After the Winter: How Digital Health Companies Can Thrive in 2017 – 10 Strategic Insights from Investors
Rapidly advancing digital healthcare integrates digital communication technologies, electronic medical information systems, e-prescriptions, connected medical devices, and telemedicine. Whether they are fledgling startups or established hospital systems, medical device manufacturers, and other traditional healthcare enterprises, all are now seeking to leverage these technologies to capture a share of the digital healthcare market.
In China, 2014 is widely regarded as the inaugural year of “Internet + Healthcare,” with pharmaceutical commerce companies, hospitals, pharmaceutical manufacturers, and healthcare information firms all entering the fray. 2015 proved to be a year of substantial gains, witnessing innovative changes in areas such as medical consultation methods, the doctor-patient ecosystem, patient experience, and medication purchasing channels. By 2016, the digital health market gradually returned to rationality, and investment entered a winter period.
The progress and extent of digital health development abroad offer valuable insights for China. In 2017, digital health saw few negative reports worldwide. What does the future hold for this sector? VCBeat (WeChat: vcbeat) has compiled expert perspectives on this question.
A medical technology investor stated that digital health is dead.
CNBC data shows that since 2014, more than 800 companies in the digital health sector have received a total of approximately $16 billion in investment. If these investors were to achieve their expected returns, the market capitalization of the entire health tech industry would be three times its current size. Such unrealistic expectations have created an unhealthy environment for startups and enterprises in healthcare.
Until recently, monitors of venture capital unicorns began to question whether success stories with valuations reaching billions of dollars were not occurring as frequently in the digital health sector, while also exposing underlying concerns that the income statements of overcapitalized digital health investment portfolios might be adversely affected.
The only thing that can match the rapid growth of capital inflows into the digital health industry is the industry’s extravagant hype. Digital health has not only permeated the entire sector with an optimistic belief that “better technology can solve healthcare delivery problems,” but it has also consistently maintained its appeal to venture capital financing.
This is not entirely bad news.
Undoubtedly, the heavily scrutinized field of healthcare information technology requires an optimistic vision and deserves increasing capital investment. However, when the unfounded ambitions of eager digital health companies meet venture capitalists, a precarious environment is created.
Rob Coppedge, CEO of Echo Health Ventures, who has 20 years of investment experience in the healthcare sector, stated, “A significant amount of capital has gone up in smoke before even contributing to the development of truly sustainable businesses. Many companies have quietly exited the market, while many others are still searching for viable solutions.”
In fact, the outcome does not necessarily have to be this way. Despite the worsening situation driven by the continuous influx of digital health investments, macro trends, industry challenges, and consumer demands remain very much real. There is no doubt that innovators, companies, and investors will be the key players in devising solutions to these pervasive challenges.
It is indisputable that the healthcare system needs reform. Many digital health companies have risen to these challenges with their passion, long-term vision, and substantial capital.
However, a significant number of companies still lack specialized expertise, overlook the importance of healthcare-specific workflows, misinterpret the patient journey in healthcare consumption, and severely underestimate the efforts required to break through the healthcare sales cycle. All of this has come at a substantial and costly price for many enterprises.
Rob Coppedge identifies four key issues in the digital health industry:
1. Lack of a better mousetrap.Companies invest substantial resources in developing superior technologies, apps, and analytical methods, while paying scant attention to go-to-market strategies. Without mice, even the best mousetrap is useless. Many digital health companies end up chasing their target markets and fail to achieve scale.
2. Inadequate medical care equipment in enterprises.Many early-stage solutions prove inadequate when facing large buyers and customers.
3. Consumers are (temporarily) not yet convinced.The vast majority of companies dedicated to consumer engagement solutions are still grappling with extremely low participation rates.
4. Overvaluation and Capital Surplus.Healthcare services and information technology are not fertile grounds for unicorns, and the sales cycle in this industry is notably long. Nevertheless, many digital health companies have inflated their capital valuations excessively.
