Where we see opportunities at the intersection of fin-tech and health-tech

This post was co-written with Chris Ellis, CEO of Thatch, the modern health benefits platform.

One of the biggest black boxes in the healthcare industry involves the flow of money. What entity is getting paid, by whom, and ultimately who’s the one footing the bill. It’s opaque and for good reason - there’s literally dozens of middlemen that are incentivized to keep it that way. 

So one of the trends we’re most excited about involves the intersection of payments or financial technology and health care. This area historically hasn’t received the investment dollars and attention that it warrants, given that revenue cycle alone is a $150 billion market. To put it another way, Chris estimates that nearly $1 in every $20 spent in the entire world is spent on U.S. healthcare – in contrast, the global advertising market represents about $1 in every $100. 

One of our theories for why there’s an investment gap is the “intersectionality” problem: Investment teams are often bucketed into areas like health, financial services or enterprise SaaS - but rarely is any one individual working across multiple categories. There are generalist investors, certainly, and that helps. But there are very few of what he’d describe as “intersectional” investors - and therefore, there’s a lack of funding available for intersectional companies and teams.

There are also reasons that are more related to misaligned incentives in the system. As Victor Echevarria, a technology investor at JSV who focuses on the health-tech/fintech intersection, put it (correctly, in our opinion): 

“Organizationally, providers want to charge more and payers want to pay less. There is no room for innovation when the deep pockets are so completely at odds with each other financially. Every great idea eventually devolves into helping providers bill more or helping insurance companies pay less. Those concepts have been commercialized to death.”

Lastly, clinicians are deeply impacted by revenue cycle management and the flow of money. But it hasn’t historically been viewed as part of the job, nor is it taught in medical school. As a16z’s Julie Yoo told us, it’s the “monkey on the back of clinicians,” reminding them constantly of their undue documentation and administrative burden. Few want to dive headlong into the topic at a dinner party, let alone to figure out ways to invest in it.

Chris’s company Thatch also sits at the health-tech/fintech intersection. When he started raising capital a few years ago, he and his co-founder Adam got a lot of “no’s.” Many VCs were confused why a “healthcare startup” was mostly made up of software engineers from fintech companies like Stripe and Ramp. He is grateful to this day that the a16z team instantly understood it. Before joining the firm, Yoo founded Kyruus. She told Chris and the Thatch team how she learned first-hand through that experience how “payment systems were the tail that wags the dog” in the healthcare system.

This space is ripe with opportunity - so where should entrepreneurs focus their time and energies? Without further ado, here are some of the categories at the payments and health care intersection where we see the most potential: 

Anything involving the “consumerization of healthcare”

For most of American history, health insurance fully covered the cost of medical services. As healthcare costs continue to rise, more of the onus is on the consumer to pay for services out-of-pocket. It’s unclear how successful that has been in terms of making people more responsible for their own health care. But what it has done is pushed consumers into becoming more informed about what they’re spending money on. Yoo from a16z has been spending time thinking through this shift of late, increasingly referring to the consumer as a “new class of payor.”

Taking a step back, a rational consumer market requires three key elements in our view:

1) an understanding of what the product is;

2) how much the product costs;

3) its quality relative to similar products in the market.

While doctors tend to do a decently good job of explaining their product; transparency around cost and quality have been elusive. American healthcare is like booking a ticket to Fiji on an unknown airline and receiving the bill when you land. 

But we’re starting to see signs that this is changing, particularly when it comes to cost. Quality is a different matter that has its own complicated history. It is very hard to assess quality amongst clinicians effectively, particularly when only certain providers will take on more complex cases. And there’s an institutional resistance to any attempt to publish data on the topic - see the reaction to Propublica’s “Surgeon Scorecard.”) So for this piece, we’ll focus more on transparency around cost. 

Transparency

The Hospital Price Transparency rule that took effect in 2021 required hospitals to publish the rates they negotiate with health insurers. Today companies like Turquoise Health have emerged to make it very simple to search for procedures and determine how much they’ll cost. The “No Surprises Act” of 2022 is also worth a mention because it requires providers to give you the bill before you take off for Fiji, not after you land. Services that have been around for a while like Zocdoc also make it easier to book, and rate, comparable doctors, and there’s a cohort that offer cash prices both for health services and pharmacy (Ro, Hims & Hers, and so on). Mark Cuban’s Cost Plus Drugs is another good example of transparency, both in terms of its rates and the company’s willingness to discuss the reality of how pharmacy works.

