Two MD Investors Look at the Medicaid Tech Space and See Opportunities
Startups focused on Medicaid populations have received only a fraction of the venture capital funding ($1.5 billion) that their counterparts focused on Medicare Advantage ($20 billion) have obtained, according to recent research. Yet despite the opportunities available for fruitful investment in the Medicaid arena, relatively little innovation from private startups is yet happening. Based on research into lessons learned from startup success in Medicare Advantage, Justin Norden, M.D., a partner at the Menlo Park, Calif.-based GSR Ventures, along with Andrey Ostrovsky, M.D., are two physicians who have become involved in investment around Medicaid populations.
Dr. Ostrovsky is the former Chief Medical Officer of the of the Center for Medicaid and CHIP Services, the nation’s largest health insurer. He is the managing partner at Social Innovation Ventures, where he invests in and advises companies, non-profits, and artists dedicated to eliminating disparities. He also advises federal and state regulators on how to incorporate human centered design into policy making. He previously operated a series of methadone clinics in Baltimore, Maryland, and currently practices as a primary care pediatrician at a federally qualified health center in Washington, D.C. Dr. Norden is a partner at GSR Ventures, where he focuses on early-stage investments in digital health. Prior to GSR Ventures, he was CEO and co-founder of Trustworthy AI, which was acquired by Waymo (Google self-driving). He worked on the healthcare team at Apple, co-founded Indicator (an NLP based platform for biopharma decision making), and helped start the Stanford Center for Digital Health. As an academic, he is an award-winning machine learning and bioinformatics researcher with 20-plus publications.
Recently, the two physician investor leaders spoke with Healthcare Innovation Editor-in-Chief Mark Hagland about the innovation space around Medicaid populations. Below are excerpts from that interview.
How do you both see the overall landscape in this area right now?
Justin Norden, M.D.: The investment in healthcare technology and digital health has really increased over the past decade. Around 2012, there was around $1 billion invested each year into digital health annually. Now look at 2021, a peak year, where $29 billion was invested in digital health and health technology. The technology has been getting better and better, and increases in capital are flowing in, as people believe there’s a real technology to improve healthcare.
Andrey Ostrovsky, M.D.: I’ve operated two businesses that have been largely reimbursed by Medicaid, and found that the power brokers of healthcare are investors; if investors decide a problem is worth solving or a population is worth serving, they deploy capital. And that opens the door to serve a certain type of sub-population. And for some reason—perhaps bias or ignorance—investors have generally avoided the Medicaid space. There’s literature, particularly writings by Professor Prahalad [C.K. Prahalad, Ph.D.], that explicates a societal pyramid, in which the top of the pyramid, with relatively few people, has high purchasing power, while the bottom of the pyramid is composed of lots of people with little to no purchasing power. Internationally, compelling profitably scaled businesses have been built on serving the bottom of the pyramid; and Justin and I invest in that bottom of the pyramid. There’s added regulatory complexity, but that can also create a moat. And the sheer volume of people whose care is reimbursed by Medicaid is massive. So on a per-unit basis, it’s not as compelling, but on a pure market basis, it is very compelling.
But Justin and I aren’t doing what we’re doing to make a buck, but rather leveraging financial mechanisms to make a difference in care. Investors are just profit optimizers, and our job as clinicians who happen to be investors, is to make that bridge to do what’s ethical to do, especially with an equity lens, and bridge that over to profit optimization, which is what the investors want. But there is a way to take the greed and profit-optimization motivation and to show that internal rates of return can be very compelling.
What can physicians in practice and individuals with physician practice backgrounds, bring to technology-focused areas of healthcare, as investors and as investment advisers?
Norden: One of the really exciting things is the opportunity to serve a large number of people. That’s where we’re seeing the power of software in other industries; we have yet to see that in HC. To take one of the things Andrey mentioned, there are fewer dollars available per patient in Medicaid. That’s where technology and software have incredible potential, as in AI-based therapeutics, which we know work, and where we know there’s potential to deliver services at scale.
How do you apply your clinician lens to emerging technologies?
Ostrovsky: I don’t really do a huge much of due diligence around the technology; a vast bulk of my investor decision is based on founder attributes, and the remaining component is looking at how big a company might be able to reach. It’s traditional entrepreneurial success factors. But in the Medicaid space, where so much credibility is tied into trust, brand, and empathy, and how easy it is to lose that trust, esp. as a for-profit entity—there’s this metaphor of walking through walls. And a great shortcut is, is the entrepreneur coming from a community they’re trying to serve or create value for? That’s a great way to reduce the lead time in finding product market fit. And then also, is the founding team, is someone from that team coming from deep inside that industry? I like the combination of someone who’s new and even naive and then someone coming from within the bowels of a payer organization.
And how do you view things through your special lens as a physician, Dr. Norden?
Norden: I agree with everything that Andrey said, and more. And have they really built something interesting? In terms of the clinician lens. Is the team solving a problem that really matters? And oftentimes, there’s product-led entrepreneurship; and often, that doesn’t work. So having the experience of seeing and being around clinical care and being able to validate quickly, is this solving a problem people are wiling to pay for? That’s one key lens. People outside HC don’t get that.
Do you both believe that some health plans and even some provider organizations, will be willing to be active investors?
Norden: Everyone in healthcare is slower than in other sectors; there’s more inertia, there are lots of competing incentives, lots of stakeholders. What’s exciting is that in recent times, now we’re starting to see plans become more exciting and get involved early on; ten years ago, that would never have happened. And that’s exciting to us.
Ostrovsky: I think that the investment arms of plans are intrinsically conservative; they’re a limited partner. A plan wants to protect the revenue base as opposed to innovating where it could lead to self-cannibalizing; but I do see a path where investment arms of plans can get exposure to more innovative investment managers. Heritage out of Nashville are as traditional as you can get. But they’re really opened their eyes to what’s possible, and are looking through more of a social-impact and health-equity lens, and made an investment with a safety-net provider to support development. And it’s refreshing to see a senior partner and junior partner making long-term investments. And they employ low-income staff who are on the verge of Medicaid eligibility themselves. They see they’ll have a far bigger opportunity, a category-making opportunity. They’re investors with me on the board of a company called Connections, an acute psychiatric provider headquartered out of Arizona and is entirely Medicaid-reimbursed business. So they’ve been coaching the leadership team in approving strategy favorable to the patient rather than the investor; that’s what it takes to obtain a longer-term return. This is a behavioral-health services business. But the theme is totally applicable here.