Transforming Health Care from the Ground Up

By Vijay Govindarajan and Ravi Ramamurti
Harvard Business Review, July-August 2018

The U.S. health care system desperately needs reform to rein in costs, improve quality, and expand access. Federal policy changes are essential, of course; however, top-down solutions alone cannot fix a wasteful and misdirected system. The industry also needs transformation from the bottom up, by entrepreneurs and intrapreneurs.

Innovation by Start-Ups: Iora Health

Rushika Fernandopulle realized that in order to build the right business model and scale it, he needed private capital. In 2010 he cofounded Iora Health, a for-profit company, and raised more than $6 million from three venture capital firms. The new company opened four offices, each with a self-insured employer or union benefits manager as its chief insurance partner. From the start, he wanted to be sure his model could be scaled geographically, so he selected sites from different parts of the country with different patient mixes. One was in Hanover, New Hampshire (in partnership with Dartmouth College), another in Las Vegas (with the Culinary Health Fund), the third in Brooklyn (with Freelancers Union), and the fourth in Dorchester, Massachusetts (with the New England Carpenters Benefit Funds).

This time, Fernandopulle didn’t mess around with partial solutions. He instituted a fully capitated payment system focused on primary care that required no fees, no coinsurance, and no copays. Instead Iora charged insurers a flat monthly fee per member that was twice their historical spending on primary care. He hired four health coaches for every doctor—paying them a fifth of a doctor’s salary and half of a nurse’s. He spent an outsize chunk of his start-up money on a custom IT system—and had no reservations about the cost.

Patient focus.

Iora’s goal was not to deliver health care but to empower patients to take control of their own health. “What we are really trying to do is change behavior,” Fernandopulle told us. At Iora, that change was driven by three innovations that worked together in a virtuous cycle: a capitation-based business model, a health coach for every patient, and a customized IT platform. Capitated payments eliminated any concern about whether a particular patient interaction was billable, so consultations that once required a visit to a doctor’s office could now take place via convenient technologies such as phone, e-mail, and Skype, and they didn’t necessarily involve a doctor. That cleared the way for more involvement from health coaches, whose frequent patient interactions were facilitated by the IT platform. The platform, which tracked all patient data and made it available to doctors, health coaches, and patients, was designed not to facilitate fee-for-service billing but to enable better health outcomes.

Iora wasn’t the only provider to use health coaches in its practice. Omada Health and others used them, too, but they recruited coaches with prior health care experience, whereas Iora recruited people with qualities such as empathy, compassion, and gregariousness and then trained them in the medical skills they would need.

Iora’s health coaches proactively managed each patient’s well-being and intervened the moment trouble arose, especially with chronic-care patients whose costliest problem was noncompliance. Health coaches did some work that doctors and nurses did—such as taking vital signs and drawing blood—but they also engaged patients in new ways. They ran smoking cessation clinics, and they took diabetic patients to the grocery store and helped them shop for food. They led Zumba classes and served as confidants and cheerleaders. They trained patients to manage some of their care, such as monitoring blood pressure and insulin levels. This kind of task shifting, from doctors to health coaches and from health coaches to patients, saved money. More important, the coaches were better at many aspects of care than doctors—and they loved their work. But it was the capitated payment system that was the real game changer. Under the legacy fee-for-service systems, providers need a high volume of patient visits and procedures in order to make money. Under its capitation system, Iora makes money only if its patients stay healthy and thus require fewer tests and procedures. It was a completely different business model, one focused on value, relationships, outcomes, and the long game. Hybrid payment systems like Renaissance, Fernandopulle realized, created internal conflict. It had to be all or nothing. Iora’s capitated model would save on administrative costs by reducing paperwork and would encourage other cost-saving measures to make the most of the flat-fee dollars. Iora clinics, for example, performed many of their own lab tests and processed their own blood work, which was cheaper and faster than sending the tests out. But the big savings would come from the investment in intensive and creative primary care that would reduce downstream expense on specialist and hospital care as patients stayed healthier. For patients with chronic conditions, Fernandopulle expected to see returns in the first year; the payoff for healthier patients would take longer. But he believed that every dollar he saved his partners in fees for ultrasounds, kidney dialysis, bypass surgeries, and other downstream costs generated additional buy-in for his capitated model.

Cost control.

When necessary, Iora provided patients with specialist care, but there, too, Iora saved money by contracting specialists as consultants to the primary care practice—essentially inviting cardiologists, nephrologists, and others to join the gig economy. When Fernandopulle asked the head of endocrinology at a top hospital what percentage of endocrine clinic patients could be managed by a primary care physician with a little expert advice by phone or e-mail, the answer was an astonishing 80%. A formal study of e-consultations by PCPs across 10 specialty areas, including neurology, rheumatology, dermatology, and nephrology, confirmed that on average, primary care physicians were able to address problems in those areas for 60% of patients. By 2017, seven years after he launched Iora Health, Fernandopulle’s premise had proved itself. It had reduced hospitalizations for its members by 40% and cut total health care spending by 15% to 20%—far beyond the 4% to 5% needed to recoup Iora’s higher spending on primary care. Its patient retention rate was 98%, and its Net Promoter Score among patients was in the 90s. Some 90% of patients had their blood pressure under control, compared with an average of 60% across providers in the industry. Employee attrition, at a mere 2.5%, was off the charts. Iora was increasing the number of patients it served by well over 50% a year, largely by attracting seniors through contracts with Medicare Advantage plans. Iora now has 24 locations in eight cities and employs more than 400 people. It has raised $125 million in venture capital, including from long-term investors such as Rice University’s endowment fund and Singapore’s Temasek.

