Tech Outregulates Regulators

I Just finished listening to a Freakonomics podcast episode, Regulate this!, that outlines the battle between local governments and peer-to-peer (P2P) services such as AirBnB], Uber, Lyft, and EatWith. Freakonomics interviews people on both sides, including cofounders of AirBnB, Lyft, and EatWith, as well as New York State Senator Liz Kruger.

Throughout the podcast, Kruger repeatedly highlights how P2P marketplaces aren’t regulating the users of their respective marketplaces, and thus consumers and bystanders could be adversely impacted without regulations and protections in place. She cites moving drug labs that operate via AirBnB; Lyft and Uber drivers that may not have insurance, and at-home chefs that may be intentionally or accidentally poisoning their guests.

The fundamental premise of Kruger’s argument is that consumers and bystanders must be protected, and that top-down government regulation is the best, and perhaps even only, way to protect consumers.

Her argument is by all means logical. She has hundreds of years of history backing her argument. Governments regulate industries to try to ensure fair outcomes for all stakeholders. But her argument also fails to account for a few of the most profound aspects of human behavior and sociology: the power of social norms and reputation and the power of creating transparency through technology.

These P2P-based businesses are by all accounts exceptional. They are each worth over $1B and are only a few years old. The market has proven that they solve real problems that millions of people face at spectacular scale. And like all businesses that operate at massive scale, there are a few bad apples left in their wake.

All successful P2P businesses are based on identity, reputation, and trust. Each of these services goes to extreme lengths to ensure a vibrant and healthy community:

eBay - after every transaction, buyers and sellers are asked to rate one another. Many sellers highlight their seller ratings in new and ongoing listings.

AirBnB - after every transaction, AirBnB offers discounts to guests to review their host. Hosts must review their guest before they can accept a new guest.

Uber / Lyft - Both services require that riders and drivers rate one another after each and every transaction. Neither party can partake in another transaction without rating the party from the prior transaction. Moreover, Uber and Lyft perform background checks on all drivers, require valid and updated vehicle inspections, and mandate a current insurance policy.

These businesses strongly encourage - and in some cases force - users to rate one another to build a trust-based community and marketplace. The reputation score tied to each party is based on the sum total of every single transaction each party has with the system.

On the other hand, when governments regulate businesses, they tend to review/approve businesses prior to opening, and on some periodic ongoing basis. In many cases, the business being regulated by the government knows approximately when the government may be coming by for a regulatory inspection.

In this light, it would appear that crowd-sourced regulation is actually stronger than government-mandated regulation. Crowd-sourced regulation is most certainly more granular, more frequent, and less prone to bias and corruption. Perhaps more interestingly, each of these crowd-sourced services also tends to offer better service than their respective traditional retail analogs:

Uber and Lyft drivers are known to be quite friendly and enthusiastic. Many offer complimentary water. Uber and Lyft both go to great lengths to build a community among their drivers and to ensure that drivers provide a great customer experience.

AirBnB hosts are generally warm and welcoming people and offer stellar traveler experience. I’ve used AirBnB four or five times. All of my hosts offered home-cooked breakfasts and bars for the road at fraction the cost of nearby hotels. This is perhaps largely due to self- selection of hosts, but is no less relevant. Hosts are thankful for the opportunity to earn money when they otherwise would not, and want to work hard to earn guests’ business in a competitive AirBnB marketplace.

These P2P marketplaces ensure and promote high-quality for every transaction by promoting accountability during every transaction. The government will never be able to regulate these services at this level of granularity because governmental approaches to regulation are intrinsically top-down as opposed to bottom-up.

Everyone, for all of our sakes, regulate one another!

CEO = Chief Worry Officer

I'm a first time founder. I've been fortunate enough to build a company supported by an ambitious, talented team. Together, our team has built a great product, proven its value with customers, and raised $5.4M in Series A financing off the back of our early success. For the first time in my life, I'm responsible for millions of dollars of other people's capital, and as such, I now report to a board. I'm a founder, and I can be fired. I'm learning a lot as I go.

