Seth Sternberg was visiting his 65-year-old mother in Connecticut when he got the idea for his home-health-aide business, Honor. She'd picked him up at the airport, and he noticed that she was driving really slowly. He asked why. "And she was like, 'Well, driving's just harder than it used to be,' " he recalls. This got Sternberg's mind working. What if his mother were 75 or 85, and tasks like driving or bathing were not just harder but impossible? Would she need to move into assisted living? "If I ever said to my mother, 'You need to leave your house,' she might kill me," he says.

Sternberg, 37, had sold his previous company, the messaging service Meebo, to Google for a reported $100 million in 2012. He and Meebo co-founder Sandy Jen were looking for a new startup idea, together with two of their Stanford friends, Plaxo co-founder Cameron Ring and Monica Lo. They wanted their follow-up act to be something important, so they started researching the state of in-home senior care through interviews with geriatricians, private-duty caregivers, and senior-center administrators. They learned that it was ripe for improvement. It was hard to get a health aide for less than four hours, because agencies usually paid them minimum wage and they spurned jobs that would earn them just $20 or $30. Finding qualified aides involved hours of sifting through resumes and interviews--and was still a crapshoot. Records languished in spiral notebooks. Sternberg's team realized an Uber-like logistics algorithm could match patients to local caregivers, making shorter visits cost effective. Digital records could reduce mistakes and ensure continuity of care. User ratings could make for easier vetting. On the strength of the idea and the co-founders' track records, they raised $20 million from Andreessen Horowitz and others to launch Honor. They built two mobile apps--one for consumers, the other for caregivers--and a software back-end to connect them, then recruited care pros and seniors for a pilot program in Walnut Creek, California. Honor is now up and running in the Bay Area and parts of Los Angeles.

Sternberg thought Honor's customers would be people with money who wanted to keep Baby Boomer parents in their homes. But then he started getting phone calls he hadn't expected--from hospital system administrators asking for Honor's help. As a result of a provision in the Affordable Care Act, they told him, their hospitals were under pressure to lower their readmission rates or risk seeing their Medicare reimbursements drop. That meant finding ways to make sure patients returning home after surgeries didn't suffer falls or forget to take their medications. Even something as simple and low-tech as trimming someone's toenails could be the difference between a smooth recovery and a costly trip to the ER; untrimmed toenails can lead to infections, numb feet, falls, and broken hips.

Sternberg called up two of his investors, PayPal co-founder Max Levchin and Yelp co-founder Jeremy Stoppelman, to deliver the news: Honor had stumbled on a bigger opportunity than any of them realized. "We thought we were doing the $20 billion home care industry, but it turns out there's $250 billion in post-acute spend," he says.

Sternberg is one of hundreds of entrepreneurs working to bring about a sea change in America's $3 trillion health care industrial complex, a would-be revolution articulated in the Affordable Care Act. Although still very much a work in progress, the ACA is a grand experiment with the potential to transform a sector that represents a sixth of the American economy. Obamacare is still poorly understood by the general public, who know of it primarily as a political football. Even less widely appreciated outside the narrow world of health care investors, insurance executives, and hospital administrators is how the ACA has set off a Big Bang-size explosion of startups.

"Anytime you take a sector and apply a whole bunch of regulatory changes and economic incentives to it, it creates enormous opportunities for new entrants to come and take advantage," says Bob Kocher, a venture capitalist at Venrock in Palo Alto, California. A physician who specializes in public health, Kocher was President Obama's top adviser on health care policy. Having helped draft the ACA, he was among the first to grasp how its implementation would hinge on the efforts of entrepreneurs, especially those in tech. "It's really hard for a 200-year-old hospital system or a 100-year-old insurance company to figure out how to use technology to make its product better and cheaper," Kocher says. By his tally, the amount of funding going into technology-infused health care startups has more than doubled in the past five years, with $10 billion going into the formation of 500 new companies.

When you hear ACA,you likely think of the mandates it created: You must offer health insurance if you have more than 50 employees, or, as an individual, buy it for yourself if you don't have coverage. But hidden in the sprawling maze of laws that make up ACA is a gold mine for entrepreneurs willing to do some very heavy lifting. The key is language buried within that seeks to change the way medical costs are reimbursed. The ACA, says Kocher, is trying to move the entire health care system away from a "fee for service" model--which encourages health care providers to deliver lots of interventions, many of which are unnecessary or ineffective--and toward reimbursement based on the quality of the individual patient outcome.

