1. The 21st Century Cures Act makes “Real World Evidence” a buzzword in pharma and payer circles, and justifiably so
For the uninitiated, “Real World Evidence” (RWE) is a term that has received much attention and debate as a core component of the 21st Century Cures Act: a bill that received much press coverage in Q4 2016. The term refers to health care information about the use of a drug after it has been approved by the FDA and prescribed to patients in the “real world.” This data is usually derived from electronic health records, claims databases, and patient-reported registries. Given the several ramifications of the Cures Act, 2017 will see pharma and payers clamor to acquire solutions to harness the power of RWE, creating new revenue opportunities for incumbents and early stage companies.
Amongst its many regulations, the Cures Act speeds up the FDA New Drug Approval process while earmarking short term funding for other health related programs like NIH research, mental health, and Joe Biden’s cancer “Moonshot” initiative. The Act passed in overwhelmingly bipartisan fashion with a 295 – 14 vote in the house. Perhaps the most subtle, yet profound component of the law allows Pharma companies to do post-market launch research around “real world use” (read: off-label) of drug products. If data suggests positive outcomes of off label use, this evidence can be used to expand the indications of use for that drug. This game changer will allow biopharma companies to save tens to hundreds of millions of dollars as the previous standard practice of expanding indications required re-running costly randomized control trials.
In addition to expanding indications, there are a host of other biopharma use cases for RWE highlighted in the below QuintilesIMS schematic where the case is made for a Billion dollar opportunity per pharma client.
From a payer perspective, the impact of expanding indications will be immediate, but the looming hazard is the sheer volume of high cost, specialty drugs and biosimilars coming to market sooner than ever before. To mitigate the uncertainty of the value of new, high-cost drugs, Payers are turning to value based contracts powered by RWE. A great example is my former employer, Harvard Pilgrim Health Plan and their CMO Michael Sherman, who has pioneered a series of value based contracts for high cost cholesterol and congestive heart failure drugs.
Given the above catalysts, there is a clamoring in both biopharma and payer circles for solutions to harness the power of RWE. Answering this call are a score of companies who are focusing on “value based” therapeutics analyses. One exciting company with significant market traction focused exclusively on RWE is NYC based Aetion (Arrivi, Lakestar). The company, founded by Harvard pharmacoepidemiologists and Wall Street data scientists, is pioneering the concept of “Rapid Cycle Analytics” in healthcare. On behalf of its pharma and payer customers, the multidisciplinary team performs real-time simulated studies drawing on terabytes of distributed international data sets. With statistical precision, the company can perform comparative effectiveness studies and reproduce the results of large scale clinical trials with 10x the speed of traditional methods of database programming, statistical modeling, and analysis.
There are a handful of health tech analytics companies previously focused on biopharma market access, reimbursement, and R&D efficiency that are now reorienting around the RWE use case. Some notable early stage tech companies here are GNS Healthcare (Cambia/Echo, Alexandria) and Truveris (Canaan, New Leaf, First Round). In addition to these early stage companies, the Large HCIT Conglomerates (QuintilesIMS, Optum, Truven/IBM, Inovalon) and traditional consulting firms (Avalere, ZS Associates, Decisions Resources Group) are starting to devote significant resources to this emerging opportunity in RWE and are likely acquirers in this space.
Special mention in this category goes to Flare Portfolio company, Health Verity. The company is led by successful serial entrepreneur Andrew Kress, who sold his last health data start up SDI to QuintilesIMS in 2011. Health Verity is pioneering new ways for large healthcare enterprises to buy and sell rich healthcare data. By liberating, enriching, and marketing previously siloed patient data, Health Verity is on pace to become a market leading supplier of the RWE mentioned above.
2. Clinical Decision Support moves into the world of Prescriptive Analytics and finally takes root
The delivery of scalable, patient centered, evidence based clinical decision support (CDS) to entire populations has been viewed as one of the “Holy Grails” of health tech. This promise has led to a score of CDS companies being built on the way to creating a $500M market for CDS solutions. But given the universal appeal for CDS in the addressable market of providers and payers, some would argue that the opportunity has been largely undershot. In the following paragraphs, I’ll attempt to make the case for why 2017 is the year that CDS solutions begin to overcome their previous barriers and finally take root in the market through incorporation of big data and cognitive commutive resources.
