As co-leaders of an early-stage health technology accelerator, over the past three years we’ve reviewed and evaluated the business plans for hundreds of life science companies.
Through this work, we’ve discovered that company founders—all of them exceedingly bright people, M.D.s and Ph.D.s who are seeking to advance the boundaries of health sciences—often struggle to understand the basic blocking and tackling when it comes to launching a health product.
And no wonder—they are trying to build a new business in the most complex healthcare system in the world. The payer-provider universe is an arcane world by design. These complexities make commercialization frustrating, not to mention confusing for a novice entrepreneur.
Some of that confusion lies in misperceptions about what makes a good product or service and the nature of the marketplace itself. Let’s clear up a few of those:
Misperception: A product that improves patient outcomes will naturally find success in the market.
Reality: Solutions that increase productivity—by decreasing costs or increasing throughput— and markedly improve patient outcomes are most likely to succeed.
We say “markedly” because solutions that do not change productivity or decrease the resources necessary to deliver care have low adoption rates due to the financial and human pain of change—even if they are incrementally better for quality or patient experience.
If you can’t improve productivity, marginal changes in quality or experience may not be worth the hassle for technology adopters.
Misperception: The patient is the customer.
Reality: This is partially accurate. While it is true that the patient has the most to gain or lose from an advance in clinical treatment, the costs are absorbed by a group of stakeholders including payers, state or federal government and private businesses.
For example, over 60% of the U.S. population is covered by commercial insurance, which typically covers over 90% of total healthcare costs while patient liability only makes up about 10%.
In reality, the costs associated with adoption are absorbed by payers and private businesses along with various social safety net programs such as Medicare, Medicaid and workers' compensation.
At the end of the day, these are your customers.
Misperception: Physicians drive purchasing decisions.
Reality: Physicians play a critical role in the adoption of new technology but are not the only decision-makers. In healthcare settings, the value-analysis committee comprises many disciplines from across the system and includes clinical and administrative teams from finance, contracting and procurement.
Misperception: FDA approval and a CPT code mean a commercial product is ready to go.
Reality: FDA approval does not immediately mean there is a reimbursement mechanism for the solution. Along similar lines, a current procedural terminology (CPT) code doesn’t always translate into reimbursement. A CPT code still needs to be built into a contract as a covered service by an insurer.
On top of that, there needs to be adoption by the clinical team doing the procedure and training for the billing team to understand when it is appropriate to bill this code (and which payers accept it).
A changed healthcare ecosystem
Even if you have all of that straight, the ongoing shift between the traditional fee-for-service paradigm and value-based reimbursement models can create misaligned incentives.
You might think, for example, a virtual technology that moves patients away from brick-and-mortar facilities would be a big winner—but nobody wants to see a hospital or outpatient center shuttered in their town or voting district. Moving too fast in one direction creates political headwinds.
Your new technology solution completely disrupts the way physicians work? Great—except that you need those same clinicians for testing and adoption.
Your business plan creates a lot of value for the health system’s multiple stakeholders (payers, providers, federal and state governments, self-insured businesses and patients)? Great—but cost burdens are often absorbed by only one of those stakeholders. All value is not created equal.
It’s a lot to take in. And given rising interest rates and the deep decline in the public markets, the venture capital space is vastly different than it was 12 months ago. Add in macroeconomic headwinds—the perfect cocktail of changing consumer behaviors, labor costs and COVID-related staffing shortages that have produced massive losses for many providers over the last three years—the operational landscape for all hospitals has changed dramatically since 2020.
Only the startups that truly understand the changed healthcare ecosystem—and how their product fits into it—will have the best chance of success.
Stephen Hunter is the vice president of innovation and incubator operations for Allegheny Health Network. Megan Shaw is the managing director for life sciences at Innovation Works. Together, they oversee AlphaLab Health, a life sciences and digital health accelerator based in Pittsburgh.