The ACA has essentially created new carrots and sticks to force everyone--individuals, health care providers, and employers--to make this shift, mostly using the massive bargaining and buying power of Medicare, which controls 20 percent of U.S. health care dollars. For instance, it lets Medicare contract with a new type of doctor network, the accountable care organization, whose members coordinate on patient care and billing. Medicare reimburses each ACO at preset benchmark levels tied to the makeup of its patient population. The carrot: If an ACO bills for less than its reimbursement target, it gets to keep part of the difference. The stick: If it comes in high, it may have to eat the extra cost.

The ACA is moving health care away from fee-for-service and toward payment based on patient outcomes. This is huge.

Another ACA stick is the Bundled Payments for Care Improvement Initiative. This plan seeks to tie all costs for a treatment--including follow-up--together. Under this provision, a hospital would get the same reimbursement whether a patient has to be readmitted for multiple complications or goes home with a clean bill of heath.

There are sticks for employers as well. The new excise tax, a.k.a. the Cadillac tax, penalizes employers for offering expensive insurance plans that experts believe result in overconsumption of health care. It takes effect in 2020, but the threat of the excise tax is already nudging employers toward high-deductible plans, which, not coincidentally, resemble the high-deductible plans on the Obama­care exchanges.

By 2018, half of Medicare disbursements will be through mechanisms other than fee-for-service, like those outlined above. The government's actions are already having a ripple effect in the commercial insurance industry. With providers now retooled to bill as ACOs and receive bundled payments, private payers like Cigna, Aetna, and United Health have copied those models. In other words, they are assuming that Obama­care is, in some form, here to stay, and that fee-for-service is on its way out.

"Finally, there's a business case for improving health, not just delivering more health care, which is what everybody had been focusing on," says Farzad Mostashari. Like health care IT. In 2014, he founded Aledade, a startup that gives primary care physicians the digital tools and know-how to form ACOs. Aledade has raised $34 million in funding and now serves more than 100 physician practices in 11 states.

Aledade was founded expressly to take advantage of an opportunity created by the ACA. There are also many companies that might have existed anyway but would not have been as successful in a non-ACA world. Honor is one of these. Grand Rounds is another. Its co-founder, Lawrence "Rusty" Hofmann, is one of the world's top practitioners of interventional radiology in the treatment of deep vein blockages. In 2011, his 8-year-old son developed aplastic anemia, a life-threatening condition that causes the body to stop producing red blood cells. The child needed a bone marrow transplant, but Hofmann himself was the only compatible donor and there was no data on the efficacy of parental donations. Through his network of professional contacts, Hofmann tracked down a colleague at Seattle's Hutchinson Cancer Center whose unpublished paper suggested the treatment would work. He was right.

His son recovered, but Hofmann was shaken by the experience. "I said, this is just horseshit. We have to figure out a better way to help patients get through this," he says. His idea was a digital platform that would "scale medical expertise" by connecting the most knowledgeable doctors--the five to 20 in any field who do the research and develop the techniques their peers eventually all adopt--with the most challenging cases. In Sep­tember 2012, over coffee with Reputation.com co-founder Owen Tripp, Hofmann explained how new data-reporting requirements in the ACA had made it possible to rank doctors by specialty and procedure using their success rates. By connecting patients and these top-notch doctors more efficiently, he believed they could eliminate unnecessary visits and bring down the total cost of care. Tripp was on board. Today, Grand Rounds covers two million patients and has raised $106 million in venture capital, with the most recent Series C round of funding bringing its valuation to a reported $750 million.

Grand Rounds says its platform saves almost $10,000 per complex case. That makes it attractive for larger employers, 84 percent of which pay for employees' care directly. Grand Rounds also helps them provide gold-plated medical benefits while escaping the Cadillac tax.

"A lot of things that are happening because of the ACA should have been happening anyway," says Arvind Rajan, a former LinkedIn executive who founded a software and services company called Cricket Health that will administer in-home dialysis to patients with end-stage renal disease. "It's not like people didn't care about outcomes before, but, you know, they go where the money is."

The ACA's Byzantine nature ups the difficulty level for entrepreneurs unaccustomed to the peculiar and dated ways of the health care industry. "This space is so f---ing complicated, I had no clue," says Honor's Sternberg. To help him navigate it, he hired Kelsey Mellard, a former special assistant to the director of the Center for Medicare and Medicaid Innovation, which was created by the ACA. Like Sternberg, Tripp of Grand Rounds hailed from a consumer-tech background and had come to regard its rapid cycles of product development and market penetration as the norm. "I don't think there's a single constituent in the health care system that's able to change its behavior quickly, inclusive of patients," he says. He recalls how Grand Rounds, in its early days, was unable to find patients willing to sample its service for free, a service that now costs several thousand dollars. Eventually, the company figured out that people were more comfortable with services they'd heard about through their doctor or employer. Grand Rounds stopped selling directly to patients, and began distribution as an employee benefit.

