The Stone Cold Truth About Home Health Startups
One of my all-time favorite healthcare blog posts (besides Healthcare Pizza’s last few…) is a Medium article by Kyle Hill titled, “There’s No Magic in Venture-Backed Home Care.” Kyle is the former CEO and founder of HomeHero, a venture-backed non-medical home health startup that raised $23 million in funding before shutting down operations in late 2016. Throughout the article, Kyle describes the conception, growth, and fall of the company, detailing from his own perspective what went right and wrong along the way. I am a big fan of startup leaders expressing vulnerability and releasing an autopsy report to help future businesses, investors, and entrepreneurs. And as an American, I very much want someone to create a sustainable home health model that provides high-quality and convenient care at a price point available for all Americans.
Before we get too far ahead, it is important to distinguish non-medical versus medical home health. Non-medical care, also known as custodial care, are services that assist with the activities of daily living (ADLs) like bathing, dressing, housekeeping, cooking, medication management, transportation, and companionship. Medical home health is prescribed by a physician and includes services like therapy, wound care, pain management, IV therapy, and mobility training. The other major difference is that non-medical home health is typically a cash business, instead of being billed through health insurance, which is why so many startups have started on the non-medical side of the house.
According to Crunchbase, 140 startups have received $1.2 billion in venture funding to tackle the problem of home health. The reason venture capitalists love the home health market is because spending is projected to grow 7% annually from $103 billion in 2018 to $173 billion by 2026. Across the healthcare industry, we’ve seen an intentional site of care shift away from inpatient settings towards the home to improve patient quality and lower cost. See below for just a few of the high-flying companies that I’ve personally followed over the years who have raised mind-boggling sums of money.
Cue HomeHero’s entrance to the scene, as described in Kyle’s Medium article. Started in 2013, HomeHero’s business model leveraged a workforce of independent contractor (1099) caregivers, who were referred to as “Heroes”. With a user-friendly application and nicely designed online caregiver profiles, the marketplace grew quickly. According to Kyle, the 1099 independent contractor model allowed HomeHero to charge clients 30-40% less than industry average, while paying the actual caregivers 25% higher wages. Two years after launch, due to superior economics and technology-enabled scalability, HomeHero expanded into Orange County, San Diego, and San Francisco, having on-boarded 1,200 Heroes and raised another $20 million during a Series A.
The beauty of the technology-enabled 1099 contractor model allowed HomeHero to quickly expand to new geographies. While this geographic expansion was great for initial growth, their heavy digital marketing strategy seemed to have a cap on attracting new customers. In each new market, HomeHero was competing with entrenched local home care agencies who staffed experienced marketers and sales reps who focused on in-person relationship building with discharge planners and care managers at hospitals, skilled nursing facilities, senior centers, and outpatient facilities. To compete and fuel growth, hesitantly, HomeHero added this additional local marketing staff because the core service of the uber-like platform produced strong enough margins to support this extra SG&A expense.
On October 13, 2015, this all changed. On that day, almost 2 million home care workers gained protection under the Fair Labor Standards Act (FLSA) minimum wage and overtime provisions. From my review, this required all home care workers (i.e., certified nursing assistants, home health aides, personal care aides) to be treated as W-2 employees with the required benefits. Now let me be clear, I support the ability of all workers to earn a fair wage and be afforded their due benefits for full-time work, like health insurance and workers compensation. However, the world is not always right and wrong, and as you’ll see in a second, this decision had major implications on not only HomeHero’s business, but likely the future of home health for tens of millions of Americans receiving non-medical support in perpetuity.
In Kyle’s post, he shared the economics of the 1099 and W-2 employment model for HomeHero that I’ve summarized in the table below. The results are striking. The incremental on-boarding costs are dramatically higher due to complexity in paperwork and training required for new-hire W-2 employees in multiple locations. In addition, the W-2 applicable benefits like worker’s comp, benefits, and state taxes add $3.13 in cost to HomeHero. I do realize that you could make the case the costs never went away, it just shifted from the caregiver’s responsibility to the company, but it still hurt the startup’s financial picture.
The point being, any business that charges a customer $19.00 per hour and generates 26% margins, is much better than one that charges $3.00 more but just breaks even. Due to the void contracts based on the regulatory change, HomeHero terminated 95% of their 1099 caregivers, resulting in a business model that lacked the price, speed, and scalability that had allowed them to succeed. According to Kyle, in order to make profit, HomeHero would’ve need to raise prices to $25-30 per hour, which seemed too expensive for their target audience. This is what inevitably forced HomeHero to shutdown operations. Jump forward to today, according to an article from June 2019 in Home Health Care News, a new technology-enabled home care company, Family Directed, based in Louisville, KY, has acquired “substantially all the assets of HomeHero”.
The reason I’m so focused on the economics is because I want a sustainable, more affordable solution. Like gravity, taxes, and an Ironman-less Thanos, non-medical home health is inevitable. Whether it’s a family member, friend, or paid caregiver. Unless American’s begin adopting multi-generational housing at a furious pace, we have a simple math problem that threatens an entire generation’s independence. On average, non-medical home health services cost between $20 and $40 per hour, depending on the level of need, geography, and local supply. Even if we assume the lower-end cost of $25 per hour, if your loved one requires assistance 40-hours per week, that will cost $4,000 out-of-pocket per month. And that is for life.
The big problem is that less and less have that type of money for extra support. The average social security retirement benefit per month in 2019 is $1,461. According to Northwestern Mutual’s 2019 Planning & Progress Study, 1 in 5 Baby Boomers have less than $5,000 saved for retirement and 1 in 4 have less than $5,000 in personal savings. With an average life expectancy of 79 years old, who are the Americans that can potentially afford decades of paying thousands of dollars per month out-of-pocket? I want to believe in the promise of a better tomorrow, but home health is a really tough problem that will require future innovations in remote monitoring and sensors, along with changes in housing culture and flexibility to fairly compensate workers that allows remaining in your home affordable for everyone.
*Side Note: I will be traveling to Southeast Asia over the next two weeks, and therefore will be putting a momentary pause on Healthcare Pizza. The next article will be available on December 10, 2019 at 9am ET.
November 19, 2019