The Healthtech Funding Landscape: Breaking Down Market Responses

John (00:01):
Greetings, everyone, and welcome to Healthcare Market Matrix. I’m your host, John Farkas. If you’re listening to this podcast, I’m just guessing you’re at least familiar with the factors that have been influencing healthcare technology investment over the last bit. We’ve talked about this before on the podcast, but we saw record numbers of investment deals in the last part of 2020 through the first half of 2022. And those numbers, over the last couple of years, have just plunged to the lowest levels we’ve seen in a long time. They have bumped up a little bit earlier this year, and I had hope that there was the start of a trend, but alas, they went right back down last quarter.

We’re looking at a combination of things. I mean, it’s revenue-constrained provider organizations, high interest rates, the dawn of—not the dawn, but certainly the ubiquity of generative AI coming online and shaking the whole scheme up a little bit. The result has been some very unusual trends in the last bit. So joining us again to unpack this is Chris McCord, who has just a lot of perspective on this landscape. Chris is the Managing Director of Healthcare Growth Partners, and they are a leading investment and merchant banking advisory firm that focuses on the sector. He is an active mentor, director, and investor to emerging companies and is a regular speaker and writer in this realm. So, I’d like to welcome Chris to Healthcare Market Matrix again. We have a chance to dive into this a little bit today. Welcome, Chris.

Christopher McCord (01:47):
Yeah, thank you, John. Good to be here. Thanks for the intro and for trying to lay out a little bit of the complexity of the market. Let’s see if we can at least try to make sense of it.

John (01:58):
Yeah, it is tricky. One of the things that you guys do at Healthcare Growth Partners that I am really impressed with is your healthcare or health IT market review. That’s really a pretty in-depth look at the nature of the funding realm in this segment. And I’d love for you to dive into what that is, what you’re doing, what the intent of that overview is.

Christopher McCord (02:30):
Yeah. So the report synthesizes all of the data that we capture. We have a database that captures basically every transaction that we can get our hands on within the health IT realm, and it pulls that data into a central location where we can begin to look at trends and analyze those trends to draw insights from them. We pair that with our own personal experiences. Ultimately, what we try to do through all of that is answer questions that we’re asking ourselves. How is the market performing? Where are valuations? Who’s doing what in the market? What are the sectors that are hot? What are the sectors that are out of favor? Broadly, thematically, maybe a little bit more of what we’ll talk about here—how is the health IT industry tracking from a general financial perspective, and how is the capital flowing?

You’re right. This market has benefited from a huge tailwind from 2018 through COVID. COVID was amazing because it wasn’t just a financial bubble—it was a health bubble. So, the health IT industry in particular had the compounding effect of getting the uplift from the health crisis of COVID along with the financial euphoria.

John (03:38):
Mm-hmm, yeah, lots of spotlight on that sector for sure in that moment.

Christopher McCord (03:54):
Yep, all the COVID stocks—a lot of the COVID stocks were health stocks. Now, that’s working its way through the system, but there’s going to be a long tail because a lot of capital came into the health IT market with the expectation that the COVID crisis was going to be transformational to the delivery of healthcare. While it did inflect a lot of different aspects of the healthcare delivery system, it probably wasn’t as transformational as many expected. So, it resulted in this long overhang of many companies raising significant amounts of capital at very high valuations with the expectation that their financial model would reap the reward of the change from COVID that was not met. And so, here we are, dealing with that. I don’t know if I’d call it a fallout—for many, it’s a fallout—but for sure, it’s an overhang.

John (04:46):
Yeah. It’s interesting. Not too long ago, I was at the HFMA conference, and the number of companies there that I interacted with and talked to, that were kind of hanging on that, you know, living under that overhang, was pretty dramatic. I mean, there were several companies with really solid value propositions—good organizations that had some solid tech that actually is meeting a market need right now—and they’re trying to find a way to make it through the next six months, you know, and not seeing the uptick that they were thinking they were going to see and not seeing the deal flow that they were anticipating. And uniformly hearing, “My gosh, the sales cycles went from, you know, 12 months to 18 to 24 months, and it’s just like everything is in slow motion, unlike anything that they’ve seen before.” I just know that’s a pretty blanket understanding across most of what I’m hearing.

Christopher McCord (06:02):
Yeah, and HFMA—a lot of your audience is going to be companies selling into hospitals. We’ve seen the hospital market probably the most challenged of the different end markets that health IT companies are selling into. Their margins were compressed in this post-COVID cycle. Labor costs were high, some surgical volumes were down, and taken together, hospitals just weren’t performing. That’s actually normalized here in 2024, so I think that’s helping vendors selling into the hospital market rebound. But the other thing that we see is in the larger acute care space, the competitive dynamic with Epic is at a level that I’ve never seen before in my 18 years at HGP. Now Epic is increasingly displacing Cerner—it doesn’t look like they’re the tight number one and two anymore. Epic seems to have gained a bigger lead over Cerner. And the wallet share that’s going into Epic and Epic’s strategy of vendor consolidation under their platform has just…the idea of consolidating under Epic, whether there’s a truly competing product, is enough to slow the sales cycle that you’re referring to there.

John (07:25):
Yeah, it’s really interesting. Just last week, I was talking to Neil Patel, who’s the CIO of Vanderbilt Medical Center. We were talking about this whole, you know, “Do we wait for Epic to solve XYZ problem? Is Epic going to solve XYZ problem?” And right before that, I was talking to Mike Mosquito in a similar interview, talking about, “Do we sit and wait for Epic?” It’s the other EHR platforms too, but Epic being the 800-pound gorilla, “Do we wait for them to solve this problem, or do we buy a solution that solves this problem now?” That’s a big question for a lot of organizations, and it’s holding back a lot of decisions. It probably shouldn’t, based on some of the conversations we were having.

Neil was saying, “If you’ve got a problem, I’m not waiting around right now to solve the problem. I have to solve the problem if it’s a real problem. I can’t be waiting.” But at the same time, not everybody has the resources that Vanderbilt has to go after it, and they might be looking for that type of synergy with Epic. So it’s a pretty interesting moment in that regard, too.

Christopher McCord (08:58):
And I think Epic can pick their partners. So, a lot of vendors are dependent on whether they’re making the shortlist with Epic and if Epic’s going to play nice—or just play neutrally. It’s definitely better if you can be on the “play nice” list. “Hey, this is our partner” versus “This is not our partner.”

John (09:13):
Absolutely. It’s big news. I mean, we’ve got two clients that just recently landed in the “most favored” status, and it’s big news in their world because that’s a big open gate when that can happen, for sure.

Christopher McCord (09:28):
Then I think we had years and years where the pile of cash was growing, and it made folks spend more loosely than they are in this environment of tightening rates, tighter Fed policy, and a little bit of a contraction in the overall money supply, which I think you kind of feel out there in a positive way in containing inflation and reducing labor costs, which unfortunately drives up unemployment to a degree—but maybe a healthy degree to create more equilibrium in the market. For sure, meanwhile, in the background, there’s this macroeconomic backdrop that has resulted in tightening that is directly tied to the hospital market, as well as these other markets where these sales cycles have become more challenging.

John (10:06):
Mm-hmm. Well, let’s dive into the report a little bit and some of what you guys uncovered specifically, because I know that there’s, like we said, an unusual landscape right now. When we were talking about this before, I heard you say this is unlike anything you’ve come across in your tenure. I know there’s been a lot of M&A activity, but valuations have still yet to recover. I hear that across the board from a lot of people who are shopping for funding right now—they just can’t stomach what the valuations look like. So they’re pressed between a rock and a hard place in looking at how they’re going to carry forward. Why do you think there’s that disparity there, and what do you think that means in the context of the market?

Christopher McCord (11:27):
Yeah, let me think about where to begin here because I think on the whole, valuations are down. They’re down, maybe flat for some, down some for others, and then down a lot for another tier of companies. So it’s almost like you have to stratify the type of company that’s out there to how valuations have behaved in this post-pandemic era—or, I’d say, it’s more about post-inflation than it is about post-pandemic. The result of inflation and interest rates and capital allocation and risk management has sort of been the driver behind all of this. So the companies that have the lowest…

John (12:10):
Yeah, and then you stick AI in that equation, and it just adds another layer in some sense of unsure.

Christopher McCord (12:17):
Exactly. Yeah, we can definitely come back to AI, which I think is exciting in this context too—potentially super disinflationary, which I think could be great on the whole, as long as it doesn’t take a big bite out of jobs. But I think we’ve got some time to figure that out. We’ve been through other transformational tech events in the past, and here we are with record-low unemployment, and we’re doing just fine. Hopefully, AI will have history repeat itself and just see continued productivity gains.

In terms of the stratification of companies, the top tier, those that have the lowest view of risk, are those that have been the bellwethers through this transition. Profitable companies for sure—the multiples in which buyers are paying based on profit have largely remained the same through COVID and beyond. That would be the top tier.

Then I’ll jump down to the bottom tier, which is the companies that are losing money. We estimate that approximately upwards of 20% of all health IT M&A transactions this year involved companies that sold for—I’m going to say it slowly—they sold for less than the amount of capital that they raised. You might have a company that raised $10 million at a $50 million valuation. We’re talking about the company not trading for less than $50 million in valuation, but trading for less than $10 million, the amount of capital that went into it. That’s about 20% of M&A deals, so it’s kind of washing out the bottom of the tier of the overhang. There’s still a lot of that out there—a lot of unlabeled investment rounds, which are existing investors…

John (13:53):
Not a pretty picture.

Christopher McCord (14:08):
…dropping cash into a company to continue to fund it. That’s been at all-time highs in 2023 and 2024. We’re seeing a lot of these companies just continue to get funding to stay afloat, either expecting to get to profitability or to have the market perception change. That’s a big issue, and those companies also have trouble funding. That’s why there are these unlabeled rounds. Valuations were set at high marks post-COVID, and they’re going back to the market, having raised a lot of capital, and it’s hard—they’re in a tough position to go out and raise more money.

