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March 2, 2023

Financial and operational benchmarks for tech-enabled care organizations (Sofia Guerra, BVP)

Awell Partnership lead Rik Renard hosted Sofia Guerra to reveal the fundamental trends and benchmarks CareOps leaders need to know about tech-enabled care organizations. Watch the full conversation here or here is an overview with key insights.


Our conversation was filled with more wisdom in 60 minutes than most people gain from a one-year MBA program, here is what we learned:

  • You need to be obsessed with measuring your clinical and financial ROI because it means you can renegotiate with payers and get paid more - which will boost your economics and gross margins.
  • Investors don't want you to use all your capital to develop products if you can buy something that already exists
  • Companies like Babylon, Oak Street Health and One Medical were being pushed to grow at all costs, but in the current market early-stage companies should put a lot of emphasis on how to scale efficiently

Quick CareOps recap

If you are already familiar with the terms CareOps and care flow, skip this section and feel free to go straight to the key takeaways.

What is CareOps?

CareOps is a set of practices and tools to build, operate and improve software-enabled care flows. It applies principles from agile software development, quality improvement and design thinking to healthcare processes.

CareOps brings people from clinical, operations, product, data and compliance teams together, overseen by strong clinical leadership. Ultimately, CareOps increases a provider organization’s ability to deliver higher quality care at lower cost and drive improvement cycles more frequently than its peers.

For more context on CareOps, read What is CareOps and why do we need it?

Isn't CareOps the same as clinical operations?

Clinical operations or clinops is a function that helps making sure care is getting delivered.

CareOps is a cross-functional practice to design, implement and optimize software-enabled care flows that power clinical operations.

What are care flows?

The central concept of CareOps is the “care flow”. At different care providers different terms are in use for this term, such as care program, care pathway, care plan, patient flow, patient journey, care journey, clinical protocol, care process, (clinical) service line, care process model, clinical workflow or even digital therapeutic.

In essence they’re all sequences of activities completed by a care team and/or patient to maintain or achieve a desired health status for that patient.

Care flows are often defined at the medical condition / population level: a care flow for “Anxiety”, “Type 2 diabetes”, “Total joint replacement with obesity for 65+”, “Menopause”, “Sexual health for LGBTQ+”, “Discharge after surgery”, etc. and can be patient facing only, care team facing only or include activities for care team and patient.

We’ve used “care flow“ as an umbrella term in the panel discussion.

Our conversation with Sofia Guerra

Rik Renard: In our CareOps articles, we argue that companies should monitor four metrics: performance, financial metrics, clinical outcomes and PROMs. Which of these fourmetrics is most important to you as an investor? And does this change as the company scales?

Sofia Guerra: Financial metrics are not going to be as relevant if you're a seed stage company. A more important, leading indicator we're looking for are things like how you're engaging customers, what channels you're activating them in, what's their engagement percentage over time. Those leading indicators will matter a lot early on. And then, over time, we'll focus a lot more on how fast your revenue is growing? What's the CAC feedback on your sales and marketing spend? I think a combination of all of those will be important just depending on the situation that you're in.

Rik Renard: In the State of CareOps we saw that only 10% of the care organizations that we surveyed ticked all four metrics. Is this a red flag for you as an investor?

Sofia Guerra: I don't know who was part of the survey and what stage companies are in, so I don't want to say it's a huge red flag. But now that capital is not free anymore founders need to understand they have a set amount of money to spend, and you're making investment decisions as a CEO or founder, you're thinking about all of those metrics to make investment decisions and see if I invest $1, in sales and marketing, what is that going to create? And how do I track that it's having the outcome that I want in the business before we stopped those investments. And that's the same for if I'm investing $1 in hiring extra clinicians to deliver a specific service. So, I think just being metrics driven across outcomes, across financial and operational KPIs, and then a bunch of those leading indicators of engagement activation that we talked about, it's really important.

