Healthcare After Coronavirus

Welcome to the inaugural edition of The Innovation Armory. Last week, I ended my investment banking role and will be starting as a technology investor later this summer. Each week in between jobs, I will be publishing thought pieces here on technological innovation. Today’s piece highlights shifts in healthcare after COVID-19 expected to unlock new innovation and investment opportunities for founders, management and investors alike.

Next week’s edition will focus on technology’s role in flattening the climate change curve.

I hope you enjoy this week’s update and please feel free to share with colleagues, family and friends passionate about innovation.

Healthcare has historically lagged behind other economic sectors in innovation. Only 32% and 27% of physicians and consumers respectively believe the healthcare system is effectively digitizing. Healthcare is one of the largest industries globally, representing a multi-trillion dollar market with largely inelastic demand. Why then have some entrepreneurial efforts been deterred or unfruitful?

Below is a summary of some of the major barriers facing entrepreneurs:

1. Healthcare regulations - Healthcare is highly regulated across the full value chain. Regulations provide existing players strong barriers to entry. Startups that seek to introduce compliant products face high costs. Separately, the US regulatory paradigm is currently in flux. Entrepreneurs realize healthcare debates are at a polarized inflection point with some politicians vying for universal healthcare while others are trying to repeal Obacamacare. New policies could create innovation opportunity. However, until the dust settles, healthcare entrepreneurs have less clarity about the incentive framework under which they are to build. Building a healthcare business is difficult without clarity on a narrow band of probable policy outcomes. Founders don’t want to assume risk building businesses that assume a potentially reversible policy paradigm. Finally, many capital providers seek to back businesses that can unlock multinational markets. Given significant regulatory differences between countries, building a multinational healthcare business is particularly challenging.

2. Strategy Incongruence – Many entrepreneurs release a minimally viable product to learn and build, iterating to achieve product market fit. In some sectors, the negative consequences of releasing a premature product could be an unhappy customer or a productivity impact. The stakes for healthcare are higher, possibly worsened patient outcomes, illness or death. The entrepreneurial cost of learning ($ / unit of market learning) is substantially higher because more product investment must occur before receiving market feedback. Trial and error learning around safety, commercial viability and product market fit often occur in separate phases for healthcare. These benchmarks are interactive and iterative in other sectors. Moreover, businesses take longer to scale because products must adhere to strict regulatory timelines. Enterprise software has been a popular venture focus area over the past decade due to an ability to hyper-scale through sales and marketing investment. Healthcare’s longer path to scale deters some venture capital due to longer investment horizons.

3. Data Gap – there is poor availability of medical data that would be useful to improve healthcare solutions, manifesting through three primary means: First, data silos between healthcare providers lock up patient data. Patients have different records for medical history, testing and symptoms with various healthcare portals. While EHR providers have systems to exchange records, these methods pose technical and financial frictions for staff. Second, data moats accrue differently in healthcare than in other sectors. The data value distribution curve has fat tails (especially pharma) because medicine is personal and outcomes vary based on genomics, family history and more. The current quality of data mapping treatment effects to underlying personal factors is mediocre. Fatter value tails make it tougher to accrue fuller data moats. Third, patients are unwilling to offer data or unable to for regulatory or privacy reasons.

Current trends in response to coronavirus foreshadow a different post-pandemic world for entrepreneurs that could alleviate barriers to innovation. The FDA has decided to fast track an experimental vaccine for COVID-19, a deviation from traditional regulatory approval processes. Capacity constraints are straining traditional healthcare delivery and enabling technology tools to hyper-scale. For example, total telehealth visits spiked 50% in March with virtual visits possibly surpassing 1 billion by year-end. Certain states have already approved contact tracing applications, which could facilitate medical information sharing. These early shifts provide a glimpse into what healthcare could look like post-crisis. Below is a summary of healthcare technology areas before and after COVID-19:

Dramatic transformations realizable in the near term include:

