Why disrupt healthcare?

January 6, 2015
Niko Skievaski President & Co-Founder

In healthcare, about ⅓ of each dollar spent doesn’t improve health. That’s around $750 billion dollars of waste per year–as much as the US spent in the first 9 years on military efforts Iraq.

This is a terrifying truth for hospital administrators and policymakers. Our health system cannot sustain this much waste. The players understand that it’s not working and things will have to change — drastically. But that’s what is difficult. Bureaucracy is best suited to sustain the status quo.

For instance, imagine that your local academic health system miraculously found ways to do more with less and cut costs by 30%. Even if this new strategy or technology was known, it would not be swiftly adopted. A few reasons:

So maybe it will take an act of congress to speed things along? The subsidies (and soon to be penalties) of the mandate known as “Meaningful Use” pushed our health systems to adopt electronic medical records (EMR or EHR, as seems to be the en vogue acronym). This legislation was buried in the mountain prompted by the Great Recession. In 2009 a plan was released to spur the digitization of medical records – a technology that has been available since the early 80s.

As shown in my overly scientific diagram below, the first stage of Meaningful Use likely pulled the late majority and laggards up. The second and third stages will somehow mandate cost savings and improved care from these technologies but are, however, much more controversial in nature.

So now we have a base level of technology that health systems run on: the EHR. The dream of the EHR was to kick off the information age of healthcare and bring some of the strides we saw in the consumer space. Patient data was finally to be moved off of the clipboard and into vast databases where it can be sliced and diced, joined and analyzed. The new possibilities promised to increase value in healthcare. That is, higher-quality care at reduced costs. But this hasn’t happened yet.

To contrast, let’s look at pizza delivery. My first job was slinging dough for Domino’s. The IT infrastructure is phenomenal. Online ordering and real-time tracking brings streamlined service to patrons. Prices can be throttled using “deals” to account for shifts in demand based on data at the location level. Customer information is used on a micro scale to help 16 year-olds answering phones deliver the best quality service efficiently: they know what you’ll likely order, where it’s going, and how much you’ll tip before you even say “for delivery please.” At the macro level, customer behavior is aggregated and used for everything from new product development to capacity planning and growth.

The type of technologies that would allow healthcare to achieve the value described above moves way beyond the EHR. As it stands, the EHR was a complex and segregated attempt burdened by the demands of operating at an enterprise level: endless customization around specialty workflows and differentiated delivery systems, combined with ever-changing regulatory requirements.

In addition, the early vendors experienced artificial growth prompted by government subsidies in Meaningful Use. This created tech giants focused on capturing the newly liquid market, rather than on delivering the innovations that would create Domino’s style value. Regulations like HIPAA put silos around the data and analysis became feeble. The effort to digitize healthcare was based much more on the intuition of our digital age than on sound, break-even analysis. We haven’t seen clear returns on investment.

As healthcare costs continue to increase and patients begin to behave more like consumers and demand more value from our health systems. They will shop. They will move to the health systems who can provide the best care at the lowest costs in a convenient and modern setting. Patients will seek systems who specialize in their unique ailments. Technologies will be adopted to help deliver the value demanded by this new breed of patient-consumers.

So where will these new technologies come from? The government won’t be able to move fast enough. Hospital systems are risk averse and don’t have the capital to invest in developing technologies. Incumbent EHR vendors are bogged down by incremental updates, bug fixes, customizations, support, and new regulations. Instead, we’re seeing garage-based efforts at innovation: enter the healthcare startup.

An ecosystem has taken shape to support healthcare startups. The are about 90 dedicated healthcare accelerators in the US who invest time and capital in young companies. Institutional investment in the sector is rapidly growing to support what is expected to be the fastest growing industry over the next ten years. And the most prominent health systems are beginning to sponsor incubation and direct investment.

Armed with a MacBook and vision for a more ideal state, these new entrants see a much simpler view of healthcare. They poke holes in the rifled payment logic, create workarounds for the retro technologies, and see the bureaucracy as a surmountable manmade structure worth scaling or cleverly avoiding. Now that health information has been digitized, scores of products are being developed to sit on top of the EHR and provide better tools to patients, doctors, administration, and support staff. The pie chart above is a growing target where each slice represents a market worth tackling. As entrepreneurs in healthcare, this is our charter.

Note: Startups, however, are not entering the game without their own set of challenges. I’ll be spending some time in the coming weeks highlighting strategies used by digital health startups to circumvent barriers including emerging healthcare regulation, EHR integration, bureaucracy, risk aversion, etc.