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July 27, 2010

Government Innovation?

Filed under: Healthcare,Venture Capital — Steve Krupa @ 5:26 pm

Once again Lisa Suennen is generating discussion on the Health Care Blog, this time regarding the government’s role in stimulating innovation in the US healthcare system.  Please check it out here, they’re talking about some interesting stuff.

In the meantime, the phrase “Government Innovation” reminded me of the late-great George Carlin, and so I thought you might get a laugh out of the following list of Carlin’s odd expressions and the accompanying video of GC taking our modern vocabulary to task.       

  1. authentic reproduction
  2. business ethics
  3. death benefits
  4. forward lateral
  5. friendly fire
  6. genuine veneer
  7. highly depressed
  8. holy war
  9. jumbo shrimp
  10. lethal assistance
  11. limited lifetime guarantee
  12. live recording
  13. mandatory options
  14. mercy killing
  15. military intelligence
  16. mutual differences
  17. new tradition
  18. nondairy creamer
  19. open secret
  20. original copy
  21. partial cease-fire
  22. plastic glass
  23. resident alien
  24. silent alarm
  25. standard options
  26. true replica
  27. uninvited guest
  28. wireless cable
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July 6, 2010

Inside Value-Based Healthcare – Part 2: Who Pays for Health(care) Insurance

In my previous post, Value-Based Healthcare Part 1, I talked about the two primary business risks faced by insurers, Moral Hazard and Adverse Selection.  Recall that for health insurance markets to work effectively they must be structured to mitigate Adverse Selection (i.e., the reality that the very fact that someone is seeking insurance might make them uninsurable in the first place).  This means that the healthiest people must stay in the market as part of the risk pool, otherwise the underwriting will not work at affordable premium rates.  As such, employer-based Group Model health insurance has evolved as the prevalent distribution method.

So who pays for employer-based health insurance?

Today health insurance costs average about $4,800 per person per year.  While this expense is paid for by employers, it is essentially part of salary costs, and so it is really money that would otherwise be paid to employees were it not for the mandatory participation required in most Group Model plans.

Employers offer to buy the coverage on behalf of employees because they believe that having their employees insured improves productivity and it is viewed by prospective employees as a competitive perk.  This works out well from a risk pooling perspective, making Group Model insurance less expensive on average.  But what really drives the Group Model is its income tax subsidy.  The federal government does not assess income taxes on the value of Group Model health insurance (this subsidy does not exist for individual purchases of health insurance).

This tax subsidy is massive.  The average employee is in the 25% federal income tax bracket, making the subsidy worth about $1,200 per year (25% of the $4,800 average annual premium).  Approximately 180 million people participate in Group Model plans, meaning the total amount of this annual subsidy is about $216 billion per year.

So who pays for employer-based health insurance?

According to these calculations 180 million employees cost a total of approximately $864 billion, $648 billion is paid for by employees through payroll deductions and about $216 billion is paid for by the federal government through income tax subsidies.  These amounts exclude out-of-pocket expenses, which are by enlarge paid for by employees.

_________________________________________________

Let’s get back to Moral Hazard.

Have you ever noticed that people are very hesitant to make claims on their automobile and property insurance?  Rarely do the costs of minor fender benders result in an insurance claim.  Why?  Because people fear that claims on their auto policies will result in either their premium increasing or their policy getting cancelled.  People tend to reserve that type of insurance for major catastrophes, paying the cost of minor accidents out of their own pockets.

Most people do not behave this way when it comes to health insurance.  A very high percentage of healthcare expenses become insurance claims.

Few people lose their insurance because of high insurance claims.  As claims increase, the burden of the higher premium is shared among the risk pool.  As a result, Moral Hazard (changing your ethics because you don’t pay for the consequences of your bad behavior) in Group Model plans is severe, and many believe it contributes significantly to the 8-12% average annual healthcare inflation rate.  Despite the reality that employees pay for more than 75% of the cost of their health insurance, they are fearless when making insurance claims.

________________________________________________

So, returning to the thread that ended Value-Based Healthcare Part 1.

Employer-based health insurance suffers from Moral Hazard.  Despite the fact that it seems obvious that employees pay the most of the tab, the cost is not individualized and the consequences of bad behavior are not perceived as even remotely severe.

