Digital health startups secured $1.4 billion in investment in 2012, with healthcare administration, personal health and consumer engagement emerging as the leading investment categories. Despite this growing interest in healthcare, however, there is a reluctance among early-stage investors to invest in more nascent digital health opportunities like managed long-term supports and services (MLTSS).
Managed long-term supports and services entail risk-bearing organizations, like health insurers, coordinating care for frail elderly who are vulnerable to health disparities. The goal of MLTSS is to triage the patient to the lowest cost care and maintain sufficient functional supports to keep the patient in the community, rather than in the institutional setting.
Between the evolving healthcare regulatory environment, clinically complex patients and dispersed post-acute care market, MLTSS makes for a steep investor learning curve. This lack of investor knowledge about MLTSS not only affects investment, but more importantly stymies the funding channels needed to fuel innovation for vulnerable populations. Furthermore, the digital health technologies currently garnering the most investment do not emphasize the elimination of health disparities for vulnerable populations; in fact some may be at risk of exacerbating disparities.
Understanding the market opportunity and emerging business models for digital health startups in MLTSS could help more investors realize the potential for compelling ROI in these companies and simultaneously achieve the Triple Aim for vulnerable populations.
The market opportunity for MLTSS is grounded in the substantial potential for payers to profit from managing complex patients. Typical margins for payers managing generally healthy patients reimbursed by Medicaid range between 2 percent and 5 percent. Higher-risk patients, particularly those who are Medicare-Medicaid dually eligible (duals), can lead to margins as high as 10 percent to 15 percent if managed effectively. Conversely, some duals can cost $60,000 per year. And when payers fail to risk-stratify appropriately and only negotiate a capitated $2,500 per member per month (PMPM) premium ($25,000 per year), they can very quickly lose a lot of money.
The profit potential from managing duals arises from their disproportionately high use of acute care hospitals, with almost twice the hospitalization rate for duals than general Medicare patients. Duals are also more likely than non-dual Medicare patients to get readmitted, with 25 percent of duals and 20 percent of Medicare non-duals being readmitted within 30 days of discharge.
In addition to being more frequent users, duals also account for a disproportionate share of Medicare and Medicaid spending: They comprise 20 percent of the population and 31 percent of spending for Medicare and 15 percent of the population and 40 percent of the spending for Medicaid.
While 19 percent of the average PMPM premium for duals is spent on hospitalization costs, duals are also frequent users of post-acute care services, with 23 percent of the PMPM premium being spent on home care and 33 percent on skilled nursing facilities (SNFs). Even though acute care is one of the largest contributors to duals spending, post-acute care is the fastest growing cost. Within post-acute care, institutional long-term care, such as SNF care, costs $1,614 more PMPM than home and community based services.
Not only does MLTSS decrease the cost of care, a review of nine randomized controlled trials showed that integrated and coordinated care improves outcomes and reduces healthcare use for the frail elderly. This creates an enormous opportunity for payers, particularly when up to 30 percent of “low care” SNF patients could remain in their homes if they had the right resources or technology in place.
With the MLTSS market doubling since 2004, digital health has enormous potential to reduce hospitalizations and unnecessary use of expensive post-acute care by streamlining, augmenting and scaling MLTSS.
Emerging business models
In addition to outlining the market opportunity for digital health in MLTSS, preparing investors for more complex business models may help them become more comfortable investing in this space. A major challenge to creating scalable business models for MLTSS digital health companies is the limited purchasing power of the end beneficiary, the patient. These patients are typically financially compromised in addition to being clinically high-risk. The confluence of socioeconomic and medical risk factors limits the ability of duals and other vulnerable populations to purchase digital health technology directly. Additionally, their technological illiteracy due to language or age barriers introduces more challenges to so-called "freemium" or ad-based models.
A promising business model for MLTSS digital health startups is selling directly into risk-bearing organizations that have the most to gain from optimizing care coordination and care management for duals. Several policy instruments have created incentives for such organizations to keep patients healthy and in their homes. These organizations, typically payers, have substantial purchasing power and can drive scale of a technology once it is adopted.
A major limitation with a B2B sales strategy with payers is the long sales cycle. But that's a surmountable barrier, especially when investment dollars provide a startup in this space with the runway to test their product and business model a sufficient number of times to find the approach that is scalable.
By educating investors about the opportunities that lie in the MLTSS digital health space, more informed investment can be made in a healthcare space that is pregnant with opportunity to create profit for investors and achieve the Triple Aim for vulnerable populations.
Other stakeholders in the startup ecosystem can help to eliminate risk for investors in MLTSS and other spaces that leverage digital health to eliminate health disparities. Incubators can vet startups for top entrepreneurs and provide a conduit to difficult-to-reach resources such as development talent or legal guidance. Foundations can educate investors and establish best practices for investment in digital health to serve vulnerable populations. The government can continue to liberate data and push for rational interoperability standards.
This glimpse into socially minded digital health innovation and investment is just one of many opportunities to leverage commercial growth to eliminate health disparities.
Andrey Ostrovsky, MD, is the co-founder and chief executive officer of Care At Hand, Inc., and a pediatric resident at Children's Hospital Boston and Boston Medical Center.