You are about to meet Jenna, a single parent raising her 12-year-old daughter, Nina, on the outskirts of a Chicago suburb. Jenna is in the wake of a bitter custody battle where her ex, Greg Casino, tried, but failed, to snatch Nina away.
Two years of living under a dark cloud of fear has taken its toll: At night, her mind races with questions: What if I lose my job? What if I died, who would raise Nina? Jenna is a surgical nurse, part of a neurosurgery team which specializes in spinal cord injuries. Because she is on call, sleeping pills for her insomnia cannot be taken – they would cloud her thinking.
“Nina, get down here or you’ll be walking to school!” yelled Jenna. “Coming, Mom,” Nina yelled back, as she and her brown lab, Boomer, raced down the stairs. “Did you feed Boomer?” “Well, I…”
Boomer was concession No. 1. Jenna, raised on a farm, believed that big dogs belonged outside. But when the divorce hit, and her daughter’s 10th birthday came, well, Jenna saw the joy in Nina’s eyes when a puppy jumped out of a basket and landed in her daughter’s arms.
Concession No. 2 was allowing Nina to feed Boomer hamburger with ketchup.
After dropping Nina at school, her guilt returned. “Am I spoiling my daughter because I brought her bad news father into her life? Or is Boomer my bribe, to outcompete her father?” She arrived at the Metra Station and boarded the train which whisked her off to her job downtown. As the train rumbled and shook, a stream of images – houses, trees, shops – soothed her mind and temporarily released her from the iron shackles of maternal guilt.
Work: With a wave of his hand her boss, Dr. Taylor, beckoned Jenna into his office. “Two weeks off, starting now, Jenna.” “Dr. Taylor, what’s this about?” “It’s about a 63-year-old man who is worried about his prized nurse, who is growing dark circles under her eyes.”
“My insomnia is tearing me down, I need help, but no meds.” Dr. Taylor gave her a card. Dr. Helms. “Go see him and ask for CBT-I.” “What’s that?” “Cognitive Behavioral Treatment for Insomnia.”
Office Visit No. 1: Dr. Helms began. “Your physician gave you a clean bill of health, so let’s start on the two test findings here: Insomnia and paranoia. What’s the suspiciousness about?” “My ex-husband tried to take Nina away, but when he failed, he made threats to hurt me. Also, since the insomnia hit, it’s like strange things happen – a window is left open, or I’d lock the front door and the next morning it would be open.”
Dr. Helms asks, “Do the police know about all this?” Jenna nodded, “Yes.” Dr. Helms handed her a packet. “This is your CBT-I booklet. Use the sleep diary to record the strange things. For the next 10 weeks, you will be learning the Sleep Scheduling Program, or SSP, which has these parts: 1. Establish a set rising time. 2. Go to bed only when sleepy. 3. No naps. 4. Observe the 15-minute rule – if you can’t sleep after 15 minutes, leave the bed, go to another room and read, then, go back to bed and try again.”
Office Visit No. 6: For the first time in years, Jenna was able to fall asleep. Her episodes of paranoia were also fading. Dr. Helms had found a pattern: twice a month, usually on a Friday at the end of the work week, Jenna felt like someone was watching her, especially at night.
Work: She had just arrived at work when Dr. Taylor announced, “gunshot wound, get prepped.” Jenna helped to pull the gurney carrying the patient into the operating room. But when she saw the face of the unconscious girl, she froze – it was Nina.
“Mom, Mom, come here.” Jenna jerked out of her nightmare and dashed into Nina’s room. “Boomer’s sick.” They raced to the vet, who after examining Boomer, came out and spoke. “Someone tried to poison your dog. But for reasons unknown, Boomer didn’t eat the steak that was laced with poison. All I found in his stomach was a tiny shred of meat. He’s OK to take home.”
Back at home, Jenna began to sense something was wrong. But this time, it was overpowering. She called Dr. Helms, but before she could speak, he blurted out, “I’ve been looking at the dates and times when you had the episodes of paranoia, and I wondered, are these the same Fridays when Nina has visitation with her father?” “Yes,” Jenna replied. “Today is Friday, does she have visitation with her father tonight?” “Yes,” Jenna said. “Has anything suspicious happened today?” “Yes,” Jenna said, as she explained what happened with Boomer. A plan was made.
That Friday night, Jenna went to bed at 10 p.m. At 1:30 a.m., she heard glass breaking downstairs. Within seconds, her front lawn was awash in cherry-red police lights. A man with a ski mask was cuffed and held by two burly officers. When his mask was removed, Boomer exploded with barking. There stood Greg Casino, her ex.
Conclusion:
1. Insomnia is now recognized as an independent disorder, with its own specific treatments.
2. Paranoia may not be paranoia. That feeling that, “something is wrong,” is a primitive but powerful way of keeping us safe.
3. Boomer’s diet of only eating hamburgers with ketchup saved his life.
(The content of this article is for educational purposes only and should not be used as a substitute for treatment by a professional. The characters in this story are not real. Names and details have been changed to protect confidentiality.)
