Home Care Disrupters

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.

Regulatory Environment

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.

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Written by Amy Baxter, Home Health Care News