It is estimated that up to 50 percent of medical care for chronic conditions does not adhere to evidence-based medicine/guidelines (EBM). This statistic is compounded by the fact that 86 percent of all US healthcare costs are a result of complications of chronic disease. When analyzing the high prevalence of non-EBM in chronic conditions such as cardiac disease, diabetes, and renal disease, its generally accepted that systematic adoption of patient centered EBM portends improved outcomes and potential cost savings.
CDS 1.0 saw the health tech industry simply digitize long lists of clinical guidelines into workflow tools. A common tech manifestation of this trend was the “order set.” Order sets are essentially checklists or protocols that direct a clinician to order certain tests and medicines when they encounter a patient with a certain clinical condition (e.g. A CHF or COPD order set). A notable company from this era was Zynx Health, co-founded by CDS Veteran and Cedars Sinai Chief Clinical Transformation Officer Dr. Scott Weingarten. Zynx was ultimately bought and sold twice, first by Cerner, and then subsequently to Hearst Media. Criticisms of this first wave of CDS companies was a lack of patient-centeredness. The guideline-based recommendations did not change from unique patient to the next, which led to providers decrying one-size fits all “Cookbook” medicine.
I would contend we are starting to see CDS 2.0 with early stage companies pioneering the relative new trend of Prescriptive Analytics. These new entrants are combining predictive population health analytics with that of evidence based guidelines and compiling these data sets to make patient-centric recommended interventions pertinent to a patient’s current condition. This new wave of CDS companies are using virtual data warehousing, natural language processing, and Cognitive computing to incorporate disparate data sets, determine causative factors and predict outcomes.
There are a handful of next generation CDS companies that are attacking varying elements of the care spectrum using the prescriptive analytics strategy. In the Care Management space, an exciting early entrant is the stealthy, NYC-based HealthReveal, founded by Dr. Lonny Reisman. Prior to seeding and starting HealthReveal, Lonny served as chief medical officer of Aetna after his start-up Active Health was acquired by Aetna for $400M. HealthReveal is predicated on the ability to identify individuals in a population who are not receiving evidence-based care, then recommending evidence-based interventions, called “Reveals,” to the responsible clinician or care manager. Two other notable players in the care management space are venture-backed Lumiata (Khosla, Intel, Sandbox) and Atlanta based Jvion (Eastside). Led by CEO Ash Damle, an MIT trained data scientist, Lumiata company is pioneering the use of AI to identify populations that are at highest risk of adverse clinical outcomes, and directing care management through the codification of the world of clinical evidence. Jvion is harnessing their cognitive clinical success machine to serve a variety of use cases from preventing readmissions to driving success in value-based payments.
Two companies that are exclusively focused on CDS at the patient bedside through integration with Providers’ EHR and ordering systems are Stanson Health and PeraHealth. Stanson Health (Cedars Sinai), co-founded by previously mentioned Scott Weingarten is a continuation of his work at Zynx. Stanson attempts to reduce low value and unnecessary care by pinging clinicians with context-driven alerts and prompts at the point of care. PeraHealth (Mainsail) provides real-time CDS tools that are based on the Rothman Index: a validated clinical measure of patient condition/stability based on 26 independent variables. With an installed base of 80 hospitals, PeraHealth helps clinicians better predict and anticipate transitions in care, readmissions, and morality.
There are a host of large legacy players who will continue to speak to the opportunity in clinical decision support, most notably the large EHR Vendors (EPIC, Cerner, Allscripts, Athenahealth) as well as HCIT stalwarts (IBM/Watson, Optum). Given the platform nature of these companies, it is likely that they will be acquirers of these next gen CDS models that will continue to come to market in 2017.
3. MACRA spells the end of the standalone primary care provider and health tech looks to fill the void
In late 2016, CMS overrode the way Medicare physicians received payment with the passage of MACRA (Medicare Access and CHIP Reauthorization Act). The legacy approach to physician payment, known as the Sustainable Growth Rate (or “doc fix”), was based on a fee for service backbone. MACRA details how physician payment and its adjustment over time will occur after 2018. These payment adjustments will be based on two value-based criteria: involvement in Alternative Payment Models (APM – such as ACOs and CMMI demonstration projects) and a Merit-based Incentive Payment System (MIPS). With MACRA reporting to begin in 2018, I predict that 2017 will see increased market adoption of health tech solutions to manage and automate primary care operations.
Prognosticators familiar with nominated HHS Secretary Dr. Tom Price’s preferences predict that MACRA will remain unchanged in the new administration given its broad bipartisan support. What may change though, is shifting of mandatory APM rollouts such as the CJR (Complete Joint Replacement) demonstration project and cardiovascular bundles to optional/voluntary participation. This switch to voluntary participation is possible because the APM component of MACRA is a bonus payment until 2026, when it then becomes a requirement and a lion’s share of the payment adjustment schedule. The below chart shows the dollar flows in typical APM structure for the average PCP.
