Andreessen Horowitz

Digital Health

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.

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The Wire

• Pear Files Chapter 11: DTx pioneer Pear Therapeutics filed for bankruptcy after a decade of operations and $409M in funding. A heartfelt farewell from CEO Corey McCann announced “a reduction in force, including me,” placing some of the blame on payors’ ability to deny coverage for digital therapies regardless of their effectiveness. Pear received the first DTx approval for substance abuse all the way back in 2017, but the writing was on the wall when it reported an operating loss of $123M on $13M in revenue in 2022.

• MA Enrollees Discharged Faster: A JAMA study of over 10M patients found that Medicare Advantage beneficiaries who experienced an ambulatory care-sensitive condition were less likely to be hospitalized (relative risk: 0.94) and more likely to be discharged directly from the ED (RR: 1.44) than patients with traditional Medicare. The findings seem to indicate that reductions in potentially avoidable acute care have been associated with the shifting of inpatient care to settings such as ED direct discharges and observation stays.

• The “King Kong” of GLP-1s: Eli Lilly is setting its sights on the white-hot weight loss market through the development of the “King Kong” of obesity medications – Mounjaro. The Wall Street Journal published a great breakdown of how Eli Lilly needed to overhaul long-held but failing practices to pave the way for Mounjaro, which appears to be more powerful than leading GLP-1s such as Novo Nordisk’s Wegovy and Ozempic. Mounjaro can reportedly help a typical person weighing 230lbs lose up to 50lbs in 17 months, results that Eli Lilly expects to be worth about $25B annually.

• Clarify No-Code Query Engine: Clarify Health rolled out a no-code query engine within its Clarify Rates transparency solution that allows payors and providers to instantly generate reports from 500+ terabytes of data. Clarify Rates contains rates from over 65 payors and enriches them with claims data on 300M+ lives, allowing it to display prices that have actually been billed. We can only imagine how fun it was to clean the raw data from “trillions of records,” but Clarify users can now access those insights without doing that heavy lifting themselves.

• Audio-Only Common at Safety Nets: RAND Corporation found that audio-only visits still account for 1 in 5 primary care visits and 2 in 5 behavioral health visits among patients who receive care at California FQHCs. The proportion of in-person primary care visits increased from 30% in April 2020 to 71% by August 2022, while audio-only visits decreased from 67% to 21% (video visits increased from 4% to 7%). The audio-only popularity likely reflects Medi-Cal’s decision to grant permanent reimbursement parity to those visits.

• LeanTaaS + Siemens Healthineers: LeanTaaS is teaming up with Siemens Healthineers to help health systems across the country achieve and sustain peak operational performance. The collaboration enables Siemens Healthineers’ 3,000+ hospital and health system customers to convert performance data into prescriptive actions that help unlock capacity and throughput across: perioperative, staffing, inpatient flow, infusion centers, and enterprise-wide virtual command centers.

• Oshi Lands First Commercial Contract: Oshi Health landed its first commercial contract through a new value-based care partnership to provide Aetna members with in-network access to its digestive disorder treatments. Oshi was founded in 2019 to deliver whole-person care to patients living with chronic digestive conditions by supporting them with an in-house care team of gastroenterologists, NPs, dieticians, and GI-specialized behavioral health providers.

• HHS Streamlines Prior Auth for MA: Prior authorization should get less onerous for Medicare Advantage beneficiaries (and their doctors) under new HHS rules. The new rules state that once a prior authorization approval has been granted, it remains in effect “as long as medically necessary,” while adding stricter oversight of denial-of-care decisions.

• Hospital CEO Turnover Up 58%: It’s been a tough stretch for healthcare execs, but it was still surprising to see that 41 hospital CEOs exited the role in January and February alone. That figure’s from a Challenger, Gray & Christmas report, which found a 58% year-over-year increase in hospital CEO departures, with more departures likely on the way as hospitals “recover from the pandemic, consolidate, and respond to both worker shortages and increased costs.”

• GenieMD Platform Updates: Virtual care startup GenieMD announced a pair of upgrades to its mobile-first “Care Anywhere” platform. GenieMD is now integrating Dexcom continuous glucose monitor data directly into its Remote Patient Monitoring and Chronic Care Management programs, giving care teams uninterrupted visibility into their patients’ treatment journeys. A new partnership with AT&T will also provide IoT connectivity to GenieMD’s programs and help improve access for patients living in rural areas.

• Geisinger Virtual Cardiac Rehab: It seems like Geisinger has been seeing solid ROI from its virtual cardiac rehab program. Since launching in 2021, Geisinger has delivered over 30k virtual cardiac rehab appointments and tripled its participation using a system co-designed with Recora. That system includes a multidisciplinary support team (exercise physiologists, dieticians) and a personalized recovery kit (resistance bands, monitoring tools), but Geisinger said that the secret sauce was Recora’s engagement efforts with eligible participants.

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