Rik Renard: It's good that you touch upon outcomes, because MDisrupt recently published an article stating that clinical outcomes are the new standard. And you also mentioned in your article that companies can increase their contract value when they demonstrate these strong clinical outcomes. But what do you think about the importance of clinical outcomes when making investment? If you look at public companies, like for example, Oak Street, they all seem to cite the same general data and impact, we reduced ER admissions by X percent, we reduced hospitalizations by X percent. How do you really judge this as an investor?

Sofia Guerra: Table stakes. I don't think we've made one investment in a clinical delivery side that we didn't kind of deep dive into how the company was tracking those outcomes, what was going to early, even if you didn't have like a full-on data set to look at, just think about the importance that you put into that as a company. I'll give you the example of Osh Healthi. That was one of the first investments that I led at Bessemer since I started back in July 2021. They did a pilot with optimum ventures, so they had preliminary data on that pilot, but the data really showed the impact that they were having on GI patients across a range of things that they were tracking on the symptom side, as well as the financial side. 

I think it looks like Oak Street is going to report some type of data, I'm sure that they track way more than what they publish. So, I think it's a value-based care business, their outcomes are very tied in or savings are very tight, like what they get to keep in terms of profit over time. But we can argue that there really isn't a standard way to compare across companies what a good outcome or how to track this is and I'm hoping that over time, we can have a discussion on how we do that. 

In the pharmaceutical or life sciences industry, FDA acts as a third-party body that runs how do we define efficiency and safety of a drug, but I don't want every digital health company to have to go through FDA approval because that's long and it takes a ton of money and time and there's obviously regulatory risks there. We need to find an in between, like, how do we standardize outcomes and think about the effectiveness of the solutions that they're treating. I think that the industry for good reason has started to pay a ton of emphasis on that.

Kevin O'Leary: How you get to conviction on clinical outcomes as an investor? Are you talking to patients? Are you looking at published research? Are you getting other expert opinions? What's your process for doing that?

Sofia Guerra: Threefold – One, we talked to experts. So, key opinion leaders say in GI, right? Like how do you think about actually disease modifying interventions for this category? How do we think about what are the right kind of metrics to look at right? What are the right symptoms that they're improving? Are they really thinking about this with sample science, what you said, and then candidly, sometimes, what is the companion or who are they running this with? Because Oshi ran this pilot with Optum labs. They ran kind of a two-arm pilot and how they were able to show that then we can [Unintelligible 41:35] plug for the outcome report that they just published, but they were able to kind of have statistically significant improvement in some of it. 

So, that was very statistics and pilot analysis driven. But we also talk to experts, and then third-party or organizations that can validate this, as well.

Kevin O'Leary: A lot of companies have been trying to demonstrate clinical outcomes for employers. But we've also had the conversations that employers are overwhelmed with the amount of inbounds they're getting and don't have the bandwidth to actually evaluate these solutions. So, as an investor looking at clinical outcomes, but also evaluating business scalability, if the customer doesn't fully care about clinical outcomes, why do we all? 

Sofia Guerra: I think that the employer channel is probably relevant to only a few sets of conditions because the way we've thought about it is, what are the top five, seven areas of spend for an employer that are going to really force them to think about making investments in this space? And how do we align that with outcomes, right? 

That's the alignment of incentives to all stakeholders. Not every condition is going to matter to them, unfortunately. And that's when you think about okay, does this matter to a payer? And if so, that should be your business model? Does this matter to the consumer because it is the big pain point, it's a big unmet need, but the payer, and then we're not really thinking about this, so they're willing to pay directly, and that's when a direct to consumer business will make sense. I think it really depends on the condition.

Rik Renard: Do you believe that a given care process, especially in the early states can drive both these operational efficiencies to increase the margins, but also clinical excellence and also improve the outcomes?

Sofia Guerra: I better hope so because that's why I can get out of bed every morning. I think that, like I said, your unit economics and the inputs into your gross margins will vary by clinical intensity of the model. And then that's why you need to figure out what's the right price for your solution, who is willing to pay for that? And then, how do you negotiate that over time? And then what's the role of technology over time? Or like one too many care models that you've talked about in the past and how do you scale that?