For the next 10 years, MIPS (Merit Based Incentive Payment System) will become the required, default system of clinician payment adjustment. The MIPS adjustments start at a (+/-) adjustment of 4 percent of Medicare revenue, but ultimately grow to (+/-) 9 percent by 2022. Said another way, a clinician can stand to gain a bonus or a dock in pay equal to the adjustment figure in a given year. The MIPS system is based on four components of reporting of care of varying significance: quality, value-based payment practices, meaningful EHR use, and clinician improvement activities.
Compliance with MIPS reporting and achieving success in target measures creates a significant burden requiring dedicated infrastructure. Independent primary care groups will understandably struggle to comply and succeed in a post-MACRA world. Even large integrated practices will require new workflows given the potential 10-plus percent swings in Medicare revenue. Given the need for new infrastructure, I predict we will see the continued trend of consolidation of independent practices and entry by health tech/service start-ups offering MACRA compliance and optimization services.
The last five years have seen emergence of a spectrum of primary care practice management/value based care enablement offerings in the market. Three well-funded leaders in this space are Aledade(Venrock, GV, Biomatics), Village MD (Oak HC/FT), and Lightbeam Health (Hearst, 7 Wire). Y Combinator alum Able Health and Greenville based Chartspan (Iron Yard), represent new entrant, pure play MACRA enablement solutions. There are a host of start-ups who have pioneered Chronic Care Management (CCM) reimbursement code submission that are also well positioned to power MACRA compliance. Two notable players in this space are CareSync (Greycroft, Harbert, Merck GHI) and MD Revolution (Jump). I predict that this is just the tip of the iceberg, and venture investors will see a flood of new entrants combining aspects of the above business models to serve the growing need of primary care practices in a post-MACRA world.
4. Start-ups develop a “high risk” appetite and target “node” conditions in high risk populations such as Medicare Advantage and Dual Eligibles
Some would consider that the “First Act” of Digital Health innovation (2011 – 2015) was heavy on hype and light on substance. Quantified self was the battle cry with a focus on the “worried well” population who have relatively low average annual healthcare expenses of $4,400. Many entrepreneurs and investors bought in, with decidedly mixed results. Veterans from this era have learned that tech in healthcare requires a more utilitarian approach: there must be a valuable “use case” or core costly problem being solved to generate a willingness to pay (WTP). A great example of this WTP is care management in the high cost populations of Medicare Advantage and Dual Eligibles. By the sheer number of medical conditions in these populations, management is problematic with average total medical expense ranging from $10,000 to $30,000 per year. I predict that 2017 and the “Second Act” of digital health will see a continued trend of entrepreneurs gravitating towards the sickest and highest cost members of our population, delivering valuable tech enabled solutions for “node” conditions that drive costs for individual patients.
An interesting phenomenon that is emerging amongst many successful start-ups targeting high-risk populations is the focus on what I’m calling a “node” condition. These “node” conditions (e.g. a terminal illness, end stage renal disease, chronic pain, behavioral health, and frailty) are the most advanced in a patient’s medical history and serve as the cost driver condition for a patient. Because of this centrality, the specialty care team responsible for the “node” condition can best manage the total cost of care for the patient. This is the concept behind the “specialty medical home,” a model being piloted across the country. Many spectators have doubts as to whether specialist physicians can truly manage the total cost of care of patients, and entrepreneurs are rushing in. Early stage companies are designing full stack, tech-enabled services to manage these “node” conditions, and then inking contracts with payers/providers that allow start-ups to “go at risk” and participate on the upside of potential savings realized.
Two notable early stage companies managing care in patients with terminal illness are Landmark Health (Francisco Partners) led by former Accretive Investor Adam Boehler, and Nashville based Aspire Health (GV, Oak, Sandbox), co-founded by Senator Bill Frist. With the end of life period being the costliest period of all, these companies are providing palliative care services that dramatically lower costs as they aid patients and families transition from chronic illness to palliation.
An interesting early stage company attacking the high cost node condition of end stage kidney disease is Cricket Health (First Round, Boxgroup). Co-founded by former LinkedIn exec Arvind Rajan and Aberdare Partner Vince Kim, the company’s HOPE platform identifies patients at risk for advanced kidney disease and delivers a navigation service that educates and attempts to lower the cost of care for these patients.