Then there’s the tier in the middle. I’m a huge fan of the tier in the middle. HGP has worked with a lot of just healthy, normal companies. They may not be the absolute tier A-plus companies, but they’re very good businesses—sustainable, scalable, but not necessarily rule of 60 in terms of the combination of growth and profitability companies. That tier of company has struggled in this market. They previously might have been worth a nice multiple of revenue, and today they’re having a hard time trading at all. That’s where we feel the most sympathetic to how the market is behaving and maybe where there’s the most opportunity. That’s the area of the market that we’re hoping to see come back to life here as just the market normalizes further.

John (15:43):
Can you maybe stick a layer of skin on that and do a little bit deeper profile of that type of company—what they look like, some of the dynamics they are likely facing?

Christopher McCord (15:57):
Yeah. So the typical profile might be they haven’t raised a ton of money. So one thing is that they’re not benchmarked against a very high valuation watermark from a prior round. We’re seeing some companies begin to take this profile because they’re cutting costs, but they still have kind of a gnarly cap table that they have to work against and deal with. I’m not saying these companies don’t have that to begin with. If you have that, then you kind of have to deal internally with your shareholders and figure out, “What do we do? How do we fix this? How do we…”

John (16:10):
…Pry around, yep.

Christopher McCord (16:25):
Yeah. These companies to me are recurring revenue businesses that have a growth rate of, call it, under 20%, maybe 10 to 20%. It could even be single digits, although that’s a little bit low in any environment. They’re making money, but they’re not making enough to trade on a profitability multiple, so they’re self-sustaining. I think, to be fair, we’ve got to say that they’re competitively durable—they’re maybe not in the crosshairs of Epic or some big regulatory risk. They’re just doing their thing. They’re selling but not selling at an exceptional rate, but they’re also probably bootstrapped. They don’t have the capital resources to go out and hire up a big sales force, and there’s probably a lot of potential in these businesses if they were better resourced.

That is often the investment thesis behind a lot of these M&A transactions—“We can take these kinds of bootstrap companies and supercharge them.”

John (17:40):
…and accelerate their go-to-market, yeah.

Christopher McCord (17:51):
Yeah. That thesis and that risk, especially among the strategic landscape, has almost all but vanished. A lot of the strategic acquirers have just been more on the sidelines, focusing on their own internal operations, maybe dealing with a little bit of a capital overhang themselves from taking out debt that’s repricing in this higher-rate environment. We see that among some of the publicly traded health IT companies, so there are dynamics on all sides of the market.

John (18:24):
Gotcha. One of the things that the report brings out that I think is interesting to look at—and you’re talking about at some level here—is the stratification and how that is looking. If you were to pull that out another step and anticipate what we are likely to see in the next six months as this continues to build or move, how would you see it unfolding? I know that’s an impossible question in some ways. But is that stratification going to continue? Are we going to see that exacerbate, or do you anticipate it coming together a little bit more?

Christopher McCord (19:11):
Yeah, I think that stratification is almost always there to a degree—you have good companies, you have distressed companies, and then you have companies that sort of sit in the middle. Where we’re seeing that stratification more here is that those companies that sit in the middle have had more trouble getting to a transaction at a fair price than they have historically. The good companies, generally, unless it’s a very terrible market, do well. There’s a lot of demand out there for high-quality companies.

What is a high-quality company? You hear rule of 40. I think it’s got to be at least rule of 40, but it’s probably rule of 50 or 60. Just for those who haven’t heard it, the rule of 40 is the sum of the revenue growth rate and the profitability of the business. It could be 30% growth, 30% profitability—that’s a pretty awesome combination. Forty percent growth, 20% profitability—that’s getting there.

Companies that are not profitable just have to have much higher growth to still be attractive in the market. Then I think the other thing that unprofitable companies need to have at a minimum is a high gross margin. Gross margin is the cost of delivering directly against your revenue, and usually, it’s a pretty good indicator of how profitable a company can be once it reaches scale. For a software company, we’d like to think a gross margin above 80%. For example, if you have a 40% gross margin, your net profitability is never going to be any higher than, say, 25%. That would be pretty lean operating expenses. You kind of have a self-limiting ability to be profitable.

John (20:39):
It’s there, yeah.

Christopher McCord (21:05):
I think we’ll see some normalization. The big question we’re all asking ourselves is, “We’ve been in 15-plus years in a zero-interest rate environment, and we’re no longer in that. What does normal look like?” There’s been a lot of concern around inflation and economic risk. I think we’re hopefully working toward a soft landing. The indicators seem to point to that, although there’s nervousness there. The Fed is going to cut rates in September by 25 or 50 basis points, which should be a nice cut. All these things together will instill more confidence and bring that middle tier back into a better position to transact and realize value for a lot of investors and operators who’ve worked hard to create it.

John (21:54):
So one of the things that the report shows—and we touched on here—is a pretty big surge in buyout activity. How are you seeing that? What’s driving it? And how is the recovery in the private credit market making it happen? How is it driving and contributing to it?

Christopher McCord (22:15):
Yeah. For a while there, as rates went up, the spreads for the cost of debt went up even more. So, you not only had higher rates, but you had a higher premium for going out and financing in the private credit markets. Those spreads have come back down, while rates are high, and it’s just made capital borrowing more accessible for private equity funds that go out and leverage up to do transactions. There’s also a huge capital overhang. There’s been a ton of money raised by private equity funds in the last decade. And while we’ve seen a lot deployed, there’s still a lot that’s been not deployed. So there’s kind of a supply-and-demand disconnect in terms of the availability of capital and the availability of opportunities. We’re seeing these investors put capital to work.

Lastly, as I mentioned, the strategic acquirers have…

John (22:48):
Yeah.

Christopher McCord (23:08):
…been a little bit more risk-off right now. They’re not…usually, in theory, they have a competitive advantage because they are able to reap the strategic value of a deal. But currently, a lot of them are focused on their own cash management, capitalization, and operations and are not competing for deals at the same rate that they have historically, creating an opening for more private equity funds to do platform deals.

John (23:34):
Interesting. So what do you see as the…I guess, in looking at that in the next term, where do you see the opportunity? Or what do you see coming out of that from an opportunity perspective or trend-wise? What do you anticipate?

Christopher McCord (23:57):
I think usually these private equity-backed platforms make good acquirers because a lot of the investors’ thesis is to go and buy more companies. So, it should broaden out the universe of potential acquirers. I think it’s just a sign of overall health in the market. We haven’t seen as many of these buyout deals go the way of IPOs, but we did see the Waystar and Tempus IPOs in late Q2, which I think helped…

John (24:07):
Yep.

Christopher McCord (24:25):
…resuscitate a little bit of the public side of health IT, which we can get to here in a little bit. I think it’s all positive. I mean, the rate of health IT buyouts is as high as we have ever seen it in the data that we tracked. It’s kind of one of these surprising things where sometimes it’s not how we feel. It doesn’t feel that way as we’re…

John (24:44):
Wow. Yeah, that’s a little counter-flow, right?

Christopher McCord (24:53):
…out there operating and talking to private equity investors who complain about maybe lower deal flow and things like that. But the data is undeniable, and it supports a higher rate of activity than I think many feel.

John (25:10):
Let’s talk a little bit more about the AI part of this conversation, or the part of the equation. When we’re looking at AI-powered tools, what are some of the things you’re seeing in terms of investments in that sphere? Where do you think the greatest opportunities are existing right now? And how is that coming together? It’s a lot of question marks around it.

Christopher McCord (25:39):
It’s a loaded topic, and it’s everywhere right now. Historically, we saw a mix of about 50-50 in AI investments—50% going toward clinical solutions and 50% going toward workflow solutions. In the post-GPT, LLM era that we’re in now, we see about a seven-to-one ratio going toward workflow over clinical. We’re not seeing the clinical investment rate happen at the same speed. I think there are a few reasons for this.

One is it’s easier to apply AI in a workflow environment than a clinical environment. Clinically, you’re asking physicians to change their behavior, change their reliance on computing, and that’s a tougher ask. For sure, they feel threatened, and I don’t think they should feel threatened anytime soon around AI.

The other thing is the term AI is being thrown around a lot more. There are more off-the-shelf AI tools that companies can use, so they themselves may not be pure AI companies, but they’re leveraging AI. The semantics alone are capturing more companies than fairly reflect the number of companies in the market, just because we’ve seen it for years—companies throw around semantics loosely. We saw it with AI well before this, but machine learning was an example. We saw that for a…

John (27:18):
Yeah, I think what this movement is doing is showing really clearly the difference between organizations that are really creating innovation with AI and bringing something forward that is unique and different, versus those who are employing AI to do a part of what they’re doing but had before been claiming AI as part of what they were offering. Now, everybody can do that. I’m oversimplifying it, but everybody can deploy AI in their solution. It’s bottom-shelf, it’s pretty easy to do.

Now the question is, and this is something I think the market is becoming increasingly attuned to—who’s really creating innovation here right now? What does that really look like? Because it can’t be reduced to an easy marketing ploy anymore. People are being much more discerning—their understanding of AI is getting…the buyer’s understanding of AI and what it is able to do and not do is getting much more sophisticated. People are looking at it with a lot more discerning eyes than they had been prior. It’s contributing a lot to how things are and appropriately so when you’re looking at value, right? Because I think that where I saw a lot of companies in the marketplace get some tailwind around some claims around AI, all the people I was talking to that really knew what was under the hood were saying, “You know, this is barely their technology compared to some others.”

So, it really is to me…two things are going on. There’s a lot of people pushing pause and saying, “Okay, what is and what is going to become? What do I need to know? How do I need to inform my buying decisions? What does this look like? And how is it likely to play out? What does real technology and real innovation look like?” Because there were a lot of people claiming things based on a pretty shallow deployment of some technology that now…those who had shallow deployments of AI, the generative models can come in and just make that ubiquitous in a big hurry. So it’s reshuffling a lot of things in that regard.