I was recently talking with a friend (who I'll call Barry for the rest of this post) who's raised over $100M in VC financing. We've talked quite a bit about startup boards, and specifically, the board's expectations of CEO performance (not just my board, but all boards). It's pretty easy to overthink these issues. Barry provided a simple framework to think about my role as CEO: the board has hired me as Chief Worry Officer.

As Chief Worry Officer, my job is to worry about the business. I find that it helps to pretend the board hired me as an outside consultant to come in and "worry" about things. I have to demonstrate a realistic understanding of where we are as a business, highlight strengths and weaknesses, identify the problems we're facing, and outline how we're trying to solve them. The worst thing a CEO can do is understate and underestimate problems. As Chief Worry Officer, I must find, vocalize, and solve these problems.

I would love to provide an anecdote to substantiate the above, but we haven't been holding board meetings long enough for me to discuss board issues publicly. Although the framework is new, I love it. It forces me to worry about just a few issues, and to delegate everything else as part of the leveling up process. Today, I have 4 key issues that I'm worried about. I've written those 4 key items down in my task manager that stays open on the right hand side of my computer at all times. As chief worry officer, I've structured my thinking, meetings, and processes around solving the key issues the board has hired me to worry about.

I recommend this framework to all new VC-backed founders. Founders, worry. It's good for you :).

Looking At Field Service Through Google Glass

This post was originally featured in Field Technologies Online.

Why do enterprise customers of capital equipment demand guaranteed uptime? Because the capital equipment is mission critical to these organizations' revenue streams; when the capital equipment isn’t working, the organization is bleeding money and literally dying. Worse, nonfunctional equipment can put peoples' safety at risk (e.g. patient safety in hospitals when diagnostic machines are down). So when mission-critical equipment isn't working, businesses cannot function correctly. Executives quickly (and rightly) grow frustrated and money is burned. In other words, time-to-resolution (TTR) is critical in field service.

Therefore, buyers of capital equipment spend extraordinary amounts of capital to purchase service contracts that ensure maximum uptime. In turn, equipment manufacturers spend extraordinary amounts of capital to satisfy service level agreements (SLAs) to guarantee that uptime. These SLAs are supported by highly trained, specialized support teams who either fly to--or are located near--the customer's capital equipment for one simple reason: if things break, someone needs to be on site fast.

What if they didn't have to be on site? What if the customer could be supported remotely by a centrally located expert? Google Glass and other smart glasses are making this a reality.

Why Glass? Why not mobile?

For mobile, hands-on workers, smartphones and tablets promised a new paradigm in information access, process control, and remote support. To a certain degree, these devices have delivered. From an information perspective, workers equipped with mobile devices are better equipped than ever before. But smartphones and tablets suffer from one critical problem: they obstruct the worker's process. All the functionality in the world is somewhat less helpful to a worker if they're constantly interrupting their work to glance at, tap, and swipe on their tablet. Most notably, using video for remote collaboration is somewhat less useful if the tech must hold a phone in front of their workspace, occupying one hand and obstructing their view.

Glass, then, is the natural solution to this problem. It brings all the capability of the smartphone to the field, without the obstructions. Glass is voice activated, lightweight, and stays out of the field of view. Most importantly of all, the front facing camera means that a Glass-wearer can share their point of view with anyone, while maintaining their focus and the use of their hands. Every pair of hands in the field now has access to the expertise of the entire organization, in real time.

Perhaps more interestingly, this model can be extended directly to the customer. Particular for field service and repair of capital equipment, this has powerful effects: dramatically improved time to resolution, and lower cost to provide the service.

An Example: Diagnostics in Action

Acme corporation manufactures MRIs for use in hospitals. Pines Hospital in Smithville has an MRI from Acme. It runs about 12 hours per day and generates a total revenue for the hospital of $225,000 each day (or $15k/hour). Last Friday at 8:30AM, the MRI broke at Pines Hospital. It took 3 hours and 40 minutes before an Acme service technician could arrive and fix it. During that 3 hours and 45 minutes, Pines hospital lost $15,000 * 3.67 = $55,000.

