Platforms In Healthcare-Part 1. Platforms Explained-The HSB Blog 11/29/21

Our Take:

The digital health industry is increasingly moving to platform solutions, with many different healthcare solutions likely to start converging into platform products, leading to more innovation and overall improvement of healthcare industries. While companies that buy and sell healthcare technology products both stand to benefit from this trend by having an integrated, more comprehensive set of tools available to solve their business needs, it is even more important for these platform developers to consider the many constraints that the market dynamics of the healthcare industry creates for new entrants.

Key Takeaways:

According to SaaS consulting company Formotus, surveys suggest that the price range for developing an enterprise mobile app is generally in the range of $100,000 to $500,000.
The IQVIA Digital Health Trends reports notes there are currently over 350K health-related mobile applications available to consumers with more than 90K added in 2020 alone.
According to Zus Health there are 4000 companies building heatlhcare registration apps alone.
The average employer benefits plan has 18 stand alone health and wellness apps as part of its benefits offerings.

The Problem:

Exciting market opportunities exist in narrow market segments that have high customer demand and low competition. Peter Thiel, a well-known investor and serial entrepreneur, recommends startups to focus their efforts on areas that can come up with innovations that are significantly better than existing solutions. This is due in part to the fact that incumbents often fear changing the status quo or embracing innovation since it entails fear and risks of the unknown in processes such as operations and purchasing behavior both of which have helped them to develop a competitive advantage. Nevertheless as strategists such as Thiel and Clayton Christensen have recommended, to be significantly better, there needs to be a drastic improvement in reducing cost, increasing value, and/or the quality of the user experience. For industries that are associated with complex problems, including healthcare, education, government services, successful companies have often targeted reducing the cost and complexity of reaching the market for their customers. There are large market opportunities to improve the value and quality of products in these industries.

Although the healthcare industry has large market opportunities, it is highly regulated with legal and regulatory requirements that could constrain companies with innovative solutions. New entrants need to recognize and prepare for these constraints during product development. For example, new medical software often can produce diagnostic results faster and more accurately than existing diagnostic methods, however, generally, it will still need to go through rigorous testing with regulatory authorities such as the FDA for patient safety and clinical effectiveness before it will be able to be sold into the marketplace. For industries that are fragmented such as healthcare, there are typically fewer opportunities to form long-lasting competitive advantages due to competitive pressures from new entrants, changing needs from customers, and cost pressures from suppliers.

Platform companies can help overcome some of the competitive and regulatory issues that constrain innovation and provide a way to increase user value through network effects. Network effects describe how an additional user added to the platform will increase the economic value of the platform in a self-reinforcing loop causing more people to be added to the platform. An example of this is social media platforms, where having only one user on the platform would bring negligible value, but by contrast, enticing a larger number of users to join the platform initially will generate additional content that will keep users engaged, retained, and cause them to suggest their friends and associates join the platform thereby repeating the cycle. Viral user growth and user-generated content in social media platforms attract advertisers because of high user engagement and attention in the application to view advertisements. Companies develop a competitive advantage by reducing costs for customer acquisition (by leveraging existing users as referral sources) and creating high switching costs to prevent users from using alternative substitutes (ex: when the vast majority of one’s friends are on a particular social network). Initially, these products often require stable cash flow generation and long-term investment as early-stage platform products need to develop enough value on their early versions to retain and grow their user base to create and leverage network effects. For healthcare technology and enterprise software products, it is important to consider how risk-aversion must be overcome for companies to purchase a new innovative product. Developing platforms in digital health can help emerging companies in healthcare overcome existing barriers in areas such as systems integration, data security, and interoperability by effectively creating a roadmap for product developers to follow.

The Backdrop:

Platform models can be divided into two different categories, value exchange platforms, and innovation ecosystem platforms. Value exchange platforms encompass platforms like those in the so-called sharing economy, such as Uber and Airbnb, and other multi-sided marketplaces, such as Etsy and Angi. Innovation ecosystem platforms encompass developer tools for building infrastructures, such as Stripe and Amazon Web Services, and app stores, such as the Apple App Store and the Microsoft Store. The platform models that will be covered in this will be focused on the innovation ecosystem category.