Research backs the notion that when an insured party pays a higher percentage of the total cost of the service Moral Hazard reduces.

So the question becomes, if we are looking for an employer-based health insurance model that will counter increased healthcare consumption why not just increase the out-of-pocket payments and reduce Moral Hazard?

In some cases higher out-of-pocket costs can lead to Unintended Consequences, namely people forgoing necessary treatment.  For example, the medicines necessary to treat Type-2 diabetes are much less expensive than the costs associated with the side-effects of untreated diabetes like heart attack, stroke, amputations, blindness, etc.  A health insurer wants Type 2 diabetics to take their medications, however high out-of-pocket charges often impose barriers to compliance.

Medications like Glucophage, a treatment for Type 2 diabetes, have a high value.  The treatment costs about $400 per year, real money for an individual, but a small investment for a health insurer given that compliance with the drug should mitigate a number of side effects of Type 2 diabetes, saving money on hospitalizations and other forms of expensive healthcare.  Further, Type 2 diabetics should see podiatrists and ophthalmologists regularly.  Again, high co-pays for these services could mitigate compliance and increase adverse events within an insured diabetic population.

Value-Based Healthcare: Definition #2:

Value-Based Healthcare involves designing insurance benefits with economics that encourage (or remove the barriers to) the utilization of high-value healthcare services.

So why is Value-Based so new?  What are the barriers to implementing Value-Based?

These questions will be covered in future posts.

To leave you with something to think about, it was only until recently that the information technology necessary to begin experimenting with the implementation of Value-Based Healthcare became available.

June 25, 2010

Inside Value-Based Healthcare – Part 1: Moral Hazard

Value-Based Healthcare.  There, I said it…

I had fun on Wednesday sitting on the healthcare reform panel at the Dow Jones Limited Partners Summit.   The conversation centered on investment trends in healthcare as updated for the passage of PPACA, during which I blurted out the concept of value-based healthcare, a pretty complex and to some extent novel concept, and a cornerstone to many of Psilos’ VC investment strategies.  This was subsequently reported, and to Jennifer Rossa’s credit, she provided enough detail around my comment to correctly convey the concept.

There are important nuances, however.  This post is the beginning of a series that will explore the ins-and-outs of Value-Based Healthcare.

Value-Based Healthcare: Definition #1:

Value-Based Healthcare, or more specifically, Value-Based Health Insurance Design, its sobriquet being simply, Value-Based, intends to mitigate the Moral Hazard inherent in low cost-sharing health insurance coverage.

If we were to take an insurance or advanced finance class together we would spend a lot of time talking about Moral Hazard and Adverse Selection, the two primary business risks that underpin managing financial institutions, insurance companies and banks included.  Failure to manage these risks properly can lead to disaster (in fact, recently Moral Hazard and Adverse Selection got the better of the mortgage banking business, a primary cause of the financial crisis).

Moral Hazard reflects the reality that a party insulated from a risk (like an insured or a borrower) will behave differently than if it were fully exposed to the risk.

Adverse Selection reflects the reality that the very nature of a party’s desire to seek insulation from risk reflects a greater risk of loss.  For example, parties that are either sick or expect to get sick have a higher demand for health insurance.  Similarly, parties in the market for a mortgage that have a concern that they may default are more attracted to low-down-payment mortgages.

Underwriting models are designed in part to set prices to countervail the risks of Moral Hazard and Adverse Selection.  This is more easily accomplished in an underwriting model where each policy gets priced individually, like automobile insurance.  In this model individuals are placed in broad price cohorts based on age, gender, style of car, etc., and then adjustments to the policy price are made based on individual attributes like historical driving record.  Moral Hazard and Adverse Selection are less prevalent in insurance markets where policies are individually underwritten and where the underwriter will be the party that ultimately pays the claims on any policy.  Absent these conditions the risks of Moral Hazard and Adverse Selection will always be lurking.

Such is the case in the current market for employer-based health insurance (also called Group Model health insurance).

Let’s start with Moral Hazard.  Today many employer-based health insurance models feature low cost-sharing, meaning that patients pay a very small amount of the health resources they consume.  Here the economic question is whether the value of a healthcare service exceeds the out-of-pocket cost to the patient, which is a small fraction of the actual costs.  Moral Hazard comes into play because the insurance insulates the patient from full payment, thus altering behavior toward increased healthcare consumption, a phenomenon some believe is encouraged by the fact that providers (doctors and hospitals) are generally not at risk either and are paid on a fee-for-service basis.

