a16z Podcast - a16z Podcast: The Business of Healthcare

Episode Date: March 9, 2017

Starbucks supposedly spends more on healthcare than it does on coffee beans. And 20 years ago, says Rajeev Singh, CEO of Accolade, healthcare was 10% of GDP; today it’s 19% -- that's nearly one-fifths of our gross domestic product. So what tools do we have to address the high costs of health care, especially as stakeholders increasingly look for value-based care? This episode, recorded at our a16z inaugural Summit and moderated by Vijay Pande (a16z general partner on the bio fund) discusses approaches that combine new tech + people + data to address and improve healthcare. What are the macro trends driving innovations in the business of healthcare? And what will define the success of companies in this space? (Hint: it's not directly related to costs or healthcare reform.) 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. This episode of the podcast discusses the business of health care, the challenges and opportunities for new businesses that combine tech, people, and data to address health care. health care needs. It was recorded at our inaugural A16Z event late last year and is moderated by general partner Vijay Pande, who starts off the conversation. The next voice you'll hear will be Sean Duffy, CEO of Omada, followed by Accolade CEO Rajiv Singh. Hi, good afternoon. We were talking actually about what would be a good way to emphasize the cost and the challenges that we're dealing with here. Sean made a great point that Starbucks spends more on health care than spends on coffee beans. Granted, those coffee beans are marked up, but still, it's a dramatic cost. And so

the question is, what can we do about it? And, you know, there's a traditional sort of biotech approach for handling things. And the companies that we have up here represented are really taking different approaches. And so we want to dig into that. One of the appeal about both your companies is that there's the opportunity in principle to decrease cost and increase care, the quality of care. And on the surface, that sounds like bullshit. I mean, how's that possible. Usually you have to choose one or the other. It's funny. I think the most transformative healthcare innovations of our error will all fit that rubric. And I think it's very possible with new technologies coming to bear because the way that the vast majority of the 2.7 trillion not out of pocket

spend is spent in the health care system doesn't make sense. Actually, it doesn't align with that. And, you know, bit by bit, the world and the health care buyer is asking for more, you know, value-based contracts and outcomes pricing. I mean, in diabetes in particular, it's amazing how clear it is what you should do. In fact, one of the things that inspired me is reading all the epidemiological publications about this enormous crisis of type 2 diabetes, you know, CDC estimating that 40% of adults in their over the course of their lifetime, we'll find out they have type 2. And in the discussion section, it was this amazing call-to-arms of all these epipapers.

It was like, oh, my gosh, if only we could scale these proven interventions. you know, they're all in person, but the caveat was always, it's impossible. It's too hard to scale those. They're too expensive. But technology is really helping there. And I think the neat thing is when you're doing something that's, you know, using tech and people in a different way, and it leads to improvement of health and improvement outcomes, the market's really receptive for that. If I had anything to add to that, it would only be, you know, there's one thing that's definitive. 20 years ago, 25 years ago, health care was 10% of GDP. Today, it's 19% of GDP. It cannot be 100% of GDP. It cannot be 100%.

of GDP. And so we don't lack for quality care. We lack the capacity to consume that care in the right way. And those tools are becoming available. So, you know, we talked about these tools being a combination of people and tech. I mean, how do you balance that combination and how do you make it work? I mean, if it's too much people, I would think it would be back to the sort of Ewm's law of growth curve of healthcare game or expensive. But tech isn't ready to take care of everything. I mean, or is it? I mean, how does that balance work? Well, here's the way we think about it. We're quite happy if one of our clients, an employee of your business,

picks up the phone and calls us, and if we spend 10, 12, 14 minutes digging in with that person to understand the context of their care, we won't complain about that a minute. What we do complain about is ensuring that that outcome is managed to the utmost value of that person's opportunity, number one, number two, that our people are using, the best tools available to them so that they're not wasting any time between those interactions with those consumers. Here's the interesting thing that we find, Vijay, that I think is really compelling. Oftentimes, the first time someone enters the health care system, they're coming in for

a transactional item. They pick up the phone and they ask us, hey, I need a new insurance card. Now, the simple thing to do that a lot of health plans might do for them is say, well, cool, give me the last four years or so, and I'll send you a new card. A more compelling thing to do might be, hey, why do you need a card? I'm going to get you a card, but why do you need one? And then the next part of that dialogue is, oh, you know what, I've been having this lower back pain and I don't know what to do about it and I've tried some pills.

