16+ Terms Entrepreneurs Should Know for Navigating the Healthcare Industry

The U.S. spends over $3 trillion annually and healthcare accounts approaches 20% of our GDP — this is clearly an industry that is ripe with opportunity and lots of activity. But it is also rife with waste, operational inefficiencies, and complex but crucial regulatory requirements. As a new breed of entrepreneurs and startups tackle the challenges in the healthcare system — many of whom are armed with the technical and scientific know-how but not necessarily an insider’s view on navigating the alphabet soup of people, places, and processes — here are 16 terms you should know. An exhaustive list this is not, but hopefully it provides a place to start, as well as signposts to guide you through the often bewildering landscape.

Regulatory terms and players

Any innovation in healthcare has to, first and foremost, show it’s safe and effective — usually in that order. The onus is on every company, large or small, to take a Hippocratean approach with their product and services, but regulatory and other agencies also have several, sometimes overlapping, frameworks and schema in place to ensure that patients’ rights and wellbeing are adequately protected.

#1 IRB (Institutional Review Board). If you want to conduct any biomedical research involving human subjects — note, this is true of non-medical research as well — you’re going to need approval from an IRB. These boards consist of experts in the field, and are used to protect patients’ rights and wellbeing, as well as ethics. As such, IRBs review protocols, research methods, and how informed consent is achieved with patients. Here are two things entrepreneurs should also be aware of when it comes to IRBs: First, they’re not limited to therapies; for example, you may need IRB approval even if you’re just doing analyses on patient data. Second, while most IRBs are affiliated with a specific research institution (universities, corporate labs), there are commercial IRBs that startups can hire to serve the same function given their limited scale. If you’re going to work with a commercial IRB, ask around to make sure they are reputable and have worked on projects similar to yours so they have the appropriate skills to assess the specific nature of your work.

#2 HIPAA (Health Insurance Portability and Accountability Act). You’ve probably heard this one a lot, because if you’re developing any software to be deployed in the healthcare system, your product or service will need to be HIPAA-compliant. This is the legislation that, among other things, governs and safe guards privacy obligations for individuals and institutions handling individuals’ medical information. HIPAA is often regarded as a scary or burdensome regulatory overhead, but the requirements for compliance are clearly codified, well understood, and entirely manageable if designed into the product/process from the beginning. I’d also argue that HIPAA provides an opportunity for entrepreneurs looking to develop solutions for health data ownership and sharing, especially since patients are not bound by HIPAA requirements: They have the right to ask for their own, entire medical records… and can choose to share or provide them to a third party (such as data analytics companies and clinical trial CROs, more on those below). Getting data directly from the individual with consent therefore provides more freedom for the user of that data.

#3 LDT (laboratory developed test). Diagnostics have historically been a challenging area for investment and commercialization, but advancements in machine learning/AI and other technologies have reinvigorated the diagnostics landscape. If you want to develop a diagnostic, one of your first decisions will be whether to develop an in vitro diagnostic (IVD), a packaged product that is sold to clinical labs or providers usually as a device or kit; or a laboratory developed test (LDT), a diagnostic test that is run entirely in-house in your lab. Commercializing an IVD requires extensive testing and trials for FDA approval and a go-to-market strategy in place to ensure your IVD product reaches the clinics/labs where the samples are being collected and tested. In contrast, offering an LDT requires the samples to come to you in order for you to provide your test as a service. While the FDA has the authority to regulate LDTs, it has historically elected not to enforce it, making this approach a faster go-to-market strategy in most cases — but also one requiring more operational complexity and rigorous internal controls. The FDA has also stated that they will be revisiting their policy and may change their stance on LDT regulation in the future, so stay tuned.

#4 CLIA (Clinical Laboratory Improvement Amendments). When graduating from internal R&D to handling clinical samples, you’re obligated to ensure correct sample handling and processing. So if you’re going to develop and commercialize an LDT, you’ll need to certify that your lab is CLIA-compliant — these are the standards, enforced by the federal government’s Centers for Medicare & Medicaid Services (CMS), that regulate all laboratory testing. Basically regulators want to make sure that all labs handling clinical samples are using GLP (good laboratory practices) by following proper protocols and demonstrating data reproducibility. Sounds daunting, but there are seasoned experts that can help startup labs put the policies, processes, and systems in place to achieve CLIA certification in a timely manner. It’s definitely better to bring in an expert in here than try to reinvent it all from scratch, especially if the company also embraces a culture of compliance.

