By Frederic Zussa (@fzussa), OnDigitalHealth.com, January 21, 2012
With the mHealth Summit and the Digital Health Summit behind us, here is a good opportunity to step back and reflect on the enthusiasm and hope the emerging Consumer Digital Health space is generating.
It is very exciting to see that those two events have rapidly become a must-attend gathering for anyone interested in Digital Health. The HIMSS Annual Conference, a.k.a. the granddaddy of Healthcare IT gathering, should better watch out since long-standing conferences can too be disrupted by novel, fresh, dynamic, and creative new entrants.
It is worth noting the many commonalities between the mHealth Summit and the Digital Health Summit. Both events are in their 3rd year. Both have experienced significant growth in term of attendance and content. The Digital Health Summit @ CES was a half-day affair in its first year, grew to a full-day program last year, and boasted a two-day agenda this year. This last edition of the mHealth Summit reached 3,500 attendees and 300+ exhibitors, twice the size of the previous year.
Last but not least, both events are placing significant emphasis on next-generation Consumer Digital Health innovation. Not surprising since the Digital Health Summit is hosted within the world largest consumer electronics show, while the mHealth Summit, as it name implies, focuses on the potential of the mobile phone, a consumer staple, as the next-generation vehicle to deliver health. The significant presence at both events of major tel.companies further accentuate the consumer-focus of both gatherings.
Consumer Digital Health: An Emerging Category
A new category of healthcare product and services is indeed emerging. I am sure you have come across some of them. They boast consumer-friendly names such as Zeo, FitBit, Up Band, Skimble, orThe Eatery. Several trends are fueling innovation in the Consumer Digital Health area. To name a few: 1) the increased availability of low-cost sensors, 2) the significant market adoption of smartphones, providing an ubiquitous software development and distribution platform, and 3) a growing interest by tech entrepreneurs for opportunities in healthcare.
I have been personally delighted to see so many talented technology entrepreneurs moving with such passion and energy into healthcare. One thing is sure is that our healthcare system desperately needs it. With them, those technology entrepreneurs bring best-in-class software development skills (Adam Bosworth, who co-founded Keas in 2007, a Health and Wellness engagement platform, previously worked at Google, Borland, and Microsoft), beautiful product design, consumer engagement know-how, and amazing creative skills. Their contribution should be welcomed and celebrated.
The central hypothesis being tested by many is that the reason why individuals have NOT engage with their health is because they have NOT been provided with tools that are beautifully designed, addictive to use, revealing on one’s health habits (a.k.a closing the feedback loop), and empowering. Should they be right, the way in which we manage our own health could significantly be altered as a result of this fresh thinking.
Will Consumers pay? Most likely not!
Beyond the societal potential those new products bring, the big question one should ask is: Will consumers be willing to pay for them? Given that the success of this Consumer Digital Health sector partly sits on early entrepreneurs hitting a few home runs , the business model question is a critical one to examine.
When asked about this topic, a majority of early-stage entrepreneurs reveal that their intention is indeed to sell their products directly to consumers. A recent survey conducted by Rock Health, a Digital Health start-up incubator located in San Francisco, indicated that over 60% of Digital Health entrepreneurs polled reported pursuing a business-to-consumer business model (slide #23,http://www.slideshare.net/RockHealth/rock-report-state-of-digital-health).
This is intriguing for several reasons. First of all, for good or bad, most consumers, particularly those who needs it the most, don’t expect to pay for healthcare. Individuals have come to expect that healthcare should be almost free (if not completely) and be paid by someone else (either their employer or through government-sponsored programs). Now, I am not saying that consumers are unwilling to pay for anything that’s health-related. In fact, the $600B global health & wellness segment is predominantly a self-pay market and is doing really well despite the challenging economic times (see report).
One key challenge, though, with the Health & Wellness market is that it is heavily fragmented on the demand-side. This is partly due to the fact that when it comes to Health and Wellness, the tastes and affinities of consumers are as broad and varied as can be. Consumers like to coalesce in small affinity groups, leading to niche markets and niche products on the supply side. Therefore, one may develop a very successful online platform for gym-going fanatics but that same site may not as strongly appeal to obese individuals who need to increase their physical activity, to the moms who are looking for a social venue to meet other moms while getting back in shape during work lunch breaks, or to Seniors who want to maintain a physical activity while exchanging pictures of their grand kids. While each segment can make for a decent business, the Health and Wellness opportunity is a hard one to crack on a grand scale.
