Following up on the HGP Health IT Market Evolution – Introducing the HGP Health IT Policy Evolution

June 14, 2016

Ever since the introduction of HITECH, the health IT market has evolved like a game of Whac-A-Mole. Vendors are constantly reacting to a steady mandate of feature requirements, alternative payment models, quality reporting, and compliance provisions. This reactive cycle perpetuates itself with each policy change. On the surface, one might get the impression that market forces are driving HIT innovation. While true to an extent, we believe this is a misconception that leads many companies to pursue misdirected strategies. The reality is that at this point in the market cycle health IT behaves more like a policy-based economy than a market-based economy.

Along these lines, the trend toward consumer-driven healthcare is a direct and indirect result of policy rather than consumer choice. Consumers are not choosing high deductible health plans, narrow networks, and individual or exchange plans that encourage their engagement and financial responsibility. Rather, the decision has been made for them by other stakeholders in the process, such as health plans, employers, and government mandates. Patients continue to be faced with the conundrum of rising costs, more restrictions, and more responsibility, but lack the information transparency to make informed decisions. These are not the characteristics of a market- and consumer-based economy. This complex mix of policy and market dynamics creates opportunities and challenges due to market inefficiencies, which stakeholders can choose to either exploit or solve.

The takeaway is that the underlying catalyst for purchasing decisions by healthcare stakeholders is often based on forces other than the free market. Profitability and revenue growth are key considerations, but profitability and revenue are as much about keeping up with regulatory changes as staying ahead of the competition. Money follows the incentives, and in today’s environment, these incentives are dictated as much or more by policy than by competitive behavior. This market complexity makes designing a go-to-market strategy as critical and as complicated as ever.

Relative to the volume of problems they aim to fix, health IT start-up economic successes are few because most fail to develop an effective go-to market and pricing strategy capable of aligning the conflicting stakeholder incentives that are unique to this complex market. One of the common mistakes is that companies predicate the business and pricing model on expectations of long-term market forces rather than near-term purchasing catalysts. While the companies’ solution may not be too far ahead of the adoption curve, the go-to-market strategy often is.

As we have looked at sustained, successful enterprises in the market, we continue to find that their initial focus was on solving a narrow problem that represented a significant pain point for their target customers. Once these businesses have a satisfied customer base and some meaningful revenue traction, they earn the ability to pursue additional expansion avenues that add to their addressable market and support the next stage of growth.

We urge innovators to approach the market pragmatically and not get carried away by idealism during this transitionary time of policy-based innovation. In health IT, disruption seems to come in increments versus all at once. We find that when health IT companies fail to achieve objectives (or founders get significantly diluted), it’s most often because the product or strategy arrives on the scene too early versus too late.

We also urge investors to temper their focus on “addressable market” and to focus more on stages of market development. While the non-healthcare technology investing model’s focus on market size clearly maintains relevance in healthcare, we have observed numerous situations where companies lose focus and complicate execution by targeting a “big” market rather than building the business on a series of small markets which collectively add up to a large opportunity.