Featured Health Business Daily Story, Sept. 17, 2014

Health Insurers Track Startups for Ideas, Investment Amid Venture-Capital Boom (with Chart: Managed Care M&A Activity, 2004 Through First-Half 2014)

Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry.

By ,
September 8, 2014Volume 24Issue 30

Venture capital is flowing into the digital health space at rates that by midyear 2014 had already eclipsed what was seen for all of last year, according to new industry data. That leaves health insurers to consider investments in or outright acquisitions of a bevy of software developers, wearable device makers and behavioral health tool creators. Sifting through the suddenly crowded digital health startup market has become an important part of innovation efforts at major insurers, such as UnitedHealth Group’s UnitedHealthcare, as the search for new ways to make money, please a technology-obsessed public and generate efficiencies intensifies.

Rock Health, a San Francisco-based funder of early-stage startups in the health care sector (HPW 2/3/14, p. 5), said first-half 2014 venture capital moving into digital health topped $2.3 billion, more than the nearly $2 billion for 2013. Of that $2.3 billion raised thus far this year, about half of the money focuses on six areas, Teresa Wang, strategy manager for Rock Health, tells HPW. These popular segments include $211 million for startups in payer administration, $206 million for digital medical devices, $196 million for analytics and big data, $193 million for health care consumer engagement, $162 million for population health management and $150 million for personalized medicine, she says. UnitedHealth Group and Blue Shield of California are partners in Rock Health, along with nearly two-dozen other corporate, medical, venture-capital and programming organizations.

Startups Get Investment Interest

Some of the money that traditionally went into biotech and medical devices definitely now is coming to digital health, David Jones, Jr., chairman of Louisville, Ky.-based venture capital firm Chrysalis Ventures and former chair of Humana Inc.’s board of directors, tells HPW. And even within the health care market, there is differentiation. “There is more money going into transparency tools now than shopping platforms. This is because with the launch of the public exchanges, and all the turmoil there, and the emergence of some private exchange platforms, there are real companies up and running in those spaces, whereas transparency is a much younger and less-defined field,” he says.

The amount of money and new technology coming to health care should be attractive to insurers. “I think the health plans have a fabulous opportunity to capture value from the types of care coordination and predictive modeling that this technology suddenly makes possible because they are big data aggregators. And they have the financial muscle to benefit from avoiding unnecessary medical costs,” Jones says. The hard part for venture investors is that “you have to separate the cool from the money-making,” he adds.

The strategies that insurers will use to get into the innovation game are increasingly dictated by the new marketplace reality under the Affordable Care Act (ACA), David Williams, co-founder of the Health Business Group and MedPharma Partners, tells HPW. “Basically insurers are not very good at being innovative. They are in a kind of basic and boring business and historically make money by raising premiums and in some cases doing some merging. But with the ACA and its medical loss ratios, they are looking to increase profits by investing in businesses not subject to administrative and profit caps,” he says. Thus, they have made investments in recent times in technology and population health management, like for instance Aetna Inc.’s purchase of Healthagen in 2011, which in turn created iTriage as an app to help consumers evaluate their symptoms and find providers (HPW 12/26/11, p. 8).

It is a challenge, however, for carriers to make forays into other industries, since Williams says they are not well trusted, and so they face a danger in investing and creating “a reverse Midas touch.” There are also problems caused by the large size of major insurers and the cumbersome bureaucracies, but that could be changing somewhat with plans hiring leaders outside their ranks to bolster innovation goals. He points to WellPoint, Inc.’s tapping of former Boston Consulting Group executive Martin Silverstein, M.D., as its chief strategy officer (HPW 4/28/14, p. 8), for example.

But in the end, there is a conservative tilt to how insurers operate, and they remain heavily regulated at the state level, which creates issues of its own. “That is an additional issue and results in insurers not wanting to attract a lot of attention. There are already enough people who don’t like them, and they don’t want to risk getting into a new business that they don’t understand and get more scrutiny,” Williams says.

In the related area of mergers and acquisitions, Daniel Farrell, partner in PwC’s healthcare deals practice, tells HPW that his firm’s latest research shows that managed care companies have been active in 2014 (see chart, below) now that the dust has settled somewhat on the ACA. And much of the talk in mergers for health plans is branching into these new areas where so much venture capital is headed. “The more forward-thinking, larger payers are beginning to test the waters in new spaces such as wellness and population health and even some tech companies to help speed up that process,” he says. The twin goals in play now for insurers are to try and build membership and at the same time look to expand benefit offerings, Farrell adds.

UnitedHealth Takes on Digital Health

Tom Vanderheyden, vice president for business development and commercialization at UnitedHealth Group, tells HPW about the “soft” and “hard” sides of the investment world for the carrier, which can start by assessing startups that are often filtered through to the company through its relationship with Rock Health. The soft side of investing includes consideration of a mentoring role by the insurer for some of these candidates in an exchange of value and learning. “The hard side of the investment world, which we don’t do a tremendous amount of, is direct investment in early-stage companies,” he says. The shear size of UnitedHealth makes it difficult to manage too many direct investments, but “in any given year we have low single-digit direct investment for very unique investments,” Vanderheyden says. The insurer is also a limited partner in several venture-capital funds that also provide funds for new companies.

As for what UnitedHealth is looking for in startups, the interests run the gamut and can be something useful at a practical level or can be about how unrelated processes that a startup employs could benefit the insurer, he says. Examples of some of the latest Rock Health startups that have received seed money just this month include Welkins, a diabetes management platform, and a company named Aptible that helps other companies become HIPAA-compliant.

When asked how these startups can mature into real money-making concerns, and possibly go public down the road, Vanderheyden says there is a certain ebb and flow to the type of businesses seeking out seed funding in the health care arena. “Two years ago I would be saying, ‘Please don’t ever show me a challenge-based fitness company.’ I had seen literally 75 of them. And ultimately they stop showing up, and then that market narrows and hones itself, and only a few have staying power,” he says. “A lot of people think of a similar solution at the same time. One of the challenges with the new technical environment is that two guys in only three months can build a really good app.”

Now, if there is an interest by the insurer in a startup, there are different ways to move beyond a simple investment, Vanderheyden says. These include signing a straight commercial agreement with the new company or the more aggressive step of partnering. “The second [option] is that first one amped up a little. We say ‘we think if we partner with you, and you may have a market maker position, we will take warrants with you. If we partner and it is wildly successful, we will take warrants in that success as well,’” he says.

Two other possible steps are for UnitedHealth to make some level of minority investment in the startup or to acquire it outright. “Generally speaking, to acquire it, it has to have meaningful traction and or verified proof of efficacy from a clinical standpoint,” Vanderheyden adds. An example of such an investment was in 2012 when the insurer took a stake in the Lose It! weight-loss app.

Managed Care M&A Activity, 2004 Through First-Half 2014

Managed Care M&A Activity, 2004 Through First-Half 2014

*Deal volume includes deals in which terms were not disclosed.

SOURCE: The Health Care M&A Information Source. Visit www.healthcareMandA.com.

© 2014 by Atlantic Information Services, Inc. All Rights Reserved.

What investment opportunities do you see for insurers in the venture capital world? Are they out of their league, or is there an opportunity to make money, please members and be on the cutting edge? Join the conversation at the AIS Blogs.

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