a16z: Healthtech Business Model Magic

The news cycle took a bit of a breather ahead of the upcoming wave of HIMSS announcements, giving us a chance to highlight an excellent thinkpiece from the healthtech team at a16z.

After charting up a beautiful comparison of publicly traded healthcare companies versus other growth companies, a16z found that the healthcare outperformers leverage the same three types of “business model magic” as the world’s largest tech companies:

  • Increasing customer lifetime value (LTV Magic)
  • Expanding operating leverage (Operating Leverage Magic)
  • Declining customer acquisition costs (CAC Magic)

LTV Magic can be boiled down to creating “sticky” products with high retention. Healthtech companies that embed their platform into their customers’ core workflows can then build pricing power and widening revenue streams.

  • Outperformers can add new components to their platforms that increase LTV without a proportionate increase in costs. Ex. Flatiron Health’s provider network enabled it to efficiently build a pharma-facing, real-world evidence generation business on top.

Operating Leverage Magic revolves around reducing the marginal costs to serve customers as the business expands – mainly by leveraging software’s near-zero marginal cost dynamics.

  • Outperformers in a16z’s analysis also maintain modest operating expenditure growth at the central business level as they scale. Ex. Agilon and Oak Street command a valuation premium for impacting the cost of care without having to hire many central clinical staff.

CAC Magic involves finding ways to have declining marginal costs of customer acquisition. One of the most efficient ways to acquire new customers is by accessing groups of patients through partnerships with entities that already maintain those relationships, like MA plans.

  • Outperformers also have network effects that make their service more valuable as more people use it. Ex. Doximity gave more value to its 10,000th user than its 1,000th user, making it easier to acquire new users over time.

The Takeaway

a16z makes one thing very clear with its analysis: investors are ultimately underwriting a business’s ability to generate a lot of revenue over the long term. Every healthcare startup has to find its own way to reach that goal, but the three types of magic highlighted by a16z give a good sense of the ways that current outperformers are earning their premium valuations.

a16z: Consumer Health Forecasts

VC powerhouse Andreessen Horowitz (a16z) is quickly building out its library of health tech thought leadership, and its latest opus focused on the areas of consumer health where it sees the most opportunity.

Here’s a high-level summary for the three major categories, but the full report has plenty of insights to go around if you want to take a deeper look at any of the topics.

Area 1: Improving Access to Care

  • Marketplaces: To say that a16z is bullish on marketplaces would be a huge understatement. One of the biggest challenges for marketplaces is that consumer usage must be frequent and durable enough to justify the customer acquisition cost (one reason why apps that focus on infrequent forms of care struggle), but a16z believes we’ll start to see these metrics improve by letting users compare drugs, health plans, and non-traditional services (wellness, family, caregiving) within a single platform. 

Area 2: Changing How Consumers Receive Care

  • Payor Focus Categories: a16z goes with a safe pick for its first subcategory: the specialties that payors spend the most on. These include cardiometabolic/diabetes (Omada, Marley Medical), MSK (Sword, Vori), and oncology (Thyme, Jasper) – all areas where payors need better care at a lower cost. While this market is relatively mature, a16z predicts that there’s more success to come for startups who can leverage their ability to engage consumers, manage medications, and inspire behavior change into broad consumer engagement platforms across multiple patient journeys.
  • Consumer Focus Categories: Several VC success stories come from spaces where people don’t expect payor coverage, and therefore handle the costs themselves (Hims, Ro). a16z is forecasting a lot of upside for services that have had slower adoption in traditional healthcare, but are quickly gaining traction in DTC, such as medication-assisted weight loss, psychedelics, and biohacking/longevity.
  • Gaming: a16z is also excited about the intersection of healthcare and gaming, but it’s still wondering whether the successes in this category will “gamify healthcare or healthify games.” In other words, will they look more like Epic Systems (EHR) or Epic Games (Fortnite)? Gamified health is more likely to be designed for efficacy and health outcomes, but healthified games are more likely to have better retention (which is one of healthcare’s biggest challenges).

Area 3: Helping Consumers Afford Care

  • The last section was such a minefield of spam words that any summary side-stepping all of them wouldn’t do it much justice. That said, “less crappy” health plans, patient-friendly BNPL, and new card products all made an appearance. With total American healthcare debt already sitting at over $1 trillion, it’s a big enough problem that a16z sees enough space for several massive companies to emerge while solving it.

The Biggest Company in the World

Venture capital giant Andreessen Horowitz (a16z) got right to the point in a recent blog post that made a huge splash across health tech social media: “We think the biggest company in the world will be a consumer health tech company.”

a16z lays out two paths that could let a healthcare company leapfrog over massive consumer icons like Google, Apple, Facebook, and Amazon to become the world’s most valuable company (Fun fact: the $4T US healthcare market is 5x the size of the global advertising industry).

Path 1 involves creating a vertically integrated “payvidor” that grows to own most care. Picture a company that looks something like if “UnitedHealth Group and Apple had a baby,” with the business model of UHG but the sleek consumer experience of Apple.

  • a16z believes that these companies will need to become big enough to cover most specialties, and also own a health plan that encourages patients to stay within the same care ecosystem (similar to Apple’s tech lineup).
  • Combining both components is essential so that the reimbursement arm can serve as a distribution channel for the care delivery services.

Path 2 centers around building a horizontal marketplace similar to Amazon where healthcare services are aggregated alongside trusted reviews and comparison data. 

  • According to a16z, the key to success for healthcare marketplaces is to serve as an acquisition channel for established players, in addition to being their own acquisition channel.
  • These companies will need to crack the code on how to direct patients to relevant services, while also leveraging the traditional healthcare system for both provider listings and patients.

The Takeaway

Some of the biggest companies in the world are consumer companies that were built in relatively small industries, and the US healthcare market is so big that it can support plenty of success stories with both vertical and horizontal models. That said, packaging something as complicated as healthcare into a consumer experience as simple as Amazon isn’t exactly an easy task, which is why a16z believes that the biggest company in the world will be the one that pulls it off.

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-- The Digital Health Wire team

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