By Blake Marggraff, CEO, CareSignal.
If you’re in the healthcare technology sector, you already know that business has been booming. Five years ago, the industry was valued at $125 billion. Now, COVID-19 is fueling the fire as health systems invest heavily in technology to care for patients remotely.
Industry growth isn’t slowing down anytime soon, either: With a compound annual growth rate of 13.2%, the healthcare tech market size is expected to balloon to $297 billion by 2022.
Healthcare SaaS companies and those investing in them are invigorated by this growth — and they’re capitalizing on opportunities to solve new problems created by the pandemic.
In parallel with healthcare tech innovation, healthcare itself is also experiencing a shift. The incumbent health systems and payers, representing trillions of dollars in revenue, are shifting away from the old-school fee-for-service economics and into value-based care models. As COVID-related financial pressures on health systems and payers mount, more healthcare organizations will move toward risk-based models to ensure long-term sustainability. This trend was already underway pre-COVID; now, it’s become almost necessary to succeed financially.
According to data from both HFMA and Numerof & Associates, the risk appetite is only going to grow stronger in healthcare. Healthcare SaaS companies can expect that this demand for risk will trickle down, and healthcare organizations will demand more risk from their SaaS partners.
Taking on more risk can do a lot to drive growth for healthcare SaaS companies — especially in light of COVID-19. And with the rapid growth projections in healthcare tech overall, it’s clear there’s a lot to gain for companies that can align their value with risk-based business models.
Risk-based pricing models are the responsible (and lucrative) choice for healthcare SaaS companies today
When a recent study compared clinical and financial outcomes for patients involved in value-based care models to those in fee-for-service models, it found that risk-based contracts achieved their stated goals of providing better services at lower costs. Risk-based pricing models are working for healthcare, as they put a heavier focus on value for patients. Similarly, healthcare SaaS companies can be rewarded for taking on more risk.
What’s more, as businesses across the country teeter on the brink of bankruptcy, it seems at best inappropriate for healthcare SaaS providers with little to no overhead to shy away from a share of the risk involved in financial contracts. Especially with the growth in healthcare tech, rapidly growing healthcare SaaS companies likely have the cash on hand — or access to venture capital — to enable a smooth transition to risk-based pricing models and better serve their enterprise customers.
But that doesn’t mean risk adoption is a form of charity — not by a long shot. For healthcare SaaS companies, risk can produce rewards and fuel growth in a few ways:
Improve long-run financial outcomes.
Consider the current COVID situation and its impact on businesses. Every dollar counts, and livelihoods are on the line. When high-margin healthcare SaaS companies effectively take on more risk, they minimize the financial exposure of clients until they reach desired outcomes.
If the client is a healthcare organization, those goals could be clinical improvements, operational efficiencies, or staff and patient satisfaction. No matter what form they take, they all contribute to the same long-run outcome for the SaaS company: improved financial returns compared to the status quo and the long-term business of a client that might never have signed on if it had to bear all the risk.
The notion of shared risk has real-world validation already. Oak Street Health, a for-profit healthcare company backed by private equity, has departed from the model of charging patients per visit. Instead, it receives revenue from contracts with Medicare Advantage plans that pay the organization per patient per month.
For example, if one patient’s condition deteriorates and she incurs healthcare costs beyond the revenue she generates, Oak Street loses money. As a result of the arrangement, the company is incentivized to provide top-notch care. So far, the results speak for themselves:
- Hospital admissions have reduced by half.
- ER visits have reduced by 52%.
- The patient retention rate sits at an impressive 90%.
Demonstrate confidence in the product.
When healthcare SaaS companies decline to take on risk, it gives clients the impression that the product isn’t necessarily worth the price. After all, if the software was worth the investment, wouldn’t SaaS companies be willing to give it away in the short term in order to win business in the long run? When companies bake true risk into their contracts — similar to industry leaders like Lumeris — their clients feel confident that they’re working toward the same goals and are on the same team.
Plus, when SaaS companies expose themselves to calculated risk, they demonstrate confidence in their products and a position of financial strength. In healthcare, ROI generally means reductions in medical claims, and only companies with the utmost confidence in their operational and clinical chops can confidently take on the risk.
Accelerate the adoption of innovation.
When vendors add risk to their side of a partnership, it lowers risk for the client. In this new equation, client organizations are encouraged to take chances on innovative products. Unburdened by all the risk, they can focus on the potential upsides of disruptive new technologies and accelerate technological growth in the entire healthcare industry, even as COVID-19 tightens budgets.
In its best form, risk-based pricing turns the oft-muttered phrase “if only money was no object” from dream to reality.
Think of risk-based pricing as future-proofing for the uncertainty that looms during COVID-19 response and recovery. It’s the ultimate way to sit on the same side of the table as a customer. And as massive health systems and tiny coffee shops alike struggle to stay above water financially, I think it’s just the right thing to do.