a16z Podcast - a16z Podcast: Scaling Healthcare

Episode Date: December 13, 2017

No matter how grand a vision for a particular industry, disruption in practice is hard. This is especially true in industries like healthcare, which have long been resistant to software-driven change. But sometimes you can innovate within the bounds of the industry, using those very constraints to move it forward -- whether it’s understanding and working with the early adopters in healthcare to focusing on the bottomline. This conversation -- recorded at our recent a16z Summit in November 2017 -- between co-founder and CEO of Omada Health, Sean Duffy and CEO of Accolade, Rajeev Singh (moderated by a16z bio fund partner Jeff Low), considers how such innovation affects go-to-market strategies and pricing to measuring savings and the entire ecosystem of healthcare spend. As this generation of digital health tech companies begin to change the healthcare business -- and scale -- what effect are they having on the rising cost of heathcare overall, and the bottom line? ––– The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi and welcome to the A16Z podcast. As tech companies in the digital health space begin to scale, what effect are they having on the rising cost of health care? This conversation recorded at our annual summit event in November 2017 between co-founder and CEO of O'Mada Health, Sean Duffy, CEO of Accolade Rajiv Singh, and moderated by A16Z's own Jeff Lowe, looks at how innovation within the healthcare system is affecting the bottom line, from effective go-to-market strategies to price, to measuring savings to the entire ecosystem of health care spend. The rising costs of health care aren't just a societal concern. Becoming an issue of international business competitiveness, this generation of startups has now reached the scale necessary

to tackle the problems that will affect everyone in this room. So we've been talking about health care costs in the U.S. for at least a decade. Has anything changed, and is there anything that businesses can do about it? Well, it's been inflating. I mean, what we're seeing is a confluence of a lot of challenging bits. In our space, for the first time in global human history, preventable chronic disease is killing more people than infectious disease. This is something that's new that humanity is facing,

but with that cost just inflate. It's almost, you know, becomes reliable. Year every year, you see in the diabetes space, about 5% cost inflation. You know, you get diagnosis of type 2 that's coupled with a cascade designed to keep you healthy. That cascade costs money. So, you know, it's really not tenable.

The neat bit is digital can really help because the chronic conditions that are driving a lot of these costs need lots of touch points through someone's journey in order to, you know, make an impact. So we're spending more, Raj, what can businesses do about it? Well, business have been trying a whole variety of different things, meaning there's a common misconception that business hasn't really woken up to the idea that health care costs are diminishing sort of competitiveness. The reality is businesses have been trying stuff forever.

And in the last 10 years, the idea of consumer-driven health plans, which is just, it's a beautiful code for we're going to shift the burden on the consumer and give them higher deductibles to manage was one of the big things that companies tried. The unfortunate reality is the consumers never didn't really get smarter as a part of joining the health care system as an economic buyer and costs would go down for a year and then start to slowly but surely drift back up. And so we're entering an age where companies are looking for more systemic answers to the problem.

It's not just enough to say, hey, your deductible is now $7,500. You figure it out. It's, hey, what tools can I give people to make better decisions to improve their care and to get to better outcomes. And for the first time, I really believe, and we're seeing this in the RFPs we see, and the types of questions we're getting, employers are asking, how do I get to better outcomes? And that's a big difference between how do I lower costs? So we went from giving people consumer choice to now saying, well, employers have to at least help them if they're going to give them the choice. Yeah. Not too many people are responsible for the health care spend at their companies.

You know, why should they even care about health care costs at their company? Well, roughly at around a thousand employees, it makes sense to actually just self-insure. So you'll contract with a health plan like an Aetna, a Cigna, to just administer your benefit for you. So your employee would walk into Stanford Hospital, get a procedure. The claim would be routed through Aetna, but just drawn from the balance sheet of the self-insured companies because the money is actually carrying the risk. So look at the private health spend, right? Fifty-five percent of the private health spend in the U.S. is through self-insured employers. And they have an enormous amount of power to influence the plans to influence change across the whole ecosystem. If you take a 10,000,

person company. That company's annual medical spend, I mean, they'd be self-insured level. It's probably around $100 million a year. And, you know, the number of thousand employees used to be the boundary for employers to move to self-insured. That number's going lower and lower every year. The number of employers who are saying, hey, in this fully insured model, my carrier is not necessarily doing the job I need to control costs. I'm going to take it and manage it myself. And, you know, we're seeing companies with 300, 400, 200, 200, 200 employees look at self-insured. So, you know, this matters to investors, obviously for those companies, but for the people sitting in this room, why should they care about their healthcare spend? Every one of your businesses

