Data Catalyst - EnergyThis interview is an excerpt from the second instalment of the Connected World Market Insights Series, and has been cross-posted from MaRS News & Insights.

Connected World Market Insights Series

An interview with Zayna Khayat, MaRS Health lead at MaRS Discovery District.

What role do startups play in transforming healthcare?

Transforming healthcare requires innovation. Entrepreneurship underpins innovation. Key feeders of this innovation are new health ventures that are founded by entrepreneurs who are challenging the status quo. Entrepreneurship as a mindset is particularly salient in the health sector because we are witnessing the creative destruction of institutions that have been operating for more than 50 years.

An entrepreneur is not necessarily someone who starts a small health company, but rather someone who redefines the status quo. Young high-growth health ventures will be a key piece of the puzzle because they will feed into the incumbent organizations that currently drive the health system (major health delivery organizations, government payers, third-party insurers and private players such as retail pharmacies, labs and medical product innovators). The incumbents are (rightly) bureaucratic by design—their processes are embedded and systematized to allow them to provide a consistent service or offering in healthcare at scale. It is a challenge for our established health institutions to be agile; they cannot easily change their business model, yet business model innovation is fundamental to achieving the connected and decentralized models described in Transforming Health Part 1. Startups, on the other hand, are agile and lean; however, they face challenges in scaling their technology. MaRS and several other organizations incubate and nurture startups and help them dock with health incumbents who can partner with them to further scale their products or services. Some startups might try to scale on their own, but this tends to be the exception.

What are the major hurdles for health IT startups?

Among the many hurdles our young health companies face, two stand out.

Firstly, as described above, our large healthcare institutions are in many ways designed to suppress innovation, and so embedding in an ecosystem where startups can plug in their technologies is critical to their ability to evolve their offerings and business models. However, it is very difficult for health startups to access these institutions to validate with first customers (patients, clinicians, administrative staff). For biomedical innovators (drugs, devices, diagnostics), there is at least somewhat of a defined path to access the health system. This is not the case for health IT ventures, despite digital health being the type of technology that the health system really needs right now, and despite it also being where the volume of innovation is happening.

A second key challenge for startups in this sector is landing on a viable business model. It is very difficult for health IT innovators to monetize the technology they have developed as health IT is in many ways still viewed as a “cost centre” and not a “value centre” in organizations.

To facilitate adoption, what value proposition must health IT startups demonstrate?

In a resource-constrained and highly evidence-based system like healthcare, it is critical to build a rigorous, (ideally) academically defensible value proof in order for a health IT technology to be adopted and paid for by the public purse. Theoretical returns on investment (ROIs) are no longer sufficient to convince a decision-maker to pay for, adopt and diffuse your technology. Startups require robust observational and empirical data, even better if there is a randomized control study that is published, together with a strong health economic model.

In many cases it is not possible to do this “pre-market” (before selling into the health system) because health IT solutions have rapid development cycles, and the technology itself obsolesces rapidly and changes as it is used in the field by clinicians and patients. In these cases, where the decision-maker faces high clinical or financial uncertainty about the value of a health IT solution, a market entry strategy that health IT innovators can adopt is to build real-world evidence while the technology is adopted live in market, and then adjust the payment scheme after an agreed-upon time frame with the payer. This is sometimes called “coverage with evidence development” (or “pay for performance” or “ managed entry” or “risk sharing agreement”). This strategy is already being deployed by drug and device manufacturers with high-ticket technologies; health IT innovators are beginning to incorporate these schemes into their contracts with healthcare institutions. As an example, one of our young ventures recently signed a multi-year contract with an institution with a provision to check in every six months to show that the promised outcomes had materialized, and even were monetized. If the outcomes did not materialize, the terms of payment would be revised to ensure the buying institution captures their desired value-for-money threshold.

Payers and procurers of health technologies are also reconsidering their current strategy for valuing health IT solutions. A unique challenge that was recently highlighted by PwC Canada is the impact of rapid price collapse on the “I” part of an ROI equation. That is, a technology assessment’s ROI analysis might indicate that a technology is cost-prohibitive based on its cost/price today, but as costs rapidly fall (think whole genome sequencing, which now costs as little as $99 in the United States) this might not always be the case. An adaptive ROI model is key for estimating the value-for-money of new and disruptive health IT solutions.

What is the role of new entrants like Google, Wal-Mart and Apple in the healthcare field?

As has been eloquently framed and discussed by PwC recently in their New Entrants series, there is a growing phenomenon whereby many consumer goods and retail players are now in the healthcare business. This is being driven by the rising consumerization of healthcare—citizens/patients/families experience incredible customer service in other parts of their lives, and are now expecting that level of service and personalization from their healthcare providers. The incumbents are institution-centred or system-centred or physician-centred, and so it is a struggle to adapt their business model to be truly patient-centred. But new entrants in the healthcare business already think and act this way. They have an advantage over both the incumbents who can’t innovate quickly enough, and our health startups that are significantly less capitalized and do not have the level of scale that the new entrants possess.

We have a few great stories of how new entrants and startups are making strides in Canada. For example, NexJ Systems began as a highly successful customer relationship management (CRM) company in the financial services, with customers across North America, Europe and Asia Pacific. They used this platform to enter health with an incredible offering, NexJ Connected Wellness, that is centred on activating patients to better manage their own health and wellness and connecting them to their circle of care (family, friends, and healthcare professionals). NexJ recently acquired Toronto health startup Liberate Health, which allowed them to extend their platform even further by providing education and literacy tools to patients.

Another great example of a health startup docking with a new entrant is Toronto-based MemoText, whose first major client was Boots drugstores in the United Kingdom (which was recently acquired by retail pharmacy giant Walgreen’s). In many ways retail pharmacies are healthcare incumbents, but they’re also new entrants because they’re entering adjacent spaces. That is, they’re extending their business from the core offering of the safe dispensing of medications toward becoming broad delivery vehicles for a range of healthcare services. Retail pharmacies now offer medication checking programs, diabetes support services, blood pressure checking, flu shots and more. Loblaws started as a grocery chain, which then developed pharmacies, and now some sites offer primary healthcare services. MaRS is working hard to help our young health startups dock with both incumbents and new entrants to help accelerate their strategies toward being broad consumer health solution providers.

You can read the entire interview, and accompanying company profiles, over on MaRS News & Insights.