Payment Tools

New solutions are starting up to make it easier to afford and pay for healthcare, too. As medical debt reaches new heights (it’s one of the leading causes of personal bankruptcy in the U.S.), there’s now more of a need for this than ever before.

Medical credit cards like CareCredit have been around for a long time. But newer solutions like Paytient offer a new twist, channeling the rise of the “buy now, pay later” movement (BNPL) that’s been popular for a while in fintech. These companies work by fronting the money and allowing employees to deduct payments from their paychecks. On the health system side, growth-stage companies like Cedar work with providers to provide better tools for more customer-friendly billing tools. 

We believe that there’s still opportunity here, particularly for companies that give patients leverage and help them reduce costs. We often feel that patients are forgotten in our system, where the true buyer is typically the payer and/or the employer. Here’s just one example: Most consumers don’t even know they can appeal denied health insurance claims or contact the government for help, per one study on the topic.

“I'd love to see a company that can arm patients with the same financial leverage that payers and providers wield,” said Vince Cogan,  an attorney who has held senior roles at fintech companies like Brex and Stripe, before joining Chris’ company last week.

This may seem like a pipe dream but Cogan believes the timing is ideal. Many of the largest fintech success stories, like Stripe and Paypal, started up after a period of financial destabilization and distress. Health care may be 15 years behind, but he sees signs of momentum. “Healthcare expenses are ripe for innovation,” he said. “Similar to how the economic events led to the founding of notable fintech companies, we are collectively still recovering from a worldwide pandemic and living through a healthcare cost crisis so this is a perfect time to tackle this problem.”

We can’t stress this point enough: We are living through a moment of unprecedented inflation when it comes to health care costs, which presents both problems and opportunities.

Incentivizing prevention?

There’s no question that our system is not designed to prevent illness. It’s referred to as a “sick care” system, versus a “health care” system by industry insiders for a reason.

This point is debatable. But we do think that consumers are highly incentivized to prevent sickness and safeguard their long-term health, because they’ll personally suffer the consequences if they don’t. Of course, there are also socio-economic factors at play here - there are millions of people who lack the resources to pay for high-quality food and opportunities for exercise. That’s a major reason why we’re enthusiastic about companies in the Food as Medicine space, which are working closely with Medicaid to offer fresh, affordable produce to communities in need.

Big picture: We know these preventive modalities like good nutrition, regular exercise, and quality sleep work. So why aren’t they subsidized a whole lot more by our healthcare system? It’s worth noting as just one example that the government does not specify health behaviors like gym memberships in their list of allowable items to use pre-tax healthcare dollars via the FSA and HSA in most cases.

“If exercise and quality sleep came in the form of a pill, everyone would be prescribed it,” Justin Mares, CEO of TrueMed, a health-tech/fintech company that is looking to expand access to the HSA, told us.

Opportunities to rethink the humble HSA?

We could be doing more with this large pool of pre-tax dollars.

Services like TrueMed help people secure letters of medical necessity to take advantage of $123 billion in assets that exist in HSAs. This would dramatically expand the pool of HSA-eligible goods and services to include activities that can actively prevent illness and improve health.

But first, why do we think HSAs are worth spending more time thinking about? 

Well, people forget that when Health Savings Accounts came into existence in 2004, they were a niche product serving a limited market. Twenty years later, more than 35 million Americans own an HSA. But that doesn’t mean the market doesn’t have room for innovation.

Roy Ramthun, who led the U.S. Treasury Department’s implementation of HSAs, told us he still believes that “new entrants are still able to challenge the status quo.” One intriguing possibility in our opinion involves combining modern fintech with HSAs to create new kinds of tax-free lending. For example, employees could access financing through their HSA account via payroll deductions – and that could result in brand new forms of “tax-free Buy Now Pay Later (BNPL).”

And that’s just one possibility - we’d love to see more start-ups thinking through opportunities here! Let us know if you have any smart ideas.

Biggest opportunities (and pitfalls)

So, what would the future look like if healthcare and fintech’s marriage were consummated? The result in our view could be similar to Amazon’s impact on retail purchasing, the iPhone’s effect on how we interact, or Uber’s reimagining of transportation. 

If healthcare spending were far more consumer-directed, with a lot more transparency than we see today, the future would look quite different. 