Two additional node conditions that are often connected and have a high prevalence in these high-risk populations are chronic pain and mental illness. It’s well documented that patients with chronic pain have healthcare costs that are two to three times that of the general population. Two companies that are focused on delivering tech enabled management solutions to this population are MOBE and Axial. MOBE provides a unique solution for payers that identifies patients with chronic pain and delivers comprehensive CBT and coaching to improve health outcomes. Venture-backed Axial Healthcare (Oak, Sandbox, 406) is developing comprehensive analytic solutions that monitor prescriber and patient behavior to help navigate high-risk patients to receive care at centers of pain excellence (COPE). I’ve written extensively about behavioral health tech companies that are delivering much needed, cost saving solutions to these high-risk populations.
A final special mention is in the emerging awareness of the node condition of frailty. Although seen as a natural progression of aging, there is a medical diagnosis that corresponds to frailty known as failure to thrive. Many start-ups are now rushing into the frailty space to provide services to delay this gradual decline and in turn, preventing high cost complications. Two special early stage mentions in this category are Welbe Health and Attuned Care. Bay Area based Welbe (F-Prime) is implementing the much-acclaimed PACE program which provides Medicare reimbursement for delivering common activities of daily living such as meals, transportation, and home care assistance. Chicago-based Attuned Care is providing comprehensive care services for the high needs populations of Assisted Living communities.
I predict start-ups in 2017 will continue to hone in on node conditions, and will be rewarded as payers and at-risk providers look to the market to deliver best in breed solutions to their populations.
5. Health tech industry innovation will not waver over the next 4 years, it will subscribe to republican orthodoxy and free market forces
Most of the preceding predictions will be impacted by the election of a Donald Trump administration, and perhaps more importantly, a systematic republican transfer of power. Post the 2016 election, Republicans have the majority in both houses of congress: Senate (R – 52, D – 46, I – 2) and House (R – 241, D – 194). On a state level, there is a predominance of republican governors (R – 33, D – 16, I – 1) and republican controlled state legislatures (32 states – accounting for 61 percent of the population). This is important given that a likely GOP ACA replacement plan would leave much fine-tuning of policy to the states. It should be no surprise then that traditional republican policy will prevail, and prudent entrepreneurs and investors should prepare for that.
For the next four years, we should expect legislative reforms that reflect traditional republican principles, specifically: deregulation and less federal government oversight of industry, privatization of federal programs, and re-appropriation of funds from entitlement programs. We should expect a very active climate of legislation as both the legislative (Congress) and executive (Health and Human Services) branches of government promise to enact healthcare reform. The key representatives of both branches have made attempts to replace Obamacare and are on record regarding their wish lists. Representing the legislative branch, Speaker Paul Ryan has spearheaded a concerted effort on behalf of his congressional caucus and think tank groups to author his “A Better Way” series for his vision on the elements of a repeal plan. Representing the executive branch, HHS nominee Dr. Price has previously submitted his version of a replacement plan — Empowering Patients First Act, HR 2519 — four times in four different congresses. Finally, the last republican congress actually passed an ACA repeal bill – Restoring American Healthcare Freedom Reconciliation Act of 2015, HR 3762 — that was ultimately vetoed by President Obama. Ultimately the details of the ACA replacement plan will become clear in the months to come, but the essential elements of the plan will be held in the plans noted above.
And as expected, in joining my brethren of investor health tech bloggers, I am compelled to include my guesses at what replaces the ACA. Sticking with the trends approach, I’ve selected key items that will face either headwinds or tailwinds in the new congress. I’ve also included the sources that led to these predictions.
Overall, our team at Flare Capital is very bullish about continued value creation in the healthcare sector through traditional free market forces. Whereas the last eight years have seen healthcare innovation driven by the federal government, we believe the market will now become the leading driver of change. We predict that enterprises will attempt to improve their bottom line, gain market share, and achieve differentiation through continued adoption of innovative health tech and services. We believe that many big businesses will be built by providing solutions to this end for the multi-trillion dollar US healthcare market. We hope that this market-driven lens, combined with the preceding sector specific predictions, provides all participants a guide to navigating dramatic change in the coming year.
About the author: @DanGebremedhin is a Principal at Flare Capital Partners, an early stage Health Technology and Services focused VC Firm. He is a practicing physician at the Massachusetts General Hospital, and previously served as an Associate Medical Director at the Harvard Pilgrim Health Plan, and spent five years as an entrepreneur in the Health IT Industry.