April 17, 2014 – By Jean-Luc Neptune, MD MBA

Note To Reader – As some of you know I recently left Health 2.0 after a great three year run. Over the last few weeks I’ve spent time reflecting on my experiences and thinking about the future of digital health. This piece, which has been broken into three posts, is a distillation of my thought process and culminates in an idea for advancing digital health innovation. Today I’m publishing Part 1, and will be publishing the other parts over the next few days. I appreciate your thoughts and suggestions on how to move forward, so please feel free to comment. Thanks for your time. JL

Digital Health Is Taking Off – Believe The Hype

It’s a very exciting time in the world of digital health (or “e-health” or “health tech” or whatever term you’d like to use).  Back in 2007 when my buddy Ed Shin (now CEO/founder of Quality Reviews) and I launched our online clinical trials matching company, Healogica, nobody seemed to care about technology-focused health companies.  In “those days” everybody was obsessing about “Web 2.0” companies and the big ideas of the day: social networking, social media, user-generated content, etc.  Digital health definitely wasn’t sexy.


Fast forward a few years, however, and it’s amazing how much the digital health industry has evolved.  Until recently, I was the Director/GM of the Health 2.0 Developer Challenge program, where I worked with large health stakeholders and digital health innovators to solve interesting problems using technology.  Over the course of three years, I watched interest in digital health EXPLODE with thousands of individuals and many-hundreds of companies creating new products and services to address a wide range of health care problems.

Major pieces of legislation like the ACAARRA-HITECH, and America Competes are creating many new opportunities in digital health that simply didn’t exist before.  The excitement around the space is palpable and highly reminiscent of the mood in the early internet days (depends on your perspective, of course, but I’m talking circa mid-nineties).

You Want Evidence?  I Got Your Evidence Right Here!

To understand how much has changed let’s take a look at investment in digital health companies.  MobiHealthNews analyzed 10 years of publicly disclosed funding data (see graph below) for “patient-facing digital health companies”.  Their analysis showed that funding for digital health companies increased every year from 2002 to 2012 (except for a slight drop 2009), totalling $939 mm in 2012 (up from only $6mm in 2002).

While the Mobihealth data shows a funding dip in 2013, a report by RockHealth showed a 39% annual increase in venture funding for digital health companies in 2013(totalling $1.97 B), and recently-released data from Q1 2014 show an 87% (!) year-over-year increase from Q1 2013.  Health 2.0in a report using a more precise methodologyto determine funding levels (they include venture funding, angel funding, and other sources), showed that funding for the digital health sector increased from $1.61 B in 2012 to $2.31 B in 2013, a year-over-year increase of 43%.  Bottom line – a lot of money is being invested in digital health now and that amount is growing steadily.


What’s even more encouraging is that investment in digital health is now being rewarded with meaningful exits.  In the last month we had TWO digital health IPOs: Castlight Health (CSLT), the SF-based health transparency company, and Everyday Health (EVDY), the NYC-based digital media and content company.  By going public, these companies have shown that it’s possible to build a significant digital health company AND achieve a significant exit, something that many investors have been dubious about for a long time. An increasing number of acquisitions of companies like MapMyFitnessAvado, and Bodymedia has also strengthened investor confidence.

There are a number of other really well-positioned companies out there like ZocDocPracticeFusion, and Vitals that could also IPO or be acquired soon, and it will be exciting to see where they end up.  I believe that success begets success and predict that the strong financial performance of digital health companies will continue to drive investment and growth in the space.

Meanwhile, Back In the “Real World” Of Health Care

Despite all the money invested, all the new companies formed, all the talented people who have come into this industry, and all the hype, the truth is that very little of the innovation that we are collectively building is making its way into the “real world” of hospitals, clinics, pharmacies, nursing homes and other places where health care is delivered.  Why does this matter?  Well, if you want to innovate and slow the relentless upward climb in health care costs you have to go, as Willy Sutton (might) say, “where the money is”.  Where the money is (see table below) is in hospital care and professional services (almost 60% of total national health expenditures) – i.e. direct health delivery.


