How to Calculate Value in Digital Health

November 9, 2017 Karl Hess

digital health value: person pushing buttons on a calculator

What’s the best way to calculate the value in digital health investments? There are already a number of highly-publicized measures. Unfortunately, most decision makers have limited tools for assessing value in digital health, largely because quantitative data is still in relatively short supply. Thanks to the number of stakeholders involved, the complex array of data sources, the regulations governing how and when data can be shared, and the cost of conducting clinical studies, progress has been evolutionary, not revolutionary.

So how does one get to a (more) accurate measurement of value in digital health? Here are five considerations that should be included with every assessment:

1. Product/Market fit

When you’re evaluating the usability of a digital health application, don’t get carried away with the caveats. Your goal is not to invest in something that might help someone alleviate half a problem under very specific circumstances. It’s to find an application that’s extremely compelling, with an immediately graspable value proposition and a missile-like solution to an as-yet unmet need.

The most compelling digital health solutions cut across many user types and market and customer segments—because they’re awesome. And people will pick them up the first time, and will continue to log in and use them, because they are (close enough) to indispensable.

2. ROI

ROI is one of many measures of value. As I mentioned earlier, there aren’t a lot of well-defined, time-tested and/or reproducible ROI equations in digital health.

But that doesn’t excuse us from using the few that do exist. And we as an industry should keep pushing until ROI is a part of our everyday vernacular, part of every purchase and/or investment decision, one of our most-reached-for tools in the value measurement toolbox. Will your organization get more out of its potential investment than the amount that’s put into it? If so, how much more, and over what payback period?

3. Customer satisfaction

Most companies in this space either don’t know how to measure satisfaction, or have purposely chosen to devote very limited resources to doing so.

Yes, you can and should ask how a prospective portfolio company or vendor measures customer satisfaction. Yes, you can and should ask for a list of reference customers. But these don’t go far enough, in my experience. You need to make some specific requests and do some homework on your own. Reach out to known customers that aren’t on the list of reference customers. Ask them about their experiences, and you’ll probably find out why they’re not on the ‘list.’

4. Standard business analytics

Not all industries are as complex as healthcare. Some even have a more-or-less standardized set of valuation/operational/execution success metrics. Many of these metrics are applicable to digital health companies—especially LTV, or lifetime value, which asks a simple question: Can you make more profit from your customers than it costs you to acquire them? So establish which metrics matter to your business and lay down the foundation for applying them.

5. Probability of realizing maximum future value

(A.K.A. the discount rate in your NPV calculation.)

This is a bit more intangible than some of the other items in the list, primarily because there are a multitude of factors in the equation. It comes down to your ‘due diligence’ process as a potential purchaser or investor. Do you really look under the hood, or are you content to peruse a slide deck, some marketing collateral or a few documents in the data room? Do you know what you’re looking for? Can you spot a red flag? Here are a few questions you should ask:

  • Scalability: Can the operational and organizational structure as well as the technology platform be readily scaled to match the lofty goals of the business model?
  • Code: How big is the engineering team in comparison to the company’s technology roadmap, development cycles, and the content of its release notes? How efficient is the engineering function, and at what (resource) burn rate? These factors speak directly to future product development, time to market, competitive advantage, profitability, scalability, and long-term viability.
  • Risk Management: Has the company put in place a robust risk management process—or any risk management process, for that matter—with clearly delineated risks and subsequent probabilities of occurrence, triggers, mitigation strategies, and both strategic and tactical options? Most startups seem to prefer to “fly by the seat of their pants.” So when something unforeseen happens, they throw the whole organization into damage control mode… which is not very efficient, to say the least.

I’ve said before that outcomes—the numerator of the healthcare value equation—are more important than eyeballs and clicks. And outcomes, as Michael Porter pointed out back in 2010, “are inherently condition-specific and multidimensional. For any medical condition, no single outcome captures the results of care. Cost, the equation’s denominator, refers to the total costs of the full cycle of care for the patient’s medical condition, not the cost of individual services.”

It’s advice well worth heeding in the still-frothy digital health space, where “caveat emptor” is still one of the best pieces of advice that anyone can give.

This piece first appeared on LinkedIn.

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About the Author

Karl Hess

Karl Hess is a healthcare executive and consultant with more than 20 years of product, market, and corporate development experience across medical devices, biotech, pharma, and digital health.

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