Earlier this month, I spent a week in San Francisco to meet with corporate leaders and investors in healthcare. For the corporate and investor community, the second week of January is one of the most important weeks of the year. More than 30,000 investors and executives congregate in the Bay Area to network and identify attractive investment opportunities. This week-long gathering also builds consensus on the healthcare market’s most urgent topics and its near-term outlook.

This year, beyond the perennial topics of growth and innovation, several themes have emerged including virtual health solutions, mental health issues, and patient-centered business models. These topics not only coincide with issues that have been raised in the public’s health discussions, but they also provide investors with a broad range of potential targets for capital deployment. Investors, however, seem to show little interest in opportunities outside of a narrow band of “proven” categories where significant investments have already been made, or innovations primarily focus on incrementally improving existing solutions. Investing in transformative innovations that will make healthcare simpler, more accessible and less expensive does not seem to be a priority.

Why does such disconnect exist? Using the lens of Jobs to Be Done, we find that this gap arises from investors’ jobs not aligning with those of key stakeholders in healthcare such as patients, physicians, and providers. Clayton Christensen, professor at Harvard Business School and co-founder of the Christensen Institute, explains in Competing Against Luck that a job is the progress that a person or a firm is trying to make in a particular circumstance. For investors, then, progress is maximizing the ROI, or the return on investments. With that goal in mind, investors tend to look for returns that can be realized in a relatively short time period, while ensuring any exposure to risk is minimized. Unfortunately, this strategy pulls investors away from considering innovations that make healthcare simpler and inexpensive.

The exercise of finding targets with the greatest ROI potential often leads investors to chase “hot” sectors over innovations that could fundamentally change how healthcare is delivered. For example, the investor community is heavily focused on investing in cutting edge areas such as cancer immunotherapy and gene editing, two rapidly emerging fields that are highly popular but with few proven outcomes. Yet there’s less interest in developing solutions for mental and behavioral disorders or new antibiotics for super bacteria, both of which the healthcare community recognizes as serious and broad public health problems. One reason for this is that a successful cancer immunotherapy or a gene editing tool could warrant prices in the range of hundreds of thousands of dollars per treatment, but an effective dose of a drug for super bacteria will cost no more than a few hundred dollars.

Because investors prefer realizing returns on their investments sooner than later, they generally prioritize innovations that incrementally improve upon existing products and services and  deliver faster returns rather than transformative innovations that can reach more people. In healthcare, securing the FDA’s approval is one of the most time-consuming and expensive processes. A novel drug or device that has never been vetted by the FDA will take much longer to receive an approval than those that improve on already approved products.

Finally, given the desire to minimize exposure to risk, investors in healthcare tend to favor investing in drugs over medical and diagnostic products. Medical products, particularly technology-based devices and diagnostics, carry both clinical risk from the FDA approval processes and market risk from lack of customer adoption. Although receiving an approval for a drug is time consuming, most drugs are rapidly adopted by physicians and patients once approved by the FDA, whereas medical devices and diagnostic products face the second uphill battle to realize consumer adoption.

Under these parameters, investors find opportunities that deliver simpler, more accessible, and less expensive solutions financially unattractive and much more risky, which is one of the major reasons why our healthcare system continues to get bloated, drug prices continue to escalate, and quality of care continues to decline.

How can we overcome this dilemma?

First, as past transformative innovations have shown, game-changing solutions need to arise from the outside of the boundaries of healthcare. For example, an established medical product company selling a centrifuge for thousands of dollars would not want to develop an inexpensive blood centrifuge that does not require electricity or battery. Such a move would cannibalize its existing business. However, we are seeing an infiltration of sensors and simple diagnostics that have been born out of the consumer product industry. Compared to most established medical products, such “cross-over” products can often reach the consumer market more quickly at lower prices, more easily collect performance data, and have a lower ROI threshold. Each of these aspects—short lead time to market launch, and lower priced products targeting general consumers—will attract investors. With smaller capital requirements, investors’ risk tolerance is also higher.

Second, both innovators and investors must recognize that investing in new business models can lead to significantly greater ROI than just investing in new technology that fits well into the established model. Historically, the third-party payer system, where insurance companies are solely responsible for all medical payments, has strongly resisted changes to business models. Going forward, however, healthcare’s evolving landscape with new laws and increasing cost pressure will make new business models less risky and more rewarding. Although this rapidly evolving environment has resulted in some unpleasant side effects such as drug price inflation, new business models are adapting. For example, by introducing a generic epinephrine injector at a significant discount to its competitor’s, CVS is well positioned to take significant market share from Mylan, the pharmaceutical company behind EpiPen, without compromising quality and outcome for consumers. This is the true value of innovating the business model. Transforming business models can lead to unmatched value creation for a significantly larger number of consumers. More investors need to target such innovations.

Every year as I walk away from a week’s worth of meetings and receptions in San Francisco, I remind myself that most investors have their hands tied by structural, cultural and financial hurdles that make it challenging to effectively invest in innovations that can lower the cost of healthcare. But, innovators can guide the investment community to create greater value without sacrificing ROI and exposure to risk. For the healthcare community to address its most pressing and urgent needs, its innovators must convince investors of the value of the solutions they’ve created, as well as how those solutions will transform the healthcare system for good. It’s a tall order, but a highly rewarding challenge.

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  • Spencer Nam
    Spencer Nam