What’s Really Killing Digital Health Startups

In 2004 I started the first VoIP-based SaaS company for the call center market. Based on the moderate success we achieved, I thought making a play in the healthcare industry would be a cakewalk.

I was wrong. Stupidly, ignorantly wrong.

While it’s true that many startups fail not because of a lack of technology but rather a lack of product market fit, in healthcare, many great ideas falter because of technology — or more specifically, the difficulty in integrating to legacy systems.

Whether you’re selling to a small doctor’s office or a large hospital, healthcare organizations of any size are juggling multiple software systems, many of which do not speak to each other, i.e., they lack “data interoperability.”

During 2009 to 2012, many great ideas for healthcare companies received seed funding between $500,000 to $2 million. While this was enough to get a proof of concept or even a working beta with some painfully long sales cycle pilot customers, it often wasn’t enough to overcome the political and technical hurdles of integrating into myriad legacy Electronic Health Record (EHR) systems, Practice Management systems, billing software, etc. For example, there are well over 100 established EHR vendors in the U.S. market alone.

In the early days of my healthcare startup DoctorBase, you would often hear my sales reps repeat, “Sorry doc, we don’t integrate to ______ yet.” All day. Every day. It was excruciating to hear as the CEO, and it was the cause of many a sleepless (Ambien) night.

It wasn’t for lack of trying by my engineers; they tried valiantly to integrate (hack) antiquated databases in order to get our patient engagement software to speak securely to legacy systems. Although we were successful in many cases, in other instances there were political or economic motivations by other organizations that made that nearly impossible.

I thought making a play in the healthcare industry would be a cakewalk.

I still vividly remember the excitement — later turned into disillusionment — of landing our first respectable research hospital who loved our software, but needed it to integrate into their multi-million-dollar EHR system. The EHR company actually sent a “diplomat” to my office to get an idea of our feature set, then told us that integrations are a long and carefully thought-out process “because of HIPAA.” They then went to the hospital and convinced them that integrating would cost several million dollars, and that it was largely unnecessary, as they were planning on building those same features anyway. What a coincidence.

Another well-established vendor created a partner program under the guise of wanting to disrupt the EHR market (one in which they had significant market share), then later rejected our application because, they said, it was competitive with one of their modules. At least we didn’t have to pay their $10,000+ application review fee.

As DoctorBase grew bigger, we had multiple acquirers approach us for an acquisition. When I turned down a large EHR software vendor with whom we had been working, they immediately cut off our integration access and sent an email to all of our mutual customers citing that we were “a security threat.”

This kind of behavior by incumbent vendors leaves a lot of young digital health startups at risk of not being able to scale fast enough before their seed rounds dry up.

An investment banker friend of mine, Frederic Laurier from 11T Partners, recently told me, “I’m seeing more early stage companies in digital health apply for the M&A market in 2015 than I have in recent memory.”

All the blame can’t be aimed at just the established technology vendors in healthcare. The Federal government omitted data interoperability as a mandatory requirement of the first stage of the HITECH act (known as “Meaningful Use Stage I”), where each individual doctor got paid up to $44,000 in cash to adopt electronic health records.

And while EHR vendors had to jump through hoops to get certified for Meaningful Use Stage I, one of the hoops they didn’t have to dive through was to make sure that they had open APIs (Application Programming Interfaces) that would allow innovative startups to integrate into their platforms in a straightforward manner.

Many courageous, innovative tech entrepreneurs come into healthcare at significant risk to their finances and careers.

As any engineer knows, most software applications have APIs; it’s simply a business choice whether to publish them or not. The Fed could have required that software vendors wanting to be certified for Meaningful Use Stage I publish their APIs at the critical first stage of this multi-billion-dollar program, and require only nominal costs for startups to pass an incumbent vendor’s security checklists.

But as entrepreneurs would have it, a few innovative companies that have sizable market share are starting to forge ahead in the brave new world of open healthcare APIs.

In mid 2014, my engineers were somewhat shocked to discover that an Irvine-based company called Kareo (disclosure: Kareo acquired DoctorBase in March of 2015) had API documentation that they publicly published. Integrating into their Practice Management and EHR software was more straightforward than any system we had attempted in the past. When they eventually approached us about an acquisition, I was already halfway sold on the idea of joining forces.

And it’s not just Kareo. Companies like Elation EHR and PokitDok have growing market share, but are investing in an open platform vision. We need to support these types of business models by building more awareness around what they’re spearheading — a healthcare IT industry that allows innovative young companies to flourish instead of having to rebuild a (wheel) library of integrations.

Many courageous, innovative tech entrepreneurs come into healthcare at significant risk to their finances and careers; after all, there are far easier business verticals in which to make money. So it’s a shame that in addition to the array of challenges digital health startups face, interoperability into the legacy systems of their customers still remains a primary roadblock.

Because while walled gardens in other sectors of business annoy consumers, such business practices in healthcare hurt patients.