transforming health
research institute & advisory consulting
Joaquim Cardoso MSc
Founder and Chief Researcher & Advisor
December 25, 2022
Source:
Second Opinion
Christina Farr
December 22, 2022
2022 was a very strange year.
The stock market plummeted, interest rates rose and inflation skyrocketed, creating all sorts of problems for companies across all stages of growth.
Health care companies weren’t immune and many folks in our industry are struggling to make sense of what’s coming down the pike in 2023.
I’ll preface this post by sharing that I go back and forth about whether it’s worth writing predictions posts.
A lot of them are very vague and generic and no one person has a crystal ball. But when done well — I’m an avid reader of Venrock’s piece for instance — it can be a worthwhile exercise. Particularly as we get into planning mode as we wind down the year.
For my list, I’ve done things a little differently. I decided to put a few really smart folks on the spot — essentially nominating them — to come up with a prediction about the specific area within the health sector where they specialize, whether it’s employers, insurance or value-based care.
These folks know their stuff so I trusted them to cut through the fluff and get right to the chase. And of course, we’ll be evaluating their prediction next year to see if they were correct. I also put myself on the spot, because it’s only fair!
So let’s get to it. Here’s the list of predictions, both short and long, broken out by theme:
- 1.Employers will face rising costs
- 2.Hospitals will shift away from value-based pricing
- 3.The senior living industry will collide with health care
- 4.Who will buy digital health tools? It’s not who you expect
- 5.How bad will it get for tech-backed insurance? Worse
- 6.Late-stage capital raises: We’ll see more discipline
- 7.Greater transparency is finally coming in pharmacy
- 8.Startups will sell at a steep discount
- 9.Virtual care will continue to grow, but hybrid models will be most successful
- 10.Biosecurity will become more of a thing
- 11.Anything non “mission critical” will struggle to sell
1.Employers will face rising costs
In the hot seat: Brian Marcotte, the former president/CEO of the Business Group on Health
- Employers will face rising costs
- Some of that will be tolerable but there could be some surprises in ‘23
- We should expect to see pruning of digital health vendors, particularly those that aren’t performing
I believe the employer market will have to innovate and mobilize in ’23 fueled by a double-digit medical trend and a need to rein in costs.
Medical trend is always a multiple of general inflation and typically lags a bit due to the timing of provider contracts.
Return on investment (ROI) will become the priority for health vendors and digital health.
The last decade saw general inflation consistently run in the 0 to 2 percent range with top line medical cost trend running (at) 6 percent for large self-insured employers, netting out at 4 to 4.5 percent after plan design and cost management initiatives.
I would say 4 percent was considered a ‘tolerable’ cost increase for most employers. General inflation today is running at 7 to 8 percent.
Medical trend could surprise employers in ’23 and run hotter than the projected 7 percent, and reach double-digits by ’24.
This generation of Chief Human Resource Officers (CHROs) and Benefit Leaders may not have ever experienced medical cost trends north of 10 percent.
Having said that, you should see both pruning of solutions not performing and doubling down on solutions that can produce a meaningful ROI.”
Having said that, you should see both pruning of solutions not performing and doubling down on solutions that can produce a meaningful ROI.”
2.Hospitals will shift away from value-based pricing
In the hot seat: Farzad Mostashari, founder Aledade
- New MA supplemental benefits companies will receive fewer VC dollars
- The senior living industry will continue down a collision course with the healthcare system
- Specialty care’s convergence with value-based care will continue to accelerate
“Hospitals accumulated primary care practices and dabbled in value based payment models (in recent years).
As financial pressures mount, many of them will double down on their core Fee-For-Service hospital business model and shed both their primary care practices and value based payments.”
As financial pressures mount, many of them will double down on their core Fee-For-Service hospital business model and shed both their primary care practices and value based payments.”
