Encore! EP355: The 5 Business Models for Digital Health Companies, With Nikhil Krishnan

This week, I am with my Aventria team on-site at one of our clients. We are holding a full-day workshop to help our client figure out who all across the healthcare industry they will need to get aligned with to achieve greater success in the market and how to handle all of these inevitably conflicting interests strategically and also potentially from a messaging standpoint.

I’m one of the subject matter experts who gets to pipe up during the part where we talk about all of these market dynamics, what everybody is up to, and who is going to want what so the client team can do their thing and get paid for it. Anyway, I say all this to say that this week, I am pretty darn busy but also thrilled to encore this episode with Nikhil Krishnan, founder of Out-Of-Pocket, and one of our most popular episodes in the past 12 months.

My guest in this healthcare podcast is Nikhil Krishnan, who is the founder of the Out-Of-Pocket newsletter. I was talking with Nikhil, and we identified—or, more accurately, he identified—five business models of digital health. What makes each model distinct is a few factors. If you weren’t in the healthcare industry, you’d probably expect that I’m going to say that the biggest factor a business model must hinge on must have something to do with patient outcomes or care or something that has something to do with the hopes and lives of patients. Except no. Mostly, our models do not define themselves by attributes of their patients, except on one dimension: who is paying their bills.

Who is paying has enormous downstream consequences that I don’t think people outside of healthcare, or even people inside of healthcare sometimes, really appreciate. It’s because of all of the perverse incentives. It’s a tangled web we weave.

For example, let’s just say you’re a start-up founder trying to cook up your unique selling proposition. You can’t just decide you’re gonna lower costs and improve patient care as general constructs. Because let’s just say you do that—that’s your USP (lower costs and improve patient care)—and then you try to sell your thing to Medicare Advantage plans or large provider organizations.

Oh, right … Medicare Advantage plans or even commercial ones—they don’t care about the total cost of care. Neither do provider organizations unless they take on sufficient risk to care, and many do not.

In fact, as came out in that JAMA article the other day, it could be construed that entities such as these carrier health plans have a perverse incentive to see total costs of care go up. So right, you naively (you’re the start-up founder again in this case study, don’t forget) trot into some administrator’s office with a great something or other to reduce total costs of care—and you’ll get cast out upon your petard on the quick.

Every single day of the year in my world, I see people make this same mistake over and over again: not tailoring their product market fit to any particular market, with the recognition that some in this healthcare industry have a vested interest to see costs going up and some have a vested interest in costs going down. Either way, if we’re talking about large organizations here and even some small ones, the money wins over patient care. So sad to have to say that, but listen to EP351 with Dr. Eric Bricker and you’ll get all the context you need on that point.

Here’s the thing, though. I don’t know about you, but I can’t tell you how many digital health start-ups I run across where I look at their decks or have a conversation with a founder, and I ask who their customer is. Is it employers or health plans or … ? And they don’t know. They’re gonna figure this out later. I don’t get how to successfully do that. I’m indubitably wrong here given all of the pivots I hear about that seem to go OK, but the prospect of completely redefining my operational goals and operations and market positioning at some point in the future seems like a daunting and avoidable prospect.

I would be remiss not to mention, however, the number of really good mission-driven healthcare companies out there really trying hard to figure out how to create a sustainable business, a fair profit, while at the same time serving patients really well. There are companies adding value commensurate with the dollars that they come by, and I certainly applaud everything that they are doing.

At the same time, given all this, here’s a message for all of you VCs and private equity etc—people with money—out there. Let me quote Dr. Vivek Garg here (@vgargMD on Twitter): “If you’re financing care delivery without board-level focus on clinical outcomes, you’re part of the problem.”

So, let’s talk about these five business models that health and healthcare start-ups eventually settle themselves into after they figure out who their customer is. Nikhil Krishnan, my guest today, and I discuss how they can be financially viable and if we think they’ll actually be able to provide superior patient outcomes.

[Trumpets play here] In no particular order, this is what we’ve got for our five business models:

1. Completely avoiding incumbents, creating a cash-pay ecosystem
2. Better middleware (being the pipes, as I’ve heard so many times these past couple of weeks)
3. Companies serving incumbents either by being a virtual front door for them or disrupting the competitive landscape somehow
4. Joint ventures
5. Old-school digital health who are now incumbents in their own space

My guest in this episode, Nikhil Krishnan, has a bunch of things going on. He might be best known for his newsletter, Out-Of-Pocket Health, which you should certainly subscribe to. He’s also working on a healthcare 101 crash course to teach newcomers about the Wild West we call American healthcare. Besides all of this, Nikhil does some early-stage investing.

You can learn more at outofpocket.health and with Nikhil’s upcoming course.

Nikhil Krishnan is the founder/thinkboi at Out-Of-Pocket, where he’s trying to make the business of healthcare more easily understandable and (hopefully) entertaining. He runs a newsletter (yes, yet another one) and an online healthcare community and does some digital health investing on the side. He’s “extremely online,” and you can find him firing off obscure healthcare memes plus the occasional insight on Twitter at @nikillinit.

06:20 What are the different models of digital health?

08:05 What are the different motives for cash-pay digital health models?

13:54 “One of healthcare’s original sins is that every solution deployed has been a custom solution for the end user.”

14:19 How willing will these companies be to share their data with third parties?

18:07 “I don’t think selling tech to large incumbents is going to move the needle.”

21:14 “These companies, most of them are actually getting extra money for the more expensive stuff.”

22:58 How did joint-venture digital health business models come about?

26:37 Why do you see partnerships more on the payer/provider side?

27:29 Who are the old-school digital health companies that could be considered incumbents?

29:36 Why do so many digital health start-ups have a hard time pinpointing who will pay for their services?

32:10 “The ability to go through the idea maze is way faster now.”

34:55 “The field is wide open to help teach people how healthcare works.”

You can learn more at outofpocket.health and with Nikhil’s upcoming course.

@nikillinit discusses #digitalhealth on our #healthcarepodcast. #healthcare #podcast

Recent past interviews:

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Emily Kagan Trenchard, Dr Scott Conard, Gloria Sachdev and Chris Skisak, Mike Thompson, Dr Rishi Wadhera (Encore! EP326), Ge Bai (Encore! EP356), Dave Dierk and Stacey Richter (INBW37), Merrill Goozner, Betsy Seals (EP387), Stacey Richter (INBW36), Dr Eric Bricker (Encore! EP351), Al Lewis, Dan Mendelson, Wendell Potter, Nick Stefanizzi, Brian Klepper (Encore! EP335), Dr Aaron Mitchell (EP382), Karen Root, Mark Miller, AJ Loiacono, Josh LaRosa, Stacey Richter (INBW35), Rebecca Etz (Encore! EP295), Olivia Webb (Encore! EP337), Mike Baldzicki, Lisa Bari, Betsy Seals (EP375), Dave Chase