The development of digital health products must be integrated with clinical practice; this is beyond doubt., so how do frontline clinicians view digital health? In the eyes of physicians, technology is not always perfect when it comes to clinical care. Below are ten concerns about digital health that mygihealth has compiled from real interviews with doctors and the questions they have raised:
1. Physicians do not have the leisure time to manage and review medical data;
2. The credibility of the data and information provided by digital health platforms cannot be guaranteed;
3. The practicality and efficacy of digital health have not been proven;
4. Wealthy patients may benefit from it, while the interests of other patients are not guaranteed;
5. Young people are more receptive to digital health, whereas the elderly may not be;
6. Patient information security is not guaranteed;
7. The utilization rate of medical and nursing care resources is too low, with most people using them merely to track step counts or sleep patterns;
8. Digital health promotion is overly hyped, with people rarely seeing any negative coverage;
9. Most people abandoned the use of digital devices long ago; what is the point of digital healthcare?
10. Digital health struggles to reduce costs while improving outcomes.
In light of these concerns, the FDA is recruiting a new cohort of resident companies. These entities will be required to work on-site at the Food and Drug Administration’s offices for at least three days per week and join the FDA’s Digital Health Center of Excellence. Their tenure shall be no less than six months and no more than two years.
The key tasks to be completed by the companies recruited by the FDA are as follows:
1. Analyze business processes and key performance indicators in the software industry to identify reliable predictors of product quality and organizational excellence;
2. Develop and test data collection and analysis models;
3. Collaborate with external stakeholders, trial participants, and internal employees to identify the needs and inputs for emerging digital health platforms;
4. Identify opportunities to enhance data sharing and acquisition processes and policies.
It is not new for the U.S. federal government to engage in corporate partnership projects. Since 2012, the U.S. Department of Health and Human Services (HHS) has been collaborating with the HHS IDEA Lab. The U.S. FDA is also developing a pre-certification program aimed at improving the efficiency of the review process for high-risk products.
On the one hand, digital healthcare remains in a phase of development and exploration, focusing on strengthening its foundational infrastructure; on the other hand, numerous startups continue to seek funding.
The alluring revenue figures and extensive media coverage of digital health have not only attracted investors within the United States but also spurred Chinese companies into action. The strategic moves by tech giants in this sector are particularly noteworthy. In recent years, Tencent has invested heavily in numerous U.S. biotechnology and digital health enterprises.
According to data from Crunchbase and Rock Health, these companies include Grail (an early cancer screening company), Scanadu (developer of the “medical tricorder” device), Karius (an infectious disease diagnostics service provider), Clear Labs (a food testing company), HomeHero (a home care services platform), CliniCloud (developer of connected home medical kits), Circle Medical (a primary care provider), and Benchling (a cloud-based DNA research management tool).
In addition, Tencent has made more direct investments. The company invested $155 million in iCarbonX, a healthcare and artificial intelligence firm, which subsequently signed a $100 million contract with the U.S.-based patient social platform PatientsLikeMe. This collaboration aims to integrate diverse medical data with AI technologies to enhance our understanding of human diseases. In China, Tencent has invested in and consolidated nearly all the leading digital health enterprises in the market, including WeDoctor, DXY, Zhuojian, Medlinker, and Haodf.
In addition to Tencent, Baidu and Alibaba have also invested in companies in Silicon Valley and other technology hubs; however, only Tencent has focused intently on healthcare. This strategy is partly driven by medical challenges in China, such as the shortage of physicians and the high incidence rates of certain cancers. Due to a growing population and high smoking rates, lung cancer cases in China are projected to exceed 800,000 by 2020. China also has the largest number of Alzheimer’s disease patients worldwide.
Ted Driscoll, a Silicon Valley healthcare investor, believes that China’s healthcare challenges are extremely severe, and therefore Chinese investors are interested in any startup that can propose an innovative solution.
Bringing artificial intelligence back to China is not only anticipated by large enterprises such as Tencent, but also supported by the government. Policymakers view AI as a tool capable of supplementing physicians, thereby enabling more people to access appropriate treatment.
Scanadu founder Walter De Brouwer believes that technologies such as artificial intelligence are highly attractive to Tencent’s investment team. He stated, “In the United States, we progressed from paper-based records to electronic health records, then to mobile health, and finally to AI-driven healthcare.”In China, people have greater interest and ambition in artificial intelligence, with a broader scope as well.。”
Alongside the surge of enterprises and technologies in the digital health industry, a series of regulatory measures and critical voices have emerged. An increasing number of departments are beginning to engage in the regulation of digital health companies, and the industry will face increasingly stringent laws and regulations in the future.
