Digital health update: Investors hopeful but disruption elusive

Reuters

A Withings Smart Blood Pressure Monitor with an iPhone connection is displayed during a media preview event for the 2011 International Consumer Electronics Show in Las Vegas, Nevada January 4, 2011.

This morning, Rock Health released its midyear report on the state of digital health, a sector that continues to demonstrate a growth in venture funding, in contrast to other areas of healthcare.  It's not just capital - Rock Health might have also highlighted venture's increased deployment of dedicated personnel in this space; examples include Mo Kaushal at Aberdare, and Steven Yecies at Orbimed, who are both here in Silicon Valley (rapidly emerging as the Silicon Valley of digital health).

Although not covered in the Rock Health report, there's also been increased academic activity in digital health - for example, UCSF's Center for Digital Health Innovation, MGH/MIT's Center for Assessment Technology and Continuous Health (CATCH) (disclosure: I am a co-founder), and Berkeley's executive education course (offered jointly by Health 2.0) on digital technology in healthcare.

Federal efforts in this space are encouraging as well; I'd especially recommend signing up for the listserv coordinated by Wendy Nilsen of the NIH's Office of Behavioral and Social Science Research (OBSSR) (instructions here).

Yet, even with all this upbeat news about digital health, key questions remain.  For example:

  1. Where's pharma?  As Brian Dolan highlighted in his recent, informative MobiHealthNews midyear review, there seems to be only minimal evidence of pharma interest to date.  Top of mind examples include the continued investments from Merck's Global Health Innovation fund, Sanofi's efforts around diabetes solutions, and J&J's Masterclass in Europe.  But the contrast between the transformative potential of digital health in characterizing disease and contributing to impactful treatments, and the investment by pharma in actually doing this, remains striking, emphasizing the intrinsically conservative nature of pharma, and their inclination to do just enough to stay off the radar, rather than demonstrate any meaningful leadership in this area.
  2.  Where are the exits - and what will they look like?  While continued investment in this space will require some evidence of success, I worry less about whether significant exits will eventually occur, and more about how disproportionately influential such exits might be.  In the same way that rare success, paradoxically, can be harmful to a pharma company by inappropriately serving as an example which all future programs are expected to follow (the "This is what we did for Fosamax" syndrome), I can envision very different patterns of subsequent investing depending on whether a dramatic exit is achieved by (for example) Practice Fusion (EMR), ZocDoc (scheduling), or Castlight (transparency).
  3. Where's the differentiation?  It's nearly impossible to distinguish the entrants in many categories; this has been a much-discussed problem for wellness apps, but extends to many other areas as well, including analytics, where almost every company I know claims to have their own secret sauce, and most point to a supposedly successful (or promising) pilot.
  4. Where are the results?  We hear so much about the potential of digital technologies to improve care and quality, but it would be nice to see more publications that go beyond novelty, and robustly demonstrate added value.  I'd especially like to see more inquisitive physicians utilize emerging technologies - this is a central premise of our MGH/MIT CATCH initiative and other academic efforts.

Additional important emerging themes include:

Finding the right model: As much as VCs like consumer web - Steve Blank has suggested they may even be addicted to consumer web because of its unusual potential for explosive growth - this may not be the right model for most of healthcare.

More generally, digital health entrepreneurs need to find a way to leverage the disruptive power of tech innovation while also recognizing key differences.  As Jae Won Joh pointed out in a brilliant recent post, Facebook's legendary motto, "Move fast and break things" may not translate well to healthcare, where the dominant credo is "First, do no harm."  Providers view patient care as too important to entrust to a half-baked app, or an incompletely thought-through solution.  This turns out to be true for most companies in the healthcare space, including biopharmas.

Finding the right customer: An important priority of digital health entrepreneurs is identifying the right customer for their healthcare innovation offering - especially given the intrinsically (and, perhaps, understandably) conservative stance of most stakeholders.  Where do promising but early startups go to find traction?

The difficulty in finding a customer truly receptive to innovation within an established healthcare company represents a serious problem for the industry as well - it's exactly why so many (most notably Eric Topol) are clamoring for creative destruction.  The fact that incumbents do not seem to be under even greater pressure to be especially receptive to innovation may speak to how entrenched and dysfunctional the healthcare market is, but may also reflects a respectful caution around anything involving patient care.  In a sense, the stakes are almost too high.

Consider, for example, pharma clinical trials.  These tend to be remarkably rigorous - generally executed in a far stricter fashion than most academic studies.  Consequently, if you are going to sell a solution to a pharma company for use in a clinical trial, it needs to be robustly validated, rock-solid.  Companies would rather use a relatively inelegant solution they trust versus a sexy new approach that seems unvetted.  (The tendency of large hospital systems to adopt Epic is arguably another example of the same phenomenon.)

This leaves the digital health entrepreneur interested in this space with three choices: validate through collaboration with academic investigators (challenges: limited resources and likely long timelines); find a small healthcare company for whom the digital health innovation might be transformative and provides a profound enough competitive advantage that they are willing to invest (challenge: small companies place huge emphasis on capital efficiency and tend to be hyperfocused in allocating resources); find receptive innovators within a large, well-resourced company - in pharma, for example, these might be departments of translational or experimental medicine (challenge: it can be hard to find the right mindset, especially among those who've been in large companies for many years).  You can also appreciate why many technologist investors (such as Khosla) are keen to find solutions that circumvent incumbents entirely.

Coping with perverse incentives: Without meaningful changes in reimbursement and the structure of incentives, important disruptive innovation in healthcare will continue to face a brutal uphill battle against deeply entrenched interests who have little motivation to evolve - and perhaps a trillion reasons not to.  Unfortunately, dysfunction is often rewarded like a feature, while care innovation can be received like a bug.

Consequently, as Sequoia Capital's Todd Cozzens recently pointed out, healthcare innovators are forced to design offerings that work in both the poorly-aligned system of today as well as the largely hypothetical, value-oriented system of tomorrow.

Bottom line: There remains significant interest in the transformative potential of digital health; the challenge is on the implementation side, finding a way to realize and give expression to this enormous potential, and demonstrate the value so many of us believe is there.  Perverse incentives within the existing system represent an uncomfortable reality that digital health entrepreneurs must recognize - then consciously leverage, adroitly avoid, or imaginatively overcome.

 

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