Ask yourself, however, what has changed at your local hospital or doctor’s office since the foundation of WebMD, the first big digital health company, back in 1996?  What percentage of doctor visits are booked online?  What percentage of prescriptions are filled online?  What percentage of provider-patient interactions happen virtually?  Ask yourself a similar set of questions about any other industry – banking, retail, entertainment – and you realize that health system that you and I experience every day is still phenomenally ANALOG.

I will admit that there has been some progress made in the use of technology to deliver health care, particularly in the area of electronic health records (EHRs).  A recent study showed EHR adoption increasing year-over-year across all provider group sizes (small physician office, large physician office, and integrated health system), with the overall adoption rate in 2013 being 61% (vs. 50.3% in the prior year).  I think everyone would agree that the adoption and use of electronic health records is a good thing.

The cynic in me, however, would like to point out that the increased adoption of EHRs has been fueled by big-time government incentive programs that won’t go on forever.  The part of me that “keeps it real” would also like to point out that the incentives have driven the adoption of antiquated legacy EHR systems that primarily allow providers tobill more aggressively, and don’t really improve the quality of health or the health experience.

Aside from EHRs I’m sure that there has been some progress made in other places, but overall I think it’s safe to say that we’re not anywhere close to where we need to be.

What Factors Are Limiting The Use Of Digital Technologies In Health Care Delivery?

In my previous post I argued that while there is a tremendous amount of excitement around digital health (signified by new company formations, investments, exits, etc.) very little of the innovation we’re seeing at the Health 2.0TedMedStanford/MedicineX conferences is making it into health care delivery “enterprise” environments (e.g. hospitals, doctors offices, etc.). What I learned from running the Health 2.0 Developer Challenge and pursuing my own startups is that the underpenetration of digital technologies in the clinical realm is a complex problem with many root causes.

Because the factors limiting digital health innovation (detailed below) are inextricably linked to the history, culture, financing, and organization of the health care industry I don’t think there’s ANY simple “silver bullet” solution that will dramatically accelerate digital health adoption in the short term.  That said, I do believe there are approaches that are working well and that can help us increase the pace of technology adoption, one of which I will detail in my next post.  I also think that by understanding the factors limiting adoption of digital health technologies, we can start to develop new and improved innovation strategies to accelerate progress.


At a high-level the factors limiting digital health innovation can be broken into those impacting providers (doctors, hospitals, health systems, and academic medical centers) and those impacting innovators (companies creating new technologies to help providers deliver care more effectively):

Provider Facing

  • Fee For Service Is King – In my view, the dominance of the fee-for-service payment model in the United States is the single greatest obstacle to the adoption of digital health innovations in the delivery of health care.  In the fee-for-service model providers only get paid if they can bill a third-party payor for a service that has been previously assigned a reimbursement code.  While telehealth visits (telehealth being arguably the most commonly employed type of digital health technology) are increasingly reimbursed by Medicare, Medicaid and private insurers, few other categories in the digital health space are eligible for third party reimbursement.  Therefore, providers have little incentive to use or try digital health tools to deliver care more efficiently, despite the potential benefits to patients.  CMS (Centers for Medicare and Medicaid Services) and other payors are currently experimenting with new alternative reimbursement models such as the Shared Savings and Readmissions Reduction programs.  These new programs are driving provider organizations to seek out and embrace technologies that may not be reimbursable, but can help them maximize the financial results from these alternative payment arrangements.  In fact, one of the hottest areas in digital health is the “readmissions prevention” sector where dozens of startups are building technologies to engage patients, monitor them at home, and facilitate communication with providers with the goal of preventing readmission to the hospital.  As alternatives to fee-for-service medicine proliferate we will hopefully see greater demand for digital health technologies in the clinic.
  • Risk Aversion – The health industry, in general, is very conservative and for good reason – when you’re providing care to human beings you want to make sure you’re limiting risk and avoiding anything that could hurt a patient.  In the United States there is also the ever-present risk to providers of medical malpractice litigation which resulted in $3.7 billion in payouts to plaintiffs in 2013 .  Providers are generally averse to any technology that hasn’t been thoroughly validated and approved for use (except obviously for new drugs and devices being tested in clinical trials), which makes it difficult for new digital health startups that often have no evidence to support what they’re offering.   In addition to lacking evidence of efficacy, many digital health products and services are further hampered by limited functionality and it’s not uncommon to see applications marketed that have more than a few bugs.  In an industry in which products are expected to work perfectly there is very little patience for “beta” releases and unstable prototypes.  In health care it’s almost always better to be safe than sorry.
  • Organizational Complexity – Another issue that plagues providers and stifles digital health innovation is the organizational complexity of many academic medical centers (AMCs), hospitals, and hospital systems (the org chart for UT San Antonio Health Science Center is illustrative). The typical AMC is an amalgamation of a teaching hospital (or hospitals), a medical school (often associated with a major university), a physician professional service group, and various research institutes (among other things).  Each component of this unwieldy organizational structure generally has its own leadership (often with some overlap), its own mission, and its own priorities.  Coordination of these different entities to support a new digital health initiative can be difficult, if not impossible, particularly as the number of stakeholders increases.  Other sources of complexity include legal and regulatory review processes that may not be optimized to consider new digital technologies, and budgetary approval processes that must go through multiple levels of review.  Even well-defined processes are complicated and proceed at a glacial pace in the typical AMC.  For example, most digital health pilot programs launched at an AMC will require IRB (Institutional Review Board) approval prior to launch, a critical step for any research protocol involving human subjects, but this process can often take months to complete.  Many large provider organizations simply can’t move at innovator pace, which greatly constrains new technology experimentation.