Why did it take so long to fix the MRI? Because it took three hours for the nearest ACME support representative to make it from his home in Houston to Smithville. Upon arriving, the field service technician opened the back panel on the MRI, reset the device, re-installed the system settings, and ran a few tests to ensure the MRI was correctly connected back to all of the ancillary imaging and scheduling system. The diagnostic and repair process took just 20 minutes.

Enter Glass: The Next Generation of Field Service

Meanwhile, in an alternate universe, Acme had equipped their technicians with Glass.

In this alternate universe, things occurred differently when the MRI went down. Instead of calling on a telephone, the local Pines Hospital radiology technician put on a pair of Glass and initiated a video call. In seconds, the radiology technician was showing the ACME technical representative exactly what he was seeing and hearing as he walked around the MRI. With guidance from the remote Acme technician, the radiology technician fixed the MRI machine in 40 minutes. Although it took the radiology technician twice as long to complete the actual repair, there was no time lost in transport or logistics. In this alternate universe, Pines hospital only lost $15,000 * .67 = $10,000.

In other words, remote service workflows, powered by Glass, drove material savings for Pines hospital! Plus, the shorter overall downtime kept the hospital running smoothly: patients received diagnoses on time, staff went home on time, and schedules weren't pushed out.

From Example To Reality

This alternate universe is becoming reality! Already, industry leaders are adopting Glass to enhance their field service organizations--equipping both technicians and customers. At Pristine, we’re pioneering this reality, building software for Glass to power new field service workflows based on the "Wearable Worker.” Our customers are lowering costs, shortening time to resolution, and bringing ever more positive experiences to their customers. That’s the next generation of field service in action. Drop us a line to learn more.

The Entrepreneur Hustle

This post was originally featured on Forbes.

We live in incredible times. Young, inexperienced, naive founders without any connections or experience can raise millions of dollars from angel investors without a product, plan, revenue, users, or clients. My company Pristine is a testament to that fact – we recently followed the seed round described below with a $5.4 million Series A.

When we first started in May of 2013, my co-founder Patrick and I thought we knew what raising money meant. After all, we’d read about hundreds of financings on TechCrunch. It seemed like 20-something founding teams could get funded to build just about anything in Silicon Valley. VCs couldn’t find enough 20-somethings to quit their jobs and change the world.

We didn’t have a clue.

Through dumb luck, my blogging connected us with an anesthesiologist who ended up investing our first $100,000 in June of 2013. In the ensuing months, we raised hundreds of thousands of dollars in $25,000 and $50,000 increments from smart and dumb money without a demo, let alone clients or revenue. In retrospect, I can’t believe we raised when and how we did. We had nothing and we were entering an awful market — health care is 10 years behind in terms of technology. Why would investors think that physicians would be the first adopt Google Glass?

So how did a 23-year-old and 21-year-old in this space do it? In short, we hustled. Specifically:

Blogging

My New Year’s resolution for 2013 was to blog three times per week, every week, for the entire year. I succeeded in keeping my pledge, writing about everything I found interesting — human computer interaction on PCs, the strengths and weaknesses of Google Glass, why Macbook Pros are amazing, healthcare policy, macroeconomic changes in the healthcare landscape and more. Blogging led to a number of strangers emailing me, some of whom ended up funding Pristine to the tune of $250,000 and helped us find some of our first clients. One of those strangers was a physician at UC Irvine, who became our first client.

AngelList

This is an obvious choice, but one that I can’t stress enough. There are angels that scavenge AngelList just looking to invest capital. We ended up raising about $150,000 from cold intros via AngelList. We did however make one big mistake — we incorporated as a Texas C-corp instead of Delaware, which made us ineligible for AngelList’s syndicates.