ABSTRACT
Objectives: Hospitals must strategically build organizational capacities to succeed in bundled payment arrangements. Given differences between Medicare and commercial arrangements, capacities may vary between hospitals in Medicare vs both Medicare and commercial bundled payment programs. This study compared organizational capacities between these 2 hospital groups.
Study Design: National survey of American Hospital Association (AHA) member hospitals with experience in bundled payment programs.
Methods: We analyzed data from October 31, 2017, to April 30, 2018, collected from AHA member hospitals with bundled payment experience in only Medicare (Medicare-only hospitals) or in both Medicare and commercial insurers (multipayer hospitals). Survey questions examined capacity in 4 areas: (1) physician performance feedback, (2) care management, (3) postacute care provider utilization, and (4) health information technology.
Results: Our sample included 114 hospitals reporting experience in Medicare or commercial bundled payment programs. Both Medicare-only and multipayer hospitals reported high organizational capacities in performance measurement of physician-level quality and cost feedback and in incorporation of health information technology. More multipayer hospitals reported high capacity for coordinating hospital to postacute care settings (88% vs 52%). Although nearly all hospitals in both groups reported formalized relationships with skilled nursing facilities (98%), fewer hospitals reported such relationships with long-term acute care hospitals (83%) and inpatient rehabilitation facilities (80%).
Conclusions: Although they have similar capacity in a number of areas, Medicare-only and multipayer hospitals differed with respect to other aspects of organizational capacity.
Am J Manag Care. 2022;28(12):In Press
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Takeaway Points
A national survey demonstrated differences in organizational capacity between hospitals participating in Medicare bundled payment programs and those coparticipating in both Medicare and commercial bundled payment programs.
- Medicare-only and multipayer hospitals both have high capacity for quality and cost feedback, as well as for incorporation of health information technology.
- Compared with Medicare-only hospitals, more multipayer hospitals have high capacity for coordinating transitions from hospital to postacute care settings.
- Nearly all hospitals in both groups have formalized relationships with skilled nursing facilities, but fewer hospitals have such relationships with long-term acute care hospitals and inpatient rehabilitation facilities.
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Driven by a decade of policy and efforts by public and private payers to shift the United States toward value-based reimbursement, bundled payments have become a prominent nationwide alternative payment model. CMS has been at the forefront of this shift.
Between 2013 and 2018, CMS implemented the Medicare Bundled Payments for Care Improvement (BPCI) initiative, in which hospitals voluntarily accepted bundled payments for care episodes spanning hospitalization and up to 90 days of postacute care.1 As the largest completed US bundled payment program to date, BPCI has been associated with cost savings and stable quality for both surgical and medical episodes.2,3 Medicare has used these successes to model subsequent bundled payment programs, such as the Comprehensive Care for Joint Replacement4 and BPCI Advanced programs.5
Over this period, a number of commercial insurers also developed bundled payment programs.6 These initiatives shared the same underlying foundation as their Medicare counterparts: Hospitals voluntarily chose to accept financial accountability for the quality and costs of defined care episodes. However, commercial programs differed from Medicare’s BPCI program in several ways, including incentive design, extent of financial risk sharing, and covered populations.7
In both Medicare and commercial bundled payment programs, hospitals must invest in new organizational capacities to help transform care delivery in response to value-based payment incentives.8 Unfortunately, little is known about the strategies adopted by hospitals in Medicare vs commercial bundled payment programs.9 In this study, which is to our knowledge the largest survey of hospital experiences in bundled payments to date, we examined the organizational capabilities of these 2 groups of hospitals in 4 domains: physician performance feedback, care management, postacute care provider coordination, and health information technology.
METHODS
Survey
We analyzed survey data from the AHA-Penn LDI National Bundled Payment Survey, an online survey conducted between October 31, 2017, and April 30, 2018, among American Hospital Association (AHA) member hospitals identified by the AHA as having experience in voluntary bundled payment programs. The overall survey response rate was 38% (160/424), with 114 hospitals reporting experience with Medicare or commercial bundled payment programs and included in this analysis.
As described previously,10 the survey included questions about 4 domains relevant to an organization’s performance in value-based payment models. The domains were (1) physician performance feedback, (2) care management, (3) postacute care provider utilization, and (4) health information technology. Within each domain, respondents were asked to assess specific aspects of hospital capacity via 5-point Likert (“little to no ability” to “near complete to complete ability”) and other (“yes” vs “no” vs “unsure”) formats. The survey was pretested among study team members, AHA leadership, and several hospital executives.
Statistical Analysis
We focused our analysis on hospitals reporting participation in Medicare’s BPCI program. Among BPCI hospitals, we used hospitals’ survey responses about participation in commercial bundled payment programs to distinguish between multipayer hospitals (those reporting participation in both BPCI and commercial bundled payment programs) and Medicare-only hospitals (those reporting participation in BPCI only). Survey results were combined with 2017 AHA Annual Survey data to capture information about hospital characteristics.