Consider what might happen if the out-of-pocket costs to the patient were raised.  In insurance markets where patients could opt out and choose not to buy insurance, an increase in out-of-pocket costs would certainly result in some people, probably the healthiest, declining coverage.  This would cause premiums to rise, because the insured pool would be sicker on average, causing more of the healthiest people to decline, increasing the risk of the pool, increasing the premiums, and so on, into an Adverse Selection spiral.

In health insurance markets we need the healthiest people to stay in the market in order for the underwriting to work at reasonable levels of insurance premium.  This is one of the reasons why health insurance is provided by employers.  Employers, or coalitions of employers, are able to deliver large enough populations of sick and healthy people for the underwriting to work.  The participation of large numbers of employees mitigates Adverse Selection and as a result many large employers choose to self-insure (tax incentives is another reason employer-based health insurance dominates – more on this another time).

Nonetheless, in employer-based health insurance we are still left with Moral Hazard, and research seems to back the notion that its degree is inversely correlated with the percentage out-of-pocket paid by patients (low out-of-pocket = high Moral Hazard = high healthcare consumption).

So the question becomes, if we are looking for an employer-based health insurance model that will counter increased healthcare consumption (and believe me, we are), why not just increase the out-of-pocket payments and reduce Moral Hazard?

It turns out not to be that simple.  Please give this some thought and we’ll dig a little deeper next time…

June 15, 2010

President Bill Clinton at AHIP

Filed under: Healthcare — Steve Krupa @ 4:02 pm
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This was my third time seeing Citizen Bill Clinton speak publicly. The first was at the American Red Cross Centennial Ball in October, 2005, a few months after the disaster that was/is Hurricane Katrina; the second was on-site in New Orleans, along with Bush Sr., in May of 2006.(1)  Over the past four years, and much to his credit, Clinton has honed a consistent message, one he is assured to deliver, regardless of his audience’s predilections.

AHIP (America’s Health Insurance Plans) is a collective voice for almost 1,300 health insurance companies, a lobbying group that holds an annual convention and trade show designed to address the pressing issues of and the new technologies/businesses in the health insurance market.  AHIP states that one of their major policy goals is to expand access to high quality, affordable coverage to all Americans, yet it is clear that the AHIP collective was one of the many losers in the recent policy debate regarding PPACA (re: our new healthcare reform law), with their only major policy win being, in my view, the elimination (delay) of the “public option” from the enacted law.

It’s a nice position in life to get paid handsomely to address former foes.  No doubt many members of the AHIP collective had much to do with President Clinton’s own form of healthcare reform failing in the first half of his first term (1992-94).  Putting its primary content aside for just a moment, Clinton’s speech was peppered with two wheedling, audience-specific themes: the first, an invocation of thanks to the AHIP collective for supporting healthcare reform, or the rhetorical equivalent of praising someone for handing over their wallet while being held at gunpoint; and the second, a win-one-for-the-Gipper pep talk praising AHIP’s members as the chosen few who know that improved healthcare quality and lower healthcare costs can coexist, a sentiment that I know from first hand experience many of the AHIP collective struggle to affirm.(2)(3)  By injecting these two themes into what was essentially a speech outlining Clinton’s view of the world’s humanitarian challenges, the ex-president succeeded, brilliantly I believe, in conveying the following message, like it or not: we are committed to making things more equal in the world (the US included); healthcare reform is one step in that direction; and, as part of the process, we are offering you a second chance to re-build your industry around the needs inherent to this objective.  There was no gloating, just a warm embrace and a subtle nod or two – folks please get with the program and get it together – all this for the standard public appearance fee of the popular ex-President, which sources state range in the area of $150,000.