Christopher McCord (30:05):
Yeah. I’ll tell you what’s also…so where I think we’re saying similar things is that companies will claim AI when maybe they’re just trying to participate in the wave. They’ll maybe be using it to a modest degree—something off the shelf—but it’s not necessarily transformational. We’ve also seen a whole cohort of companies that work…so, healthcare has always had a problem with unstructured data, right? That’s where most healthcare information sits, and companies for decades have been trying to come in and better manage that information. We’ve dealt with many companies that have done so prior to the introduction of today’s LLMs. They’ve invested a ton of money in rules and different tools to accomplish that task, when all of a sudden, at the flip of a switch, the tools to manage these processes have been democratized, and that competitive advantage that they had has now significantly deteriorated.

There’s a whole cohort of companies out there that invested a lot of money in proprietary tools that no longer have that competitive advantage. That’s kind of interesting—we talk about these emerging companies, but there are also the old-guard companies that have to figure out how do they competitively differentiate now if they can’t do it on technology alone?

John (31:07):
Evaporated, yep.

Christopher McCord (31:28):
How do they competitively differentiate now if they can’t do it on technology alone?

John (31:33):
Yeah, I just posted on LinkedIn yesterday about this very dynamic. There are a lot of companies that were relying on some sort of tech moat that was protecting their competitive advantage. In a world where AI is able to speed development, you’ve got companies who had, I’ll say, fragile competitive advantages from a technology perspective to begin with. Now, their competitors can match them feature-per-feature in six months, whereas maybe it would have taken 18 months of development or work or whatever to get to that point.

So, value now is shifting from “Who’s got the coolest, best tech?” to “Who’s got a really solid product and does a phenomenal job of delivering a great service set?” Because…

Christopher McCord (32:41):
One hundred percent. I’ve always felt like in healthcare, in particular, and really in any market—but in healthcare, where the incentive model is so whacked out—that your go-to-market strategy for what you sell, how you sell it, who you sell to, where you price it, how you define your value proposition to those stakeholders is so important because each stakeholder has a different set of incentives. I’m even looking at the fee-for-service versus value-based world. Value-based care obviously is where the market is shifting to, and we’re hearing a lot more around Medicare Advantage and underutilization of care. Fee-for-service drove overutilization of care, and now there are complaints of upcoding and underutilization of care.

It’s a little bit of a sad reality of the corporate interest going beyond the social responsibility that these companies have to deliver high-quality healthcare. It’s inherent—it’s going to happen. It’s been a wild ride in terms of how the go-to-market strategy and aligning your value prop…I guess what I’m saying is it’s important, but it also can be manipulated depending on what your value proposition might be.

John (34:07):
Yeah, it’s interesting. A great example of this…I’m going to start into this and might regret pulling this analogy, but you want to take an example of this—Epic is a great example. I mean, arguably, Epic is built on a horrible platform. It is not the most advanced tech platform that exists on the planet. The code base is, I hear from a lot of people, not what it ought to be. I also talk to a lot of CIOs who will tell me, “I love these guys.” They are like…I was telling you, I talked to Neil Patel this week, and we talked about their implementation of Epic and what that was like in the context of Vanderbilt. He was saying, “They are everything, but what they are wonderfully is a partner.” They were there with me—I knew that they were there with me. They were working. They led us through every step of the way and anticipated the problems and the pitfalls and the challenges that we might face. They led proactively into that space. That was extraordinarily valuable.

I hear the same thing from the folks at Premise Health. They just have a person that is their person. If they have any issue, their person is there, caring for them, making sure that everything is cared for, and that they don’t have the bumps and challenges that they might if they wouldn’t. That’s the essence. When we’re talking about value right now, tech is a big part of it, but how you partner with the organizations you’re working with, what they say and experience as a result, and how sticky that makes you as an organization is going to increase in importance in determining what makes a valuable organization and a valuable product. It extends far past the technology itself.

Christopher McCord (36:26):
I think you have to have that. Otherwise, you have to have an out-of-the-stratosphere exceptional product that stands on its own. Otherwise, you have to pair it with a really solid go-to-market messaging and customer service to drive the adoption and the value from the solution through your users. Epic has been a total leader in that. Once they reach an amount of scale, they’re able to capitalize on that through their scale. And then, lucky for them, one of their biggest competitors has dropped the ball, creating an even bigger opening for them. It’ll be interesting to see how it plays out over time in terms of their market share and footprint and control over data and the ecosystem—how that plays out from an antitrust standpoint or anything like that. I don’t see that on the near-term horizon. People talk about that, but I think it’s hard to just go in and penalize a company for being the best out there when it’s a wide-open…well, maybe not wide-open because leaders can dominate the markets that they’re in, but there is a competitive opportunity for another company to come in and do better. I think Cerner could have outcompeted Epic. The opportunity was there, and they just, at least to date, have failed to do so.

John (37:46):
Yeah, and there’s a lot of story there to be written still, it seems to me. But it’s going to be interesting to watch and see what might be able to happen as a result of Oracle and how that all is likely to form.

So, just recently, we’ve seen some interesting take-private deals. I was talking to some folks at HIMSS about Augmedix, then shortly after that, heard some news there, and then Sharecare. What does that tell us about the state of things right now in the public market and potential implications for how things are going to frame out?

Christopher McCord (38:36):
Yeah, so we haven’t over the years looked too much at the public health IT companies as comparables for private market activity. It helps to have a good IPO market so companies can go public and create exit events, which has been a little bit turned off recently. There’s a big overhang from COVID in the public cohort of health IT companies. Over 50% of the public health IT companies have gone public since 2020. Over half of them, and a…

John (39:04):
Say that again—it was over 50?

Christopher McCord (39:06):
Over half of the public health IT companies that we track broadly across the industry went public since 2020. Most of those would have gone public in that pandemic period. A lot of them were SPACs—about 40% of them were of SPAC structure, which, because of the structure, tended to self-select lower-quality companies. So, we kind of have this lower-quality mix of health IT companies out there. For that reason, we don’t look at that set as a great indicator.

There are some good companies that have gone public. Doximity would be one of those, and there are others. I think Veracyte went public right before the pandemic. I think so. Then, like, Teladoc—we’ve seen it collapse. Health Catalyst has gotten hammered. Accolade has gotten hammered.

John (39:53):
Was it that long ago?

Christopher McCord (40:05):
Yeah. Some of these companies have…some of them, I think they’re all losing money, and they have debt that is subject to repricing here in the next couple of years. Just given their capitalization and the repricing of that debt, it has resulted in their stocks getting hammered. They’re a great testament to the hype of these raw COVID stocks. What goes up came down even further—a lot further than they were pre-COVID. I think that’s the surprising part of all of this.

John (40:35):
Yeah.

Christopher McCord (40:37):
Yeah, so…

John (40:39):
In that realm, what is…so, I’m going to call an edit point here. Jess, mark it because I just jumped off my thought train for a second. What would be…well, let me just ask you, Chris, while we’re taking an edit break—a very loud edit break.

Christopher McCord (41:08):
Yeah.

John (41:12):
What else would we do well to make sure we cover here?

Christopher McCord (41:17):
Yeah, that’s a call. I would love to…I feel like we’ve kind of gone through the script here. I hope it’s interesting to people. I sort of live in this, and I can’t quite tell sometimes. Like, I’m looking at the rest of the agenda. We talked about some of these things. We talked a little bit about macro. I think some of the things I think about maybe are broader healthcare-specific. We’ve been in this market for a long time, and I often ask myself, I’ve seen billions of dollars go into it. Is it doing any good? Are we improving the system, or are we almost entirely dependent on regulatory policy to make things better? Health IT is part of the journey, but it’s not the end-all determinant of whether the healthcare system gets better. I don’t know—that’s the cynical part of me that feels that way. But it’s just something I think about a lot because I say I’m in this industry to advance healthcare.

John (42:27):
Yeah.

Christopher McCord (42:29):
And we can talk about that some. One of the things I say that I find myself coming back to is, at the end of the day, there are two parties that have to win in our healthcare system. One is the people—aka the patients—that are working to get care. The other is the clinicians that are caring for them. They both have to win, right? At the end of the day, those are the two elements that have to come out of this whole. And the rest…and challenge me when we’re offline here, but the rest are just supporting actors in some sense. That isn’t always apparent in our system, especially when you add payers in the mix and look at how payers demand, constrain, and manipulate care frameworks. That gets hard.

One of the things that I’m looking at when I consider value in healthcare is, is it directly helping one of those two entities? Raising the bar of what happens for those two? And if it’s helping one or the other, that’s good. If it’s helping both, that’s probably really good—if it’s a measurable help in both of those, if it’s raising the water for both. Often it is, but that, to me, helps me think through it with some degree of clarity. I think that gets obfuscated sometimes when you’re working several steps removed from that and you’re getting into complex revenue cycle stuff between insurance payers and providers.

Christopher McCord (44:33):
Totally. Yeah, you’re focused on a sliver of the delivery model, and yeah, I think you completely can lose sight of these things.

John (44:37):
Yeah. So, I don’t know. We could push into that a little bit if you feel like there’s something there, or if you’ve got a soapbox you want to stand on.

Christopher McCord (44:48):
Maybe we can just jump into the regulatory lag, because I think, to me, that’s sort of an interesting…ties to a little bit of what you’re saying here. We haven’t had as many catalysts, but we’ve had some great innovations like GLP-1s and things like that. It’s very interesting to see how they can potentially change the dynamics in the market, but folks can also kind of take advantage of…

John (45:16):
Maybe just jump into that second question then.

Christopher McCord (45:20):
Yeah, I think in the interest of time, maybe we jump to the regulatory.

John (45:26):
Okay.

