How proprietary technology fuels innovation in digital health and value-based care

Many companies in the digital health and value-based care spaces have either acquired most of their technology over the past 10 years or built their businesses by leveraging commercial software to deliver process efficiency and more advanced analysis.

In a Harvard Business Review piece by Nicholas G. Carr titled “IT Doesn’t Matter,” Carr provocatively argues against the assumption that an increase in IT’s “potency and ubiquity” increases IT’s strategic value. Rather, he posits that scarcity, not ubiquity, is what truly drives strategic value. True, sustainable advantage over rivals can only be accomplished by offering unique value that others cannot. Investments in proprietary technology and processes are examples of this argument in action, particularly in markets that are prone to commoditization such as telehealth.

Proprietary technologies are a system, application or tool that is owned exclusively by a single company. As long as they remain protected, proprietary technologies can be the foundation for long-term strategic advantages, enabling companies to reap higher profits than their rivals.

Investing in the right areas

Research and development (R&D) spending is often used as a yardstick to compare investments, with the assumption that companies that spend more push innovation further and develop unique competitive advantage.

For fiscal 2021, Microsoft spent $20.7 billion on R&D. Amongst software companies, it was second only behind Alphabet, the parent company of Google. Apple, having steadily caught up with R&D spending on a nominal basis over the past 15 years, came in at $21.9 billion for fiscal 2021. Still, one could argue that given Apple’s very aggressive launch of its proprietary M-Series semiconductors, its overall software spending was likely lower.

The key is where the investments in proprietary technology are made, not necessarily the amount of money being spent. Of course, the spending efficiency is another consideration, but we will assume modern management techniques, culture and global development practices are similar amongst technology companies.

In the early stages of investment in a fairly nascent sector like digital health, it is not always clear which areas within the technology stack firms can build proprietary technology that will support sustained competitive advantage and which ones are a waste of company resources. Time tends to be the best remedy for sorting out the wins from the losses.

Early foundational decisions play a big role in differentiation

Babylon, a global provider of artificial intelligence (AI) technology and clinical services, though founded in the UK, decided early on to develop its probabilistic graph model around a set of regional epidemiology models and various languages and cultural nuances. Its products operate in 15 countries across Europe, North America, Africa and Asia and are capable of operating in more than 16 languages to millions of people.

Given Babylon’s mission to make health care affordable and accessible to every person on the planet, these foundational decisions early in the engineering and design of the product have played a large role in the company’s competitiveness.

For example, Babylon’s product introduction into the U.S. supported both U.S.-English and Spanish languages, which allowed the technology to better serve a broader part of the population. This, of course, included customer-facing AI-based applications such as its symptom checker which helps ascertain what may be wrong with an individual and recommend a triage based on the app’s interactions with the user. For many digital health startups based in the U.S., broad language support is likely less significant, as the U.S. domestic market for health care is extremely large all by itself. Still, when building proprietary technology, early foundational decisions become areas of potential competitive advantage and sustainability.

Faster pivoting when needed

In 2021, Tesla showed through the global chip shortage that it was still able to navigate better than any globally scaled automobile company given the company’s control of its software technology stack. It pivoted to using microcontrollers and developed firmware to work with new chips from other suppliers. While most of the auto industry licensed software from others and lacked the ability to revise their chip support, Tesla turned this to its advantage.

Interestingly, Tesla spends about 5% of its global revenue on R&D, whereas most large technology companies spend 10-15%. Innovation may be more closely aligned with the culture, leadership and past foundational decisions than purely the size of the check written.

Summary

The nascent market for digital-first health care and comprehensive value-based care is taking shape. One could argue that aggressive revenue growth from a company is generally the result of the investments it has made in proprietary technology.That growth trajectory can be above the industry growth levels if sustainable competitive advantage is afforded. It will take a few more years in the maturing of the space to really understand the long-term winners and losers.

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