#5 IND (Investigational New Drug) application. If you’re looking to develop a new drug, you’re going to need to conduct human clinical trials — and you’re going to need the FDA’s blessing to do so. The information in an IND application allows the FDA to review the drug’s activity in animal models, to understand the drug’s chemical properties and manufacturing methods, and to outline how you plan to test it in humans. INDs are not for the faint of heart though: Submissions number in the thousands of pages, and stories abound of companies loading up U-Hauls with stacks and stacks of printouts just to drive them down to Washington, D.C. to submit their applications. And then once you submit an IND, you will need to be on call to answer any questions from the FDA. Again, don’t try this at home (alone); hire an expert, and use the number of INDs submitted as a barometer of experience as you build out your clinical team. Finally, even if you don’t intend to go the distance on developing a drug alone and are looking to partner with a large, established biopharma company, the path to IND is an important value-inflection milestone. Prospective biopharma partners are looking to fill their pipelines with innovative new drugs that will have near-term impact, so business development discussions will often focus on timelines to IND-enabling studies (the experiments needed in order to submit an IND application). Traditionally, these companies looked for drug programs that achieved proof of concept through Phase 2a (arguably the most important phase as it’s when one can show safety and initial efficacy data). But over the past decade, biopharma companies in highly competitive areas have been in-licensing (or at least optioning through agreements) drug programs much earlier, so the time to IND-filing and beyond is especially critical to those business development discussions.

#6 USPSTF (United States Preventive Services Task Force). While this independent, volunteer panel of experts is often overlooked, it’s worth paying attention to because they provide ratings for clinical screening tests — which in turn directly influences and helps convince private payers to reimburse those tests. USPSTF ratings evaluate if a given screening test has a strongly (A)or moderately (B) positive net benefit, a small net benefit (C), no net benefit (D), or is inconclusive (I). A good chunk of a diagnostic’s success can often be traced to getting into USPSTF’s screening guidelines: If the USPSTF grades a screening method with an “A” or “B” rating, private payers are mandated to cover that service with “no cost sharing, so the patient does not have to pay coinsurance, copay, or any amount of a deductible”. Given that payer and reimbursement issues are a major part of go-to-market plans in healthcare, it pays to understand how USPSTF ratings work. Note that this can be a multiyear process that can involve getting the support of physician specialty societies, government agencies, and industry groups.

Healthcare supply chain

Healthcare has a famously complex industry structure. Manufacturers develop products to help patients who are being cared for by providers, but are paid for by a combination of payers (insurance), patients (copays), and employers (benefits). It can be a dizzying prospect to keep track of it all, but here are a few of the lesser-known players in the U.S. system.

#7 PBM (pharmacy benefit manager). This one is a bit of a mystery to many entrepreneurs new to the healthcare industry, and it has also come under scrutiny recently as drug-pricing discussions have taken center stage through high-profile cases over the past few years (Valeant, Martin Shkreli with Retrophin, Daraprim and Turing, and so on). PBMs have been controversial because they are paid by both drugmakers and payers; have been blamed for the lack of price transparency; and have even been accused of driving up drug prices for consumers due to their commissioning mechanisms. But what are they? PBMs are third-party intermediaries that work between drugmakers and health plans to establish and maintain the list of medicines that should be covered by specific insurance plans (the formulary); to process and ensure payment of claims; and to contract with pharmacies. They also negotiate with drug manufacturers to put their drugs on the formularies and establish discounts/rebates. Their stated primary aim is to help manage costs for payers — for all kinds of healthcare plans — while maintaining or improving health outcomes, but the industry is on the cusp of being transformed. The three historically dominant PBMs (CVS Health Express Scripts, Optum/UnitedHealthcare) have all seen significant M&A activity or speculation as payers look to vertically integrate. Amazon is also rumored to be entering the space, and startups are looking to create next-generation “digital” PBMs.

