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March 23, 2010

A First Reaction to Our New Healthcare Reform Law

Getting health insurance for everyone in this country is a worthy objective that I have wanted to see achieved.  However, I believe the techniques used in the new law to accomplish universal health insurance create serious financial issues that its sponsors have avoided addressing, assuring that as a nation we are bound to confront a massive healthcare driven financial crisis in the very near future.

Recall that several weeks ago I put together a simple post titled “Follow the Money,” that explained that it would cost at least $200 billion to cover all 47+million of the uninsured under today’s average insurance premiums. Presumably the $200 billion would be financed by mandated individual payments and government subsidies (paid for by tax increases). These costs should be expected to grow annually by about 8% (which is the annual growth rate of HC costs, today).

It is fair to speculate, as some have, that using current HC costs and growth as a projection tool misses the latent demand for HC services present in the high-risk uninsured population.  As this manifests, it could create an immediate upward shift in demand for HC and in turn accelerate the rate of growth of HC costs.  As someone who deals with the actuarial realities of HC costs as part of many an investment analysis, I believe this concern has merit.  Over the past 20+ years, as private healthcare evolved from indemnity (80%/20% with a deductible) to first dollar insurance (HMOs, PPOs and POS plans), healthcare utilization accelerated massively, at a minimum demonstrating that HC consumption follows the law of moral hazard, i.e., it increases when HC is perceived as “free.”

As a matter of legislative necessity the new law “works around” this real economic problem and its analysis.  The mechanics of the law requires tax revenues to expand ahead of the provision of subsidies, creating a ten-year projection of net federal deficit reduction (about $134 billion, read, the plan is profitable for the first ten years).  This is exactly how the law had to be structured for it to pass the CBO test and be eligible to become law.  Unfortunately, at some point within or shortly after the 10-year projection period it seems certain that HC subsidies will overtake tax revenue, creating the same ongoing funding problem(s) we constantly face with the current Medicaid and Medicare programs.

On this basis, my first, and unfortunate, take on this law is that it will fail on a financial basis without significant modification to its financial sources, incentives and HC delivery mechanisms.  Such modifications need to be designed to curb moral hazard and HC cost inflation.

One of the main purposes of this Blog (and my professional life) is to explore (and invest in) solutions to these issues. This law accelerates the need for these solutions, almost to an uncomfortable extent.  It may be too much of a financial burden too soon in the technology cycle, which I see as only recently focused on simultaneously lowering costs and improving quality in the HC system.

For any HC reform that envisions universal coverage to work, both financially and medically, it will need eventually to include:

  1. Expansion of consumer accountability and engagement in HC purchasing decisions (HC cannot be perceived by anyone as “free” or a “right” – it is an individual and collective cost/liability that must be managed by the power of the consumer marketplace and the diligence of individual beneficiaries)
  2. Changing HC service compensation from fee-for-service to performance and quality based compensation (just like in almost every other American industry)
  3. Mandated reductions in medical errors and redundancy, especially in hospitals
  4. Deployment of technology and accountable care management designed to more efficiently care for the chronically ill, which represents 70+% of all healthcare costs, especially those insured individuals with 4 or more chronic illnesses

Unfortunately all of these necessities are materially absent from our new law, and as a result, I am unable to applaud its passage despite my genuine belief that universal coverage is a desired and ultimately obtainable goal.  With this legislation I am afraid we are headed down a path that does not portend eventual success.


March 18, 2010

March Madness & the Art of the Best Guess

Filed under: Casual Fridays,Sports,Venture Capital — Steve Krupa @ 12:31 pm

I remember going to a meeting with one of our limited partners where I explained our reasoning for staying clear of investments in biotechnology and novel compounds.  I equated it to the early rounds of the NCAA tournament – terming it “March Madness Investing.”  It turned out that my LP completely understood my analogy, shooting back, without missing a beat, that he felt the same way about selecting venture funds…


My wife and I just submitted our NCAA brackets.  At tip-off it looks like there are 16 entries in my group, for a total pot of $320.  My wife’s got one bracket in, creating “pot odds” of 16:1.  This year I am playing two brackets, bringing my “pot odds” down to 8:1.  Of course, I have a system.