It’s also a nice position in life to do what you want to do and talk about what you want to talk about.  In terms of air time, Clinton’s cajoling served as mere tasting notes to a speech primarily concerned with his current world view and its alignment with the work of his William J. Clinton Foundation (a nongovernmental organization with over 1,100 staff and volunteers in over 40 countries).  A few notable points from his speech, titled Embracing Our Common Humanity, include:

  • The belief that the past decade of crises and changes in the US economic system, up and to the recent (current) recession, has alienated white non-college educated males in the US, who as a group are struggling for hope and optimism and are one of the primary sufferers of the massive unemployment trend.
  • That there is an underlying fear that America, a historical underdog turned post-WWII perennial favorite, may not be winning anymore, as developing countries like Brazil, Russia, India and China challenge our economic supremacy and terrorism challenges the capabilities of our military.
  • That the world is an incredibly interesting place where we continue to advance beyond our imaginations, noting in the years since his first taking office as President: the evolution of cell phones from a 5 lb device to today’s smart-phones accessing a pervasive Internet; and the advancement in genetic engineering to our current realization of synthetic organisms (to list just a few).
  • That despite the world’s being an incredibly interesting place, we still have trouble dealing with three major problems: (a) instability; (b) inequality and (c) climate change (and here I note that these three challenges line-up with many of the Clinton Foundation’s programs including his work to rebuild (or build) Haiti and to reduce global greenhouse gas emissions, the latter of which he believes is a cause to the current climate change).

With respect to healthcare reform specifically, Clinton acknowledged that the law is a vague beginning that is reliant on a second phase of specific programs.  These programs will have to address the real issues of cost and quality that he knows AHIP’s members understand, but that are not clearly understood by the public at large.  According to Clinton, making the new healthcare law work requires innovation, an American specialty that will bridge the gap between “what the government can provide and what the private sector can [currently] produce.”

Notes:

(1) For a transcript of Clinton’s May 2006 speech in New Orleans, click here, and for a transcript of George H.W. Bush’s speech at that same event, click here. Both are short, sweet and excellent, with Bush Sr. winning over the day despite Clinton’s rock star status with the Tulane student body.

(2) The belief that quality healthcare can be delivered at a lower cost is one that many people, not just insurance executives and underwriters, struggle with, especially consumers (patients). Generally, many patients find evidence-based medicine terms like “quality guidelines” and “quality standards” confusing and continue to believe that more and newer care is best. Patients are also reluctant to believe that their doctor could provide anything but sound medical advice.

(3) The vast majority of the new businesses exhibiting at AHIP have as their very purpose improved quality and lower cost.  Our insurers’ skepticism resides in a history of failed attempts at accomplishing this objective on a broad scale.  As I have noted many times in this blog, this objective can be met within subsets of the healthcare economy today. Broader deployment is the challenge and necessity presented by PPACA, a law that will financially bankrupt the US without massive improvements to the cost-quality relationship in healthcare.

June 2, 2010

The OmniGuide Laser

Filed under: Healthcare,Technology,Venture Capital — Steve Krupa @ 7:34 pm
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Happy Physicist Yoel Fink

Here’s a fun shot of a very happy (and brilliant) CEO Yoel Fink, who runs one of our (Psilos’) portfolio companies, OmniGuide.  This picture was featured in a massdevice.com article that just came out and it reminded me that I have yet to post on Yoel’s company.

OmniGuide falls into the medical device segment of our healthcare investment portfolio.  Over the past 40+ years VCs have invested in incredible medical devices and diagnostic inventions that have led a revolution in medicine, extending life and improving lifesyle.  Unfortunately, our current healthcare related financial crisis is one of the unintended consequences of this revolution.

In anticipation of an era of financial constraints on the healthcare system, our investment approach is to back new medical devices that not only provide a new standard in quality outcomes, but also reduce cost to the health system and align the economic incentives of payers (insuers, gov’t, consumers), providers (doctors and hospitals) and patients (consumers).  OmniGuide’s BeamPath laser technology is a product that does just that and more.

Below is a 5 minute video of a report on CNN on how a Wake Forest surgeon found OmniGuide’s BeamPath and used it to remove what was believed to be an inoperable brain tumor.

What I think you pick up from this video is that OmniGuide has developed a one of a kind medical invention that saved a life that was unlikely to have survived previously.  While this is incredible, we were attracted to investing in the company because the CO2 laser operates with virtually no collateral damage, making it the perfect scalpel for operating near sensitive tissue (think the brain, the prostate, the uterus, the ear, the eye, etc.).  Also, the newfound ability to bend this laser enables its use as a minimally invasive surgical method.  These two features together reduce the trauma from a procedure and improve the surgical efficiency, producing better outcomes (higher qualilty) and better productivity (reduced hospital costs).

