3 Reasons Why Healthcare Startups Fail
I’ve read countless articles pontificating about why digital health and healthcare startups often fail. Or at the very least, why we rarely see the break-out successes in healthcare enjoyed in the consumer tech or social media space. The realest article was written by Neal Khosla, who likely gave some founders and investors PTSD over his description of the challenges faced. Now I’ve worked in strategy for a hospital, health plan, and healthcare technology company, and still feel somewhat unprepared to offer a bulletproof opinion. However, I’ve received multiple requests to address this topic and therefore will try to give the people what they want. In reality, there are literally a million reasons why healthcare startups fail. Bad founders. Unable to pass FDA approval. Inability to receive patient or physician adoption. No legitimate reimbursement. HIPAA and regulatory barriers. And a ton of other reasons. Rather than boil the ocean, I will now dive into 3 factors that I believe disproportionately take the cake.
1. Long Sales Cycles Hunting Whales
Picture it. Your startup needs one new hospital, pharmaceutical, large employer, or health plan partnership. The deal would bring in revenue, data, and name brand credibility to your startup. If you close an exclusive deal with Cleveland Clinic, even the investors may get off your back. Welcome to the business of whale hunting. You and every other hungry entrepreneur in your particular space are targeting the same organizations with eerily similar sounding value propositions. I know your baby feels special, but as an early stage population health IT startup, how differentiated can your product really be to larger startups or publicly-traded companies over a pitch email? The unfortunate thing about whale hunting is that most healthcare startups are not well positioned to sell into c-suite offices at large, incumbent organizations. If you’re 35 years old and this is your first foray into healthcare, it is highly unlikely your rolodex is chock full of healthcare leadership from your parents’ generation. Remember the saying, your network is your net worth? These words have never been truer then in the hierarchical world of healthcare.
I’ve spoken with many startups who start with the c-suite targeted approach via warm introductions through investors or advisors. This is a great option, particularly if you have a well-connected individual willing to go to bat for you. However, make sure that your value proposition and solution matches the audience you’re speaking with. Imagine getting a 45 minute in-person meeting with the leadership of a $5 billion health system who is simultaneously facing a 2,000-employee nursing strike, $150 million Epic installation, and a 5% fee schedule reduction with large commercial health plan in their market. If your technology promises a potential savings of $500,000 a year, you are the 18th most important decision that day. In addition, if your startup does not deliver value to the clinical, financial, and strategic pillars of the organization, you will fail to convince necessary stakeholders at the table to take a chance on your idea.
Now in absence of the warm-introductions, many startups rely on mass email marketing, conference booths, and cold calls. They also usually pivot towards targeting mid-level managers at large healthcare organizations. Nowadays it is very easy to find some email list and blast off a few hundred generic pitches to people who might not even work at the company anymore. These emails will often include phrases like, “Looking for a pilot”, “We have some of the best investors”, and “Our technology will lower costs and improve outcomes.” Literally everyone uses those phrases, so try and be more creative. However, let’s assume for one second the mid-level manager responds and asks for some supplemental material to review. You should do everything humanly possible to get a meeting, preferably in-person, and at the very least over the phone instead. I don’t care if they provide a random day next week in a different city. You should say, “funny enough, I’m actually in your area for a few days next week and happy to swing by in-person.” As long as you’re halfway capable, the in-person interaction will help you in the sales process. Now here’s the risk of the mid-level manager approach. Have you ever been to purgatory? That is what happens if you get stuck in the bureaucratic machine and unable to make any real deal progress. You end up with half a dozen phone calls and emails over 6 months without ever having met the decision-maker of the organization.
As someone who has tried to sell complicated technology and services to health systems, health plans, and physician groups across the country, I feel the pain of the long sales cycle. I also understand that a “no” today does not necessarily mean a “no” tomorrow. Managing the pipeline from top-of-funnel down to deal negotiation is both a skill and an art. And as someone who has growth hacked their way to a LinkedIn healthcare following of over 15,000 in 8 months, I know firsthand how difficult it can be capturing the attention of leadership at healthcare companies over digital marketing. Be scrappy and resourceful throughout the whole sales process.
2. Difficulty Navigating Local Healthcare Kingdoms
Think about the massive healthcare system we have created in this country. The landmass of America is almost identical to Europe, and there’s 44 European nations with drastically different economies and populations. There are 6,146 hospitals in this country. There are over 1 million active physicians across a range of specialties. We have a ridiculous number of health plans and different lines of business, from for-profit national insurers (e.g., UnitedHealthcare, Aetna, Humana) to small, regional plans across Medicare, Medicaid, Commercial, and other (e.g., Tricare, Veterans, Indian Health Services). This doesn’t even take into account the variety of special needs plans (SNP) and Centers for Medicare and Medicaid Services (CMS) demonstration programs. In most instances, even individual state plans of larger national parent companies have flexibility to create their own unique partnerships and startup pilots.
