How Do Healthcare Investors and Payers Separate the Tools From the Toys?

December 6, 2016 Erin Righetti

Guest post by Nicole Fisher, Founder & CEO at HHR Strategies, Inc., Forbes Contributor

The healthcare sector does not behave like other industries when it comes to money. Early stage investing is minimal and the odds of capitalizing on a blockbuster drug or device is becoming ever slimmer. Next, the U.S. health system does not incentivize it and payers do not rush to financially support or reimburse the waves of new technologies flooding the market. Lastly, companies entering the market often fail to stand out from the noise of competitors, meaning that getting noticed by investors or being able to commercialize is near impossible.

In fact, according to Asher Rubin, Global Head of the Life Sciences and Healthcare Industry Team of Hogan Lovells, when separating the tools from the toys in digital medicine some of the first questions asked by potential investors are, “How will it be approved, or not? How will it be reimbursed? And will the industry even care enough to pay?” Therefore, health investors remain risk averse, and if the recent past has taught us anything, it’s that there are far too many options and an ever-changing industry that will ensure this trend continues.

Because landscape transformations due to technological advancements and policy shifts have made healthcare financing a Wild West compared to other industries, products and devices of real value have a hard time communicating their importance above the noise. The upside is that the products, devices and apps of impact have led to digital health and medicine progress in the last five years, attracting potential investors and payers. But the downside is that there are so many new items making similar claims, even the experts have a hard time determining the difference. 

At the recent Digital Medicine Connect conference in Boston, VCs claimed they see the value in getting ahead of growing trends such as digital health and mobile medicine. But they are taking cues from third-party payers like insurance companies, particularly in states with one primary insurer like Blue Cross Blue Shield or Kaiser, to see where the returns might come from.

They are also searching for products that are ready to be commercialized to the public and past the R&D trials, as they are more likely to succeed. This means getting funded early is very difficult for startups—that is unless they embrace the new world where M&A is replacing R&D, and the startup is willing to go in as a partner with the investor for commercialization. We’ve been seeing this more frequently as larger companies such as Johnson & Johnson and Google are willing to put money into supporting health startups and partner with them to roll out packages of products.

While VCs have never played in the health sector the way they traditionally do, the importance, interest and potential gain in the emergent health tech space is proving that VCs make good partners. And for startups, partnering with investors in novel ways can create all kinds of new opportunities to learn from their expertise and mentorship in financial investment, networking and intellectual property, and gain insight about the types of contributions that to help make commercialization successful in today’s market. This in turn decreases the risks for third-party payers and those who reimburse for new technologies.

The tides are turning as tools begin to distance themselves from toys in digital health. And, investors are beginning to see who is breaking away from the pack—not always because of technology or idea itself, but because of the collaborations and mergers that are ensuring a diverse and well-rounded team of partners and because of who is willing to reimburse for what.

Investors and payers are beginning to see above the fray and find their place in the digital medicine world. It is only a matter of time before they take bigger leaps in tandem with the people and organizations preparing for the future of digital health and with the third-party payers who are key to financial success. But as they slowly emerge, it is vital for startups in the health tech space to understand that risk aversion and uncertainty will not ease anytime soon—nor will policies change in the immediate future to support more reimbursements for digital health.

Therefore, the best way to find investors and payers in the current state of the health ecosystem is to seek them out as strategic partners.

Digital medicine companies need a business strategy to ensure their innovative ideas will get to market and to work together with other industry stakeholders to make the biggest impact. Make the necessary connections with decision makers and investors from the life sciences sector by attending Digital Medicine Showcase this January in San Francisco.

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About the Author

Erin Righetti

Editor-in-Chief, Insight

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