3 Unique Attributes of Healthcare Business

Healthcare is often described as fundamentally different from other industries—but why is that?

At Kakao Ventures, we work closely with early-stage startups in the healthcare space and constantly ask this very question. What makes healthcare so uniquely hard to build in, and why do even experienced founders struggle to navigate it?

I’m Chiweon Kim, a Vice President on the Investment Team, and in this article, I’d like to share three unique attributes of the healthcare industry that every founder and investor should understand: uncertainty, complexity, and high-mix, low-volume production.

Why Healthcare Is Structurally Different

Healthcare experts and business professionals often say,

“Healthcare is different from other businesses.”

At first glance, this seems self-evident.

But explaining what exactly makes it different and why can be challenging, even for large corporations: They often venture into the vast scene of healthcare business but fail to produce much fruit. Even when experienced professionals propose healthcare-specific business plans, the management often finds them difficult to understand. What may end up happening is that they apply existing business approaches to healthcare which is a different beast altogether - The results? Suboptimal.

To reduce such inefficiency, let’s explore how and why the healthcare industry differs from others through its three attributes: 1) uncertainty, 2) complexity, and 3) high-mix, low-volume production.

1. Uncertainty in Healthcare: The Role of Agents (Doctors) and the Third-Party Payment System

Nobel laureate Kenneth Arrow discussed in his 1963 paper, “Uncertainty and the Welfare Economics of Medical Care,” as follows:

The special economic problems of medical care can be explained as adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment.

Medical services have uncertainty in both the necessity for medical services (arising from illness) and the effectiveness of treatments. This insight is crucial.

Some argue that uncertainty is not unique to healthcare, citing that welfare and education also have uncertain outcomes. While this is true regarding the effectiveness of interventions, there is a significant difference in the uncertainty of necessity in these respective areas. In healthcare, the probability and timing of disease occurrence are highly uncertain for each individual. In contrast, welfare beneficiaries can be relatively easily identified by income and age, and most of the population needs education.

This uncertainty leads to significant information asymmetry between healthcare providers (doctors) and consumers (patients). Therefore, healthcare services are classified as “credence goods,” which are goods whose value consumers find difficult to evaluate even after consumption, relying instead on expert (provider or agent) assessments.

In contrast, “experience goods” are evaluated through direct experience, and “search goods” through others' evaluations.

Because healthcare services are credence goods, the credibility of healthcare providers (doctors) is vital. Governments implement licensing systems to ensure that healthcare providers are trustworthy, maintaining a certain level of service efficacy. In this sense, doctors hold significant authority and responsibility.

This issue of uncertainty is not easily resolved, even with the rise of digital healthcare. Digital healthcare brands must build trust to sell healthcare as a credence good, which is a time-consuming process, as the credibility of the brand in the end comes from healthcare professionals.

Additionally, the impact of diseases varies widely among individuals, adding another layer of uncertainty. Even with the same illness, the severity and prognosis differ, leading to varying medical costs. This variability necessitates the third-party payment system of health insurance.

As a result, the intrinsic uncertainty of healthcare leads to the following two characteristics in the healthcare industry:

First, the significance of the doctor as an agent due to the nature of credence goods, and second, the emergence of the third-party payment system (health insurance) to manage the risks from uncertainty.

These features make B2C business models in healthcare challenging, as patients have little incentive to pay substantial amounts directly and repeatedly in a system where doctors’ involvement and insurance cover a significant portion of costs.

2. Complexity in Healthcare: Variability in Medical Practice

Healthcare uncertainty leads to complexity, as explaining uncertainty is inherently complex.

Modern science attempts to resolve uncertainty through extensive, repeated experiments. However, medical research faces ethical constraints, limiting researchers' ability to conduct experiments freely. This leads to many unresolved, complex hypotheses within medicine.

Healthcare is complex for doctors as well, as medical science itself is uncertain and complex, and treatment outcomes vary with patient-specific factors and even minute changes in the treatment process, resulting in significant variability in medical practice.

This variability arises from the inherent imperfections in applying medical science to clinical settings. Various factors influence medical practice. Medical knowledge is derived from averages across large patient groups and cannot be directly applied to individual patients.

Additionally, the healthcare system, including medical infrastructure and insurance, significantly impacts medical practice. Doctors must consider various factors, such as the availability of hospital beds for admission and insurance coverage for prescribed drugs.

Individual doctors’ characteristics and preferences also play a crucial role, as the application of medical knowledge depends on each doctor.

For example, the use of beta-blockers after a heart attack illustrates this variability.

Beta-blockers reduce heart rate and were previously contraindicated after a heart attack due to presumed negative effects on heart function. However, a 1982 clinical trial showed that beta-blockers improved survival rates after a heart attack.

Despite subsequent studies confirming these findings and their inclusion in treatment guidelines, beta-blockers were still prescribed very conservatively to heart attack patients even many years later.

In addition to doctors, patient perceptions and preferences significantly influence medical practice.

Healthcare, though scientifically based, is heavily affected by culture, customs, and institutions. For instance, Anglo-Saxon populations tend to be more stoic about pain, while Italians and Jews are more expressive. Postpartum care in Korea is also culturally specific and uncommon in Western countries.

From a business perspective, all healthcare is local. Beyond differences in regulatory and insurance systems, distinct markets are formed at regional and even individual doctor levels, emphasizing the importance of sales capabilities in the healthcare, pharmaceutical, and medical device industries.

3. Production in Healthcare: High-Mix, Low-Volume

The final key characteristic of the healthcare industry is its high-mix, low-volume production.

Diseases are diverse, and the required treatments vary widely based on patient characteristics and disease progression. Therefore, medical products are inherently produced in a high-mix, low-volume manner.

For example, in 2021, Medtronic, a major medical device company, had a pipeline of diverse products, each requiring separate research, development, regulatory approval, and insurance coverage. This complexity makes healthcare a cumbersome and intricate business.

Many big tech companies, including Google, Apple, and Microsoft, are known to have an interest in the healthcare sector.

However, their default production mode is low-mix, high-volume, making it challenging to achieve immediate success in healthcare. Even their AI capabilities are not easily leveraged in healthcare. Developing medical AI software or devices requires collecting specific health data and creating specialized products, followed by navigating regulatory and insurance approval processes in different countries.

It is difficult to assert that big tech companies will excel in this area. A more realistic strategy for companies like Google and Microsoft may be to incorporate the vast healthcare data onto their own cloud platforms for other service areas.

Those in the healthcare industry are likely already well aware of this information.

I hope this will be helpful for those considering entering the healthcare industry from other sectors. Additionally, I hope this serves as a valuable reference for those within the healthcare industry, such as university hospital professors, who work only in specific areas.

Written by Chiweon Kim, a Vice President in the Investment Team at Kakao Ventures.