My Brutally Honest Interview on AI's Place in Healthcare: A Critical Need or Just an Efficient Automation Solution?
I talk trash (constructively, of course š) about the healthcare cartel, EHR, Epic's monopoly, primary care crisis, Walmart's failure, the death of telehealth, VC "pump & dump" scheme & the AI bubble.
Welcome to AI Health Uncut, a brutally honest newsletter on AI, innovation, and the state of the healthcare market. If youād like to sign up to receive issues over email, you can do soĀ here.
I talk trash (constructively, of course š) about the U.S. healthcare cartel, the financialization of healthcare, EHR issues, Epicās monopoly, the primary care crisis, Walmart Healthās failure, the death of telehealth, startups falling prey to VC āpump and dumpā schemes, and the AI bubble.
If youāre here to talk politics, this aināt the time or place. For politics, head over to X (formerly Twitter) or wherever you get your bias-tailored news.
This is the spot to talk healthcare and how weāre going to fix it, honestly and unbiasedly. If youāre not ready for the no-nonsense truth about healthcare, stop now and go spend time with your family. Every wasted minute counts.
For those ready for a hard-hitting discussion on U.S. healthcare, hereās my interview, complete with a summary and best quotes.
I sat down with the renowned digital health expert and podcaster, Alex Koshykov, on his āDigital Health & Tech Innovationā YouTube channel.
We covered a wide range of topics: the U.S. healthcare cartel, the financialization of healthcare, EHR issues, Epicās monopoly, the primary care crisis, Walmart Healthās failure, the death of telehealth, startups falling prey to VC āpump and dumpā schemes, and the AI bubble.
Companies and individuals mentioned: WellAI, Dr. Jeffrey Funk, ChenMed, Doximity, hims & hers, Teladoc, Amwell, Tempus AI, Epic, Cerner, UnitedHealth, Cigna, Aetna, CVS, Walmart, Amazon, One Medical.
Hereās Alexās and BeKeyās succinct summary of the interview from LinkedIn:
š Ever wondered whatās really going on behind the scenes in digital health?Ā
Our latest episode of Digital Health Interviews with Sergei Polevikov is a must-watch! šļø
In this brutally honest discussion, Sergei shares:
š¹ The surprising state of healthcare expenditures and why higher spending doesnāt mean better care š
š¹ Why doctors are frustrated with their EHR systems and the hidden risks involved š„
š¹ The harsh reality of primary care and why so many companies are making the same mistakes over and over again ā
š¹ The truth behind the telehealth struggle š
š¹ The shocking strategies of VCs and how startups can avoid the pump-and-dump trap š°
š¹ The AI hype: Is it the next big thing or just another bubble waiting to burst? š¤
Donāt miss out on these eye-opening insights!Ā
One of the primary issues in healthcare is the scarcity of truthful information. People often refrain from sharing their honest opinions, which is understandable.Ā
As a founder in digital health, criticizing the major EHR systems is risky since integration with them might be necessary in the future. Similarly, if youāre seeking investment, it may not be wise to openly critique venture capital business models.
This is why I am deeply grateful to Sergei for his brutally honest interview and his insightful posts and research on digital health.
By discussing these challenges more openly, we might accelerate the development of effective solutions.
Click the link to watch now:
Here is the outline of the interview:
00:00 Sergeiās selected quotes from the interview
01:49 Sergeiās background
03:01 What is WellAI? https://wellai.health/ What is AI Health Uncut? sergeiAI.substack.com
09:13 How satisfied are you with U.S. healthcare?
15:45 Healthcare spending in the U.S. is projected to rise to $7.2 trillion by 2031, larger than that of all EU countries combined. Yet, the quality of care isnāt improving. Why?
21:20 Why are physicians not satisfied with their EHR?
26:30 Can a startup build a competitive EHR system?
29:56 Why do so many large companies venture into primary care and fail repeatedly?
36:53 Despite the rising adoption rates of telehealth services, why is the telehealth business not doing well?
40:45 What is the VC āpump and dumpā strategy, and why are startups falling into this trap?
51:55 Are we in an AI bubble? Does this remind you of the dotcom bubble?
56:53 Sergeiās advice to digital health startup founders
Here is the full transcript of the interview. I hope you enjoy it!
