In this interview Liam Donohue and Trip Hofer, investors at .406 Ventures, discuss the challenges that traditional payment models pose in expanding access to mental healthcare, especially for underserved or high-need populations. They also explore how these payment structures can suppress innovation that could improve access and share insights on how their investment strategy is influenced by these dynamics. 

Liam Donohue is Co-Founder and Managing Partner of .406 Ventures in Boston, an early-stage venture capital firm founded in 2005 with a focus on healthcare and technology infrastructure. 

Trip Hofer is a Venture Partner at .406 Ventures as well as a longtime senior executive in the healthcare industry. He is currently also the CEO of Redox, a .406 portfolio company that provides a leading healthcare data interoperability platform.

What challenges do traditional payment models pose that limit access to mental healthcare, especially for underserved or high-need populations?

Trip Hofer:

If you think about the traditional model for these populations, you're commonly talking about Medicaid. And the problem with Medicaid, first and foremost, is that it is usually the lowest fee on a fee schedule. For the companies that we typically interact with, some of them say, “I can't get into the market because the fee schedule is so low that I have to make significant changes to my cost structure in order to make the economic model work.” By its very nature then, the Medicaid fee schedule, which a lot of these patients are leveraging, doesn't support access to rural or high-need populations. Second, if you look at the criteria by which you have to submit claims, it's much more cumbersome in a Medicaid environment than it is in a commercial environment.

And so, the bar to meet certain regulatory standards as well as the process complexity to operate on the Medicaid side is so much higher than on the commercial side. You’ve got a population of people who are in need, often in rural areas, or who are not able to pay for services themselves outside of a Medicaid environment. And then you've got the worst fee schedule and the highest barrier to entry for operations, process, etc. It’s the worst of all worlds vs. commercial populations that don't face what a typical Medicaid population would face.

Liam Donohue:

You also have two other important dimensions. First, delivering care through more innovative models depends on technology and connectivity, which are often less available for this population. Another critical factor is accounting for no-shows -- tracking people down, rescheduling, and maintaining engagement. In non-fee for service models, this becomes especially challenging, since individuals in these groups often have less predictable availability.

Do traditional payment structures present challenges that suppress innovation that could expand access?

Trip:

Definitely. When you have a very low rate on a fee schedule, companies have to obviously pay for the services provided, but part of that fee also allows them to take a portion of that money and innovate. So, if you're operating in a low margin environment where the vast majority of those dollars have to go to just providing the services, then your ability to innovate is minimized. 

Liam:

I do think in some of the companies that we've backed, for example, InStride and Equip, where you've got multidisciplinary folks, it's just not formulaic regarding how much of a particular service -- for example a psychiatrist, psychologist, coach -- each patient needs. And to the degree that you're trying to manage those populations in a traditional fee for service model and you can't predict utilization because it's all going to be driven by what the specific patient needs within that team approach, it is just very, very challenging. If you can integrate that all, looking at a population, the team, and bill in a more comprehensive way without having to do that fee for service calculation of number of hours spent by this particular clinician, it is much easier to manage across those more integrated models.

How do these payment structures influence your investment strategy in mental health? Are there promising companies you've passed on because their model wasn't “payer friendly?”

Liam:

As enterprise-focused investors, we’re looking at companies that are going to be reimbursed by the payer or the payer as a proxy for large employers vs. direct-to-consumer models. So, in general, we pass on those. We also try to stay away from pure fee for service and look at value-based models, which allow for a more holistic approach, (as I described reimbursement) vs. just a more commoditized version of “how do you provide therapy at X rate” and do it maybe more efficiently or on a different platform, but not in a way that is really responsive to the population.

Trip:

The only thing I'd add is it might not necessarily influence the initial investment strategy but might as a company grows. A lot of these companies tend to come from different payment models – they might take cash, they might be direct to consumers as Liam noted, they might be direct to employer because employers (especially self-funded employers) will pay a higher rate, and then have this vision that they're going to be able to very easily one day just flip a switch and be payer friendly. This idea that all of a sudden you can sell the payer without actually having an organization that is enabled to do that is obviously a watch-out because it's a lot of investment to flip an organization and prepare an organization to work with payers.

For example, I was with a company the other day that said “oh yeah, we're going to go into payers.” I then asked how many people they had on their analytics team. Their response? “We don't do analytics. We don't do measurement.” Good luck. You’re about to come across an army of people that will ask you how you measure, and you have no one that does that. How do you take insurance? How do you cost share, how do you do copay, all that. Those are systematic changes. I think for a company to be “payer friendly” without having people actually understand how payers operate can be a huge red flag.

Liam:

There is so much complexity to even getting the connectivity of the systems into a payer, coding properly, billing, and not having it go haywire. For one of our companies, it took six months and a million dollars to get plugged into provide the payment and billing service that everyone had agreed to contractually. The mechanics and the backend -- all the sausage making -- it’s just incredible.

