The Impacts of COVID-19 Blog Series
The COVID-19 pandemic has been characterized as a black swan—an event that happens so rarely that it is incredibly hard to predict and even harder to prepare for. With the benefit of hindsight and knowledge of our current reality, this blog series approaches and attempts to answer a series of questions about our present state and our future. The first post dissects the U.S. healthcare system and discusses the structural weaknesses that this pandemic exposed. The series follows with a post on how innovative healthcare stakeholders are responding to these weaknesses with incredible problem solving and resiliency. Building off this foundation, we continue the series with a look forward into the future of healthcare (Part 1, Part 2) through the lens of this pandemic. We conclude the series with the viewpoint of the investment community and unpack what pre-COVID-19 themes will persist or be accelerated and what new categories will emerge.
During the COVID-19 pandemic, digital technologies have played an outsized role in enabling care delivery systems to realign resources to acute and virtual settings. However, many technologies that were not paramount to the crisis response have fallen out of favor for customers and investors. Health system and payer budget and mindshare strain, compounded by financial market volatility, does not bode well for health IT investment activity.
However, the current crisis has redoubled our conviction about the digital health value chain and our bullish stance toward the health IT investment landscape. While growth concerns hamper funding activity, our long-term optimism remains unwavering. Healthbox has partnered with the DaVita Venture Group to help manage its investment fund, and we are taking an active investment stance throughout the pandemic while sticking to our investment themes and principles. The fund remains focused on accelerating kidney care innovation, despite the challenging environment.
This blog post intends to provide market observers an update on the current environment for health systems and payers and perspective for startups navigating the rough waters.
Venture Funding Impact
The start of 2020 set a record-breaking pace for digital health funding, with $3.1 billion raised, and more than 50% higher than Q1 of any previous year. Several large private financings closed in January—for instance, Alto Pharmacy, a digitally enabled mail-order pharmacy, raised a $250M Series D financing, and EQRx, a drug discovery and development platform, raised a $200M Series A round. While large transactions continued to close through March, these are deals that were in the market before the pandemic, some of which were repriced to more investor-friendly terms.
However, we saw a precipitous drop in investment activity during April. Per Pitchbook, across all U.S. venture deals, April deal value fell 38% versus the Q1-2020 monthly average, while deal count fell by 32%. Within digital health, there are market segments that have been boosted despite the broader market backdrop, such as telemedicine, digital triage/symptom management and remote patient monitoring (RPM).
During Q1-2020, Seed and Series A stage digital health companies took a bigger hit than others, in aggregate falling from 53% of deal volume in 2019 to 45%. As it relates to Seed investments, while the public markets swooned in March, many angel investors pulled back, given individual exposure to the economic downturn. We anticipate that the biggest impact for Seed and Series A companies will be investment velocity, rather than deal pricing.
Coming out of Q1-2020, growth-stage digital health company funding grew significantly, representing an 80% higher than average proportion of growth deals relative to the preceding five years.2 As the digital health industry matures, this also indicates company exposure to increased investor expectations. Going into Q2-2020, growth-stage companies are being disproportionately hit by the economic downturn as a “growth multiple” is no longer appropriate for companies experiencing a revenue slowdown. This segment will feel the most impact of the downturn from a valuation perspective.
When evaluating the appetite for deal activity, investors will ask, “What have you done for me lately?” With venture funds scrambling to defend their portfolio companies until brighter days ahead, investors are prioritizing bridge capital for their existing companies and more opportunistically picking out winners from the COVID-19 crisis. The provider and payer perspectives below highlight how those “winners” are being sourced.
The onset of COVID-19 has strained providers financially, given inadequate COVID-19 reimbursement combined with elective surgery deferral, and incremental spend on PPE. As part of the CARES Act, COVID-19 DRGs were boosted by 20%, but each case, on average, is estimated to cost hospitals $2,000. These financial pressures are compounded by surgical volume reductions that have impacted providers across the country. For example, HCA, in its quarterly earnings, reported a 50% year-over-year reduction in inpatient surgical volumes last quarter and a 70% reduction in outpatient surgical volume in the first half of April.
