Four Big Trends in Digital Health
Healthcare was already beginning a digital transformation before the COVID pandemic due to advances in technology and regulation, but slowly. The pandemic’s pressures compressed trends toward digital and virtual care that might otherwise have taken years into a few months. But which of these trends will endure, or even continue to accelerate, even once the pandemic has been brought under control?
At Menlo Ventures, we see four big enduring trends (two for consumers and two for enterprises) in digital health and healthcare data that are creating opportunities and challenges for patients, incumbents, startups, and investors. Two are consumer-facing trends that will help shape a different, better, and less expensive digital experience of healthcare. The other two are enterprise-facing trends that will change how businesses handle healthcare data for the better.
Consumer Trend 1: Consumer-ish-ation of Healthcare
Much has been written about the consumerization of healthcare and patients demanding more control of their healthcare experience. We think this trend might be more appropriately called “consumer-ish-ation”: Healthcare is not and will never be an open consumer market. Risk to health, regulation, and third-party payors all make the healthcare market more conservative, and appropriately so. Entrepreneurs and technologists from outside of healthcare who rush to offer technology-based solutions without fully understanding why those problems still exist are likely doomed to fail.
We get most excited about companies and solutions that can succeed in the world that exists today (still largely fee-for-service, with coding and coverage issues) as well as the world that most of us want (value-based, with real world evidence of outcome and ROI). We welcome the injection of consumer-grade, frictionless user interfaces that will engage users when they want or need to be involved in their health, coupled with enterprise-grade features like security that will engender user trust when they want to focus on the rest of their lives (which is frankly the vast majority of the time).
One great example of “consumer-ish-ation” (or partial consumerization as it were) is the gradual creeping of wearable sensors into patient care. We believe remote patient monitoring via innovative hardware or (ideally) pre-existing phones or watches will become part of the fabric of consumers’ lives. Many groups, from startups to tech giants like Apple and Fitbit, are developing solutions that are gradually growing in sophistication from “data for the curious” toward information and intervention of demonstrable medical value. We are most excited about solutions that use a combination of new monitoring data, individual patient information (including EHR data), and AI/clinical workflow tools to nudge consumers to make better decisions in the moment. These solutions may also triage patients to be escalated for human intervention along a cost and urgency spectrum from physicians to medical assistants to caregivers. However, we are less bullish on products that just provide new data – we think the magic comes from data-driven intervention. We think existing coding for reimbursement of remote patient monitoring and COVID tailwinds support near-term business growth in this area, and the most successful companies of the future will use this window of opportunity to show meaningful clinical and economic outcomes such as better disease control, fewer expensive hospitalizations, and more efficient use of clinical resources.
Consumer Trend 2: Unbundling Care
Healthcare is not a monolithic market. For all of the efforts to personalize medicine, there remain many subpopulations of patients (i.e., market segments) that are underserved by the current system. Healthcare today is built on cross-subsidization—some medical procedures and patient populations generate much more revenue and profit than cost to healthcare providers, while for others, the cost to serve these patients dwarfs the reimbursement. This means by definition some patients get great value for money and others do not. For these segments, disruption can potentially happen quickly. New solutions that improve the user or economic experience of specific, targetable patient populations can win rapid adoption.
Forming these solutions requires disaggregating bits of (and people from) horizontal layers like hospitals, physician offices, specialist practices, pharmacies, and home care, and re-aggregating them into full-stack (or at least vertically integrated), tech-enabled solutions. These solutions offer the potential to efficiently acquire large populations with overlapping needs and then digitally steer them into the least expensive care pathway that meets their needs, reducing usage of expensive resources like emergency rooms and physicians if digital tools or less expensive, more conveniently available humans can work as well or better. These solutions are complex to develop due to the multiple capabilities required but can have high transaction volumes, good margins, and high customer lifetime values when efficiency and effectiveness are appropriately balanced.
