Bay Area dermatologist David Wong can’t forget a patient he met during a trip to California’s Central Valley in 2009: a farmworker with a bleeding lesion on his right forearm who died within six months of Wong’s diagnosis of metastatic melanoma. The man lived less than two hours from San Francisco, and Wong says he was appalled by the “marked difference in the access to care as well as the quality of care patients were receiving.”
That experience led Wong and a fellow dermatologist to launch an online clinic in 2010. Direct Dermatology uses photos patients upload to diagnose growths, rashes, and other skin problems, usually in less than a day and at what Wong says is about half the cost of a regular doctor visit. The Palo Alto business, which has nine employees and a network of 20 dermatologists, has performed more than 10,000 consultations. Its services are covered by Medicaid and some private insurers.
Wong is one of a “huge, huge number of entrepreneurs working in health-care IT and services who really want” to improve services for poor, uninsured, and Medicaid patients, says Margaret Laws, director of the California HealthCare Foundation’s Innovations for the Underserved program. Few venture capital firms have shown interest in funding these types of startups, so donors are helping to fill the gap with grants, loans, and equity investments. Direct Dermatology got just over $1.2 million in 2012-13 from the California HealthCare Foundation and the Kresge Foundation in the form of convertible debt.
Businesses and nonprofits seeking to improve health care for the poor received more than $81 million in debt and equity investments from foundations in 2012, according to a December 2013 report from California HealthCare, which is dedicated to improving access to care. Although there is no historical data on this type of funding, Law believes the numbers are going up, propelled by the Affordable Care Act’s goal of insuring all Americans. The Obama administration is projecting that in 2014 more than 19 million people will join Medicaid, the national health-care program for the poor, now that 25 states, plus the District of Columbia, are expanding eligibility criteria for the program.
Before Obamacare, hospitals and clinics resisted incorporating entrepreneurs’ new products into their systems, says Veenu Aulakh, executive director of the Center for Care Innovations, a San Francisco nonprofit that acts as an intermediary between health-care providers and startups. There’s “now a sense of urgency” about adopting innovations that make them more efficient, she says.
Sims Preston, chief executive officer of Morrisville (N.C.) startup Polyglot Systems, says the 2010 health-care law has helped his four-year-old company sign up more than 300 pharmacies, 200 clinics, and a handful of hospitals as customers. Polyglot’s software, available in 18 languages, prints instructions for taking medicine in formats that patients with low literacy levels can understand. The shift to reimbursing for quality of care, rather than quantity of care, “means the mission that we’ve been on now has a business case to support it beyond simply the moral case,” says Preston, whose company has received about $2 million in grants from the National Institutes of Health.
Propeller Health, a four-year-old startup in Madison, Wis., that makes hardware and software to help sufferers of asthma and other respiratory diseases manage their conditions, is also partially backed by California HealthCare. Asthma attacks are a leading cause of emergency room visits and hospitalizations in the U.S., where 25 million people—many of them children in low-income families—are afflicted, according to the American Lung Association. The 22-person business received a second investment of mostly convertible debt from California HealthCare in June, for a total of just over $1 million from the foundation. Propeller Health co-founder and CEO David Van Sickle says the increase in demand for technology like his is linked to the Affordable Care Act’s efficiency push. Insurance companies are willing to pay for Propeller’s product because it reduces trips to emergency rooms, producing “savings of between $700 to $1,000 per patient, per year,” he says.
Purple Binder, a four-person Chicago startup that helps health-care workers find community services for patients, also credits Obamacare with making its online tools more compelling: “As health-care providers take on more risk, they need to leverage existing resources to keep their patients healthy,” says Joseph Flesh, the company’s co-founder and president. For instance, using Purple Binder, a pediatrician can connect a needy mother with a local church that’s handing out diapers. The startup makes money by selling subscriptions to providers and through paid listings on its site.
New York-based business accelerator StartUp Health is using a $500,000 grant it received in December from the Robert Wood Johnson Foundation to advise entrepreneurs around the world on how to build businesses that improve access for the poor. “If we’re really going to solve the big challenges in health care, we have to focus on bringing innovation to the underserved communities” that make up a large percentage of medical spending in the U.S., says Unity Stoakes, president and co-founder of StartUp Health. “It’s not just a market that needs to be served. There is a real business opportunity.”
That’s why Direct Dermatology’s Wong is confident he’ll eventually be able to raise money from venture capital firms and strategic investors such as health insurers for expansion plans that include hiring at least six more employees this year. “There’s a lot of financial incentive for adoption of solutions like ours,” says Wong, prompting “interest not only from foundations but from traditional investors.”
The bottom line: As Obamacare expands insurance rolls, startups targeting the poor are attracting more funding.
Leiber is Small Business editor for Businessweek.com, Entrepreneurs editor for Bloomberg.com, and covers small business for Bloomberg Businessweek.