A Golden Era of Investment in Digital Health: Part 2
PublishedMarch 11, 2022
Andrew Le, MD: Julie, as a venture capitalist, what aspects of digital health are you really excited about?
Julie Yoo: All this activity makes me extremely giddy. The things we were waiting for over the last 10 to 12 years are finally happening. It’s a case study that proves timing is everything. Hundreds of variables created the primordial soup to enable this level of growth. But I’ll highlight a couple meaningful inflection points.
One is the appetite of the “trad med,” as we call it—the traditional medical industry—to adopt innovative digital solutions. With the first cohort of digital health companies, the only way we could come to market was by selling to legacy providers, legacy payers, legacy life sciences companies, and employers. Because they had access to the users, they had access to the funding. They weren’t willing to take risk and invest in these kinds of capabilities.
The pandemic made it an absolute necessity to invest in technologies that improve the resiliency of the operating models of care delivery and extend into sites of care that historically have not mattered—like the home, the community, virtual, et cetera. People are buying stuff now that they weren't buying before. From a budget availability perspective, that's huge.
Total corporate funding for digital health including venture capital, debt and public market financing reached $21.6 billion in 2020, up 103% from 2019, marking recording breaking investments globally in digital health, according to a year-end report by research firm Mercom Capital Group. Source: Fierce Healthcare.
The second piece is that the payment dynamics of our market have reached a tipping point. Consumers are feeling pain. Because of the third-party payer system, we weren’t used to feeling pain, except for catastrophic events. It was mostly outliers that hit that threshold. But with high-deductible plans, underinsured people, and those who lost insurance during the pandemic, everyone's feeling the pain in their own pocketbook.
We’re seeing consumer-driven behaviors. People want choice. They want transparency. They can't navigate the things that historically have required providers and payers to contract with each other. Inherently, the system must transform itself. That's where you see a ton of activity from startups.
Lastly, the whole cost structure of our industry is completely unsustainable. We must significantly reduce the cost of delivering care. Cost impacts quality, access, experience, and everything else.
And finally, we now have success stories to point to. The reason you see so much capital pouring in is that investors see a path to liquidity. That was not the case even a few years ago. We have dozens of companies going out to the public markets, being acquired at scales at an order of magnitude bigger than what we saw in the last decade. From an exit-value perspective, people are willing to put more capital to work in the early stages in this space.
These are the things that make me excited. We're just at the beginning of a golden era of investment in our space.
"We're just at the beginning of a golden era of investment in our space."
Andrew: I couldn't agree with you more. We're in the early innings of how digital health is going to change healthcare forever. Your startup, Kyruus, offered intricate matchmaking between patients and providers. As Buoy evolves into a marketplace, matchmaking is a big part of our value proposition. What did you learn in your experience with matchmaking?
Julie: This could be an entire podcast, but I’ll boil it down to three things. One is that we validated through the work at Kyruus that matching is absolutely everything. Getting it right means good outcomes; getting it wrong means f*cked-up outcomes. Matching is an upfront, high-stakes part of the workflow.
The second pillar would be that the definition of “match” means many things: clinical, convenience, affordability, social preferences, availability. So, you need to have a crisp definition of what you can control and then structure that universe of potential options in a way that systematizes the algorithm. Some things are hard to systematize—especially in the preference category when it comes to qualitative things. Being specific about the criteria is super important.
Even more important is recognizing who you are optimizing for. That's probably the hardest thing to establish a guiding principle around and stick to. Ideally, you're optimizing for everyone. But at some point, someone needs to compromise. For instance, our system sold to enterprises. Because they were paying the bills, we had to optimize for the enterprise. This came with certain implications that meant expressly trading off what might be important to an individual doctor or patient or payer.
Those became the toughest strategic decisions that we had to make. You must be explicit about those trade-offs. So, write it down. What is your north star? Recognize that you will have to make a lot of hard trade-offs because of that.
The last thing is that matching is only as good as your ability to fulfill. Managing the supply side of the marketplace is extremely important and difficult, especially in our space where there's such heterogeneity, both operationally and clinically.
But the way you capture value and get credit for your match is through the fulfillment process. It’s doing the hard work of vertically wiring into the operations of the supply side of the marketplace, so that “last mile” fulfillment can happen, let alone in an optimized fashion when you control the experience.
This is why the first generation of marketplace companies struggled. It’s tough to get scale with supply-side heterogeneity and lack of ability to control and manage that side of the equation.
“Getting it right means good outcomes; getting it wrong means f*cked-up outcomes. Matching is an upfront, high-stakes part of the workflow."
Andrew: You're right that we could spend hours on that. I like your key takeaways around being explicit about those trade-offs. Let’s turn to your investment areas of interest. One of your battle cries is about unbundling primary care, which is a somewhat controversial take. What exactly does that mean to you?
Julie: It’s a recognition that primary care was the forgotten stepchild of healthcare. Primary care was this blunt instrument that was completely underfunded but was expected to manage anything under the sun that walked in the door but without the resources to do so.
What's exciting is that we've seen the emergence of the funding rails that now incentivize investment into preventative care, social determinants of health, and customer engagement. And patients have more choice now. You need to differentiate yourself by connecting with a very specific audience and offering them a unique value proposition.
After observing that set of tailwinds in the market, we concluded that primary care needs to be unbundled. It needs to be verticalized in a way that speaks to a specific audience to have the best shot at generating the outcomes that we all believe it can generate downstream. And then also wiring into different payment rails that enable them to scale to a far greater degree than they have in the past.
The most prominent example is Medicare Advantage. Senior-oriented primary care has a clear demographic with unique needs. And the Medicare Advantage payment chassis created a specific business model scheme that people could wire into in a relatively de-risked way.
This accounts for $343 billion (or 46%) of total federal Medicare spending (net of premiums). Source: KFF, The Kaiser Family Foundation.
So, that was the tip of the spear of this form factor playing out in other markets. We just invested in a Medicaid company that's doing this. There's Tia Health, a primary care company that focuses on women. They've figured out a very specific business model that aligns with other stakeholders in a broader healthcare ecosystem. We've seen LGBTQ-focused models. We've seen ethnic focused. I love the fact that there is an Asian American-focused Medicare Advantage plan with a primary care chassis. Could our parents have ever imagined that such a product could exist?
See a16z.com/disclosures for important information.
In Part 3 of the conversation, Julie and Andrew talk about creating connective tissue for the patient journey and how blockchain will shape the healthcare industry.
About the participants:
Julie Yoo is a general partner at Andreessen Horowitz (a16z), leading investments in healthcare technology while focusing on companies that are modernizing how we access, pay for, and experience the healthcare system.
Andrew Le, MD, is the CEO and Cofounder of Buoy Health.