Mike Totterman (CEO and Founder of Clerio Vision) and Sasha Latypova (Founder, Director of Clerio Vision) share their perspective on monetizing technology innovation in Healthcare.
Understanding Motivations
There is a lot of frustration and confusion among entrepreneurial technology companies trying to gain traction in Healthcare market. This is because most start-ups forget that Healthcare is driven by the same motivations as any other market – primarily by revenue and profit maximizing objectives. Most outsiders believe that these objectives align with improving diagnosis and treatment outcomes for patients, and that is regrettably not the case in most situations. The market participants that indeed typically care about improved patient outcomes (i.e. physicians) have the least decision making and purchasing power in Healthcare market. That is why, solutions targeted at physicians with the goal of improving treatment outcomes often do not grow beyond few sporadic sales.
Hospitals are not driven by metrics to treat disease better or diagnose disease more accurately. These two items, while generally thought to be a focus of hospitals have not in fact been a focus since MBAs started running hospitals beginning in the 1980s. The primary purchasing decision metrics are (a) is it a procedure that is reimbursed by insurance and can we make money on it or (b) will it allow me to charge more or (c) does it allow me to run my surgical suites or other high cost infrastructure at a higher utilization. Being able to diagnose diseases better or cure patients is actually not a purchasing criterion, which is often confusing because this is what doctors care about but they are not generally allowed to make purchasing decisions.
For example, virtual colonoscopy never made it partially because it was cheaper (hospital makes less money) and it would have taken more money from the pocket of the GI doctor and put less of it in the pocket of the Radiologist.
If you are an entrepreneur with a disruptive technology seeking to build a venture backed company in Healthcare it is equally important (if not more) to understand the non-technology dynamics. This will enable you to avoid the cliffs most entrepreneurs fall off.
Success Story – iRythm, delivering definitive arryhthmia detection, superior clinical accuracy
The way iRhythm successfully monetized their innovation is that they delivered a complete solution and also invested in developing a proven monetization model. They made a smaller device, collected more data, analyzed it better and ran large clinical trials to get CMS/Medicare to pay extra for the procedure. Specifically, a traditional Holter is reimbursed at about $40 but iRhythm was able to increase this to over $300 due to clinic studies and negotiations with CMS/Medicare which probably consumed another $50M in capital above and beyond building the business.
The reasons for adoption: a) The doctors said yes because the system is better for the patient and; b) iRythm figured out a new way to pay for it (created a new and additional revenue pool from the government). Generally, this new revenue pool also includes an increased slice for the hospital/physician to help drive adoption (which in some fashion needs to be rational and defensible). Unfortunately, just doing something more efficiently in the diagnosis chain in the hospital is generally measured in pennies on the dollar. If the system is sold to a Hospital, the question is how much more revenue or net margin will the hospital make from the product.
Conclusions
In Healthcare (outside of pharmaceuticals), you are trying to solve for a five-sided market:
(1) Is there a clinical benefit for the patient, which is most visible but least important and will the patients go for the procedure and comply with it.
(2) Will the hospital make more revenue, margin or increase utilization – measured in actual dollars vs. cost.
(3) Will the physician responsible for the practice area make more money and not spend more time doing it.
(4) Will insurance or Medicare reimburse for it.
(5) Will it not erode the hospitals other business lines.
