In February, news broke that venture capital darling (and market disruptor) Oscar Insurance Corp. failed to meet expectations when their offering debuted on California’s 2016 exchange. Despite much fanfare and marketing, less than 1 percent of the 1.57 million people who renewed or chose a plan on California’s 2016 exchange chose Oscar. How can we understand Oscar’s lack of attractiveness, along with a wave of difficulties encountered recently by other high-profile innovators—from legal and PR scandals (Theranos and Zenefits) to abrupt bankruptcies (HealthSpot)? Chris Bernene, a partner in Oliver Wyman’s Health & Life Sciences practice, says it’s time to take a step back—and a deep breath—to think about what drives the viability and adoption of disruptive healthcare business models:
Are these seemingly innovative models smoke and mirrors?
Like any industry going through rapid change, bumps in the road are common. Despite these disappointments, the reality is that consumer innovation is taking hold. The march of innovation continues apace, and with some notable successes:
- More consumers are using self-directed tools (such as private exchanges) to select health plans. Our data shows that the vast majority—nearly 75 percent—of seniors are signing up for their Medicare Advantage plans using DIY tools.
- The long-awaited application of Big Data to healthcare took a big step forward with IBM Watson Health's acquisition of Truven Health Analytics.
- The Internet of Things—in the form of wearable devices, implants, and remote monitoring of patients—is already having an impact in the way chronic and costly diseases are being managed, much to the benefit of patients.
- Oscar, despite the slow start in California, is in fact growing quickly in other markets. In the New York counties where Oscar sells plans, their share increased from 4 percent to 7 percent.
What do the experiences of Oscar and others teach about innovation and the pace of change?
The fact is, innovation is especially hard in healthcare. There are stringent regulations, tight data security, and a complex web of stakeholders. This creates an environment where innovation needs to follow different routes than those followed in other industries. And we are finding that it takes longer.
There has been no shortage of capital—in 2014 venture funding for digital healthcare surpassed $4.1 billion. But investors and innovators are struggling to find the balance between the explosive growth required by venture capital investors with the structural and regulatory reality of the healthcare industry.
The payoffs for the winners will be huge, but they may take longer to realize than in other sectors where concepts can be brought to market and scaled more quickly.
So what’s working and what’s not working in healthcare innovation?
- Innovations that address consumer need for cost transparency. With high-deductible health plans on the rise, consumers have a great need for cost transparency. However, data shows that consumers are not good at making quality/cost trade-off decisions; and when presented with cost data, they tend to reduce utilization. That is likely due to the fact that cost/quality data tends to be confusing, cumbersome, and hard to find. Zoom+, a Portland-based network of “on-demand” clinics and health insurance company, is an example of an innovation that is working because it provides consumers simple, transparent pricing. While Castlight Health, which provides an easy-to-use transparency tool, hasn’t quite lived up to investor expectations (long sales cycles and gradual adoption rates have led to a cash bleed and difficulty turning profit), the buzz that still surrounds the company indicates the importance of this innovation.
- Innovations around creating an easy shopping and administrative experience are also working. While private exchanges are not growing as fast as initially forecast, they do show growth and there is a high degree of customer satisfaction with them. New players like Fidelity are getting into the space.
- Innovations that make it easier to share secure data to allow for coordinated care. The technologies that connect patients with providers (and providers with other providers) are addressing a core need for actionable and sharable data.
What’s not working:
- Innovation efforts and growth plans that do not properly account for regulatory complexity inherent in health care. This turned out to be a stumbling block for Zenefits. The core model is still valid, but the expansion trajectory is not.
- Innovations that are not oriented around solving a fundamental customer problem. There are a lot of cool technologies and innovations coming to market, but some of them are the equivalent of the many companies that flourished briefly and then disappeared during the first internet boom in the 2000s. That is, interesting ideas, but limited commercial value.
- Innovations that add complexity and cost to customers or operations. This is considered a likely part of HealthSpot’s troubles—too complicated and too capital intensive.
How should incumbents and investors think about the next generation of innovation?
Stay laser-focused on the fundamental constituent problems—for consumers, for employers, for providers. The solutions that win will solve problems for multiple constituents—for example, innovations that help patients better understand costs will save them money and time, and will also address the provider problem of long collection times for providers.
Understand that the “supply” of innovations is, right now, outstripping the “demand.” We are in the early stages of consumer healthcare, and consumers, in general, are not aware of all the cutting-edge innovations that can make their healthcare shopping easier, lower their costs, and get advice and guidance. The consumer revolution is building slowly, but it is building.
We can be certain that there will be more high-profile failures and setbacks like the ones we have seen recently. Equally certain, however, is the fact that future winners will emerge from the tidal wave of innovation we are now seeing. Each wave of innovation in health provides more clues to the types of things that will truly change the game. As we enter into the next phase of innovation, look for investors to learn from the past mistakes and to fund models that have a better chance of redefining the industry.