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Why Health Care Isn’t Staples or Starbucks (05:12)

Why don’t we see more chains in health care services, like we do in other industries? New Marketplace Theme Leader Leemore Dafny comments that most clinics have the same patient care process. “It ought to be fairly standardized and automated,” she says. “There shouldn’t be all this reinvention of the wheel. What is going with that? Where is the scalability?”

They may have the same process, says Rushika Fernandopulle, CEO of Iora Health, but there are very few who have been able to scale, particularly across geography. “With a lot of chains and retail — Staples, Starbucks — you can take essentially the same thing and stamp it out. Health care is local, for better or for worse,” he says. “It’s local in terms of the physician culture, the illnesses, patient experiences, the payment model, the competitive landscape.”

So the questions are: What can and should be the same, where that makes business sense, and what can and must be different, because health care is local? “The problem is, most existing health care people get it wrong on one side. They try and just keep it variable, and they don’t standardize enough,” says Fernandopulle. “And when the Staples and the MBA types try to do this, they try to standardize too much, and it fails. I think it’s really hard to get it right in the middle.”

A related challenge for new entrants is raising funds. “Is there money growing on trees, because everybody recognizes there is such a problem with health care delivery that they’re willing to invest in anything that has some promise?” asks Dafny.

“Generally yes, money is relatively available in health care — but not for bad ideas,” says Jeff Kosowsky, Senior VP of Corporate and Business Development for American Well. “It still takes a lot of work to raise it.” Kosowsky notes that American Well has been “very blessed to not have venture capital,” adding, “if you’re on a venture capital model that says, ‘You’re set, and you have to exit,’ we’d be 3 years late.”

“When I started doing this 12 years ago, it was almost impossible to raise money to do health care delivery things. Everyone was chasing the new drug or the new device,” adds Fernandopulle. “I think it has gotten much easier and there are a lot more people who are looking to invest in this space.” It’s still difficult to raise money as a new health care entrant, however. “The venture capital and private equity markets are geared for too short a time frame for doing the sort of stuff that we are doing,” he says, whether that’s an IPO flip within 18 months or 5-year closed-end funds for an organization 6 years young. “We’re solving really hard social problems. This is about behavior change, about moving a huge industry. It is a huge return but on a longer time frame, and I think the funding mechanisms we have in general don’t match with that.”

From the NEJM Catalyst event New Risk, New Business Models held in Boston, October 6, 2016.

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