Survey responses were summarized using percentages. We used χ2 tests to compare categorical variables and t tests to compare continuous variables. For 5-point scale questions in each of the 4 organizational capacity domains, hospitals were deemed to have high capacity in a particular area if they reported a 4 or 5 on the 5-point scale; otherwise, they were deemed as having nonhigh capacity.10 Non-Likert questions about capacity were dichotomized (yes vs no/unsure). Statistical tests were 2-tailed and significant at the 0.05 α level. Analyses were performed using SAS version 9.4 (SAS Institute). The survey was approved by the institutional review board at the University of Pennsylvania.
RESULTS
There were 88 Medicare-only and 26 multipayer hospitals in our sample. Multipayer hospitals tended to be larger than Medicare-only hospitals, and they were more likely to be located in the Northeast (Table 1). No differences were observed in ownership, urban/rural setting, teaching status, or safety-net status between the 2 hospital groups.
Physician Performance Feedback Capacity
Multipayer and Medicare-only hospitals did not vary with respect to most facets of performance measurement, monitoring, or feedback capacity (Table 2). More multipayer hospitals reported high capacity for monitoring clinical quality data compared with Medicare-only hospitals (81% vs 55%; P = .016), but there were no significant differences in the content of information that was provided to physicians. Most hospitals in both groups reported providing physicians with clinical quality data across all levels of care (health system, hospital system, practice group, and individual levels). Across both groups, the majority of both multipayer and Medicare-only hospitals also reported using insurance (81% and 77%, respectively), electronic health record (100% and 98%), and patient survey (96% and 94%) data to monitor clinical quality.
There were no observed differences in either reporting capacity or content of monitored cost data. The majority of both multipayer and Medicare-only hospitals reported high capacity with respect to cost monitoring, more commonly via hospital-level data (73% and 81%, respectively) than individual-level data (72% and 58%). Less than 50% of hospitals in both groups used patient-reported outcomes data (46% and 36%).
Care Management Capacity and Postacute Care Utilization Capacity
The 2 hospital groups varied in reported capacity for care management and postacute care utilization (Table 2). Whereas the majority of both multipayer and Medicare-only hospitals reported having integrated care management programs to target high utilizers and high-cost conditions (69% and 58%, respectively), more multipayer hospitals reported care management processes in place to ensure smooth transitions after discharge to postacute care settings (88% vs 52%; P < .001). Additionally, more multipayer hospitals reported efforts to reduce preventable utilization, including preventable postdischarge emergency department visits (77% vs 40%; P < .001), compared with Medicare-only hospitals.
Uptake of several strategies across multipayer and Medicare-only hospitals was high, notably following up with patients within 48 hours of discharge via telephone (92% vs 91%), appointing patient navigators or care transition coaches (88% vs 84%), and using home visits (69% vs 70%). However, compared with Medicare-only hospitals, more multipayer hospitals provided discharge summaries to primary care physicians (96% vs 63%; P = .004). Telemonitoring for patient follow-up was more common among Medicare-only hospitals (38% vs 27%; P = .002).
Nearly all multipayer and Medicare-only hospitals reported formalizing some type of relationship with skilled nursing facilities (100% vs 98%, respectively) and home health agencies (100% vs 99%), but fewer reported analogous relationships with inpatient rehabilitation (88% vs 77%) and long-term acute care (88% vs 82%) facilities. Although both hospital types reported highly developed systems for determining patients’ postdischarge need for skilled nursing facilities, it was more common for multipayer hospitals to report similarly developed systems for home health (77% vs 50%; P = .02).
Health Information Technology Capacity
Hospital groups did not differ in health information technology capacity. The majority of multipayer and Medicare-only hospitals used single electronic health records (73% and 77%, respectively), whereas a minority used multiple electronic health records (27% and 20%). Less than half of each (35% vs 43%) had the ability to apply risk stratification models to their patients using their electronic health record. Multipayer and Medicare-only hospitals did not differ with regard to ability to manage discrete bundles or episodes of care (42% vs 63%; P = .07), access outside provider data (65% vs 81%; P = .10), or conduct risk stratification and predictive risk assessment (35% vs 43%; P = .44).
DISCUSSION
This analysis demonstrated that although they have similar organizational capacity in a number of areas, Medicare-only hospitals and multipayer hospitals differ in key aspects of their institutional capacities. As these represent early descriptive data of organizational capacity among hospitals accepting bundled payments through multiple payers, several findings are noteworthy.
First, multipayer hospitals tended to have more developed systems to coordinate postdischarge care. Not only were multipayer hospitals more likely to have formal systems in place aimed at reducing preventable readmissions and postdischarge emergency department utilization, but they were also more likely to have programs designed to determine patients’ postacute care needs, proactively coordinate postacute transitions in care, educate patients prior to discharge, and reach out to primary care providers.