Other Crowdfunding Sites

We were promiscuous fundraisers. We signed up for as many crowdfunding portals as we could find. RockThePost, HealthFundr, AngelMD, MicroVentures and others. Some of these portals didn’t drive any investment, but those that did drove an additional $350,000 in investment and led to paying clients. Although each portal may consume several hours’ worth of time, it was worth it to pursue every one. Founders, don’t hesitate to flirt with everyone.

Shameless Begging

Young, naive entrepreneurs aren’t selfish enough. Successful people who like to help entrepreneurs often ask how they can help, but entrepreneurs are too shy to directly ask for money. I wasn’t, and it worked. Whenever someone asked me how they could help, I would always ask, “Do you know any angel investors that you think might be interested in our space?” That question alone generated over $200,000 in investment.

…And a Few Less Successful Strategies

We also did a few foolish things. For instance, never again will I spend capital attending a startup pitch contest. We spent over $25,000 attending and winning a major pitch competition. What did we get? Nothing, except a temporary ego boost. If there’s a local pitch contest that you can participate in without spending any capital, you should attend to practice your pitch and network. But don’t spend a dime.

We also wasted an enormous amount of time meeting with VCs while we were at the seed stage. VCs will not fund first-time entrepreneurs at the seed stage, period. They receive too many pitches from seasoned executives to invest in an unproven team and will always wait until you demonstrate real traction.

But the most dangerous mistake of all was allowing an angel — we’ll call him Bob — to get actively involved in the business by taking a board seat. Bob was a first-time angel investor who led a syndicate of his friends to invest $300,000. A few weeks after investing, he got cold feet and demanded all of the syndicate’s money back. He had no legal basis for doing so, but threatened us with lawsuits. We sent the money back, but it was a serious morale kill, and a massive time and money suck (lawyers are expensive).

Moral of the story: Be cautious about allowing angels, especially first-time angels, to get involved in your business. Use them for advice, use them for their connections, and take their money, but be wary of anything else.

For first-time entrepreneurs, the fundraising process is confusing. There are no magic tricks, but there are some pitfalls that can be avoided. So long as you are incredibly passionate and have a business that could theoretically work, you can succeed. Let the fear of missing payroll coerce you into approaching strangers in person and on the Internet to shamelessly ask for money. If necessity is the mother of all invention, then fear of death is the mother of the entrepreneur hustle.

Pristine Raises $5.4M!

I speak for our entire team when I say that we’re incredibly excited about this milestone, and we’re ready to put this new financing to work. In service of that mission, we’re very glad to be working with our lead investors at S3 Ventures here in Austin to capitalize on our early success, expand our team, continue building our groundbreaking products, and grow our business in healthcare and beyond.

If you’re an avid reader of the Pristine story, you know that the last 18 months or so have been a whirlwind for us. Not so long ago, the notion of Google Glass in healthcare seemed fanciful to many. Now, that very notion is seen as a potential game-changer in healthcare delivery. I can’t thank our team enough for everything they’ve sacrificed to make this happen.

Mirroring Glass’s growth, Pristine too has come a long way in the last year and a half, as a company. We’ve gone from our first pilot to dozens of clients, from just Patrick and I to a great (and growing) team of 15, and (in true startup form) from my living room to a real office (pictures coming soon)!

As we open the next chapter of the Pristine story, I’d like to take this opportunity to thank all of you who have helped us along the way. We couldn’t have done it without you!

Aligning Incentives Across Disparate P&Ls

My company sells solutions that typically span multiple avenues of care. We’ve encountered a unique problem: incentives to improve care coordination rarely align when disparate P&Ls accrue to different players across the continuum of care. In other words, split P&Ls pose a destructive risk to care coordination and ultimately outcomes.

How does this play out in the real world?

Ambulances

Most health systems do not own or operate their own ambulances (Atlantic Health System and NS-LIJ being notable exceptions). Instead, ambulances are typically run by local governments or private companies. Why is this a problem? Many of the most critically ill patients arrive to hospitals via ambulance. Many of these patients are are in time-critical conditions. Ambulances should have the best tools to help save those patients and improve outcomes and suffering. All of the care that ambulances provide should be coordinated with the receiving hospital.