This trend has expanded into a variety of sectors of interest to investors like us, including many chronic conditions, tele-pharmacy, mental health, women’s health, and primary care. In many cases, like managing patients with chronic conditions, these solutions can improve overall efficiency and costs for expensive populations. But in some cases, peeling off younger, healthier, tech-savvy customers can place additional strain on hospital systems and physician groups who are already suffering from the economic impact of COVID and worsen already significant issues of equity in access to care. However, we think this trend is inexorable, and the long term impact on existing healthcare institutions is just beginning.
Enterprise Trend 1: Vertical SaaS
Vertical SaaS, or software as a service focused on meeting the needs of a specific market segment, rather than a business need (horizontal SaaS), has been a major focus for Menlo Ventures across many sectors. We see many opportunities emerging for vertical SaaS in healthcare.
We typically look for three factors in ideal vertical SaaS investments, which we call the “trifecta:” 1) a clear initial wedge where a new entrant can automate and digitize a manual workflow and gain traction, 2) proprietary data generation or integration to become a system of record (meaning the authoritative source for that data), and 3) the opportunity to leverage data to expand into multiple applications. Companies that meet all three criteria are providing immediate and quantifiable value, creating barriers to entry for competitors, and continuing to increase value and revenue per customer.
In the large life science research and pharmaceuticals segment, opportunities include improving productivity and outcomes in R&D (where we recently invested in Benchling), commercial/medical go-to-market (where we recently invested in H1), and clinical trials.
Healthcare workflows have been dominated recently by large scale, horizontal EHRs, and we see opportunities in many vertical applications like care coordination, patient engagement, patient financial experience, physician matching, and practice growth. An example in our portfolio is Rivet Health, which creates solutions to improve financial transparency. We know customer behavior in this market can be challenging, so part of our “trifecta” threshold is whether a company can achieve a balance of both high velocity sales motion (often smaller customers, sometimes self-service) and high annual contract values (typically larger customers).
Enterprise Trend 2: Unbundling the EHR
Patients should control their own medical data. But healthcare data has been siloed in electronic health records (EHRs). Even today, 70% of hospitals still use mail or fax to share health records, driving up costs and leading to missing data that causes clinical errors and lives lost.
The Gordian knot of healthcare data interoperability has been a huge and enduring issue for patients, doctors, hospitals, and healthcare organizations alike. Even today, our COVID pandemic response suffers from a lack of data sharing.
But new “Anti-Information Blocking” rules stemming from the 2016 21st Century Cures Act are finally giving patients digital access to their own health data. Combined with new modern API standards (like FHIR), we believe networks can and are being built to enable patients to grant secure and efficient access to their health data. We expect that within a couple of years, friction will go to zero—the impossible of today will be a commodity tomorrow.
Access to patient medical information will enable many digital health applications to deliver more targeted interventions and therefore value to patients. Telemedicine providers like Doctor on Demand or Plushcare can seamlessly become primary care providers. Digital programs for patients with chronic diseases like diabetes or hypertension can easily integrate patient-reported or wearable data with gold-standard laboratory data and clinical results (e.g., hemoglobin levels). We believe much of the promise of digital health can be boiled down to efficient effectiveness, or routing patients into an equal or better, but less costly, intervention using digital tools. But good decisions require real-time access to complete information.
Just as Plaid created and scaled a network transmitting financial data by enabling an ecosystem of applications, we see opportunities for one or more networks in healthcare data to reach meaningful scale. Particle Health recently launched an API to securely and reliably query medical records for over 250 million patients by permission, without requiring a password. As the barriers to data sharing begin to fall, we expect differentiation for data seekers will come from reliability, completeness, ease of use, and data integration. For patients and data holders, we expect differentiation will come from usability, privacy, and security.
Enduring Opportunities in Healthcare Data
Adoption of digital health has surged with the pandemic, and one of our central dilemmas as an investor is to differentiate a temporary bump from an enduring trend. At Menlo Ventures, we think the opportunities for data to transform healthcare, both from the perspective of consumers and of enterprises, are massive and enduring.
Digital health is a major focus area for us at Menlo. Over the past few years, we have invested in several companies helping lead in this emerging area (including Benchling, H1, Particle, Pillpack, and Rivet), and we look forward to continuing to invest in innovations that drive fundamental improvements in cost and quality of healthcare.