Innovator Facing

  • Health System Access – In addition to being conservative the health care industry is also very insular, with a clear distinction between “insiders”, those who have been granted access (via licensure or certification) to the inner workings of the health care system (i.e. doctors, nurses, administrators, etc.), and “outsiders”, which is pretty much everyone else.  Digital health companies need to get “inside” the delivery system if they want to work on the biggest problems (remember, almost 60% of health care spending goes through providers), but getting inside the typical health system, hospital, academic medical center, physician practice or clinic, however, is really hard.  At large institutions (think health systems), just navigating the organization and finding a decision-maker can be really difficult.  At smaller institutions (think doctors offices) the decision maker is generally heavily defended by an array of gatekeepers.  I have found that unless you have privileged access to the “inside” of the system getting to your target customers can be a long, expensive, and painful process.
  • Understanding The Issues – The $3 trillion U.S. health system is wickedly complex and difficult even for insiders to understand fully.  Because of the complexity of the system and because accessing the inside of the delivery system is so hard, it can be difficult for innovators to get an accurate read on what problems need to be solved.  If they can get a sense of the problems, entrepreneurs sometimes fail to understand the subtleties of the health system, like hidden incentives and arcane regulations.  In addition, innovators often fail to collaborate with all the important stakeholders (think patients, providers, administrators, etc.) and miss key user insights.  As a result, innovators may develop solutions that don’t solve real problems or don’t solve them in a way that benefits the relevant stakeholders.  Unfortunately, many entrepreneurs are RIGHT NOW building products and services for customers who don’t want or need them.
  • Survival – Many entrepreneurs, particularly those coming from the “lean startup” world, don’t understand that success in the digital health space is more-often-than-not a long term proposition.  Digital health companies require significantly more runway to succeed compared to other types of startups and also therefore require more funding.  In digital health everything will take longer than you think and will cost you more than you expect: you’ll have to build more security and privacy features into your product, you’ll need to hire high-quality sales people with deep relationships to sell your product, those salespeople will need more time to sell to large enterprise customers, and you’ll end up doing more legal work to understand issues like HIPAA, among other things.  Fortunately, digital health companies are raising more money now than ever before, which should hopefully increase the chances that new digital health innovations make it to the market.

This list of reasons for why technology is not making into the delivery system is by no means comprehensive.  There are likely many other reasons that I missed and I invite you to add your own thoughts in the comments section below.  The point I’m making, however, is that digital innovation is constrained by a wide variety of limiting factors that will not be easy to overcome in the near term.

Next Up: Thinking Out Loud About A New Approach To Digital Health Innovation – PART 3 (Coming Next Week). In my next post I’ll talk about the most successful innovation program I ran during my time at Health 2.0 and the implications for other digital health innovation efforts.


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