3.The senior living industry will collide with health care
In the hot seat: Daniel Kaplan and Russell Hirsch, Generator VC
- New MA supplemental benefits companies will receive fewer VC dollars
- The senior living industry will continue down a collision course with the healthcare system
- Specialty care’s convergence with value-based care will continue to accelerate
“We’ve seen a lot of value-based care dollars aimed at primary care, some primary care-specific and others global.
It wasn’t until earlier this year that we started seeing entrepreneurs focused on building specialty care businesses focused on taking risk, usually through the form of ‘Per Member Per Month’ models (PMPMs) or bundled payments.
In recent years, there has been an explosion of companies going to market as Medicare Advantage (MA) supplemental benefits providers.
Others that started with consumer, or private pay-focused go-to-market strategies eventually pivoted to MA. MA has long sales cycles, and strong evidence bases are needed to get the attention of executives and actuaries alike.
Furthermore, MA plans are notorious for their dislike of working with a myriad of supplemental benefits vendors.
While the supplemental benefit opportunity is still very real, there is too much noise in the market for lots of new venture-backed entrants in 2023.
We believe a better opportunity is to tech-enable existing potential supplemental benefits providers and connect them with MA plans versus building from scratch.
Most senior living operators are focused on providing hospitality services and could be missing the bigger picture:
senior living is a care setting where many environmental and social determinants of health factors such as socialization, food and nutrition, transportation, and built-in environment are controlled.
As acuity levels rise in assisted living ( residents of Alabama manage 14 chronic conditions on average), independent living, and memory care, we’ll see more entrepreneurial activity focused on linking senior living with the healthcare system.”
As acuity levels rise in assisted living ( residents of Alabama manage 14 chronic conditions on average), independent living, and memory care, we’ll see more entrepreneurial activity focused on linking senior living with the healthcare system.”
4.Who will buy digital health tools? It’s not who you expect
In the hot seat: Nikhil Krishan, Out-of-Pocket Health
- It won’t be the brand name hospitals
- Lesser known hospitals may be the ticket in ‘23
“Historically digital health companies have tried to get the Mayo Clinics, Cleveland Clinics, and other brand name hospitals as first customers.
They’ll grind away at a pilot with the faint glimmer of hope that they’ll convert to a customer, become a logo they can use in their sales deck, and ride easy to the IPO.
Only for the big hospital to put out a research paper, and never talk to the startup again.
On top of that, these hospitals are now incubating and starting companies themselves after realizing the value they actually have.
This is going to make it really hard for startups to target these academic hospitals as first customers.
these leading hospitals are now incubating and starting companies themselves after realizing the value they actually have.
This is going to make it really hard for startups to target these academic hospitals as first customers.
On the flipside, there seems to be an increasing appetite to partner with tech companies from “lesser known” hospitals.
A combination of getting stretched extremely thin and operations running off the rails due to COVID + a need to figure out how to get referrals might be the reasons driving this.
For example we’ve seen a16z partner with Bassett Healthcare Network for their portfolio companies to test out solutions and Carbon partnering with John Muir Health.
I’m excited to see whether this leads to more interesting contracting as well, since brand name hospitals are addicted to fee-for-service whereas these other hospitals are getting crushed financially anyway and might be more open to shifting to Value Based Care if they have a tech partner to help with care outside of the clinic.”
On the flipside, there seems to be an increasing appetite to partner with tech companies from “lesser known” hospitals.
5.How bad will it get for tech-backed insurance? Worse
In the hot seat: Ari Gottlieb, Principal, A2 Strategy
- Tech-backed insurance faced a reckoning in ‘22
- ’23 may lead to some spin
- But ultimately we’ll likely see more wind downs
“In some ways it is hard to be negative on several of the most famous start-up health plans for 2023 given what a terrible 2022 they had, but all you have to do is look at their performance.
2022 was the year that financial market and marketplace performance converged, in many ways a reckoning with reality ending with a regulator-induced effective failure and even turning away customers due to capital issues.
As for the future, I think we’ll see more spin and repositioning (which to be fair tends to be one of the key strengths of several of the start-up health plans), but ultimately more wind-downs, shut-downs, and slow-downs as capital runways end, investors become more discerning, and performance — not promises — become the measure of success.”
