Successful Health IT Deals Are Obamacare Agnostic

(A version of this Health Alert was published by Forbes.)

Obamacare has definitely benefitted the health sector. My Forbes colleague Zina Moukheiber makes the case the Affordable Care Act (Obamacare) and the HITECH Act of 2009 (which channeled 30 billion taxpayer dollars into Electronic Health Records) deserve the credit (or blame) for the explosion of health information technology investments. That is undoubtedly true for traditional Electronic Health Record (EHR) providers like Cerner or Epic, which were boosted by the HITECH Act. In addition, the recently signed Medicare “doc fix” will likely ensure they continue raking in money for a while, because the law increases the EHR burden on physicians.

However, other successful new health IT ventures have prospects quite independent of Obamacare’s risky future. Rather, they appear robust in the face of a wide range of possible futures for U.S. health reform. Because health care is so dependent on government, it is not surprising that adoption of effective IT in health care has lagged behind other sectors, where suppliers have to rely on customers — not government — for revenue. Nevertheless, even a sector so politically protected from disruption as U.S. health care must eventually give way to change. Three examples show this change can come from different directions, despite Obamacare’s straightjacket.

First, Castlight Health, which carries the legacy of an overly hyped Initial Public Offering was priced at $15 per share in March 2014 and traded as high as $41.95 on its first day before losing half that value by the end of the month. Castlight Health is succeeding in addressing a significant problem: Large employers are frustrated by health plan administrators that do not give them good, transparent data on claims and prices for procedures for which they pay.

Although still unprofitable, Castlight’s $16 million revenue in the first quarter was almost double last year’s and it signed six new customers, including Viacom, McKesson and the State of Mississippi. Its two top customers from 2014 have renewed and it is partnering with a large Pharmacy Benefits Manager to integrate pharmacy claims with its service offering. The company issued guidance that Q2 earnings would be $17.6 million to $17.9 million and annual earnings $74 million to $77 million. In line with the theme of disruption, Castlight has invested heavily in its own salesforce instead of relying on distributing through channel partners (such as insurance brokers or agents). Large employers’ health benefits are not going to disappear any time soon, whatever the future of Obamacare.

Another example is Zenefits, which raised $78 million in private capital in 2014 and another $500 million this year, valuing the young company at $4.5 billion. Zenefits focuses on small groups, acting as a benefits broker that offers free HR management software to firms using its platform to buy health benefits. Zenefits might not be fully immune from Obamacare, because there is some evidence that small employers are dumping employees onto Obamacare’s exchanges. However, the economic recovery led to a remarkable resurgence in employer-based benefits that has nothing to do with Obamacare. Indeed, were the Supreme Court or Congress to roll back Obamacare, Zenefits would only see more opportunity as employer-based benefits were more fully restored.

A third example is Evolent, which just filed for a $100 million Initial Public Offering. Like Castlight, Evolent also uses cutting edge software to analyze population health spending and outcomes. However, its market is health systems, not employers. Evolent has three institutional investors, including UPMC Health Plan, an insurer owned by the University of Pittsburgh Medical Center. UPMC is generally regarded as a top provider-based health plan. Launching a health plan is a risky endeavor for a hospital system. Nevertheless, if the local community is comprised of employers with long-term employees who provide a stable population of patients, it can be a very successful venture.

Although Evolent’s business model is somewhat dependent on Medicare, which seeks to impose value-based purchasing on hospitals, it is not dependent on Obamacare itself. The recently passed (and expensive) bipartisan Medicare “doc fix” indicates both Democrats and Republicans in Congress agree the government has an obligation to move beyond “paying for volume” to “paying for value.” Although such talk is little more than sloganeering at this point, Evolent appears poised to succeed whichever party controls the federal government.

What all these ventures have in common is that their success really depends on the employer-based model of health benefits persisting. So far, the evidence from Obamacare’s first two years is that this almost 80-year old model is holding up, having covered far more people since 2013 than Obamacare has.

Investors love the profits incumbent healthcare businesses are reaping from Obamacare. These profits are dependent on unpredictable decisions by the Supreme Court, Congress and a future president. These three examples show that new health IT ventures do not have to take on the risk of Obamacare to succeed.

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