In this case, it just so happens that OmniGuide’s technology is also groundbreaking in and of itself.  Yoel figured out how to bend a CO2 laser without energy loss, something that was thought to be near impossible, and then manufacture his perfect mirror to a size that produces a 10s micron laser profile, enabling its use in minimally invasive surgery.

For more on OmniGuide, click here.  Awesome.

May 15, 2010

Psilos’ Annual Outlook on Healthcare Venture Capital Investing

Last week my firm Psilos Group released its collective annual outlook on the state of healthcare venture investing.  The Outlook serves as our public statement outlining areas of opportunity in IT-Enabled Healthcare Services, Healthcare Information Technology and Medical Devices, Diagnostics and Instrumentation.

 

Psilos Group Calls Health Reform Legislation
“An Opportunity for an Industrial Revolution in Healthcare”

Quality and Cost Innovations Critical to Addressing Healthcare Inflation;
Premier Healthcare VC Firm Outlines Six Opportunities to Drive Meaningful Change

NEW YORK, May 12, 2010 – It is time for an “industrial revolution” to change the underlying costs and structural inefficiencies in the healthcare industry, according to a new report issued today by healthcare venture capital firm Psilos Group (www.psilos.com), and the recently enacted Patient Protection and Affordable Care Act (PPACA) affords healthcare entrepreneurs and investors an unusual opportunity to respond with innovation.

The report addresses the challenge of adding 32 million newly insured Americans to the “bad economics” of U.S. healthcare, but suggests that reform can “catalyze healthcare innovation that improves quality and reduces cost, if only investors, policy-makers and companies rise to the challenge before us.” The report calls for accelerated development and adoption of innovative solutions and technologies that will deliver real value for each healthcare dollar spent by the federal and state governments, U.S. corporations and individual healthcare consumers.

“We cannot simply go on investing in incremental changes to approaches that have failed repeatedly,” said Dr. Albert Waxman, Psilos’ senior managing member and CEO. “If done well, new medical technologies and disruptive models of delivering healthcare services can be the foundation for new businesses based on 21st century information technology.

“A real healthcare industrial revolution would go a long way towards eliminating the 30 percent waste and error in our current system, improving national competitiveness and creating new products for global exportation.  The return for the U.S. will be a vibrant healthcare economy that enhances the public good and private enterprise at the same time.”

As part of its second “Annual Outlook” on healthcare economics and innovation, Psilos notes that failure to establish a culture of innovation in healthcare delivery will lead an existing $2.5 trillion industry to continue to inflate to over $4.5 trillion by 2019, as projected by the Center for Medicaid and Medicare Services (CMS). Psilos highlighted six specific areas where innovation can bring about near-term, high-impact and high-return changes to improve the U.S. healthcare system. These include:

  1. An efficient system to prevent and manage chronic illness, which accounts for 78 percent of all our healthcare expenses. Technology can help improve care management to prevent costly procedures and to incentivize consumers to live healthier life styles.
  2. Error reduction in inpatient, ambulatory, and post-acute care. These errors are most often the result of poor information flow and imperfect human behavior. Innovative solutions to help care administrators avoid costly and tragic mistakes have begun to emerge and have demonstrated positive clinical outcomes.
  3. New technology and benefit plans to deal with the diabetes epidemic, which costs an estimated $170 billion annually in the U.S. Improved diagnostic solutions and healthcare management programs will go a long way in controlling the spiraling costs.
  4. New medical technology to enable earlier, better diagnosis and thus earlier intervention with high-cost, high-morbidity diseases. Continued innovation around technologies that help identify diseases earlier will have a vital financial and clinical impact.
  5. Medical devices to foster less invasive and more effective surgical interventions. New minimally invasive surgical technologies will enable care givers and hospitals to provide treatment options that reduce inpatient use and result in fewer negative side effects and better clinical outcome.
  6. Expanded adoption and investment activity in healthcare information technology. This includes venture investments to recognize and sponsor entrepreneurs committed to developing modern solutions that bring about the much-needed innovations to put the U.S. healthcare economy on track for a successful future.

For more details, please review the Psilos Annual Outlook at: www.psilos.com/outlook.