---

Jessica (45:27):
And team, a quick warning. I figured I’d hop in here since we’re taking a quick prep break. We are at 10 minutes—we’ve got 10 minutes left here.

---

Christopher McCord (45:39):
Let me just pull something up. I just have a piece of data I want to pull.

---

John (46:07):
Alright, let’s pick it back up. So, Chris, I know that the regulatory lag seems to be affecting—maybe hindering—the growth in the healthcare IT sector. Can you explain how this ends up impacting innovation and what investors should watch for in terms of regulatory developments that would be good bellwethers of what might be on its way or some of the gates that are getting ready to be opened?

Christopher McCord (46:46):
Yeah, I think a little bit of our partisanship has been an impediment to driving innovation in healthcare. I hate to even say the government is going to drive innovation in healthcare, but they do sometimes put the regulatory catalysts in place that the market reacts to. We had a whole string of them. We had Obamacare…

John (46:52):
Partisanship an impediment? Really?

Christopher McCord (47:13):
…which came with the Medicaid expansion, creating a lot of opportunity among the Medicaid population. Right before that, you had the HITECH Act and Meaningful Use, driving the adoption of information systems and then interoperability for sharing all that information. HIPAA rules were driving a lot of compliance. We had some software-as-a-medical-device rules come down, which kind of opened up new categories for using software as their therapies. We had some of the COVID regulations maybe free up the use of telehealth. But really, other than that recently, we haven’t had these big overarching Meaningful Use-like programs that have driven inflection points in the market. We’ve also had the shift to value-based care models, which I think…in Medicare Advantage. So there have been a lot of things in silos that have driven adoption waves in the market, but I feel like we’re missing some of that these days, and we need more of it. It’s just creating a bit of a hindrance compared to some of the catalysts that we’ve had historically in this market.

John (48:23):
Yeah, I’m really going to be interested to see…I think there’s some real opportunities, as I understand it, for the government to help put some lane lines around healthcare data usage and help drive how we can access and draw meaning out of what is presently siloed data. If it was able to be brought together or accessed in secure ways that could allow for research acceleration, allow for different elements to come forward and help, it would end up dramatically helping our population, you know, as we look at cancer research and some of those dramatic opportunities that could be greatly accelerated by some form of data access framework.

Christopher McCord (49:18):
Yeah. Going back to the AI topic, there’s a ton of opportunity there. We mentioned the seven-to-one workflow-favoring investment trend in AI, but we do see a lot of very large deals going into clinical drug discovery centered around AI. It’s a little opaque, and I think the value of these investments has yet to be demonstrated, but in theory, that is just the golden opportunity to leverage AI and the use case. It’ll be really cool if we can pair clinical AI around drug discovery with all the clinical data from patients and marry those two things together because we have the information, we’re building the tools, and you just feel like it’s a matter of time before all that lines up and we see some massive breakthroughs.

John (50:11):
Yeah, from what I know about some of the tools and technology that’s coming out that AI is enabling to happen, groups like OpenMind and what they’re doing right now with informing, just empowering us to get meaning from data that we can’t see through really advanced private AI privacy frameworks that allow for discovery without effectively touching data—without touching the identity part of the data—lots of great, very advanced opportunities there. It’s going to require some lane lines. It’s going to require some clear understanding and frameworks that are above a lot of governments’ pay grades right now, as far as the ability to understand and lead. So that’s some of the hope, right?

Christopher McCord (51:09):
Yeah, right. The government is having a hard enough time regulating AI and thinking about how to set regulations around AI. Marry that with personal, protected health information, and you’ve got an explosive landmine. The other thing that comes to mind related to this—pairing together data and policy—is GLP-1s. I feel like every week, I read a headline around the use case for GLP-1s. I find it fascinating because, from what I’ve read, in order for GLP-1s to be effective, they require a lifetime of adherence. There’s so much spend going into them right now as all these different consumers and patients are taking these medications. We’re going to see a pretty significant uptick in medical benefit premiums in 2025 as a result of this spend.

John (51:53):
Yeah…

Christopher McCord (52:08):
But it requires a lifetime of adherence. So, how do we get the incentive model right around something like that, where the long-term payout is going to be quite long-term, but in the interim, there’s going to be a lot of investment? Every time a patient falls off of one of these drugs…

John (52:29):
…a lot of indecency.

Christopher McCord (52:32):
…the data shows that they’re regaining 65 to 100% of that weight within a year of stopping the drug. Then all that prior medication cost is a lost cost. How do we bring that together from an economic standpoint? I’m not expecting you to answer that question, John, but it’s just something I think about because it’s a massive amount of spend. It’s a massive innovation, but we don’t have the infrastructure to leverage it properly. In the near term, it’s going to drive up healthcare costs for everyone.

John (53:04):
Yeah, I read an article late last week around that very dynamic—what that’s going to cost us. I hadn’t stopped to consider it to that point. As someone who spends at least an hour a day in some form of exercise, an effort to maintain behavior that’s other than popping a pill designed to help wellness—it’s a hard equation. What I’d like to see is investment in how we are going to…what I’m really excited about is some of the technology around helping change human behavior and foster healthy, proper habits and the right kind of movement. That is not necessarily that type of work. What I know is those drugs are helping a lot of people with real conditions. At their highest and best use, they are really helping deliver people from some difficult scenarios. And they’re being abused…

Christopher McCord (54:18):
It’s really hard. You give mice the Western diet, and they will immediately devour it uncontrollably and turn obese as quickly as you can go obese. You take the diet away from them and put them back on their original diet, and they won’t eat it—even if they’re really hungry. The addictive nature of our food supply system is out of control. I feel like generally what we do is we attack the symptom without attacking the problem itself. It’s a great drug for so many different use cases, and I’m not trying to detract from that, but it doesn’t attack the heart of the problem, which is lifestyle and behavior. But you can only go so far when you have this crazy addictive temptation staring you in the face everywhere you go. You travel the world and see KFCs on the corner, and you think, “Man, all we’re doing is taking healthy diets and exporting our Western obese-inducing diet around the world.” I get kind of worked up over this topic because I find it so frustrating when we lose sight of our social responsibility in what we’re trying to deliver for consumers. I know we need to feed people and do so at a reasonable cost. I just know that we’re also capable of doing much better.

John (55:42):
Well, that’s probably a whole separate topic for a podcast. At the end of the day, there are a couple of parties we just need to remember who need to win here. One is the people—the patients that are on the receiving end of care—and the clinicians, physicians, and providers that are caring for them. Coming up with solutions that are serving them well is a big part of the mission here. The supporting structures have to be there. Those two parties have to win in order for this system to sustain and do what it’s ultimately designed to do. That’s an important thing to keep in mind. I know we’re getting ready to wrap up here, Chris. I’m curious, as you think through what you saw in the report, what would be some of your top recommendations or things for health tech companies and investors to keep in their sights and on their dashboards as we go into Q4 here?

Christopher McCord (56:56):
Yeah, so we’re coming into a market that rewards just running a good business—a scalable business that’s profitable. We think it’s advisable to just get back to the basics. Go run a zero-base budget. What do you need to run your business? How should you think about your pricing? What sort of resources do you need? How do you think about your value proposition? Start with a clean slate and don’t look back on the past, but look at the present and into the future.

That go-to-market, pricing model, and value proposition we talked about previously is mission-critical to success. It’s more important than the product itself, as case after case has shown us over time. At the end of the day, we segment operators in the healthcare industry into two buckets. You have exploiters who are trying to take advantage of the dysfunction of the healthcare system for themselves. And you have solvers who are trying to solve the dysfunction for the benefit of many. I can’t stress enough how important it is to maintain that solving mindset when you’re out there doing the work that you’re doing.

We’re in such a high-pressure environment—social media, a lot of capital has been pumped into the system. There’s a strong pressure to build your own wealth. You can do both at the same time—you can take a solver mentality. In fact, I think the solver mentality is going to be more durable and sustainable for the long haul than the exploiter mentality. We see a fair amount of exploiters in healthcare.

John (58:29):
History would tend to show that. It’s really true, and it’s a hard thing. If we’re looking at durable investment, it’s going to go to the solver every time for sure. That’s a great reminder and a call to the industry. I would like to think…because this is the world I would like to live in…where exploiters don’t get invested in, and solvers do. Working toward that end is a good thing. It starts with having great ideas that solve real-world problems, because that is what ends up being rewarded long-term. It’s easy to stray from that when you look at making a quick buck on exploiting a problem.

Christopher McCord (59:29):
Upcoding, downcoding—depending on what the incentive is—it’s a very slippery slope. All of a sudden, you wake up and realize you’re really not operating in the way that you need to be. It’s not as binary as it meets the eyes. I think continuing to revisit—are you doing the right thing as an operator in the healthcare market? Are you serving your patients and the clinicians that care for them in a way that benefits with social responsibility?

John (1:00:03):
Well, a good place to land us here, Chris. Before we jump off, tell our listeners where they can get their hands on the report that you guys have so carefully prepared. Give us the roadmap—how do we get there?

Christopher McCord (1:00:21):
Yeah, you can download it from our website. You have to drop an email address at the form at the bottom of the website—hgp.com, healthcaregrowthpartners.com. We are also publishing this data on a weekly basis through some charts on our website. So, in real time, you can go there, look at valuation trends, transaction trends, just to get a sense of how we’re doing. We did that because we kept asking ourselves the same question, and we kept going back to that data, so we thought we’d just put it out there for others to see.

John (1:00:51):
Yeah, it’s a great tool. I encourage you all to check it out. There’s a lot of good insight in the report, and the website is a great place to keep your finger on the pulse of what’s going on in this realm. Chris McCord, thank you so much for joining us today. I’m eager to see when the next report comes out. Hopefully, we’ve seen some of these trend lines reverse a little bit and things freeing up in this sector. Thanks so much for your insight and joining us here today on Healthcare Market Matrix.

Christopher McCord (1:01:25):
John, I really enjoy being with you. Thanks for having me on, and I look forward to further conversation.

