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Health Care Fat, Silicon Valley Surgery

Eric Rosenbaum, CNBC.com
Friday, 17 May 2013 | 6:02 PM ET
Geber86 | E+ | Getty Images

Want to talk about the obesity epidemic that doesn't get as much press as Mayor Michael Bloomberg's supersized soft drink ban? It's the bloated waistline, and bottom line, of the health care industry itself.

Spending on health care – now running at roughly $3 trillion per year -- is on its way to 34 percent of GDP by 2040, according to the federal government.

Here's a few more eye-opening ways to examine GDP and the health care system: the government contends that cutting into health care costs by just 1.5 percent would increase real GDP by over 2 percent in 2020 and nearly 8 percent in 2030. It also claims that as much as 30 percent of health care costs (or about 5 percent of GDP) could be saved without compromising health outcomes.

(Watch: Health Care Industry Game Changers)

Health care has been a pretty bad investment. All that money into the system isn't improving our health or the patient experience. We may be living longer than ever before, but we aren't getting collectively better at a reasonable price. The percentage of personal bankruptcies with a medical cause? Sixty-two percent, according to a study by Harvard University researchers.

Sounds like disruption is just what the doctor ordered.

The five health care companies on the inaugural CNBC Disruptor 50 List are: 23andMe, Audax Health, Castlight Health, Ginger.io, and ZocDoc.

Ironically, some of the health care companies being disrupted are now prescribing disruption to their own patients. And that's not as unhealthy as it may seem.

As the CEO of Audax Health, Grant Verstandig, told CNBC, health care companies know that between the Affordable Care Act and the pressure from startups like his--whose businesses are being fostered by technological leaps--the competitive landscape is changing, and not in the favor of a wasteful, overpriced health care market. Prices are going to come down, and companies that want to be health care survivor stories will have to do a better job of competing.

That's why companies like Aetna and Cigna have top executives on the board of Audax Health, and why Cardinal Health is a client. These companies want to be the health care sector leaders that eventually get a larger share of the market through more competitive offerings. The lazy incumbents with legacy revenue streams who don't adapt—typical of a disrupted company—will be forced out of the market, as consumers are provided more and better information.

As with many disruptive innovations driven by technology, the biggest force for change in health care is you, the passive health care system participant.

Audax, which makes the bold claim that as much as 75 percent of health care spending is avoidable, and also boasts former Apple CEO John Scully on its board, is trying to change the way you live and think about your own health. The company's CEO said its subscription-based model—insurers and health plan providers offer Audax's service to participants—is "growing like wildfire."

"Self-engagement," also referred to as "self-actuation" of Americans, is the buzzword behind many of the disruptive models targeting the status quo within the corridors of America's hospitals, examination rooms of doctors' offices, marketing arms of drug makers and claims models of the insurers.

Ginger.io is giving you the tools to monitor and modify your behavior before expensive health care remedies are required, by collecting passive patient data from phone sensors and patient-entered information for health care providers. Its CEO, Anmol Madan, remarked, "Disruption is solving a problem from first principles—what should exist, but doesn't. Then being fearless enough to make it so." He began his health care startup quest as an MIT Media Lab experiment, using 70 MIT and Harvard students' phone data to predict flus based on phone usage patterns and survey answers.

Castlight Health, which has raised more money from VCs than any other current health care startup, wants to give power to the people when it comes to a health care pricing environment that is today defined by a lack of transparency. It's working with health providers including Medco Health Solutions, Castlight has raised more money than any other current health care technology startup--$181 million. Though this record VC raise speaks as much to the big opportunity Silicon Valley sees right now in making a new market of health care, as it does to Castlight's model specifically.

(Watch: From Ruptured Eardrum to Million Dollar Business)

Verstandig said that when he looks at companies such as Ginger.io and ZocDoc and Castlight, alongside Audax in the wave of venture-backed attacks on the health care status quo, he has never seen a moment in market history when government reform and entrepreneurship have been so productively aligned.

23and Me, founded by Anne Wojcicki, Google founder Sergey Brin's wife, lets you take a peek at your own DNA—its Personal Genome Service—with a kit you can order online for $99 and have analyzed (a drop of your saliva is required). Its goal is to reach 1 million genotyped customers by the end of 2013—the 1 million threshhold is the key to making larger genetic discoveries more quickly, according to the company, which is at the quarter million mark now.

It all stitches together around a consumer disruption story with the potential to trim a big part of that $3 trillion a year in health care system fat.

"Disruption is a marathon that takes passion, bravery and stamina to solve old problems in new ways," said Giovanni Colella, CEO of Castlight Health.

You could probably run a little more yourself each week. Indeed, between each individual getting a little more exercise and the startup sprint turning into a marathon effort, health care companies are going to have to become more like the disruptors, or end up in the ER, and ultimately, on market life support.


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