May 11, 2010

The Coming Age of (Health Insurance) Exchanges

Bryce Williams, CEO of Extend Health, a Psilos portfolio company, has written an interesting piece for SHRM (Society for Resource Management) that explains the primary benefit of a heath insurance Exchange, namely its ability to allow individual purchasers of health insurance to buy exactly what they want in a competitive market (buzz words to keep in mind: personalization, choice, competition, consumerism, to name a few).  Bryce’s company Extend Health demonstrates these benefits to its customers today, every day, and has been doing so for several years now, even before the enactment of healthcare reform, first in Massachusetts’ and now nationally, where in both cases the role of the Exchange takes prominence as a tool for expanding health insurance coverage.

So how does an Exchange work?

In the case of Extend Health, the users of its private Exchange are Medicare beneficiaries (aged at least 65 years) that receive supplemental health insurance from their former employers as a negotiated retiree benefit.   The Exchange enables these retirees to purchase an individual Medicare Advantage Plan (MA for short, which is similar to a HMO or PPO for Medicare) or Medicare Supplemental Insurance (Med Sup or MediGap for short, and it is what it sounds like, supplemental insurance that covers many of the coverage gaps in the standard Medicare package).  Today, both MA and Med Sup products are sold to individuals by most major national and regional health insurance carriers (United Healthcare, Blue Cross / Blue Shield, Aetna, et al).  Extend Health works with the former employers to establish individual accounts on behalf of each retiree, usually a Health Reimbursement Arrangement (HRA) or something similar.  The former employer funds the individual HRA(s) in lieu of purchasing a group health policy from one insurance carrier that covers all of the retirees (typically referred to as a Group Plan).  The retiree then uses the money funded into the HRA to purchase any MA or Med Sup policy offered on Extend Health’s Exchange (as of this writing Extend Health offers over 1900 policies from over 60 insurance carriers).

Operationally, and from a consumer’s perspective, Extend Health’s Exchange works the way most non-healthcare related consumer purchases work, which, oddly, makes it very unique in the healthcare world.   Retirees can access information about all available plans online at Extend Health’s website.  While the website is enabled for transactions, almost all of Extend Health’s customers make telephonic appointments with a licensed benefit advisor.  During these appointments, which usually last about 30-45 minutes, retirees review their budget and healthcare needs with the advisor and ultimately select and purchase health insurance coverage.

Today Extend Health has over 45 corporate customers (a/k/a the former employers) and has helped more than 250,000 retirees compare and choose a MA or Med Sup plan that meets their needs.  After this much experience the evidence is clear that the aggregate cost of individual insurance purchases is significantly less than the cost of a Group Plan, in some cases up to a 35% reduction in cost to the former employer and $500 per year for the individual retiree.

In his article Bryce sites the following as among the reasons for the savings:

  1. Consumerism and Personalization:  Retirees purchase the precise insurance benefit that they want.  The money in the HRA is theirs to spend on healthcare and as such they naturally spend it wisely and avoid waste.
  2. Geographical Efficiencies and Competition:  As an example, individuals living in Florida do not require primary provider networks in other states, and as such it is cheaper to buy local health insurance individually than through a national or multi-regional Group Plan.  Further, local competition for the individual business drives pricing rather than Group Plan underwriting by a national carrier.
  3. Guaranteed-Issue:  With few exceptions, MA and Med Sup plans are “guaranteed-issue” coverage, which means that no one who is eligible for Medicare can be denied coverage, eliminating an economic advantage of the Group Plan, namely the underwriting of large groups to enable expansion of coverage to high-risk individuals.

Psilos’ investment in Extend Health demonstrates our belief in the economics of Exchanges and the power of a true consumer, and I expect that over time Exchanges will evolve into one of the primary ways people access health insurance in the US.  In the market for employer funded retiree health, the Group Plan no longer makes economic sense, and today the Exchange model is facilitated by the Guaranteed-Issue structure of the Medicare market.  As 2014 approaches and the insurance market for people under the age of 65 begins to trend toward a Guaranteed-Issue structure because of the deployment of risk-pools and the prohibition on denying coverage for “pre-existing conditions” (as outlined in PPACA), I expect Exchange models to offer a viable option for corporations to provide insurance to their active employees.