needs engineers. Every one of your businesses needs salespeople. Every one of your businesses competes on a global basis, regardless of whether your market is domestic or not. Today in the United States, just the simple fact of the matter is, we spend twice as much to get outcomes that aren't quite as good as the rest of the world is seeing. That competitiveness issue cost you engineers. It costs you salespeople. I think the quote that was in the Wall Street Journal recently is healthcare costs are the tapeworm of American business. And we're oftentimes as business people, super focused on tax relief, very focused on issues of competitiveness, but we leave health care as this thing that's driving a whole bunch of top-line cost

out of the equation. And that's not even counting productivity, which is sometimes trickier to measure. You know, someone with diabetes has three-x the visits. They're taking more time off of work. They're less productive. And for those of you who sit on public and private boards, reflect on if in those board conversations you've had the ask and the questioning of, well, what are you doing to drive agency with your self-insured medical spend?

And if the answer is, oh, I'm leaning on towers, I'm leaning on Aon, I'm leaning on my carrier, there's money being left on the table, and there's efficiencies to be gained, and, you know, health of employees to be fostered. Absolutely. I would give that a nudge. If that's the answer, I'd dig in a little harder. Digging. So cost, competitiveness, productivity, and health of your workforce.

The economies of the U.S. health care system cannot sustain, or globally, cannot sustain the diabetes trajectories and chronic disease trajectories we're on. It's insidious. We can't have 40% of the adults in the U.S. go on to find out in their adult lives, that they get type 2 diabetes. It's just a, it's a mandate to try, just from a societal perspective. Now, so a lot of people have talked about prevention as a way to, you know, solve a lot of our health care problems. But, you know, that's been really hard to put in practice. I mean, Sean, your company that's done a lot of prevention space, how do you put that in practice?

Well, I mean, the first thing is, is you have to fit in the mental model of the current U.S. healthcare system. People sometimes call us a prevention company. And, you know, when I describe us, I talk about ourselves as an intervention for early metabolic disease. Because at the point that we intervene, you see problems. You see pre-diabetes, hypertension, right, the early metabolic indicators. We help individuals at high risk for diseases caused by obesity, so principally diabetes that access hypertension, high cholesterol, make some lifestyle change, lose a bit of weight in a way that's clinically shown to reduce progression. So, you know, for us it was all about proving that it works, right? So we've now published nine research studies

that allows us to go to these health plans and make the case that this needs to be included in the medical benefit, no different than, you know, metform. And then we can work with the self-insured employers. We have claims data now. that look out a year and see 1,300 in savings per enrollment. So, I mean, it started as an academic paper in the New England Journal of Medicine, but how did you enact from an academic paper to a sort of real thing? Just bit by bit, showing that it works, you know, figuring out how to work with the existing healthcare infrastructure

and manage to its complexities and, you know, taking the hard road. You know, we got the American Medical Association for the first time in AMA history in the U.S. to approve a digital-specific CPT code. Never happened before. But you have to use the existing infrastructure. That's kind of what we found. The existing mental model, that was a phrase of child. Use of which I think, or existing model, is really important to note.

Think about it this way. The way, and largely speaking, insurance carriers have been the managers of this cost on behalf of corporations for decades. And that model had been largely, we're going to wait until we understand that you have a chronic ailment, and then we're going to reach out to you. Those were programs called disease management. The idea that once we understood that you're spending money on health care, now I'm going to call you.

I'm going to call you at dinner time, and I'm going to say, I want to help you. And unfortunately, the reality of that situation was that consumer in that moment was not prepared to receive that input. And so you have to rethink the model and say, well, no, no, let's not wait until we get there. Let's approach them proactively. And let's approach all of those consumers proactively. Let's build relationships. Let's understand intent. What do you want to achieve?

It's really interesting to note that sometimes consumers are dealing with multiple issues. And as they're dealing with those multiple issues, you have to understand not just that, Oh, you know what? This particular hypertension issue is the most expensive. Let's go address it. But instead address, oh, you know what? Depression is really the issue that we have to address first. So you have to understand intent. You have to be proactive in your sort of managing the relationship with that consumer. And then you have an opportunity to impact things before they become costly. Got it. So you're focused on some of the things around waste, some of the things people have traditionally talked about and also making decisions. I mean, how to acculate if you put that into practice?

The first thing we do when we deploy a new customer is we take a couple years' worth of data about every single one of their members or every single one of their employees and their families. We take that data, we segment it, and then we create personalized recommendations for every single one of those consumers. So oftentimes, the first time we interact with that consumer, they're calling in for something tactical. They're a 27-year-old calling in to find a primary care physician. Now, in that situation, that's a 27-year-old who spent $200 on health care last year. We might say, look, we're going to get you that primary care physician, and we're going to tell you about your preventative benefits,

and we're going to let you go on your way. Now, on the other hand, because the recommendations are all pre-built, based on our understanding of their previous data, a 52-year-old untreated diabetic who hasn't got the A1C screen and spent $17,000 on health care last year, we might automatically start introducing the idea that your company's already purchased a solution for you, and it's spectacular. You should think about it.

