2021’s Healthcare Dumpster Fire

Billions Were Burnt On Tech Company Playbooks That Don’t Work In Healthcare.

In 2021, the healthcare sector, invigorated by the exigencies of the pandemic, saw a surge in investments and digital health initiatives. Driven by a Zero Interest Rate Policy (ZIRP) environment, investors chased high-growth prospects, often overlooking the foundational intricacies of healthcare. This fervor was amplified by unprecedented public health spending, igniting hopes of innovation. The reality proved less rosy, revealing our collective myopia in understanding healthcare's nuanced dynamics, especially during a black swan event like a pandemic.

Eren Bali from Carbon Health encapsulated the sentiment, lamenting that “Every decision we made in 2021 was a mistake.” Following suit, an expose by The Information highlighted Carbon's significant financial issues (chart above)  in the wake of 2021’s spending spree, with numerous acquisitions now facing shutdown or sale. Carbon, which I think has some of the smartest people I know in health tech, has   The more than $18 billion Teladoc-Livongo acquisition has been written down by over $13 billion, with Teladoc’s current market cap at $2.6 billion down from $37 billion at the time of the deal. The trouble scaling care sustainably at companies like obesity care provider Calibrate and mental health practice Cerebral are predictable in hindsight, exemplifying the pitfalls of hasty, pandemic-induced decisions to go all in on prescription mills. 

In the end, the big problem was digital health companies burned a lot of money trying to be tech companies. Software is infinitely scalable, so we can feed dollars into customer acquisition without quality declining. Scaling care models is much more difficult. Founders and investors conflated in-house tech development with sustainable innovation. The attempts at building proprietary Electronic Medical Records (EMRs) invariably led to significant capital burn with little to show in terms of differentiation or value addition. A better EMR doesn’t get you better reimbursement rates.

Scale means everything in healthcare. If you’re a provider, that typically means geography density. Even unicorn startups found themselves out-leveraged when negotiating with colossal payors. The promise of novel services, however much they are cherished by patients like myself, mean little without addressing the financial concerns of payors and patients. 

That doesn’t mean there isn’t room for tech companies. They just need to take a narrow approach to build their scale. Those that can build asset light networks by providing utility to patients, providers, and employers will be the winners. 

As a patient I want all of my doctors to use Photon Health so I can direct my own prescription to the pharmacy of my choice. I send prescriptions to different pharmacies, generics to Cost Plus Drugs and my local Acme Supermarket Pharmacy for everything else (LOVE the team at Acme pharmacy). This requires more back-and-forth with practice admin and providers than it should. Every doctor or admin I’ve talked to thinks it's a great idea for them and the patient. If they build a network with density in geographies or specialties there are a lot of opportunities for expansion. 

I’m very excited about next-generation revenue cycle management firms (medical billing) like Adonis Health, Juniper Platform, Candid Health, and Strata PT. By boosting practice net collection rates from 60-80% to >90%, they are becoming embedded within practices and are laying the groundwork for robust provider networks. With a deep understanding of provider utilization and patient demographics, these firms are on a promising trajectory toward creating an 'Optum-like' entity, albeit with a lighter asset footprint. While they have not yet achieved the scale necessary for such a transformation, their continued growth and strategic network expansion hint at a future where they could negotiate with payors on an even playing field, thereby reshaping the healthcare payment landscape.

True innovation will come from dismantling and reassembling the components of U.S. healthcare from within. Transcarent’s national direct to employer health system, with participation from prominent health systems like Intermountain and Mount Sinai, is a prominent example of disintermediation that I am excited to watch. By acting as a direct contracting platform between provider groups and employers, Transcarent is building care networks that could be leveraged for commercial, Medicare Advantage + direct contracting, or management medicaid businesses. 

I am most excited by companies like Cost Plus Drugs who are circumventing traditional pharmacy benefit managers (PBMs) by creating a consumer-centric brand, which accelerates their partnerships with payors and distribution networks eager to leverage the brand's positive reputation. I would love to see Mark Cuban negotiate directly with Novo Nordisk and Eli Lilly to supply Ozempic and Mounjaro at net prices. With Novo's net on Ozempic at $290 and Lily’s net on Mounjaro at $215, a cost plus model with a few transparent fee is sustainable for all but the health insurers. 

Cost Plus Drugs is a great example because there is little to no proprietary tech involved in its success. It is delivering lower prices for patients, employers and taxpayers. In a landscape where I've yet to meet a health insurance executive who struggles with medication affordability, the urgency for a more equitable framework is undeniable. Software companies can act as a uniting fabric, re-assembling networks necessary for system change. But the lesson we learned from 2021 is you can’t defy physics and  telehealth companies are not tech companies.