Over the past 20 years, more than $150 billion in venture capital (VC) has been invested in the health care sector, according to the 2016 MoneyTree Report released Jan. 11 by PricewaterhouseCoopers and CB Insights. Investments in the last three months of 2016, however, dropped 43%, while overall investments declined 26% from the third quarter of the year.
Given the unknown future of the Affordable Care Act (ACA) and health reform 2.0, venture capitalists contacted by AIS Health say they are waiting to see how the Trump administration influences the sector. In the meantime, they’re eyeing technology companies that are tapping into artificial intelligence (AI) and digital therapy, as well as start-ups that can help self-insured companies contain rising health care costs by improving consumer engagement.
Even if the law is torn down by Congress, some trends driven by the ACA are likely irreversible, notes Yumin Choi, managing director of health care investing at Boston-based Bain Capital Ventures (BCV). The health insurance industry is moving away from a fee-for-service model and toward value-based care and bundled payments, and a repeal of the ACA is unlikely to change that trajectory, he says. “Health care doesn’t change over months and years, it takes decades,” he says. BCV has $3.7 billion of assets under management and has backed firms including Liazon and MinuteClinic.
Ambar Bhattacharyya, managing director at Maverick Capital Ventures, a San Francisco-based VC firm focused on the health care and technology sectors, says venture capitalists are trying to determine the impact repeal and replace will have on their portfolios, as well as on future investments. Until the future becomes clearer, investors will focus on trends that won’t be impacted by health policy. Start-ups that help self-insured companies control health care spending is one area of interest, he says.
“Looking to 2017, the focus on self-insured employers will remain extremely high for us. We are interested in pricing transparency, claims management and next generation data warehousing,” he says. Self-insured employers, he says, “have really woken up” over the past two years and are pressuring carriers, brokers and vendors to do something about the cost of coverage.
Choi agrees that VC firms are paying closer attention to start-ups that can help self-insured companies and their workers. As an investor, he says he looks for companies that promise to reduce cost, improve quality and target the consumer experience.
“Everyone talks about engagement, but it’s really, really tough to do,” he says, adding that a number of companies have promised to do just that over the years, and have been hired by employers. But it’s unclear if those start-ups have driven the return on investment that their clients expected.
Bhattacharyya predicts more interest in companies that help workers make better financial decisions about their care, particularly given the Trump administration’s expected emphasis on expanding health savings accounts (HSAs). Investors will look for companies focused on price transparency and those that help consumers understand where their dollars are going, he says.
Oscar Clones Are Unlikely
VC investments driven by the ACA have included Oscar Health Insurance Co. and Bright Health, which targeted the individual insurance market, and Remedy Partners, which focused on bundled payment. Given the volatility of the individual market, Oscar is moving into the small-group market. The company has taken in $727 million in VC funding, but lost nearly $130 million in the first three quarters of 2016. Bright is looking to expand into Medicare Advantage (MA).
Bhattacharyya says 2017 is unlikely to see any new insurance start-ups targeting the individual market, but there could be some interest in the group market as well as in MA and Medicaid, particularly if states wind up taking on more risk through block-grant funding (HPW 12/12/16, p. 1).
Choi says next-generation insurers like Bright and Oscar are potential acquisition targets for large carriers that want to improve engagement. Some carriers might also be interested in snapping up VC-backed firms that offer cloud-based payment platforms, claims adjudication or medical chart coding.
Digital therapy and AI are among the top trends VC companies are eyeing in the health space. Digital therapy is a broad category where the patient experience is digitized. That can include everything from telehealth to a text-messaging platform that prompts members to take prescribed medication. Companies that offer interactive text-messaging platforms and online appointment scheduling software might also be attractive to investors, says Choi. Payers are trying to put the consumer first while also lowering their costs, he explains. Automated text messages that target chronic care can cost a company just pennies, rather than $12 or $13 dollars per phone call with a nurse.
Choi says he’s been watching Iora Health, a VC-backed firm that operates primary care clinics and promises to “restore humanity to health care.” Iora Health uses a team of caregivers and software to interact with members when they’re sick and when they’re not. Rather than billing for each service, the company charges members a flat fee. Last fall, the company closed $75 million in Series D financing. In October, Humana Inc. said it added five Iora Primary Care practices to its MA network in Arizona, Colorado and Washington state.
“I think you’re going to see more companies like Iora Health become more mainstream,” says Choi.
The insurance broker model is another area where VC-backed start-ups have succeeded. Maverick was a seed investor in Zenefits. Other broker-based firms such as Gusto have moved into the small-group market. Such companies, Bhattacharyya says, have pushed brokers to “sharpen their pencils” to make sure they provide real value to their employer clients. Those companies also have encouraged brokers to become more technology-enabled. “There are a handful of start-ups that could help brokers to become tech-enabled and more efficient.”
AI Is Latest Innovation Trend
A growing number of companies in the health care space are tapping into AI, a trend that is expected to continue into 2017, according to the MoneyTree report. HealthMine CEO Bryce Williams says VC firms are increasingly interested in the use of AI in health care.
Case in point: On Jan. 9, California-based HealthTap, a VC-backed technology firm, released an AI-powered “personal physician,” which translates a patient’s symptoms, and related data from a personal health record, into doctor-recommended courses of action. The service also offers real-time doctor consults via video, text and voice.
In December 2011, HealthTap received $11.5 million in its first round of funding. In May 2013, it raised $24 million in its second round of funding. The company now invests in and acquires other start-ups, says CEO Ron Gutman. There are more than 1 billion Google searches each year for physical and mental health symptoms. But such search engines aren’t designed to diagnose symptoms, Gutman tells AIS Health.
“Every headache becomes a brain tumor in four clicks or less,” he quips. “The challenge was how to triage people into the right level of care using data to help them make better decisions.”
The Dr. A.I. platform incorporates the collective clinical knowledge of more than 105,000 licensed doctors across 141 specialties gathered over the past six years. While a headache is a common symptom, there are hundreds of ways in which headaches can present, according to Gutman. Through Dr. A.I., users might be asked when the pain started, whether it is a sharp or dull pain, if the pain is in the front or side of the head and whether it gets worse when you bend over. The user will then receive diagnosis information about what doctors have suggested may be going on in similar combinations of symptoms and circumstances, together with a set of associated actions, which could include a virtual consultation with a doctor, Gutman explains.
To see the MoneyTree report, visit http://tinyurl.com/hvoyo7v.