With the push for value-based care, health care players – from manufacturers, to providers, to payers – are looking for ways to improve patient quality while reducing the costs of care. Advanced technologies, including digital health and artificial intelligence (AI)-based tools, are a major part of the equation, but companies face several challenges and barriers to adoption. To that end, management consultancy Deloitte has launched a new Health Tech website featuring a Health Tech Industry Accounting Guide and other helpful advice for health-tech companies.
The impetus for the new resources was the increasing convergence of health care and technology, said Peter Micca, a partner and national health tech practice leader at the London-based firm. “More and more of our clients were in this space, and the revenue streams of these organizations are typically software or software-as-a-service or some type of technology revenue stream based on services,” he told BioWorld.
Deloitte regularly aligns accounting and reporting guidelines for companies in various sectors, so it decided to create a set of guidelines targeted at the health-tech market.
These companies’ revenue streams often include multiple elements over a number of years, and formulating a strategy for revenue recognition can have implications for arrangements they may have in place, Micca explained.
Tailoring to different needs
“If you’ve seen one contract, you’ve seen one contract. They can be tailored to the economic substance of the arrangement … to whether the customer is a hospital, a health plan, a pharmacy benefits manager, a clinical trial company, a pharmaceutical organization [or] a biotechnology company, because the needs are different,” he said. “So reading the contractual arrangements, understanding whether there are any milestones, understanding when the company actually culminates the earnings process and can recognize revenue, that’s the judgment that goes into the process.”
The accounting guide Deloitte has developed is intended to serve as a roadmap for CFOs, controllers and others involved in financial planning.
“We thought it was important to provide content and perspective to those negotiating those contractual arrangements, so they understand that decisions that they make during the contracting process can have an impact on, ultimately, the position the company takes in terms of how it recognizes revenue,” Micca said.
The 36-page, downloadable guide provides an overview of the emerging health-tech marketplace, including investment trends. A chapter on capitalized software discusses capitalization of internal costs, from product development to postimplementation, as well as cloud computing arrangements and external-use capitalized software. A separate chapter on revenue recognition provides tips for identifying performance obligations in contracts, determining the transaction price and allocating that price to the performance obligations, along with other advice.
The website and guide are intended for both startups and larger companies, which have different sets of needs. For example, a small number of large contracts can be extremely impactful for a startup, just by virtue of where they are in their lifecycle, Micca said. They are likely to be more flexible and open-minded about tailoring arrangements to meet the specific needs of the client vs. larger organizations with more mature product offerings and multiple clients.
With the global coronavirus pandemic skewering well-conceived business plans and financial bottom lines, health care companies also are facing questions about future projections and the valuation of certain assets, such as goodwill intangibles and long-lived assets. They also need to look at the impact that projected cash flows have on their ability to stay afloat during the crisis. “Do they have sufficient liquidity to meet their operating activities over the next operating cycle, and, if not, what ability do they have to access the debt markets, credit facilities, etc.?” Micca said.
For all the fallout – and there has been plenty – with many companies suspending their financial guidance for the duration of 2020, some health-tech segments are faring well in the COVID-19 environment, Micca noted. Utilization of telehealth has accelerated dramatically, fueled by the loosening of regulatory restrictions on licensing across state borders and the increasing willingness of insurers to pay for virtual visits.
That could bode well for future investment. “The genie’s out of the bottle,” Micca said. “The general consensus is telehealth, post-COVID-19, will demand greater usage.
He sees opportunities for investment in contact tracing as well, including collaborations between startups and larger tech companies on remote access monitoring.
It’s clear that COVID-19 has accelerated the use of technology in health care, particularly in terms of consumer access and bending the cost curve. “I think technologies around artificial intelligence and robotics will continue to impact how health care gets delivered,” Micca said. “Analytics and companies that have specific analytic capabilities, use technology to do root cause analysis on therapies, will continue and make it an environment [in which] we have so many companies trying to focus on vaccines and other therapies, the clinical trial process will get accelerated, and technology will play an important part in that.”
Where’s the money?
Are investors willing to fund innovations in this uncertain environment?
Short-term investors are likely to wait it out on the sidelines, unless the technology is very disruptive and could have a short-term impact, according to Micca. Long-term investors, on the other hand, are looking for technologies that provide increased access, improve care quality and outcomes or help to align incentives with payers and value-based care.
“Any organization that provides a solution around any of that will get a lot of interest from a health care investor,” he said.
Meanwhile, well-capitalized provider organizations, such as the Mayo Clinic and UPMC, will continue to attract government funding and private capital to accelerate their own health-tech solutions, Micca predicted. At the same time, smaller, less-capitalized providers will be challenged to raise capital or invest in technology solutions.
How long will COVID-19 dominate the wish list?
For the foreseeable future, companies with the capital and capacity to focus on COVID-19 solutions will do so, but at a more accelerated and massive scale than they would have otherwise, Micca believes. But those are the same companies that have solutions and the scale to focus on multiple therapeutic classes.
“I think COVID-19 will wedge its way into the starting lineup … as a therapeutic class,” he added. “But while we have seen, short-term, less of a focus on other therapeutic classes, there is a too big of a market in cancer, diabetes, etc. … to completely supplant those” needs.