I had an early investment in my career that failed, and it wasn't because the technology was bad or the clinicians were subpar. It failed because I didn't truly understand the unique physics of healthcare economics. After 25 years, I've learned that the most durable successes are rooted in mastering how value is truly created and captured in this industry. Healthcare simply does not play by the same rules as other sectors.
The Four Rules That Change Everything
1. The Buyer Isn't the User. In almost any other market, the person using a product pays for it. In healthcare, the patient gets the service, but an insurer or the government pays the bill. A successful business model has to align the priorities of all three.
2. Prices are Opaque. There's often no "market price." An insurer might pay $3,000 for the same MRI that Medicare pays $500 for.
3. Demand is Inelastic. A patient with kidney failure needs dialysis to live, regardless of the economy. This creates incredibly stable, predictable demand—an exceptionally valuable business characteristic.
4. Regulation Shapes the Market. In many states, you can't just build a new hospital because of "Certificate of Need" laws. These regulatory walls protect established players and are a powerful source of value.
My Framework: The Four Levels of Value
I tend to look at opportunities through a four-level hierarchy. Level 1: Operational Efficiency. Being cheaper and faster. It's essential, but it's easy for competitors to copy. Level 2: Service Quality. Having better outcomes or patient satisfaction. A stronger position, but it requires constant investment. Level 3: Market Position. This is achieving a near-monopoly. A perfect example is Sanderling Renal Services, operating dialysis clinics in rural areas where they are often the only provider for many miles[37]. Level 4: Ecosystem Integration. The highest level. This is when a company becomes the indispensable "operating system" for a region. Our primary care group Complete Health does this by managing the health of thousands of Medicare Advantage patients, becoming the central hub that specialists and payers rely on. Success in this field comes from recognizing that it's an economic system with its own rules. The companies that win aren't just the ones with a great clinical model; they're the ones with a business model perfectly designed for this complex and often counter-intuitive world.References
- Sanderling Renal Services rural operations, https://pharosfunds.com/sanderling.php ↩
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