As the annual JP Morgan Healthcare conference kicks off next week, hundreds of hedge funds, private equity firms and VCs will be making their annual pilgrimage to San Francisco’s Union Square to find the next star to hitch their wagons to. Having attended the conference for the past decade, we've observed its growth and the changing trends of the industry it represents. Every year, there are more presenters and more generalists dipping their toes in healthcare. And recently, an increasing number of digital health startups in attendance.
As the afterglow of 2014 is tempered by plummeting oil prices and the stock market's volatile start to 2015, healthcare’s $3 trillion price tag is setting a long shadow on the stability of our nation’s financial health. Healthcare continues to be a serious problem and the U.S. economy is running out of solutions. Yet, a glimmer of hope rests in the promise of what digital health holds: empowering consumers to take control of their health while lowering their costs. We believe strongly in the “consumerization” of healthcare — that is, a shift towards consumers taking control of their own health care costs and outcomes.
Learn more about 2014 healthcare stats from Fortune's video team:
Healthcare’s skyrocketing costs in the U.S. have been well documented: At $9,000 per person, the U.S. spends two to three times more on health care per person than Europe and Asia. But while America may spend more, the nation’s health outcomes are meaningfully inferior. In fact, the U.S. suffers from lower life expectancy (it’s ranked 36th by the World Health Organization, behind Portugal, Slovenia and Costa Rica). What’s more, according to the Centers for Disease Control, cardiovascular disease accounts for one-third of deaths in the U.S. (accounting for one-sixth of our spend) and almost 10% of our population now has some form of diabetes.
According to a study by The Commonwealth Fund, the U.S. ranked last among the 11 developed countries they studied in terms of equity, efficiency and healthy lives. While the Affordable Care Act (ACA) expects to extend coverage to another 10 million people, the system that will cover these lives has yet to be fully reformed.
Furthermore, the cost burden, even under new insurance plans, is clearly shifting to the end consumer. Over 30% of plans now ask for significant out-of-pocket costs, with employee contributions nearing $5,000 annually. Plans with a high deductible or a consumer-directed component have increased from 17% in 2007 to 31% in 2012, according to The Kaiser Family Foundation. This trend is not about to stop, but will likely accelerate in 2015 and beyond.
With the burden and emphasis shifting to the end consumer, the fundamental business model of healthcare is shifting from a focus on businesses to consumers. Rather than seeing insurers, employers and health systems negotiate contracts with passive consumers who simply accept the services they’re offered, this new consumer-centric model increasingly puts consumers at the center of their own health care decisions. Employers, struggling with growing costs, are providing employee incentives for healthier lifestyles and better maintenance of their health. Insurers are ramping up efforts to cater to consumers who buy through online insurance exchanges. Providers and hospitals are actively marketing directly to consumers. And, perhaps most importantly, the Affordable Healthcare Act’s emphasis on “pay for performance” is encouraging physicians to be more focused on patient engagement and outcomes.
Meanwhile, because of the growing sophistication of the Internet, consumers are experiencing a golden age of personalization, accessibility to services and mobility. Faster connections, higher computing power, and the mass proliferation of mobile devices are making this new age of digital products possible. The “Uber of ____” phenomenon is powerful and here to stay. You can find almost anything on-demand these days.
Digital health startups will have enormous impact as they focus on four primary areas: transparency, coverage, care and wellness. In just the past 5 years, we've seen an influx of digital health startups that have focused on these key areas of need. For instance, One Medical, Pager and Doctor on Demand are turning primary care upside down by giving consumers direct access to doctors through their smartphones.
Healthcare is a difficult industry to navigate and fraught with regulation, incumbency and politics. The last generation of healthcare startups required large amounts of venture capital funding and were mired in bureaucratic red tape, but a new generation of entrepreneurs are entering the market and appealing to a recently-empowered class of consumers who want to take charge of their own healthcare costs and outcomes. For example, YCombinator's current winter class has a record 10 companies in the healthcare industry, and we expect that to increase going forward. As partners to entrepreneurs, but more importantly concerned citizens, we are hopeful of what the future will bring through the rise of digital health.
Eric Kim and Chi-Hua Chien are co-founders of Goodwater Capital, an early-stage venture capital firm focused on consumer technology. Goodwater Capital is not an investor of One Medical, Pager or Doctor on Demand.