Rik Renard: If you for example, look at recently IPO companies like One medical, Oak Street, Babylon, or they are all either wildly unprofitable, or they need a lot of cash to continue their operations. So imagine a friend of you came to you and said, like Sophia, I'm debating whether I should focus on automating my care processes to increase my margin, or grow faster, more unpredictable and increase my top line revenue instead, how would you advise them and what would be different based on the company's state and size? 

Sofia Guerra: That's a tale of the times, right? The Oak Streets and Babylons, and other public companies or even private companies didn't have to focus on the bottom line because for good reason. They were being pushed to think about growth at all cost, so they were able to raise the capital. So, if you're not really forced to get to profitability, you're not putting your attention there. All they wanted to do is raise more money, to grow faster and then compete against competitor number two or number three, right? 

So, I think it really had to do with a sign of the times. I think it is important to think about how do you grow efficiently, and that doesn't mean that you need to get to EBITDA profitability. That means that you're being very thoughtful about investments that you're making in your business and then what does that drive. And then, that has to do the nuance of like, are you a software business and what's the recurrency of that revenue? What's your gross margin, etc? Versus your tech-enabled services and what's the business model for a clinical delivery company? I think they were not forced to think about that. I wouldn't be so disillusioned by that.

And then I mean, that goes by to everyone. All these amazing businesses, they're born in a recession. Everyone's like, what does that mean? I've been thinking a lot about this and debated a ton with other friends and colleagues. I think it has to do because at early stages, when you're building these businesses, you're putting an emphasis on how to scale efficiently, which ultimately will end up yielding more enduring businesses over time and then more scalable. 

Kevin O'Leary: If you're out trying to raise in this market and looking at a series A, as a health tech-enabled service, is there a threshold that you'd be thinking about hitting in order to successfully raise a Series A at?

Sofia Guerra: There is no specific data. That's why I'll probably go back to this slide I shared on the four buckets that show and I think product market fit may be different for a DTC business than a value-based care business that a Series A.  I think that there are four buckets, big buckets, and then take maybe some of the bullets that are included there and think about okay, for that business, what are the types of outcomes that I will be able to show? Or what are the types of contracts that I've been able to sign for a Series A that show that the service that I'm providing or model that I'm providing is scalable over time? And like, what's the appetite of a payer or employer or consumer to get this type of service? And then, what are the early indicators of that? 

A bunch of people are like, oh, a million dollar in recurring revenue is kind of that sign, probably argue, maybe has to be larger than that and maybe lower than that if you're a value-based care business, because there's cash flow implications about value-based business that you don't see that cash in the door right away. I hate to say that it varies. That sounds like an investor answer. 

Kevin O'Leary: The series A company's, earliest stage companies in your portfolio that are growing but still burning cash. As they're looking at cash runway over time, how are you thinking about advising them in terms of conserving cash focusing on getting to profitability, going out and raising more? What's the general tenor of the market in that regard from you all?

Sofia Guerra:  I think that we've been focused on milestones, not specifically, like, oh, you gotta get to profitability with whatever cash you have in the bank, right? I think it varies if it's a very early-stage company that we think, okay, you've raised a ton of capital and this is where the expectation of that capital should have gotten you in terms of round size and patient base, etc. I think it's more about, okay, if I'm a Series A company and I'm going to raise a Series B, how many months of runway do I have? What's my self-cycle like? Where do I think of the contracts that I have and the engagement data that I have? Where do I think I'm going to get to at the end of this year and then end of next year. 

And then, A: do I have to risk capital by the end of 2023? What type of data am I going to be able to show based on the KPIs that I showed you in terms of financial and operational KPIs? Am I going to be in the bottom quartile? Am I going to be in the top quartile? And then, once you look at the data on the report, not every company is in the bottom quartile bucket and only those are the ones that we backed. By the way, I think every company has a story and every company has kind of a set goals and where you think about what's going to be an inflection point in your business. 

So, really just knowing inside and out the data, and really being able to thread the needle and tell the story and why it is that those KPIs are what they are historically, and what are the goals that you think you'll get to in the next round, I think is important.

