Eliminating Health Disparities by Filling the Digital Health Investor Knowledge Gap

Digital health startups secured $1.4 billion in investment in 2012 with healthcare administration, personal-health, and consumer-engagement emerging as some of the leading investment categories.[1] Despite the growing interest in healthcare, early-stage investors’ reluctance to invest in unfamiliar industries[2] has limited funding for more nascent digital health opportunities like managed long-term supports and services (MLTSS).[3]

Managed long-term supports and services entail risk-bearing organizations, like health insurers, coordinating care for frail elderly that are vulnerable to experiencing health disparities.[4] The goal of MLTSS is to triage the patient to the lowest cost care and maintain sufficient functional supports to keep the patient in the community rather than in the institutional setting.

Between the evolving healthcare regulatory environment, clinically complex patients, and dispersed post-acute care market, the multifactorial nature of MLTSS makes for an insurmountably steep investor learning curve. The deficit in the average investor’s knowledge base about MLTSS not only precludes investment consideration, but more importantly stymies the funding channels needed to fuel innovation for vulnerable populations. Furthermore, the digital health technologies currently garnering the most investment do not emphasize the elimination of health disparities for vulnerable populations[3]; in fact some may be at risk of exacerbating disparities.[5]

Filling the gap in investor understanding about the market opportunity and emerging business models for digital health startups in MLTSS could help more investors realize the potential for compelling ROI in these companies and simultaneously achieve the Triple Aim[6] for vulnerable populations.
  

Source: IHI Innovation Series. Cambridge, MA. 2012.

Market Opportunity
 
The market opportunity for MLTSS is grounded in the substantial potential for payers to profit from managing complex patients. Typical margins for payers managing generally healthy patients reimbursed by Medicaid range between 2-5%. Higher-risk patients, particularly those that are Medicare-Medicaid Dually Eligible (Duals), can lead to margins as high as 10-15%, if managed effectively. Conversely, some Duals can cost $60,000 per year.[7] And when payers fail to risk stratify appropriately and only negotiate a capitated $2,500 per member per month (PMPM) premium ($25,000 per year), they can very quickly lose a lot of money.

The profit potential from managing Duals arises from their disproportionately high utilization of acute care hospitals, with almost twice the hospitalization rate for Duals than general Medicare non-Dual patients.[8] Duals are also more likely than non-dual Medicare patients to get readmitted, with 25% of Duals and 20% of Medicare non-Duals being readmitted within 30-days of discharge.[9]

In addition to being higher utilizers, Duals also account for a disproportionate share of Medicare and Medicaid spending: Duals comprise 20% of the population and 31% of spending for Medicare and 15% of the population and 40% of the spending for Medicaid.[10] 

Source: Jacobson G, Neuman T, & Damico A. Medicare’s Role for Dual Eligible Beneficiaries.  APRIL 2012. Kaiser Foundation.

 
While 19% of the average PMPM premium for Duals is spent on hospitalization costs, Duals are also high utilizers of post-acute care services with 23% of the PMPM premium being spent on Home Care and 33% on Skilled Nursing Facilities (SNFs). Even though acute care is one of the largest contributors to Duals spending, post-acute care is the fastest growing cost.[11] Within post-acute care, institutional long-term care, such as SNF care, is $1614 more expensive PMPM than home and community based services.[12] 

Not only does MLTSS decrease cost of care, a review of 9 randomized controlled trials showed that integrated and coordinated care improves outcomes and reduces health care utilization for frail elderly people.[13] This creates an enormous cost differential for payers to take advantage of, particularly when up to 30% of “low care” SNF patients could age in their homes instead of the SNF if they had the right resources or technology in place.[14] 

With the MLTSS market doubling since 2004 [15], digital health has enormous potential to reduce hospitalizations and unnecessary utilization of expensive post-acute care by streamlining, augmenting, and scaling MLTSS.

Emerging Business Models

In addition to outlining the market opportunity for digital health in MLTSS, preparing investors for more complex business models may help them become more comfortable investing in this space. A major challenge to creating scalable business models for MLTSS digital health companies is the limited purchasing power of the end beneficiary, the patient. These patients are typically financially compromised in addition to being clinically high-risk. The confluence of socioeconomic and medical risk factors limit the ability of Duals and other vulnerable populations to purchase digital health technology directly. Additionally, their technological illiteracy due to language or age barriers introduces more challenges to freemium or ad-based models.

A promising business model for MLTSS digital health startups is selling directly into risk-bearing organizations that have the most to gain from optimizing care coordination and care management for Duals. Several policy instruments have created incentives for such organizations to keep patients healthy and in their homes. These organizations, typically payers, have substantial purchasing power and can drive scale of a technology once it is adopted. A major limitation with a B2B sales strategy with payers is the long sales cycle. But the latter is a surmountable barrier, especially when investment dollars provide a startup in this space with the runway to test their product and business model a sufficient number of times to find the approach that is scalable.

Conclusion

By educating investors about the opportunities that lie in the MLTSS digital health space, we hope to facilitate more informed investment into a healthcare space that is pregnant with opportunity to create profit for investors and achieve the Triple Aim for vulnerable populations.

Other stakeholders in the startup ecosystem can help to eliminate risk for investors in MLTSS and other spaces that leverage digital health to eliminate health disparities. Incubators can vet startups for top entrepreneurs and provide a conduit for startups to difficult to reach resources such as development talent or legal guidance. Foundations can help to further educate investors and establish best practices for investment in digital health to serve vulnerable populations. The government can continue to liberate data and push for rational interoperability standards. This glimpse into socially-minded digital health innovation and investment is just one of many opportunities to leverage commercial growth to eliminate health disparities.


References:

1) Tecco H. 2013 Midyear Digital Health Funding Update. Rock Health. 2013. < http://bit.ly/19OvI7r >
2) Feeney et al. Private investors' investment criteria: Insights from qualitative data. Venture Capital: An International Journal of Entrepreneurial Finance. 1999, Vol 1(2). 121-5.
3) Startup Health, IHI, & Ostrovsky A, et al. Characteristics of Top 100 Funded Startups. Startup Health Insights. 2013. [Unpublished]
4) Medicaid. Managed Long Term Supports and Services. < http://bit.ly/S2vmzi >
5) CPEHN. Equity in the Digital Age: How Health Information Technology Can Reduce Disparities. 2013. < http://bit.ly/UMpReg >
6) Berwick D, et al. Health Aff May 2008 vol. 27 no. 3759-769.
7) Young K, et al. Medicaid and the Uninsured: Medicaid’s Role for Dual Eligible Beneficiaries. April 2012. Kaiser Foundation.
8) Segal M. CMS Policy Brief: Dual Eligible Beneficiaries and Potentially Avoidable Hospitalizations. 2011.
9) Jencks SF, et al. NEJM 2009; 360 (14):1418‐1428.
10) CMS. A Data Book: Health Care Spending and the Medicare Program. 2012.
11)Chandra et al. Large Increases In Spending On Postacute Care. Health Aff. 2013 May; 32(5): 864–872.
12) Milligan C. Innovations in Integrated Care. February 23, 2011. Hilltop Institute
13) Eklund K, Wilhelmson K. Outcomes of coordinated and integrated interventions targeting frail elderly people. Health Soc Care Community. 2009 Sep;17(5):447-58.
14) Grabowsk et al. Prospects For Transferring Nursing Home Residents To The Community. Health Affairs, 26, no.6 (2007):1762-1771
15) The Growth of Managed Long-Term Services and Supports (MLTSS) Programs: A 2012 Update. Paul Saucier, Jessica Kasten, Brian Burwell, Lisa Gold. July 2012