Editor’s note: This post was written in April and is being re-promoted today as the Supreme Court finally offers its ruling on the Affordable Care Act.
Sometime between now and the end of June we’ll get a decision from the Supreme Court on the constitutionality of the Patient Protection and Affordable Care Act, also known as healthcare reform or “Obamacare.” The Court could rule the law entirely constitutional, overturn just part of it, or overturn the entire law. Could the decision deal a blow to the apparent momentum of health startups across the country?
Not likely, according to a number of industry experts, which is actually surprising.
The bill, which became law in March 2010, is credited with breathing life (and dollars) into new ventures across the healthcare industry, as it spelled out the contours of the future of U.S. healthcare. So why wouldn’t its repeal, or even the potential of repeal, chill investments and stall startups’ traction?
“Prior to healthcare reform there were folks sitting on the sidelines to see how it would shakeout,” Stephen Kraus, a partner at Bessemer Venture Partners told me. “I haven’t seen a decrease of activity because of the oral arguments and some of the uncertainty on how the Supreme Court is going to rule.”
In conversations with Kraus and others, a common theme emerged: though the bill set in motion fundamentally changes the way we pay for healthcare, with respect to many of those changes, the train has left the station no matter what the Court decides.
First, a bit of background. (If you’re familiar with the reform bill and the Supreme Court case, you can skip this.)
There’s not room in this article to describe everything the bill does (an in depth overview is here) but its basic goals were to expand heath insurance coverage and limit costs. To achieve the former, the bill expanded health insurance coverage by making it illegal for insurers to reject customers based on preexisting conditions or price them differently based on common differences in risk. Then to avoid adverse selection – the sick buying insurance while the healthy hold off, knowing they won’t be rejected if they go to buy it once they get sick – the bill mandated that all individuals obtain insurance. To accomplish this, it outlined the use of “exchanges,” regulated markets through which individuals would buy insurance. It then offered subsidies to those who would be unable to afford to pay for that insurance.
It also took a variety of steps to curb the rising cost of healthcare through a number of different methods, among them an advisory board tasked with reducing the cost of Medicare and the encouragement of Accountable Care Organizations (ACO’s), a mechanism through which healthcare providers coordinate to provide care. The latter is part of a push in the legislation to shift from “fee-for-service,” in which providers are reimbursed by the unit of care delivered, to payment based on health outcomes.
Though the bill’s supporters were confident in its constitutionality, that confidence was shaken by tough questioning by a number of the Justices during oral arguments in March. The mandate in particular appears to be at risk, and the possibility that the Court would overturn the entire bill, though unlikely, is now more frequently mentioned.
The Court Won’t Hurt Startups
One of the biggest reasons why the health startup community isn’t on the edge of its seat as the Court deliberates is that the mandate is less central to innovators than the shift away from fee for service. Expanding coverage is important, not a top area for innovation.
But what about the change in how providers are reimbursed? The rise of ACOs and the shift away from fee-for-service is the “next big thing” in healthcare, according to Jared Kesselheim of Bain Capital Ventures. But according to Kraus, that shift can’t be undone by the Court.
“Regardless of what happens to [the bill], it set some wheels in motion,” he said. “I think the reform bill was a wakeup call.” He expects the rise of ACOs to continue, regardless of what the Court decides. Robert Greenglass of Highland Capital Partners agreed.
“It is clear that the healthcare system is moving to a ‘pay for quality’ vs. ‘pay for quantity’ system,” Greenglass told me by email. “As physicians become more accountable for the care that they provide, and consumers of healthcare are on the hook financially, there is a need for companies to be built to address these issues.”
Other healthcare trends that will continue to offer opportunities for startups regardless of what happens to the reform bill include digitization of medical records, the use of mobile devices as health sensors, and the use of genetic sequencing, to name just a few.
Overturning Government Innovation
None of this is to say that the Court overturning the entire bill or, perhaps more likely, total repeal by Congress, wouldn’t hurt healthcare startups at all. Nate Gross, Medical Director at Rock Health, a health startup incubator, cited the creation of the Center for Medicare and Medicaid Innovation as one of the bill’s most helpful features for startups.
The center will provide $1 billion in grants for innovative health ideas. But even that, Gross says, isn’t a make or break funding source for startups.
“To have those gone would I think be unfortunate,” he said. But he added, “I don’t think a startup’s lifeline is ever depending on grants like that. These startups have not formed with the expectation of getting those grants.”
Of course, while startups wouldn’t be hamstrung by repeal of the healthcare reform act, that’s little comfort to the roughly 12 million Americans who would end up without insurance because of it. And it would be a shame to see innovative pilot programs rolled back.
“I have been in healthcare for a decade plus,” said Kraus. “I have never seen the government push so many innovative things through. It’s amazing how almost entrepreneurial the government has been, which you don’t see often.”
Nonetheless, even full repeal wouldn’t crush startups’ momentum. Kraus concluded our conversation summarizing his own view:
“What happens if healthcare reform falls apart? I think some wind will be taken out of the sails for sure. There’ll be uncertainty introduced again. I think the wheels have already been set in motion on a bunch of this stuff. I think entrepreneurs are going to figure out ways to create new companies around this uncertainty. Because from uncertainty comes opportunity.”