These capabilities may reflect increased salience of the incentives under commercial programs or greater alignment or integration between hospitals and postacute care providers. Alternatively, observed differences may indicate a dose-response relationship through which participation in programs through multiple payers drives greater innovation in postacute care management. Any differences in postacute care capabilities are particularly salient as lower levels of postacute care have been identified as a key driver of dropping out of bundled payment programs.11 Given the early descriptive nature of this study, however, future work should employ both quantitative and qualitative methods to further elucidate differences in postacute care between the 2 groups.
Second, compared with Medicare-only hospitals, multipayer hospitals reported greater capabilities related to providing physicians with real-time feedback on quality performance. Although all hospitals are incentivized to achieve certain quality performance under bundled payments, observed differences may reflect the fact that incentives are stronger when applied across multiple payer segments. Alternatively, trends observed in this analysis could reflect larger potential savings or stronger incentives in the commercial programs, or greater experience at multipayer hospitals with quality incentives—and, in turn, investments that can contribute to bundled payment success (eg, in data sharing capabilities).12 Future work is needed to investigate these potential dynamics.
Our data also suggest potential areas of capacity building for both hospital groups. Neither group reported uniformly developing formal relations with inpatient rehabilitation centers and long-term acute care hospitals (as they have with skilled nursing facilities). Given the considerable costs associated with both types of facilities, greater emphasis on formalizing institutional protocols and discharge criteria may become more important with time. Additionally, a plurality of hospitals in both groups had yet to provide physicians with real-time cost data on the individual or group practice level, instead favoring hospital-level data, which are less directly actionable for the individual. Although both hospital groups incorporated survey data about patient experience in physician feedback on quality performance, less than half in both groups reported incorporating patient-reported outcomes data.
Limitations
Our study had limitations. First, as with all surveys, it was subject to self-report and potential recall bias, as well as differences in how respondents may have interpreted questions or quantified capacity. Second, results may also have limited generalizability due to sampling strategy, focus on AHA member hospitals with known bundled payment experience, a 38% overall survey response rate, and inclusion of a subset of hospitals with bundled payment experience. Data availability precluded comparison of respondents with nonrespondents or non–bundled payment hospitals.
Third, our findings reflect a description of trends rather than an assessment of causal relationships. Additional analyses should be conducted to evaluate the relationship between organizational capacity and patient outcomes. Fourth, due to data limitations, this analysis could not compare and contrast differences between hospital groups with respect to value-based payment models or overall hospital incentive structures as wholes. These should be focus areas in future work.
CONCLUSIONS
Although they reported similar organizational capacity in a number of areas, Medicare-only and multipayer hospitals differed with respect to other areas of capacity. Future work should build on these descriptive data and use a range of methods to evaluate the implications of observed capacity differences.
Author Affiliations: Department of Medicine, Beth Israel Deaconess Medical Center (JU), Boston, MA; Department of Medical Ethics and Health Policy, Perelman School of Medicine at the University of Pennsylvania (ASN), Philadelphia, PA; Corporal Michael J. Crescenz Philadelphia VA Medical Center (ASN), Philadelphia, PA; Leonard Davis Institute of Health Economics, University of Pennsylvania (ASN, JML), Philadelphia, PA; Value and Systems Science Lab (LZ, JML), Seattle, WA; Department of Medicine, University of Washington School of Medicine (LZ, JML), Seattle, WA; University of Illinois at Chicago School of Public Health (JB), Chicago, IL; American Hospital Association (PDK), Chicago, IL.
Source of Funding: None.
Author Disclosures: Dr Navathe reports grants from Hawaii Medical Service Association, Commonwealth Fund, Robert Wood Johnson Foundation, Donaghue Foundation, Pennsylvania Department of Health, Veterans Affairs Administration, Ochsner Health System, United Healthcare, Blue Cross Blue Shield of NC, Blue Shield of CA, and Humana; personal fees and equity from Navahealth; personal fees from Navvis Healthcare, YNHHSC/CORE, Maine Health Accountable Care Organization, Singapore Ministry of Health, Elsevier Press, Medicare Payment Advisory Commission, Cleveland Clinic, Analysis Group, VBID Health, Advocate Physician Partners, Federal Trade Commission, and Catholic Health Services Long Island; equity from Clarify Health; and noncompensated board membership for Integrated Services, Inc outside the submitted work in the past 3 years. Dr Bhatt is a board member of Cook County Health. Dr Liao reports honoraria from Comagine Health, Marcus Evans, and Brown University, all outside of this work. The remaining authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.
Authorship Information: Concept and design (JU, ASN, JB, PDK, JML); acquisition of data (JU, ASN, LZ, PDK); analysis and interpretation of data (JU, ASN, LZ, JB, PDK, JML); drafting of the manuscript (JU, ASN, JML); critical revision of the manuscript for important intellectual content (JU, ASN, JB, JML); statistical analysis (JU, ASN, LZ); obtaining funding (ASN); administrative, technical, or logistic support (ASN); and supervision (ASN, JML).
Address Correspondence to: John Urwin, MD, Beth Israel Deaconess Medical Center, 185 Pilgrim Rd, Deaconess 3, Boston, MA 02215. Email: jurwin@bidmc.harvard.edu.
