Blog: Blockchain in financial services offers a case study for health care adoption – STAT

This story has been excerpted from the STAT Report, “STAT’s guide to blockchain in health care.”

Not long ago, blockchain technology captured the imagination — and the wallets — of financial services firms that sought a “first-mover” advantage by integrating it into their outdated management systems. Experts predicted that blockchain could bring millions of dollars in savings, its uses ranging from real-time clearing and settlement of securities-related transactions, to cross-border payments and regulatory compliance.

But with the finance industry’s fierce competition and wariness of transparency, the adoption of the technology has so far brought few successes.

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Now it’s the health care sector’s turn. Hospital systems, tech startups, pharmaceutical companies, payers, and others in the intensely competitive, $4 trillion health care business have set their sights on blockchain — the technology that supports bitcoin and other cryptocurrencies — with the hope that it can cut costs and boost innovation. From 2018 to 2021, the global blockchain in the health care market grew at an average annual rate of approximately 55%, driven by security and transparency concerns throughout the industry’s value chain, according to a recent report.

It remains to be seen, however, whether health care companies can overcome the obstacles that have impeded its adoption in the finance industry, or the hurdles specific to patient care.

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At its core, blockchain is a ledger that can keep track of transactions and assets — whether it’s cryptocurrency changing hands, a patient’s medical chart, or a pill moving through the drug distribution pipeline. The technology distributes information across multiple computer hubs, creating an immutable, decentralized system of linked and synchronized “blocks” of data, joined or “chained” by digital signatures.

Even more simply put, a blockchain is a decentralized list of largely uneditable digital records, linked together by computer code. In health care, a blockchain network might work as follows: Imagine a lab technician who wanted to attach a doctor’s referral to a patient’s digital records on the blockchain. The technician would enter the transaction on the blockchain, creating a “block” consisting of the medical data related to the referral, the author of the transaction, and a timestamp. The block would then be delivered to the entire peer-to-peer network, which could include the patient’s physician and family members.

Proponents say that upgrading to blockchain could save the health care industry billions of dollars a year in costs associated with data breaches, information technology, operations, support function, personnel, counterfeiting, and insurance fraud.  It has tremendous potential to allow organizations to verify sources of goods, track their movements, and strengthen transparency in supply chains. Companies could pinpoint fraud, contamination, or counterfeit goods immediately.

The pharmaceutical industry, which loses approximately $200 billion to counterfeit drugs yearly, would be a natural beneficiary of the technology.

Blockchain could also enable better health information exchange, which is essential in managing rising health care costs and promoting quality care.

Covid-19 has helped usher the health care industry further into the digital world and bring more attention to the potential of blockchain. The pandemic pushed providers to adopt digital technology, remote patient monitoring, and artificial intelligence to help providers monitor and treat more patients from a distance. Telehealth use similarly exploded.

According to a 2020 Organization for Economic Cooperation and Development report, blockchain-enabled tools are emerging to combat the virus, including an identity management system supporting contact tracing in South Korea, a system for data-sharing, and software to support research. Blockchain has also been used or proposed for supply chain management for medications and medical supplies, the report said.

The financial services industry’s foray into blockchain technology illustrates some of its opportunities — and potential pitfalls — and may provide a road map, as health care innovators contemplate how to push forward blockchain’s use.

After the 2008 collapse of the housing and financial markets, traditional financial services firms faced a host of challenges to their business models.

New regulations, such as the Basel III framework — which set up international banking standards for capital adequacy, stress testing, and liquidity requirements — and Dodd-Frank legislation, which overhauled financial regulation, brought dramatic changes to the competitive landscape, forcing firms to reassess how they deployed their capital.

What followed was an era of sweeping innovation. Rather than migrate to jobs within the community of traditional Wall Street investment banks, many of the newly unemployed opted to join or establish financial technology startups. The departure of brainpower from global investment banks set the stage for these leaner, unregulated firms to gain traction.