John (00:01):
Greetings, everyone, and welcome to Healthcare Market Matrix. I’m your host, John Farkas. If you’re listening to this podcast, I’m just guessing you’re at least familiar with the factors that have been influencing healthcare technology investment over the last bit. We’ve talked about this before on the podcast, but we saw record numbers of investment deals in the last part of 2020 through the first half of 2022. And those numbers, over the last couple of years, have just plunged to the lowest levels we’ve seen in a long time. They have bumped up a little bit earlier this year, and I had hope that there was the start of a trend, but alas, they went right back down last quarter.

We’re looking at a combination of things. I mean, it’s revenue-constrained provider organizations, high interest rates, the dawn of—not the dawn, but certainly the ubiquity of generative AI coming online and shaking the whole scheme up a little bit. The result has been some very unusual trends in the last bit. So joining us again to unpack this is Chris McCord, who has just a lot of perspective on this landscape. Chris is the Managing Director of Healthcare Growth Partners, and they are a leading investment and merchant banking advisory firm that focuses on the sector. He is an active mentor, director, and investor to emerging companies and is a regular speaker and writer in this realm. So, I’d like to welcome Chris to Healthcare Market Matrix again. We have a chance to dive into this a little bit today. Welcome, Chris.

Christopher McCord (01:47):
Yeah, thank you, John. Good to be here. Thanks for the intro and for trying to lay out a little bit of the complexity of the market. Let’s see if we can at least try to make sense of it.

John (01:58):
Yeah, it is tricky. One of the things that you guys do at Healthcare Growth Partners that I am really impressed with is your healthcare or health IT market review. That’s really a pretty in-depth look at the nature of the funding realm in this segment. And I’d love for you to dive into what that is, what you’re doing, what the intent of that overview is.

Christopher McCord (02:30):
Yeah. So the report synthesizes all of the data that we capture. We have a database that captures basically every transaction that we can get our hands on within the health IT realm, and it pulls that data into a central location where we can begin to look at trends and analyze those trends to draw insights from them. We pair that with our own personal experiences. Ultimately, what we try to do through all of that is answer questions that we’re asking ourselves. How is the market performing? Where are valuations? Who’s doing what in the market? What are the sectors that are hot? What are the sectors that are out of favor? Broadly, thematically, maybe a little bit more of what we’ll talk about here—how is the health IT industry tracking from a general financial perspective, and how is the capital flowing?

You’re right. This market has benefited from a huge tailwind from 2018 through COVID. COVID was amazing because it wasn’t just a financial bubble—it was a health bubble. So, the health IT industry in particular had the compounding effect of getting the uplift from the health crisis of COVID along with the financial euphoria.

John (03:38):
Mm-hmm, yeah, lots of spotlight on that sector for sure in that moment.

Christopher McCord (03:54):
Yep, all the COVID stocks—a lot of the COVID stocks were health stocks. Now, that’s working its way through the system, but there’s going to be a long tail because a lot of capital came into the health IT market with the expectation that the COVID crisis was going to be transformational to the delivery of healthcare. While it did inflect a lot of different aspects of the healthcare delivery system, it probably wasn’t as transformational as many expected. So, it resulted in this long overhang of many companies raising significant amounts of capital at very high valuations with the expectation that their financial model would reap the reward of the change from COVID that was not met. And so, here we are, dealing with that. I don’t know if I’d call it a fallout—for many, it’s a fallout—but for sure, it’s an overhang.

John (04:46):
Yeah. It’s interesting. Not too long ago, I was at the HFMA conference, and the number of companies there that I interacted with and talked to, that were kind of hanging on that, you know, living under that overhang, was pretty dramatic. I mean, there were several companies with really solid value propositions—good organizations that had some solid tech that actually is meeting a market need right now—and they’re trying to find a way to make it through the next six months, you know, and not seeing the uptick that they were thinking they were going to see and not seeing the deal flow that they were anticipating. And uniformly hearing, “My gosh, the sales cycles went from, you know, 12 months to 18 to 24 months, and it’s just like everything is in slow motion, unlike anything that they’ve seen before.” I just know that’s a pretty blanket understanding across most of what I’m hearing.

Christopher McCord (06:02):
Yeah, and HFMA—a lot of your audience is going to be companies selling into hospitals. We’ve seen the hospital market probably the most challenged of the different end markets that health IT companies are selling into. Their margins were compressed in this post-COVID cycle. Labor costs were high, some surgical volumes were down, and taken together, hospitals just weren’t performing. That’s actually normalized here in 2024, so I think that’s helping vendors selling into the hospital market rebound. But the other thing that we see is in the larger acute care space, the competitive dynamic with Epic is at a level that I’ve never seen before in my 18 years at HGP. Now Epic is increasingly displacing Cerner—it doesn’t look like they’re the tight number one and two anymore. Epic seems to have gained a bigger lead over Cerner. And the wallet share that’s going into Epic and Epic’s strategy of vendor consolidation under their platform has just…the idea of consolidating under Epic, whether there’s a truly competing product, is enough to slow the sales cycle that you’re referring to there.

John (07:25):
Yeah, it’s really interesting. Just last week, I was talking to Neil Patel, who’s the CIO of Vanderbilt Medical Center. We were talking about this whole, you know, “Do we wait for Epic to solve XYZ problem? Is Epic going to solve XYZ problem?” And right before that, I was talking to Mike Mosquito in a similar interview, talking about, “Do we sit and wait for Epic?” It’s the other EHR platforms too, but Epic being the 800-pound gorilla, “Do we wait for them to solve this problem, or do we buy a solution that solves this problem now?” That’s a big question for a lot of organizations, and it’s holding back a lot of decisions. It probably shouldn’t, based on some of the conversations we were having.

Neil was saying, “If you’ve got a problem, I’m not waiting around right now to solve the problem. I have to solve the problem if it’s a real problem. I can’t be waiting.” But at the same time, not everybody has the resources that Vanderbilt has to go after it, and they might be looking for that type of synergy with Epic. So it’s a pretty interesting moment in that regard, too.

Christopher McCord (08:58):
And I think Epic can pick their partners. So, a lot of vendors are dependent on whether they’re making the shortlist with Epic and if Epic’s going to play nice—or just play neutrally. It’s definitely better if you can be on the “play nice” list. “Hey, this is our partner” versus “This is not our partner.”

John (09:13):
Absolutely. It’s big news. I mean, we’ve got two clients that just recently landed in the “most favored” status, and it’s big news in their world because that’s a big open gate when that can happen, for sure.

Christopher McCord (09:28):
Then I think we had years and years where the pile of cash was growing, and it made folks spend more loosely than they are in this environment of tightening rates, tighter Fed policy, and a little bit of a contraction in the overall money supply, which I think you kind of feel out there in a positive way in containing inflation and reducing labor costs, which unfortunately drives up unemployment to a degree—but maybe a healthy degree to create more equilibrium in the market. For sure, meanwhile, in the background, there’s this macroeconomic backdrop that has resulted in tightening that is directly tied to the hospital market, as well as these other markets where these sales cycles have become more challenging.

John (10:06):
Mm-hmm. Well, let’s dive into the report a little bit and some of what you guys uncovered specifically, because I know that there’s, like we said, an unusual landscape right now. When we were talking about this before, I heard you say this is unlike anything you’ve come across in your tenure. I know there’s been a lot of M&A activity, but valuations have still yet to recover. I hear that across the board from a lot of people who are shopping for funding right now—they just can’t stomach what the valuations look like. So they’re pressed between a rock and a hard place in looking at how they’re going to carry forward. Why do you think there’s that disparity there, and what do you think that means in the context of the market?

Christopher McCord (11:27):
Yeah, let me think about where to begin here because I think on the whole, valuations are down. They’re down, maybe flat for some, down some for others, and then down a lot for another tier of companies. So it’s almost like you have to stratify the type of company that’s out there to how valuations have behaved in this post-pandemic era—or, I’d say, it’s more about post-inflation than it is about post-pandemic. The result of inflation and interest rates and capital allocation and risk management has sort of been the driver behind all of this. So the companies that have the lowest…

John (12:10):
Yeah, and then you stick AI in that equation, and it just adds another layer in some sense of unsure.

Christopher McCord (12:17):
Exactly. Yeah, we can definitely come back to AI, which I think is exciting in this context too—potentially super disinflationary, which I think could be great on the whole, as long as it doesn’t take a big bite out of jobs. But I think we’ve got some time to figure that out. We’ve been through other transformational tech events in the past, and here we are with record-low unemployment, and we’re doing just fine. Hopefully, AI will have history repeat itself and just see continued productivity gains.

In terms of the stratification of companies, the top tier, those that have the lowest view of risk, are those that have been the bellwethers through this transition. Profitable companies for sure—the multiples in which buyers are paying based on profit have largely remained the same through COVID and beyond. That would be the top tier.

Then I’ll jump down to the bottom tier, which is the companies that are losing money. We estimate that approximately upwards of 20% of all health IT M&A transactions this year involved companies that sold for—I’m going to say it slowly—they sold for less than the amount of capital that they raised. You might have a company that raised $10 million at a $50 million valuation. We’re talking about the company not trading for less than $50 million in valuation, but trading for less than $10 million, the amount of capital that went into it. That’s about 20% of M&A deals, so it’s kind of washing out the bottom of the tier of the overhang. There’s still a lot of that out there—a lot of unlabeled investment rounds, which are existing investors…

John (13:53):
Not a pretty picture.

Christopher McCord (14:08):
…dropping cash into a company to continue to fund it. That’s been at all-time highs in 2023 and 2024. We’re seeing a lot of these companies just continue to get funding to stay afloat, either expecting to get to profitability or to have the market perception change. That’s a big issue, and those companies also have trouble funding. That’s why there are these unlabeled rounds. Valuations were set at high marks post-COVID, and they’re going back to the market, having raised a lot of capital, and it’s hard—they’re in a tough position to go out and raise more money.