We know that the Exchange model empowers the consumer and drives greater competition.  As such, I expect it to serve as a force to inspire the innovation in healthcare delivery necessary to reduce healthcare inflation and promote greater service quality.  Over time, I believe its practical and effective economics will become irresistible to a society desperate to reduce the total cost of healthcare.

April 15, 2010

I Want My Mobile Healthcare (Part 1 of many)

I have long avoided investment in mobile healthcare applications, but I am afraid the time has come to reconsider.   

from the Economist, "Wireless Health Care"

For a long time my pessimism has been propped up by the debacle of e-prescribing (now referred to as mobile Rx or mRx).  In the venture business sometimes you show your chops by what you avoid.  From 1999-2003 we looked at almost every opportunity in the mRx space, but ultimately never pulled the trigger on an investment.   

In that period of time huge amounts of capital went into at least 15 mRx start-ups, with the 5 best-known companies raising over $170 million in venture capital (recall names like: Parkstone, ePhysician, iScribe, and Pocketscript), with only ePocrates (VC-backed) and Allscripts (public company) emerging as survivors, but hardly successes with a pervasive mRx product.   

The idea of mRx is simple.  Doctors prescribe medications using a mobile device.  The mobile device runs a series of applications that confirms the appropriateness of the drug and the dosage and checks for any drug-drug interaction problems for the patient.  If all clears, it sends the script to the pharmacy for fulfillment.  The patient shows up, picks up the initial script, and down the road the doctor can be prompted for renewals delivered by mail order.  The benefits are:  (1) less prescribing errors – which saves money on waste and the potential bad outcomes related to improper medicine and (2) time efficiency for the doctor, the patient and the pharmacy.   

In 1998 mRx ran on PDAs (Palm Pilots – remember those) and today it runs on smart phones.  The application is simple at the mobile device, but super-complicated as an interface.  The number of multi-system interactions necessary to accomplish a transaction are fantastic in number.  We stayed away from the opportunity for precisely 2 reasons:  (1) PDAs were just not that pervasive in the medical community, and frankly the wi-fi capability felt clunky and slow and (2) we just could not quantify the cost of building the systems necessary to interface with the pharmacy, PBM (pharmacy benefit management), Health Plan and provider IT systems, almost all of which were not web-services enabled.

But the times are changing…

Mary Meeker (equity research analyst at Morgan Stanley), predicts that mobile Internet usage is growing so fast it is bound to surpass desktop Internet usage by 2013-14 (chart below).    

 

(For access to all of Ms. Meeker’s presentation, which is very interesting, click here)

Fred Wilson, a leading edge IT VC and Twitter investor, blogged earlier this week about the ascension of social networking platforms like Facebook and Twitter over general email as the leading communication platforms on the Internet (again, see Morgan Stanley chart below).    

Pithiness and convenience drive much of Twitter’s appeal and its seems we are beginning to see a training ground for mHC emerge, where short, precise interactions will serve as the basis for successful applications, particularly in the area of remote patient monitoring, which I see as one of the more interesting areas of mHC from a return on investment standpoint.   

With the mobile market now beginning to make sense, the question turns to whether the HCIT infrastructure is ready for mHC.  Generally the answer is probably no, but recent trends, including the government’s proposed HC reforms, seem to be on track for stimulating changes in this area.

As we all know there are numerous conflicting issues and confusion around the HC business, including the now imminent expansion of the Department of Health and Human Services (HHS) as the next super-big Washington bureaucracy.  With a little help from consultants and attorneys I am in the process of reading and analyzing our new healthcare law (a/k/a  HC Reform which includes, for our purposes here, the Patient Protection and Affordable Care Act -PPACA or HR 3590 – plus the Health Care and Education Reconciliation Act – HCERA or HR 4872 plus the Health Information Technology for Economic and Clinical Health Act – HITECH ), and I promise to begin publishing my cheat sheets soon.  But so far it seems that HC Reform has the potential to revolutionize HC IT as we know it, an attribute that may countervail the financial crisis spawned by its passage.

Many a future post will deal with the details of this idea (revolution, that is), but generally I believe that HHS reimbursement policies, which under HC Reform are expected to revolve around proper care coordination among primary care, specialist and hospital-based providers, will demand smart applications running accross seemless connectivity among HCIT systems.  This means that existing legacy system configurations will not survive the transition to HC reform because they will need to be replaced with Services-oriented architectures (SOA) that enable low-cost web-services and data transfer.  Once this transition gains steam (and it is already happening at the payer level of the value chain), mHC will be set to explode. 