REFERENCES
1. Bundled Payments for Care Improvement (BPCI) initiative: general information. CMS. Accessed March 3, 2021. https://innovation.cms.gov/innovation-models/bundled-payments
2. Navathe AS, Emanuel EJ, Venkataramani AS, et al. Spending and quality after three years of Medicare’s voluntary bundled payment for joint replacement surgery. Health Aff (Millwood). 2020;39(1):58-66. doi:10.1377/hlthaff.2019.00466
3. Rolnick JA, Liao JM, Emanuel EJ, et al. Spending and quality after three years of Medicare’s bundled payments for medical conditions: quasi-experimental difference-in-differences study. BMJ. 2020;369:m1780. doi:10.1136/bmj.m1780
4. Comprehensive Care for Joint Replacement Model. CMS. Accessed April 11, 2021. https://innovation.cms.gov/innovation-models/cjr
5. BPCI Advanced. CMS. Accessed June 3, 2020. https://innovation.cms.gov/innovation-models/bpci-advanced
6. Glickman A, Dinh C, Navathe AS. The current state of evidence on bundled payments. LDI Issue Brief. 2018;22(3):1-5.
7. Song Z, Chokshi DA. The role of private payers in payment reform. JAMA. 2015;313(1):25-26. doi:10.1001/jama.2014.15904
8. Corrigan J, McNeill D. Building organizational capacity: a cornerstone of health system reform. Health Aff (Millwood). 2009;28(2):w205-w215. doi:10.1377/hlthaff.28.2.w205
9. Peiris D, Phipps-Taylor MC, Stachowski CA, et al. ACOs holding commercial contracts are larger and more efficient than noncommercial ACOs. Health Aff (Millwood). 2016;35(10):1849-1856. doi:10.1377/hlthaff.2016.0387
10. Liao JM, Clodfelter RP, Huang JJ, et al. Organizational capacity of hospitals co-participating in accountable care organizations and bundled payments. Am J Med Qual. 2022;37(1):39-45. doi:10.1097/01.JMQ.0000741980.70096.ce
11. Joynt Maddox KE, Orav EJ, Zheng J, Epstein AM. Characteristics of hospitals that did and did not join the Bundled Payments for Care Improvement – Advanced program. JAMA. 2019;322(4):362-364. doi:10.1001/jama.2019.7992
12. Freeman R, Coyne J, Kingsdale J. Successes and failures with bundled payments in the commercial market. Am J Manag Care. 2020;26(10):e300-e304. doi:10.37765/ajmc.2020.88503
The rift between hospitals and commercial insurers is age old. But a new survey shows the relationship isn’t going to improve any time soon.
The American Hospital Association (AHA) survey, released Wednesday, found that 78% of hospitals and health systems said their relationship with commercial insurers is getting worse. Less than 1% said their relationship is improving and the rest said it has stayed the same.
The survey included 304 respondents representing 772 hospitals. All of the respondents are members of AHA.
One of the main culprits behind the worsening relationship appears to be certain practices of commercial insurers, such as prior authorization. The report found that 95% of hospitals and health systems said staff time spent seeking prior authorization approval is increasing. Meanwhile, 62% of prior authorization denials are eventually overturned, the report found.
Aside from time spent on administrative procedures, costs may also be a factor in the relationship souring. A whopping 84% said the cost of complying with insurer policies is also increasing.
“Misuse of utilization management tools like prior authorization has several negative implications for patients and the health care system,” AHA said in the report. “Prior authorization denials can result in delays of necessary treatment for patients and ultimately lead to unexpected medical bills. The extensive approval process that doctors and nurses must go through adds wasted dollars to the health care system through overuse of prior authorization, inefficient submission processes, excessive requests for unnecessary documentation and the need to reprocess inappropriate payment and coverage denials.”
AHA also takes issue with claims denials, stating that commercial health insurers are “increasingly delaying and denying coverage of medically necessary care.” However, 50% of claims denials that are appealed are overturned, AHA said.
There are financial consequences to these delays and denials, AHA stated. The survey found that 50% of hospitals have more than $100 million in accounts receivable for claims that are older than six months, totaling $6.4 billion in delayed or potentially unpaid claims among the 772 hospitals in the survey. Another 35% of respondents said they’ve lost $50 million or more in revenue because of denied claims.
“These payment delays and denials for medically necessary care have serious implications for the financial stability of health care providers and compound fiscal challenges plaguing our health care system,” AHA said.
The report also provided several policy recommendations, including streamlining the prior authorization process and increasing oversight on insurers. Additionally, the organization sent a letter to the Department of Health and Human Services and the Department of Labor, calling for action against commercial payers.
“Health care coverage must work better for patients and the providers who care for them. We urge you to take additional steps to ensure adequate oversight of commercial health plans, including those offering Medicare Advantage plans, this open enrollment season,” the letter stated. “Individuals and families should feel assured that the plan they choose during open enrollment will actually be there for them when they need care.”