Now we have a care event. We have an opportunity to build trust, to build an opportunity to get to the right spot. We think those are high value-added moments. It's anything that's not that transactional work that we can automate or self-service work that the consumer wants that can drive the right scale of the business. And how about for you? I mean, because you have a fairly different model. Yeah, different, but philosophically very aligned in that, you know,

we believe people are incredibly important to these interventions. I mean, you know, in Orta Mater, we match people into small groups, mail them a scale that we put a cell phone chip in it, kick them off in a curriculum, you know, pair them up with a coach. It's quite people forward because that's what matters. You need the right social pressures and the right kind of guidance. You know, our view is that you shouldn't and can't take the people out of it, but you should use tech to scale, you know, people as efficiently,

have them, you know, operate in the right way, really. So, you know, as a, for instance, every single night in our platform, we analyze all the data, and then every coach wakes up with a list of suggestions based on the data trail of each person that they're managing, right? It was, you know, as someone who's weighing in quite a bit, and now for a period of time, they've stopped, and that's really a suggestion, kind of outreach, you know, moment. And, you know, interesting enough, it's not, it's not too different to what others in the healthcare world are thinking about in that, you know, new digital tools are being created for,

providers or PCPs to manage their patients a little bit more differently. You know, these sorts of things are happening. Yet I think the advantage that both of us have for our businesses is we're starting from kind of a clean slate where you don't have to deal with the baggage of already having 10,000, 2,000 primary care docs on salary and managing that immense workflow shift that doesn't quite align with how your contracts are set up to provide you, you know, revenue to drive your, you know, your business objective. And so I think the, you know, the companies that can use people in this new way, we're kind of starting from, well, what should

this look like, and then backing into how to make it. Well, so, you know, thinking about tech, often startups have a kind of Goldilocks problem, that sometimes it's a little too early, sometimes it's a little too late. You know, why now? What makes this the time and not, you know, five, why couldn't we do it five years ago, and why is this not five years too soon? And I'd say there's macro trends that play in our favor first. There are significant macro trends. The world's moving away from fee-for-service. I get this question a lot.

What's going to happen with the new administration? Here's one thing we know, I believe, that the work that CMS is doing, the work the private sector is doing in terms of moving to value-based care, that's not going to stop. So that's a macro, that's a tailwind for us. I think, secondly, you're seeing more and more technology advance in the space that does give consumers more information. Thirdly, and I wouldn't call this necessarily a positive,

but you're seeing higher deductible plans, which are creating challenges for individuals. So a lot of macro tailwinds, I should say, that are pushing companies and consumers to say, we need to do this differently. Give us more information, help us understand how we're supposed to engage. I think the macro trade wins are very real. It'll take time. Everything takes time. But things like macro, which is a bipartisan initiative to fund hospital systems in new ways

for Medicare revenue, are causing real shifts. I mean, you're at risk of substantial bits of revenue if you're hospital under macro and you're starting to think about how you need to adjust your workflows, which, you know, carries trade winds through, you know, all sorts of other areas of the health care system. You know, the other bit for us is that people are much more comfortable now engaging socially through web and mobile than there were, you know, 10 years ago. I don't think, I think the value profit at the consumer level would have been a bit harder. And, you know, I always remember it was really, there was a moment where it was scared

to even have your profile photo up at all on air. Have your picture on the internet was a scary, scary thing. That's not true anymore. You know, we match people into these groups of people they don't know, and it's very rare that we get, like, you know, a cat where someone opposed to. And when that happens, they're the only cat in the group, so they quickly realize, well, then you put a real picture here. So I think ways, the ways that people are using techs mix with the macro trends of volume to value, you know, in combination with what is the biggest healthcare crisis in the globe right now, you know, preventable chronic disease. And you look at like Gates Foundation, right? Historically very focused on infectious disease.