My first bracket is 100% gut-shot, a blast through the match-ups based mostly on personal feel.  I took this approach last year.  I picked a few upsets and entered the final four with a strong bracket.  My wife went to UConn, so I am a UConn fan, and I picked them to win it all last year despite my gut feeling for North Carolina.  This year UConn is out of the tournament, so my gut is pure.  I should have submitted two brackets last year.  I will not make that same mistake again.

My gut-shot spoiler is K-State.  I have them beating Syracuse and Kansas to get to the finals where they will lose to Kentucky.  It feels like Kentucky’s year to me, they have a great new coach who needs to win before he gets caught in another NCAA violation (like he did at Memphis and UMass).  Interestingly, out of the 32 first round games my gut produced 8 first round upsets (25%).  I bet that’s how many there will be, but I doubt they will be all or many of the ones I picked.  I think I am in big trouble on the gut-shot (for those interested my first round upsets are listed below).

As I was filling out my first bracket I found all sorts of interesting information on ESPN (, of course), where a horde of college hoops fans submit brackets every year.  With no real love interest in the tournament (UConn and USF are playing in the NIT), I decided to submit my second bracket based solely on ESPN’s “National Bracket,” which shows the preferences of the majority of the horde.  It turns out that the “National Bracket” is not much different than the NCAA tournament seeds.  Of the 63 potential games, the majority of the horde chose the favorite 59 times, with the only upsets coming in the first and second round (N Iowa (9) over UNLV (8), Louisville (9) over Cal (8), Texas A&M (5) over Purdue (4) and Michigan St. (5) over Maryland (4)) (Note a 9 over an 8 seed or a 5 over a 4 seed is hardly and upset, just perhaps an indication that the majority of the horde disagreed with the seeding ever so slightly).  But I know this is not the way things are going to turn out.  There has to be more upsets than that.  Perhaps I should submit a third bracket, the average of the first two.  That takes my “pot-odds” down to 4:1, I would lose alpha, returns would go down the tubes.

For the record, I claim no expertise in college basketball.  I read the box scores sometimes, and watch a game or two a week during the season, but, unlike, say the Oscars (ha!), my opinion is as much a guess, built off of the seeding, versus an expert point of view on how each team matches up against the others.

I wonder how Bobby Knight and Digger Phelps do on their bracket picks (both, which I am sure you know, b/t/w, are former college coaches and current ESPN analysts)?  The experts should beat me nearly every time.  The odds are that one of the number 1s will win the tournament.  The horde (and my second bracket) has Kansas as the winner.  The experts say they are the best by a meaningful margin.

But it’s a fairly well established notion that in order to succeed in an NCAA bracket you have to pick some upsets.  How do you do it?  Best guess?  Educated guess?  Study and know your stuff.  Understand the match-ups.  Pick the unknown underdog. Dartboard?  Or is the notion of needing upsets to create a winning bracket false?  Where’s the data?  Is it reliable?  Maybe the seeding is off? Is NCAA seeding reliable?


If you’re curious, here are my 8 first round upsets on my gut-shot:

1.    Houston (10) over Maryland (4)

2.    No. Iowa (9) over UNLV (8) (9 beats 8 – not a major upset)

3.    GaTech (10) over Oklahoma St. (7)

4.    UTEP (12) over Butler (5)

5.    Florida (10) over BYU (7) (some people like BYU to go to the final four to play in Salt Lake City – I say no way)

6.    Wake Forest (9) over Texas (8) (Texas was ranked #1 in the country earlier this year only to fall hard)

7.    Missouri (10) over Clemson (7) (I never have any luck picking Clemson)

8.   Louisville (9) over Cal (8) (again 9 beats 8, no biggie)

Of course my big upset is K-State going to the final four.  Good pick?

