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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.