Healthcare – The Ultimate Vertical Market (Part 3)

Ask anyone their opinion on the forces that tend to slow down innovation in the healthcare sector, and usually, government regulation tops the list.

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It’s a fair critique. Understanding and then complying with the maze of federal and state regulations is a time-consuming and complex undertaking. Consider this: as of June, the U.S. Department of Health and Human Services had published 952 documents in the Federal Register year-to-date, including 53 final rules, 20 proposed rules, and 879 notices. That works out to an average of 190 per month or six each day!

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The $5 trillion healthcare industry is shaped by a regulatory maze of healthcare standards and agencies – HIPAA, PHI, CMS, FDA, CDC, CMS, etc. – each with its own rulebook. And the stakes are high. Non-compliance can result in financial penalties, legal action, erosion of customer trust, and even patient harm.

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But here’s the counterintuitive truth: In healthcare, regulation is not the enemy of innovation. In fact, it’s often the catalyst. More than in any other industry, except perhaps banking, regulation can be the catalyst for change that would otherwise never happen organically or at scale. It’s one of the few forces that’s powerful enough to align millions of stakeholders and to drive change at a national scale in years, not decades.

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Time and again, the most enduring healthcare SaaS categories have been forged not despite regulation, but because of it. HIPAA was foundational for the healthcare compliance and security software industry. The HITECH Act transformed EHRs from niche systems into a critical infrastructure. E-prescribing mandates created billion-dollar networks. And when COVID forced regulatory hands, telehealth went from novelty to necessity almost overnight.

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For founders and operators building healthcare SaaS, this pattern is essential. Regulations don’t just impose limits and slow down innovation. They define requirements, standardize behaviors, and align incentives. In doing so, they create the conditions that make software scale possible. The best companies don’t simply comply with regulation. Instead, they anticipate it, internalize it, and develop product roadmaps based on it. In healthcare, the rulebook isn’t just something to navigate. It’s something to leverage. Let’s walk through some examples.

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HIPAA: The Law That Created a Category

Let’s start with the original catalyst. HIPAA, enacted in 1996, didn’t just introduce privacy rules. It effectively created the healthcare security and compliance industry. Every business associate agreement, every encrypted message, and every audit log can all be traced back to HIPAA.

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Yes, HIPAA is old. It predates the iPhone. It was written for the era of fax machines, which in healthcare never actually ended… But its underlying principles — patient privacy, data security, and information portability — are more relevant than ever. And, critically, HIPAA provided something no startup ever takes for granted: clarity. In a world without it, we’d have 50 different state laws and a patchwork of conflicting standards. With HIPAA, healthcare founders know exactly what rules they must comply with.

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Entire markets sprang up to meet the new requirements — from secure messaging (TigerText, Imprivata Cortext) to compliant cloud hosting (ClearData, Datica) to encrypted email (Paubox, Zix).

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Most importantly, HIPAA gave rise to HITRUST — a private certification framework that translated vague legal requirements into specific, auditable controls. HITRUST became the gold standard for enterprise deals. In many sales cycles, the question isn’t “Can you do this?” It’s “Are you certified?”

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This is how regulation becomes infrastructure. HIPAA didn’t just create rules. It established the playing field — setting boundaries, standards, and expectations that every healthcare software provider still plays by today. HIPAA didn’t just regulate. It created the healthcare compliance industry.

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E-Prescribing: How Regulation Built a Network

The e-prescribing story is one of healthcare’s most successful digital transitions. It started with a simple nudge: the Medicare Improvements for Patients and Providers Act of 2008 offered incentive payments for providers who adopted electronic prescriptions. Later, it imposed penalties on those who didn’t.

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The incentives worked. Adoption grew. But the real change came in 2010, when the DEA allowed controlled substances to be prescribed electronically, with strict conditions. Two-factor authentication. Identity proofing. Audit trails. PKI certificates. These requirements weren’t just technicalities. They were market-makers.

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Entire ecosystems formed around helping providers comply. Imprivata became the leader in identity and access management. DrFirst and NewCrop (later acquired by Surescripts) built robust platforms to handle the complexity. And Surescripts itself became the essential infrastructure, routing over 2 billion prescriptions annually.

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Even Epic, the most dominant EHR in the country, still relies on Surescripts to transmit prescriptions. That’s how deep the moat goes. The regulation created the mandate. The mandate created the network. And the network created the category king.

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HITECH: How $30 Billion Compressed 30 Years

Before the HITECH Act, electronic health records were slowly gaining traction. Epic, Cerner, and a few others were serving large hospitals and health systems. However, by the passage of HITECH in 2009, only 12% of hospitals had fully adopted an EHR, despite four decades of development. The market was crawling.

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HITECH changed everything. With $30 billion in incentives tied to "meaningful use" criteria, EHR adoption skyrocketed, and by 2021, it surpassed 96%.

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And it wasn’t just about EHR vendors. HITECH’s criteria created new software markets overnight: health information exchanges (HIEs) to meet interoperability standards, patient portals to satisfy engagement requirements, consulting firms to guide providers through attestation, etc. Athenahealth repositioned its entire value proposition to help providers maximize incentives. It wasn’t just compliance. It was ROI.

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HITECH shows how regulation can act as a fast-forward button. Decades of gradual market evolution were compressed into a few years. The ripple effects are still playing out.

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Telehealth: Regulation Unleashes Latent Demand

Telehealth had been around for decades. The tech existed. So did the use cases. But a decade ago, adoption was anemic. Why? Because regulations made it hard to get paid. Medicare wouldn’t reimburse for virtual visits. State licensing laws blocked cross-border care. Controlled substances require in-person consults.

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Then came COVID.

