Looking Toward 2024

Yep, a predictions post

I’ve slowly been trickling out some thoughts about what might happen in healthcare, digital health, and health tech next year while resisting the urge to do a formal predictions post. Resistance, as they say, is futile. This past year was a challenging one for startups. Early-stage companies struggled to get funding and late-stage companies found exit opportunities scarce. Many are busy cleaning up their financials, streamlining business models, and trying to get profitable in anticipation of an IPO. The theorized M&A bonanza never fully materialized, but there’s still time for tuck-in acquisitions to fuel growth and put previously raised capital to work. Macroeconomic conditions remain a wild card with the expectation that interest rates will stay steady in the near term with possible rate cuts as early as Q2 2024. Whether that'll be enough to thaw a difficult market is anyone’s guess. Here are some of mine.

Big Retail + Big Bets = Big Pressure (+ Big Move?)

Big Retailers have made primary care (particularly advanced or alternative primary care models) their big bet. The gauntlet has been thrown with CVS/Oak Street, Walmart Health, Amazon/One Medical, and Walgreens/VillageMD. It’s still curious to me that these companies have chosen primary care as their entry point. Primary care is undoubtedly undervalued and underappreciated. Innovation, especially if it spurs high quality, comprehensive, patient-centered care, is welcome. But the economics of primary care in the US are challenging. It’s well established that hospitals and health systems use primary care to control the flow of patients to their facilities, ancillary services, and lucrative specialty care. So far, it appears Big Retail is counting on Medicare Advantage and value-based care (so much as it exists) to drive profitability and produce returns on their (significant) primary care investments. This strategy appears more dubious by the day. The future of Medicare Advantage is unclear, and delivering value-based care is difficult when you don’t directly control the downstream. Big Retailers ability leverage primary care to support other service lines (verticalization) is limited compared to traditional healthcare.

The short-term prediction here is that one of these retailers (I’m guessing Amazon) will attempt to overcome this limitation by acquiring a specialty care platform. As I’ve argued many times (biased as I may be) that MSK remains a tailor-made opportunity to begin constructing a “multi-specialty” offering. MSK is a large cost driver for alternative primary care and value-based models. For this reason, controlling utilization of MSK services is a particular area of focus. The rub — APMs aren’t great at MSK. Second opinion and virtual consult services can address some of these shortcomings, but APMs seem reluctant to bring MSK fully in-house. Partnerships with traditional MSK providers are an imperfect solution. Meanwhile, offering Orthopedic care directly unlocks many opportunities for ancillary income and allows tighter integration of services. The business case for MSK is strong — injections, DME, imaging services, physical therapy, and even ambulatory surgery center ownership.

It’s tempting to think that a Big Retailer would simply acquire one of the many virtual MSK startup companies. But doing so only addresses a small part of the equation and misses a much bigger opportunity. There are several Orthopedic MSOs offering the full spectrum of care thus representing a better investment and larger opportunity. Acquiring such a platform would be a bold move that would give an immediate leg up (pun intended) to whomever is willing to make it. I picked Amazon in large part because they seem best positioned to take such a risk. Walmart Health has been up and down with a high turnover rate amongst its leadership. CVS seems to have staked most of its chips on Oak Street and Signify. The appetite for another expensive move probably isn’t there. Walgreens has shut down some VillageMD locations and appears to be in the process of circling the wagons a bit. Amazon has the cash, and making such a move would immediately give them an advantage over the other Big Retailers (something they would covet when it comes to healthcare).

The long-term prediction is that we’ll someday look back on these moves into primary care as risky bets that largely didn’t pay off. None of these APCs have been profitable. The typical counterargument is that they’ve all been focused on growth mode to this point. Once scaling is complete, economics will improve. I’m not convinced. It’ll likely take years for any of these models to generate profits — board members, investors, and public markets may not have that level of patience. Retail pharmacies are already facing headwinds for their money-making PBMs, and negative sentiment towards Medicare Advantage is growing. There has to be another way to generate revenue here, and I’m not sure what it is (but it could be diving into specialty care).