However, ambulances, especially publicly-operated ambulances, run on extremely tight margins; they can’t afford to invest in many new technologies. Hospitals won’t invest in tools for ambulances – even for at-risk patients – since hospitals won’t actually control the deployment of the technology to ensure they impact outcomes for at-risk patients.

But what if hospitals owned the ambulances that fed the hospitals? In this model, as hospitals move towards risk-based care-delivery models, incentives will be aligned to deploy mobile technologies into ambulances to improve time-to-care, diagnostics, and even triage patients to avoid hospitalizations entirely. Specifically, what if every ambulance was equipped with a mobile X ray, CT, EKG, ultrasound, and a suite of standard diagnostic tools (blood pressure, thermometer, stethoscope, etc? Upon arriving at a non-emergent patient’s home, the paramedics could locally diagnose and triage the patient with a virtual physician’s input and avoid non-essential ER admissions.

But that can only happen if incentives – specifically P&Ls – are aligned across the continuum of care.

Outsourced physician Management Services (e.g., EmCare)

Many hospitals contract with physician groups to staff service lines in the hospital. Although these groups provide real value – e.g., more flexible hours and operational processes – than employed physicians these groups also break up how P&Ls are accrued.

For example, many anesthesiologists align as a group to contract with hospitals. Within their practice, these MDs may find a new automated anesthesia monitor that enables more effective management of residents and CRNAs across multiple ORs. In turn, anesthesiologists should be able to extend the MD:mid-level ratio, drive improvement in patient safety, and make more money. But, concerns about damage, theft, and losing the hospital contract render these same anesthesiologists unlikely to ever buy the equipment themselves. Hospitals will also be reluctant to invest since they won’t accrue the financial benefits of improved labor productivity since the financial benefits accrue to the anesthesiologist group, not the hospital.

But Modularization Works In Other Industries

Indeed, most value-chain centric industries are highly modular. Each layer of the value chain can independently optimize itself and control how it interacts with the layers of the value chain above and below it. A few examples:

In the movie value chain, movie production studios don’t own and operate theaters; theaters are independent

In the retail value chain, retailers usually don’t act as distributors, and distributors don’t usually act as producers

With the exception of Apple (who by no means control the entire value chain), most of the computing value chain is modular; retailers like Best Buy have no hand in chipset design, chipset manufacturing, OEM design, OEM manufacturing, operating systems, Internet infrastructure, internet service providers, or cloud services.

Modularization In Healthcare Delivery: Can it work?

Healthcare delivery is not a linear value chain. Each player in the healthcare delivery system doesn’t build incremental, linear value on top of its suppliers. Rather, healthcare delivery involves the coordination of a breadth of disparate resources to A) diagnose, B) treat, and, C) manage chronic conditions / maintain wellness (these are the three different businesses that Clayton Christensen astutely observes in his excellent book, The Innovator’s Prescription).

Healthcare could perhaps be modularized if a certain set of providers acted to diagnose a patient, then handed off the patient to another set of providers for treatment, who in turn would transfer the patient to another set of providers whose job it was to manage ongoing chronic care. However, this arrangement is only tenable if: 1) the boundaries between these three different businesses are clear and distinct, and 2) the providers in each have a high degree of confidence in the “output” from their “suppliers” (e.g., an accurate diagnosis).

What are your thoughts? Have you seen other scenarios where disparate P&Ls lead to mis-aligned incentives? Have you seen risk-based payment models that successfully bridge disparate P&Ls?

Is The Future Of Smart Clothing Modular or Integrated?

OMSignal recently raised $10M to build sensors into smart clothes. Sensoria recently raised $5M in pursuit of the same mission, albeit using different tactics. Meanwhile, Apple hired the former CEO of Burberry, Angela Ahrendts, to lead its retail efforts.

