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Complexities for startups within different healthcare spaces

"Domain specificity is important." It is so refreshing to hear a tech entrepreneur like Steve Blank say this. Blank has been working with researchers and clinicians for almost three years to bring the lean startup philosophy to healthcare. This is one of his conclusions about the industry.

Many people trying to get healthcare into the 21st century – doctors, nurses, entrepreneurs, investors – have been frustrated by the obnoxious attitude that technology is the solution to everything. A few too many tech entrepreneurs have breezed into the health world with "the solution."

If you know anyone who still thinks "fixing healthcare" is easy, send them this video. Steve Blank moderated this session that features four venture capitalists discussing revenue models in therapeutics, devices, diagnostics and digital health. The conversation was part of the lean launchpad course at University of California San Francisco for clinicians and researchers. He summarized the 17-minute video in his blog post about the session. Here is how he summed up how each segment makes money and the constraints around those revenue sources.

Therapeutics (Starting at 0:30)

  • Revenue is from drug companies not end users
  • 18 months to first revenue from a deal
  • Predicated on delivering quality data to a company
  • Deal can be front-end or back-end loaded
  • Quality of the data has to be extremely high for a deal

Diagnostics (Starting at 4:10)

  • Diagnostic revenue is from end users: a hospital or clinical lab
  • Pricing is capped by your reimbursement (CPT) code limits
  • Reimbursement strategy is paramount, design to good codes avoid bad ones
  • Find a reimbursement code consultant
  • Don’t do cost-based pricing… go for value-based pricing

Medical Devices (Starting at 8:23)

  • Device companies often start with a Volkswagen product and then build to the Ferrari product
  • Revenue models are typically direct product sales
  • Don’t do cost-based pricing, go for value-based pricing, especially where your device lowers the treatment costs of the patient
  • In most cases, pricing is capped by your reimbursement (CPT) code limits
  • Or pricing can be capped by what competitors offer, unless you can demonstrate superior cost savings
  • In a new market there is no reimbursement code but if you show high cost-savings you can get a high reimbursement rate
  • A risk in device hardware is getting trapped in low-volume manufacturing with low margins and running out of cash

Digital Health (Starting at 10:35)

  • Revenue models are often subscription models to a company per month across a large number of users
  • Intermediation fees – where you broker a transaction – are another source of revenue (i.e. HealthTap)
  • Advertising is another revenue model, but requires 10 million users to work, but can be lower if you have higher value uses like specialist physicians because you can charge dollars not cents
  • Go for value-based pricing
  • The sum of customer needs + product/market fit = the pricing you can achieve

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