They're realizing that preventable chronic is killing more people than infectious now and are really dialing up efforts to help. So it has to be done. It's a mandate clinically. It has to be done it. Yeah, in some sense it's a reflection of healthcare being so good at so many of the things. This is what's left. This is the future.

So, okay, so we've covered a lot of things. We've talked about the tech and why now and where it stands in the macro economy. but what allows you to build companies that become big rather than having lots of companies in the space that are all sort of finding for the big pie? You know, what would allow one to build big companies in the space? For one, you need a lot of clinical proof.

Peer-reviewed trials and publication, you know, is very tough to convince the medical director community in, you know, in enterprise healthcare to work with us and reimburse our program until we've kind of gone down that road. So those are, you know, that's a lot of kind of foundational bits. The thing that I was reflect on for our business is, unlike, you know, a drug or a device where you're just relying on a patent to kind of

keep your monopoly for a period of time, these programs are constantly evolving. And there's an enormous data advantage because you, I mean, we've enrolled the largest longitudinal data set of these sorts of programs of the world. And you learn so much from that to make the program better for the next person. It has to be outcomes based in this, in this particular market. The first set of accolade customers were all control versus pilot tests, where we take a group with 25,000 people in a population and compare them to another 25,000 who the actuarial said looked exactly alike. That proof goes a long ways where you can sit with the consulting world and you can sit with the buyer and explain where they can expect to see the value

and why the outcomes will improve. We're having millions of interactions a year. And what we're in process of doing is really driving the measurement of every one of those transactions. And so it's not just about the end outcome. It's how well we proceed in the episode of care. And the belief that we can measure that from a unique vantage point. I can tell you whether the consumer's happy with that episode of care, whether our health assistant or concierge who's very well-informed believes it was the right episode of care, and whether our clinician believes that. And that data set will allow us to make the next episode better, which means scale matters. Yeah. I mean, and I would add, usually when we think about companies, we would say what makes

them a big company is, let's say, something like a patent. But the intriguing thing is about a data network effect never goes off patent. And with that patent window shrinking, there may be a day where people question whether a patent on a drug may be the way to build a big company or not. So with that said, I mean, Sean, for you in particular, when we think about a cure to disease like type 2 diabetes, we think about a drug. And, you know, you have in a sense of therapeutic company that's not a drug. And, you know, this is another area that I think a lot of people's initial reaction is like, it's a call bullshit. I mean, how could we start curing diseases without drugs? Yeah, it's funny. I mean, we feel this a lot when we're contracting because we're very unique to health care, kind of like a digital hospital, like the Cleveland Clinic for early carded metabolic disease that has to have some of the same go-to-market elements and foundational assets and products as a drug company might. So, you know, we need to kind of pump out rich, you know, clinical trials, right? But we have to contract as a hospital. So it's, you know, it's a bit about finding your, for us what really worked was finding, you know, a bunch of our early health plan partners that are like,

like, yeah, I bet we could make our systems work for that. And you kind of figure out some of the kinks and then they get on the phone with the next. Like, look, here's how we actually operationalized with our claim systems. Because you don't look, you don't fit in a particular bucket. And, you know, the health care system has evolved to create, you know, certain commercialization pathways like silos, you know, and talent for specific, for specific buckets. So, Raj, previously you and your team at Concurb, what do you think you're going to be able to bring from that space that concurres in that would have an impact

into the way you think about things of Ackley? For those who don't know, concur is a travel and expense company, so online travel booking and expense reporting. And actually, I think it's exactly the same as health care. No, I don't. It's very, very different. Let me start with the differences. Something I learned, it took me, it was two weeks after I took the job, not before, is that people talk about this $2.9 trillion

space as if it's one homogeneous space. Not really, actually. Not really. And so, you know, the opportunity to build a cloud-based solution that can span a Medicare Advantage population and an exchange population and a tri-care population and a fully insured book and it's different. And the solution needs to be different. The answer needs to be different. And you need to contemplate the needs of that consumer in a fundamentally different way every time. You may have a common tech stack and you need to have a common tech stack, but you need to configure the rest of that thing in a very specific way, very different than the world of travel expense. I think incrementally, it's a space that goes a little slower than a lot of other technology spaces go.