Lessons for start-up innovators.

Iora’s success, and that of half a dozen other start-ups we studied, suggests some general principles by which innovators can attack U.S. health care’s bloated costs, uneven quality, and access limitations. Fernandopulle and the other visionary founders took a clean-slate approach, building new business models from scratch. They launched ambitious, for-profit ventures right out of the gate. They thought from day one about how to scale their models by tapping into venture capital and private equity funding. They did not hesitate to make big strategic investments, including in technology, as Iora did with its customized IT system. Finally, they thought carefully about what kind of payment system would best fit their purpose, considering risk-sharing alternatives such as capitation and bundled payments.

In our research, we’ve seen several Iora-like start-ups. CareMore, for example, uses health coaches called extensivists to deliver capitated primary care, with a focus on geriatric patients. Other disruptive start-ups we studied look quite different. Consider Health City Cayman Islands, a for-profit hospital launched in 2014 by Dr. Devi Shetty, the founder of Narayana Health in India. Seeking to replicate innovative practices honed in India and to target American patients, Health City opened in a location near the United States but outside its regulatory sphere. This approach involved making innovative, even radical, decisions about where to locate, whether to build or buy (management opted to build from scratch), whom to partner with (it chose Ascension), how to price (bundles), and how to crack the U.S. market. Health City launched as a modest 104-bed facility for cardiology and orthopedic care, but the plan is to develop a large for-profit system, investing $2 billion over the next 10 to 15 years. Health City’s transparent, bundled prices—which are 60% to 75% lower than those in the United States—serve its disruptive strategy of luring American patients from legacy hospitals.

As Fernandopulle points out, if his company and others like it can capture even 20% of the $350 billion in wasted health care spending per year, it would amount to a staggering sum. By our calculation, if companies with Iora’s primary care–focused approach enrolled one-third of America’s projected 55 million seniors in 2020 into Medicare Advantage plans, the country could save $30 billion to $40 billion a year in avoided spending on secondary and tertiary care. And if those companies reaped 20% of the value thus created, their market capitalization could be upwards of $100 billion, even with a price-earnings multiple of just 15.

Numbers like that are a powerful incentive for change. They will no doubt motivate many health care innovators to expand access to quality care, enabling patients to enjoy good health. If you’re looking for a starting point, start there.…

For a health care system that is overpriced and underperforming, it seems that reform should be based on improving our allocation of higher quality essential health care services. By any measure, that requires a top down, comprehensive approach for which governments are best suited. Yet much of the effort comes from the bottom up in the medical-industrial community, with the support and encouragement of business academics such as these authors.

A quick read of the endorsement by Professors Govindarajan and Ramamurti of Rushika Fernandopulle’s creation of Iora seems like just anther description of the successes of venture capital and the individuals driving the innovations. But for those who want to see the changes in our health care system that we desperately need, especially in the financing, Fernandopulle’s model is particularly disconcerting.

In perhaps overly simplified terms, let’s look at what he has done. He begins with venture capital – a financing method designed solely to create monetary rewards – a terrible start when applied to health care since the goal should be to maintain and improve health which requires spending money, not generating more. He then structures his health care model based on primary care, but not the usual team of physicians, nurses and other health care professionals, but rather on an army of health coaches – individuals with no health care qualifications but rather who receive only on-the-job training. These health coaches are intended to replace a significant portion of the functioning of fully trained health care professionals, especially doctors and nurses (ratio of four health coaches to one physician), though much of the work they do is song and dance (taking diabetics grocery shopping, and leading Zumba classes?). For those patients who have more serious problems, often requiring the services of specialists, they have managed to keep the majority of them away from the specialists. They make a big point that a major element of their success is capitation which is why they provide specialized services within the primary care environment. Referring patients out requires paying for those services whereas retaining them within the practice allows them to keep more of their capitation payments (success defined by net profit).

Most of the health care professionals with whom I have been associated would find problems with this. There is something sacred about the science and art of health care as it is applied to the patient. The model described here places business success above all else, and any quasi-semblance of sanctity must fall under other unfamiliar gods that do not frequent the halls of health care justice.

We know what health policies would work to improve the welfare of the American patient. So what is this diversion from health policy science into what some might describe as ethics? Well, that’s precisely it. The business community thrives on matters of money and profits, but the health professions thrive on the well being of the individual.

The authors of this article in Harvard Business Review have simplified this as the advantages of bottom up versus top down management, but if that is what this really is all about, then we need to unify the nation for the top down approach that would bring health care justice to all.

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