Platforms that fall in the innovation ecosystem category are critical to the advancement of the underlying infrastructure for an industry. For example, Stripe started with creating code to simplify payment processing for developers. Stripe then expanded their platform to encompass multiple areas of financial technology to make management of e-commerce and payments from new startups to public companies. Building upon these successes, the company now states its mission is to build the economic infrastructure for the internet. Building tools that lay the foundation for a new approach to industry infrastructure and supports developers will enable more product development, which will result in more innovation and a more mature ecosystem with better solutions. Similarly, a non-software example would be how the development of user-friendly 3D rendering software and inexpensive 3D printers contributed to a growth in rapid prototyping and DIY movement for so-called “makers” that support the use of open-source software in creating new devices electronics, robotics, 3-D printing,

App stores that have a large market share with hardware devices are the Apple App Store, Google Play Store, Microsoft Store, and Amazon App Store. App store platform models allow software companies to control the distribution of third-party applications and digital content for hardware devices. For example, the Apple App Store’s revenue model has two main revenue streams, revenue from developers to publish their mobile applications on the app store, and commissions from developers when users purchase apps, and make in-app purchases.

Platforms that can sustain their network effects can create what is referred to as a “flywheel effect” where growth compounds on previous growth eventually leading to extremely large and continuous gains in scale. This flywheel effect is what makes competitive advantages more resilient as initial first-mover advantages can contribute to lower costs from economics of scale in purchasing and operations, more revenue from exponential gains in customers and low customer acquisition costs, with more efficient distribution channels.

Implications:

Understanding customers and regulatory requirements are important considerations for organizations that are building platform companies in heavily regulated industries like healthcare, as healthcare providers (ex: hospitals and physicians) are subject to legislation such as HIPAA, HITECH, the 21st Century Cures Act, Anti-Kickback, and Stark Laws as well as numerous other regulations around the privacy and security of personal health information (PHI). These regulations for data privacy, security, and compliance can limit the ability of new entrants to gain traction in the industry by increasing the difficulty of developing products. The complexity of understanding the requirements rewards industry veterans that are able to develop solutions that can work within the existing regulatory framework.

When compared to more consumer-focused retail and media, the differences in user dynamics and data privacy add an additional layer of complexity for building platform products in regulated industries. Regulated industries tend to have long sales cycles with risk-averse purchasing behavior. New startups require long-term investment horizons and sufficient financial capital to have enough resources to test products with customers and learn how to integrate their solutions into existing business processes. In healthcare given the many regulations around data privacy and security, data access and data storage can often be fragmented with different types of data residing in different systems in the organization. For example, in healthcare, there is structured and unstructured data that includes handwriting from doctors’ notes, lab results, images from radiology reports, and claims processing, which makes it difficult to create broad end-to-end solutions that would encompass a patient’s entire longitudinal record. End-to-end functionality is also hard to accomplish on a larger scale throughout an organization, even if it is able to be accomplished on a smaller scale since data if often siloed within departments.

Interoperability is a barrier limiting how data from multiple systems can be integrated together for analysis. As noted earlier, healthcare data interoperability solutions being developed by companies such as Validic and Redox can provide the foundation for additional healthcare applications and solutions to be built on. Another characteristic of complex user dynamics is the lack of standardization in workflows. Custom technological solutions are expensive due to the complexity of system integration and limited standardized compliance requirements for interoperability. Building platforms for software engineers will reduce the cost of custom solutions and support more healthcare innovation. Zus Health and Health Gorilla are two of the multiple companies working on platform products for developers to reduce the cost associated with customization for healthcare applications.

There is a large opportunity for the growth of platforms in healthcare if sufficient platform products that build critical infrastructure can reduce costs for innovating and delivering value to customers. This opportunity is similar to how enterprise cloud computing led to the reduction in infrastructure costs for server management and web hosting, which in turn led to more innovation. There are many reasons to remain optimistic about the future value of healthcare platform companies in improving healthcare delivery when the barriers to innovation can be overcome.

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