The Upside of Risk

Screen Shot 2013-03-22 at 5.21.56 PMDuring every health IT-related conference, Meetup or tweet stream there’s bound to be a discussion about Affordable Care Organizations. Yet most Americans today don’t receive care within an ACO.

News articles still speak futuristically about health care that focuses on outcomes. “All of care is going to move down this path, and it has to,” Kaiser Permanente CEO George Halvorson said in a recent New York Times article. “Medical homes are doing it; the very best ACOs are going to figure out how to do it.”

Many say that within the next five years health care’s current business model will be shaken completely. In thinking about this future, health care organizations worry how their IT investments will fare, startups worry whether their time and energy investments will be worth it, and venture capital firms worry if their monetary investments will pay off.

In his talk at the Entrepreneur’s Club hosted by the Entrepreneurship Center at the University of California, San Francisco, Abhas Gupta, a partner at Mohr Davidow Ventures, spoke about ACO-driven uncertainty. “The number of opportunities that are here is just staggering,” he told a classroom of mostly prospective PhDs, MDs and entrepreneurs.

About 30 million patients currently receive care at organizations that take on risk. There are a number of payment models that enable physicians to accept risk for a group of patients. What these ACO-like entities all have in common is that for the most part they reject fee for service. Gupta predicted that in about four years the number of patients served by one of these entities will have grown to about 200 million.

“The fee for service world is over as far as I’m concerned,” he said. “By the time we invest in a company, they go through two more rounds, they go through another five years of development, the entire world around them will have changed into this managed care world.”

Today more than 400 organizations are fashioned like ACOs, and many of these were born within the past six months. But just because they are novel doesn’t mean they are nimble. Gupta said that only 15 might be technology and business-driven and able to achieve a substantial profit.

“One of the organizations that’s starting now, they’re managing 10,000 patients. Ten thousand patients is $80 million in revenue, and their profitability on those $80 million is $30 million.”

How are health care technology startups managing to get their products implemented into ACOs? Gupta’s sense is that they’re not. For three reasons:

1. There aren’t many ACOs
2. Of the ACOs in existence, the individual disease-specific interventions that startups pin their focus on aren’t a high priority at this time
3. There aren’t many sophisticated ACOs today

If startups are seeing success right now it’s because they’re convincing the fee for service world that their product provides a better level of care and should be implemented based on that alone. Within the next few years, that quality of care incentive will start to align with the financial incentive.

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