4 Potential Roadblocks for Health Startups

Health care startups can sometimes face a tough path gaining traction in an industry dominated by incumbents currently enjoying large slices of a $2.8 trillion pie. Recognizing some of the roadblocks inherent to scaling inside the health care market is a smart first step for startups trying to figure out how to work (or not work) with key stakeholders.

Providers—local markets and fragmentation: Health care is delivered locally by 800,000 physicians in nearly 6,000 hospitals, creating a series of micro-markets that make it challenging to sell the same solution nationally. Every market exhibits unique dynamics in terms of incentives and outcomes based on the interactions of hospitals, physicians, payers and employers—Boston is very different from Bentonville when it comes to health care delivery. For startups, this can mean that while it is easy to do a pilot in any one market and meet the requirements of a single unique customer, it can be difficult to scale to an enterprise solution for all markets.

If you are a startup thinking big, remember that it is okay to start small. Traction takes time to develop and scalability takes time to demonstrate. While no innovation will unilaterally apply to every environment, understanding the micro-market you are targeting, and its relationship to other local markets under the larger health care umbrella, will help you keep perspective as you look to expand your enterprise.

Health plans—market consolidation: After 40+ horizontal mergers in the last two decades, the health plan sector has consolidated tremendously, with the five largest companies (UnitedHealthcare, WellPoint, Aetna, HCSC and Cigna) now owning nearly 50% market share across all segments. For startups, this means that getting access to the millions of customers and reimbursement for new solutions (lowering the effective price paid by consumers and/or giving providers an incentive to change existing clinical practices) requires being able to strike partnerships with the large plans—a challenging proposition as a new entrant, particularly as the health insurers themselves move to diversify into health information technology.

Examine and utilize your network. Rock Health serves as liasion, partner, and ambassador for startups, connecting entrepreneurs and payers, facilitating collaboration at the nascent stage of idea development, and effectively lowering the barriers for startup entry into the health care market.

Self-insured employers—gatekeepers and intermediaries: The self-insured employer market is essentially brokered through benefit consultancies (such as Mercer, Towers Watson, and Aon Hewitt)—there are no other established B2B distribution channels and selling directly is cost-intensive at best or fruitless at worst. It is a risky proposition for benefit consultancies to recommend a startup solution over an incumbent to their Fortune 500 customers; however, that endorsement is critical to startups seeking distribution efficiency and sell-through to self-insured employers.

This trend partially explains the tactic many startups adopt, which is to develop a patient-focused product/app/platform that can be marketed direct-to-consumer. While this strategy circumvents the need for gatekeeper buy-in, digital health startups that truly want to offer disruptive solutions to providers must ultimately find a way to re-engineer the B2B distribution channels.

Devices and clinical solutions—burden of evidence: New clinical solutions that take advantage of shifts in technology (ubiquitous wireless coverage, portable computing, app distribution) to better prevent, diagnose or treat disease can require overwhelming evidence to gain approval by the FDA and traction in the market. This pathway can take multiple years and significant capital investment, not to mention specialized expertise—an advantage incumbents clearly hold over new entrants.

This hurdle is real and non-trivial. Digital health incubators can lead as an arbiter of change by finding creative ways to align incentives between incumbents and new entrants (to share both expertise and capital), and to educate and prepare entrepreneurs for the potentially long regulatory road ahead.