Note: this is a series on making a digital health startup. The first post is here.
Last week we talked about the difficulties of selling B2B in general. This week we’ll talk in a little more detail about selling treatments to insurers. Sometimes you’re selling a piece of IT software to a hospital. It’s technically digital health, because it’s software and it’s related to healthcare, but ultimately that’s is a traditional sales process, similar to that of a big oil company or consumer goods company.
But let’s say you have a new digital therapeutic or a new device, and you want insurance coverage. What then? I ended last week’s post with a quote from an insurer, so I’ll start there.
Having spent the last 15 years of my life as an entrepreneur, I know it’s a difficult and time-consuming process. Now, as an insurer, I’ll demand lots of data and good RCT trials results, and I’ll make you squirm you in looking for data. You’ll have to prove the benefit of your product in a variety of ways, and it’s going to be an expensive and long road ahead. If it turns out really great, there can be some rewards…but trying to get there will take years.
On the one hand, I can see how people might read this and become angry at the insurers. Insurance companies hate innovation! Insurance companies focus more on money than on the health of their members (the industry term for “customers”)!
But I think that’s not entirely right. Insurers are petitioned a dozen times a day to cover a new treatment or device; how should it decide?
We’ve put insurance companies in a really difficult place, and by way of illustration I’d like to use the example of England’s healthcare. In England, where the argument is a little simpler, health coverage is nationalized. Citizens pay fixed taxes to the government, and the government’s National Health Service (NHS) provides basic health care to all its citizens (“universal health care”). More specifically, citizens pay ~£113 billion in taxes each year, so ~£113 billion is the budget for all the healthcare needs of the English population. With this money, the government is responsible for every malady that a citizen might encounter, from the flu to ebola, birthing to hospice. And every year, roughly all of the money is allocated out; there is minimal cushion for extra expenses.
This means a few things:
- First, there isn’t just money waiting around to be spent. If the NHS wants to spend £1 million on a new technology, it must, in general, decrease spending elsewhere by £1 million in order to keep a balanced budget.
- Second, the relative benefit of each technology must therefore be compared against its cost. Note: all facts below made up for illustrative purposes. Let’s say there’s a new medical device that can save the lives of the 100 people in England with a rare form of deadly pancreatic cancer but costs £100 million per year…should the NHS cover it? From one perspective, sure! If you can save even one person, you should do it! But from another perspective, that £100 million needs to be compared against what it can do elsewhere in the health world, as the NHS’s budget is more-or-less fixed. £100 million might also mean 200,000 infant vaccinations or 100,000 HIV medicines — should the NHS cancel these programs in order to save the 100 cancer sufferers? And now it turns out the medication saves 80% of cancer patients but puts the other 20% in a coma. What now?
- Third, the way the NHS handles this issue of cost vs. benefit is by using, among other things, a calculation called a Quality Adjusted Life Year (QALY), essentially a calculation of the number of years of high-quality life a treatment can provide. It then sets a specific value to a high-quality year and compares that to its cost. Let’s say the cancer drug provides one extra year of fully-healthy life, and it costs £1 million per year. And let’s say the UK has set the value of a QALY at £50,000. According to this calculation, the drug would be too expensive to justify using it. If the drug makers could lower their cost to £49,000, then it might be accepted. But if not, then it wouldn’t be accepted.
This might seem like a cruel thing — let’s place a “value” on a human life, and let’s let some die because the cost to treat them is too high — but at the same time Britain has managed to provide a safety net of basic coverage for all its citizens, without going bankrupt. And folks who wish to seek the most advanced (and risky and expensive) treatments who have the money to pay for them are free to go outside the government system and purchase these treatments on their own.
In the United States the system is way more complicated. When folks are old or poor their health coverage resembles the example above, because two government agencies, Medicare and Medicaid, respectively, provide universal healthcare to these people, but for the rest of the population, they choose their own insurance plan. Each plan provides different services and accepts different treatments.
So how do these insurance companies decide which treatments to accept and which to deny? In the United States the QALY system is considered unpalatable / unethical (see: death panels), so it’s illegal, but as this article discusses, it’s also sometimes used (maybe — but not always — this is complicated!). But again, with insurers there’s a fixed amount of money coming in (via monthly premiums) and a widely variable amount of money being spent (let’s say there’s an ebola outbreak and everyone’s getting quarantined — who pays for that?!), so their natural impetus is to deny coverage as much as possible, in an attempt to remain solvent.