As for the future, I think we’ll see more spin and repositioning (which to be fair tends to be one of the key strengths of several of the start-up health plans), …
… but ultimately more wind-downs, shut-downs, and slow-downs as capital runways end, investors become more discerning, and performance — not promises — become the measure of success.”
6.Late-stage capital raises: We’ll see more discipline
In the hot seat: Teresa Lee, OMERS Growth Equity
- More rollups could be on the horizon
- There will be additional resources will be dedicated to product development
“In 2023, I predict that growth equity will focus more on opportunities to create value by rolling up the innovation that VC has funded over the last few years.
As the cost of capital increases and leaders emerge in their respective corners across healthcare, there will be a pivot of resources to building product.
And not, for instance, in investing in duplicative sales and marketing functions or knocking on the same customer doors with products that are not meaningfully differentiated.
Instead, as organic growth will be more hard won, growth equity will target adding products via acquisition and focused research & development …
… to build a platform suite that more efficiently leverages sales and marketing and other OpEx infrastructure.”
As the cost of capital increases and leaders emerge in their respective corners across healthcare, there will be a pivot of resources to building product.
And not, for instance, in investing in duplicative sales and marketing functions or knocking on the same customer doors with products that are not meaningfully differentiated.
7.Greater transparency is finally coming in pharmacy
In the hot seat: Joe Murad, CEO, WithMe Health
- The largest employers are pulling their weight around
- That’ll lead to pushback against the Big 3
“In our particular industry, a handful of trends have emerged.
For instance, more and more parts of the Pharmacy Benefits Manager (PBM) stack are getting carved out, as seen by some of the largest employers in the country …
… who are pushing their weight around and want to garner greater control back from the Big 3 companies who have provided limited ability to create customized experiences, creative alternative funding programs for greater flexibility, let alone controlling their own formulary, demanding an open network or plan design management. That’s changing.
For instance, more and more parts of the Pharmacy Benefits Manager (PBM) stack are getting carved out, as seen by some of the largest employers in the country …
We’re starting to see an evolution in the market.
Employers and payers alike are asking for greater transparency with respect to the impact their subsidies are having — knowing they’ve exhausted all the cost shifting they can to the member before there’d be a mutiny.
Employers and payers alike are asking for greater transparency with respect to the impact their subsidies are having — knowing they’ve exhausted all the cost shifting they can to the member before there’d be a mutiny.
There’s mounting pressure demanding greater flexibility for plan sponsors.”
8.Startups will sell at a steep discount
In the hot seat: Leslie Schrock, angel investor extraordinaire
“2023 will be a year of survival, reckoning, and focus.
Companies that raised monster rounds at enormous valuations that haven’t done sufficient whittling are in for a painful time.
For those that focused, cut as-needed, and continue to spend wisely, there will be money though expect to earn it and set aside any expectations for 2020–2021’s bonkers terms-including founder carve outs like no board (thanks, SBF!)
For the market leaders, it’s time to go shopping: early stage companies that have yet to achieve product/market fit or point solutions that cannot find their next round will be scooped up at deep discounts.
For the market leaders, it’s time to go shopping: early stage companies that have yet to achieve product/market fit or point solutions that cannot find their next round will be scooped up at deep discounts.
In these more uncertain times, consumers will also return to simpler product experiences and businesses that solve basic needs.
Think text messaging versus complicated, overweight apps. Anything that is just nice to have simply will not cut it”
9.Virtual care will continue to grow, but hybrid models will be most successful
In the hot seat: Alyssa Jaffee, Partner, 7wire Ventures
- Hybrid care solutions will be most successful in ‘23
- But virtual care utilization will grow
“Virtual care has been in the hot seat this year with proponents lauding the benefits of scalability and convenience while adversaries remain bullish on the value of in-person care.