00:00 Sergeiās selected quotes from the interview
Sergeiās selected quotes from the interview:Ā
š£ļø āItās not that the industry needs AI necessarily. Itās just that AI often helps automate those processes that need to be automated in healthcare.ā
š£ļø āStandalone telehealth is deadā¦ But telehealth as a whole is a very growing area with a future.ā
š£ļø āThe big picture is that helping patients is not only about financial outcomes.ā
š£ļø āWe have this paradox: you have great people willing to do the work, and then you have this bureaucracy, these monopolies that are controlling the industry. So, the question is, what do we do about it?ā
š£ļø āPhysicians should be the final decision makers.ā
š£ļø āWhy innovate, why invest in system updates and technological advances if, in their mind, providers have nowhere to go?ā
š£ļø āAI is turning things to gold if youāre a big tech company. AI is a kiss of death if youāre a startup trying to become a public company.ā
š£ļø āWeāre gonna take over the industry. Weāre gonna help everybody. Itās gonna be great.ā
š£ļø āThe UnitedHealths, the Cignas, the Epics, the Cerners are reaping the benefits of the system at the expense of the patient.āĀ
š£ļø āThe moment the industry financialization started, the objectives and the goals became very misaligned with the social outcomes of healthcare.ā
š£ļø āThe problem is that thereās so much fragmentation in this country.ā
š£ļø āOnce somebody has monopoly power, the incentive is to keep the monopoly power.ā
š£ļø āWhen you look inside Epic, you donāt see innovation.ā
š£ļø āItās Epic, Epic, Epic getting bigger, bigger, and bigger.ā
š£ļø ā78% of all new EHR customers are Epic customers. That number is inevitably getting bigger. And thatās the definition of monopoly.ā
š£ļø āMonopolies donāt like innovation because that disturbs their monopoly power.ā
š£ļø āIf you question the board, you may not end up in a good place. So a lot of CEOs are just basically Yes men or Yes women.ā
š£ļø āHealthcare is a lot of aspects. Itās emotional. Itās community. Itās social.ā
š£ļø āHealthcare is local.ā
š£ļø āWalmart Health failed because Medicare patients like their own doctors, not Walmart doctors.ā
š£ļø āInitially, there was commoditization of telehealth, and now itās become more streamlined.ā
š£ļø āIn venture capital, itās not about the idea. Itās about how you market the idea.ā
š£ļø āThere is a vicious cycle of artificial price inflation in venture capital.ā
š£ļø āVenture capital is all about the exit.ā
š£ļø āThis is not legal. They cannot do it. Why the regulators are not looking into this I have no idea.ā
š£ļø āBelieve in your vision and donāt let anybody, including venture capitalists, change your vision.āĀ
00:58 Greetings
Alex: Hi and welcome to our digital health interviews. Traditionally, Iād like to remind you to subscribe to our channel to find out more about digital health. Today, in our episode, I want to talk about some really complicated, often controversial, and bipolar topics. The best person to do this would be our todayās guest, Sergei Polevikov. Hi, Sergei.
Sergei: Hi, how are you?
Alex: Good. How are you?
Sergei: Iām good, Alex.
Alex: I really have lots of topics to discuss, so letās not waste time and letās get to our interview. But before I start asking my questions, tell us a bit about your background. What are the main insights into your professional journey?
01:49 Sergeiās background
Sergei: Absolutely. Thanks for having me. My background started many years ago with my deep interest, I would say, in math and statistics, just playing with numbers. My dad is a professor, so from early years I was interested in formulas, how things work, and mathematical proofs. Back in my home country, Belarus, I did some formal training in mathematics and statistics, and later got into AI and machine learning. When I came to the U.S., the applications of my knowledge were in fields like economics, finance, and fintech, where there are a lot of great people using mathematical and machine learning models to enhance the industry, to make things better. In the last few years, almost five years, I wandered into healthcare and digital health.
03:01 What is WellAI? https://wellai.health/ What is AI Health Uncut? sergeiAI.substack.com
With my partner, we started a startup called WellAI, which is still going strong. The idea was just to help patients and customers get direct information from medical literature on topics that interest them, which most of the time are the daily problems they have ā the symptoms, the diseases ā and so we actually have an app. I can actually show you a little bit, which is functional, and customers use it. Initially, it was an app that was direct to consumer, but itās a very difficult area. There are a lot of issues like legal ones and questions of who we are really reaching. Are people going to use it at face value? And so now weāre working with businesses, providers, and clinics, but initially, it all started with this simple app that accesses the database and essentially gives you answers back. Itās in an interactive form. So a simple app where I can start talking to it.
[Sergei starts interacting with the WellAI app.] āHi, I woke up this morning and I have a terrible headache.ā āHere are symptoms I heard you are experiencing: headache. Is everything correct?ā So it reads through a lot of information and basically just focuses on the problem area, like a headache in this case. Iām saying yes. Then it starts asking questions. Now, questions are targeted based on the dataset of medical studies. So if I say headache, it kind of knows with high probability what other symptoms or questions are useful to ask. And after 10-15 questions, it narrows down to a particular probable diagnosis.
So, as you can imagine, when you are coming out 5 years ago and we were at the time the only ones doing this particular work, there were a lot of questions. The medical community is very proud but also very sensitive to newcomers. They were like, āWho are you guys? What data are you using? Is it all legal? Is it not? Is it HIPAA compliant?ā And so it was interesting to learn, communicate, and get, for example, doctors on our board to develop this project. Right now, the part that I showed you is still a big part of the triage process, but now we have so many other things, including telehealth and scheduling, and helping the reception with some administrative automation. So itās kind of like a full-blown IT service.
So this is where we are with the company. I also like contributing my knowledge through my writings and my articles [sergeiAI.substack.com]. So this is kind of my hobby, as you probably know. This is kind of a long story, but thatās my story.
Alex: Very interesting. So the outcome of this app should be either the algorithm would redirect you to a doctor or try to schedule an appointment or schedule a telehealth visit? What should be the outcome?
Sergei: Exactly. After this, there is the workflow that, for example, you can schedule telehealth, you can chat with a nurse, or you can schedule an office visit. So there are some options based on this information. So again, the idea is: AI helps aggregate and summarize the data. But at the end, itās a lot about automation. Doctors are burned out. The reception desk, especially during peak times, is completely overwhelmed. As you know, phone calls go to voicemail. So now, by having the system - and again, weāre not the only ones obviously but just in general - having some kind of automated system helps doctors, helps front desk, nurses, patients, the whole ecosystem to streamline the process. So phone calls donāt get unanswered because itās in the app. Itās all within the app. Itās automatic. You donāt sometimes need to call the office. So the idea is that the office is not as overwhelmed, and patients are happier. So this was the original idea. Again, in our vision everything was perfect.Ā
āWeāre gonna take over the industry. Weāre gonna help everybody. Itās gonna great.ā āSergei Polevikov
Ā The reality was a little different. First of all, thereās competition. There are a lot of innovators in the space, as you well know. Digital health is full of great ideas, gadgets, discoveries. And so at the time we still were pretty unique in how we do things, you know, algorithms. But obviously there are so many ways to automate things. And again, Iāve said this before in my articles and in my posts on social media, itās not that the industry needs AI necessarily. Itās just that AI often helps automate those processes that need to be automated in healthcare. So this is my story.