March 13, 2010

Lisa Suennen, Patient Safety and the Health Care Blog

Filed under: Healthcare — Steve Krupa @ 10:29 pm
Tags: , ,

There have been no posts over the past few days because I have been on vacation playing in a golf tournament with my father in St. Lucie, Florida.

In the meantime there seems to be a lively debate on the Health Care Blog with respect to my business parter Lisa Suennen’s recent post on investing in patient safety.  I recommend checking that out here.

See you in a few days when I am back in full work mode.

March 8, 2010

Oscar Picks Audit / The Handsome Men’s Club

Filed under: Casual Fridays,Film — Steve Krupa @ 8:55 pm

A quick recap on the Oscars, and then back to more vocational posts.

I went 5 for 6 on my picks.  My prediction that Carey Mulligan would upset Sandra Bullock did not come to pass.  However, I do stand by the artistic merits of my pick, and, I have to say, I do like Bullock’s public persona.  As I was saying to my wife during the show, if I had to bet I would have bet on Bullock.  On the whole, I did not notice any big surprises except for The Hurt Locker‘s getting a bunch of technical awards, which I thought Avatar would sweep.

To wrap it up, I thought you might enjoy the following video, called The Handsome Men’s Club from Jimmy Kimmel’s post-Oscar show.  For sure, there are quite a number of surprises here.

March 5, 2010

Kathryn Bigelow for Best Director and Other Oscar Picks

Filed under: Casual Fridays,Film — Steve Krupa @ 11:35 am

This year’s film phenomenon was undoubtedly AvatarHow much did it really cost? – numbers range from $230-$500 million.  It’s analogous to Star Wars (I saw Star Wars with my father the first week it was out.  I was 13).  Its state-of-the-art 3-D/CGI sets the stage for revitalizing the Hollywood blockbuster, creating new film making techniques and enhancing the theatre going experience as something superior to home DVD viewing, even Blue Ray.  Avatar is a visual masterpiece and James Cameron deserves praise for it.  But does he deserve the Oscar for Best Director?  Is Avatar a great movie, or an amazing visual spectacle?  Did someone make a better movie this year?

Avatar, which I really did like, ranks 6th on my list of the 10 nominated films (yes – I have seen all 10).  As beautiful as the film is, I find its story flawed (I’ve seen it before).  Granted, the predictability allowed me to get absorbed into the 3-D/CGI, but I never quite fell for the Universe’s greatest sci-fi army falling prey to the native’s bows and arrows and super powerful prehistoric animals bit.   For a more intellectual dissection of Avatar’s plot failings, check out David Brooks’ analysis in his New York Times Op-Ed, The Messiah Complex.   

Director Kathryn Bigelow spent around $15 million on The Hurt Locker and managed to make a much better movie than her long-ago ex-husband Cameron; it might well be my favorite war movie since Michael Cimino’s The Deer Hunter.

So what makes The Hurt Locker so special?  It manages to slow down war and make it comprehensible, both visually and emotionally; it creates a set of characters we find ourselves giving a damn about; and it creates non-stop, nearly unbearable, suspense.  Every shot and hand-held camera angle is meticulous and in almost every instant we know exactly what everyone is doing and why.  On a personal level, it’s also about those of us that at some point in our lives learned to do something so well that we loved it beyond anything else.  That’s the case of the understated main character in this film, Staff Sgt. William James (played by Jeremy Renner).  He knows how to diffuse bombs better than anyone.  He’s a hotshot.  It’s all he loves, and he changes the lives of everyone in his platoon as a result of it.

Below is my ranking of the nominees for Best Director.

Best Director Ranking:

  1. The Hurt Locker (Kathryn Bigelow)
  2. Avatar (James Cameron)
  3. Precious (Lee Daniels)
  4. Inglourious Basterds (Quentin Tarantino)
  5. Up in the Air (Jason Reitman)

If you have an interest in Bigelow, and you’re okay with a couple of plot spoilers, Leslie Stahl’s 60 Minutes profile on Bigelow is very interesting.  It includes an interview with James Cameron who insists Bigelow might win because she is a woman.  Oh, I failed to mention, were Bigelow to win she would be the first woman ever to win the Best Director Oscar, pretty cool.