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In 2020, emergency waivers erased years of regulatory friction almost overnight: Medicare paid for virtual visits, states relaxed licensing restrictions, and providers could prescribe remotely. The result? Telehealth visits jumped from 1% to over 30% in a matter of weeks. 

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Companies like Teladoc, Amwell, and MDLive scaled rapidly. Direct-to-consumer startups like Ro, Cerebral, and Hims & Hers built billion-dollar businesses in categories that didn’t exist pre-COVID. The demand was always there. Regulation had just been holding it back.

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Far from being a barrier, regulation in healthcare has often acted as a tailwind for innovation, shaping not just how companies operate, but why they exist at all. Time and again, regulatory shifts have created entirely new categories and crowned enduring winners. For Vertical SaaS founders, the playbook isn’t just about building great software. It’s about reading the rulebook better and faster than anyone else.

When Everyone’s a Stakeholder (and No One’s in Charge)

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Healthcare is the ultimate example of a multi-stakeholder market. It’s often said with more than a little truth that healthcare is the only industry where the patient is not the buyer, not the user, and not the decision-maker. Just a single doctor’s visit can involve a multitude of separate parties: the patient, the provider, the payer (often via the employer), government programs, pharmaceutical companies, device manufacturers, and the pharmacy, each with its own systems, incentives, and data.

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The result is complexity by design. Stakeholders are interdependent but misaligned. Providers care about outcomes. Payers care about costs. Patients care about convenience. Pharma cares about access and market share. The friction this creates isn’t just administrative. It shapes workflows, slows innovation, and drives the need for new kinds of software platforms.

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The most effective Vertical SaaS platforms serve not just one stakeholder; they orchestrate across many. By aligning incentives and streamlining interactions, they become essential infrastructure in markets defined by complexity. In healthcare, only a few companies have reached this level. Availity is one of them.

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Availity and the Rise of Industry Platforms

Some of the most valuable software in healthcare doesn’t sit inside the clinic or the hospital. It sits between providers and payers. Availity is a perfect example. Founded as a joint venture between Florida Blue and Humana, it created a neutral intermediary between providers and payers. 

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Before platforms like Availity, providers needed separate portals, credentials, and workflows for every insurance company. A typical medical practice might juggle 20+ different payer websites just to check eligibility, submit claims, and track payments. Availity created a single front door for all of them: one login, one workflow, one source of truth.

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What makes Availity a true Industry Platform is how it aligns previously competing interests.

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Instead of navigating dozens of payer portals, providers get a unified interface for eligibility checks, claim submissions, prior authorizations, and payment tracking, reducing administrative burden. Studies show providers using clearinghouses like Availity save as much as 10 minutes per transaction.

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For payers, Availity standardizes the chaotic inflow of provider interactions. Rather than maintaining expensive provider portals and call centers, payers can rely on Availity’s infrastructure. They also gain access to Availity’s provider network effects. The more providers on the platform, the more valuable the payer’s participation becomes.

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Availity’s open platform also lets health tech vendors embed its capabilities. EHRs, billing systems, and RCM platforms integrate via APIs, creating a virtuous cycle: the more vendors plug in, the more valuable Availity becomes.

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The result is not just efficiency, it’s lock-in. By sitting at the intersection of administrative workflows, Availity has become the system of action for one of healthcare’s most painful and high-volume functions. Providers won’t leave because their payers are there. Payers won’t leave because the providers are there. And vendors integrate because that’s where the ecosystem lives. It’s a textbook example of workflow gravity and data gravity working in tandem to entrench a Vertical SaaS platform as infrastructure.

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Today, Availity processes more than 13 billion transactions a year. Its power comes not from automating workflows alone, but from orchestration. It connects and aligns stakeholders who otherwise pull in different directions. That’s the hallmark of a true industry platform.

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Healthcare’s complexity isn’t just about the rules; it’s about the relationships. Every transaction spans multiple parties with conflicting incentives: patients, providers, payers, employers, pharma, pharmacies, and government programs. That fragmentation is exactly why platforms like Availity become indispensable. By orchestrating across misaligned stakeholders, they turn chaos into infrastructure. The winners in healthcare SaaS don’t just automate workflows. They align interests.

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Parting Thoughts: Reading the Rulebook

In healthcare, the strongest software companies don’t just survive the rulebook and the chaos of competing interests. They thrive because of them. Regulation sets the rules of the game. Compliance signals value. Multi-stakeholder complexity ensures no single player can go it alone. That combination creates deep, deep moats.

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This is the paradox that makes healthcare the ultimate vertical market. What looks like friction from the outside – the burden of compliance, administrative waste, and conflicting incentives – is exactly what creates the opportunity for new category leaders. HIPAA created the compliance industry. HITECH made EHRs ubiquitous. Telehealth scaled when the regulation shifted suddenly. And platforms like Availity emerged because providers and payers needed some neutral ground. 

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Throughout this series of essays, we’ve shown how all four forces play out: specialized workflows that demand bespoke solutions; data gravity that entrenches systems; regulation that catalyzes adoption; and multi-stakeholder dynamics that elevate platforms into industry infrastructure. Put together, they explain why healthcare is not just another large market but the proving ground for the next generation of Vertical SaaS winners.

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Healthcare is the ultimate vertical market, not just because of its size, complexity, or data gravity. It’s the ultimate vertical because the intersection of software, systems, and policy defines it. That’s what makes it hard. That’s what makes it durable. And it rewards those who not only play by the rules, but also learn to use them.

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For founders and investors, the lesson is simple, but not easy. Healthcare rewards depth, patience, and fluency in the rulebook. Master those, and you’re not just building software. You’re building the operating systems of one of the world’s most vital industries.