āItās not that the industry needs AI necessarily. Itās just that AI often helps automate those processes that need to be automated in healthcare.ā āSergei Polevikov
Alex: One of the reasons you started your newsletter is to explore how healthcare works in this country, and your newsletter is called Brutally Honest Insights on AI and Digital Health [sergeiAI.substack.com]. And I do hope that weāre going to have a brutally honest interview today. But before that, I want to ask a different question from a different perspective, as a patient.
09:13 How satisfied are you with U.S. healthcare?
Alex: How many years have you been living in the U.S.?
Sergei: Oh, I came in 1995, so itās been 29 years.
Alex: Almost 30 years. But for a person who has not been living here for their whole life - and youāve probably experienced other health systems around the world - as a patient, are you satisfied with the care that you receive in this country?
Sergei: So, first of all, I came to America for a reason. I was escaping the regime that was far from free, and Iām obviously thankful to this country for what it provided to me. Iāve raised my family here. My two daughters were born here, so thereās nothing against the democratic system per se, or especially the freedom it gave my family and so many other immigrant families. But since you mentioned healthcare, yes, I have the privilege of comparing the system we have in the U.S. versus Europe versus, you know, Belarus that I had years ago. Iām surprised at how much progress has been made in this country to develop the technology and train the best doctors in the world. But the system itself, in terms of how you get care and how easy it is to get access to care, fails in comparison to other developed countries. That bothers me a lot. Thatās one reason I started this startup with my partner. Itās also the reason I started my newsletter. As you mentioned, as a patient, I experienced that firsthand. I think I told you about a month ago I ended up in the ER. It kind of brought me back years because I hadnāt had this experience in a while. The whole experience, the wait, and how everybody is so burnt out - from the nurses to the admin staff - how hard they work but seem to get nowhere. The particular hospital I was in was completely overcrowded. They had beds outside of the rooms. I was actually in this temporary facility they set up there. I was there overnight, so I guess I wasnāt the most serious case. But it's interesting how great and hardworking the staff is, but then how bureaucratic the system is. They have to make sure that the insurance accepts the claim. They donāt accept it right away. Thereās almost this thinking in the medical community that prior authorization is magical, that it gets denied at first, but then they look at it and approve it. It doesnāt have to be like this. In other developed countries, at least from my experience and conversations with people who live there, the physician should be the final decision maker. It shouldnāt be a clerk at Cigna or Aetna who decides, āOh, this patient had this care. Well, I donāt think he or she needed this careā - even though a live physician just looked at you, looked at your medical tests, made an educated decision based on their training, the symptoms the patient has today, and the tests the patient just received. The fact that some person in an office, often with no medical education, just following some predefined rule by that insurance company, can deny it makes no sense to me. This doesnāt happen in any other country in the world. That bureaucracy is what triggered me to speak up and write the newsletter. There are a lot of great things in this countryās healthcare. Doctors are great, nurses are great - the most hardworking people in the industry. But the system is set up against them, against the doctors, against the nurses, against the patients. The system benefits the most. Itās the UnitedHealths, the Cignas, the Epics, the Cerners. Theyāre reaping the benefits of the system at the expense of the patient.
āThe UnitedHealths, the Cignas, the Epics, the Cerners are reaping the benefits of the system at the expense of the patient.ā āSergei Polevikov
That really bothers me. When Iām not doing my daily job, Iām trying to investigate why thatās happening and how we can help. Iām actually involved with, or trying to be involved with, some Congress people. Sometimes I think maybe itās the regulation. Sometimes I think regulation has nothing to do with this. Maybe itās some other parties that need to decide what to do with healthcare in this country. There are a lot of questions. I pose these questions in my newsletter, in my posts, trying to involve people - policymakers, economists, data scientists, physicians - everybody who has any good idea. Iām always listening. Iām happy to receive criticism. It doesnāt matter. As long as at the end of the day we help the system, we help our healthcare, we help patients - that what matters.
15:45 Healthcare spending in the U.S. is projected to rise to $7.2 trillion by 2031, larger than that of all EU countries combined. Yet, the quality of care isnāt improving. Why?
Alex: So, sort of to back up your previous answer. By 2000, health expenditures reached about $1.4 trillion, and in 2022, the amount spent on health tripled to $4.5 trillion, according to CMS. Healthcare spending in the United States is projected to rise from $4.7 trillion in 2023 to $7.2 trillion by 2031, growing by an average of 5.5% per year. So, and you sort of talked about some of the problems, and yet I donāt think the increase in spending correlates with the quality of care. So, my short question to you would be, what is going wrong?
Sergei: So, if you look at the United States healthcare system 50 years ago, it was much simpler. There was no waste or minimal waste, minimal bureaucracy. You know, in the 60s and the 70s, basically the system was: you get a symptom, you become sick, you go to a doctor, you pay for a service, you go home. I feel like it was at that point where the financialization of the system started in the early 70s, with the health insurance companies and later with PBMs, with TPAs - all these acronyms. But essentially, in a big picture, theyāre middlemen between the patient and the provider. And the problem started when they became so big - and you mentioned the numbers - that theyāre actually the biggest part of healthcare, which is ironic. You know, you have doctors, you have patients. Where do all these other parties come from? So, the moment this financialization started, with objectives and goals right now completely, I feel like, or very misaligned with the social outcomes of healthcare.
