This article reflects the observations of the digital health markets in Europe and the US, as triggered by a heated discussion over spicy Asian curry in Berlin. In short, the authors believe that the US-EU digital health market will experience continued growth and interest, but due to to the dynamics within the healthcare market, a series of trade sales and consolidations are more likely to happen in the EU than a vast number of digital health unicorns.
US Digital Health Dynamics
In 2010, the US healthcare market was shocked by The Affordable Care Act (PPACA, or ‘Obama Care’). The resulting market impacts were profound:
(i) a new degree of healthcare consumerism and awareness grew as consumers accessed the health insurance market and actively shopped for coverage on exchanges (both public and private),
(ii) payers increased plan promotion via B2C channels, and
(iii) key provisions of PPACA created Accountable Care Organizations (ACOs).
For years, integrated care delivery networks (i.e. Kaiser Permanente, etc.) had (have) been delivering team-based, outcome driven care. But, these models were largely regional and fee for service was still a large portion of US care delivery. PPACA ACOs encourage patient-centric care by reimbursing based on outcome and episode, rather than fee-for-service. Similarly, other Payers and players (pharma, retail, etc.) followed suit, negotiating similar outcome-based risk-share contracting deals with providers, employers, etc. (risk-based, etc.).
Overall, a dynamic market emerged and moved away from the old fee-for-service model, to one rich in consumerism and moreover rich in stakeholder willingness to adopt new (digital) solutions to maximize success in outcome-based payment models.
The Importance of the US Employer-Employee Healthcare Relationship
The US’s employer-employee health insurance relationship creates a carrot/stick dynamic not found in other markets. Even with PPACA and the emergence of public health insurance exchanges, the majority of US health insurance is still employer-sponsored. Thereby, employers are incentivized to influence and improve employee health behavior to lower their own premium sponsorship costs. In the US, it’s very common for employers (both carriers of fully insured and asset-service only) to offer employees direct premium discounts and/or cash health savings account deposits if employees participate in health improvement activities like: gym membership and attendance, non-smoker status / smoking cessation programs, annual wellness exams and biometric screening, and care pathway adherence. Furthermore, in order to drive employee engagement and adoption, employers (and payers) are challenged to find solutions via all means available, whether that is on-site clinics, patient/employee portals, and even digital health and gamification platforms.
EU Healthcare Dynamics
In contrast to the US market, health care players within the EU focus first on reimbursement. For example, pharma, medical device, providers, and others in the value chain enter the market by negotiating with a government authority for product or service reimbursement based on expected efficacy and population health impacts when compared to alternatives. An indirect result is that the end consumers and patients become only a pass-through for those providers to obtain reimbursement.
Additionally, the EU health care payer market is highly fragmented when compared with the US’s major national and regional payers. For example, Germany, one of the largest EU healthcare markets with 118 statutory health insurers and over 40 private health insurers, does create a unique model of healthy competition by the insurers for members, but the fragmentation carries a cautious tone due to the high numbers of mergers rooted in rising costs and related underwriting challenges. For example, in Germany, in the last ten years, the number of statutory health insurers has shrunk by more than half from 267 to 118. Similarly, in the United Kingdom, there are over 200 health boards/trusts that operate as hyper-localized payers – sometimes with shared procurement routes, as well as a handful of private payers.
By comparison, while the German market is not entirely unlike the US pre-65 exchange and Medicare Advantage/Supplement markets, the US market prohibits buying plans across State lines and also sets plan standards (i.e. Supplement Plan K or Advantage Part C Plan):These standards force insurers to compete for members with ancillary benefits funded by overall plan efficiency. Furthermore the US insurer environment is already transitioning to value-based payment schemes, whereby digital health solutions can then be used by payers to achieve higher reimbursements and win-over membership. From the digital health founder perspective, this opportunity is strengthened by access to funding for growth and scale, as well as a comparatively uniform consumer market over 300M. In contrast, while the EU market has over 500M consumers, language and culture barriers can slow scale, alongside funding pools dwarfed by those found in the US.
Healthcare Spending Dynamics
Another stark difference between the US and European healthcare models is the cost of care delivery. The Centers for Medicare & Medicaid Services reports that in 2014, US healthcare spending was $9,523 per person, or 17.3% GDP. By comparison, healthcare spending in the United Kingdom and Germany was £2,259 (8.5% GDP) and €3,825 (11.0% GDP) respectively. How does this influence funding? It’s simple, in a world where digital health targets improving health and reducing costs, the US market has a much larger cost take-out opportunity and therefore and a larger appetite to seek ways take advantage of that cost disparity. For example, in the US, it’s attractive to fund digital health that can bring the cost of a primary care consultation down to $40 from >$300, however, it’s less attractive in Europe where that same example might be only to €40 from €100.
Patient (Consumer) Behavior
In both the EU and US, patient (consumer) behavior is strikingly similar. Consumers view healthcare and health insurance products differently than other services and risk products. Healthcare is personal, not transactional or technical. Anyone that owns a car does not expect their auto insurer to pay for routine maintenance like an oil change, but in contrast with health insurers patients are oftentimes dissatisfied with co-pays, high deductibles, and out-of-network costs. Why? People, especially in Europe, still hold the perception that healthcare is a public good and should be provided by 3rd parties, i.e. the welfare state or health insurers. European health care reforms might help to encourage the consumers to be more self-responsible and aware of their future health. However, policy changes are slow and often met with constituent (voter) disdain.
The digital health evolution sees no indications of slowing down, whether in the US or EU. Digital health start-ups continue to land deals and secure growth funding. However, due to market dynamic and regulatory differences, digital health funding and the emergence of unicorns will likely continue to be dominated by US players or EU firms with US ties. This might change over the time. However with no ‘external shock’ or change in the regulatory environment, which would incentivize the stakeholders to look for new digital solutions, European Start-ups will have it more difficult to create a European unicorn that exceeds a billion dollar valuation. The European trade sale exits (i.e. Runtastic and Withings) that we have recently seen are still life style products that only scratch the health care surface in its potential.
If European policy makers can create an uniformed environment, where stakeholders are incentivized and open to adapt new digital health solutions, It will create new market dynamics and an infrastructure where potential unicorns might place their hooves.
Eric Brotten manages a portfolio of international digital health products at Optum, a leading health services and innovation division of UnitedHealth Group. He also previously spent time at a US healthcare startup before his current focus on EU/UK digital healthcare markets. The opinions herein are his own, and do not reflect the views of his employer in any way. Eric blogs personally on healthcare topics at www.ericbrotten.tumblr.com