The CARES Act, passed in March, provides $100B in loan relief to U.S. providers to support healthcare-related expenses and cover lost revenue attributable to the COVID-19 pandemic. The act includes provisions for suspending the 2% Medicare sequestration requirements in Medicare fee-for-service; requiring payers to cover COVID-19 tests performed in both hospital and lab settings; waiving face-to-face telehealth reimbursement requirements; and providing reimbursement for all uninsured patients at current Medicare rates. Providers are expected to repay CARES Act loans over eight months, beginning in August.
Providers have bellowed that the CARES Act program has not gone far enough. The American Hospital Association and American Nurses Association have asked for loan forgiveness, and other groups have asked for another $100B in funding. Fiscal shortcomings have resulted in workforce reductions in non-essential service lines and administrative positions and across-the-board pay cuts.
Payers have felt less acute symptoms of the crisis, given the near-term benefit from surgical deferrals. However, payers are by no means immune and are susceptible to a long tail from the crisis.
In the near term, payers are adapting to support members during the pandemic by removing cost-sharing provisions for COVID-19 treatment, eliminating prior authorization requirements, waiving 30-day prescription requirements, and expanding 90-day mail-order pharmacy benefits.
The biggest concern is the projected decrease in the number of lives covered by commercial insurance as the unemployment rate has spiked to nearly 15%. As the pandemic pushes the unemployment rate higher, insurers will need to create strategies to acquire and support this segment via more affordable plans available to consumers outside of employer benefits.
Payers expect long-tail challenges from delayed preventative and elective procedures that will occur in a condensed period as the pandemic subsides. Additionally, sell-side analysts predict a significant increase in the cost of care for patients with more serious illnesses that may have been prevented had earlier care been available. Models indicate that based on current capacity, U.S. hospitals will be behind on preventive and elective procedures delayed due to COVID-19 for up to 12–18 months. The AHA estimates that the cost of pent-up demand for preventive care and elective procedures is around $160B, a significant amount of which will hit payers in 2021 and 2022. Premiums may increase to offset these expected increases in medical spend.
Providers and Payer Solution Adoption
Given the financial and operational constraints facing both groups, providers and payers are heads down on addressing the challenges immediately in front of them.
In addition to the strain on provider front-line workers, clinical informatics leaders, such as chief medical information officers and chief nursing information officers, are being overwhelmed with the implementation of new clinical workflows. These leaders should be characterized as primary gatekeepers to bringing in new technology. Circumstances to consider include:
- Implementation of new on-premise systems has been put on hold unless the upgrade is critical.
- If a cloud or on-premise solution requires IT department support to implement, other than an information security review, it is not going to get done in the near term.
- Vendors that have existing provider implementations are best positioned to grow within the system.
- Prioritized solutions include telemedicine, symptom management/triage, RPM/hospital at home, clinical decision support and risk stratification, contact tracing, behavioral health support and supply chain management.
Payers are prioritizing solutions that already exist in their ecosystem to fill gaps in care during the pandemic. Unless there is a significant member network care gap stemming from the crisis, the appetite to adopt new technology is lacking.
- Like providers, solutions that fill existing gaps and are not already part of the payer ecosystem need to be out of the box to implement and simple for end-users to learn.
- With concerns about capital constraints, payers are likely to slow investing in additional solutions. We anticipate an increase in the perceived cost of capital, requiring higher ROI hurdles for project approval.
- Prioritized solutions include telemedicine, symptom management/triage, RPM/hospital at home, behavioral health support and mail-order pharmacy.
Related to technology adoption in each vertical, the anecdotes below dive deeper into the acceleration we’re seeing in the adoption of telemedicine, symptoms management/triage tools and RPM solutions.