āThe moment the industry financialization started, the objectives and the goals became very misaligned with the social outcomes of healthcare.ā āSergei Polevikov
Thatās the problem. So, the incentives of these middlemen - of PBMs, of health insurance companies, which is often the same group of companies - misalign with the patientās needs and with the doctorās needs. And thatās a problem. You mentioned those $4.7 trillion now going into five or six trillion. A big part - I think the number is like 25% - is waste. And it was documented so many times, in so many studies. Itās the paperwork these companies create, itās the additional technology that has to be created. For example, what Iām dealing with right now in my company is to have access to EHR records of the patients that weāre serving, which is, you know, ridiculous. But the system makes it so difficult, so bureaucratic to have this access that itās actually become a huge part of this healthcare spending. So, the patients are paying out of their pockets, and a big part of it is not only paying all these companies, all these executives, but also paying for unnecessary bureaucracy. And that bothers me. In an era where we have great progress with AI, with all sorts of technology, with innovations, I feel like healthcare is left behind compared to other industries like tech and manufacturing and finance. And I think a big part of the reason for this monopoly is the huge spending that they create and that they benefit from at the expense of the rest of the industry, of all of us. Itās a very unique problem to the United States. As far as I know, none of the other certainly developed countries have this problem. And so you have this paradox: you have great people willing to do the work, and then you have this bureaucracy, these monopolies that are controlling the industry. And so the question is, what do we do about it?Ā
āWe have this paradox: you have great people willing to do the work, and then you have this bureaucracy, these monopolies that are controlling the industry. So, the question is, what do we do about it?ā āSergei Polevikov
And thatās what Iām trying to think about. Not always do I have all the answers. But this is what Iām addressing in my newsletter [sergeiAI.substack.com], in my posts, and in the interviews. So hopefully, together we can find a solution.
21:20 Why are physicians not satisfied with their EHR?
Alex: Talking about the newsletter, well, first of all, weāll definitely add the link. I highly recommend subscribing because itās literally one of the best newsletters in healthcare I have personally found so far. Over the last few months, youāve covered a lot of topics, news, and scandals. I would definitely want to talk about pretty much every one of them, but we would need days or weeks to do that. I decided to choose just a few of your recent posts, and Iād like to start with something on Epic EHR. Your prediction is that potentially by the end of 2024, Epic is going to be hacked. Considering that itās the biggest EHR system in the country with over 305 million patients, it would be catastrophic. But I would like to discuss Epic from a different angle. Iāve been in the U.S. a little over one year, and Iāve talked to around 30 physicians. I havenāt met a single one of them who is satisfied with the EHR system. Not all of them are using Epic, but none of them are satisfied. So doctors are not happy. Potentially, it has a lot of security breaches. It doesnāt help to solve the problem of interoperability in this country at all. So the question is, why do hospitals continue using it, and some even switched to it recently?
Sergei: Itās a great question. So by law, first of all, providers and hospitals are required to have a system that is not only HIPAA compliant but meets all sorts of compliance issues and parameters to store and access patient data. This is where this whole industry started. In terms of why everybody uses Epic, or why Epic has so much control, it comes back to the conversation we had. Basically, for the last few decades, for better or worse, weāve established a monopoly, or to be more precise, an oligopoly in this country. Basically, itās a cartel, a group of companies controlling the industry. So EHR is no exception. The EHR industry, and Epic is the biggest player there. First of all, I want to say that there are people who would disagree completely with what we are talking about here. There are people on both sides, I guess. I feel like, just in my conversations, if youāre already in partnership with Epic, you usually have more positive views on Epic. In other words, once youāre part of the club, you kind of feel good about it. For example, you mentioned interoperability. Apparently, I was told that within Epic itās great. So if thereās a hospital using Epic and the patient was there for some procedures, and then in a different hospital that also uses Epic, two Epics talk to each other.Ā
āThe problem is that thereās so much fragmentation in this country.ā āSergei Polevikov
The problem is that thereās so much fragmentation in this country that once it gets outside of a certain system, we have a real interoperability problem. And thatās, I think, the major issue. But youāre right, Epic is no exception here. Itās, again, going back to the monopoly.Ā
āOnce somebody has monopoly power, the incentive is to keep the monopoly power.ā āSergei Polevikov
Ā The way you do it is to either prevent innovation from coming, or if you see some innovation coming and you think, āwell, thatās inevitable,ā you either partner or acquire that startup or company. This is what Epic has been doing. Itās not as many acquisitions, although theyāve had some, but itās this partnership. They have four partnership levels, you know, whatever itās called. Itās almost like gold, silver, bronze, or something, which they call it differently, but itās kind of interesting. And so they have these partners and theyāve created this illusion that theyāre very innovative because āhey, look we work with this startup, with that startup.ā But when you look inside, and you mentioned providers who actually work with the system, they don't see that innovation.
