Late last week the Bureau of Labor Statistics released a blow-out jobs report showing that 353k new jobs were created last month, nearly doubling expectations. The year ended with 157.2 million employed Americans with an unemployment rate of 3.7%, continuing a 24-month streak of less than 4.0%. Of that total, 17.2 million (11.0% of total) are employed in the healthcare industry according to recent analysis by Altarum. This has been on a steady upward climb over the last 30+ years from approximately 7.5% of total to 11.0% with notable spikes during recessions and the pandemic. Healthcare employment grew 3.9% last year as compared to 1.5% for all other industries.
Healthcare Share of Total Employment
Source: Altarum (January 2024).
Also, late last week, Cohere Health, a long-standing Flare Capital Partners portfolio company, announced the close of its $50 million Series B financing. The company has developed an intelligent suite of powerful automated prior authorization (“PA”) products that augment existing utilization management programs. While the timing of these announcements are completely coincidental, the underlying dynamics at play here point to a fundamental tension: there is simply too much non-clinical labor in healthcare to meaningfully lower overall costs of care. An October 2021 study in JAMA concluded that there are twice as many administrative staff as there are frontline doctors and nurses.
In 2021 a McKinsey analysis identified $265 billion of administrative costs that could be removed from the U.S. healthcare system without impacting quality or access to care. Overall, it is estimated that there is $200 billion of costs associated with the “financial transactional ecosystem” which includes activities such as PA, claims processing, and revenue cycle management. Cohere Health estimates that there is approximately $30 billion in costs associated with just utilization management.
Across the healthcare system there is a heightened degree of vendor fatigue with a landscape littered with narrow point solutions. Quite simply too many undifferentiated companies were created over the last five years, partially in response to the pandemic demands placed on the healthcare system to quickly become virtual, on-demand, always on, transparent, predictable, and intelligent. It is quite clear that we have now entered the “emerging winners” phase of this funding cycle.
So what accounts for the strong reception the company received by investors, especially considering the recent dramatic decline in venture funding for digital health companies ($29.2 billion vs $10.7 billion invested in 2021 and 2023, respectively)? First, the company has built an impressive, highly relevant, and complete management team. Great people will always attract capital. Additionally, management was very deliberate about having significant depth on both the clinical and technical teams, which resonated with investors.
Having identified a very specific need in the market, the team developed products that were precisely responsive to that need and did so in a manner that limited the amount of custom integration. The company has a comprehensive solution with end-to-end automation incorporating generative AI capabilities, all highly valued by customers which drove dramatic revenue growth. Importantly, management did not over-capitalize the company during the frothy times two years ago. Being slightly capital constrained at the outset reinforced a maniacal focus on just building what the market will pay for today. Today Cohere Health sells both a fully delegated product as well as a “Platform as a Service” offering.
Notably, Cohere Health is a terrific example of Flare Capital’s “Co-Creation Model,” whereby we partner with one of our strategic limited partners to collaboratively build a company to address immediate market opportunities. In this approach, our corporate partner contributes an asset (intellectual property, launch contract, etc) and we recruit a world-class management team and provide capital. This has proven to be a very effective approach to quickly scaling a new company.
Importantly, there has been an explosion in artificial intelligence and machine learning that Cohere Health has drafted behind. The requirement for greater data liquidity in healthcare is obvious. The CAQH Index, which tracks payor and provider adoption of electronic transactions, estimates that there were 228 million such transactions in 2022, growing at 7.4%. According to Niall O’Connor, the Chief Technology Officer at Cohere Health, clients are seeing a greater than 3-to-1 cost savings by simply automating the data flow and migrating clients away from analogue “channels and behaviors” to digital.
As computers are better trained to mirror actual clinical decisions, savings start to head to 10-to-1 ROI. Cohere Health has now automated 80-90% of all PAs with a target of 95+% for most procedures (this will likely never be 100% given specific issues will be found that will require human clinical intervention). One word of caution involves the phenomenon known as the “paradox of automation.” As AI replaces human judgement and intervention, the overall competency of humans may dull. This concern is especially heightened in healthcare as these tools are used by lesser credentialed clinicians.
Not to be lost in the value proposition discussion is the dramatic reduction in friction and improved patient experience. According to a recent Grant Thornton survey of 100 healthcare CFOs, approximately 75% stated that improved patient experience was the greatest component of current growth strategies.
The PA competitive landscape is complicated and falls along two principal vectors: degree of cost impact and degree of administrative burden (the top two quadrants below have lower operational burden). The emergence of large language model (LLM) vendors has undoubtedly accelerated the pace of innovation but those platforms risk being commoditized as fast-follower open-source platforms appear. The companies that offer differentiated applications on top of LLM platforms should endure. “We have a mini hospital attached to us,” observed O’Connor.
Source: Cohere Health.
Not surprisingly the regulatory considerations are significant and provide a meaningful tailwind. According to America’s Health Insurance Plans (AHIP), there are 26 bills pending in 16 states already. There is considerable momentum to drive greater transparency of reporting metrics, data interoperability, and to facilitate better communications between payors, providers, and patients. The Interoperability Prior Authorization Final Rule (CMS-0057-F) was released last month by the Centers for Medicare & Medicaid Services (CMS) and mandates that most operational provisions need to be enacted by the beginning of 2026.
Notwithstanding the marked increase in healthcare technology investment (over $55 billion in just over 1,800 companies in the last three years according to Rock Health), 2023 saw the greatest increase in healthcare employment with 654k new jobs added. Approximately 25% of all jobs created in the U.S. were in healthcare, underscoring one of the ironies that technology adoption has not yet reduced the need for labor.
On the Flying Bridge 