Here’s just a few trends we could envision:

• We’d see the unbundling of classic commercial health coverage. Rather than having one health insurer that covers virtually all medical expenses, health insurance would serve its original purpose: Insuring against catastrophic medical illnesses. Subscription-based disease management solutions for conditions like MSK, diabetes, mental health, and even cancer could sell directly to consumers and specialize treating these conditions. Consumers would allocate their dollars more efficiently, rather than today's employer-sponsored system.

• We could also see the proliferation of new health insurers, creating a more vibrant competitive ecosystem. Today it’s hard to start a new health insurer from scratch. Insurgents need billions of dollars and a national network if they are to compete for the employer market, who demand wide networks to ensure 100% of employees are covered. Yet if health insurers primarily sold to consumers, who primarily require local networks, the start-up cost would be tremendously lower. An insurgent could target the 44.8% Hispanic population in Houston with a Spanish-language doctor network, for example. In this model, we’d see the rise of more payor-providers (“payvidors”) like Kaiser. These health systems could compete for the local population by offering better service at more competitive prices than the national conglomerates. We may see more private equity purchases of health systems who then add on a health plan. General Catalyst’s proposed acquisition of Summa Health would fit the bill. (This idea is also not without precedent. The individual market, established through the ACA, created fertile ground for insurgent health insurers targeting a consumer population. These include both new tech-forward carriers like Oscar and Taro, as well as insurers who’ve traditionally played in the Medicaid market like Centene.)

• We may see the rise of healthcare’s first “everything app.” Doordash, Uber, and Airbnb were made possible in large part due to new financial infrastructure. The experience of ordering a meal, a car, or a short-term rental wouldn’t be the same if at the end, you had to pull out your wallet and pay in cash. Better financial infrastructure will have a similar effect on the way healthcare is accessed. Booking a doctor’s appointment, finding a new therapist, and shopping for a low cost MRI will one day be as easy as booking a hair appointment or ordering a burrito. 

• Could we see an “elimination of the claim?” That’s a space that Yoo from a16z has also been contemplating of late. As she wrote to us: “What kinds of incentive structures and insurance designs could result in the entire elimination of the claims-based reimbursement process?” On the pharmacy side, the rise of more transparent cash-pay avenues for purchasing pharmaceuticals such as Cost Plus Drugs present intriguing alternatives to the existing system. In the future, consumers might opt out of the opaque system ruled by pharmacy benefit managers (PBMs) and instead purchase drugs directly.

• Modern payment rails: In the wake of the Change Healthcare outage, we collectively learned about the vulnerabilities in our architectures, opening up opportunities for systems that are more secure, cloud-based and resilient to the growing complexity of health care payments. The 2010s saw the rise of modern financial infrastructure for businesses and consumers with companies like Stripe and Plaid. Perhaps the 2020s see a similar renaissance in the underlying infrastructure that powers healthcare payments.

• A new “gold card” for providers? Yoo’s team at a16z believes in the potential of an American Express style gold card for clinicians that essentially offers an agreement across payers. This would be a fast track that lets them avoid the prior authorization step, significantly reducing friction for clinicians. For those tired of relying exclusively on payers for income, we may even see more move to the concierge medicine model, charging consumers a subscription for their services directly.

To sum up…

The stakes are higher than ever. Healthcare was just 4% of US GDP in 1960. It grew to roughly 20% in 2020. At this rate, healthcare could reach 44% – nearly half – of all American spending by the end of the century. Aspiring builders would do well to look at American healthcare spending both as a target-rich environment for innovation, but also as a societal responsibility we share to prevent our system from devolving into a dystopia for our children’s children. 

Fortunately, it’s easier than ever to start a company at the intersection of healthcare and fintech, in large part thanks to emerging infrastructure. Yet, builders should be aware of common pitfalls that make this space far more challenging than others. 

Most of the larger health insurers and health systems were founded before the invention of the internet. Legacy revenue cycle management and payment companies like clearinghouses, eligibility verification systems, or e-prescribing networks, can be hard to deal with. Becoming overly reliant on a single vendor can create a single point of failure (as we saw with Change healthcare hack).

None of this work is easy, but it is worth it. And increasingly, we believe there’s going to be interest in funding it.

Where do you see the biggest opportunities in fintech and health-tech intersection? What kinds of teams do you see emerging to take on the charge? We’d love to hear from you. Reach us anytime at [email protected] and [email protected].