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Valor’s Healthcare Thesis

May 18, 2020

As cross-border investors we search for the best business from the US and other countries that have opportunities to grow in Brazil, as well as successful Brazilian solutions that have the potential to go abroad. More often than not, we invest in tropicalized models, those that adapt a product or service to the local market. When studying the Brazilian healthcare sector, we soon understood that to succeed in the industry at all, entrepreneurs could not tropicalize any model; rather, they would have to create a native Brazilian model focused on addressing the peculiarities of the industry in the country. Let us break drown three of them:

  • Brazil has a universal healthcare system – In Brazil, healthcare has been a constitutional right since 1989, when the SUS, Sistema Único de Saude, was introduced. The system offers any kind of healthcare service, from primary care to surgeries, free of charge. It is estimated that SUS is the main healthcare payer for more than 150M Brazilians, 70% of the population, who cannot afford private health insurance or pay for out-of-pocket procedures. While SUS has laid the foundations for a better healthcare system and has contributed to improving the quality of life of its population, the system has been failing to efficiently deliver quality care for all  due to a generalized problem of lack of funding, high geographic concentration of clinics, and an uneven distribution of physicians. Brazilian capitals register up to four times more doctors per capita than municipalities in the interior. Moreover, in the Southeast region, there are about 2.81 physicians per thousand inhabitants, while areas like the North and Northeast have 1.16 and 1.41, respectively. Furthermore, the system is becoming even more overloaded by the country’s changing demographic profile: an aging population that increasingly suffers from chronic ailments and a large urban class that suffers from infectious and lifestyle diseases will make up an ever larger portion of Brazil’s population in the coming decades.
  • Unsustainable, rising costs: Companies, the main payers of private healthcare insurance in Brazil, have seen their health plan expenses rise 158% in the last five years (2013 to 2018), 3-4x general inflation (IPCA). In the 5-10 years ahead, with an expected compound growth of 19% year over year, this situation will become increasingly unsustainable. This is the result, in part, of high-level inefficiencies in the healthcare value-chain and a misalignment of financial incentives. The payment model based on fee-for-service reimbursements predicated on the number of patients attended to and the quantity of services rendered incentivizes providers to optimize procedure volumes and not medical outcomes, increasing payment rates. Moreover, there is lack of communication, information, integration, and digitalization between healthcare silos, enhancing the system’s inefficiency.
  • Incipient Digitalization: Increasing healthcare information digitalization enables data accumulation, integration, and insights, which are the key drivers of cost reduction, silo integration, information efficiency and personalization. Digital penetration in the Brazilian healthcare system has not yet  reached meaningful levels; various participants across the industry are still in the process of adopting software and collecting data to improve operations. The country is well positioned to succeed in this process given its high penetration of mobile phone ownership and improving connectivity, which empowers people to manage their own health through services that are increasingly being delivered through mobile systems (e.g. telemedicine).

There remains a long road ahead to gather, sort, and efficiently integrate all of the puzzle pieces of the Brazilian healthcare system, many of which are not mentioned in this text. Notwithstanding, we truly believe that the process can be accelerated by entrepreneurs who are playing an instrumental role in filling the fundamental gaps of the industry – in the past year alone, we analyzed hundreds of healthcare startups. Since our first investment in the sector in 2012, we have matured immensely in our knowledge of the market and have narrowed down our industry focus to three themes which we believe can drive fundamental changes in healthcare:

  • First, we want to support healthcare digitization that will allow providers to create critical infrastructure to increase their reach and efficiency. Two Valor investments exemplify this effort: i) Boa Consulta operates an online booking platform and management solution for clinics; and ii) TNH Health provides AI-powered chatbots to engage, screen and monitor populations at scale that are facing health problems such as epidemics (COVID-19, Zika Virus, Dengue) and mental health issues.
  • Second, given the increasing recognition that healthcare’s fee-for-service paradigm must be substituted for value-based care, we want to invest in businesses that are innovatively disrupting the legacy payer-focused model for one in which patients are fundamentally at the center of care provision and decision making.
  • Third, we see a great opportunity to back adjacent industries, like education, wellness and financing, that are essential in restructuring and supporting the healthcare system to achieve long-run sustainability.

Recently, we announced two new additions to the Valor Family that are fundamentally redefining how Brazilians interact with the system: Sami, a technology-enabled HMO redesigning health plans based on patient outcomes, and Sanar, a digital platform broadening the accessibility and reach of medical education to both students and medical professionals alike.

Sami – Vertilicalized Digital Health Maintenance Organization (HMO)

Sami will tackle three main aspects driving increased health insurance costs: frequency of usage; ii) intensity per episode of care; and iii) medical procedure unit costs. First, Sami is implementing a full care coordination system that will unify patients’ care paths, reducing unnecessary usage frequency. Second, the company is setting clinical protocols that, powered by digitalization and efficiency-centered mechanisms, will decrease operational and procedural intensities. Third, Sami is supporting the alignment of financial incentives between all value-chain players to decrease unit costs. As a Digital HMO, Sami is able to create its own care coordination plan with data integration to become the gatekeeper of the system, which will follow Sami’s clinical protocols and will lead Sami to optimize the network for the users’ needs, controlling the intensity and frequency of system usage. Moreover, due to its new structure, Sami is able to redefine the payment paradigm by rewarding quality rather than quantity of care, therefore better controlling price. Sami will, in turn, be able to offer plans 30% cheaper than incumbents’ plans, allowing the company to reach the 150M Brazilians who are not able to afford current private healthcare solutions.

Sanar – Healthcare Education Platform

In 2018 in Brazil, for every 1,000 people there were 2.2 physicians, disproportionately concentrated in urban centers (vs. 4.0 in Argentina, 2.6 in the US and Chile, and 2.4 in Mexico). Recently, the government has tried to increase both the density and distribution of healthcare professionals through the introduction of new healthcare courses and through programs to bring physicians from abroad, such as the “Mais Médicos” (More Doctors) program. To guarantee the quality of those professionals, there are qualification tests, such as “revalida,” which is focused on foreigners and non-public school professionals that need to do recertification, and “residência,” which is focused on physicians that want to become specialists. Consequently, as the number of graduates and new professionals increases, the demand for courses to prepare them to pass qualification tests increases as well. The current prep and continuing education courses in Brazil are expensive, inaccessible, and outdated, creating a need for accessible and quality healthcare educational content.

In 2011, Sanar was founded to support these underserved students and healthcare professionals. Sanar’s platform is composed of online courses, a procedural guide application (YellowBook app), and videos (SanarFlix), all priced at almost 10x times cheaper than competitors’ offerings. Today, there are more than 2.3M learners within Sanar’s communities. By understanding the student during their entire education journey – from graduate to postgraduate specialization – Sanar has the potential to become a complete hub of support for health practitioners.