Inflation is rising, stagflation seems likely and an economic recession seems inevitable. “A slight decline could be followed by a painful long recovery” is how The Economist describes the short-term economic climate, which will seriously affect the patterns of buying and selling health technologies and reduce the available capital for technology investments; it also places greater emphasis on digital health vendors so that they can clearly demonstrate the return on investment and the value of their products.
Demonstrating a return on investment is not an easy task – nor should it be
Those were good times really good for digital health vendors over the last decade and increasingly over the last few years. Even with the recent withdrawal in 2022, funding for digital healthcare reached $ 6 billion in the first quarter of this year (compared to $ 6.7 billion in the first quarter of 2021), which is certainly not worth it. you sneeze.
But with economic uncertainty comes growing capital constraints that will overturn the long-thriving digital healthcare market in the coming years.
Gone are the days when digital healthcare startups could sell based on stories and promises. Now more than ever, digital healthcare companies need to clearly demonstrate their value and prove that they are real financial Return on investment for the organizations they sell to – showing not only the value to patients and the healthcare system, but also to the buyer’s end result in both the short and long term.
Make no mistake: communicating value in this way is difficult, in part because often different stakeholders within a healthcare organization have different (or partial) knowledge of how a digital healthcare solution can affect their business. For example, the CFO has different knowledge of his own business from a first-line clinician; both can be important when testing a digital health solution. And just because a solution is compelling for one component, doesn’t mean it will ultimately be a smart business solution for the buyer, whether it’s a hospital, healthcare system or other supplier organization, or payer or employer. This means that the burden of proof is on digital healthcare companies to explain how their decisions will help not only patients but also the healthcare organization itself.
Understanding your client’s business
Renowned Health Quality Champion and Chief Medical Officer of Humana, Dr. William Schrank, is a proponent of a results-oriented approach to technology development. From pilots and research to investing in data science, Dr. Schrank is an advocate for real evidence and is working to show how technology can improve patient care, quality, safety and results.
But how can a solution help the healthcare organization financially? Too often, digital healthcare companies do not answer (reliably) this question, if at all.
As the country shifts to a new economic reality, digital healthcare companies need to consider the following to legitimize themselves, their business and the value their decisions bring to shoppers across the healthcare ecosystem:
1. Immerse yourself in finance to find out what business your potential customers are in: Analysis of a potential client’s financial statements and submission of documents to the SEC may not be possible if they are not publicly traded, but there are likely to be the largest players in their market. An analysis of several of these companies can provide valuable information about their business: profitability, of course, but also key market engines, areas of investment, a view of competition and sources of revenue. Perhaps most importantly, with financial documents and profit calls, executives focus on the key economic drivers of their business, using language that shows the indicators they are most focused on.
2. Understand the revenue engines of your prospects and customers: What are the different sources of revenue for the buyer and how is their revenue model structured? If this is a refund-based model, what is the payment schedule? Is this a service charge or head model? Are there quality thresholds? If this is a head model, is it based on the patient population that the organization serves?
3. Understand your client’s cost structure and the populations it serves: What populations does a customer serve? For hospitals, health systems and primary care providers, what is the mix of payers and cost structure?
For hospitals, labor is a huge driver of costs; what does the client’s workforce look like? What is the combination of doctors to nurses? Are nurses paid per day or per hour? Do you know the breakdown of fixed to variable customer costs (which can inform how easily labor costs can be moved or reduced)?
Or take home health care providers, for example, where the vast majority of patients are Medicare beneficiaries and home health care agencies are paid for both Medicare and Medicare Advantage (MA) recovery models.
In one of these cases, reducing unnecessary visits is a good thing; on the other hand, reducing the number of visits can reduce the organization’s revenue and the corresponding contribution margin.
Knowledge of the customer’s revenue model, payer mix, cost structure and cost factors is just one part of a growing list of requirements for digital health vendors who want to both sell to buyers successfully and keep their promise to achieving results.
Paying for doing it right
Going through this due diligence process helps digital healthcare providers more directly align their thinking and demonstrating value to a particular customer, including by using the customer’s own metrics, which significantly reduces the cognitive load of the buyer (and key stakeholders) in the decision-making process. Using key performance indicators (KPIs) and customer nomenclature, digital healthcare companies are able to speak the right language and more clearly illustrate how and why a decision will have an impact.
This process forces digital healthcare companies to think more carefully about how their products will be used and to translate the benefits in a way that resonates with customers. Although this will be an investment on behalf of technology vendors in advance, this level of due diligence will avoid longer sales cycles and the need for financial transfers during the last part of discussions and transactions.
Learning about a potential customer’s business in advance will force digital healthcare companies to make important connections between what has been studied and what has not, and what gaps in knowledge and value demonstrations need to be filled. For example, if a digital health company claims that its technology will reduce hospital complications, companies must first understand what these complications are, what the contributing factors are, how many of these factors can be addressed by the technology, and what extra effort (usually in the form of change management) must be spent by the hospital to unlock the value.
It is important for digital healthcare companies that sell to hospitals and healthcare systems to recognize that they are among the most complex organizations that understand and draw clear lines from solution to value. From countless wards with different levels of subsidies, to the existence of multiple payment schemes and different fixed costs, determining the value of a decision for a particular hospital and healthcare system can be an incredible challenge; this is also an extremely important job that will only benefit digital health vendors and buyers throughout the sales and bargaining cycle.
From the burden of proof to the economic benefits
To demonstrate value, digital healthcare companies need to use a solid return on investment – figures that can be quantified. A digital healthcare company cannot talk about providing value for the end result to a potential client without an intimate understanding of its business and the different groups of the population it serves. And to really understand the potential value of a solution for the customer, solution developers also need to understand what it takes to unlock that value. The more realistic and customer-focused digital healthcare companies can demonstrate and extract this value, the more efficient the sales cycle will be.
The burden should never be on the technology buyer to complete this level of work and prove the value of the potential investment to their organization; Digital healthcare companies need to take this upon themselves and develop easy-to-understand models that can be updated as needed and help demonstrate value at every stage of adoption and implementation.
This due diligence process must also be joint – treating the potential client as a trusted partner before signing any agreement – and comprehensive. And if done right, it will not only improve the evaluation and buying experience of buyers, but will sharpen the focus and improve the sales process for digital healthcare companies now and in the future.