Inflation is soaring, stagflation looks likely, and an economic recession seems imminent. “A mild downturn may be followed by a painfully prolonged recovery” is how The Economist describes the near-term economic climate, which stands to severely impact healthcare technology buying and selling patterns and decrease available capital for tech investments; it also places a greater emphasis on digital health sellers to be able to clearly demonstrate the ROI and value of their products.
Digital health founders may be rightly focused on quality of care and patient outcomes, but those … [+] selling to incumbents increasingly need to consider the bottom line value their solutions create for their clients
Demonstrating ROI Is No Easy Task – Nor Should It Be
The good times have been really good for digital health sellers over the last decade, and increasingly so over the past few years. Even with recent pullbacks in 2022, digital health funding reached $6B in Q1 of this year (compared to $6.7B in Q1 of 2021), which is certainly nothing to sneeze at.
But with economic uncertainty comes increasing capital constraints, which stands to turn the longstanding burgeoning digital health market on its head in the years to come.
Gone are the days where digital health startups could sell based on stories and a promise. Now more than ever, digital health companies need to clearly demonstrate their value and prove a real financial ROI to the organizations they’re selling to – showing not only the value to patients and healthcare system, but to the buyer’s bottom line in both the short and long term.
Make no mistake: communicating value in this way is hard, in part because frequently different stakeholders within a healthcare organization have different (or partial) knowledge of how a digital health solution may impact their business. For instance, a CFO has different knowledge of her own business than a front-line clinician; both may be important when vetting a digital health solution. And just because a solution is compelling to one constituent does not mean it will ultimately be a smart business decision for the buyer, whether that’s a hospital, health system or other provider organization, or a payer or employer. This means the burden of proof is on digital health companies to explain how their solution(s) will help not only patients, but the healthcare organization itself.
Understanding Your Client’s Business
Renowned healthcare quality champion and Humana’s chief medical officer, Dr. William Shrank, is a proponent of an outcomes-driven approach to technology development. From pilots and studies to investing in data science, Dr. Shrank is an advocate for real-world evidence and doing the work to show how technology can improve patient care, quality, safety and outcomes.
But how does a given solution stand to help a healthcare organization financially? All too often, digital health companies aren’t (credibly) answering that question, if at all.
As the country shifts into a new economic reality, digital health companies should consider the following to legitimize themselves, their business, and the value their solutions bring to bear for buyers across the healthcare ecosystem:
1. Dive into financials to understand what business your prospects are in: Analysis of a prospect’s financial statements and SEC filings may not be possible if they’re not publicly traded, but chances are the largest players in their market are. Analyzing several of these companies can yield valuable insights into their business: of course profitability, but also key market drivers, areas of investment, view of competition, and sources of revenue. Perhaps most importantly, with financial filings and earnings calls, executives focus on the key economic drivers of their business, using language that indicate the metrics that they are most focused on.
2. Understand your prospects’ and clients’ revenue drivers: What are a buyer’s different sources of revenue and how is their revenue model structured? If it’s a reimbursement-based model, what is the timing of payments? Is it a fee-for-service or capitated model? Are there quality related thresholds? If it’s a capitated model, is it based on the population of patients the organization serves?
3. Understand your client’s cost structure and populations it serves: What populations does a particular client serve? For hospitals, health systems and primary care providers, what is the payer mix and cost structure?
For hospitals, labor is a huge cost driver; what does a client’s labor force look like? What is the mix of physicians to nurses? Among staff nurses, are they paid per diem or hourly? Do you know the client’s breakdown of fixed versus variable costs (which can inform how easily labor costs might be shifted or reduced)?
Or take home health providers, for example, where a vast majority of the patients are Medicare beneficiaries, and home health agencies are paid under both Medicare and Medicare Advantage (MA) reimbursement models.
In one of these cases, reducing unnecessary visits is a good thing; in the other, reducing the number of visits may reduce the organization’s revenue and corresponding contribution margin.
Knowing a client’s revenue model, payer mix, cost structure and cost drivers is just one part of the growing list of requirements for digital health sellers that wish to both sell to purchasers successfully and fulfill their promise of achieving results.
The Payoff of Doing It Right
Going through this due diligence process helps digital health providers more directly align their thinking and value demonstration to a specific client, including using the client’s own metrics, which importantly reduces the cognitive load on the buyer (and key stakeholders) in their decision-making process. By using a client’s key performance indicators (KPIs) and nomenclature, digital health companies are able to speak the right language and more clearly illustrate how and why a given solution will make an impact.
This process forces digital health companies to more carefully think about how their product will be used, and translate the benefits in a way that will resonate with clients. While it will be an investment on behalf of tech sellers upfront, this level of due diligence will avoid lengthier sales cycles and the need to do any financial translation during the latter part of discussions and transactions.
Learning about a potential client’s business upfront will also force digital health companies to draw important linkages between what has been studied and what hasn’t, and what knowledge and value-demonstration gaps must be filled. For instance, if a digital health company’s claim is that its tech will reduce hospital complications, companies must first understand what those complications are, what the contributing factors are, how many of those factors can be addressed by the technology, and what additional effort (normally in the form of change management) must be expended by the hospital to unlock the value.
For digital health companies selling to hospitals and health systems, it’s important to recognize that they are among the most complex organizations to understand and draw clear lines from solution to value. From myriad departments with varied levels of subsidization, to having multiple payment schemes and different fixed costs, determining the value of a solution to a specific hospital and health system can be incredibly challenging; it’s also critically important work that will only benefit digital health sellers and purchasers throughout the entire sales and contracting cycle.
From Burden of Proof to Economic Benefits
To demonstrate value, digital health companies must use hard ROI — figures that can be quantified. A digital health company can’t talk about delivering value to a potential client’s bottom line without an intimate understanding of its business and the various populations it serves. And to truly understand a solution’s potential value to a client, solution developers also need to understand what it will take to unlock that value. The more realistic and client-focused digital health companies can be at demonstrating and drawing out that value, the more efficient the sales cycle will be.
The onus should never be on the technology purchaser to do this level of work and prove the value of a potential investment to their organization, either; digital health companies must take this on themselves, and develop easy-to-understand models that can be updated as needed and help demonstrate value at each stage of adoption and implementation.
This due diligence process should also be collaborative – treating a prospect as a trusted partner before any agreement is signed – and comprehensive. And, if done correctly, it will not only improve the evaluation and purchasing experience for buyers, but will sharpen the focus of and improve the selling process for digital health companies now and in the future.