And as you spend more and more time, you realize that that's for a reason. Sometimes it's frustrating and a giant pain in the neck, and there's a reason for it. People's care is at stake. Massive processes need to be changed in order to change behaviors. And that takes time. In my opinion, as an entrepreneur, that means we have to leverage that fact, because we're not going to necessarily change all of that. So we have to leverage that fact to build our planning processes around the fact that change,

happen slower. On the plus side, culture always matters. Teams always matter. Cohesive views on operating plans with names and dates and getting things done always matter, and that hasn't changed a bit. One of the things I find really interesting about chatting with each of you is that your companies are coming from fairly different directions, but that philosophically, I think you to see things very much the same way. I don't know if it's easy for you to articulate sort of how you think the healthcare system needs to be changed and how you can sort of play a role. Yeah, it's funny. I think you have to suffer the learning curve in enterprise health care. It's like you have to read the primary lit, like go through the CMS risk adjustment rigs, like, you know, read the mobile medical device guidelines.

Like it's, you know, figure out how self-insured employer looks, figure out what TRICARE means, you know, what's the difference between TRICARE, you know, VA, you know, where, you know, Medicaid, how's that managed, Medicare. Like, it's massively complicated, you'll never be an expert. But I think I've always felt that there's no, like, disrupt from the outside shortcut. it's kind of disrupt from by working with the existing stakeholders and empathizing with them and understand, you know, what drives them and their needs. I think Sean just used the ultimate word, which is empathy. This is a space that in some way, shape, or form has on occasion lost its way, understanding that the consumer's at the middle of all of this.

Once that trust is created, there's opportunities to create scale. And so the companies that will succeed will fundamentally serve someone who's not paying for their own health care or who's not their buyer. But when you lose track of that buyer, when you lose track of that consumer, you lose your way. Unfortunately, there's some incumbents in the space who have lost their way and who've lost their way with 10 million, 20 million consumers being impacted. If you're thinking about where you guys are going to be in five years, who are your customers? What does your tech look like?

I mean, does machine learning come in more? What is your vision for how things change as the years go by? You know, massively personalize, you know, one top shop for obesity-related crunch. disease. I mean, these are conditions that need to be helped between visits, that require behavioral and clinical personalization on top of a common platform. And historically, behavioral medicine has been tough to measure because it's been delivered in person. So, you know, you can't quantify the different aspects that matter. And then commercially, you know, I was talking at, you know, the company is, you know, I want in five years, 80 percent of Americans in the U.S.

to have us in their medical policy. You know, statins are in the medical policy for probably 100 percent of America in the U.S. These sort of programs should be first line of care. So it becomes standard of care. Intrigingly, I mean, if you can prove out the greater efficacy, not being standard of care becomes unethical, which is an intriguing place for a

company to be. Well, I think we have time for one or two quick questions if people hadn't. Yes. So the question is, how do you get paid? So we, yeah, we can start. We kind did this from the very beginning, and it just felt like we should charge for the outcome.

And now, you know, five and a half years later, you know, it's still viewed as so incredibly innovative. But we don't charge any PEPM. So we regularly sign contracts for like 100,000 lives. We have no revenue until we get someone in the door. And then we've an enrollment fee that helps cover something different cross. And then it's outcomes-based pricing according to our clinical success, you know, which we love because we can model the data and, you know, essentially know how we're going to do.

It also aligns with a lot of the macro trends to pricing, you know, to pricing on outcomes. And we're a combination of that, meaning we'll charge a PM, PM fee with an incentive associated with outcomes. Great. Well, thank you. Please join me in thanking Raj and Shantra. Thank you.