āWhen you look inside Epic, you donāt see innovation.ā āSergei Polevikov
So something happens in between, which is hard to explain. But at the end of the day, again, because Epic is such a monopoly, thereās no incentive for them to make their system friendlier for providers.Ā
āWhy innovate, why invest in system updates and technological advances if, in their mind, providers have nowhere to go?ā āSergei Polevikov
And providers also are tricked into this idea that āwell, this is what weāre left with. Thereās nowhere to go.ā Itās because the same EHR companies keep saying āwell, try building all these systems from scratch. You need to have it by law, right?ā You know, we have all these laws, the High Tech Act of 2009, the Care Act a couple years ago that kind of explain what providers should do with patient data. And theyāre like, āwell, you know, try dealing with that. But weāre already there, and by the way, we have all this power.ā
26:30 Can a startup build a competitive EHR system?
Alex: Sorry for interrupting. Letās say, well, Iām personally, my team and I are confident we can build the best EHR out there, which is going to be user-friendly, efficient, and super secure. But building the tech would not do it for me. Do I need connections in Congress who would lobby for the adoption of my EHR? What would a startup need to do in order to make this new EHR, thatās going to be much better than the previous ones, be adopted in this country?
Sergei: Many have tried to build such systems, and actually many have. ChenMed, for example, is one of the more well-known ones. They have their own system. I donāt have all the answers, but the bottom line is that itās very difficult to sell this new EHR system when you have this monopoly control of Epics, of Cerners of this world. Obviously, lobbying wouldnāt hurt. In my opinion, lobbying has prevented innovation in digital health also. Again, for the reasons that, who are āWho are the main lobbyists?ā Itās the same group of companies. You know, Epic has one of the biggest lobbies. United Health, I think, has the biggest lobby in healthcare. Theyāre the ones that are doing everything they can, including being experts on drafting the new law, because you know, when the new law is on the table, on the floor, who are they going to consult with? Congress? Theyāre going to the same companies because theyāre the biggest experts. So guess what? The laws are drafted so that these companies keep their monopoly power. And if youāre a new company who wants to build a new EHR system, theyāre going to make it very difficult for you. Itās not impossible, I donāt think. But I feel like the innovators, seeing the previous failures of the companies who have been trying to do itātheyāre looking at ChenMed, which is a great company and actually a large companyābut in terms of market weight, especially in the EHR industry, not that itās their goal per se, but you look at EHR and itās Epic, Epic, Epic getting bigger, bigger, and bigger.Ā
āItās Epic, Epic, Epic getting bigger, bigger, and bigger.ā āSergei Polevikov
I think Iāve seen the numbers that in 2023, the new systems that were installed, I mean all the new customers that EHR systems received, 78% of them were Epicās customers.
ā78% of all new EHR customers are Epic customers. That number is inevitably getting bigger. And thatās the definition of monopoly.ā āSergei Polevikov
So youāre getting more newā¦ Not to mention the fact that theyāre already controlling almost 50% of the market, theyāre getting even more than 50% market share of new customers. So that number is inevitably getting even bigger. And thatās, at the end of the day, the definition of monopoly. Again, monopolies donāt like innovation because that disturbs their monopoly power.Ā
āMonopolies donāt like innovation because that disturbs their monopoly power.ā āSergei Polevikov
Thatās the definition. Again, I donāt want to discourage anybody, and obviously, Iām kind of trying my best to innovate, to bring the ideas of AI to this industry. So there is no discouragement here. But Iām just saying thatās the reality. What can be done about this is a completely different issue, and I write about this thinking extensively in my work.
29:56 Why do so many large companies venture into primary care and fail repeatedly?
Alex: OK, letās talk about another complicated topic, primary care. Primary care is hard. In lots of cases itās not profitable, yet so many big companies are still trying to get in and continue doing this mistake over and over again. Why?
Sergei: Well, there are many reasons. I think one reason is that if there is a big competitor that did something in primary care and failed, a new big company comes in. So letās say you know CVS started something and they didnāt have much success. Now Walmart comes in and says, āWell, weāve been doing great in retail, weāre the ultimate masters of scaling and reducing costs,ā so how difficult could it be, right? A lot of executives have this vision that if they did something in one area this automatically translates into a different area. They fall into this trap a little bit of the fact that they think that they did something great in, you know, whatever areas of finance or retail, they can automatically do it in healthcare. So thatās one reason. Another reason is that itās the way the corporations are structured. You know, itās not one person who runs the corporation. You have the board. You have investors. If itās a big investor, that investor will actually likely be on the board, but also likely to have opinions on what the company should do. So if you are a Chief Medical Officer in a big corporation and you know that primary care is hard, for a whole bunch of reasons including financial and social outcomes, but then you have the board telling you, āOh, you know, we have Amazon just started One Medical. You know, theyāre trying to conquer primary care. Why are we not doing that?ā And so if you start asking questions and question the board the way it works in many corporations you may not end up in a good place. So a lot of CEOs are just basically Yes men or Yes women.
āIf you question the board, you may not end up in a good place. So a lot of CEOs are just basically Yes men or Yes women.ā āSergei Polevikov
Theyāre going with this idea that, āHey, you know, if Amazon can do it (or if Walmart can do it), we can do it.ā Thereās a lot of this going on. But at the end of day I think my personal opinion is that all these corporations look at financial outcomes. I think healthcare is different in a sense that we have to look at the big picture.Ā
āThe big picture is that helping patients is not only about financial outcomes.ā āSergei Polevikov
Itās a lot of aspects. Itās emotional. Itās community. Itās social.
āHealthcare is a lot of aspects. Itās emotional. Itās community. Itās social.ā āSergei Polevikov
When you are very one-dimensional, especially in primary care, which is the number one area - this is where people go if they have day-to-day issues - itās hard. And again, I donāt have all the answers, but I can kind of look back and explain why certain ideas or certain projects of these big corporations failed in primary care.
