Tech companies see market opportunity in healthcare innovation

Few people would admit to, much less boast about, keeping a copy of the 906-page US Patient Protection and Affordable Care Act on their Kindle. But after uncovering a provision on diabetes prevention on page 879 during a medical school internship, Sean Duffy swears by Obamacare, as the act is known informally, and generously credits it as the catalyst for the launch of Omada Health, his digital health platform.

"Omada was founded in direct response to the Affordable Care Act (ACA)," says Duffy, a former Harvard University medical student and Google analyst who had long maintained one foot in medicine and the other in Silicon Valley but had struggled to combine the two.

His light-bulb moment came during his internship with Ideo, a consultancy in Palo Alto, California, where he drew up a business model that would tap into ACA funds allocated to the Centers for Disease Control and Prevention, the US national public health institute, for the prevention of type 2 diabetes - a chronic disease that costs the US $245bn annually in treatment and lost productivity, according to the American Diabetes Association. "We wouldn't have any customers without the ACA doing this," he notes.

Promptly dropping out of Harvard, forgetting even to tell his father, Duffy launched Omada in April 2011, embracing what he calls "digital therapeutics". This combines mobile and wearable health-tracking tools with an online peer group to foster better exercise and eating habits. The concept, combined with Duffy's technical and medical acumen, attracted a $23m capital infusion from Andreesen Horowitz - the Silicon Valley venture capital firm's first foray into digital health technology.

Through small online communities comprising a coach and peers who share their health dreams, fears, triumphs and failures through Omada's platform, individuals at risk from type 2 diabetes can monitor and encourage one another toward their goals. While weight-loss schemes are loathed by many, Omada's convenient, community-driven approach to dropping pounds has been a hit - 65 per cent of clients have stayed in the programme for 12 months following the initial trial period.

Duffy's story illustrates how a new crop of health technology entrepreneurs have jumped on the Obamacare health reforms to transform a sector that was an investment backwater and notorious technology laggard into a space overflowing with innovation and opportunity.

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The winds began to change after the recession from about 2008, which spawned a new urgency among employers - led by groups such as Apple, the technology company - to control healthcare costs, new funding for digital health records and data, and the passage in 2010 of Obamacare, which flipped the business model of health insurance on its head and revamped how the government pays healthcare providers for services rendered.

These reforms fundamentally changed the incentives behind how healthcare is delivered. Under the old "fee-for-service" model, healthcare providers were compensated strictly based on the volume of care they provided, and US healthcare spending, though tapering off recently, rose to $2.9tn in 2013 (17.4 per cent of gross domestic product - nearly double the OECD average).

In the new landscape, known in industry jargon as "population health", providers are paid based on how well they can deliver more effective care at a better price. This has created a new emphasis on promoting healthy habits, thereby minimising the need for costly hospital stays and treatments.

<>Eyeing a sea of opportunity, technology entrepreneurs quickly rushed in to find ways of fostering healthy lifestyles and improving treatment outcomes. Venture capitalists followed suit, quadrupling their investments in the area since 2011, according to Rock Health, a healthcare technology incubator. In 2014, $4.1bn was poured into digital health companies focused on new fields, such as consumer engagement, data and analytics, personalised medicine and wearable devices.

Bryan Roberts, a partner in Venrock, a health IT venture capitalist, says these new incentives for value creation and the availability of data are attracting the brightest young minds to the field. "We are seeing a dramatic increase in the level of entrepreneurial talent participating in the space," he says.

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Health IT's unofficial coming-out party came during a December 2010 economic summit between President Barack Obama and top corporate executives in which post-ACA health technology was promoted by the president as a potential new opportunity. Venture capitalist John Doerr of Kleiner Perkins - who was bullish on the vision but lamented that nobody else in the investment community knew a thing about it - took matters into his own hands by convening the first panel on innovation in healthcare technology at the following month's JPMorgan healthcare investor conference.