Please note that when I reference mHC I am really not focused on the consumer market for mHC applications (these are cute and I will talk about them soon).  I am interested in applications that link patients, payers and providers in a way that optimizes HC economics and outcomes.   

In upcoming posts on this subject I will begin to explore specific mHC applications, among them remote monitoring of the chronically ill and care coordination among providers, and whether the timing is right for venture investors.

April 7, 2010

More Self-interest in MA Healthcare

Filed under: Healthcare — Steve Krupa @ 5:31 pm
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Mr. Adam Smith (again)

On 4/4/2010 I blogged about insurance cycling in Massachusetts.  News reports state that some MA consumers are gaming the system  by purchasing health insurance prior to getting an elective procedure only to drop it after receiving the service.  For many consumers, especially those without chronic illness, it is cheaper to pay the $93/month penalty than a $400/month insurance premium, unless of course the cost of the services you need exceed the short-term cost of  health insurance.  This behavior, which  is allowed by insurance regulations in MA, is economically rational (albeit mean and not for the good of all).  Widespread experience of this type of behavior would certainly increase the individual cost of health insurance for those that maintain continuous coverage. 

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Today, 4/7/2010, we have a cadre of Massachusetts insurance companies, led by Blue Cross Blue Shield of MA, suing the state’s department of insurance (DOI) for refusing to approve proposed premium increases, claiming, among other things, that they (the cadre) stand to experience substantial losses if the rate increases are not approved.  Apparently the MA DOI has rejected 235 of 274 applications for premium increases, demonstrating their intention to impose a cap on premium increases.  Traditionally the primary role of the DOI is to protect insurance consumers by monitoring the financial solvency of insurance companies. 

In MA healthcare is now 100% under the purview of politics, with some reports suggesting that MA’s healthcare program is significantly over original budget estimates (did I mention that the proposed rate increases range from 8-32%?).  If you are a politician, bureaucrat or consumer in MA, rate caps initially appear to be the perfect solution to rising medical costs. 

However, it is unlikely that insurers will stay in a market where they are certain to lose money, a reality I am certain the MA bureaucrats (read: DOI) understand.  If the insurers vacate certain markets where will consumers go for their health insurance?  If this situation were to play out to its extreme and insurers were forced to abandon certain markets would this be viewed as a failure of the bureaucracy, the elected politicians or the private insurance system? 

If you were an elected politician would you expect to remain in office if the private insurance system failed under your watch? 

A failed private insurance system would certainly boost the argument for a “public option,” a euphemism for “an insurer of last resort” and a potential transitional step toward a single-payer HC system, which is a rational bureaucratic objective.

April 5, 2010

The Genius of the Healthcare Consumer

On 3/23/2010 in my post, A First Reaction to Our New Healthcare Reform Law,  I wrote that an engaged and accountable consumer would be a necessary element for universal coverage to work. 

Of course, consumers are always “engaged and accountable,” most notably to themselves, and so, I went on to say parenthetically that HC should not be perceived as “free” or a “right,” but as a cost/liability managed by the collective diligence of individual beneficiaries (and I point out here that often some of my better points end up inside parenthesis).

So what did I mean by this?  Well, check out what is claimed to be going on in Massachusetts, as reported by today’s Boston Globe in a piece titled, Short-term Customers Boosting Health Costs:

“Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage…  [According to Blue Cross Blue Shield of Massachusetts] the typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month…  The problem is, it is less expensive for consumers — especially young and healthy people — to pay the monthly penalty of as much as $93 imposed under the state law for not having insurance, than to buy the coverage year-round.”

Here we again have individuals acting in their self-interest, something we have been able to predict perfectly since the origins of economic theory.  The Bay State healthcare law contains perverse incentives and consumers are exploiting them to the detriment of the collective goal.  No doubt, this behavior will be a cause for premiums to rise unless incentives are altered.

Ideally, self-interested consumer behavior, which is a given in all cases, should be leveraged to improve quality and lower cost in HC.  This requires that all individual consumers have a direct economic stake in HC costs.  That is not the case in HC today and it will definitely not be the case under our new reform law, which contains the same moral hazard problems as the Massachusetts law.

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