#JPM16: Betting on healthcare instead of fretting the markets

I LOVE the annual JP Morgan Healthcare conference – I may be one of the few or crazy who say this after taking 59 meetings in four days.  But it’s always a great way to kick off the start of a new year in healthcare.

What’s better than getting industry leading founders, executives, investors, and thinkers all together in one city to talk about ACO, PHM, and PMPMs over a few G&Ts?

For sure, the hot topic of #JPM16 was the broader market.   The conference marked the worst start to the NBI (the NASDAQ biotech index) in more than a decade and many of the top digital health stocks were down 50% from their 52-week highs.   So, it’s not surprising that I was repeatedly asked whether we should expect a prolonged market correction, and if so, how long it would last.   I left my audience wanting:  Since I am not a public market investor, I’m not the right guy to ask.

But, as a venture investor, I spend a lot of time thinking about the future and the broad macro trends that will flourish regardless of near-term market fluctuations.   Here are some of the key ideas I took from #JPM16:

  1. The massive $1 trillion shift to fee-for-value is underway and here to stay – Healthcare reform is driving a massive transition from a fee-for-service to a fee-for-value (FFV) payment system. In the state of Massachusetts (one of the early leaders in this shift), most large health systems already receive 40% of their payments in some form of value-based schema. Forward-looking entrepreneurs and investors understand the opportunity in building massive businesses that help healthcare stakeholders survive and thrive in this value shift; by BVP’s count, there are more than 175 companies started in the last 3-4 years with a product suite and business model predicated on a fee-for-value payment system. These companies have collectively raised $4.5 billion and we believe there is a lot more funding of this space to come!  To kick off JPM week in San Francisco, Bessemer published a Fee-For-Valuescape which profiles companies that are driving this $1 Trillion transformation of the healthcare industry – http://www.bvp.com/healthcare


  1. While large insurers may continue to flee public exchanges, the next United or Aetna will be formed – The past few years have seen massive consolidation and change in the health insurance industry. Mega-mergers are commonplace as companies seek the benefits of scale to counteract the costs of increased regulation.  Just last quarter, the country’s largest insurer, United Healthcare, said they may pull back on the publicly regulated healthcare exchange. These changes are significant and create opportunities for new entrants like Oscar Health, Clover, Collective Health, and Bright Health to provide better healthcare insurance offerings and experiences for members.  The rise of new offerings makes sense in an era where consumer choice has become limited as consolidation continues.   And the size of the pie for new entrants is so large (e.g., United’s revenue and profits are twice as large as that of Google/Alphabet!) that the risks and costs of starting a new health plan are justified.


  1. While DTC stands for “Direct to Consumer”, the term will become synonymous with “Death to Companyin healthcare – As patients bear more of the responsibility and costs of healthcare decision-making it seems obvious that the companies that serve them best will win. At BVP we believe in the growing consumerization of healthcare and we’re “putting our money where our mouth is” with our investments in Liazon, Docutap, Welltok, ClearCare and most recently Docent Health.  Interestingly, while each of these companies have products and services designed to touch the end consumer/patient/member, they all pursue a B2B2C “go to market” strategy. The reason for this is clear – consumers still access the majority of their healthcare from traditional enterprises, whether that be a hospital or an insurance company or their employer. While this may change over time with the rise of high-deductible plans and increased out-of-pocket costs, healthcare investors will follow the age-old prover “follow the money”; and the majority of dollars in healthcare still flow from B2B2C not DTC.   Unfortunately, many first generation digital health companies failed to realize this key tenet in healthcare. Many assumed that great software and apps that helped the consumer make better healthcare decisions would be enough.   It wasn’t, and ultimately the best companies with great consumer-grade products (like a DoctoronDemand, Mango Health, etc.) pivoted to more of a B2B2C business model.


  1. The promise of personalized medicine will be slowed by FDA action on LDTs (Laboratory Developed Tests) – The sequencing of the first human genome 12+ years ago may be the greatest advancement in the last half-century. Since that time, we’ve seen incredible work in the field of genetics and genomics with the goal of moving medicine away from trial and error to a future where a patient’s treatment is tailored based on individually diagnosed pathology.  This is the promise of personalized medicine and there have been some great strides (recently with CAR-T therapies from Juno and Kite Pharma, PD-1 inhibitors from BMS and Merck, and others leading the $20B+ immuno-oncology wave).  However, the FDA looks to be cracking down on Laboratory Developed Tests (LDTs) and in 2016 we expect heavier regulation to arrive.  Unfortunately, as we brace ourselves for increased regulatory scrutiny, the negative impact of widely publicized questions around Theranos don’t help!  We worry that this may hurt the diagnostics industry and, more specifically, limit developments in personalized medicine.


  1. Software won’t eat healthcare . . . at least not anytime soon! – Venture money has poured into healthcare in the past few years, as people look at the aged, somewhat broken, and fragmented healthcare system and presume that all it needs is a little technology pixie dust to transform the performance of the country’s largest industry. “Software will eat healthcare” is a cute phrase that I hear often but one that, frankly, underestimates and misunderstands the breadth and depth of the problem.  Yes, the creation and adoption of modern technology will surely help and is much-needed, but healthcare—by its very nature—will remain a business driven by human interactions and so the best companies will be the ones that seamlessly interface technology with healthcare workers.  In truth, the best “digital health” companies (Athena, Evolent, Teladoc, Omada, etc.) are, at their core,  tech-enabled service plays.   Ignoring this, may result in healthcare eating software!