1. FDA Regulation of Medical Devices
Digital health apps are subject to FDA regulation. Guidance from the U.S. Food and Drug Administration indicates that the agency intends to regulate medical apps classified as medical devices that could pose a threat to patient safety.
The FDA has remained highly proactive in modernizing the regulatory framework for digital health technologies, seeking to balance oversight with the need to avoid unduly stifling innovation within the industry. This July, the FDA introduced a new Digital Health Innovation Action Plan, aimed at ensuring the safety and efficiency of digital health technologies.
2. Relevant Laws and Regulations on the Practice of Pharmaceutical and Professional Segregated Accounts by Enterprises in Various States
Many U.S. states have their own Corporate Practice of Medicine (CPOM) laws, which prohibit general business entities from directly providing medical care or employing physicians to engage in medical activities. These state laws apply to various types of licensed healthcare providers, such as physicians, dentists, and massage therapists. Digital health companies that provide medical care services must comply with every applicable CPOM law in the states where they operate.
In addition, many states have “fee-splitting” laws designed to prevent licensed healthcare professionals and medical equipment providers from sharing fees with unapproved individuals or business entities. For example, New York State’s fee-splitting rules make it extremely difficult for physicians to share fees with other individuals or business entities. Digital health companies must ensure that any business involving licensed healthcare professionals complies with these fee-splitting laws.
3. State Medical Licensing Requirements and Telemedicine
Companies providing telemedicine services face a range of licensing requirements, with regulations varying by state. Most states require healthcare professionals to obtain a license in the state where they practice.
Similarly, digital health companies providing services to patients across multiple states must ensure that their affiliated healthcare professionals hold the appropriate licenses in all covered states.
Some states have even enacted specific laws targeting telemedicine and online prescriptions. For example, California law prohibits prescribing certain medications directly over the internet without an appropriate medical examination.
4. Health Care Fraud and Abuse Law
Federal healthcare fraud and abuse laws in digital health include the Anti-Kickback Statute (AKS) and the Stark Law. The Anti-Kickback Statute prohibits offering, paying, soliciting, or receiving remuneration in exchange for referring products or services reimbursable under federal healthcare programs. The Stark Law prohibits physicians from referring Medicare patients for designated health services to entities with which they have a financial relationship, and also prohibits submitting claims for reimbursement for services resulting from such prohibited referrals.
Digital health companies must ensure that their business arrangements comply with these complex laws and their related regulations. Furthermore, many states have their own corresponding fraud and abuse laws.
The scope of state laws will continue to expand, and it is highly likely that they will eventually regulate a wide variety of businesses, rather than being limited solely to public healthcare programs such as Medicare and Medicaid.
For example, digital health services involving marketing or market expansion must carefully evaluate their business arrangements to ensure compliance with state and federal healthcare fraud and abuse laws.
5. Federal, State, and International Healthcare Privacy Laws
As more consumers begin to seek online tools to help them set health and fitness goals, track fitness progress, and manage long-term medical conditions, health and wellness apps are becoming increasingly popular.
Digital health companies that develop or operate health apps must ensure that the protected health information created, stored, and transmitted by their apps—on behalf of hospitals, clinics, medical practices, health plans, or projects involving such entities—is safeguarded in compliance with the Health Insurance Portability and Accountability Act (HIPAA). To this end, they are required to implement a comprehensive HIPAA Privacy and Security Program.
6. Health Privacy Act
Many states have health information privacy laws that offer stricter protections than the Health Insurance Portability and Accountability Act (HIPAA). These state laws may cover a broader range of information or impose more stringent requirements, such as shorter timeframes for breach notifications. Digital health companies must be well-versed in these laws in the states where they operate and where their customers reside.
7. Federal Trade Commission and State Attorneys General Consumer Protection Regulations
The Bureau of Consumer Protection of the Federal Trade Commission (FTC) enforces federal laws against companies engaged in unfair, deceptive, or fraudulent business practices. The FTC’s regulatory authority covers data security and false advertising, profoundly impacting the digital health industry.