And Google is pushing Android Wear in a major way, with significant adoption and uptake by OEMs.

There’re two distinct approaches that are evolving in the smart clothing space. OMSignal, Sensoria, and Apple are taking a full-stack, vertical approach. OMSignal and Sensoria are building sensors into clothing and selling their own clothes directly to consumers. Although Apple hasn’t announced anything to compete with OMSignal or Sensoria, it’s clear they’re heading into the smart clothing space in traditional Apple fashion with the launch of Health, the impending launch of the iWatch, and the hiring of Angela Ahrendts.

Google, on the other hand, is licensing Android Wear to OEM vendors in traditional Google fashion: by providing the operating system and relevant Google Services to OEMs who can customize and configure and compete on retail and marketing. Although Google is yet to announce partnerships with any more traditional clothing vendors, it’s inevitable that they’ll license Android Wear to more traditional fashion brands that want to produce smart, sensor-laden clothing.

Apple’s vertically-integrated model is powerful because it allows Apple to pioneer new markets that require novel implementations utilizing intertwined software and hardware. Pioneering a new factor is especially difficult when dealing with separate hardware and software vendors and all of the associated challenges: disparate P&Ls, different visions, and unaligned managerial mandates. However, once the new form factor is understood, modular hardware and software companies can quickly optimize each component to drive down costs and create new choices for consumers. This approached has been successfully played out in the PC, smartphone, and tablet form factors.

Apple’s model is not well-suited to being the market leader in terms of raw volume. Indeed, Apple optimizes towards the high end, not the masses and this strategy has served them well. But it will be interesting to see how they, along with other vertically integrated smart-clothing vendors, approach the clothing market. Fashion is already an established industry that is predicated on variety, choice, and personalization; these traits are the antithesis of the Apple model. There’s no way that 20% or even 10% of the population will wear t- shirts, polos, tank tops, dresses, business clothes, etc., (which I’ll collectively call the “t-shirt market”) made by a single company. No one company can so single-handedly dominate the t-shirt market. People simply desire too many choices for that to happen.

OMSignal and Sensoria don’t need to worry about this problem as much as Apple since they’re targeting niche use cases in fitness and health. However, as they scale and set their sites on the mass consumer market, they will need to figure out a strategy to drive massive personalization. Apple, given its scale and brand, will need to address the personalization problem in the t- shirt market before they enter it.

The t-shirt market is going to be exciting to watch over the coming decades. There are enormous opportunities to be had. Let the best companies win!

Feel free to a drop a comment with how you think the market will play out. Will the startups open up their sensors to 3rd party clothing companies? Will Apple? How will Google counteract?

If You Can't Beat Them, Fund Them!

This post was originally featured on EMRandHIPAA.

In Where Does It Hurt, Athenahealth CEO Jonathan Bush explicitly calls out a number of businesses that are disrupting hospitals. Specifically, these businesses are performing a single function – e.g. labs, imaging, birthing, urgent care – at a much lower cost with higher quality than general-purpose hospitals. These modular businesses are disrupting hospitals by ruthlessly focusing all of their operations around a single service line to optimize quality and reduce costs. This stands in stark contrast to hospitals, which generally try to be all things to all people (the antithesis of entrepreneurship and general business practices).

I’ve previously outlined how healthcare providers are struggling as they shift to risk-bearing reimbursement models. They’re straddling two dramatically different business models as they try to transform their businesses from fee-for-service to risk-bearing. Inverting a business with thousands of employees and billions of dollars worth of assets and processes is nearly impossible. This is even more challenging in a highly uncertain and fast-changing regulatory environment.

But what if there was a better way?

In the Innovator’s Solution, author Clayton Christensen describes how multi-billion dollar companies such as Apple, IBM, Johnson and Johnson, and Intuit have disrupted themselves. When faced with disruptive changes in their respective businesses, these incumbents disrupted themselves by:

  • Funding a separate operating division with its own P&L
  • In physically removed location
  • With dedicated employees who have no responsibilities to the old business model.