Traditional Healthcare Makes A Comeback

It’s been a tough few years for traditional healthcare. The pandemic magnified the shortcomings of a failing system and laid bare frontline issues previously simmering under the surface. Supply shortages and staffing issues (burnout) have stretched limited resources even thinner. Inflation, rising salaries, and service interruptions negatively impacted bottom lines. Since 2020, things have looked pretty dire. But you can’t keep traditional healthcare down for long, and there are signs of a rebound. The most recent jobs report outpaced expectations with healthcare leading the way. A recent survey suggested that many nursing and medical students don’t intend to practice on the frontlines. The question is: what do they intend to do with these degrees? Is the goal to pursue roles with payors, startups, tech companies, consulting firms, etc.? If so, are there enough of these roles to go around? Is the grass really greener there? Healthcare still offers job security that rivals any other field. Growing efforts to unionize (and the wins of existing unions) mean that conditions are slowly changing. Things remain a little dicey for doctors, but nurses, nurse practitioners, physician assistants, and other allied health professionals are expected to play bigger roles in the future with more autonomy. While lots of challenges remain, my sense on the frontlines is that traditional healthcare is getting some of its mojo back. (Whether any tough lessons have been learned remains to be seen).

Along those same lines, digital health companies who expand their customer base and value prop beyond employers and health plans will be more likely to survive and thrive going forward. Of the many things that are a bit askew about tying healthcare to employment is the idea that your HR department or benefits manager is the place to go for access to medical care. While it's certainly a nice thing to have, I'm not sure most people think "I'm sick or hurt, let's see what employer has to offer." I'm curious as to the engagement rate of platforms that are offered as an employee benefit. (This is an area where Amazon Clinic may eventually have a significant advantage -- people already think of Amazon first when looking to buy something. Could the company become top of mind for easily accessible healthcare?).

Another problem is that an employee loses access to a digital health platform if they leave their company (assuming the new employer doesn't offer it). As far as I know, there is no COBRA for digital healthcare. (As a side note, this seems like a missed opportunity. Offering free access to the employee for a year would seem to be a simple way to open a sales channel into the new employer...but I digress). Selling to providers isn't easy, but building a provider network is going to be the biggest differentiator going forward and will unlock a key market. Patients do think of their doctor when they need care. And I'm guessing they're more likely to use a health tech product if their care provider supports and champions it. Unless they are moving out of the geographic area, patients (employees) often keep their medical team, even if they change jobs. Digital health companies and traditional healthcare often seem to exist in two separate worlds. (In MSK, you could even argue they've been a little adversarial). If the next phase of health tech is M&A, companies that can break this barrier and engage the traditional system may have a significant advantage.

Big Tech, Small Impact

Hopes that Big Tech would make a big splash in healthcare have all but faded. Google Health is no more, and the company has (perhaps wisely) pivoted its healthcare efforts to be more in line with what it already does well. Google Cloud, Youtube, and FitBit will be the focus going forward. Despite its July 2022 manifesto, Apple’s healthcare moves have largely failed to excite. The company’s internal struggles have been well documented, including culture clashes between clinicians and managers. Features continue to trickle onto the Apple Watch, but there is concern that more robust offerings such as continuous glucose monitoring or blood pressure measurements are far away. Amazon, despite the One Medical acquisition, has also had its struggles. Amazon Care gave way to Amazon Clinic (a more sensible but less ambitious offering). Smart home (Alexa) and wearable offerings (Halo), once thought to be a perfect entry point into consumer health, have fizzled. Microsoft, under Satya Nadella, has been deliberate and strategic in its business moves — healthcare is no different. The company purchased voice recognition company Nuance and continues to push its cloud service Azure as a key component of its healthcare suite. A recently announced partnership with inevitable EMR company Epic further demonstrates Microsoft’s savvy when it comes to healthcare. All these moves make sense, but none of them are likely to have the large-scale, high-level system impact some had predicted.

A not so bold prediction: AI is going to be Big Tech’s biggest area of focus in 2024. Microsoft has bet heavily on OpenAI and ChatGPT, Amazon has made several of its own healthcare AI moves, and Google has MedPaLM. Apple is conspicuously absent here. Sure, there is AI baked into what Apple Watch does, but nothing the company offers is on the same level as their competitors. Some are speculating that Apple (true to form) is taking its time with AI and quietly working on something special (though there is no concrete indication that this is the case). Apple involvement or not, artificial intelligence and machine learning look to be Big Tech’s next frontier in healthcare.

Here’s the bold prediction: healthcare isn’t ready for widespread adoption and implementation of AI. Competition is going to spur Big Tech to move fast, and traditional healthcare won’t be able to keep up. Yes, AI implementation in healthcare already exists. But the hype and excitement around this current wave of AI tools, products, and services (spurred by LLMs and Generative AI) risks repeating the same mistakes we saw in the salad days of digital health. There is still a disconnect between the needs, wants, and workflows of frontline healthcare and the offerings of technology companies. Failure to understand and bridge this gap has resulted in the struggles (and failures) of last generation health tech companies. We also would be wise to avoid repeating the mistakes of the last health tech hype cycle — addressed in the next section.