America’s Health Insurance Plans (AHIP) declined to comment publicly on AHA’s survey, but previously told MedCity News that commercial insurers’ practices are needed to reduce expenses for patients.
“Health insurance providers advocate for the people they serve by ensuring that the right care is delivered at the right time in the right setting — and covered at a cost that patients can afford. Prior authorization prevents waste and improves affordability for patients, consumers, and employers,” Kristine Grow, AHIP spokesperson, previously said. “Health insurance providers have a comprehensive view of the health care system and each patient’s medical claims history and work to ensure that medications or treatments prescribed by clinicians are safe, effective, and affordable for patients. This results in better outcomes and lower costs for patients.”
Photo: santima.studio, Getty Images
From left: Ayush Jain of Revolution’s Rise of the Rest Seed Fund; Ayse McCracken of Ignite Healthcare and INNOVATE Health Ventures; Max Rosett of Research Bridge Partners; and Dr. Hubert Zajicek of Health Wildcatters
When it comes to investment, including healthcare and biotech, companies in the Bay area, Boston and New York tend to get the lion’s share of venture capital. But in recent years there’s been greater attention to investment in companies beyond those regions. The Covid-19 pandemic also played a significant role as people were forced to limit travel and use Zoom to connect their In a panel discussion at INVEST Digital Health, healthcare and life science investors discussed investment strategies and why they are placing their funding bets in states like Texas, Indiana, Utah and Arkansas.
The panel, Investing between the coasts, moderated by Dr. Hubert Zajicek, CEO, partner and co-founder of Health Wildcatters, offered a window into how investors are finding companies that match their investment theses, even in states that are not thought of as startup hubs. The panel was sponsored by Lyda Hill Philanthropies.
“We were the most active investor in Arkansas last year,” said Ayush Jain, a senior associate with Revolution’s Rise of the Rest Seed Fund. The fund, which was started by Steve Case of AOL fame, has made investments in more than 200 companies in 40 states since 2017.
The video platform Zoom has made an indelible impact towards democratizing investment across the country, according to Ayse McCracken, a founder and board chair with Ignite Healthcare in Houston and president of eNNOVATE Health Ventures. Ignite focuses on women-led digital health and medical device startups, while eNNOVATE invests in a broad array of startups across the continent of Africa.
McCracken said it was one of the unintended consequences of the pandemic.
“[Zoom] has allowed us to connect with entrepreneurs all across the country and all across the world and match them with mentors across the U.S. All of a sudden, we were working with an expanded ecosystem coast to coast, and we were working with startups coming from all across the country. We have eight of the 22 companies [in our latest cohort] that are coming from the Texas market — San Antonio, Austin, Dallas and Houston, which is great. We’d love to see Texas continue to grow. Denver has been another location where we’re seeing a number of entrepreneurs come from, also Minneapolis.”
Max Rosett, a principal with Research Bridge Partners, conceded that Zoom has been useful for connecting with and keeping in touch with portfolio companies in areas that would have otherwise been costly to travel to from his offices in Salt Lake City.
“This is going to sound incredibly trite and yet it’s incredibly real. Now that it’s okay to have board meetings over Zoom, life is much easier,” Rosett said.
Research Bridge Partners, which focuses on life science companies, is trying to chip away at what it refers to on its website as the “geographic misalignment” of venture capital in the Bay area and Boston. It also calls attention to trends among larger venture capital firms of creating lab-to-market systems to advance ideas towards financial liquidity that make it tougher for midcontinent principal investigators to access, because these firms favor institutional brand and geographical proximity to their offices.
Although everyone is pleased that the worst of the pandemic appears to be over, Zajicek said that in the past two years the accelerator has received a record number of applications from all over the world, which has spurred the development of a hybrid program combining in-person and Zoom-based interactions with startups in its cohorts. It has added an international flavor to its startup portfolio. Add to that the accelerator’s advantageous base in Dallas, in close proximity to an airport with the most direct flights in the country.
“It has flattened the world in non-trivial ways,” Zajicek said.
Health Wildcatters recently moved its offices to Pegasus Park, a 13-floor building that offers lots of space for healthcare and life science startups to work and connect with investors and collaboration partners.
Jain agreed that Zoom can offer a useful complement to in-person meetings and has made it easier to foster relationships with startups. He emphasized the importance of regional startup incubator and accelerator spaces, which frequently host demo days and other events to bring investors and startups together. They can also prove useful for investors from out of town seeking to plug into the regional startup ecosystem.
“If there’s a city that you gravitate towards, whether it’s because of a particular industry strength, or a personal connection, those are factors to leverage when you build relationships in those cities and find deal flow there,” Jain said. “That’s something we lean on a lot. We’re not lead investors. So we rely on finding opportunities to invest in startups, mostly through local regional investors, accelerators, incubators, places like Pegasus Park, where there’s a ton of companies. There’s some institutions in other cities like this. I think finding those and really honing in on them and building relationships is important.”
After the dizzying pace of digital health investment in 2021, it’s helpful to assess what has happened so far this year and what activity this sector is likely to see for the rest of 2022.