The panel, comprising Doerr, Chopra, Google's Eric Schmidt and Todd Park of Athenahealth, the health technology company, stole the show as investors flooded the forum to learn more about the emerging field. An informal poll revealed the vast majority of participants had little or no background knowledge of the Obamacare reforms to health IT, but they peppered the panel with questions about this new investment landscape that had been created seemingly out of thin air.

The discussion centred on the law's carrot-and-stick approaches to promoting new technologies to help control costs and improve patient outcomes, in particular the incentives for providers to begin using electronic health records (EHRs) and to use them to increase efficiency.

<>Because Medicare - which insures the elderly and accounts for 20 per cent of all healthcare spending - is the largest payment source for nearly every clinic and hospital in the country and effectively a price-maker, when the ACA mandated that it should begin to shift to new "fee-for-value" payment models, the market took notice.

The largest EHR vendors, Epic and Cerner, have been significant beneficiaries, as have new companies that specialise in providing the infrastructure necessary for tapping into new government payment models, such as Evolent Health, a spin-off from the Advisory Board Company, a healthcare and education consultancy.

On the ground level, a cottage industry of start-ups that help providers maximise Medicare reimbursements through EHR usage is taking off. Seeing an immediate opportunity to harness his technical and software background, Lewis Mitchell, a developer with Mayo Clinic, a non-profit medical research group, jumped in.

"The use of information technology [in healthcare] is 25-30 years behind the rest of the commercial world," Mitchell says, emphasising the need for new value creation. "I made a conscious decision to get into healthcare because I thought the things I was doing 25 years ago, if applied to the medical community, could have a dramatic impact."

His new program, PhySoft, tackles kidney dialysis - a cumbersome and costly procedure that accounts for $50bn in annual spend and 6 per cent of all Medicare expenditures. Using captured EHR data to optimise the drug dosages administered to dialysis patients, PhySoft could trim $15,000 off the $37,000 drug and hospitalisation bill racked up by a typical Medicare patient each year.

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In addition to Obamacare's cost-cutting pressures, its more politically controversial mandate of requiring people to obtain health insurance has forced millions of Americans to deal directly with the complexities of the healthcare system - creating opportunities for consumer education and choice.

Harnessing the frustration he incurred trying to select the proper health insurance plan for himself, Noah Lang started Stride Health to demystify the product for insurance shoppers. "Even though I have a degree in mechanical engineering, to get the data I needed to [decide on the right plan] was nearly impossible to do in terms of pricing and understanding the plans," he says, underscoring the need for the average consumer to have access to better information.

On the back of an Obamacare provision that did away with traditional paper-based insurance underwriting, Lang developed a personalised recommendation engine using algorithms that guide people to the best-fitting insurance plans on the basis of their health history and pricing needs. "I started this company to change the way Americans make healthcare coverage decisions," he says.

<>Josh Kushner is another smart guy to have been so befuddled by his health insurance that he vowed to invent a different way of doing things. With Mario Schlosser and Kevin Nazemi he created an insurance company, Oscar, whose cartoon ads adorned New York subway carriages this spring. "The consumer never mattered in healthcare," explains Kushner, "and for the first time ever the consumer does matter, because they are making choices on their own."

As New York state's first new commercial health insurer in 15 years, Oscar is off to a fast start in its drive to become the disrupting force of the health insurance market. It has attracted 40,000 customers in just two years through the state's health exchange and was valued at $1.5bn at its recent fundraising.

No industry can remain immune to technology. Kushner says. "We can have engineers look at [any industry] and say 'this doesn't make any sense', and do it better. There's government, education, financial services… but healthcare is the most screwed up - it is a total train wreck."

But this wave of healthcare innovation is not limited to the US. Looking to expand his platform to help fight obesity-related diseases on a global scale - and their $2tn impact on global GDP, according to McKinsey, the consultancy - Duffy and Omada Health are incorporating in the UK.

"Obesity is the biggest health emergency - it's this generation's smoking," warns Duffy, "but it is also the biggest market opportunity."

Additional reporting by Stephen Foley

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