Yet despite the size and breadth of the ecosystem, healthcare is still delivered local. Most Americans have their preferred primary care provider (PCP) and hospital. They also send their prescriptions to the pharmacy closest to their house and utilize the urgent care center 5 minutes from their work. The elderly care market is a perfect example of a highly fragmented market, with locally owned nursing homes, home health agencies, transportation companies, and hospice organizations. To give you perspective about the decentralization we’re doing with here, the largest hospital system in the country, HCA Healthcare, has 214 hospitals and 37,778 staffed hospital beds. There is a total of 924,107 beds in the U.S., which means HCA represents 4% market share.
The health plan industry is a little more consolidated than hospitals, but still challenging to navigate. In any given state, the largest health plan is oftentimes Blue Cross Blue Shield. However, there are 36 independently and locally operated Blue Cross Blue Shield companies delivering care across all 50 states, the District of Columbia, and Puerto Rico. Not to mention that in some cases, multiple Blue Cross Blue Shield plans overlap states. Do you start with corporate or a state-specific leadership team? What line of business are you focused on? Centene and Molina are not large players in the commercial insurance space but dominant Medicaid managed care. All these factors limit your ability to scale quickly and consistently.
And last but not least, patients are local. They don’t want to travel too far for care and have been conditioned to value in-person, physician-to-patient visits. Any startup who works to improve outcomes and lower cost will need to cater to the patient’s needs, regardless their individual living situation. This inherently challenges healthcare startups to attract and retain a critical mass of patients in the time frame required to show continued momentum for investors.
3. Fragmented Value-Based Care Reimbursement System
It’s ridiculously easy to say that all providers should shift into value-based care to improve quality and lower cost. However, what does that really mean? Since the industry didn’t adopt national standards, what started as a generic concept has morphed into a thousand flowers blooming. All across the country, we have different programs for different providers with different characteristics. For example, we have 7 different Medicare accountable care organization (ACO) models, the BASIC Track’s A, B, C, D, and E, the ENHANCED Track, and the Medicare direct provider contracting (DPC) model. These built off the Medicare ACO Tracks 1, 1+, 2, 3, Pioneer, and Next Generation model. This is literally just for the Medicare fee-for-service (FFS) patient population focused on primary care shared savings for part A and B spending.
You think episodic payments are easier to wrap your head around? Well again Medicare FFS has a current program called the Bundled Payments for Care Improvement Advanced (BPCI-A) that provides episodes after admission / procedure plus 90 days post-discharge. There are 31 inpatient clinical episodes and 4 outpatient clinical episodes across a spectrum of specialties (e.g., orthopedics, cardiology, infectious disease, etc.). The BPCI-A program is the new and improved version of the original BPCI program which had different requirements and characteristics. Oh, and you also have the Comprehensive Care for Joint Replacement (CJR) model for hip and knee replacements across 67 different metropolitan service areas (MSAs).
I bring this up because the CMS Innovation Center has done their best to appease the entire industry into transitioning towards fee-for-value. The only problem is that everyone has an opinion. We have two different value-based care models for managing Medicare FFS oncology spend (e.g., Oncology Care Model, Radiation Oncology). We have multiple different models in Medicare FFS for managing stage 4 and 5 of kidney disease (e.g., Kidney Care First Option, CKCC Graduated Option, CKCC Professional Option, and CKCC Global Option). We even have state specific models like the Vermont All-Payer ACO Model and the Maryland All-Payer Model that trump other models within their borders. And despite having an entire spectrum of Medicare FFS ACOs, CMS also has a Comprehensive Primary Care Plus (CPC+) model for supporters of the patient-centered medical home (PCMH) concept instead of ACOs.
All the above examples are focused on the Medicare FFS program, and don’t take into account the many very specific demonstrations like for nursing homes, opioids, nurse education, dual eligible, or accountable health communities. There are countless other initiatives with their various nuances in the private sector, from the Blue Cross Blue Shield of Massachusetts’ Alternative Quality Contract (AQC) to CareFirst Blue Cross Blue Shield’s Patient-Centered Medical Home (PCMH). Even states have drastically different policies. California requires any provider looking to take prepaid, capitated payments on behalf of health plans to apply for a Knox-Keene license. The state of New York has a program called Value-Based Payment (VBP) Innovator Program to allow providers to take on value-based contracts from Medicaid managed care plans. I could go on and on with hyper-specific programs that I find most startups do not understand.
Despite the challenges faced by healthcare startups nowadays, I still believe there is light at the end of the tunnel. If your primary goal is to make money, please choose a different industry. However, if you want have meaningful impact that could benefit thousands or millions of people facing life’s toughest challenges, join the entrepreneurs looking to disrupt healthcare. And if you have any questions about overcoming things listed in this article, I’d be happy to work out a consulting agreement. 🙂