Six Truths Digital-Health Entrepreneurs Need to Know

With billions of dollars at stake, the U.S. health-care system offers entrepreneurs a tremendous opportunity to shake up one of the most complex sectors of the American economy. But the battlefield is hazardous, the competition is stiff and the way forward is riddled with booby traps.

There are at least six fundamental truths that digital-health entrepreneurs will have to accept as necessary (but not sufficient) for finding success in this alluring but notoriously tricky business. Keep these truths in mind, and you will increase your chance of success.

New tech solutions should cut costs, increase revenue, or cut red tape.

The U.S. health-care system is a primary driver of the U.S. deficit — federal, state and local governments together spend well north of $1 trillion a year on health-care related programs. Meanwhile, 160 million Americans receive their health care through their employers, who collectively spend $620 billion to provide those benefits. Clearly, a rich target for entrepreneurs. Some companies are finding ways to attack the issue: Clients of Redbrick Health* are seeing 4:1 returns on investment within two years of implementing the Redbrick platform, which focuses on preventing or managing chronic diseases by applying breakthrough approaches to health engagement, consumer experience and behavior change.

The pressure to reduce costs, both for consumers and for the system overall, is high. The flip side of the equation: Find ways to boost revenue for providers or payers, and you will attract attention. The third imperative: Make processes and workflows simpler.

No matter which angle of attack you choose, keep your solution simple. It should be easy to integrate with existing infrastructure, while being comprehensive. Think in terms of combining products with services. If installation is easy, the sale will be easier.

A single app without an open API is an adoption- and scale-killer.

Most of today’s health-care data is stuck in silos, locked in antiquated systems. Engineers have to bring the best of cloud computing and open API interfaces for the next generation of products. If you can build interfaces that open up this locked system — that’s what HealthCatalyst is doing, for instance — a treasure trove of information and business opportunity will emerge.

You will, however, face challenges on this front. There is a lack of industry-wide language and communications standards, and stakeholders may not be willing to share data with perceived competitors.

Customer leverage is key to success.

Consumers are driving more decisions about their own health care. They want to be guided through the system by health care, but they expect to be engaged in their own health, and to utilize tools to self-monitor. Two companies empowering consumers with tools to manage their health and wellness are MyFitnessPal* and Rise. Both provide tools to track calories and physical activity — and both are delivering impressive results, with millions of lost pounds and happy customers.

Also keep in mind that under new federal rules, clinical summaries will have to be provided to patients within one business day for more than 50 percent of office visits. Studies also expect the next few years to see a sharp increase in the number of patients connecting to health-care providers via online Web portals.

Build a revenue model before you build your service.

Health care is quirky; many people believe anything health-related should be free. Meanwhile, medical practices typically refuse to pay for software and services, due to razor-thin margins. Freemium models can and do work in health care. A good example is in the electronic medical records rollout to physician offices. Government incentives and freemium models are transforming fax machines to computers in doctors’ offices.

Practice Fusion* learned this lesson the hard way when it struggled to sell software to physicians’ offices at prices that started at $300 a month. The company quickly pivoted to a free EHR platform for physicians, and discovered that critical mass, connectivity, targeted advertisements and data offer other strong monetization options.

As you develop your model, know who your customer is — it could be consumers, employers, health-insurance plans, hospitals, pharmacies or labs. And think creatively about pricing models. Businesses often fall back to per-member/per-month pricing — but consider creative alternatives.

High-tech and high-touch are not mutually exclusive.

The human element in patient care is still essential. The challenge is finding ways to make health-care apps as social as Facebook and Twitter. People get bored with many fitness and tracking apps, which simply aren’t engaging enough over the long haul.

Meanwhile, consumers and providers alike are becoming more and more comfortable communicating by text and video. In the years to come, most non-emergency medical communication will be asynchronous. In the future, we’ll see insurance coverage and resources allocated based on individual needs, rather than a one-size-fits-all approach.

Mango Health has a mobile platform designed to encourage patients to take their medication. Research has shown a positive ROI on addressing non-adherence, as high as 10:1 for hypertension and 7:1 for diabetes, yet little progress has been made at improving rates of adherence with at-risk populations. Mango’s team is leveraging experience in persuasive design and gaming to develop an engaging product that gives users a sense of progression and accomplishment with a responsive user interface that looks and feels like familiar mobile products.

Tech and health-care entrepreneurs need to join forces.

Though it may seem obvious, a management team with experience in both the health care and IT markets is critical to the long-term success of digital-health businesses.

Understanding the public policy framework, payer/provider dynamics, and unique workflow of the health-care market are key to guide and grow a major health-care IT company successfully.

Remember that health-care privacy is governed by the Health Insurance Portability and Accountability Act (HIPAA). Securing data offers opportunities — see, for instance, a company like TrueVault, which provides HIPAA-compliant data storage.

Also remember that in the U.S., health-care rules vary widely from state to state. Local medical boards regulate the practice of medicine, and physicians cannot practice across state lines. This has been a barrier that has taken many years and millions of dollars for telemedicine companies to overcome. Some players, like Teladoc*, have made regulatory compliance a core competency, and turned a barrier into a competitive advantage.

The fix for the health-care system and our country’s rising deficit is counting on savvy digital and life-science entrepreneurs to join forces, explore each other’s worlds, build important new businesses — and save our country from financial ruin.

*Redbrick Health, Practice Fusion, MyFitnessPal and Teladoc are all KPCB portfolio companies.

Beth Seidenberg, MD, is a general partner with Kleiner Perkins Caufield & Byers, focused on life science and digital health investing. Before joining the firm in 2005, she worked at a number of pharmaceutical businesses, most recently as chief medical officer at Amgen. Reach her @KPCB.