The BIG mid-term opportunity is in B2B
Chronic and acute conditions account for the bulk of healthcare expenditure (to the tune of $2.7 Trillion a year, climbing to $4.5 Trillion by the end of the decade in the US alone). If proven successful with engaging consumers and patients, consumer digital health innovations could play a major role in the delivery of chronic and acute care. And when it comes to deploying those innovative consumer technologies to those big dollar areas, a business-to-business model seems a more sensible route.
Indeed, as discussed earlier, chronic and acute care patients don’t directly bear the cost of the care they receive. Health plans are the party footing the bill (after the co-pays and deductibles). This is why introducing new innovation in healthcare has traditionally meant securing reimbursement from payers. The mechanism by which reimbursement is granted and administrated is through CPT codes, an archaic and outdated model and one of the most visible relic of our fee-for-service, transactional-oriented healthcare payment model. And this is where the difficulty starts for digital health entrepreneurs looking to bring those technologies into Healthcare. There is virtually no CPT code covering the kind of consumer-oriented innovation they are developing. And trying to introduce new codes is a major uphill battle particularly given the current payer focus on containing spiraling healthcare costs.
But there is hope in sight for Digital Health entrepreneurs. The payment model by which healthcare products and services are being paid for is slowly but surely changing. Both commercial and public payers are experimenting with value-based payment models. This is best reflected by the emergence of Accountable Care Organizations, entities that will be paid based on the health improvement they produce rather than on the volume of care they administer, or by the emergence of bundle payments, by which providers are paid a fixed envelop for a given episode of care.
What those novel payment models do is to shift the risk on health outcomes from payers to providers and to introduce more accountability in the system. With providers becoming more accountable, they will seek means to engage patients more effectively, to deliver care more cost effectively, and to continuously monitor patients to collect the evidence of the improved health outcomes they generated. It is this shift in the system that will most likely generate the most sizeable commercial opportunities for consumer digital health products and services.
Implications for Consumer Digital Health Entrepreneurs
There are many implications out of those few observations, Consumer Digital Health entrepreneurs should therefore consider:
First, having a good understanding of the business of healthcare, how the sector is evolving and where commercial opportunities will emerge over the next 3 to 5 years as the result of some of the systemic shits currently happening is critical to success. Introducing innovative and game chaining technology coupled with a clear understanding of how those innovations can be bolted on the changing healthcare system is paramount. Now, this is nothing different from the approach Apple followed when it introduced the iPod and the iPhone. Steve Jobs and his team showed insane skills at introducing game changing technologies while bolting them on top of the respective industries they targeted (music publishing for the iPod, and wireless carriers for the iPhone). Note than when Apple had game-changing technology (Apple TV) without a sense of how it would fit in the existing market structure (the cable TV industry), it called it an “experiment” and refrained from going big on it.
An implication of this first point is that every Consumer Digital Health entrepreneurs should make themselves scholar of the healthcare system, in its current state and anticipated evolutions. If you don’t have such an understanding already and are not interested in learning it, then quickly bring someone in your team that does and make him or her, the business person. Luckily here, as large healthcare incumbents are being shaken by the changes in the industry, a growing pool of talented and knowledgable healthcare business professionals is currently looking for career opportunities in next-generation companies. In short, it is a good time to be looking for business talent in Healthcare.
Second, Consumer Digital Health start-ups should learn how to sell to large healthcare accounts (providers, payers, product manufacturers). This will most likely mean knowing how to articulate a value proposition those players can understand in the context of the changing economics of their core business.
Finally, expect your product to be one component of a broader integrated care solution, not a standalone piece. Most likely, your product will just be one part of a more complex system. This certainly poses a big challenge designing a superior business model since entrepreneurs will need to rustle with the inherent tension between the value their component will aim to capture and the value the party they sells to (i.e. the integrator) will try to capture. But if you think how Microsoft and Intel captured most of the value of a PC at the expense of PC manufacturers, there is hope that some bright business minds will figure this one out.
The Consumer Digital Health space has a lot of potential. There is clearly an opportunity with providing consumers with tools allowing them to take an active role in managing their health. In the near-term and may be with the exception of Health and Wellness niche opportunities, Consumer Digital Health start-ups shouldn’t be looking at consumers to pay for their new products or services. Instead, those start-ups should figure out how to get large healthcare providers and payers to pay for those new tools as a mean to engage the patient, to mitigate risk, to reduce care delivery costs, and to instrument the patient to demonstrate better outcomes.
This requires Consumer Digital Health entrepreneurs to take a fresh look at their approach and business model. For those who do, the economic benefit they will enjoy and the impact they make to society will be well worth the effort.
Frederic Zussa (@fzussa), OnDigitalHealth.com