Obamacare Is Real – So What Does It Mean for Healthcare Startups?

by: Paddy Padmanabhan

If there were any doubts that parts of Obamacare might be repealed in the event of a Romney win, those doubts have receded into the dim and distant past by now. Healthcare reforms are moving ahead and will accelerate in the coming months. Defined contribution, health insurance exchanges, value-based pricing, ACO’s – these terms may well be common parlance just a few years from now.

Let’s look at a couple of big factors that will drive these changes:

  • Consumerization of healthcare: 40 million or so underinsured and uninsured Americans will be required by law to buy insurance.
  • Cost reduction and elimination of waste: The healthcare sector is a $ 2.5 trillion piece of the U.S. economy. About a third of this is estimated to be waste. Obamacare plans to eliminate this waste through changes to the compensation model for delivery of healthcare services.

This is creating a huge opportunity for startups in healthcare.

Here are some things that are happening:

  • New incubators are forming, specifically to support healthcare startups. Some of these are Blueprint Health and Startup Health. Healthbox, an affiliate of Blue Cross Blue Shield Ventures, has also been running a healthcare startup incubation program for a few years.
  • Big VC’s are getting in on the act. In the past couple of decades, VC’s, for the most part, have stayed away from healthcare because of the rigid structure of the healthcare industry that resisted any change. Now, due to the consumerization of healthcare and the potential opportunity to play a part in eliminating $ 700 billion in healthcare costs, big names like Kleiner Perkins and Khosla Ventures are getting active in this space.
  • Existing players in healthcare are encouraging innovation. Big companies like Aetna, a leading insurer, are actively promoting and even acquiring startups that can improve efficiencies. Blue Cross Blue Shield companies are joining hands to invest in promising new companies that can help them compete effectively in this new world of healthcare.
  • Healthcare IT vendors are becoming venture financiers. An interesting model is that of Athena Health, which invites startups to pitch ideas. IN exchange, winners get some seed funding and exposure to Athena’s customer base of 35,000 doctors.
  • Non-traditional players are getting in on the action. Big corporations like Walmart are beginning  to utilize their physical and digital infrastructure to disruptively engage with consumers for their healthcare needs. The healthcare industry has to address this transition from both the business model and technology perspectives.
  • Fundamental changes to the information technology landscape: Cloud computing is here, and is the de facto model for new software applications. New healthcare entities, such as ACO’s, will be stood up on virtual infrastructure that requires minimal capital investments, and can be scaled up or down on demand.  BYOD is real, and healthcare workers will interact with their employers through multiple devices, requiring IT to enable it while ensuring information security. Analytics is the new driver of operating decisions and profitability, and analytics-as-a-service will become the de facto model in a hybrid cloud environment.
  • EMR’s and digitization of medical records: While we hear a lot about the millions of dollars being spent on expensive electronic medical record systems, so far it has been used primarily for meeting “Meaningful Use” compliance requirements to claim additional reimbursements from the Federal Government. The real value, however, will be in how this information is made available to consumers over the web and mobile devices — anytime, anywhere — so that consumers can actively manage their health and wellness, and make informed decisions about their healthcare.
  • Delivery of IT through in-house, outsourced, and cloud models: Gone are the days of the on-premise, rigid, and monolithic IT organizations under a CIO. Indeed, the role of the CIO is being redefined as the delivery of IT requires building a capability to source, integrate, and deliver IT using a combination of in-house and vendor resources.
  • Looming shortage of IT workers : For all the talk of unemployment in the U.S. economy, it is well known that there is a shortage of tech workers. The U.S. economy is expected to generate around 750,000 new tech jobs between 2010 and 2020, and a third of those jobs will be in healthcare. This is going to drive more automation in healthcare as a means to reduce extreme dependency on scarce talent.

Startups looking at opportunity areas may want to look at some of the challenges ahead as we move into the brave new world of consumerism and outcome-based medicine:

  • The healthcare system is built around a financial model that pays on a unit of service today. It will be a big culture change for providers of healthcare to change to an outcomes-based model. This implies a redistribution of risk from payers to providers.  Providers are not ready for this yet. Anything that helps providers manage risk – such as analytics – will be in great demand.
  • Transparency will be demanded of healthcare providers: For the most part, healthcare consumers are flying blind today as it relates to obtaining any meaningful information about their healthcare providers. In a hyper-connected world, physicians will be forced to embrace transparency and open themselves to consumer ratings, electronic exchange of diagnosis and treatment information, and easy accessibility.
  • Healthcare is not ready for a consumerized- and outcomes-based operating model.  While the first state-run health insurance exchanges (HIE’s) are scheduled to go live a year from now, it remains to be seen if the technology will be ready to support a large-scale migration of healthcare consumers from no insurance or employer-based insurance, to individual insurance. In addition, risk management systems may not fully be in place for participants looking to build products that will adequately reflect the risk of signing up individual insurers.

Healthcare reform in the U.S is perhaps the opportunity of the century.  Healthcare in the U.S is a giant, slow-moving ship.  It’s going to need a tidal wave of entrepreneurial activity to lift this giant ship and move it forward. If any entrepreneur is looking for an opportunity to create something and make a difference to society, healthcare is the place to be.

About the author Paddy Padmanabhan @Technori
Paddy is a keen observer of technology-led business model innovation. During the week, he runs a healthcare analytics business. During the weekends, he plays guitar and sings in a classic rock and blues band. You can find him on www.linkedin.com/in/paddypadmanabhan99/, or follow him @paddypadmanabha.

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