How does one define material change in healthcare, especially in an industry that is in such dire need of it? Have you ever noticed that the more healthcare changes, the more it appears to stay exactly the same? This is the recurring theme here at Jumpstart Foundry, and we thought we would invite you to check out a snippet of this very discussion between our CEO, Vic Gatto and Managing Director, Eller Mallchok.
Vic and Eller work closely together in managing the investments at Jumpstart Foundry. However, they have an ongoing (mostly) friendly debate about how innovation will play out in the marketplace. Through their individual experiences and expectations, these two look at the healthcare industry through different lenses.
Vic Gatto has been investing in healthcare since 2001 - approaching 20 years.
Eller Mallchok has been investing in healthcare since 2015 - approaching 5 years.
We thought it would be fun to let you see their discussion points and contribute to either side.
“Healthcare is constantly evolving.”
Over the last 10 years we have seen incredible changes. The old systems are being disrupted and replaced by new and better solutions. While I understand the establishment is huge and entrenched, change is coming. You can see it in the news, in the way people interact with the health system, and in the competitive landscape.
The Effect of iPhone & Smartphones
Incredible as it seems, the iPhone is 12 years old. Apple changed the world and now just about every person in the US carries a powerful computer in their pocket all day.
This has driven the trend we call the ‘Rise of the Health Consumer.’ Individuals can track their own health with ease. They are taking an interest in their health information and beginning to use this data to improve the way they live. In addition, individuals can use this technology to find information on doctor, read reviews, and get price reports on procedures. This is already driving health systems to change and work to be more customer-focused.
Over the last couple years, the phone has evolved to become the hub for a host of other wearables to keep track of what people eat, how they sleep, how they walk, etc. All of this data is then collected by the phone and uploaded to the cloud. We are just beginning to see the predictive value of this data and it will drive incredible change in the next couple years.
Public Policy Changes
From a public health and policy perspective, there are three aspects to care: 1) Access, 2) Cost, and 3) Quality. Setting political opinions-aside, DC has dramatically waded in to try and improve healthcare in the US. The Obama administration aggressively pushed Access and was successful in getting many people onto insurance plans and providing access to healthcare resources. The Trump administration has aggressively pushed cost reductions. It is early, but these policies appear to be working to drive prices down. Health is the #1 topic for all 20+ candidates in the 2020 election. Therefore, we can expect government to keep pushing although the focus will change based on which party is in power.
Healthcare Disruption by Tech Titans
Large, powerful technology companies have begun to move in and compete for healthcare market share. They bring new approaches and lots of capital to the table. Apple, Google, Amazon, Salesforce and Walmart have all launched very large, new initiatives into the healthcare industry. Interestingly, while these big payers often compete with one another - in healthcare they have chosen instead to set their sights on establishing beachhead positions in diverse niche areas of healthcare. The established industry is not suited to compete and will be crushed in the next few years.
“Healthcare is essentially staying the same.”
While all of the above points are true, they minimally translate to how individuals experience healthcare today: how care is delivered, who pays, and who earns sustainable profits.
It’s all hype. We have seen almost no change.
Resistant Health Systems
Health systems remain dominant and resistant to change. Yes, it is true that over 50% of providers and hospitals are testing, exploring and piloting alignment of incentives and value-based care payment methods. However, it is also true that only 1-2% of actual revenue is being collected through these programs. The primary source of money remains in a fee-for-service model. This pays doctors and hospitals for each procedure completed. The incentives are designed to encourage volume not quality or outcomes.
The Battle With Insurance
The payments systems have not materially changed either. The US government pays for about 50% of all healthcare through Medicare and Medicaid. Sure they talk about reform and aligning incentives but when you dig into the details, these efforts are still small pilot projects. After CMS, the biggest payers for healthcare costs are large employers. With the labor market as tight as it is, these employers are primarily concerned with attracting and retaining the best possible talent. Therefore they are not interested in cutting costs or making big changes to healthcare coverage (scary).
Both the US government and large employers often use insurance companies to keep track of all the details and actually pay out the funds to hospitals and doctors for services. This structure confuses the general population in that they believe the insurance companies take on risk and thus are motivated to try and limit the total cost. While this is true for most forms ofinsurance (life, property, auto) it is not true for health insurance. When health insurance companies act as transaction processors, they take a small percentage of the total healthcare cost each year as their fee. In this way, the insurance industry actually makes more revenue when the overall cost of healthcare increases.
High Cost Pharma
The biggest driver of increased healthcare spending is the pharmaceutical industry. We all can celebrate new drugs that can treat symptoms and help patients manage chronic disease with a better quality of life. However, these drugs are incredibly expensive and the market is only accelerating. If we are unable to control drug prices, healthcare spending is going to become unsustainable.
Unfortunately, successful political lobbying efforts, huge advertising budgets and the American addiction to a “quick-fix” are only furthering the trend of rising drug costs.
Stepping away from this heated exchange, we see that “change” is relative and that the standard for what constitutes a meaningful change in this industry is different especially across these investors of different ages, personalities, and years of experience. In the end, we see that Eller and Vic are both right in what they say--who can argue with the facts? However, they each view the same problem through two different lenses, provided their differing expectations.
Much change has been and currently is underway, but it’s only the tip of the iceberg.
The healthcare industry is massive and has been digging itself into a hole for a very long time. It’s slow-moving with the exception of the rate at which spending grows. How can anyone expect a rapid transformation when there’s a huge controlling interest from the government--the slowest mover of all--and large lobbying groups that benefit from the system as-is? While all of this seems discouraging, it is the very reason why we do what we do.
We are passionate about making a positive impact and strive to do so by funding and advising up-and-coming companies that share this same passion as well as great potential to disrupt the system. Traditional players have shown resistance to change for quite some time; so instead of waiting for them to evolve, we are fueling rising stars that learn from trends and listen to customers to deliver service that meets their needs in ways the system has failed to do.