Are there any companies you've backed that have figured out how to bypass or innovate around traditional payment models to reach more people?

Liam:

Not necessarily to reach more people. I’ll take it in a little bit of a different direction, and Trip hit on it. There are some companies that have gone out and proven in a traditional model that they can deliver results and then leverage those results into a different, more value-based approach. And if a company can do that, it should expand its access to populations that really need help because, in theory, the company engages with them in the right way and can show ROI in that engagement. So, they start off in a traditional way with their eye on the ball of what they want to accomplish, which is to prove that they're actually adding value. 

Trip:

I think the companies that Liam and .406 have backed that are successful are ones that think traditional models like fee for service are not the right approaches, so they do have a value-based approach, or they bundle payments, which is very important. A bundled payment structure where you are taking services -- and this is what AbleTo did -- and bundling those together as a package and then using a code to bill those services allows you to bill above the fee schedule because you're providing more services. And so that bundled payment arrangement is one that we've seen to be successful, but -- you need the operational backing, you need the processes, you need to have the product that enables you to do that.

Do you believe solving the access problem and mental health is possible within the current system, or is real progress going to require systemic change?

Liam:

Access is one thing, and I think it's important. Another thing I’ve observed is that in mental health in particular, the historical business model has been one of endless care as opposed to having a discreet start and finish, with measurement along the way. If the objective is to create more capacity and therefore more access, one of the ways to do that is to build systems that allow for “cures,” where you are starting and finishing, and you've made sufficient progress instead of creating a lifetime engagement with therapy where it's not really solving the problem, and it's also absorbing a ton of access.

Trip:

I think we have to acknowledge something within that question that I appreciate – you’re suggesting that there still is an access problem. I'm getting tired of companies saying that they've solved the access problem and now it’s about measurement of quality. We still have massive access problems. Do I think that it's solvable within the current system? No, and the reason I say that is because the current system is complicated and it doesn't allow companies to move fast, especially when you get back to these underserved or high need populations where the bar to just get your product or service offered or your service offered is so substantial that it doesn't allow for fast movement of solutions to get at these problems appropriately.

It is so complicated and so hard that a lot of organizations just can't get through the barriers. And so, it depends on the population again. Commercial moves faster. That's why typically what happens is you start, you go from what I talked about, then you get in the payer space, you go commercial first, the easiest, then you go to Medicare and then you go to Medicaid. Medicaid's always the hardest because it's state by state. It's like literally operating 50 companies because you have to go in front of 50 different groups of people who have completely different opinions on what you're providing and make it incredibly onerous to get your solution implemented. Plus, we have a fee schedule in mental health that continues to be so low that it invites people to work outside of it. Mental health is one of the only industries where a clinician can say, forget this, I'm just going to take cash and make a substantial and fine living. And so, they do not have to operate within the fabric of the ecosystem of the payment model because they don't want to and they don't have to. There are many people that will just pay cash. That conundrum, that paradox, is primarily seen in mental health. It prevents access if you have a leakage of providers because the system itself fails to pay adequately.

The other thing I'll say is I have talked to individuals and to companies who continue to believe that there are significant percentages of the population that believe they need mental health support provided by a clinician, and the reality is that clinically do not. Until we recognize that reality and then put full force behind it, we'll always have this problem.

You have a stigma within a stigma. And what I mean by that is there is a stigma to acknowledge a need for mental health care, but then once you are bought in, you believe that you have to see the top provider in the country, for example, when in reality what you only really need is maybe some emotional resiliency or emotional support. You do not need to see a provider, a clinician, or even a therapist. You can see someone that's at a different level and get the care you need. Until we as a country appreciate that reality and then build payment and service models around that, we will never get out of this conundrum -- ever.

Liam:

I one hundred percent agree and would add that it's very hard to do that because unlike most other parts of healthcare, mental health has a subjective measurement system, i.e., the patient reports, and a clinician interprets. There are some scoring systems (e.g., GAD-7, ICD 10) that are helpful, but viewed by many with skepticism. At the end of the day, it's not like you can look at a blood test or a radiology test and say, this person doesn't need surgery or doesn't need a statin.

Trip:

Liam, that point is a great one. It’s one of the only medical specialties that's subjective. Among the thousands of companies I've seen, not one of them has ever failed to claim that they have incredibly impressive results, literally none of them. As a payer, everyone's coming at you saying “Look at all this stuff I do. Look at all these decreases, look at my scoring.” And not everyone can have effective solutions, period. It defies the laws of logic, but yet that's what you're faced with as a payer. And that's a conundrum too, right? That subjectivity based on outcomes is because you can't take a hunk of the brain out and measure it and see if it's better or do a blood test.