Then there’s the tier in the middle. I’m a huge fan of the tier in the middle. HGP has worked with a lot of just healthy, normal companies. They may not be the absolute tier A-plus companies, but they’re very good businesses—sustainable, scalable, but not necessarily rule of 60 in terms of the combination of growth and profitability companies. That tier of company has struggled in this market. They previously might have been worth a nice multiple of revenue, and today they’re having a hard time trading at all. That’s where we feel the most sympathetic to how the market is behaving and maybe where there’s the most opportunity. That’s the area of the market that we’re hoping to see come back to life here as just the market normalizes further.

John (15:43):
Can you maybe stick a layer of skin on that and do a little bit deeper profile of that type of company—what they look like, some of the dynamics they are likely facing?

Christopher McCord (15:57):
Yeah. So the typical profile might be they haven’t raised a ton of money. So one thing is that they’re not benchmarked against a very high valuation watermark from a prior round. We’re seeing some companies begin to take this profile because they’re cutting costs, but they still have kind of a gnarly cap table that they have to work against and deal with. I’m not saying these companies don’t have that to begin with. If you have that, then you kind of have to deal internally with your shareholders and figure out, “What do we do? How do we fix this? How do we…”

John (16:10):
…Pry around, yep.

Christopher McCord (16:25):
Yeah. These companies to me are recurring revenue businesses that have a growth rate of, call it, under 20%, maybe 10 to 20%. It could even be single digits, although that’s a little bit low in any environment. They’re making money, but they’re not making enough to trade on a profitability multiple, so they’re self-sustaining. I think, to be fair, we’ve got to say that they’re competitively durable—they’re maybe not in the crosshairs of Epic or some big regulatory risk. They’re just doing their thing. They’re selling but not selling at an exceptional rate, but they’re also probably bootstrapped. They don’t have the capital resources to go out and hire up a big sales force, and there’s probably a lot of potential in these businesses if they were better resourced.

That is often the investment thesis behind a lot of these M&A transactions—“We can take these kinds of bootstrap companies and supercharge them.”

John (17:40):
…and accelerate their go-to-market, yeah.

Christopher McCord (17:51):
Yeah. That thesis and that risk, especially among the strategic landscape, has almost all but vanished. A lot of the strategic acquirers have just been more on the sidelines, focusing on their own internal operations, maybe dealing with a little bit of a capital overhang themselves from taking out debt that’s repricing in this higher-rate environment. We see that among some of the publicly traded health IT companies, so there are dynamics on all sides of the market.

John (18:24):
Gotcha. One of the things that the report brings out that I think is interesting to look at—and you’re talking about at some level here—is the stratification and how that is looking. If you were to pull that out another step and anticipate what we are likely to see in the next six months as this continues to build or move, how would you see it unfolding? I know that’s an impossible question in some ways. But is that stratification going to continue? Are we going to see that exacerbate, or do you anticipate it coming together a little bit more?

Christopher McCord (19:11):
Yeah, I think that stratification is almost always there to a degree—you have good companies, you have distressed companies, and then you have companies that sort of sit in the middle. Where we’re seeing that stratification more here is that those companies that sit in the middle have had more trouble getting to a transaction at a fair price than they have historically. The good companies, generally, unless it’s a very terrible market, do well. There’s a lot of demand out there for high-quality companies.

What is a high-quality company? You hear rule of 40. I think it’s got to be at least rule of 40, but it’s probably rule of 50 or 60. Just for those who haven’t heard it, the rule of 40 is the sum of the revenue growth rate and the profitability of the business. It could be 30% growth, 30% profitability—that’s a pretty awesome combination. Forty percent growth, 20% profitability—that’s getting there.

Companies that are not profitable just have to have much higher growth to still be attractive in the market. Then I think the other thing that unprofitable companies need to have at a minimum is a high gross margin. Gross margin is the cost of delivering directly against your revenue, and usually, it’s a pretty good indicator of how profitable a company can be once it reaches scale. For a software company, we’d like to think a gross margin above 80%. For example, if you have a 40% gross margin, your net profitability is never going to be any higher than, say, 25%. That would be pretty lean operating expenses. You kind of have a self-limiting ability to be profitable.

John (20:39):
It’s there, yeah.

Christopher McCord (21:05):
I think we’ll see some normalization. The big question we’re all asking ourselves is, “We’ve been in 15-plus years in a zero-interest rate environment, and we’re no longer in that. What does normal look like?” There’s been a lot of concern around inflation and economic risk. I think we’re hopefully working toward a soft landing. The indicators seem to point to that, although there’s nervousness there. The Fed is going to cut rates in September by 25 or 50 basis points, which should be a nice cut. All these things together will instill more confidence and bring that middle tier back into a better position to transact and realize value for a lot of investors and operators who’ve worked hard to create it.

John (21:54):
So one of the things that the report shows—and we touched on here—is a pretty big surge in buyout activity. How are you seeing that? What’s driving it? And how is the recovery in the private credit market making it happen? How is it driving and contributing to it?

Christopher McCord (22:15):
Yeah. For a while there, as rates went up, the spreads for the cost of debt went up even more. So, you not only had higher rates, but you had a higher premium for going out and financing in the private credit markets. Those spreads have come back down, while rates are high, and it’s just made capital borrowing more accessible for private equity funds that go out and leverage up to do transactions. There’s also a huge capital overhang. There’s been a ton of money raised by private equity funds in the last decade. And while we’ve seen a lot deployed, there’s still a lot that’s been not deployed. So there’s kind of a supply-and-demand disconnect in terms of the availability of capital and the availability of opportunities. We’re seeing these investors put capital to work.

Lastly, as I mentioned, the strategic acquirers have…

John (22:48):
Yeah.

Christopher McCord (23:08):
…been a little bit more risk-off right now. They’re not…usually, in theory, they have a competitive advantage because they are able to reap the strategic value of a deal. But currently, a lot of them are focused on their own cash management, capitalization, and operations and are not competing for deals at the same rate that they have historically, creating an opening for more private equity funds to do platform deals.

John (23:34):
Interesting. So what do you see as the…I guess, in looking at that in the next term, where do you see the opportunity? Or what do you see coming out of that from an opportunity perspective or trend-wise? What do you anticipate?

Christopher McCord (23:57):
I think usually these private equity-backed platforms make good acquirers because a lot of the investors’ thesis is to go and buy more companies. So, it should broaden out the universe of potential acquirers. I think it’s just a sign of overall health in the market. We haven’t seen as many of these buyout deals go the way of IPOs, but we did see the Waystar and Tempus IPOs in late Q2, which I think helped…

John (24:07):
Yep.

Christopher McCord (24:25):
…resuscitate a little bit of the public side of health IT, which we can get to here in a little bit. I think it’s all positive. I mean, the rate of health IT buyouts is as high as we have ever seen it in the data that we tracked. It’s kind of one of these surprising things where sometimes it’s not how we feel. It doesn’t feel that way as we’re…

John (24:44):
Wow. Yeah, that’s a little counter-flow, right?

Christopher McCord (24:53):
…out there operating and talking to private equity investors who complain about maybe lower deal flow and things like that. But the data is undeniable, and it supports a higher rate of activity than I think many feel.

John (25:10):
Let’s talk a little bit more about the AI part of this conversation, or the part of the equation. When we’re looking at AI-powered tools, what are some of the things you’re seeing in terms of investments in that sphere? Where do you think the greatest opportunities are existing right now? And how is that coming together? It’s a lot of question marks around it.

Christopher McCord (25:39):
It’s a loaded topic, and it’s everywhere right now. Historically, we saw a mix of about 50-50 in AI investments—50% going toward clinical solutions and 50% going toward workflow solutions. In the post-GPT, LLM era that we’re in now, we see about a seven-to-one ratio going toward workflow over clinical. We’re not seeing the clinical investment rate happen at the same speed. I think there are a few reasons for this.

One is it’s easier to apply AI in a workflow environment than a clinical environment. Clinically, you’re asking physicians to change their behavior, change their reliance on computing, and that’s a tougher ask. For sure, they feel threatened, and I don’t think they should feel threatened anytime soon around AI.

The other thing is the term AI is being thrown around a lot more. There are more off-the-shelf AI tools that companies can use, so they themselves may not be pure AI companies, but they’re leveraging AI. The semantics alone are capturing more companies than fairly reflect the number of companies in the market, just because we’ve seen it for years—companies throw around semantics loosely. We saw it with AI well before this, but machine learning was an example. We saw that for a…

John (27:18):
Yeah, I think what this movement is doing is showing really clearly the difference between organizations that are really creating innovation with AI and bringing something forward that is unique and different, versus those who are employing AI to do a part of what they’re doing but had before been claiming AI as part of what they were offering. Now, everybody can do that. I’m oversimplifying it, but everybody can deploy AI in their solution. It’s bottom-shelf, it’s pretty easy to do.

Now the question is, and this is something I think the market is becoming increasingly attuned to—who’s really creating innovation here right now? What does that really look like? Because it can’t be reduced to an easy marketing ploy anymore. People are being much more discerning—their understanding of AI is getting…the buyer’s understanding of AI and what it is able to do and not do is getting much more sophisticated. People are looking at it with a lot more discerning eyes than they had been prior. It’s contributing a lot to how things are and appropriately so when you’re looking at value, right? Because I think that where I saw a lot of companies in the marketplace get some tailwind around some claims around AI, all the people I was talking to that really knew what was under the hood were saying, “You know, this is barely their technology compared to some others.”

So, it really is to me…two things are going on. There’s a lot of people pushing pause and saying, “Okay, what is and what is going to become? What do I need to know? How do I need to inform my buying decisions? What does this look like? And how is it likely to play out? What does real technology and real innovation look like?” Because there were a lot of people claiming things based on a pretty shallow deployment of some technology that now…those who had shallow deployments of AI, the generative models can come in and just make that ubiquitous in a big hurry. So it’s reshuffling a lot of things in that regard.