Rik Renard: In the article, you argue that tech enabled service companies should leverage technology to improve gross margins while also creating value for patients in the system overall. So, if you look at Oak Street, One Medical, Carbon, they all build their infrastructure in-house because there were not a lot of solutions on the market. But in 2023, you have multiple tools that can support these tech-enabled care organizations. So, what should tech-enabled service companies buy versus build or put differently, is the IP of the company the care model and the care flows? Or is it the tools they use to operate this as a specific care model?

Sofia Guerra: To answer the latter part of the question first. I think that moat of tech-enable services or clinical delivery businesses will be their outcomes, a bunch of the flywheel effects or network effects that we talked about on referenceable customers and candidly contracts, if you have a fee for a service contract that anyone else can get. If you're just a network provider, that's less attractive than if you have a direct contract with a payer on a value-based care business. There's variation on that. I think technology, if it allows you to build and show that scalability over time, then technology also plays a role in how you're scaling or like, I guess economies of scale in those businesses. And maybe the data that you're recording on that population will help you unlock other types of services or products over time that you can sell, say, to Pharma or to peer analytics or some other things. 

But I will also say, it's not expected for you to build everything in-house because as an investor, I don't want you to use all the capital that you're using to develop products if you can just buy something that already exists. I think it has to do with what do you think is differentiated about your business and how you're going to make those investments to own and gonna get there faster? Is the customer experience what's most important to you then kind of really building your patient app and how you engage is really important.

Is the efficiency on the provider side and how do you kind of track outcomes where you communicate with providers if you're like an MSL or physician enablement platform, it's really what's going to differentiate them. That's really important to build, right? And like, how do you get data feeds that are updated daily, but I'm not expecting you to go build integrations with each of those efficient EHRs if there's really already maybe a company that could enable you to do that. So, the long-winded answer, but again, it really depends on the business.

Rik Renard: I think we all know that the last two years have been a roller coaster going from every investor wanting to get into digital health to a much more muted view at the moment. I've heard that two digital health infrastructure companies, Capable Health & Source, are shutting down. So is this a leading indicator over major reversal of sentiment around tech enabled service providers?

Sofia Guerra: The hard question to answer because I guess we don't know how long is this recession going to last. I think that if you look at the amount of money that went into digital healthover the last six years, and maybe even look back to, I guess, 2012, I think it was 400 million and now it's like $15.3 billion. So, it's not the same as what it was in 2021 but it's still in the high in growth. I guess, my perspective is healthcare still going to require innovation and I think entrepreneurship and venture capital is a good vehicle to do that. 

Maybe not every business is perfect for venture capital and I think that for good reason, I think there's been a ton of debate about that. And how do we unlock other sources of capital for services businesses that maybe are not venture backable, and then maybe we focus on the ones that do, but I don't think that the capital that went in is going away. I think it's just there's more scrutiny on how that capital was spent. Candidly, also the valuations that those businesses raise at and what they were able to achieve with the capital that they got to. 

I guess I'm an optimist. I think that there's lots of cracks that were shown during the COVID that I think we need to fix. It's not going to be a one, two, three-year fix, right? This is like a long-term game and we need innovators to do that. 

Rik Renard: Which tech enabled companies are VC backable in your opinion and why?

Sofia Guerra: Let's look at the tech-enabled services benchmarks that I showed you. I think there are a few things that make them attractive to what we look for. One is kind of that alignment of incentives on the stakeholders. Like I said, it is a really high-cost category and why would a payer want to pay for this, and how do you engage in the customer or the patient and then the outcomes that you're having to reduce that?

It's also about that recurrency of the top line. So, is your model being an interesting one in which you're not spending money to acquire a patient and then you only engage them for a little bit. It's like reoccurring in nature, the way you've set up the model on revenue, growth and the scalability of the unit economics, like, if you're going to be at 10, 15, 20% gross margins until you scale that's going to be less interesting for a VC then if over time, as you scale, you can get to 60%, gross margins. Understandably you won't be there at the series, A or C, but then we really need to believe that they are backed together.


Quick intro: we’re Thomas and Rik, building Awell - a low-code platform allowing care teams to design, implement and optimize care flows in days, not months. CareOps grew out of our years spent improving CareOps at innovative providers.

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