Globally, healthcare is one of the costliest and simultaneously least efficient sectors from an economic standpoint. According to the World Health Organization, worldwide spending on healthcare grew 2.6 percent last year — and is expected to continue growing at an average rate of 5.3 percent each year for the next four years.
This situation is particularly apparent in the United States, which is projected to spend a whopping 20 percent of GDP on healthcare by 2020 (the most of any country worldwide), totaling more than $4.5 trillion. Couple this with the fact that in an age of rapidly advancing technological capabilities that have aided in improving the productivity of numerous industries, healthcare labor productivity has actually declined.
This context has produced a dynamic that has spurred massive government intervention, and spells new opportunity for incumbents, entrepreneurs and investors alike. We are on the cusp of a new generation of healthcare: a transition from sick care to well care, aided by the application of technology to help vastly improve individual patient outcomes and lives. No existing stakeholder will be left untouched, which makes us incredibly excited about what will become one of the biggest industry upheavals and revitalizations in history.
The days when providers could afford (and were incentivized) to be inefficient are rapidly coming to a close, as they must now balance the seemingly countervailing goals of cutting costs and improving care. While some are attempting to reconcile these dynamics through more traditional consolidation and administrative moves, nearly all are embarking upon a drastic upheaval in the foundational strategy of their organizations.
The government is helping to push this transition from service-based to value-based care (HITECH Act, PPACA, CMS payment model shifts, readmission/HAI penalties), and numerous companies/startups cropping up are aimed at helping providers incorporate domains that have been largely absent in the traditional practice of medicine (IMS Health, CareCloud, Evolent Health, Athenahealth, to name a few). Hospitals are embracing new business models that streamline the delivery of services to patients in Urgent Care, Behavioral Health, Radiology and Chronic Care verticals.
The technology backbone to patient relationship management, portable electronic medical records and population-based disease and outcome analytics is starting to take shape and slowly penetrate provider networks. As a result, a new service delivery paradigm and an increasingly personal touch from providers have ensued.
Patients are transforming from uninformed price-takers into savvy consumers of healthcare services.
The payer market is also undergoing a drastic renovation. In an effort to deal with rising healthcare costs, traditional health insurance companies and corporations are shifting risk to patients and employees, as seen in the recent proliferation of high-deductible health plans. In addition, the implementation of MLR regulation that caps insurer profit margins has forced payers to seek out solutions that help streamline and improve operational efficiencies.
The creation of a new battleground for covered lives through public and private health insurance exchanges (and the PPACA individual health insurance mandate) is also forcing a dramatic change in the competitive dynamics and risk-management concerns of the industry. Traditional health insurance companies will be forced to reinvent themselves for a new audience of individual consumers, as well as differentiate on a variety of consumer-facing factors that may not have been important in the customary purchase of health insurance (mega-insurance M&A, Oscar, Plexis, Centene, CaliforniaChoice).
Patients are transforming from uninformed price-takers into savvy consumers of healthcare services. With the shift toward health savings accounts (HSA) and high-deductible health plans, out-of-pocket expenses have grown, accounting for 12 percent of national health spending in 2013 (according to the CMS). As a result, patients have started taking control of their spending habits by demanding price transparency with regards to the quality of care.
Increased provider communication, accessible doctor ratings and better alternatives to the traditional hospital visit are among the additional demands on the hybrid patient-consumer’s list of grievances, and entrepreneurs have responded with various solutions aimed at satisfying, educating and empowering this new consumer of healthcare (Stride Health, MDSave, Guroo, others).
In addition, a rising demand from consumers, providers and payers alike for wellness and prevention solutions have sprouted up to encourage lifestyles that result in healthier and more energetic individuals, improve outcomes and limit costs and are cheaper to insure (Ginger.io, Limeade, HealthTap, PillPack, Strava, Misfit, Nant Health, ShopWell and a host of other companies).
My personal favorite is wellness and prevention development. Our genetic footprint has made it to the cloud, providing vastly superior information regarding drug and genome interaction, which will yield more personalized treatment plans (Invitae, Recombine, 23andMe, Arivale, deCODEme). Yes, healthcare is in a truly disruptive state.
Private equity funds and venture capitalists are fueling the market with an unprecedented amount of growth capital flowing into digital health and healthcare service companies. At the halfway mark of 2015 there had already been 226 capital raises, well on track to exceed 2014’s 551 total. Last year, aggregate funding doubled, to well over $4.1 billion, and $2.6 billion was already in the books by June of this year.
We are on the cusp of a new generation of healthcare.
M&A statistics are equally encouraging: 2014 saw more than $430 billion in healthcare and digital health transaction value across the globe, and there has been continued, strong momentum into 2015, with more than $480 billion already logged, to date. Aggressive behavior has become the norm in the healthcare transaction landscape, with both investors and consolidators vying for premier companies with explosive growth potential.
It’s still the early innings of the revolution in digital health and healthcare services. The sheer scale of the problem, coupled with the fact that it touches each of us individually, will continue to drive growth capital into the system. On the deal side, we are forecasting an increased level of mergers and acquisitions following suit.
As we work toward effectively using the capital being invested in the new healthcare and digital health landscape, we’ll see patients becoming true consumers, with increased access and transparency on behalf of providers. The transition from sick care to well care and the empowerment of the healthcare patient-consumer is upon us.