To Mostashari of Aledade, the challenge of trying to innovate in health care is inseparable from the disease the ACA is seeking to cure: the fee-for-service model and the mindset that goes along with it. Aledade expends a lot of energy trying to convince staff at its medical practices that doing things like making room on the schedule for same-day appointments and reasoning with patients who refuse vaccines is worth the extra effort. "What you're seeing is a system where what counts is 'If I just check the box saying the patients refused the vaccine, I'm compliant, even if they get pneumonia,'" Mostashari says. The good news, he adds, is once people come around, "it's like one of those 3-D pictures. You can't un-see it."

For policymakers and entrepreneurs alike, the laws' complexity and relative youth make it hard to assess if and where the ACA is working as it's supposed to. The same goes for the startups helping to usher in its reforms, many of which, including Honor and Cricket, say it's too early to disclose any of their performance metrics. Health care spending continued to grow faster than inflation in 2013 and 2014. (There is no data available yet for 2015.) ACA proponents insist that growth reflected the extension of coverage to 17 million previously uninsured people. The experiment with ACOs hasn't saved Medicare any money yet, after payouts to participants are factored in, but spending growth within them has slowed and measures of quality are up. The mass migration of commercial insurers to the new models is an important vote of confidence.

The obstacles facing entrepreneurs seeking to innovate in health care are plentiful. Regulations limit their freedom of action; consumers and doctors cling to ingrained habits; politicians on the right and the left threaten to scrap the whole framework and start again from scratch. But for those who can navigate these pitfalls, the potential rewards are equally towering: a chance to share in the value that would be unlocked by engineering hundreds of billions of dollars in waste out of the health care system, and a portion of the credit for solving one of America's biggest and most intractable problems.

 

Owen Tripp

Co-founder and CEO of Grand Rounds
Elite referral network and telemedicine for complex cases

I had a father-in-law who passed. He was probably 20 miles away from someone who might've had better insight into his condition. In remote communities, there are diseases the local physician has clearly never had any experience with. Just taking the information about the condition and putting it in front of a person who sees that thing all day, every day is a world of difference.

My background is in building huge technology systems. One of the things that's striking in health care is that nothing happens quickly. In software, you can make history overnight. When that Yo app came out, everyone was talking about it five minutes later. There's nothing like that in health care. You have to be comfortable with long gaps between feedback. The good news is that it's not like you're going to bomb quickly, either.

Seth Sternberg

Co-founder and CEO of Honor
On-demand in-home care for seniors

Our number one criterion going in was to be able to look a human in the eye and know you're making his or her life fundamentally better. The senior space in general is hyper-underinnovated. You hear stories of elders crawling upstairs but not telling anyone because they don't want their kids to know.

When I started, I knew absolutely nothing about health care. The biggest surprise has been just how absolutely complex it is. Without a Sherpa, it's close to impossible to successfully integrate with the system. I view it as this giant asteroid field. If it's just me, I'm going to smack into the side of an asteroid.

Farzad Mostashari

Founder and CEO of Aledade
Software and support for primary care practices operating as accountable care organizations

For me, this started 14 years ago, when I was working for Mayor Mike Bloomberg as New York City's assistant health commissioner. I was working a lot on bioterrorism surveillance and using big data to monitor the city's response to outbreaks. Bloomberg came in and said, "OK, what's killing people today? What can we do to save the most lives today?" The clarity of that question, the outcome-orientedness, was just exhilarating to me.

The current way of paying for health care has shaped every institution, every business model. It's the water we're swimming in and most of the people swimming in that water don't even see it. To change what we do and how we do it, you have to be able to see things for what they are.

 

HITTING THE MARK

The fee-for-service model has given the U.S. a health care system that costs too much and gets middling results. The Affordable Care Act attempts to bring about a "volume-to-value revolution" by tying spending to health outcomes through mechanisms like accountable care organizations, networks of doctors and hospitals that provide coordinated care for large patient populations. To persuade providers, consumers, and insurers to make the change, the law employs a number of carrots and sticks.

Carrot   Stick
If an ACO bills for less than its reimbursement target, it gets to split the savings with the government.
 
In some ACO contracts, an organization that bills over its target has to eat the extra cost.
Medicare reimbursements for complex treatments like hip replacements are bundled, rewarding providers who avoid unnecessary costs.   Hospitals that too frequently admit patients for postsurgical complications can forfeit up to 3 percent of their Medicare reimbursements.
Employers can rebate an employee up to 30 percent of his/her total insurance premium as an incentive to participate in wellness programs.   A "Cadillac tax" set to take effect in 2020 penalizes employers who offer expensive insurance plans, which are thought to drive health care inflation.
From the April 2016 issue of Inc. magazine