And that type of personalization, using technology to turn tactical interactions, into strategic conversations, that hasn't existed up to now. I think in the U.S. healthcare system, we've made the mistake of just placing all the complexity burden on the person, the patient, and you really, in order to make the sort of impact that we need to make on the prevention side, on just kind of retooling some of the fundamental underpinnings of what we do, you've got to have organizations that serve that function. So digital therapeutics, and you sound really cool, but we were talking about productivity and savings. Can you put some numbers? How much can a business here save?

We just did a bit of analytics work with Blue Crosper Shoe to Louisiana. This is with the state of Louisiana, the middle of diabetes belt. And they saw $1,300 in savings every single enrollment that they got into the Umada program within a year. If you take a $10,000 for the company, it's like $1 to $3 million just in that first year. And because of the nature of chronic disease, that actually grows in time. So really meaningful, bottom line impact. And then second to that, what's happening is these HR leaders who went live with the state of Louisiana, they're getting thank you notes from their employees.

This is incredible. It shows me that you've cared about me. one of the best benefits, you know, you've rolled out. So you get a cultural win and you get a financial win. We're really attacking the entire volume of health care spent. And so, you know, we've seen cost savings in the first year, 5 to 7 percent. That number goes higher in the out years as you build long-term relationships with those consumers. Certainly in the Fortune 500, there are more than a few companies spending more than a billion dollars a year on health care.

We can move trend just by improving consumer decision-making, getting people to the right care the first time in the neighborhood of 5 to 7 percent. in that first year. Last year we took on our first exchange population. And so for the audience that isn't super familiar with exchange populations, it's the Obamacare exchanges. Obviously there's a lot of conversation about them right now. And people moved in and out of those exchanges a lot. And so we were really concerned about, you know, could we really save money on this population because people kept jumping in and out of populations? We just got our first set of data on 100,000 member population. That's 2.9% savings in the first year. The reality is, and I don't mean this to diminish our technology, our service, et cetera. There's a pretty simple answer in here. Let's help these people

make good decisions and let's get them to the right spot. And if you can do that, you can see savings even in some pretty diverse populations. So you're coming up with, you know, big dollars and savings. Then how do you price, you know, how do you share that with your customers? Well, the way we work is a little unusual in that we contract kind of like a hospital in the U.S. healthcare system. So thanks to these coding, you know, infrastructure, bits of infrastructure we put in place will really be a hospital. So when we enroll, someone, we file a claim, and actually from there, we charge in an outcomes basis. So the more successful we are with the person, according to what percent of weight loss we get them to,

the more money we make, which we like for two reasons. One, it aligns our incentives with the employer. Second to that, it creates this really helpful innovation dynamic with our product team, because they can think, you know, I've got this person at 4 percent. How might I invest in that person to get them to six? And we don't have to redo our contracts to determine if that's a profitable sub-intervention for a model, we just try it. And maybe we invest $50 in that person in our program to try to get them further and more healthy. We can figure out how to make that profitable for us, which greatly aligns incentives. Why that you don't just say, hey, you know, if we're saving $1 million-2, how come you don't just say, hey, I'm taking percentage of the savings rather than,

you know, this weight loss, which is kind of a proxy for savings. The slight challenge with that is you get in this reconciliation moment at the end of the year where it's like, you know, where's the attribution, you know, it's kind of my actuaries versus yours. And it's kind of a not a good way to foster just deep partnerships with your clients in those sort of shared risk arrangements. So what I always look for is, is there a data feed coming in that's a good proxy for your impact you want to have near-term and very clear attribution. So sometimes that means that you think you save them this amount and they think, you know, they saved another amount.

Oh, yeah. It could be like an uncharacteristically warm season for them. And like, everyone's running. And, Raj, you have a lot of experience with that model. So we do. In fact, the accolade started with that idea. It's a common model in healthcare oftentimes to start a business where you get. go to your customer and say, if I'm going to save you money, I'm going to take a percentage

of those savings as my revenues. It's a great way to get things started. Over time, the relationship can be a little bit challenged because you end up, you can do a fabulous job and your customer loves you for 364 days a year. But the day of reconciliation is the day we go into arbitration and decide how much do I really want to pay. We've, in fact, moved all of our agreements to take a percentage of our revenues on a fixed basis, but we do want to be aligned with the customer's needs. And so we do that by saying, we'll measure ourselves on engagement, how many of your consumers are we interacting with. We'll measure ourselves on, and this is an important point, how well we'll activate the rest of your health care ecosystem. We don't want to add all the value,

