For Entrepreneurs2/12/15

How healthcare reform impacts digital health

Teresa Wang

By Teresa Wang and Sarah Jacobson

Healthcare reform is fueling digital health funding. You’ve probably heard a variation or two of that statement so here’s a look at how and why healthcare reform has helped define the digital health landscape. In a series of posts, we’ll explore the legislative landscape, starting with this overview and then diving into telemedicine, at-home patient management, and healthcare consumer engagement over the next few weeks.

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With healthcare costs expected to rise 4.9% next year, stakeholders are starting to feel the pressure to change. Legislators are busy trying to slow the growth of healthcare spending; providers strive to find a balance for cutting costs and improving care; insurers compete to gain more enrolled members. Most notably, healthcare reform efforts have created an environment for the growth of digital health, which received over $8B in funding over the past four years.

Healthcare reform focuses on increasing access and improving quality of healthcare services, yet little has translated to significantly reducing overall healthcare spending. But digital health may be the key to solving this “iron triangle” of healthcare by promising to deliver on:

  • Improving the bottom line: Does the solution help the organization cut costs and reduce expenses (e.g., administrative burdens)?
  • Increasing the top line: Does the solution help the organization increase revenue (e.g., increase member enrollment, new revenue streams)?
  • A combination of both: Does the solution enable the organization to increase profit margins by both growing revenue and decreasing expenses?

As federal initiatives seek to further reduce costs and streamline processes, digital health will be on the forefront of this healthcare transformation. Reform policies have incentivized a new wave of technology solutions, as well as business models. For instance, CMS experimentation with payment models and reimbursement strategies has manifested itself in the shift from fee-for-service to value-based care and accountable care organizations (ACOs). These ideas are not novel (think Medicare DRG payments and HMOs), yet coupled with other legislation such as the HITECH Act and PPACA, over 600 risk-bearing ACOs have formed. Late last month, HHS essentially announced the death of fee for service as they set ambitious goals for 2018 to have 50% of Medicare payments be paid via alternative payments models such as ACOs or bundled payment arrangements as well as 90% of traditional Medicare payments to be tied to quality- or value-based programs such as Hospital Value Based Purchasing and the Hospital Readmissions Reduction Program. Digital health companies are providing solutions to reflect this shift in reimbursement, often aligning their business models with value-based care.

Many companies, ranging from Omada Health to Alignment Healthcare, are taking on real risk with their products—only profitable when promised outcomes or milestones are met. Perhaps this is also the financial opportunity many investors see with technologies that help providers manage patient populations. In 2014, population health management tools raised $225M. At-home patient management companies, which extend professional care beyond the clinical setting, raised $418M. These companies will play a key role in cost reduction by avoiding dangerous and costly adverse events.

Moreover, industry stakeholders are also adjusting their business models. With the implementation of the medical loss ratio (MLR) capping insurer profit margins, payers have sought out solutions that can help streamline and optimize operational inefficiencies. These payer administration tools that strip out extraneous administrative costs to boost insurer profitability have experienced significant growth. Over $171M was raised by payer administration companies in 2014 alone, representing a 269% year-over-year growth. Likewise, providers are turning to technologies that can improve referral and marketing efforts, improve operational efficiencies,  and reduce administrative burden, which have received over $207M in funding.

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There is no doubt that reform will continue to impact and shape all areas of healthcare. We highlight three categories that healthcare legislation will profoundly impact: telemedicine, at-home patient management, and healthcare consumer engagement. New technologies in telemedicine are not only redefining the delivery and accessibility of care, but also expanding the scope of care that can be delivered virtually. At-home patient management companies aim to keep costs down as care services extend beyond the clinical setting and into the home. And one of the most direct impacts of healthcare reform is the growing consumerism in healthcare. The process of purchasing insurance is no small challenge, and many plans are now high-deductible, which require patients to first pay out-of-pocket for their healthcare expenses. But consumerism goes beyond just insurance and buying health products like wearables. Patients now have access to online sources, such as physician/provider reviews and appointment scheduling, that empower and influence purchasing decisions.

In this series of posts, we’ll dive into how reform and legislative policies will play a role in the promising growth we’ve seen in these three categories and why we’re optimistic about the future.

Part 1: How healthcare reform impacts digital health
Part 2: How laws and policies are shaping telemedicine
Part 3: The shifting center of care
Part 4: Healthcare reform puts consumers in charge


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