Silicon Valley and Healthcare (Part 1)

The inspiration for this series of blogs was a recent report on CNBC that Apple Inc. CEO Tim Cook had worn a device that tracked his blood sugar, hinting at Apple’s interest in the space.

Over the last 12 months we have had many conversations, that effectively started with a question: why is Silicon Valley not having an impact on healthcare? The answers I have given, both in our home state of Florida, and in a recent visit to Silicon Valley were the same. First, healthcare is not only “complicated” as our president was famously quoted saying; it is in part the Silicon Valley can’t figure out who the customer is.

Further, Silicon Valley has a major issue with privacy – state and federal privacy laws. In particular, the pesky law known as the Health Insurance Portability and Accountability Act of 1996, also known as HIPAA. HIPPA can be brutal, if violated intentionally. Also related are deep restrictions on the interaction with patients and providers covered by a long list of laws and regulations. We have noted that if there was ever an “Uber of healthcare” that effectively flaunted violations of Federal and State healthcare laws, every single executive and every single driver would be in jail, today. In part, these issues are what have left healthcare relatively unaffected by the healthcare transformation that has changed nearly every industry in the U.S.

That sounds very bleak, but it should not be. We believe the “Rubicon” has been crossed, and the next 10 years will show dramatic movement as consumers (Baby Boomers, Gen X’ers and Millennials) demand more technology in healthcare. See our past blogs this year, if you doubt our conviction.

First to complexity – healthcare in the U.S. is about 18% of gross domestic product. We believe we are on our way to 25% of gross domestic product in our lifetime; 18% of GDP is about $3.7 trillion US dollars. The federal, state and local governments account for about 50% of all healthcare in the United States, direct and self-insured insurances account for most of the balance, with about 8.6% uninsured. The private insurance and employers of insurance account for nearly 1,000 nationwide entities.

Healthcare is also the only industry that has an inverted demand versus supply dynamics. Healthcare costs and utilization are driven by supply availability. The more supply there is the more healthcare will be consumed.

Other than the U.S. government (USG) accounting for the most part for Medicare and Medicaid there are not many dominant dynamic players. Let me share some of the nationwide data.

Membership by Category and Insurance Companies

Note: there is duplicate counting, as in the case of Medicare and Medicaid; they have managed care beneficiaries that are also counted in the roster of insurance companies, as well as self-insured plans administered by insurance companies.

Medicaid (USG) 77,000,000

Medicare (USG) 55,000,000

Federal (USG), State and Local Employees 22,000,000

United Healthcare 70,000,000

Anthem 39,000,000

Aetna 23,000,000

Cigna 15,000,000

Humana 14,000,000

Centene 11,000,000

Kaiser 11,000,000

HighMark 5,000,000

WellCare 4,000,000

The list above shows, that unless you deal with federal, state and local government the options are minimal, with the clear exception of United Healthcare.

This primer sets the conversation and begins to confirm why healthcare is complicated.  The federal government moves the slowest and through regulations in many cases by both state and federal laws slows them down even more. Managed-care companies are the real players and where innovation can happen.

The reason why Silicon Valley has had little to no impact, as I told the executive of one of Silicon Valley’s most historic company, is that “healthcare cannot be changed from the outside; you have to partner with experts, and initiate changes from the inside.” I also added the largest players in the healthcare services by revenue – our hospitals – were also hyper regulated, and frankly where innovation is going to be very slow, as it will impact their revenues. The largest single cost of healthcare, accounting for 32% of every health care dollar is hospitals.

Back to Apple; Apple CEO was quoted in the article saying that Apple was really excited by the potential in healthcare. The direct quote from the CNBC article read:

Mr. Cook also described impediments in the U.S. to making high quality and intuitive healthcare products, namely the priority for medical device makers to get reimbursed from health insurance companies. He also said that this is an area where I am very interested about Apple’s contribution – “very interested.”

More on Silicon Valley and healthcare in the future blogs.

– Noel J. Guillama, President