Alex: Should we anticipate more newcomers in the space?
Sergei: Oh yeah. Itās like in the Wall Street movie, right?
You know greed drives everything. So there are new executives coming with new fresh ideas, and theyāre like, āOh, have we ever done primary care before?ā Walmart, by the way, this is their fourth time in the last I think like six years or something where they started their healthcare division. And every time they think that they can do it. At the end of the day I think healthcare is local.
āHealthcare is local.ā āSergei Polevikov
You know, Walmartās problem as far as I understand was that they thought they can handle Medicare patients well. But at the end of the day Medicare patients, most of them, obviously theyāre elderly, they have their own doctors. So now youāre asking, āOh no, we have this convenient location, Walmart. And by the way, we have like Walmart doctor now.ā On paper it sounded great: well you get your groceries, you may as well get your care. But with Medicare patients apparently it doesnāt work like that. Elderly patients tend to like their doctors. Theyāve been, in many cases for decades, with one doctor. They know where to go, and they donāt like the idea of being served, you know, in a Walmart store, potentially with a different doctor next time.
āWalmart Health failed because Medicare patients like their own doctors, not Walmart doctors.ā āSergei Polevikov
So I think thereās a learning curve, even for these big corporations that have a lot of smart people, but still seem to be learning. So itās an interesting area, and primary care has to be solved. There are a lot of problems. You know, the system is overwhelmed, burned out, financially strapped. Even though it looks like all these corporations are throwing money at the companies, somehow itās venture capitalists who end up with all the money at the end, which is kind of interesting. But again if we think about the solutions I think we can come up with some good solutions. When I say āweā itās the whole community. Itās again policymakers, medical community, academics. So I feel like we need to continue thinking. We need to continue generating ideas. But yeah, corporations are gonna continue trying to expand their empire, trying to conquer healthcare, and in many cases theyāre going to continue failing.
36:53 Despite the rising adoption rates of telehealth services, why is the telehealth business not doing well?
Alex: OK, telehealth is another space which looks like things are not going well and no one is safe including Teladoc, Amwell, and others. We definitely saw a huge drop after the end of the pandemic. But now what I see around the world, the numbers are actually growing in telehealth adoption. So why is the telehealth business not doing well?
Sergei: I would say telehealth is doing extremely well. It's the part of the industry thatās focused on the so-called standalone telehealth thatās not doing so well. So the original idea with Teladoc was a great idea to essentially connect patients and doctors through video calling, which is not an original idea but in healthcare I guess theyāre the first ones. So at the time, yeah, it was kind of interesting, and obviously early adopters started the industry. But I think you know that was 15 years ago, probably more than that. So over these 15 years technology obviously progressed. Now I think whatās happening in the telehealth industry is the customization, itās the way of providing telehealth as a tool as opposed to as a commercial product. So initially there was this commoditization of telehealth, and I think now itās become more streamlined.
āInitially, there was commoditization of telehealth, and now itās become more streamlined.ā āSergei Polevikov
So I think if anything telehealth is actually very popular, especially after COVID. Obviously that wave subsided a little bit. But thereās still likeā¦ I use telehealth. Itās very convenient. In fact, thereās a certain part of the population that prefers telehealth. You know, why go drive somewhere when for certain conditions you can just talk to a doctor and itās very convenient? So again, the telehealth is dead in the way we remember it from 15 years ago. So we are talking Amwell, Teladoc, there are a couple of others. But the new companies, the more what I call integrated platforms, theyāre the leaders in telehealth. So itās Doximity, even Hims & Hers have telehealth platforms. So itās actually the names, theyāre not household telehealth names. But theyāve already been in the industry and at some point theyāre like āwell, letās just add telehealth,ā right? And again, itās not as easy as just add it. You have to integrate it. But at the end of the day, you want to have telehealth in a place that you use every day anyway. So for providers, they use, for example, Doximity. Itās sort of like sometimes called LinkedIn for medical professionals. So they come in the morning. They open their computer. They already have certain systems. Doximity is one. Obviously they have an EHR system open because this is what they do to take their notes and to enter patient data. So I think EHR companies will be actually very big in telehealth because, again, of that convenience. So again, as Iāve been saying,Ā
āStandalone telehealth is deadā¦ But telehealth as a whole is a very growing area with a future.ā āSergei Polevikov
40:45 What is the VC āpump and dumpā strategy, and why are startups falling into this trap?
Alex: OK. Interesting. Youāre one of the few who actually publicly criticizes VCs and their strategy, what you call āpump and dump.ā Can you tell our audience more about what the strategy means, how startups fall into that trap, and what are the consequences?
Sergei: So letās start with 40 years ago. Thatās when this idea of venture capital and private equity became popular. In fact, private equity back then was called differently. It was actually called Leveraged Buyout, and then they renamed it so itās not as obvious that theyāre actually borrowing money to finance their deals. But in this case with venture capital, in the old days I feel like they were more progressive in the sense that they would communicate with the founders. I guess founders would reach out to them with a pitch. Theyāre experts in whatās happening in the industry. So they [venture capitalists] would say, āWell yeah, you know what, this idea - the industry needs it. Letās implement it. So weāre going to give you capital. Hereās the plan.ā But you know, you meet your benchmarks - and one of the benchmarks, by the way, was profitability, which is kind of interesting. Theyāre talking about ROI. Itās not necessarily profitability, but back then they knew that for the long-term growth of the company, for sustainability, at some point you need to turn a profit. You cannot just endlessly burn a hole in your balance sheet. And so that was the idea back then, and over time somehow it became this almost like financial trickery. So whatās happening right now, which I believe is criminal, and you know, Iāve had experience working on Wall Street, and there are obviously people going to jail for this kind of thing. Itās very simple but itās also very subtle. So it starts obviously with the founder, right? So youāre a founder. You talk to a VC. And the VC says, āOK, weāre going to give you a million dollars, right, so hereās a million dollars and weāre going to come talk in eight months.ā So they call it the next round of financing. So they may actually bring some of their venture capital, you know, friends in the next round - or VC bros, thatās right. And so whatās happening now is that oftentimes itās not even about the idea. Itās about how you market the idea.