For controversy, note that one of The Hurt Locker’s producers, Nicolas Chartier, has been banned from the Oscar ceremony because of e-mails he sent urging academy members to vote for his movie  (he also indirectly pans Avatar in the emails, apparently).

It is “Casual Friday” so here are my other Oscar Picks.  We’ll check in on Monday to see how I did.

Best Picture Ranking:

  1. The Hurt Locker
  2. Precious
  3. Up
  4. District 9
  5. An Education
  6. Avatar
  7. Inglorious Basterds
  8. A Serious Man
  9. Up in the Air
  10. The Blind Side 

I have no idea how The Blind Side got nominated, it’s a very good made-for-TV movie, like Brian’s Song.  Bullock might win for Best Actress, but I didn’t get why the performance was so special.  My wife disagrees.

Best Actor:

Jeff Bridges is great in Crazy Heart.  He sings, he plays, he pukes, he does it all.  He was better as the Dude, so this is a make up win for a great career, but he deserves it.  Jeremy Renner is also excellent in The Hurt Locker.  If he weren’t running against Bridges I’d expect him to win.

  1. Jeff Bridges (Crazy Heart)
  2. Jeremy Renner (The Hurt Locker)
  3. George Clooney (Up in the Air)
  4. Did not see: Colin Firth (A Single Man), Morgan Freeman (Invictus)

Best Actress:

  1. Carey Mulligan (An Education)
  2. Meryl Streep (Julie and Julia)
  3. Gabourey Sidibe (Precious)
  4. Sandra Bullock (The Blind Side)
  5. Did not see:  Helen Mirren (The Last Station) 

Carey Mulligan upsets Sandra Bullock – you watch.  And see An Education.  It’s creepy and unexpected.

 Best Supporting Actor:

  1. Christoph Waltz (Inglourious Basterds)
  2. Did not see: Matt Damon (Invictus), Woody Harrelson (The Messenger), Christopher Plummer (The Last Station), Stanley Tucci (The Lovely Bones)

Sorry, I can not add a lot of value to this category given that I have not seen 4 of the 5 performances.  I did think Christopher Plummer did a great voice over in Up, as the evil explorer, and Stanley Tucci was sweet in Julie and Julia.  Christoph Waltz MADE the movie in Inglorious Basterds.  I have not heard similar praise for the others, but we’ll see.

Best Supporting Actress:

  1. Mo’Nique (Precious)
  2. Maggie Gyllenhaal (Crazy Heart)
  3. Tie:Vera Farmiga (Up in the Air), Anna Kendrick (Up in the Air)
  4. Did not see: Penélope Cruz (Nine)

Notwithstanding my missing Penélope Cruz (Nine), I just cannot believe that Mo’Nique will not win this category.  In Precious she (Mo’Nique) plays Mary Jones, the meanest most disgusting woman in the world, and the perfect antagonist to the loveable Precious herself.  I guess Mo’Nique is a loved stand-up comedian (I thought to include a youtube clip of her stand-up routine, but it’s quite dirty and this is a PG blog).  Credit Lee Daniels for getting a great performance out of her, and other celebrities including Lenny Kravitz and an almost unrecognizable Mariah Carrey.  Note: Gyllenhaal was very good in Crazy Heart, but my favorite performance of hers was her supporting role in Away We Go, which is a very fun movie if you haven’t yet seen it. 


March 4, 2010

Investing in Patient Safety

Query:  provide an example of a venture investment with a product that addresses patient safety.

One of our (Psilos‘) more interesting investments is a company called PatientSafe Solutions, f/k/a IntelliDot (for those interested in investing, unfortunately we just completed a round of venture financing with TPG  and Camden Partners).  PatientSafe’s medication bar-coding technology is installed in well over 80 hospitals.  To date, estimates have the technology avoiding over 11 million hospital-based medication errors.  There are 5800+ US-based hospitals, which creates a huge market for us, but the company clearly has a long way to go.