Christopher McCord (30:05):
Yeah. I’ll tell you what’s also…so where I think we’re saying similar things is that companies will claim AI when maybe they’re just trying to participate in the wave. They’ll maybe be using it to a modest degree—something off the shelf—but it’s not necessarily transformational. We’ve also seen a whole cohort of companies that work…so, healthcare has always had a problem with unstructured data, right? That’s where most healthcare information sits, and companies for decades have been trying to come in and better manage that information. We’ve dealt with many companies that have done so prior to the introduction of today’s LLMs. They’ve invested a ton of money in rules and different tools to accomplish that task, when all of a sudden, at the flip of a switch, the tools to manage these processes have been democratized, and that competitive advantage that they had has now significantly deteriorated.

There’s a whole cohort of companies out there that invested a lot of money in proprietary tools that no longer have that competitive advantage. That’s kind of interesting—we talk about these emerging companies, but there are also the old-guard companies that have to figure out how do they competitively differentiate now if they can’t do it on technology alone?

John (31:07):
Evaporated, yep.

Christopher McCord (31:28):
How do they competitively differentiate now if they can’t do it on technology alone?

John (31:33):
Yeah, I just posted on LinkedIn yesterday about this very dynamic. There are a lot of companies that were relying on some sort of tech moat that was protecting their competitive advantage. In a world where AI is able to speed development, you’ve got companies who had, I’ll say, fragile competitive advantages from a technology perspective to begin with. Now, their competitors can match them feature-per-feature in six months, whereas maybe it would have taken 18 months of development or work or whatever to get to that point.

So, value now is shifting from “Who’s got the coolest, best tech?” to “Who’s got a really solid product and does a phenomenal job of delivering a great service set?” Because…

Christopher McCord (32:41):
One hundred percent. I’ve always felt like in healthcare, in particular, and really in any market—but in healthcare, where the incentive model is so whacked out—that your go-to-market strategy for what you sell, how you sell it, who you sell to, where you price it, how you define your value proposition to those stakeholders is so important because each stakeholder has a different set of incentives. I’m even looking at the fee-for-service versus value-based world. Value-based care obviously is where the market is shifting to, and we’re hearing a lot more around Medicare Advantage and underutilization of care. Fee-for-service drove overutilization of care, and now there are complaints of upcoding and underutilization of care.

It’s a little bit of a sad reality of the corporate interest going beyond the social responsibility that these companies have to deliver high-quality healthcare. It’s inherent—it’s going to happen. It’s been a wild ride in terms of how the go-to-market strategy and aligning your value prop…I guess what I’m saying is it’s important, but it also can be manipulated depending on what your value proposition might be.

John (34:07):
Yeah, it’s interesting. A great example of this…I’m going to start into this and might regret pulling this analogy, but you want to take an example of this—Epic is a great example. I mean, arguably, Epic is built on a horrible platform. It is not the most advanced tech platform that exists on the planet. The code base is, I hear from a lot of people, not what it ought to be. I also talk to a lot of CIOs who will tell me, “I love these guys.” They are like…I was telling you, I talked to Neil Patel this week, and we talked about their implementation of Epic and what that was like in the context of Vanderbilt. He was saying, “They are everything, but what they are wonderfully is a partner.” They were there with me—I knew that they were there with me. They were working. They led us through every step of the way and anticipated the problems and the pitfalls and the challenges that we might face. They led proactively into that space. That was extraordinarily valuable.

I hear the same thing from the folks at Premise Health. They just have a person that is their person. If they have any issue, their person is there, caring for them, making sure that everything is cared for, and that they don’t have the bumps and challenges that they might if they wouldn’t. That’s the essence. When we’re talking about value right now, tech is a big part of it, but how you partner with the organizations you’re working with, what they say and experience as a result, and how sticky that makes you as an organization is going to increase in importance in determining what makes a valuable organization and a valuable product. It extends far past the technology itself.

Christopher McCord (36:26):
I think you have to have that. Otherwise, you have to have an out-of-the-stratosphere exceptional product that stands on its own. Otherwise, you have to pair it with a really solid go-to-market messaging and customer service to drive the adoption and the value from the solution through your users. Epic has been a total leader in that. Once they reach an amount of scale, they’re able to capitalize on that through their scale. And then, lucky for them, one of their biggest competitors has dropped the ball, creating an even bigger opening for them. It’ll be interesting to see how it plays out over time in terms of their market share and footprint and control over data and the ecosystem—how that plays out from an antitrust standpoint or anything like that. I don’t see that on the near-term horizon. People talk about that, but I think it’s hard to just go in and penalize a company for being the best out there when it’s a wide-open…well, maybe not wide-open because leaders can dominate the markets that they’re in, but there is a competitive opportunity for another company to come in and do better. I think Cerner could have outcompeted Epic. The opportunity was there, and they just, at least to date, have failed to do so.

John (37:46):
Yeah, and there’s a lot of story there to be written still, it seems to me. But it’s going to be interesting to watch and see what might be able to happen as a result of Oracle and how that all is likely to form.

So, just recently, we’ve seen some interesting take-private deals. I was talking to some folks at HIMSS about Augmedix, then shortly after that, heard some news there, and then Sharecare. What does that tell us about the state of things right now in the public market and potential implications for how things are going to frame out?

Christopher McCord (38:36):
Yeah, so we haven’t over the years looked too much at the public health IT companies as comparables for private market activity. It helps to have a good IPO market so companies can go public and create exit events, which has been a little bit turned off recently. There’s a big overhang from COVID in the public cohort of health IT companies. Over 50% of the public health IT companies have gone public since 2020. Over half of them, and a…

John (39:04):
Say that again—it was over 50?

Christopher McCord (39:06):
Over half of the public health IT companies that we track broadly across the industry went public since 2020. Most of those would have gone public in that pandemic period. A lot of them were SPACs—about 40% of them were of SPAC structure, which, because of the structure, tended to self-select lower-quality companies. So, we kind of have this lower-quality mix of health IT companies out there. For that reason, we don’t look at that set as a great indicator.

There are some good companies that have gone public. Doximity would be one of those, and there are others. I think Veracyte went public right before the pandemic. I think so. Then, like, Teladoc—we’ve seen it collapse. Health Catalyst has gotten hammered. Accolade has gotten hammered.

John (39:53):
Was it that long ago?

Christopher McCord (40:05):
Yeah. Some of these companies have…some of them, I think they’re all losing money, and they have debt that is subject to repricing here in the next couple of years. Just given their capitalization and the repricing of that debt, it has resulted in their stocks getting hammered. They’re a great testament to the hype of these raw COVID stocks. What goes up came down even further—a lot further than they were pre-COVID. I think that’s the surprising part of all of this.

John (40:35):
Yeah.

Christopher McCord (40:37):
Yeah, so…

John (40:39):
In that realm, what is…so, I’m going to call an edit point here. Jess, mark it because I just jumped off my thought train for a second. What would be…well, let me just ask you, Chris, while we’re taking an edit break—a very loud edit break.

Christopher McCord (41:08):
Yeah.

John (41:12):
What else would we do well to make sure we cover here?

Christopher McCord (41:17):
Yeah, that’s a call. I would love to…I feel like we’ve kind of gone through the script here. I hope it’s interesting to people. I sort of live in this, and I can’t quite tell sometimes. Like, I’m looking at the rest of the agenda. We talked about some of these things. We talked a little bit about macro. I think some of the things I think about maybe are broader healthcare-specific. We’ve been in this market for a long time, and I often ask myself, I’ve seen billions of dollars go into it. Is it doing any good? Are we improving the system, or are we almost entirely dependent on regulatory policy to make things better? Health IT is part of the journey, but it’s not the end-all determinant of whether the healthcare system gets better. I don’t know—that’s the cynical part of me that feels that way. But it’s just something I think about a lot because I say I’m in this industry to advance healthcare.

John (42:27):
Yeah.

Christopher McCord (42:29):
And we can talk about that some. One of the things I say that I find myself coming back to is, at the end of the day, there are two parties that have to win in our healthcare system. One is the people—aka the patients—that are working to get care. The other is the clinicians that are caring for them. They both have to win, right? At the end of the day, those are the two elements that have to come out of this whole. And the rest…and challenge me when we’re offline here, but the rest are just supporting actors in some sense. That isn’t always apparent in our system, especially when you add payers in the mix and look at how payers demand, constrain, and manipulate care frameworks. That gets hard.

One of the things that I’m looking at when I consider value in healthcare is, is it directly helping one of those two entities? Raising the bar of what happens for those two? And if it’s helping one or the other, that’s good. If it’s helping both, that’s probably really good—if it’s a measurable help in both of those, if it’s raising the water for both. Often it is, but that, to me, helps me think through it with some degree of clarity. I think that gets obfuscated sometimes when you’re working several steps removed from that and you’re getting into complex revenue cycle stuff between insurance payers and providers.

Christopher McCord (44:33):
Totally. Yeah, you’re focused on a sliver of the delivery model, and yeah, I think you completely can lose sight of these things.

John (44:37):
Yeah. So, I don’t know. We could push into that a little bit if you feel like there’s something there, or if you’ve got a soapbox you want to stand on.

Christopher McCord (44:48):
Maybe we can just jump into the regulatory lag, because I think, to me, that’s sort of an interesting…ties to a little bit of what you’re saying here. We haven’t had as many catalysts, but we’ve had some great innovations like GLP-1s and things like that. It’s very interesting to see how they can potentially change the dynamics in the market, but folks can also kind of take advantage of…

John (45:16):
Maybe just jump into that second question then.

Christopher McCord (45:20):
Yeah, I think in the interest of time, maybe we jump to the regulatory.

John (45:26):
Okay.

---

Jessica (45:27):
And team, a quick warning. I figured I’d hop in here since we’re taking a quick prep break. We are at 10 minutes—we’ve got 10 minutes left here.