āIn venture capital, itās not about the idea. Itās about how you market the idea.ā āSergei Polevikov
So you give money not necessarily because itās financially viable or even, you know, helping people, but just because it sounds great, it sounds flashy. So you give capital for this idea and because you get a certain equity in return, thereās an implied valuation, which in many cases they donāt talk about anymore because of whatās happening. And whatās happening is every next round typically, not always, they increase the valuation, right? So if you talk about public markets like stocks, itās millions and millions of stockholders, people who buy and sell stock, who decide on the price of the stock. Whatās happening in private financing is a bunch of venture bros decide on the valuation of the stock. So usually itās by the end of the financing rounds, right before IPO letās say, weāre talking probably like 20 different venture capital firms. So we have these 10 to 15 to 20 venture capital firms sitting at the table at every round essentially. Iām simplifying of course. But theyāre the ones who decide essentially by giving a certain amount of money on what the valuation is going to be, right?
Alex: But they still need to see the trajectory in the business plan, right?
Sergei: Right, but because they never look at profits seemingly, because we look at IPOs now, I think 80 to 90% of digital health companies are now unprofitable, certainly in actual technology overall, but certainly in digital health, which is a complete reverse from 40-50 years ago when it was actually 10 to 20% that were unprofitable. So this is a complete almost like 180. So whatās happening is that, to answer your question, when you give money to a founder itās much, much easier, and actually with the VCās help, to buy your customer, so to speak. So whether itās through ads, or actually those VCs, they actually know people in the industry so you go to them and say āHey you know we have this great technology can you become our customer.ā This is not organic growth. So by buying customers and burning more money than the customers bring to you, you know, is not exactly an organically growing business because an organically growing business is when you grow and as you grow, you becomeā¦ especially in technology, hopefully you scale more. So you have digital health companies which are technology companies, and they donāt scale. You look at their balance sheet and they keep losing money. And so, venture capital gives you money. You increase your revenues because now you have more money to burn. So the multiple, the revenue multiple, becomes more attractive, right? And so they raise even more money. And so there is this vicious cycle of what I call artificial price inflation.
āThere is a vicious cycle of artificial price inflation in venture capital.ā āSergei Polevikov
So by the timeā¦ and obviously they need an exit, venture capital is all about the exit.Ā
āVenture capital is all about the exit.ā āSergei Polevikov
Every time I talk to venture capital, itās like the first or the second question, like āOh, whatās your exit strategy?ā So itās all about the exit, meaning that they usually have a 5-to-7-year runway, so to speak, runway for this one project. And after 5 to 7 years, theyāre like, āWell, what are we doing now? We need to do an IPO or something.ā And thatās how all these digital health unprofitable companies become IPOs. But the way they value at IPO usually is they say, āWell, look, we have all the sales, right?ā Because they keep throwing dollars at the customers, and they bring in more customers like that. āDonāt look over here. Donāt look at our cost side of the balance sheet, but look at the revenues, look at the multiples there,ā right? So this is, Iām simplifying, this is how they pitch. And so they have these massive valuations on the way up, and then here they are going to IPO and saying to investment bankers, āBy the way, our last round was at this valuation,ā right? Now with IPO, weāre going to grow even more. So the valuation should be even higher. But their reference point is some artificially created private valuation. And if it was on Wall Street, this would be called āpump and dumpā because you have an incentive to pump the price because you are the original investor in the company. And so youāre pumping the price. And then you look at the financial statements: all of a sudden a lot of these VCs disappeared because they āexited.ā This was their exit. Itās not that simple obviously because they have a lock-up period, etc., but there is a way to exit either through later rounds of private valuation. And whatās happening now, especially in digital health, is you have this āpump and dump.ā You have pump on the way up so to speak. Then you go to public markets. Public decides on the value of the company, and theyāre like āWell, the company is unprofitable. There seems to be a great vision, butā¦ā But actually those are more sophisticated investors. They have the capacity, the resources to actually look deep down into the financials of the company. But the people who suffer are actual retail investors. Theyāre mom and pop investors who are listening to this VC, who are listening to the investment bankers at the IPO round who are saying, āOh, this is the greatest idea ever, you know, invest with us.ā So the trading starts. And usually you have these retail investors who are buying in because theyāre listening to all these pre-IPO rounds, hearing how great the company is. But the sophisticated investors and more and more the so-called short sellers - theyāre actually dominating the public markets right now - and theyāre pushing the price down. And so you have this dump that not only comes from VCs right now but from short sellers and from sophisticated investors who kind of know already whatās going to happen because theyāve seen the previous pattern. So again, itās not always the case, but it seems to be more and more in digital health. Now again, Iām a proponent and a believer that this is not legal. They cannot do it. Why the regulators are not looking into this I have no idea.
