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Money Ball for Medicine – Business Models for Healthcare

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Editor’s note: This guest post was written by Dave Chase, the CEO of Avado.com, a patient portal & relationship management company that was a TechCrunch Disrupt finalist. Previously he was a management consultant for Accenture’s healthcare practice and founder of Microsoft’s Health platform business. You can follow him on Twitter@chasedave.

Entrepreneurial epiphanies surface in random places. For Eric Page, it was watching Brad Pitt’s latest movie, Moneyball. The epiphany caused him to shift Amplify Health’s business model from a provider of technology to a heavy user of technology. While there is a wave of disruptive technology in healthtech, as interesting is the wave of disruptive innovation on the care delivery side of healthcare. These companies aren’t technology companies, however technology plays a pivotal role.

Previously, Page had been the Founder & President of REM Medical, a clinic for sufferers of sleep apnea. A key part of any sleep clinic’s service is prescribing CPAP machines. The problem is that the percentage of people who actually follow-through is quite low (40%) even though the results can dramatically improve one’s life. A series of behavioral insights, often applied through the use of technology allowed REM Medical to double the industry average adherence to 79%. As healthcare shifts from a “do more, bill more” model of reimbursement to a value and outcomes-based model, these kinds of results will separate the winners from the losers. Amplify Health’s original vision was to package the behavioral insights in software and sell them to providers.

With the success of his previous company, Page thought it would be easy to sell this vision to healthcare providers. Unfortunately, many healthcare providers are making the same mistakes that newspaper companies made in the late 90’s. That is, they aren’t moving as quickly as circumstances dictate. The problem is that urgency is sometimes only evident in hindsight. This is what led to the Moneyball epiphany.

For those who haven’t seen the movie or read the book, Moneyball tells the story of how Major League Baseball’s Oakland A’s Billy Beane (the team’s General Manager) was faced with a payroll that was one-third the size of their competition. Beane realized he needed to come up with a different way of picking players or he’d lose bidding wars against richer teams. For over 20 years, baseball statistician Bill James had proffered theories of baseball statistics that flew in the face of conventional wisdom on what statistics best represented a player’s value to a team. James was ignored until Billy Beane came along. He applied James’ theories with great success regularly fielding playoff teams that had one-third to one-half the payroll of the teams they competed against.

While watching Moneyball, Page had the realization that he had been acting like Bill James evangelizing his theories. Even with a successful track record, he wasn’t getting the traction he desired. Instead, he decided he should become Billy Beane and apply his knowledge to his own company. Rather than monetize via a software licensing model, Amplify Health will be in the onsite clinic segment delivering primary care and managing chronic conditions. [See DIY Health Reform: Employers Solving Healthcare Crisis One Onsite Clinic At A Time for more on onsite clinics.]

Amplify Health isn’t alone in this trend. Other examples include MedLion, One Medical Group, Qliance and White Glove Health [Disclosure: MedLion is a customer of Avado’s]. These are healthcare providers who’ve applied technology to enhance their competitive advantage. Traditional healthcare providers should be on notice about these types of disruptive innovators. After all, in the late 90’s the newspaper companies were worried about other media competitors and big players such as Microsoft. What devastated their business models was an array of niche competitors who bit by bit hollowed out chunks of their business. Companies such as Monster.com, eBay, Cars.com, Zillow, Craigslist and many others. Like newspapers that were oligopolies or monopolies, many large health systems haven’t been faced with the level of competition that is emerging. As William Gibson has stated, “the future is here, it’s just unevenly distributed.”

By definition, the legacy HealthIT vendors have optimized their solutions around the legacy reimbursement and delivery models that have created the hyperinflation in healthcare crushing family, business and government budgets. The exciting aspect of this for the healthtech startup community is entire new categories of software are emerging to support disruptive innovation taking place on the care delivery side. Even more promising is that many providers, payers and pharmaceutical companies have set up innovation groups. I wrote about one earlier — Healthcare Field of Dreams In Idaho: Health System Opens Innovation Center. An array of new models are being tested at organizations such as Horizon Health Innovations, Catholic Health West, Trinity Health, Catholic Health Initiatives, Blue Cross Blue Shield of Florida, Catholic Health Partners, Blue Shield of California and many others.

Often what has passed for innovation in healthcare is a clever way to maximize the latest reimbursement code or government incentive. For example, a large swath of providers are chasing after Meaningful Use incentives. Meanwhile, there are others building a sustainable competitive advantage in rethinking delivery models from the ground up. Not long ago, CareMore was acquired for $800 Million by WellPoint because they’d developed a creative new delivery model. VCs are taking notice. For example, Dirk Lammerts, MD is a VC with the Burrill Venture Capital Group who has stated he will avoid investing in businesses dependent on Medicare reimbursement. Rather, he wants true disruptive innovation.

Taking place this week is the Health Innovation Summit being put on by RockHealth. I’m moderating a panel on business models for health-related startups – panel members include Linda Avey, Ron Gutman and Jennifer Wong. I will speak to some of the aforementioned business models and the accompanying business models for companies that support those entities. Collectively, we’ll discuss models ranging from monetizing mobile apps to how value can be derived as a byproduct of customer use (e.g., PracticeFusion) to media models and more. What creative business models in healthcare should we be aware of? Please add your comments below.