This formula by no means guarantees success, but it creates an environment in which the disruptive division can potentially save the business as a whole, so long as the disrupting business has the operating freedom to disrupt the parent. Employees shouldn’t be bound to the processes, assets, and values of the old business model.

How can providers disrupt themselves?

How can providers, in particular large hospitals and health systems, adopt Christensen’s disruption framework? By funding their disruptors! This strategy drives value across a number of dimensions:

1) Hospital management will have the opportunity to learn about the operational expertise necessary to modularize their existing operations at a lower cost

2) Hospital management will have access to insider information about their own disruption that they would otherwise lack. They can in turn use this information to make smarter decisions about their own businesses, and potentially buy out the disruptees if they become too disruptive.

3) Drive inbound referrals from the periphery to the hubs

4) Generate a financial return

A practical example

My company, Pristine, recently spent some time learning about urgent care centers. We wanted to sell urgent care centers a lightweight telehealth platform so they could beam specialists and hospitalists into the urgent care center. This would allow the urgent care center to generate more revenue by avoiding “leakage” while also generating more revenue for the consulting specialist, guaranteeing more referral traffic to the host hospital, and providing the patient a more convenient experience. All parties would win. The idea was perfect in theory, except…

We discovered that non-hospital owned urgent care centers generally dislike hospitals, and are in fact too proud of the quality of care they provide to patients at much lower cost. These urgent care centers know that they’re disrupting hospitals, but are holding that against the hospitals as a reason not to align interests. Similarly, the hospitals view the urgent care centers as a competitive threat and have no desire to do business with them.

The more I think about this situation, the more I’m convinced that hospitals should invest in their disruptors. A financial tie will massage the hard feelings that exist and create an opportunity in which community resources can be most effectively coordinated across the continuum of care. As we move towards risk-based models, hospitals will need to drive patients to the most capitally efficient cost center that can diagnose and treat the patient.

What are your thoughts? Do you know of any major health systems investing in their disruptors? Or of any health systems that are outright trying to disrupt themselves by establishing modular service lines themselves? (Banner Health and University of Arizona are doing this to some extent!)

Why Are Telemedicine Systems So Expensive?

This post was originally featured on EMRandHIPAA.

Like many other enabling-technologies in healthcare, telemedicine has vast unrealized potential.

If we make location completely irrelevant and can deliver care virtually, we can address the supply and demand imbalance plaguing healthcare. The benefits to patients would be enormous: lower costs and improved access in ways that are unimaginable in the analog era.

However, one of the many roadblocks to adoption is the cost of the legacy technology powering clinical telemedicine use. In this post, I’ll outline why the telemedicine systems are so expensive, even in the era of Skype and other free video-conferencing systems.

The Telemedicine Industry Is Old…School

Telemedicine as an industry has existed for about 15 years, although uses of telemedicine certainly predate that by another 10-20 years. A decade and a half ago, the foundational technologies that enable video-conferencing simply weren’t broadly available. Specifically, early telemedicine companies had to:

1) Develop and maintain proprietary codecs
2) Design and assemble hardware (e.g. proprietary cameras) and device drivers
3) Deploy hardware at each client site and train end users on its management
4) Build an expensive outside sales force to carry these systems door-to-door to sell them
5) Endure long, grant funding-driven sales cycles

Though some of these challenges have been commoditized over the years, many of the legacy players still manage and maintain the above functions in-house. This drives up costs, which in turn must be passed onto customers. Since many customers initially paid for telemedicine systems with grant money (that telemedicine technology companies helped them write and receive), the market has historically lacked forces to drive down prices. Funny how that seems to be a recurring theme in healthcare!

But, there’s a better way

Today, many startups are building robust telemedicine platforms with dramatically lower cost overhead by taking advantage of a number of technologies and trends:

1) Technologies such as WebRTC commoditize the codec layer
2) The smartphones, tablets, and laptops already owned by hospitals (and individual providers) have high quality cameras built into them
3) Cloud providers like Amazon Web Services make it incredibly easy for young companies to build cloud-based technologies
4) Digital and inbound marketing enable smaller (and inside) sales forces to succeed at scale.
5) To reduce the cost of care, providers are increasingly seeking telemedicine systems now, without wading (and waiting) through the grant process of yesteryear.

