You’ve Got to Pick a Pocket or Two: WV’s Assessment of Healthcare Customers
As with any industry, an intimate understanding of your customer is key. However, given the healthcare sector’s complexities, this task is not always straightforward. There are many “pockets” you can access to pay for healthcare innovation, and it’s not always obvious which ones to approach and in what order. Today, we’ll talk about four main “pockets” or buyer categories: providers, payors, patients, and pharma (i.e. the four Ps of healthcare).
Let’s take a look at diabetes management service Livongo as an example. It would be realistic to suggest that patients should pay for this service, since they are directly experiencing the benefits of weight loss and diabetes reversal. However, their improvement in health also has major financial benefits for their insurers (i.e. payors) in the form of reduced prescriptions, lower healthcare costs and diminished risk of other tangential morbidities. So instead, should insurers pay? Similarly, in a world shifting to a capitated or value-based care model, healthcare providers also benefit from their patients’ use of Livongo, as the patient’s improving health condition reduces the provider’s required effort to yield a positive outcome. Given that, should providers pay for the service instead? There’s also an argument to be made that Livongo is driving value for pharma by improving outcomes of patients on their medications and uptake of drugs. Ultimately, Livongo settled on payors, with a focus on self-insured employers first, as the right buyer group for its go to market. Payors were a good fit for Livongo because there is significant financial savings to managing diabetes: reduced medications, complications, and frequency of care required to name a few. Within the payor universe, self-insured employers were a particularly compelling group to target first because they often can make decisions faster than large health insurance companies and they reap additional benefits from well-managed diabetes patients, namely productivity and reduced absences.
For most healthcare startups, the reason it’s important to prioritize and target the right customer is simple: companies will only have the cash runway to initially execute on one go-to-market strategy and sales cycles can be long. Thus, finding the customer group that has the highest propensity to pay for the offering is imperative. During this exercise, it’s important to understand that just because an end user extracts value from a product, it does not mean that they should be the customer as well.
Targeting the right customer from the get-go helps to increase the probability of success for a company: more customers = more revenue = more fuel for growth. Inevitably, this also makes it easier to fundraise (more customers = proven traction = happy VCs). There are also some valuable downstream impacts. Take, for example, intermediaries collecting health data and moving it out of the EHR so it can be used for other applications (e.g. Health Gorilla). These intermediaries sell to other digital health players, who in turn target the key buyer groups (payors, providers, pharma, and patients) as customers. We also believe that these intermediaries will be better positioned for success if they sell to customers whose ultimate reimbursement comes from an attractive buyer group.
The Four Pockets
As mentioned before, we see the connected health landscape as being comprised of four major pockets, or buyer groups:
- Providers: This is perhaps the most obvious group of players in the healthcare ecosystem. Providers, simply put, provide care. They can be individuals (such as your family doctor), groups (such as your local hospital), ancillary service providers (such as your dentist, physical therapist, or nutritionist) or tech-enabled players (such as Nurx or Teladoc).
- Payors: These are the folks that pick up the bill for care. The largest group in this category are health insurance companies, which can further be divided into commercial insurance and government-sponsored medicaid and medicare. As in the provider bucket, there are ancillary-focused players in the payor category as well such as dental insurers, life insurers, and pharmacy benefits managers. There’s also a large number of employers who self-insure in the U.S. For the purposes of this exercise, we’ll look at all these groups collectively as payors.
- Patients: These are the individuals receiving the care. Upon first glance it may seem like patients don’t pay for healthcare directly (unless they’re uninsured), but in many instances they do. This can range from wellness services (e.g. physical therapist visits) and elective treatments (e.g. fertility, cosmetic) that are not covered by health plans to co-pays that patients need to cover for physician visits. Over the past few years, patients have become an increasingly large healthcare buying group in the U.S. as high deductible health plans have risen in popularity among employers.
- Pharma: These are the innovators in healthcare working on new technologies and treatments. The players that immediately come to mind here are big pharmaceutical companies (e.g. Pfizer or Roche) and biotechnology businesses (e.g. Moderna or Alexion). In addition, there are many other types of life sciences organizations such as medical device manufacturers (e.g. Medtronic or Abbott), and services companies that help bring new innovations to market through regulatory approvals (e.g. IQVIA or PPD).
Comparing the Pockets
To begin comparing these four pockets, we took a look at all the different businesses models we’ve mapped out in healthcare and classified them into the “bucket” they aligned closest with. Any bucket that consisted of a type of healthcare provider (e.g. telehealth) or a product that primarily serves healthcare providers (e.g. electronic health records) was classified as provider. The same philosophy held true when categorizing the pharma and payors buckets. Companies building products that are typically direct to patient (e.g. Zocdoc, 23andMe, Noom) were classified as patient.
Criteria 1: How difficult is the sales process?
To state the obvious, selling to a hospital system is completely different than selling directly to patients. One involves a long, enterprise sale and the other often involves optimizing performance marketing. To evaluate and compare these different buyer categories, we reviewed what we have learned from meeting with businesses in each of the different buckets. We assigned a score out of five for the attractiveness of the sales cycle (the shorter the better) and the buyer’s willingness to pay (which is typically driven by margins and budgets), respectively. We then combined these two scores to represent the overall attractiveness of the sales process.
Criteria 2: How attractive is the addressable market?
We made an estimation of how large the market for solutions in a bucket is and how fast we believe it may grow. We are cognizant that we don’t have a crystal ball, which is why we kept our methodology to another simple score out of five. Something we considered is if a solution touches a very broad group of users or if it is more focused on a niche population. A digital health company focused on large chronic disease areas, such as diabetes, would score higher than a company addressing a less common ailment or population.
We also gave each bucket a score out of five for expected growth. We looked at regulatory changes, behavior changes in light of COVID, and new reimbursement rules to help determine if there were any major catalysts that would drive growth.
Putting it All Together
We then plotted our sales process scores against our addressable market scores to see how each individual bucket fared. We layered on the buyer categories or “pockets” to look for trends, and the distinction was clear: pharma and payors, were a lot more appealing markets to sell into, with patients being the most challenging segment to target.
So, What Does that Mean for Us as Investors?
While we weren’t surprised to see these categories stack up in this way, this exercise was helpful in pinpointing why we are excited about startups that target pharma and payors as customers. These startups are particularly well-positioned to get their products to market quickly, have favorable selling economics, and benefit from outsized growth. That being said, we’re active investors in companies that address each of the four Ps of healthcare and are big believers that with the right product and go-to-market strategy, you can build massive businesses in all of these “pockets”.
As always, our analysis is evolving, so please let us know if we missed something. Also, if you are building a healthcare business with an exciting product or go-to-market angle that neatly fits into our Connected Health Landscape, we’d love to connect! Drop us a line at email@example.com and firstname.lastname@example.org.