information and financial incentive are married, the healthcare ecosystem is poised to see more of these kinds of efforts, and in return healthier patients.