In short, telemedicine companies today can build dramatically more cost-effective solutions because they don’t have to incur the costs that the legacy players do.

Why don’t the old players adapt?

The simple answer: switching business models is exceedingly difficult. Consider the following:

1) Laying off hardware and codec development teams is not easy, especially given how tightly integrated they are to the rest of the technology stack that has evolved over the past decade

2) Letting go of an outsides sales force to drive crafty, cost-effective inside sales is an enormous operational risk

3) Lobbying the government to provide telemedicine grants provides an effectively unlimited well to drink from

Changing business models is exceedingly difficult. Few companies can do it successfully. But telemedicine is no different than all other businesses that thought they were un-disruptable. Like all other technologies, telemedicine must adapt from legacy, desktop-centric, on-premise solutions to modern, cloud based, mobile and wearable-first solutions.

The Health Insurance Demand Problem

This post was originally featured on EMRandHIPAA.

A family friend was recently admitted to the hospital after a traumatic motorcycle accident in Colorado. He’s not in great condition, but he’s hanging in there. In light of having just written this post about the cost of highly acute care, I couldn’t stop pondering about his health insurance.

Health insurance is a bizarre creature. Unlike other forms of insurance, people actually want to consume what they’re insured against, defying the very premise of the insurance model!

Confused? Let’s dive in.

No one wants to consume traditional insurance

People never file claims for traditional forms of insurance unless something bad has happened, like car or home accidents, natural disasters, or death (covered by life insurance). In some of these cases (like minor fender benders), the insured customer often elects not to file a claim in order to avoid a premium increase. When people do file traditional insurance claims, that means something sufficiently bad has happened, and the insurance system kicks in place to recoup the damages.

People do want to consume healthcare insurance

Healthcare insurance is a wildly different animal. Only a small percentage of total hospital admissions are highly acute, catastrophic cases. A large majority of the care delivery system services non-catastrophic cases, from preventive care to counseling, scheduled (and elective) surgeries, and skin rashes, for example. Patients want as much (non-catastrophic) healthcare as reasonably possible, and they want their insurance companies to pay for it.

This is a classic principal-agency problem. The person making financial decisions isn’t bearing the cost of those decisions; in fact, the person making financial decisions is empowered to blindly spend without thinking. To make matters worse, many healthcare providers encourage patients to consume costly diagnostics and procedures with little regard for value, knowing that insurance companies will pick up the tab.

Realigning incentives

As it currently stands, this system breaks most of the basic assumptions of capitalism: the principal-agency problem, pricing information, and ability to compare producers/providers.

Reducing demand and utilization of healthcare resources is impossible. Since patients are currently incentivized to demand unlimited care without caring about cost, supply will always find a way to satisfy demand. So, how can we realign the incentives to fix the system?

The only way to reduce demand is to make patients accountable for their own healthcare expenses. With the insurance customer suddenly conscious of the cost and value of their subacute healthcare consumption, providers will be incentivized to compete and offer lower costs.

Thus, insurance companies should provide patients “catastrophe-only” plans. These plans would fully and generously cover highly acute care needs, like trauma, cancer, or stroke care. However, like a vehicle insurance plan without comprehensive coverage, the cost of treating the medical equivalent of a keyed car (e.g. a purely speculative blood test) would fall to the individual.

As CEO of a company in the healthcare space, it pains me to know that I’m contributing to the healthcare incentive problem by providing employees with a traditional healthcare plan. But until healthcare insurers offer catastrophe-only plans, patients will continue to blindly consume. In fact, even the Affordable Care Act failed in this light; the national and state-based exchanges don’t offer a single catastrophe-only insurance plan. They are all bundled and are ripe for unbundling.