According to this H1 2022 report from Rock Health, digital health funding activity has slowed, a trend that the industry is likely well aware of. Rock Health reports $10.3 billion was raised in the first half, which extrapolates to $21 billion for the year, a marked decline from last year’s total of $29.1 billion.
However, while a projected 27.6% drop in digital health funding is significant, we should be careful not to read too much into it. Activity in the first half of this year is disappointing only directly in reference to the unprecedented level of activity in 2021. This year’s total is very likely to surpass the 2020 total of $14.7 billion, which was higher than 2019’s figure. Looking at the longer trend, digital health funding has been on a strong upward growth trajectory over the past decade – driven by fundamental improvements in technology, an increasingly favorable regulatory environment, and actual realized value from digital health innovations. While 2022 will likely be a reset from the tremendous growth in digital health funding of 2021, this is a healthy correction and an opportunity to realign on core metrics.
Keeping that in mind, it’s worth examining some of the Rock Health findings.
Macroeconomic trends
While the decline in funding this year can be at least partially attributed to a return to normal, investment in digital health has been affected by macroeconomics as well. Though healthcare is relatively resilient compared to other sectors, it’s not immune to the larger forces at play, such as inflation, the risk of recession, and the uncertainty and supply chain disruption caused by war in Ukraine.
Some of the most impacted companies are those selling to large enterprises – including health systems and pharmaceutical companies – who are looking to prioritize their spending initiatives to only the top few with the strongest value proposition, greatest return on investment (ROI), and time to value. Within this environment, it is even more important for startups to be clear about their ROI – measuring and publishing this data when possible – and emphasizing this value to potential customers to ensure their solutions fall within that prioritized list of initiatives during this turbulent period.
Mental health startups
Digital health startups offering mental healthcare secured the top clinical funding spot in H1 2022, according to the research. However, that field is under some scrutiny.
While mental healthcare startups raised a combined $1.3 billion in H1 2022, only $300 million closed in Q2 2022. While there are many reasons for significant quarter-to-quarter variability, one can also look to the public markets where a number of companies in this sector have underperformed both the broader markets and their digital health peers (NASDAQ: PEAR, NASDAQ: LFST, NASDAQ: TALKW). While this sector holds tremendous potential, the fundamental question of how to effectively transform mental healthcare delivery – making it more accessible, personalized, and effective at scale – has yet to be solved.
As a result, as we go through 2022 and into 2023, I expect continued activity in this sector; however, we should also anticipate a step down from the peaks of 2021 and Q1 of 2022 as expectations moderate and valuations recalibrate, which may also lead to a wave of consolidation.
SPACs and M&As
The first half of the year saw a significant slowdown in digital health mergers and acquisitions (M&A), compared to 2021’s record activity. There also has been a steep decline in companies going public.
First, going public. We must acknowledge the relatively poor performance of some recent exits, particularly of firms that went public via special purpose acquisition companies (SPACs) that have affected the digital health sector, in some cases more severely than other sectors. To be clear, the vast majority of these companies are great businesses; however, in hindsight we were not seeing the same performance benchmark requirements for the average SPAC company compared to the average IPO company: namely, a strong, proven commercial business model, reliable quarterly forecasting, and well-established comparables, among other attributes. As a result, public investors were quicker to turn on these companies as the markets dropped and have cooled on SPACs more broadly.
The public market downturn has not spared companies that went public via the traditional IPO process, either. One sector that has received quite a bit of attention has been the tech-enabled services field, which includes major telehealth and hybrid-model care providers (NYSE:TDOC, NASDAQ:ONEM, NYSE:AMWL). During the market peak, many of these businesses saw market caps reflective of revenue multiples of high-growth, high-margin tech companies (20-30x P/S ratios); the recent correction has instead brought their multiples much closer to alignment with premium services businesses (2-4x). Which set of multiples is the more appropriate can be debated, but what’s clear is that this reset has changed how these companies are expected to spend and grow, their plans to go public, and also the thought process of M&A.
While we naturally expect a high-valuation environment to be a catalyst for M&A – acquirers can leverage high-value stock to transact a deal and acquirees are pleased by the attractive prices — we also can expect a wave of consolidation in the lower valuation environment. In particular, there are a large number of established enterprises with piles of cash who are eager to get into the healthcare space, but who mostly sat out earlier waves of acquisition due to high target prices. Just Thursday, we’ve seen the first major sign of this as Amazon (NASDAQ:AMZN) announced an agreement to acquire One Medical (NASDAQ:ONEM) for $18/share – a healthy premium to its recent trading price though below where it traded for much of 2021. As market prices continue to be attractive over the coming 12-18 months, I would expect to see significant waves of M&A ranging from large acquisitions to sector consolidations.
Looking forward to new opportunities
As with many investors, GSR Ventures had its most active investment year for digital health in 2021. 2022 and beyond will undoubtedly bring change as the macroenvironment shifts, valuations and multiples reset downward, and the mix of prominent and emerging digital health sectors undergoes rapid adjustment.