So how, then, does an insurer agree to cover a treatment?
Sometimes the insurers are forced to cover a new treatment by Medicare; if Medicare agrees to cover a treatment, then insurers will generally follow along and agree to cover. But sometimes comes from other sources. For example, if a startup directly petitions an insurer sometimes the insurer will agree to cover a treatment. But again, the insurer feels pressure to deny coverage as much as possible, so the request of a pesky startup probably won’t matter much, unless…
Sometimes an insurer will agree to cover a treatment if a bunch of patients petition for it, or if there’s a big media swell about the benefits of a particular treatment. And sometimes if a doctor asks for approval for a specific treatment, the insurer will sometimes agree to cover it. Insurers are only valuable if desirable doctors agree to accept their insurance. And if a doctor leaves one plan for another, maybe the doctor’s patients will leave the plan, and then the insurer will lose lots of money. So the insurers spend lots of time kow-towing to the most valuable doctors, and sometimes if these doctors demand coverage for a treatment they’ll agree to cover it. But until recently the doctor would never know the price of a treatment. In fact the cost of a treatment would be considered taboo for the doctor; from the doctor’s perspective, if s/he wanted a treatment, s/he didn’t care about the price, for the doctor only cared about providing better care without focus on price.
This then created its own issues, as medical salespeople had one decision maker (the doctor) and another payer (the insurer), similar to toy companies that advertise to children knowing that if the child asks for a special Sesame Street doll the parent will buy it. And of course medical salespeople would want to make the issue of price taboo, preying on this awesome integrity of doctors, and medical startups would be able to command exorbitant prices for products with marginal incremental benefit.
We expect doctors to make fully rational decisions — they’re doctors after all, with the best interest of their patients in mind — but in one hospital I visited the medical salespeople hang out inside the operating room during surgery, and when a doctor is trying to decide which pacemaker to use and the Medtronic salesperson is standing right there, you better bet the doctor will feel peer pressure to use the Medtronic pacemaker! (In fact there’s proof that these sales reps do influence doctor decision-making.) And then, when the doctor is bribed (or asks to be bribed) as a quid pro quo for promoting a particular treatment…
Alright fine! Fine, you say – forget about these insurance companies, and forget about the doctors. Forget about this complicated system. Instead, I’ll go to the companies that insure their own employees. Instead of a big insurer, I’ll sell to these “self-insured employers.” These companies are smaller than an insurer, and their interests are aligned with their employees, and so if I can just convince a rational CEO that my product will improve health and lower costs, then it’s a slam dunk.
Wrong again. Many of the decisions related to healthcare at self-insured employers are handled by Human Resource departments, and these departments aren’t necessarily tasked with lowering costs. Maybe their only mandate is to keep employees happy. And now this new technology comes along, and it’ll be a hassle to integrate…well maybe it’s easier just not to go forward.
Direct quote from the CEO of a startup that’s sold to self-insured employers:
HR is where good ideas go to die. HR executives control $1.5 trillion healthcare spending, but they’re not passionate about health…I go talk to CEOs and they want to buy my product, and then the HR people put it in the graveyard.
In any case, the lesson for a startup is it’s probably less useful for you to go to an insurer and ask for coverage than it is for you to get either patients or doctors to do the asking on your behalf. You’re just a salesperson, a vendor — a dreaded cost on their income statement — but these patients and doctors represent potential lost revenue, and if you can help an insurer keep a patient happy or prevent a doctor from leaving, or even get new patients, then you’re way more likely to get coverage.
The other lesson: this is very complicated! And it’s really hard for a startup to get coverage for his/her product. If you’re looking for someone to blame, well…one time a medical resident exclaimed to me, “All the problems in healthcare are from insurers!” That’s not entirely true, although it’s not not the insurer’s fault. It’s partially the insurer’s fault. And it’s partially the hospital’s fault. And it’s partially the doctor’s fault. And it’s partially the medical technology company’s fault.
Next week we’ll talk about situations where the deals happen quickly and smoothly, so you can start to design your sales cycles around them.