Millions of dollars in backing from seasoned venture funds and investors. Technology built to improve efficiencies and lower costs. And plenty of ambition.
What does this combination add up to? In one recent case, it added up to a home care company that announced last week it was closing its doors for good.
California-based HomeHero ceased its home care operations after just a few years in business and raising $23 million in venture-backed investments. HomeHero is one company in a class of “disrupters” that garnered serious attention throughout the industry thanks to multi-million-dollar funding rounds, and its closure leaves many open questions.
In this startup space, real results are opaque. This has made it difficult for those in the industry to answer questions such as, can the others like HomeHero make it? What’s really going on with home care startups’ margins and overall models?
HomeHero’s closure sheds some new light on these questions, but similar emerging businesses have remained tight-lipped about their operations and struggles they may be facing. Meanwhile, some other players are pointing to the HomeHero closure as evidence of what they have been saying all along—that the startups are more bluster than disrupters.
HomeHero’s entrance into the home care market came just before the industry was hit with an onslaught of new regulations that pressured the company into switching its business model, according to HomeHero’s founder and CEO Kyle Hill, who penned a lengthy post-mortem essay on Medium.
The troubles really started when HomeHero switched from a 1099 contractor business model to a W2 model at the beginning of 2016. Consequently, HomeHero saw its costs rise ten-fold. So, it raised prices 32% and imposed a new hourly minimum.
Another California-based home care startup, Honor, has taken a similar path by switching from a 1099 contractor model to directly employing caregivers about a year ago. Honor has become one of—if not the most—high-profile of the home care disrupters, in part due to its funding rounds that reached $62 million.
Since switching to W2, Honor has not said whether they have faced higher costs or if the provider has had to raise rates, as HomeHero did. The company also has never disclosed its patient census, number of caregivers, revenue or market share to Home Health Care News.
When Honor switched to a W2 model, executives cited the change would benefit caregivers and be more useful to clients—although it might not have been the whole story. Namely, it remains a question how the company is dealing with regulatory and labor pressures in California. At the same time, Honor claims that it has “competitive pricing” and is able to pay its care professionals 10% or more than the market average in each of its service areas.
“We chose to switch to the W2 model because it would enable a better product for our customers,” Seth Sternberg, CEO and co-founder of Honor, told Home Health Care News following the HomeHero closure. “Honor is stronger for having made that decision.”
When Honor completed a $42 million Series B funding round last year—which brought total investment up to $62 million—Sternberg told HHCN he believed Honor was the largest home care company in San Francisco. Honor has also stated its turnover rate is “dramatically below” industry average, but has never disclosed any hard numbers.
‘Not a Technology Problem’
Honor is one company that points to its technology for its ability to keep costs down.
“Honor has been able to leverage our technology platform to help bring down operating costs which allows us to pay care professionals more while charging market rates,” Sternberg told HHCN. “We believe companies should win based on better product—not just better pricing.”
This claim, on the surface, appears to make sense. Technology can improve efficiencies and streamline services to lower some costs, to be sure.
However, it’s agencies that can deliver personalized services in a local market, often at high prices, that win in today’s home care marketplace—and this is not a status quo that can be changed with a technology solution, according to Hill.
“It’s not a technology problem,” Hill wrote.
A significant change in business model has also sent a different message to home care incumbents, and even other new entrants.
“HomeHero’s closing is a reminder that operating a successful home care organization in today’s health care world is challenging and constantly changing,” Gavin Ward, regional director of strategy with 24Hr HomeCare, told Home Health Care News. “We have seen a few technology companies enter the industry and quickly realize it was not what they expected, having to change their business model as they learned along the way.”
24Hr HomeCare is also based out of California, also technology-forward and also offers some of the same services as Honor and HomeHero. However, the company hasn’t had to change its business, having originated with a W2 model.
New York-based Hometeam, another home care startup that has raised upwards of $40 million from investors, including Kaiser Permanente, also hasn’t had to face the challenges of a significant shift in its business, as it also started out with a W2 model. Not to mention, Hometeam doesn’t operate in California, which has been a national leader with rising minimum wage rates. New York and New Jersey, Hometeam’s markets, are not far behind.
“Hometeam has always had a different business model than HomeHero—from the outset our caregivers have been W2 employees and we accounted for that,” Ashish Prashar, director of communications and policy at Hometeam, told Home Health Care News. “All states function a little differently, and there are a lot of nuances that you need to account for.”
Given that the home care industry is in need of innovation, Prashar said that the HomeHero closure is unfortunate.
“We’re sad to see them close,” he said.
While no one appears eager to dance on HomeHero’s grave, some do point out that they’ve been predicting—if not failure—than at least some serious adjustment of expectations around these home care startups. For one, Geoff Nudd, CEO of home care software company ClearCare, previously called out the “hype” around claims of disruption.
“This validates our belief in the power of the locally owned and operated home care agency to win referrals and provide the best care,” Nudd told HHCN on Tuesday. “If health care is local, then home care is ‘hyper-local.’ The fragmented industry structure is driven by local referral sources and the high-touch nature of the relationship between the agency, the caregiver, the client and the family.”
ClearCare secured $60 million in a funding fund in August 2016.
Are Health System Relationships Sustainable?
When it comes to staying alive in the home care field, all eyes are on gaining partnerships with health and hospital systems. The unlikelihood of turning pilot programs into contracts with health systems was a major factor in HomeHero’s decision to close, according to Hill.
Can private duty find success with health systems?
To even be considered as hospital partners, home care companies need to have a W2 model according to Hill. Ward also agrees it’s important to their hospital partners.
While HomeHero couldn’t achieve long-term, sustainable contracts with other health care providers, others argue there is a place for non-medical care to work alongside hospitals and health systems.
“I think private duty absolutely can have success in this space and that hospitals are seeing value in this space with the right partner,” Ward said. “I’ve been privileged to personally oversee 30 hospital and health system programs that fund in-home care while at 24Hr HomeCare. These partners are the largest managed care organizations in California and two very prestigious health systems in the Los Angeles area.”
24Hr HomeCare has undertaken numerous partnerships and pilot programs that have turned into long-term contracts. As a private duty provider, 24Hr is even involved in bundled payment initiatives.
“The majority of our partnerships are beyond pilot stages and are sustainable,” Ward said.
Hometeam also has proven more strength outside the private duty market by taking on Medicaid clients in New York City.
Honor is less forthcoming. In an email to Home Health Care News, Sternberg stated, “We are excited about our relationships and momentum.”
HomeHero declined to comment for this story.
Written by Amy Baxter