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Deloitte's Life Sciences & Health Care Blog

The five Cs of disruption

What’s shaping the future of health tech investment?

 

Health care technology investment in 2017 appeared to be all about convergence. In fact, there were no health tech IPOs at all that year.1 The focus seemed to be squarely on expanding industry footprints to gain economies of scale and more control over the continuum of health services.

However, as more established companies continue to concentrate on M&A and reorganizing versus investing in technological innovation, an opportunity for new entrants may have emerged. It is a white space that health tech upstarts are seeking to fill by taking advantage of disruptive forces in the marketplace, shaking up longstanding business models and methods of health care. And, it appears to be attracting the attention of the investment community.

The five Cs of disruption

To some investors, health care has always been a bit of a laggard when it came to the uptake of disruptive technology—with incumbent companies wary of cannibalizing established revenue streams by developing new digital capabilities. But many of those same investors are now taking notice of the opportunity this reluctance affords, with private equity and venture capital now flowing toward health tech upstarts.

As these upstarts gain a foothold, incumbents should better understand what’s driving disruption in the market today in order to help stay competitive. Here are five major forces to consider—or the five Cs—now shaping the future of health tech:

  • Consumerism: Many patients, who are picking up ever-larger shares of spend, are demanding greater control over their care, along with more value and information on which to base their decisions.
  • Consolidation: Scale is necessary for efficiencies and the feasibility of scale typically depends heavily on negotiation between those who finance, pay for, and distribute the care and those who conduct the research and development for new products.
  • Convergence: With payment and care models changing dramatically, some health care providers are acquiring or partnering with health plans and organizations that finance the industry, many retail pharmacies are acquiring or partnering with health plans, and some online retailers are acquiring health plans and becoming pharmacies.
  • Cost: The shift from fee-for-service to outcomes-based models is a major transformation, affecting everything from systems infrastructure to patient engagement.
  • Compliance: Increasing regulatory requirements are increasing the burden on many market participants, forcing the migration from often error-prone manual records and reporting to digital solutions.

These forces underscore the reality that health care now functions as an entire spectrum of stakeholders—from staff and suppliers to customers, patients, and regulators. Enabled by digital technology, many new players are cropping up to smooth over any friction within this ecosystem and serve stakeholders as they strive to interconnect. It’s no coincidence that the eight largest funding deals in 2017 involved health techs specializing in consumer health information.2

This is just one of the areas proving ripe for digital solutions in health tech. As such, incumbent organizations should carefully consider who their customers are, where their competition could come from, and what’s keeping other organizations from taking their business away.

Where to now?

For those health techs that find the right formula, the future is likely to be bright. And if the dearth of IPOs continues, M&A activity could pick up as health techs mature and investors seek to exit.

This doesn’t mean incumbents don’t have to prepare for the impact technology can have on the marketplace. It can be critical to have an effective management team in place that can respond to disruptive trends—along with systems, processes, talent, and governance that capitalize on digital technologies. Even more, companies should view operational performance through a lens that takes in the entirety of the health care ecosystem rather than just a traditional business unit perspective.

The fact remains that the disruption caused by technology is helping enable entrepreneurs and investors to carve out new spaces in the market as well as allowing nontraditional companies to gain traction. What incumbents should remember, though, is that the very same disruption offers them an equally significant opportunity to reinvent themselves.


1 “Financing health tech: Health care’s new frontier,” Deloitte
2 Rock Health Funding Database

Author bio

Peter, Deloitte & Touche LLP, leads the national industry practice for Health Plans across Audit & Enterprise Risk Services. He has experience in assurance and enterprise risk management; corporate and regulatory governance and compliance; internal audit; security, privacy and cyber security; and M&A. Pete works with strategic, operational and private equity buyers and IPOs, SEC registration statements/comment letters and organizational carve-outs/spin-offs. Pete joined Deloitte in 1989.