The health insurance industry’s legacy business-to-business model of the past half-century is on the brink of irrelevance. The Affordable Care Act created the opportunity for individuals to shop for insurance directly on public healthcare exchanges. Employers are jumping on the bandwagon by moving away from group coverage toward defined contribution models that also send people to an exchange to buy their own health insurance.  This new market dynamic, where individual consumers now prevail, will be highly disruptive. At the same time, we’ll see excellent opportunities for venture investors and emerging technologies.

To remain competitive in this new environment, insurers will need to rethink their entire value proposition and differentiate themselves, offering reimagined products for both the individual and employer markets. Technological innovation will play center stage in this transformation, which opens the door to exciting investment opportunities.

We’re already starting to see this play out, as evidenced by a huge spike in funding for digital health startups, which consulting firm Accenture predicts will double to $6.5 billion over the next three years. And it’s not just venture capital firms accounting for all this activity. Large health plans, including Blue Cross and Blue Shield of Florida (Florida Blue) and Horizon Healthcare Services in New Jersey, for example, are increasingly getting in on the action through direct investments in early stage healthcare IT companies.

So where are the best places to invest?

One area with enormous potential involves upgrading the administrative and claims systems now running at most health plans. These are where all the data comes from. America’s largest health plans rely on antiquated IT platforms with functionality that has been stitched together over decades. This has resulted in systems that are too expensive to maintain and too inflexible to address the demands of the new consumer driven marketplace. They will simply have to be replaced with new, modern platforms that can address things like e-commerce functionality, automated claims adjudication and payment, patient engagement through mobile communication, and high-touch, real time customer service. New systems are also required to effectively manage the complex operational and reimbursement aspects involved with new market innovations like accountable care organizations, patient-centered medical homes and value-based benefit design.

VentureBeat will be discussing a variety of key health tech topics with industry innovators at HealthBeat 2014, Oct. 27-28 in San Francisco.
Be sure to register today — ticket prices go up tomorrow.

Another big area is wearables, a market that is expected to explode with Apple Watch and a slew of other devices hitting stores next year. But the issue with wearables is that they’re primarily made for and marketed to healthy people. Fitness tracking and weight loss are important applications in the context of population health. However, the ultimate value proposition for these devices to the health insurance market comes from their potential to engage patients and integrate with other technologies in order to meaningfully improve adherence to evidence-based treatments, impact care management for the chronically ill, and ultimately reduce hospitalizations, which drive most of the cost in the system.

In our own portfolio at Psilos, SeeChange Health is leading the way in clinically driven health improvement and consumer engagement as an enterprise service. Another investment, HealthEdge, provides next-generation, business-transforming core administration, claim adjudication, and care management technology platforms to the health care payer market.

As investors in health care for more than 16 years, we believe that the winners in this new healthcare environment will be insurers who make the shift to embrace consumer demands and technology companies whose solutions facilitate this transition by simplifying payer processes, improving customer experience and cutting costs across the board. The result will be a more outcome-based healthcare system in which the patient is the focal point.

Steve Krupa is a Managing Member and COO of Psilos Group. He focuses on identifying investment opportunities in next-generation healthcare services and healthcare IT companies. 

David Eichler is a Managing Member of Psilos and focuses primarily on investments in the healthcare services and medical technology sectors.

VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Discover our Briefings.