Revenue Generation vs Cost Savings in Healthcare

Introduction

At first glance, saving a dollar and making a dollar might seem like the same thing. After all, aren’t all dollars created equal? But the reality is more complicated, especially when you dig deeper into how businesses, particularly in healthcare, operate.

In a previous post (from before the newsletter started!), we explored the nuances of cost savings versus revenue generation, highlighting how each affects the customer’s buying decision. In short, while saving costs can improve a company’s efficiency, generating revenue typically has a stronger and more direct impact on the client’s financial standing.

Recently, a LinkedIn post we came across added even more depth to this conversation, particularly for investors in the healthcare market:

This perspective brings up a critical distinction between cutting costs and driving revenue. Let’s break down some key points to consider:

Private enterprise vs Government Enterprise

Private companies are always in a battle on two fronts. First, they’re focused on expanding their market—driving revenue growth by reaching more customers and outpacing their competitors. At the same time, they must manage costs, as the constant push from market competition tends to drive prices down. It’s a delicate balance of making more while spending less to stay ahead.

Government enterprises, in contrast, often operate in environments with little to no competition, giving them monopoly-like characteristics. While they may not be true monopolies, many government entities provide essential services or operate in highly regulated sectors, meaning they don’t face the same competitive pressures as private companies. Instead of focusing on cutting costs, government enterprises may prioritize expanding their reach or securing larger budgets to sustain their operations.

For startups working in healthcare, many large healthcare entities—such as hospital systems—function similarly to government enterprises. These organizations often hold geographic monopolies or are the dominant providers in a specific region. Because of this, startups should approach them with the understanding that reducing costs may not always be the primary goal. Instead, the focus should be on how their solutions can help these entities expand their market presence or maintain their regional dominance.

Bigger budget = bigger titles

In private enterprises, the mantra is often "do more with less." Companies are driven to maximize efficiency, stretch their resources, and cut unnecessary costs. However, in many government-like enterprises, this principle doesn’t always apply. Instead, there’s a tendency to seek larger budgets, not for efficiency's sake, but because bigger budgets often translate to more influence, higher positions, and greater control.

A significant driver behind this behavior is the "use it or lose it" mentality. Many government organizations are required to spend their entire allocated budget by the end of the fiscal year. If they don’t, they risk receiving less funding in the next cycle. This creates a strong incentive to spend remaining funds, regardless of necessity, just to secure the same or larger budget in the future. In these cases, it’s not about doing more with less, but about ensuring the budget remains intact, or better yet, increases.

Similar to the suggestion in the previous section, while private companies might appreciate cost-cutting innovations, these healthcare entities may be more interested in solutions that help them secure larger budgets or justify their existing ones. In this context, for healthcare startups, pitching a product as a tool for expanding reach or maintaining dominance could resonate more than emphasizing cost savings alone.

Get a piece of the cost:

In healthcare, there’s often no direct relationship between the buyer and the seller, and there are legitimate historical reasons for this. A few key factors include:

• Complexity of services: Healthcare services are rarely straightforward transactions. A single patient may receive care from multiple providers, requiring coordination across different specialties, facilities, and treatments, making direct transactions more complicated.

• Insurance structures: Health insurance became the norm to help individuals afford care, introducing a middle layer between the patient (buyer) and provider (seller). This shifted the financial interaction away from direct transactions.

• Regulatory oversight: Government programs like Medicare and Medicaid introduced additional intermediaries to manage payments, compliance, and cost control, further distancing the buyer and seller.

However, with so many layers of middlemen involved—each taking a percentage of the transaction—solutions that reduce costs across the system can sometimes backfire. When a solution has a deflationary effect, it threatens the margins of every player involved, from insurance companies to healthcare administrators. Similar to how the music industry initially fought against streaming services and digital platforms that disrupted their traditional revenue streams, healthcare middlemen may resist changes that reduce their slice of the pie.

For startups determined to follow the path of reducing costs, it’s critical to ensure that the savings are significant across the entire spectrum. Alternatively, focus on creating savings that bring new players into the fold who stand to benefit from the changes. For example, MeCo Diagnostics (a Healthcare Syndicate portfolio company) is developing a novel diagnostic test that predicts treatment success to a generic antifibrotic drug, dramatically lowering the cost for patients at high risk of breast cancer recurrence who previously would have had to consider expensive targeted therapies, broadening cancer treatment to even more patients.

Conclusion

There’s plenty of merit to the argument that there are far too many middlemen in healthcare and that we’d be better off without them. But (un)fortunately, as inefficient as the US healthcare system is, the current scale and might is in part enabled by these intermediaries specializing in specific parts of the ecosystem, and they’re here to stay for the time being.

For healthcare startups, tailoring your business model to these realities isn’t admitting defeat; it’s about being strategic. Understanding the roles that these intermediaries play and finding ways to align your solution with their interests can unlock new opportunities. Instead of fighting against the system, focus on how your innovation can work within it—by driving value that benefits not just the end-user, but also the various stakeholders that keep the wheels turning. In the end, success in healthcare isn’t just about saving costs or generating revenue; it’s about navigating a complex ecosystem and ensuring your solution has a place at the table.

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