Telemedicine adoption has been widely hailed as a significant beneficiary of COVID-19, as patients have been steered away from clinic-based care to free up capacity and reduce infection risk. Utilization has spiked across all provider types. Teladoc, which counts large health plans and providers as its clients, announced in its earnings report a quarterly increase from 1.2 million to more than 2 million virtual visits. Health systems have independently indicated a tremendous ramp. For instance, Allina Health clinics have hit nearly 5,000 appointments per day, which represents nearly 60% of their scheduled visit volume. In March, this totaled approximately 1% of their visit volume. Health plans are also promoting telemedicine uptake by offering zero copays for virtual appointments and, in certain cases, paying participating providers on par with in-person rates.
The investment community has taken a positive view of these developments and is anticipating long-term consumer behavior to shift. Medici, a telemedicine platform for independent practitioners which in April raised a $24 million Series B, saw a 1,400% increase in patients from February through April versus Q4-2019. Tyto Care, which offers a handheld connected medical exam kit that is sold to health systems and direct to consumer, raised a $50 million Series C in April. Lastly, 98point6 raised a $43 million Series D in April to support the growth of its asynchronous plan-sponsored telehealth platform.
Symptom management and triage tools have been in high demand to manage patient flow into healthcare facilities and reduce infection risk. Both providers and payers are investing in solutions. For instance, Cigna and Express Scripts announced a partnership with Buoy Health last month to provide beneficiaries a symptom-checker tool that incorporates CDC guidelines. For facility-based partners, Phreesia announced in its quarterly earnings report, 2.5 million screened patients through its COVID-19 tool, indicating the importance of triage tools for both facility-based and telemedicine workflows supported by the company. Partners HealthCare invested in its own AI bot to screen patients, triage them to the appropriate care setting, and share captured data with the patient’s provider. From a funding perspective, K Health raised a $48 million Series C in February from Anthem and others to support its growth in the current climate.
RPM has also been a beneficiary of the environment, as providers shift less acute COVID-19 positive patients into the home and support chronic care condition management. Given the fact that 78% of COVID-19 related ICU admissions were individuals with chronic conditions (per the CDC), virtual condition management is playing a key role in managing outcomes. Livongo, for instance, added 380 new health plan/employer clients in Q1-2020 (44% quarter-over-quarter growth), with a particularly significant uptick in diabetes enrollments. On the provider side, Providence implemented a program to monitor positive screened COVID-19 patients that are appropriate for step-down care, in partnership with Twistle and Xealth. Patients are provided a thermometer and pulse oximeter and are monitored by Providence clinicians for escalated risk. On the funding side, Vida Health raised a $25 million financing in April to support 500,000 new users (>50% growth) brought onto the platform since the start of the pandemic. The platform, which primarily targets employer beneficiaries with chronic conditions, leverages connected activity data, health coaches and personalized care plans to manage individual outcomes.
While certain market segments are being called upon to support the public health crisis, others are not positioned to grow in the current climate. Many companies have pivoted into use cases that are in vogue. In most cases, it’s clear to solution buyers who is truly positioned to succeed and who represents another “me-too” offering. While it is enticing to pivot given the uncertainty threatening business sustainability, companies should stick to their knitting unless there is a clear unmet need solved by the product. It’s important to repeat the mantra “this too shall pass,” as startups that hunker down and focus on product development and customer success will come out stronger than ever. In the meantime, startup leaders need to plan for the worst. What happens if we miss sales targets by 30% this year? What if the virus comes back stronger in the fall? Leaders must scrutinize their budgets and be willing to make cuts now to protect against the worst outcomes.
If startups are in a position to raise capital, raise more now if that is an option. Financing that will get companies through the next 18–24 months and to a clear subsequent funding milestone will position groups better than optimizing for minimal dilution.
To all startups serving our healthcare communities, thank you for the work you’re doing to solve the COVID-19 crisis, and for others, we look forward to seeing you succeed on the other side of it.
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