Health-care start-ups bet on making a killing off Obamacare
Obamacare may get mixed reviews from the general public, but it's a cash cow for start-ups. And investors expect the money pile to get bigger.
More money poured into health-care start-ups than ever before this last January, with $390 million invested across 25 deals, according to Rock Health, a digital health start-up accelerator. That helped make the first quarter of this year the best quarter ever for digital health, with $700 million pouring into the sector, Rock Health reported last week.
Because of Obamacare reforms, many digital health start-ups, unlike a lot of social-focused companies, are making a lot of money, quickly.
"The performance of some of our alumni companies has been very impressive," said Brad Weinberg, a founding partner of Blueprint Health, a health-care tech accelerator based in New York City.
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"We now have 46 companies in the Blueprint Health family and my favorite stat about those alumni is that 80 percent of them are generating revenue. Some of those companies are only six months old," Weinberg said at the Blueprint Health demo day in New York City on Thursday.
Ten companies that came out of Blueprint are on track to do $1 million or more in their first year of existence, Weinberg said.
"These companies are generating real revenue because they are solving real problems," he said.
Another reason these companies are making money faster is because they can't afford not to, said Malay Gandhi, chief strategy officer at Rock Health.
"I don't know if the rate of success is sooner or not, but it's fundamentally harder to go longer without profitability for digital health companies," Gandhi said. "So it forces a lot of companies to find revenue and customers early on."
Unlike start-ups in the consumer social space, digital health companies can't just focus on growing users and develop a business plan later. They can't be scaled fast enough for this model to work, Gandhi said. So they start to figure out how they are going to make money from the beginning—a priority that investors naturally like.
The public market is also starting to notice. On Friday, IMS Health—which provides analytics and services to pharmaceutical companies, health-care providers and payers—raised $1.3 billion when it went public, making it the second largest IPO in 2014.
Aside from early profitability, investors also believe these companies will help overhaul the overly complex and bureaucratic health-care industry--an industry that, despite institutional resistance, is unlikely to survive in its current form, Gandhi said.
"More investors are getting into the space because the longer they stare at it the more they realize how screwed up it is," Gandhi said.
For most of these digital health companies, the goal is saving health-care organizations money while also improving the quality of care, often by utilizing big data.
RubiconMD, one of the companies that demoed on Thursday, is trying to help save primary care physicians money by helping them avoid specialist referrals.
"Increasingly, physician groups are entering into value-based contracts with insurers. This means if they help their patients avoid unnecessary care they will earn more money. When done right patients see fewer doctors and receive better care," said Gil Addo, co-founder of RubiconMD.
In a typical value-based contract, a primary care provider can earn an additional $150 if they can help a patient avoid an unnecessary referral, and customers using RubiconMD system have already seen a 30 percent reduction in referrals, Addo said.
"The challenge is that primary care providers still rely on specialist input for a number of cases. And the only way to receive that input is using this complex and confusing, inefficient referral process."
RubiconMD simplifies the process by allowing a primary care physician to submit a question about a patient's condition, along with any relevant imagery, to the company's platform where RubiconMD routes the case to a specialist and returns the opinion within a few hours.
This enables the primary care provider to follow up with the patient with the necessary best steps faster and also helps the patient avoid multiple doctor's visits. Addo added that his company is not in the business of blocking referrals to a specialist, but is more about making the process more seamless and making sure the patient sees the right specialist in a quicker manner.
"The physicians that we work with are always going to do what's in the best interest of the patient, it's just how they are wired," he said.
Some of Rubicon's investors include one of the co-founders of Skype, a former president of Walgreens Clinic and a former president and CEO of Blue Cross and Blue Shield of Florida.
"We are literally bringing specialist expertise into the primary care setting," he said. "It's that simple."
—By CNBC's Cadie Thompson. Follow her on Twitter @CadieThompson.