Why Silicon Valley Innovators Struggle in Health Care

Topics: Care Delivery, Finance, Health Information Technology, Politics and Policy, Federal Government, Regulatory

A series of struggles and regulatory missteps among some health care startups suggests that Silicon Valley's ambitious brand of innovation may be a poor fit for the highly regulated health care industry.

Although a few seasoned technology companies, such as Apple and Alphabet (a holding company that includes Google), have made inroads in the health care space, startups -- with their intense focus on growth and experimentation -- often have floundered.

Startups Under Fire

For example, Zenefits, which distributes no-cost administrative software to businesses as a way to drive sales to its more lucrative business as an insurance broker, currently is under investigation in California and Washington State. The company was founded by Parker Conrad in 2013 and within two years it was reportedly among the fastest-growing companies in Silicon Valley, valued at $4.5 billion last May.

But an investigation by BuzzFeed News last fall found that, amidst pressure to continue growing quickly, Zenefits created a software tool that allowed its health insurance brokers to falsify the completion of a required 52-hour licensing course. 

Conrad recently resigned as CEO, and the company's new CEO David Sacks says it is taking steps to come into legal compliance.

Sacks in an email to employees acknowledged that Zenefits needed to change its approach, writing that the company's values "were forged at a time when the emphasis was on discovering a new market" -- the focus of most Silicon Valley start-ups. But now that Zenefits finds itself operating in the health care industry, it needs to reevaluate its core principles "to win the trust of customers, regulators, and other stakeholders." He added, "For us, compliance is like oxygen. Without it, we die."

Blood lab-testing startup Theranos is another fast-growing startup that has come under regulatory fire, this time at the federal level. CMS recently ordered the company to rectify "deficient practices" at one of its labs. The company on Feb. 12 responded to CMS, detailing a plan to address the deficiencies. As of last Friday, the plan was still under review.

In addition, Theranos voluntarily changed its method of collecting blood after FDA in October warned that the company's Capillary Tube Nanotainer was an "uncleared medical device." FDA classifies medical devices based on the associated risks, and the level of regulatory control increases with each classification.

Adapting to the Industry

In the Washington Post's "Wonkblog," Carolyn Johnson argued that the missteps by Theranos, Zenefits, and others suggest "Silicon Valley's philosophy of disruptive innovation can be more difficult to apply to health care than in the digital world."

Health care is a complex market.  And "when lives hang in the balance," she wrote, "there are far more rules than when creating new gadgets."

Halle Tecco -- founder of Rock Health, a digital health venture fund -- noted in an interview with the Huffington Post that technology innovators looking to break into the health care industry commonly voice concerns over whether their product will be heavily regulated.

However, Unity Stoakes, co-founder and president of the global entrepreneurship development company Startup Health, in an interview with Fortune said that entrepreneurs who learn to work through health care's regulatory process can have "a competitive advantage." He said, "A lot of people get spooked by the concept of regulation, but the reality is it's just a process to work through."

Stoakes also noted that in health care entrepreneurs need to work with, not around, large stakeholders. He said, "You really need to be working with these corporate and government partners in order to speed up what's actually possible."

-- by Sam Bernstein