The reality is that face-to-face care should and will always play a role in care delivery, however virtual modalities often lend themselves to more intentional, cost-effective approaches to care.
The reality is that face-to-face care should and will always play a role in care delivery, however virtual modalities often lend themselves to more intentional, cost-effective approaches to care.
While traditional telehealth solutions allowed society to shift basic healthcare online, such models will need to expand to meet the growing demand from consumers for flexible, on-demand, and affordable care.
Thus, in 2023, virtual care utilization will, and must, grow.
Even providers, some of the most difficult stakeholders to drive behavior change with, are aligned.
Providers are rapidly activating virtual health programs, payers are expanding coverage for virtual care services, and employers are developing new partnerships with digital health solutions to support their workforce.
Together, these shifts represent a non-trivial wave of opportunity to increase virtual care utilization.
That said, digital adoption does not equate to the full retirement of face-to-face care.
Physical interaction between a patient and their provider is at times critical and consumers know it; over 60% of consumers plan on using a hybrid model of care post-pandemic, with only 12% of consumers wanting to forgo virtual care altogether in favor of in-person only visits.
Digital health companies that can seamlessly support a hybrid care model will be most successful in 2023.”
Digital health companies that can seamlessly support a hybrid care model will be most successful in 2023.”
10.Biosecurity will become more of a thing
In the hotseat: Morgan Cheatham, Bessemer Venture Partners
- As programmable biology becomes cheaper, faster, and more efficient, new companies focused on biosecurity will emerge
- VCs will start to seek out these opportunities
“We can now program biology to explore new chemical and biological space that is not found in nature.
While we are excited to use this technology for drug development applications, it could be seemingly repurposed for other use cases that could pose threats to society.
Companies focused on biosecurity will emerge in 2023, and will require interdisciplinary founding teams that marry deep biology and chemistry domain expertise with cybersecurity and machine learning acumen.
These companies could take shape as core lab infrastructure, software, or developer tools, for example.
Similar to other markets in healthcare and life sciences, opening the market for new technology adoption and venture investment may fall on the back of a regulatory catalyst, which could also materialize in the new year.”
Companies focused on biosecurity will emerge in 2023, and will require interdisciplinary founding teams that marry deep biology and chemistry domain expertise with cybersecurity and machine learning acumen.
11.Anything non “mission critical” will struggle to sell
In the hotseat: Yours truly
- It’s not going to be a year where buyers take chances on unproven tech
- Startups need to sell solutions that solve problems in the short-term and figure out a way to prove they can do that as quickly as possible
“I’ve been heads down the past few months asking health care buyers and decision-makers what will be top of mind for them in 2023.
For health systems, employers and other major stakeholders, the feedback has been consistent.
It’s really about whittling things down to what’s truly essential, versus the “nice to have” expensive tools that are unproven.
Hospitals, for instance, which are bleeding cash, are primarily looking for a few things: Anything that supports payment, ideally upfront, or any tools that reduce burnout or support them in solving the ongoing staffing crisis.
Likewise, employers are increasingly looking to whittle down their digital health vendors, particularly when utilization is low and outcomes are still TBD.
Hospitals, for instance, which are bleeding cash, are primarily looking for a few things: Anything that supports payment, ideally upfront, or any tools that reduce burnout or support them in solving the ongoing staffing crisis.
So to recap… the key products that I suspect will sell well next year include: Revenue cycle management tools, anything in labor/staffing, and solutions for burnout.”
Originally published at https://ovsecondopinion.substack.com on December 22, 2022.
Names mentioned
Brian Marcotte, the former president/CEO of the Business Group on Health
Farzad Mostashari, founder Aledade
Daniel Kaplan and Russell Hirsch, Generator VC
Nikhil Krishan, Out-of-Pocket Health
Ari Gottlieb, Principal, A2 Strategy
Joe Murad, CEO, WithMe Health
Leslie Schrock, angel investor extraordinaire
Alyssa Jaffee, Partner, 7wire Ventures
Morgan Cheatham, Bessemer Venture Partners