āThis is not legal. They cannot do it. Why the regulators are not looking into this I have no idea.ā āSergei Polevikov
But again, Iāve done some research on my own. There are other people who are doing this. So, you know, Iām open to talking to anybody and discussing this. But to me, it should not be happening. This is unfair what VCs are doing. At the end of the day, theyāre becoming rich at the expense of retail investors and actually angel investors.
Venture capitalists are becoming rich at the expense of retail investors and angel investors.
Those are the investors who come in early, taking the most risk, but donāt get the benefit. And so this is another group thatās suffering because of this later stage of what I call VC bros. So thatās a big problem that needs to be resolved.
51:55 Are we in an AI bubble? Does this remind you of the dotcom bubble?
Alex: Letās get back to AI, what we started with. Since we donāt have much time left, Iāll go straight to my main question. So, I often go to lots of startup events, and I think around 8 out of 10 startup founders say they are an AI startup. When you start digging, most of them, not all, but most, just basically connect to ChatGPT with the API to their product. Nvidia is up 156% year to date with all the AI hype. A couple of weeks ago, a company called Tempus AI, and by the way, it was called Tempus just before they went public, and of course, theyāre also not profitable going to IPO. They have only 2% of their revenues related to AI-based features. I personally truly believe that AI is going to change humanity for sure. But the question for you right now is: in 2024, are we in an AI bubble just like the dotcom bubble?
Sergei: Itās interesting because there are so many definitions Iāve heard of the AI bubble. Thereās actually a good book - and the author escapes me now [āUnicorns, Hype, and Bubblesā by Dr. Jeffrey Funk] - but Iāll give you the reference. Theyāre actually talking about the AI bubble. I donāt think itās an AI bubble in the pure definition of irrational exuberance, so to speak, when the price just goes up so much that the valuation doesnāt make sense anymore. If you compare with the 1990s bubble, the majority of those companies didnāt even have profits. They would just mention āwwwā and the stock price would go up, right?
Alex: So, as now, as you said, most of the companies go public.
Sergei: Well, letās talk about it because itās funny you mentioned Tempus AI. I have an article coming up, hopefully tomorrow, on this exact issue. Itās kind of funny that you ask this question. There is this dichotomy. If you want to call it an AI bubble, then itās definitely an AI bubble that has two faces. If you look at the tech giants, basically the companies who either bought GPUs or are making GPUs, especially if youāre making GPUs, then youāre definitely on a rip. Companies like Nvidia, thereās also TSM, a Taiwanese semiconductor company that no one talks about, but they also make chips related to GPUs, and their stock price is going up like crazy as well. But definitely, Nvidia in this country, people know about it. It brought the wave up not only for Nvidia but for all of those Big Tech giants, as you know, who are using their GPUs. If you look at the multiples, theyāre nowhere nearā¦ - by multiples I mean their price relative to whatever measure you want to use from their financial statements, whether itās revenues, gross profit, or net profit, whatever - theyāre all extremely profitable. They are making good margins on their AI models, not as crazy margins as for their core business of data storage and cloud computing. But they are making money. So from that definition, itās hard to see how thatās a bubble yet. I think we may be getting there. Itās an interesting question to discuss. But again, the other side is these AI startups, and I mentioned a few of them. You mentioned Tempus AI. I identified very recent ones that went IPO. There are four companies, four startups, that either have AI in their name or in their ticker. All of them are down. Theyāre basically down from day one. Itās kind of funny that AI seems to be turning things golden if youāre this big tech company, already established, but AI is a kiss of death if youāre a startup trying to become a public company.
āAI is turning things to gold if youāre a big tech company. AI is a kiss of death if youāre a startup trying to become a public company.ā āSergei Polevikov
All of them are down tremendously. Tempus AI is down 30% in 6 days, as you know.
Alex: Isnāt that the first symptom of a bubble? And talking about Nvidia, you mentioned that yes, theyāre making good profits, but so was Cisco in the 90s with the dotcom bubble.
Sergei: Yeah, Iām just comparing the levels. If you just look at price appreciation, yeah, itās tremendous. I think just this year, Nvidia is up like 200%, not to mention for the last couple of years. But my point is: itās not at the levels, for example, of the tech bubble of the 90s. Weāre not there yet. But again, if you look at some of the definitions, some of the arguments people are making, I can totally see how weāre getting there. To me, the main definition of a bubble is when people hear something like āAIā and just take it at face value without checking any facts about that particular company. By that definition, maybe itās happening, yes.
56:53 Sergeiās advice to digital health startup founders
Alex: At the very end, I ask my guest to give a last piece of advice to startup founders in digital health. What would you recommend them to do or not to do in order to be successful?
Sergei: Well, Iām going to say exactly what I say in my newsletter: be brutally honest with yourself. We mentioned venture capitalists. Itās easier said than done. But be consistent with your vision.Ā
āBelieve in your vision and donāt let anybody, including venture capitalists, change your vision.ā āSergei Polevikov
Alex: I love that. Thank you very much, Sergei.
Sergei: Thanks, Alex.
ššššš Hi! My name is Sergei Polevikov. Iām an AI researcher and a healthcare AI startup founder. In my newsletter āAI Health Uncutā, I combine my knowledge of AI models with my unique skills in analyzing the financial health of digital health companies. Why āUncutā? Because I never sugarcoat or filter the hard truth. I donāt play games, I donāt work for anyone, and therefore, with your support, I produce the most original, the most unbiased, the most unapologetic research in AI, innovation, and healthcare. Thank you for your support of my work. Youāre part of a vibrant community of healthcare AI enthusiasts! Your engagement matters. ššššš