State attorneys general have also entered this arena, increasingly enforcing regulatory oversight within the industry. This March, the New York Attorney General’s Office announced settlements with three digital health app companies over allegations of misleading claims and privacy policy violations.
Under this agreement, these apps must immediately notify consumers that they may collect and share users’ personally identifiable information, such as GPS location data and unique device identifiers. These mandatory regulatory measures further underscore the increasingly urgent need for digital health companies to establish effective usage and privacy policies for their health and medical applications.
8. Regulations of the U.S. Federal Communications Commission
The U.S. Federal Communications Commission (FCC) regulates communications equipment, which may encompass certain digital health technologies. Medical devices that utilize radiofrequency communications are subject to the jurisdiction of the FCC. The FCC and the U.S. Food and Drug Administration (FDA) have jointly issued regulations and standards that must be complied with when using technologies falling under the purview of both agencies.
It is precisely because the digital health industry is rife with significant capital bubbles, while facing mounting challenges and increasingly stringent regulations, that it needs an appropriate solution more than ever before.
Entrepreneurs and investors alike need to step back and carefully consider how to survive and scale. In this unique industry, we must once again commit ourselves to laying the foundation for building a great and enduring company.
So, what should digital health companies do in the healthcare industry of this post-digital era? Rob Coppedge, CEO of Echo Health Ventures, with 20 years of investment experience in the healthcare sector, offers 10 recommendations:
1. In this market, sales hold greater value than capital;
2. Excellent allies and partners are often more valuable than capital. Ensure that you choose the right partners and determine the optimal operational scale, so that you can take control of your own destiny;
3. Clarify your specific needs. Profitability and a reasonable equity structure can generate returns, while large-scale investments from venture capitalists will attract extensive media coverage;
4. Ensure that you are addressing the right questions. You should be concerned with issues such as “Who is providing the funding?” and “Is the customer’s lifetime value greater than the customer acquisition cost?”
5. Regardless of the type of competition you believe you are entering, prepare as if for a marathon, not merely for a sprint. Realistic valuations and investor expectations will pave the way for subsequent fundraising rounds or exit options;
6. Before planning the company's further development, proactively plan your exit strategy (as well as your alternative strategies) in advance;
7. Beneficiaries are not necessarily the funders. This is particularly true in the healthcare and medical industry, where it is challenging to simply follow the flow of capital. Amidst the extensive hype surrounding digital health, maintaining an objective and realistic perspective on “who pays” and “what funders value” is often overlooked by enterprises.
8. Know your enemy. Entrepreneurs need to understand what the “disruption” they bring to the market truly entails. Grasping the gritty details hidden beneath production systems, workflows, cash flows, and more will help businesses succeed. Furthermore, respect the complexity of customers;
9. Do not believe in those sensational reports, especially about yourself. Reasonable humility is very critical. A large number of companies with tens of thousands of fans and emerging in The Wall Street Journal eventually disappeared due to lack of revenue and profit;
10. Most importantly, if your company is in its early stages, remain realistic. Maintain your enthusiasm and passion, and leverage the experience of your investors, partners, and board members to help you filter out unnecessary noise. Avoid overcapitalization or making excessive commitments.
As seasoned players in the much-hyped digital health arena, entrepreneurs, technologists, designers, and others who have entered the healthcare industry through digital health should feel confident in remaining in this field, working together to drive meaningful change.
From both a societal and an economic perspective, this may well be the most important and mission-driven work we undertake in the next quarter-century.
References:
https://www.cnbc.com/2017/09/06/digital-health-is-dead-says-this-health-tech-investor-rob-coppedge.html
https://mygihealth.io/expert-opinions/top-10-reasons-doctors-fear-digital-health
https://www.cnbc.com/2017/08/31/tencent-silicon-valleys-next-big-health-investor.html
https://medcitynews.com/2017/09/digital-health-innovator-fda-wants-new-entrepreneur-residence-program/
https://www.lexology.com/library/detail.aspx?g=13a9cd96-46e0-4a6e-a395-51968fa8488c