But most importantly, the need for the digital transformation of healthcare has not lessened; if anything, it’s become more pronounced. For as long as that need exists, there will be great opportunities to invest in companies driving that shift.
Disclaimer: Nothing presented within this article is intended to constitute investment advice or recommendation, and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by GSR Ventures (“GSR”). Any investment decisions shall exclusively vest based on his/her/its independent discretion and GSR will not be liable for any consequences thereof. Information provided reflects GSR’ s views as of a time, whereby such views are subject to change at any point and GSR shall not be obligated to provide notice of any change. Companies mentioned in this article are a representative sample of portfolio companies in which GSR has invested, which do not reflect all investments made by GSR. An alphabetical list of GSR’s investments is available here. No assumptions should be made that investments listed above were or will be profitable. Due to various risks and uncertainties, actual events, results or the actual experience may differ materially from those reflected or contemplated in these statements. Nothing contained in this article may be relied upon as a guarantee or assurance as to the future success of any particular company. Past performance is not indicative of future results.
Providers have sounded the alarm on healthcare’s workforce shortage in recent years, warning that the issue will have serious consequences for patient care and Americans’ collective health. The shortage has also recently gained the attention of national leaders — just two weeks ago, Surgeon General Dr. Vivek Murthy issued an advisory calling on the country to address health worker burnout, a key reason behind Americans’ decisions to abandon healthcare roles. Now, one of the country’s largest healthcare organizations has committed $100 million to addressing the crisis.
UnitedHealth Group will invest $100 million over 10 years in building the healthcare workforce, Patricia Lewis, the company’s chief sustainability officer, announced Wednesday at the Social Innovation Summit.
The U.S. could see a deficit of 200,000 to 450,000 registered nurses available to provide direct patient care by 2025, according to a McKinsey report released last month. Mercer research shows that the country also faces an estimated shortage of more than 3.2 million lower-wage healthcare workers, such as nursing assistants and home health aides, within the next five years.
UnitedHealth Group’s investment, made through United Health Foundation, seeks not only to address not only this shortage of employees, but also the healthcare workforce’s striking lack of diversity. Only 22% of Black patients and 23% of Hispanic patients have a provider of the same race, according to research from the Urban Institute.
The $100 million investment will sponsor 10,000 clinicians from underrepresented racial groups who are pursuing or advancing careers in healthcare. It is the single largest philanthropic commitment ever made by the United Health Foundation.
The foundation will provide funding to about 5,000 underrepresented students who are pursuing careers in primary care, Lewis said. Over four years, students will be able to get up to $20,000 for their education.
The rest of the funds will go to about 5,000 current healthcare professionals from underrepresented racial groups who want to advance their careers. The foundation will provide funding for physicians, nurses, medical assistants, mental health professionals and midwives who are seeking additional degrees, accreditation or certifications.
“When we think about diversity in the healthcare pipeline, we think about cultural competence,” Lewis said. “And that occurs when physicians are from similar backgrounds as their patients. We see data and evidence that suggests they have a better opportunity to build very strong relationships this way because they can relate to their patients’ experiences, and we see that there are better outcomes when that happens.”
Lewis noted that while $100 million may seem like a rather big number, it will not solve all of healthcare’s workforce problems, neither shortage-wise nor diversity-wise. She said her company made the investment to do its part in continuing to advance the healthcare worker pipeline so that 10 years down the road, the industry has more professionals and they look more like the patients they serve.
Photo: wildpixel. Getty Images
Nonprofits Want Reporting Separate From Commercial Mailers
The Alliance of Nonprofit Mailers (ANM) has filed a request that the Postal Regulatory Commission (PRC) direct the U.S. Postal Service (USPS) to report delivery service performance for Nonprofit Marketing Mail separately from commercial mail. And, when it comes to Nonprofit Marketing Mail, it was requested that regular mail be reported separately from political and election ballot mail.
According to Stephen Kearney, executive director of the ANM, the request adds that Nonprofit Periodicals’ service performance be reported separately from commercial Periodicals and that that nonprofit use of First-Class Mail for both outbound and return mail, including both stamps and Business Reply Mail be reported as a distinct category from other uses of first class mail.
The PRC issued an Advance Notice of Proposed Rulemaking to revise the Periodic Reporting of Service Performance. The regulator invited input into the process, which is largely driven by the new requirements in the Postal Service Reform Act of 2022 that directs the USPS to develop and maintain a publicly-available online “dashboard” that provides weekly service performance data for Market Dominant products, according to Kearney. It also mandates that the PRC provide reporting requirements for the USPS dashboard, as well as “recommendations for any modifications to the Postal Service’s measurement systems necessary to measure and publish the performance information” located on the dashboard.
“We believe that more granular service data will prove helpful to the nonprofit sector in gauging the value and effectiveness of mail, and in planning future mail programs,” Kearney wrote to ANM members. “Our requests are consistent with and part of our ongoing effort to enable the postal agencies to recognize and embrace nonprofit mail as an important and distinct customer segment and to increase the value of mail to our industry.”