---

Christopher McCord (45:39):
Let me just pull something up. I just have a piece of data I want to pull.

---

John (46:07):
Alright, let’s pick it back up. So, Chris, I know that the regulatory lag seems to be affecting—maybe hindering—the growth in the healthcare IT sector. Can you explain how this ends up impacting innovation and what investors should watch for in terms of regulatory developments that would be good bellwethers of what might be on its way or some of the gates that are getting ready to be opened?

Christopher McCord (46:46):
Yeah, I think a little bit of our partisanship has been an impediment to driving innovation in healthcare. I hate to even say the government is going to drive innovation in healthcare, but they do sometimes put the regulatory catalysts in place that the market reacts to. We had a whole string of them. We had Obamacare…

John (46:52):
Partisanship an impediment? Really?

Christopher McCord (47:13):
…which came with the Medicaid expansion, creating a lot of opportunity among the Medicaid population. Right before that, you had the HITECH Act and Meaningful Use, driving the adoption of information systems and then interoperability for sharing all that information. HIPAA rules were driving a lot of compliance. We had some software-as-a-medical-device rules come down, which kind of opened up new categories for using software as their therapies. We had some of the COVID regulations maybe free up the use of telehealth. But really, other than that recently, we haven’t had these big overarching Meaningful Use-like programs that have driven inflection points in the market. We’ve also had the shift to value-based care models, which I think…in Medicare Advantage. So there have been a lot of things in silos that have driven adoption waves in the market, but I feel like we’re missing some of that these days, and we need more of it. It’s just creating a bit of a hindrance compared to some of the catalysts that we’ve had historically in this market.

John (48:23):
Yeah, I’m really going to be interested to see…I think there’s some real opportunities, as I understand it, for the government to help put some lane lines around healthcare data usage and help drive how we can access and draw meaning out of what is presently siloed data. If it was able to be brought together or accessed in secure ways that could allow for research acceleration, allow for different elements to come forward and help, it would end up dramatically helping our population, you know, as we look at cancer research and some of those dramatic opportunities that could be greatly accelerated by some form of data access framework.

Christopher McCord (49:18):
Yeah. Going back to the AI topic, there’s a ton of opportunity there. We mentioned the seven-to-one workflow-favoring investment trend in AI, but we do see a lot of very large deals going into clinical drug discovery centered around AI. It’s a little opaque, and I think the value of these investments has yet to be demonstrated, but in theory, that is just the golden opportunity to leverage AI and the use case. It’ll be really cool if we can pair clinical AI around drug discovery with all the clinical data from patients and marry those two things together because we have the information, we’re building the tools, and you just feel like it’s a matter of time before all that lines up and we see some massive breakthroughs.

John (50:11):
Yeah, from what I know about some of the tools and technology that’s coming out that AI is enabling to happen, groups like OpenMind and what they’re doing right now with informing, just empowering us to get meaning from data that we can’t see through really advanced private AI privacy frameworks that allow for discovery without effectively touching data—without touching the identity part of the data—lots of great, very advanced opportunities there. It’s going to require some lane lines. It’s going to require some clear understanding and frameworks that are above a lot of governments’ pay grades right now, as far as the ability to understand and lead. So that’s some of the hope, right?

Christopher McCord (51:09):
Yeah, right. The government is having a hard enough time regulating AI and thinking about how to set regulations around AI. Marry that with personal, protected health information, and you’ve got an explosive landmine. The other thing that comes to mind related to this—pairing together data and policy—is GLP-1s. I feel like every week, I read a headline around the use case for GLP-1s. I find it fascinating because, from what I’ve read, in order for GLP-1s to be effective, they require a lifetime of adherence. There’s so much spend going into them right now as all these different consumers and patients are taking these medications. We’re going to see a pretty significant uptick in medical benefit premiums in 2025 as a result of this spend.

John (51:53):
Yeah…

Christopher McCord (52:08):
But it requires a lifetime of adherence. So, how do we get the incentive model right around something like that, where the long-term payout is going to be quite long-term, but in the interim, there’s going to be a lot of investment? Every time a patient falls off of one of these drugs…

John (52:29):
…a lot of indecency.

Christopher McCord (52:32):
…the data shows that they’re regaining 65 to 100% of that weight within a year of stopping the drug. Then all that prior medication cost is a lost cost. How do we bring that together from an economic standpoint? I’m not expecting you to answer that question, John, but it’s just something I think about because it’s a massive amount of spend. It’s a massive innovation, but we don’t have the infrastructure to leverage it properly. In the near term, it’s going to drive up healthcare costs for everyone.

John (53:04):
Yeah, I read an article late last week around that very dynamic—what that’s going to cost us. I hadn’t stopped to consider it to that point. As someone who spends at least an hour a day in some form of exercise, an effort to maintain behavior that’s other than popping a pill designed to help wellness—it’s a hard equation. What I’d like to see is investment in how we are going to…what I’m really excited about is some of the technology around helping change human behavior and foster healthy, proper habits and the right kind of movement. That is not necessarily that type of work. What I know is those drugs are helping a lot of people with real conditions. At their highest and best use, they are really helping deliver people from some difficult scenarios. And they’re being abused…

Christopher McCord (54:18):
It’s really hard. You give mice the Western diet, and they will immediately devour it uncontrollably and turn obese as quickly as you can go obese. You take the diet away from them and put them back on their original diet, and they won’t eat it—even if they’re really hungry. The addictive nature of our food supply system is out of control. I feel like generally what we do is we attack the symptom without attacking the problem itself. It’s a great drug for so many different use cases, and I’m not trying to detract from that, but it doesn’t attack the heart of the problem, which is lifestyle and behavior. But you can only go so far when you have this crazy addictive temptation staring you in the face everywhere you go. You travel the world and see KFCs on the corner, and you think, “Man, all we’re doing is taking healthy diets and exporting our Western obese-inducing diet around the world.” I get kind of worked up over this topic because I find it so frustrating when we lose sight of our social responsibility in what we’re trying to deliver for consumers. I know we need to feed people and do so at a reasonable cost. I just know that we’re also capable of doing much better.

John (55:42):
Well, that’s probably a whole separate topic for a podcast. At the end of the day, there are a couple of parties we just need to remember who need to win here. One is the people—the patients that are on the receiving end of care—and the clinicians, physicians, and providers that are caring for them. Coming up with solutions that are serving them well is a big part of the mission here. The supporting structures have to be there. Those two parties have to win in order for this system to sustain and do what it’s ultimately designed to do. That’s an important thing to keep in mind. I know we’re getting ready to wrap up here, Chris. I’m curious, as you think through what you saw in the report, what would be some of your top recommendations or things for health tech companies and investors to keep in their sights and on their dashboards as we go into Q4 here?

Christopher McCord (56:56):
Yeah, so we’re coming into a market that rewards just running a good business—a scalable business that’s profitable. We think it’s advisable to just get back to the basics. Go run a zero-base budget. What do you need to run your business? How should you think about your pricing? What sort of resources do you need? How do you think about your value proposition? Start with a clean slate and don’t look back on the past, but look at the present and into the future.

That go-to-market, pricing model, and value proposition we talked about previously is mission-critical to success. It’s more important than the product itself, as case after case has shown us over time. At the end of the day, we segment operators in the healthcare industry into two buckets. You have exploiters who are trying to take advantage of the dysfunction of the healthcare system for themselves. And you have solvers who are trying to solve the dysfunction for the benefit of many. I can’t stress enough how important it is to maintain that solving mindset when you’re out there doing the work that you’re doing.

We’re in such a high-pressure environment—social media, a lot of capital has been pumped into the system. There’s a strong pressure to build your own wealth. You can do both at the same time—you can take a solver mentality. In fact, I think the solver mentality is going to be more durable and sustainable for the long haul than the exploiter mentality. We see a fair amount of exploiters in healthcare.

John (58:29):
History would tend to show that. It’s really true, and it’s a hard thing. If we’re looking at durable investment, it’s going to go to the solver every time for sure. That’s a great reminder and a call to the industry. I would like to think…because this is the world I would like to live in…where exploiters don’t get invested in, and solvers do. Working toward that end is a good thing. It starts with having great ideas that solve real-world problems, because that is what ends up being rewarded long-term. It’s easy to stray from that when you look at making a quick buck on exploiting a problem.

Christopher McCord (59:29):
Upcoding, downcoding—depending on what the incentive is—it’s a very slippery slope. All of a sudden, you wake up and realize you’re really not operating in the way that you need to be. It’s not as binary as it meets the eyes. I think continuing to revisit—are you doing the right thing as an operator in the healthcare market? Are you serving your patients and the clinicians that care for them in a way that benefits with social responsibility?

John (1:00:03):
Well, a good place to land us here, Chris. Before we jump off, tell our listeners where they can get their hands on the report that you guys have so carefully prepared. Give us the roadmap—how do we get there?

Christopher McCord (1:00:21):
Yeah, you can download it from our website. You have to drop an email address at the form at the bottom of the website—hgp.com, healthcaregrowthpartners.com. We are also publishing this data on a weekly basis through some charts on our website. So, in real time, you can go there, look at valuation trends, transaction trends, just to get a sense of how we’re doing. We did that because we kept asking ourselves the same question, and we kept going back to that data, so we thought we’d just put it out there for others to see.

John (1:00:51):
Yeah, it’s a great tool. I encourage you all to check it out. There’s a lot of good insight in the report, and the website is a great place to keep your finger on the pulse of what’s going on in this realm. Chris McCord, thank you so much for joining us today. I’m eager to see when the next report comes out. Hopefully, we’ve seen some of these trend lines reverse a little bit and things freeing up in this sector. Thanks so much for your insight and joining us here today on Healthcare Market Matrix.

Christopher McCord (1:01:25):
John, I really enjoy being with you. Thanks for having me on, and I look forward to further conversation.