Traditional financial services firms found their business models under attack from Silicon Valley, causing a disruption in almost every silo of the financial services vertical, from banking to payment processing.

This rise of unanticipated competition and the overhang of new regulation paved the way for the financial industry’s embrace of consumer-oriented fintech — a portmanteau for “finance” and “technology” — and gave rise to Stripe, PayPal, Robinhood, Square, and numerous other fintech companies whose applications can be found on almost every smartphone today.

But another byproduct was increased consumer access to digital currencies supported by blockchain technology.

Initially, financial services firms stuck to investments in bitcoin wallets and exchanges. But in time they shifted their focus to blockchain, the technological infrastructure underpinning cryptocurrencies.

In the race to real-time financial services, stakeholders at the highest levels saw blockchain’s wide-ranging possibilities and cost-saving potential. Seemingly overnight, financial services firms and other strategic players sought to invest in commercial applications for blockchain technology writ large. By 2016, blockchain efforts comprised nearly 70% of Series A funding, with bitcoin investment trailing at around 30%.

How did this flurry of investments in blockchain for financial services pan out?

“Initially, it was very hyped up,” said Larry Tabb, head of market structure research at Bloomberg Intelligence. (Tabb is the former chairman of TABB Group, where the author previously provided consulting services.)

“We have seen very little of anything go into production,” Tabb added. He and others said that the costs, the back-end infrastructure, and the reticence among financial industry players has meant it has failed to gain traction.

The health care industry may be able to succeed where Wall Street has not. If successful, the resulting disruption could change the way companies in the health care sector deliver their services. Many of the habits woven into the finance industry’s DNA, such as the aversion to sharing data, are less prevalent in health care. And while the financial services industry is loath to upgrade its back-end systems to accommodate blockchain technology, the health care industry has a regulatory requirement to do just that.

Financial services and health care are different animals, but the two industries share certain pressure points. Both industries are saddled with legacy administrative systems and carry a significant responsibility to consumers.

“You could argue in health care, you make an error, and people die. In finance, you make an error, you completely ruin people’s lives,” said Mariya Filipova, chief innovation officer of CareQuest Innovation Partners. “There are probably parallels to be made in how the industries have handled complexity, high risk, and managing highly sensitive information and dealing with innovation.”

On the other hand, solutions that may be undesirable for the finance business model can accrue to the benefit of health care companies trying to trim their dependence and their spending on third parties.

Because many blockchain projects in health care are still in the research and development stages, companies have some runway before blockchain-based partnerships and programs reach critical mass. That said, several players are showing the way by delivering, in a variety of ways, on the promise of this emerging technology, offering proof that the blockchain can be more than buzzwords and hype.

To give one example, San Francisco-based Chronicled, a company using blockchain to support the pharmaceutical supply chain, has two blockchain-based technologies in production: one to authenticate drugs and another to automate revenue management.

Another company, the digital health startup Patientory, is using blockchain to help safeguard medical records. Health records on blockchain systems can be linked to existing medical record software and act as one overarching view of a patient’s record without placing patient data on the blockchain. Each new patient record can be appended to the blockchain in the form of a unique hash function, which can be decoded only if the data owner consents.

“We sought to really create a secure platform that would allow users to take control of their health records. Because right now, it’s in the control of the electronic medical record systems and the hospital systems,” said Chrissa McFarlane, the company’s CEO.

The popularity of cryptocurrencies has given blockchain technology almost mythical status in the general public. But although blockchain addresses many persistent issues, such as data security, privacy, and supply chain management, there are other problems this revolutionary technology does not address, particularly in health care.

“It’s still fairly new, when you think about it, digital health,” said McFarlane. “I would say it’s still early days. I mean, if you look at the industry overall, knowing that health care is always ten years behind, we’re like in 1994, right?”

“We’re still in that pilot phase and implementation phase,” she said. “I would say to see critical mass, it won’t be until another five years, really.”

But, she added, “It’s here to stay.”

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