This investment demonstrates that uncovering sound investment opportunities requires digging deeply into the economics of the healthcare system.  Sometimes at first blush investments seem so obvious, until, upon a deeper dive, perverse economic incentives in the HC system thwart success.

First some background on the company’s initial go-to-market product.  

Essentially, PatientSafe’s technology uses bar coding and confirmation software to verify what the company calls the “5 rights” at the moment of drug administration, namely: right drug, right patient, right time, right mode of administration and right dose.  It does this by having the nurse use a handheld bar code scanner, slightly larger than an android-type cell phone, to scan the patient (through an ID wristband), the nurse’s name tag, and the drug prior to administration.  If any of these data points are off, e.g., the drug is an adult dose of Heparin instead of an infant dose, as was the case in the now famous hospital-based medication error involving the the near death of actor Dennis Quaid’s new-born twins, the nurse receives an alarm at the handheld device beginning the process of correcting the error.  If no alarm occurs, then it’s clear that the technology has safely confirmed the “5 rights”.

So what is the value of this system?  Well, here’s some interesting data:

  • 19% of all medications administered to hospitalized patients are given in error
  • 1.3% of all doses given in error are potentially harmful which results, on average, in a length of stay increase of 1.88 hospital days
  • A typical 200 bed hospital will have approximately 29,000 Medicare patient days per year, with each Medicare patient receiving on average 20 medicines per day, or for the hospital, 580,000 meds per year. 
  • Of the 580,000 meds per year, 110,200 will be in error and 1,465 will be in critical error resulting in 2,755 unnecessary hospital stays (1,465 error x 1.88 days).
  • The average cost of a hospital day under Medicare is about $600, so medication errors in this sample 200 bed hospital cost the healthcare system $1.65 million per year, or $8,265 per bed per year.
  • One last calculation:  taking $8,265 per bed per year across all of the 950,000 hospital beds in the US results in a cost of $7.8 billion per year.  Note that these numbers only include Medicare costs (the reason why will be apparent in a minute).  An estimate of total cost of medication error including all patients would exceed $10-12 billion per year.

Just as a reality check:  let me assure you that the annual cost of the PatientSafe system is much, much lower than the $8,265 per bed per year computed above.

So if you were the CEO of a hospital it would be a no-brainer right?  Install a system that improves my quality and saves Medicare a ton of money.  True, provided that you (the hospital) were paying for the extra hospital stays as a result of medication error.  If you were not (paying for the errors, that is), the economics of such an investment would be shaky (oh, comments and questions, please!).

In truth, up until very recently, additional hospital stays that resulted from in-patient medication administration error were reimbursed by both Medicare and private insurance.  And as a result, were these conditions to have held, PatientSafe would have had a tough environment to sell into.  Sure a few executives would purchase the system for its quality prospects, but that alone would not have created a large enough market for PatientSafe’s product to justify the investment necessary to build it.

It was not until September of 2008 when Medicare began to enforce broadly the concept of  “never events” (contained in a 2006 law),  that PatientSafe could begin to anticipate growth in its market and eventual traction with its hospital customers over the long run.  A “never event” is something that, as the term implies, should never happen in a hospital, and if it does, under Medicare, the hospital has to fit the bill for the resulting cost.  In-patient medication administration errors are considered never events.

So what is the medication administration error rate with the PatientSafe system?  Studies indicate that it’s zero.  That’s right, the system seems to completely eliminate drug administration errors, and as such, has the potential to eliminate billions of dollars of waste in the HC system.

Today, PatientSafe’s CEO, Jim Sweeny is leading a project to expand the purview of the PatientSafe system.  Using RF technology throughout a hospital, Jim believes the system can create a “cone of safety” around each patient that will significantly reduce most of the common and avoidable treatment mistakes.  More to come on Jim and his team’s work in the future.

One final point.