1. Mental Telehealth – COVID-19 will de-stigmatize mental illness and catalyze investment into mental healthcare. Perceived social isolation is linked with depression and other mental health disorders. Healthcare professionals are at greater risk for PTSD and depression, forced to make gut-wrenching ventilator allocation decisions. Social distancing measures could bring a mental health epidemic to the forefront of America. Telehealth is well suited for psychological treatment as there are no physical examinations that require an office visit. Pre-crisis, especially in non-Metropolitan areas, there existed a shortage of mental healthcare resources. Increased prevalence of mental illness, low pre-crisis resources and efficiency of telehealth will drive an explosion of virtual psychological medicine.

2. Modular Machinery – COVID-19 has exposed a ventilator shortage in the US. Medical device companies ought to invest in modular machinery that is multi-functional. During the pandemic, numerous medical devices have been conversely under-utilized. Modular machinery systems would build different medical devices (ventilators, MRI machines, laser treatment devices) from similar building blocks so that machines could be transformed at point-of-care to meet spikes in demand. Non-medical manufacturing plants ought to also consider structuring future manufacturing facilities in a modular fashion that enable dual-use manufacturing. Tesla pivoted to producing ventilators during the pandemic. Outside of medical emergencies, dual-use factories could be helpful in manufacturing future emergency goods needed for disaster response, effects of global warming or potential armed conflicts. Moreover, coronavirus has created a PPE shortage across the US. Proliferation of 3D printing at hospitals could enable self-sufficient production of protective gear.

3. Nurse Recruiting and Education – COVID-19 has highlighted a healthcare professional shortage, particularly for nurses. Pre-crisis, nursing experts have predicted nursing shortages given imbalances between job openings / retirements and demand. Given doctors have been stretched thin across more patients than normal, nurses have been forced to take on a greater degree of responsibility. Post-coronavirus, the scope of the RN and APRN roles could widen. Hospitals will seek nurse recruiting and education tools to grow the nursing force and free up time for doctors to focus on patient care and deliver better treatment outcomes.

4. Explosion in Consumer Wellness – during distancing, the average consumer is repeatedly engaging in behaviors that keep healthcare top of mind including mask wearing and temperature reading. Some go to greater lengths, buying sophisticated technologies including pulse oximeters to monitor symptoms. These measures are ingraining preventative health behaviors into consumer action Post-crisis, consumers will continue to buy other consumer wellness categories including wearables, nutrition, monitors (i.e. blood glucose), meditation and more.

Coronavirus also has exposed the need to change paradigms and spur innovation in other healthcare areas over the long-term including:

1. Comprehensive & Universal Electronic Health Records (EHRs) – contact-tracing initiatives proposed by Apple and Google are forcing debates about medical privacy, which will impact the way healthcare data is organized in the US. Establishing an interoperable, integrated and personal health data trove (combining EHRs, biometric data, patient outcome data, genetics and more) is important for medical innovation, unlocking improved care, pharma drug innovation and better outcomes. A trusted party must undertake contact-tracing and subsequent healthcare data initiatives. Technology giants have too much to gain financially from applying biometric data for consumer purposes. Full government ownership of healthcare data strays too far from a privacy paradigm. Modern data systems must be structured to enable personalized insights to be extrapolated for broader innovation, while providing patients ownership over their own data and a “right to be forgotten” or anonymous should a patient choose. The Estonian government has already employed blockchain to provide patients control over health data. One potential model could be for the government to partner with blockchain businesses to secure, anonymize and integrate personal datasets. Patients could automatically contribute data to the blockchain ledger at point-of-care (with opt-out available). Data sharing with pharma and care providers could be regulated through a utility-type model. The government could incentivize patients to submit data by providing data income in return for contribution. Alternatively, pharma companies could pay consumers a royalty stream on drugs developed based on ledger data insights. Data initiatives could dramatically reduce the net cost of drugs. Better data access should accelerate development timelines and pharma businesses should share savings with consumers. It is important that data hubs remain anonymous to prevent abuse by consumer technology or insurance.