#8 Drug wholesaler. Drug wholesalers are the distributors in the healthcare supply chain. Their basic business model is to buy large volumes of generics and other drugs from manufactures at a discount and get them to where they are dispensed, such as retail pharmacies and hospitals. Approximately 90% of drugs in the United States are handled by three major players (AmerisourceBergen, Cardinal Health, and McKesson); as other players consolidate and there’s increasing political and consumer backlash on drug pricing, it’s likely that drug wholesalers will see increased margin compression. Given the strong market presence of the three dominant players in this segment, it’s incredibly difficult for any newcomers to compete against the incumbents. My partner Alex Rampell likes to say that the battle between startups and incumbents is whether startups get distribution before incumbents get innovation. It’s unclear how innovators would secure distribution here, but, with the importance of logistics and the reliance on antiquated systems, there may be opportunities for new technologies to create real value for distributors (for example, by alleviating escalating pressures to reduce costs while protecting margins).

#9 Self-insured employers. Some large companies, instead of establishing plans and premium cost-sharing subsidies with an insurance company, may instead assume the financial risk for providing health benefits to their employees themselves since it’s more cost effective for them to do so. This also opens up the opportunity for early stage companies, whether through that employer owning healthcare spending decisions (and associated data) or as a backdoor into insurance companies. Because these companies still need to hire large insurers to process their claims via a relationship called Administrative Services Only (ASO), employers can influence their ASO to contract with desired healthcare services/products directly for their much larger fully insured population. In this way, self-insured employers can be a great launching pad for startups to build a base of evidence and then leverage that data to make a sale to insurance companies. But there are also downsides to this approach: Benefits managers in companies are already inundated with pitches, so getting initial traction may be tricky; and as with many such large enterprises the sales cycle can be very long. Expect to demonstrate some sort of value to the employer (read: pilot); to educate their employees (read: B2B2C!); and to wait until the next open enrollment period gets rolled out across the company.

#10 Integrated Health Systems. Most healthcare providers (hospitals) are separate and distinct from payers (insurance companies) — so the hospital system usually bills and is reimbursed by the insurance company for treating a patient. Integrated health systems are unique in that they are both the payer and the provider, and as mentioned earlier, there has been a growing trend of vertical integration between the payer and provider subsectors over the past decade. California-based Kaiser Permanente, Northwestern U.S.-based Intermountain Health, Pennsylvania-based Geisinger, and Pittsburgh-based UPMC are among the best known and well regarded examples of this model. The rationale for these combined systems is that by aligning the provider and the payer, there is incentive to offer preventive and holistic care for patients that results in both positive health outcomes for patients and reduced long-term costs for the system as a whole. This characteristic also makes integrated providers a valuable ground for testing new diagnostics, therapeutics, or workflow-productivity solutions since these entities benefit from clinical cost reduction in a way that is directly and immediately legible to them. 

#11 Pharmacies. We’re all familiar with the retail pharmacy chains that dot the urban landscape — CVS, Long’s Drugs, Rite-Aid, Walgreens, and others (with the first and last ones listed there as most dominant so far). But beyond retail, there’s another class of pharmacies known as specialty pharmacies. Tightly linked with PBMs, these pharmacies deal with very expensive medicines or complex logistics that require high-touch, such as biologic drugs and injectables — totaling more than $100 billion every year. There is an incredible amount of vertical integration involving PBMs happening right now — CVS is in the process of buying payer Aetna and there are rumors of Walmart, already a major player in pharmacy, making a bid to acquire insurer Humana — so when the dust settles, the dislocation across the value chain is bound to create both threats, and opportunities, for entrepreneurs.

Other healthcare terms to know

#12 PMPM (per-member, per-month). This concept generally has two contexts. It can refer to capitation (fixed) payments, where a health maintenance organization (HMO) is paid a specific amount to a primary care physician every month for each member (patient) covered by the physician — regardless of how much treatment a patient receives in a given month… sort of like a retainer. It can also be used by insurers as a unit to measure costs for patient lives covered under a plan. What does this mean? If you’re selling to payers and/or employers, they will of course want to understand the cost/benefit of the solution through some shorthand, especially since the benefits — that is, the improved health outcomes — often take time to materialize. So one way to price your product/solution is on a PMPM basis (e.g., you are paid $x dollars PMPM). The advantage to this approach is that your company gets paid essentially for use. The disadvantage is that insurers are very sensitive to PMPM cost increases, particularly if the observed benefit will take time — thus limiting your ability to capture significant value (or easily raise prices) on a PMPM basis. Another approach is to price on a risk-sharing basis: You get little/no upfront payment unless and until you demonstrate improved outcomes (or another agreed-upon measure). This outcomes-based approach may be easier to sell and will generally enable you to capture more value long term — but the company’s out of luck if it doesn’t hit its performance metrics.