but if you've selected Omada to manage this particular challenge for you, we should make more people get to your telemedicine solution or get to your second opinion solution. We'll oftentimes measure that way. And then finally, we'll still take a percentage of this and say, tell me where, what particular segment of your population you're most concerned about and where you want to drive savings, and we'll be very focused on that, and we'll take risk on that as well. So kind of counterintuitive that you think if you take a percentage of savings, that would be kind of the best put it, but it seems like it's actually really complicated in practice. It's a beautiful idea. On its surface, you love it, and then you get into the weeds of trying

to determine how you're going to measure those savings. I think we both benefit from the fact that whether it was Accolade or others have proven in the past that in a shared savings model, you can build a business. So let's talk about implementation. So a lot of these health care business implementations have been quite difficult. What are this kind of the leading companies doing out there to, you know, play a role in health care costs? For us, we try to, whenever possible, have billing relationships with the self-insureds plan. So at the very least, we could file claims through them. That enables an easier conversation with the benefits leader because we can go in and share, like, look, we know you don't have, you know, as many people as you'd like in your organization.

We can go ahead and file claims through all of these, and you don't need the contract with us. So, you know, that takes many, many years. I mean, you know, we're six and a half years old. It took many years to set up. But those bits are helpful. You have to kind of take on the burden of two things. One is doing everything you can to take the operational and implementation burden into your organization versus put it on theirs. And then second, you know, take the complexity and burden for what the experience is like from your participant or patient and bring it onto your organization and solve it.

We're a little different in the way we work with the customers. We go directly to the customer. And the customer is actually, at some level, and this is not a secret, we'll take a component of what their carrier is traditionally done for them, what their carrier might have called member services and medical decision management and say, you know what, we're going to have Ackley do that on your behalf. What we've worked to do is make that an easy transition, number one, by building data sharing relationships with carriers and working with them to make it a win-win for the carrier by

potentially igniting some of their programs or activating some of their programs so we can drive value for the carrier without making them have to lose in the equation in terms of losing that service. The second thing we really have to do is in that early stage of deploying that customer, we have to be great at understanding their data, creating those personalized recommendations, and then finding a way via both consumer-based marketing techniques as well as things like changing the 800 number on the back of your insurance company's card to be our number, to drive engagement up early in the first year.

How do you make solutions to work for everybody? You know, every population is different. And, you know, unfortunately in this country, you can look at demographic information, you can look at zip codes, and you can look at how much people make in their HRIS system and take some pretty good guesses about where they are in their health care pathway. And so personalized recommendations for us is both about understanding claims data, the past.

Where have you been? Risk assessment, where are you going? That risk assessment could be both based on claims data, also based on demographic data, and also based on the contextual factors that we learn in conversations with that consumer. All of that factors into what we call an accolade risk score that says this is where that person is on their way to.

All of that leads to both a machine learning engine making recommendations for our people to manage the right next step, but also our people being able to select to be able to make their own decision about whether our recommendations engine is correct. The idea being that not every person who's struggling with a weight problem is the same, and that's why the Omada program is so custom. Every person has their own particular unique needs. A recommendations engine is good for making a recommendation, but not for making a decision. Sean, you guys spend a lot of time putting things on personal lives, engineering your personal. You can't think of us like exactly the same as a small molecule because this is a cake that's never done.

I mean, you don't like put it in the oven and set a timer here or ding and call it a day. I mean, you're constantly tuning and personalizing based on four pillars. This is a beautiful part about getting the data back in. I mean, we now have 24 million weight readings, you know, all very structured after more than three years that we can use as the primary endpoint to see what for that person is working. And we think of personalization is, A, what you tell us on the way in, so, you know, collecting input, you know, asking. B, what your behaviors indicate in the program. Did you come in saying you loved comedies and you're only watching horror movies, right? C, what your demographics are like.

And, you know, based on our data, what that means you'll have going for you or against you. And then fourth, we're at clinically, right? You know, do you have pre-diabetes and hypertension? Do you have, you know, early type 2, no lipid risk, but you're on the bad trajectory for pressures, right? So some examples of that, you know, we have a low literacy curriculum. Or if we find on the way in, your reading level is a bit lower, we'll deploy that. We have different coaching protocols for our coaches based on, you know, certain demographic consideration. So it's all these elements that are designed to create a good outcome

in a population. I mean, we're right now doing a big clinical trial in the safety net Medicaid space. And, you know, thus far, you know, the outcomes are quite comparable to book a business. I mean, in large part due to this personalization. So personalization, just not in demographics, but, you know, on behaviors this time. Well, thanks so much for coming.