2. Transition to Value-Based Care – COVID-19 could accelerate a shift to value-based care in the US. Traditional healthcare models pay providers for volume, whereas value-based care rewards providers for superior patient outcomes. Inability to measure patient outcomes is a barrier to value-based care adoption. If data initiatives improve accessibility and interoperability of patient outcome data, the pandemic could benefit value-based care models. Moreover, hospital financial profiles have suffered from a reduction in elective procedures, which account for a large proportion of hospital revenues. Value-based care models would help smooth out provider performance through the highs and lows of procedure volumes. For current accountable care organizations, early adopters of value-based care, it is important to not be penalized for irregularly poor performance during COVID-19. While ACOs ought to generally bear risk for poor patient outcomes, an unpredictable pandemic is out of control of any one ACO.

3. Elderly Care – COVID-19 has ravaged elderly care facilities. Seattle’s outbreak began at a nursing home and many deaths have been concentrated in nursing homes. The pandemic could upend long-term care models due to infectious disease risk of clustering immune-compromised people together. This will spur investment in monitoring and at-home treatment technologies that enable elderly to live with family for longer. In addition, AI-based smart voice-enabled devices will help alleviate elderly loneliness and aid in remote treatment monitoring, encouraging patients to take pills, perform tests and exercise. At-home elderly care demand will be further accelerated by baby boomer aging and life expectancy improvements. In addition, 80% of Americans would prefer to die at-home than in a hospital. Crisis stories of patients dying alone, family barred from their bedside, will only intensify these preferences. Advancements in AI-based predictive technologies could shift elderly palliative care from hospitals into the home, predicting prognoses with greater accuracy and improving remote monitoring. Over the coming decades, more elderly will age and die in their own homes. The growing nursing force will play a key role in remote care initiatives.

4. Process Automation – Pre-crisis, doctors were already spending a lot of time on administrative tasks. In fact, some doctors spend up to 2/3 of their time on paperwork including manual EHR entries and compliance documentation. AI automation tools and voice transcription technologies will become more prevalent post-pandemic. Doctors are being placed under increased stress from higher patient volumes and continued investment in administrative workflow automation tools will be key to preventing a cliff of burnout after the crisis and prioritizing patient care even at a faster visit cadence.

5. Rare Tropical Diseases – Coronavirus proves how quickly infectious diseases spread in a globalized world where pathogens are only ever at most a 24 hour flight away from infecting a new area. There has historically been limited commercial investment into “neglected tropical diseases”, over one hundred infectious diseases that prevail in developing economies and afflict billions of people. Treatment development costs are substantial and pharma companies haven’t believed the potential developed market to be large enough to justify investment. Because potential buyers are in under-developed countries, products seem less commercially viable to manufacture. COVID-19 highlights that the Western world is not immune from geographically distant infectious diseases because of globalization and urbanization. Moreover, global warming is causing environmental changes that will put the US in contact with new pathogens that migrate to temperate areas in which they were previously unable to thrive. Separately, continued development in frontier economies should grow foreign markets to more attractive sizes. Biotechnology companies will invest more in neglected tropical disease treatments and related drug discover software tools over the coming decade.

While the exact fallout from the coronavirus pandemic on the healthcare system is uncertain, the crisis response is already shedding light on shifts in government priorities, changes in consumer preferences and weak points in our current systems. Healthcare will be forever altered in the wake of coronavirus. Our national security demands it. Patients and doctors demand it. This awakening of America’s health consciousness will enable scaling of businesses that would have seemed impossible to build in the decade prior and accelerate life-changing improvements to future patient outcomes. Entrepreneurs, management and investors should seize this innovation opportunity to transform the lives of future patients for the better.

If you have comments or questions, feel free to reach out to [email protected].

All Innovation Armory publications represent expressly my individual views and do not represent the views of companies with which I have previously been associated or with which am soon to be associated. These publications are my personal opinions and are not meant to be relied upon as a basis for investment decisions.