It’s Not You (Digital Health), It’s Me (Venture Capital)

It’s tough out there for startups. The venture capital and fundraising environment has whipsawed from free-flowing investment money (where it seemed having an idea and a good story was enough to raise at least a couple million) to a relative freeze (where revenue generation and a solid sales pipeline doesn’t guarantee funding). As has been well documented, zero-interest rate policy coupled with pandemic-fueled excitement about digital health’s potential led to an overheated market where valuations decoupled from reality. VCs have reportedly been recommending that early-stage companies shut down rather than face an uncertain future and slow decline. That still leaves Series C and later companies grinding forward. For investors, these companies have become too big to (completely) fail. As funds get late in their lifecycles, is it time to cut bait? Is there a viable route to an exit? Some will undoubtedly test the IPO market and see where the chips fall. Doing so will pull back the curtain on the viability and sustainability of business models, growth, traction, and (to a degree) impact. Good businesses will probably be OK. But, given the struggles of previously IPO’ed digital health companies and skepticism in a post-WeWork world, retail investors may not bite on the opportunity to be a part of the health tech revolution.

It’s hard to speculate on the financial strength of private digital health companies. However, it’s not hard to speculate that many, if not most, will struggle to live up to once lofty valuations. One viewpoint is that VCs dumping bad assets (rather than throwing good money after bad) could set the health tech movement back. The counterpoint is that digital health was due for recalibration and a return to earth. Pretenders will fade away while contenders will be well positioned — and everyone will be better for it.

Two predictions on exits: widespread M&A won’t materialize and IPOs will be dicey. On the first point, I think it’s more likely we'll see acquisition of certain assets (at a steep discount) rather than entire companies. Early-stage companies experiencing organic growth with well-controlled burn and tight operations will be the most attractive acquisition targets. It’s not clear how many of these exist. “Peek-and-shriek” situations (deep dives that produce unfavorable analyses) will keep acquirers wary. From an IPO perspective, expect roadshows and PR spin campaigns to raise awareness and put a fresh coat of paint on what may be a stale idea.

I’m really curious to see how many VCs stick around health tech going forward. Digital health certainly is no longer a darling. Many startup companies struggle and once hot sectors cool off — healthcare isn’t unique there. What is unique about healthcare are the long sales cycles, regulatory complexities, overwhelming inertia of incumbents/traditionalists, and culture clash between medicine and tech. These things aren’t changing any time soon. There are a lot of things about healthcare that are antithetical to VC ethos, especially as it pertains to technology. Once bitten, twice shy?

That said, there is room for optimism. I think 2024 will see some really great companies rise above the din and despair — backed by great investors who have true healthcare domain expertise and a commitment to the long haul. It’s not going to be about great founder stories and high-minded ideas not rooted in healthcare realities. It’s going to be about innovating care delivery, supporting frontline care, and adding technology where technology makes sense. A return to rationality will be well timed with a thawing of investment money as capital (eventually) becomes less expensive. Early-stage companies that can survive until then will prove their worth — both as an investment and as a viable solution.

Quick Hitters:

• General Catalyst will not buy a health system in 2024. Despite the big splash announcement, market conditions just seem too uncertain. I’m downgrading the whole idea from “Buy” to “Hold.” Cynics suggested that GC is simply looking to prop up its existing health tech investments by giving them a bespoke market. But that ship has probably already sailed.

• Mark Cuban will expand his healthcare efforts beyond pharma. He hinted as much on the Relentless Health Value podcast recently. In an Amazon-like move, Cuban will iterate within his own companies first.

• Direct care will continue to gain steam. Patients, employers, and doctors want it. The appetite is growing, and the tools are there to better support it. (I was going to write a whole section on this, but many others have predicted the same).

• Not to belabor the point, but 2024 will be a difficult year for Medicare Advantage. Hospitals are dropping it. Physicians are dropping it. The government is clamping down. The gravy train is very much at risk of leaving the tracks. The program can be salvaged by fulfilling its promise of better, more comprehensive, capitated care. But offering all the downsides of commercial insurance (denials, PA/UM) with reimbursement that’s often worse than Traditional Medicare (all while gaming risk adjustment) isn’t going to fly any more.

• On a personal note, I can’t explain it, but I have a really good feeling about 2024. Several of the endeavors I’m involved with are poised to take off. Some things that have been slowly brewing in 2023 I expect will take more definite shape next year. Thanks to those who have allowed me to be a part of their journey. More to come.