A Golden Era of Investment in Digital Health: Part 3

Julie Yoo: If I had to pick one thesis to hang my hat on, it would be the digital health tech stack thesis that we published last year. The premise of that was simple. In my first year as a VC, I saw thousands of pitches from digital health companies. Every company had the same infrastructure needs. They needed an EHR-type system, a revenue cycle system, a patient engagement system.

There were two camps among these companies. One camp said, “We're going to build all that from scratch.” The other camp said, “We're going to license JB, athena, Elation, or some existing EHR and spend a lot of time customizing the heck out of its front end. We're going to relegate it to a system of record and use it as pipes. And then we're going to focus on building out the user-facing components.”

Julie: I am very bullish on this. Although the notion of a marketplace seems foreign to us in healthcare, there are versions of marketplaces that have persisted. I always talk about the plight of the three-letter acronyms. PBMs, GPOs, and CROs are all forms of marketplaces, but they happen to be very B2B. They're monolithic. They're opaque in how they operate, and they require a lot of services. Those are legacy versions of marketplace-type constructs that prove that if you can aggregate a proprietary set of supply and bring it to demand-side players, there can be transactional flow at large scale and large volumes. So where do we see opportunities for that to translate to higher levels of the market that are visible to consumers?

The second place we've seen it is in the health insurance markets. The ACA and Medicare Advantage are consumer-directed marketplaces. We've seen how challenging that is. Those marketplaces have shown us that healthcare purchasing is fundamentally different from consumer purchasing. People are shopping solely on price. And it's because it's super hard to understand how to do an apples-to-apples comparison between this benefit plan and that benefit plan or anything else.

So, there's a ton left to be desired there. And we see a second wave of innovators trying to unpack that opportunity set because we did see lots of volume flow through those marketplaces. Now we're in that optimization phase from a consumer-experience lens.

What you're asking is, could we see an emergence of healthcare services marketplaces that engage consumers and buyers like other sponsors? I think we're at a tipping point of the out-of-pocket spend dynamic that's causing people to want to shop. One of the most exciting trends is the emergence of fintech products that can overlay these marketplaces that almost serve as a front door. The biggest source of anxiety and uncertainty entering a healthcare marketplace is your ability to pay and what the payment flow will need to look like.

There's a huge opportunity to take consumer-facing marketplaces and tie them to sponsors— and to overlay consumer-facing fintech products that reduce financial uncertainty for the individuals who receives the services. We are seeing the inklings of this form factor through the employer chassis because that's where the action is. They were always at the tip of the spear of digital health product adoption.

Julie: Our investment thesis is ABC: artificial intelligence, bio and health, and crypto. The intersection of those things is a huge part of how we invest, so we are bullish on why blockchain is interesting in healthcare.

Blockchain is about decentralization and unbundling of trust and the ability to transact in low-friction ways. If you could boil down what is so messed up about healthcare, it's lack of trust in third-party relationships and contracting. There should be obvious applications of blockchain to things like health insurance, provider-payer contracting, supply chain, governance. We have high conviction that there will be opportunities to invest against those theses.

Like many other things in tech—big data, AI, even fintech—by the time healthcare is ready to absorb blockchain, it will be productized and packaged in such a way that you're probably not using that language to identify it as the underlying mechanism.

Who talks about big data anymore, right? It's a native part of the tech stack for a lot of companies we see. We're going to start seeing that with AI. If I compare the companies that used the word AI in their pitches to me three years ago versus now, it’s a lot lower now. They all have AI behind the scenes. It's almost like table stakes.

I think that's the way it's going to sift into our space. Some successful company will implement one of these marketplace-type business models that we described, and it will just so happen that they are using blockchain on the backend to scale in a more efficient fashion than other players in the space who might be using legacy technologies. I foresee that happening—whether it's three years, five years, 10 years. Who knows? We are in a good spot to catch that wave, given the expertise we have in our firm.

See a16z.com/disclosures for important information.