As the entire healthcare system continues to shift towards value-based models, including even drug pricing, measures of value delivery will become increasingly central to the introduction of new innovations. However, value-based pricing is a lot less straightforward to execute in the details of billing and verification than PMPM (which is why some organizations still prefer steady line-item budgeting instead). It’s therefore much easier to price by outcome when there is a readily available, cheaply observable measure tightly linked with cost savings or improved outcomes (weight loss, for instance). But if your business is trying to capture just a percentage of the cost savings, sometimes third parties have to be involved to help quantify the amount of savings attributable to the service (and to help avoid the dueling actuaries problem, where one side argues the savings were actually much smaller or due to other services/activities).

#13 Medical loss ratio. This is a financial ratio that measure the efficiency of insurance plans. If an insurance plan has a medical loss ratio of 75%, that means that for every $1 of premium, the insurer is paying out $0.75 for member medical claims and the remaining $0.25 goes to overhead, marketing, profits, etc. The current iteration of the Affordable Care Act and certain states mandate maintaining minimum medical loss ratios, which puts pressure on insurers to carefully control their margins — creating a large market opportunity for software and technologies that can make insurers more efficient.

#14 Drug discovery targets and leads (HTS, HTL). Making a drug is time-consuming, risky, and expensive, and there are some common pitfalls that first-time entrepreneurs or tech entrepreneurs new to healthcare should be aware of even if building a computational therapeutics company. In any case, the drug discovery-and-development odyssey usually starts with identifying a target, which is the specific biology (a gene, protein, etc.) that is believed to be a driver of the disease. Once you’ve identified a target, you need to then prove — both to yourself and later to others — that it is indeed an important driver of disease, which is usually done by conducting a range of experiments. With a validated target in hand, the company will then need to find a drug that “hits” that target — and ideally *only* that target — to help avoid toxicity, off-target effects, and ultimately adverse effects/ safety issues in humans. One approach to finding a hit is to run a high-throughput screen, or HTS — basically throwing a bunch of molecules at the target and seeing what sticks (that is, has activity against the target) — and then picking the hit with the most potential to become a drug. The process of winnowing down hits to advance to the next stage — that is, to becoming a “lead” (not unlike the term in sales) — is referred to as hit-to-lead (HTL). This is where you fine-tune your lead by adjusting the chemistry to ensure it has favorable drug-like qualities, a process known as lead optimization. Once you have optimized leads, the company will run additional experiments and declare one a development (or lead) candidate. The nomination of a development candidate is an important milestone, because it entails committing significant additional investment to conduct expensive animal studies in order to prepare for an IND.

#15 CRO (contract research organization). Given the difficulty of the drug discovery and development process outlined above, it’s not surprising that most early-stage companies seek collaborations or partnerships with large established biopharmaceutical (“biopharma”) companies. But even without a biopharma partner, a company can bring on a CRO to outsource much of the work — like pre-clinical and clinical trial workflows. While you will of course want to maintain strategic core expertise in-house, a CRO can save you from having to make expensive capital investments, or from hiring to cover the entire spectrum, which is usually cost-prohibitive. Although there are a few big top CROs out there, there are also a number of excellent smaller players that specialize in different steps of the process as well. As with anyone you partner with, make sure to ask around to make sure that a CRO is reputable and has demonstrated expertise in what you’re specifically hiring them to do for you. It’s also important to balance and plan, intentionally, at which point you will have enough product-market fit, milestones, and scale to build out your own expertise in-house.

#16 KOL (key opinion leader). I took this term for granted, but I’m now learning that the concept of a KOL is somewhat unique to the healthcare world. As the term implies, KOLs are recognized thought leaders in a specific domain, but in healthcare, this goes beyond the traditional sense of an “influencer”; these are the people who provide clarity or guidance in a world where science is messy and deep domain expertise is an absolute must. If your startup will play in a specific therapeutic area for example, it’s incredibly valuable to have leading researchers and/or clinicians advising you as KOLs. In some cases, they may also be on your board of directors. But it’s a common practice in biotech to establish a scientific advisory board (SAB) to ensure a broad range of domain expertise and influencer buy-in on your side. Beyond advice, the right KOLs associated with a company can provide positive validation for the team/technology/approach, and they can also provide critical support and networks for fundraising, hiring, and business development.