The implementation of the “never events” rule demonstrates one of the many ways in which simple, logical government regulation can lower cost and improve quality in the HC system.  Lots of incredible technology exists (and we’re going to talk about much of it here) that will reduce healthcare cost and vastly improve quality.  Alignment of incentives among the payers (mainly the government and corporations), providers and patients are necessary for such technology to be adopted in an economically rational manner.  The government can stimulate the adoption of that technology by modifying reimbursement mechanisms, as they have in the area of never events.  This is one very simple example of such a program and I expect private insurance will follow suit.

March 3, 2010

Lisa Suennen on PE Hub

Filed under: Healthcare,Venture Capital — Steve Krupa @ 4:13 pm
Tags: , , ,

My business partner Lisa Suennen is at it again, talking about cost savings through error reduction in hospitals.  Here’s her latest post on PE Hub, titled: Venture Capital Can Increase Patient Safety and Reduce Healthcare Waste and Error.  This is additive to the Psilos White Paper I discussed in yesterday’s post, expanding on the notion that billions of dollars can be saved in the healthcare system by reducing medical errors in hospitals.

The post also serves as a call to arms to venture capitalists to invest in healthcare IT, one of the more underserved areas of venture IT investing.  I think Lisa wishes we had more investment partners to choose from (I, on the other hand, wonder if we should not be keeping this great idea to ourselves!).

March 2, 2010

Psilos White Paper – Healthcare Reform and Combatting Rising Healthcare Costs

Please check out a fairly recent (and pretty awesome) white paper written by Al Waxman, Lisa Suennen and Darlene Collins, three of my partners at Psilos Group, titled Cost, Quality and Alignment: A Step-Wise Plan to Reform and Transform Healthcare (published in September, 2009).

The paper was written during the heat of the debate over healthcare reform, last summer, well before either the Senate or the House passed their respective bills.  It was sent to many members of congress (many actually read it) and media editorial boards (many actually wrote about it).

The overall theme of the Waxman et al paper parallels the message I sent a couple of days ago to Senator Patty Murray (D-Washington).  It recommends an incremental approach to healthcare reform designed to achieve the following goals over the next 10 years:

1.  Reduce overall healthcare inflation to 3%

2.  Enable universal access

3.  End prior condition refusals for insurance and policy cancellation for sick people.

4.  Extend solvency of the Medicare Trust Fund beyond 2017

5.  Reduce medical errors

6.  Improve the US healthcare quality ranking from #35 in the world to #5.

7.  Stimulate investment in new healthcare technologies that improve healthcare quality and lower costs

As a practical solution the current versions of the Senate and House bills (and Obama’s slightly abridged plan) have serious problems in that we don’t know the cost effect of many of the individual provisions let alone whether as a whole either bill will rein in healthcare costs (in the state of Massachusetts, universal care seems to have had no impact on rising costs).  They (the Congress) seem to be attempting to solve all of the problems in the system with one fell legislative swoop with little or no proof that their ideas will lower medical inflation.  As I discussed in my previous post, healthcare reform is not financially viable without successfully reducing healthcare costs and inflation.

Logically, the Psilos team recommends an immediate focus on cost reduction that, if successful, would yield much of the long-term financial capital necessary for expanding access (read: health insurance for the 47 million uninsured in the US).  Note that they are not just offering ideas, but proven solutions.  Among others, they note the following areas as low hanging fruit:

1.  Management of the chronically ill, particularly those in Medicare (could yield $750 billion in savings over 10 years)


2.  Deployment of technology to eliminate hospital-based errors (recall my prior post on Atul Gawande and checklists, one such error reduction program), which could yield $7-$10 billion annually to Medicare

More advanced programs that could improve costs include:

1.  Performance-based reimbursement for providers

2.  Financial incentives for individuals to lead healthier lifestyles

3.  Deployment of Personal Health Records and individual patient information for real-time point-of-care access

Obviouisly there is much to discuss here, including the young companies that are developing the technologies and programs that make these ideas work.  In the meantime, my colleagues’ white paper, a truly non-partisan view of the healthcare crisis and reform is extremely informative as to what’s possible in the ongoing effort to control runaway healthcare costs.

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