The Business of Healthcare

hospital from above

The sheer scale of the healthcare system is mesmerizing. In the US alone, $11,072 per capita spending (in 2019) and at around 320 million in population means that we’re looking at $3 trillion in annual spending.

And even though the US is the largest spender, spending per capita has been rising across the entire world, driving healthcare to make up a larger and larger share of total global GDP.

But, as experienced founders know, the sheer size of a market alone doesn’t matter that much. What matters is how attainable it is for your specific business and business model.

For founders in the healthcare sector, this means avoiding the number one faux pax; forgetting the “business” part of the healthcare system.

“Improving care” is not a compelling pitch in and of itself

When I encounter healthcare pitches, I often find they focus on how many lives the device or service will improve and a relatively generic market number.

This is, to put it simply, a mistake.

More often than other markets, healthcare founders assume that if they make a good enough product, it’ll just get adopted.

They talk about how it improves patient care and saves lives, thinking “It’ll definitely get adopted once I finish building it and going through the regulatory process!”

In other industries, this is the “If I build it, they will come” logic.

Not only is it just as flawed but—unless you have a very specific model of “quick flip” IP-based exits—it’s actually more misguided in healthcare than other verticals because customers are usually so much harder to acquire.

Healthcare is still a business

Healthcare is complicated and, in certain places, it’s not even a true private business (such as in true single payer and provider, like the UK National Health Service). Or, at least that’s the argument I’ve heard for why “it’s different” in healthcare.

That said, most of these publicly financed/run systems still make “business decisions” in terms of cost/benefit, including the US’s CMS (Centers for Medicare and Medicaid Services) which manage standards for Medicare and Medicaid.

In the case of most medical devices—which is what Creative Ventures typically invests in within the healthcare space—the end customers are providers, (aka hospitals, most of which are private even outside of the US). Single payer and provider like the UK is actually quite rare, and it’s really just the Nordic countries that are the other notable region with that system.

It’s actually harder in healthcare

Imagine that you can only receive verbal feedback and your customer can’t even use your product. That would be a complete nightmare and the kind of situation you should avoid at all costs as a startup, as per the now ever-popular lean startup philosophy.

But guess what? That’s your situation with most healthcare-related startups!

Therapeutics, especially small molecule (what most people think of in terms of pharmaceuticals), is its own can of worms with a lot of unpredictability in whether it works or not. Even putting those aside, medical devices, even ones you’re fairly sure will work the way you expect, still usually cannot be clinically tested before gaining FDA (or equivalent) clearance/approval. You may have research exceptions, but that’s still not the same thing as refining a product for a paying customer—especially since the “real” paying customer in terms of hospital administration or department heads may not even be interacting with you on those research uses!

For those of you not from healthcare, I already hear (and have heard from mentoring sessions) the “solution.” We’ll get clearance and iterate!

Before you ever get FDA clearance/approval and put the device into the hands of actual users, however, you actually need the final, manufactured version as well.

As such, you better be very sure that you know exactly how that product will be used and who you’re selling to—and that “who” you’re selling to will want to buy it.

In fact, because of this dynamic, the last part is actually the most important. There are so many preliminaries and hurdles that products in healthcare are often quite clunky and imperfect. The competitive field is shaped by the forces of these regulatory barriers—even if they’re in place for very understandable reasons. So you mainly need to ensure that the product is something that will be bought, and not something that is perfect.

That is, “perfect” in terms of refined UI/UX, nice edges, etc. Being imperfect does not mean a lack of quality management. In fact, quality management systems—QMS—are quite important.

The buyers are more complicated

SaaS startups talk about needing to deal with blockers, getting buy-in from key stakeholders, having economic buyers, and technical champions… and so on and so forth. While you can give a lot of labels to different stakeholders, all of those stakeholders exist in healthcare and are worse.

Before we even get started: payers and regulators

Before we even get into the business of even interacting with the broader “buying” market, we have to get the preliminaries in order.

In general, for the startup’s customer (the provider) to get paid, a startup may need new procedure codes (if it changes something in a procedure) or at very least a reimbursement code. There can be existing reimbursement codes, or the startup may need to push to get a new one adopted—for a lot of interesting, new applications (that can command higher reimbursement), new reimbursement codes are required.

In addition, of course, we also need to satisfy regulators. Regulators are perhaps the only step of this entire process that don’t actually have “business” considerations (either in terms of directly economic or related to workflow, etc.)—but you still need to communicate and coordinate with the FDA (if it’s not a simple clearance with an obvious predicate) and negotiate a potentially long process.

Aligning payers, providers, and physicians

Although providers themselves technically are the economic buyer, as said, you still need reimbursement codes, approved by payers (like CMS and the private insurance companies). As such, you need a business case in terms of why having this code will save the payer money (decrease costs).

Although physicians are technically part of providers, physicians can either be champions or blockers depending on how much they think your product will make their jobs easier or harder.

The incentives of these different entities often do not align:

  • Payers want fewer procedures to pay less for insuring patients.
  • Providers, because most healthcare is still fee-for-service, want to do more procedures to get more in reimbursements.
  • Physicians are overworked and although they typically do care about improving patient care, they can kill your product by advocating against it or refusing to add it to their workflow.Unfortunately, even within the provider layer, there’s complexity.

Now you get to play the sales game

After getting through all of these preliminaries, it is only now that we get to engage on the same level as a typical sales process within, say, a commercial SaaS product. And we still need to do it.

When you’re dealing with larger hospitals (which is the target for most scalable startups), you may have multiple layers of hospital administration (business and clinical directors), innovation/new technology committees of clinicians from different departments, and all sorts of other cross-hospital complexity and politics in getting your product adopted.

In other words, the process you have to go through in terms of adoption in any kind of large, bureaucratic organization.

In this case, you may need physician champions, and ideally opinion leaders that can help speed up your process by explaining and advocating for your product as part of a new standard.

As said, this isn’t that different from other institutional sales with long cycles, but it is worth noting all the layers before getting here, as well as the fact that you can’t trial/test your product before this part of the process.

Pay attention to the business side of your healthcare startup

As Justin Kan recently put in (in meme form): 1st time founders care about product; 2nd time founders care about distribution.

Product-market fit is still key, but the harder part of growing and scaling a business is finding the right distribution strategy. A good product will still get nowhere with a bad distribution strategy, but a bad product can at least still get somewhere with a good distribution strategy.

In healthcare, this is even more crucial. As discussed before, regulatory barriers mean that products in other industries may look much more refined, especially in UI/UX. Product perfection is less important than a good fit with the buyer—which in this case has many layers and is quite complex.

It’s not the right product that will win, it’s the startup that finds the right way to sell it and get the buy-in of the numerous stakeholders involved in healthcare.

If you’re a healthcare startup, being able to save lives and improve quality of care is certainly a good and laudable thing. Many founders of healthcare startups are actually clinicians who come with that clear goal in mind.

Again, I certainly would not say it’s a bad thing.

That being said, healthcare innovation is a graveyard of failed companies with a lot of potential to save lives and improve quality of care. If you want to actually succeed and realize that potential, you need to think far more about the economic incentives and flow of money related to your product.

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