During the gold rush of 1849, dozens of Americans sought their fortune in the golden hills of California. A few struck gold, but most lost everything in the pursuit. The real winners of the rush were not the ones seeking gold, but those who supported the fortune seekers in their quixotic pursuit.
Few today will remember the names of those who sought their fortunes through gold. But we all know the name of the one who made a fortune supporting the gold diggers with durable pants, Levi Strauss.
In much the same way that many sought gold in the mid-nineteenth century, many currently seek gold through healthcare technology, specifically the implementation of technology for optimizing clinical care. And the real winners, now as back then, were not the ones seeking novel technologies, but the ones supporting its implementation.
These would be the primary care clinics of the future, the ones that went from concept to national expansion in under a decade flat. They are the true success stories of healthcare innovation. Two of the most prominent names that come to mind are Oscar Health and Oak Street Health, the first being a hybrid insurer and patient technology platform and the second being a technologically advanced health care system of primary care clinics.
Both tout their successes to their ability to integrate technology with patient care, while emphasizing the former as a value driver for the latter. But a closer inspection reveals otherwise. In fact, upon detailed review, digital health technology is proving itself to be nothing more than fool’s gold.
In a recent investor meeting, Oscar struggled to demonstrate how its technological platform has any material benefit on patient care, let alone patient compliance.
Oak Street Health fared no better in its most recent investor meeting. The company did a masterful job selling its story of technologically advanced health clinics, while doing all it could to hide the fact that its clinics are mostly in the red.
Neither company is profitable, but that stopped neither from amassing hordes of venture capital dollars and growing into overnight unicorns. But now that they are fully grown and publicly traded, the two once stellar growth startups are struggling to make good on the promises that ushered in the initial investments.
This is because healthcare is not a growth industry. Successful healthcare companies that go public do so after years of steady, sustainable, cash flow positive growth. This neither defines the time horizon nor the growth trajectory of either Oscar Health or Oak Street Health.
The two are value companies masquerading as growth assets using digital platforms to create the pretense of a growth lever. But value creation in healthcare comes through effective patient care, which is best seen through incremental improvements, not rapid growth.
The acquisition markets seem to be recognizing this, even if the venture capital world remains fully immersed in this delusional model of growth. Telehealth provider SOC Telemed went public in 2020 but quietly went private in recent weeks. Analysts attribute this to a vast difference in valuations between the public and private markets, which makes sense when you analyze what each market emphasizes.
Public markets value strong cash flow and consistent growth. Private markets value sustained growth and may accept little to no profit for long time horizons, assuming a payout will eventually come. The trajectories of value are different because the two markets prioritize different forms of growth.
The bait and switch comes when health care companies, which are effectively value companies, attempt to pass themselves off as growth companies through the veneer of a digital interface. This may have worked for a time, but as markets are wont to do, the correction came quickly and swiftly.
The health IPO market has essentially shut down the first quarter of 2022, with only 16 IPOs so far this year, compared to 102 in Q1 last year. While some may attribute this to current market conditions, a more plausible explanation is that companies are looking for other ways to exit in order to generate a return on investment. For private, value based healthcare companies, this often comes as an acquisition or merger.
This has led to unique joint ventures with health companies seeking value in unconventional ways.
Embedded Healthcare, a behavior change platform created by prominent healthcare leaders Dr. Ezekiel Emanuel and Dr. Amol Navathe, was recently acquired by a value payment insurance company. The move does not make immediate sense financially as Embedded Healthcare is more of a decision-making platform, but the press release announcing the deal strongly hinted that value would be gleaned by correlating behavioral change with cost of care.
It seems the future of value creation for perceived-to-be high growth healthcare companies is, foremost, through acquisitions. This creates unique pressures for startup growth, and will shape how novel startups are formed and funded. The emphasis will be on clinical value, not financial return on investment.
This may seem like an obvious pivot, but the drivers of growth are investors, not patients, so financial considerations must always be assumed to matter as much as the clinical value itself. But increasingly, it seems the emphasis on traditional financial drivers of growth in healthcare is more fool’s gold than actual value creation. And the real value comes in accelerating clinical drivers of value.
This is market correction at its finest.