Krupa's Back Pages

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.

Advertisements

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.

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 (dot.com, 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 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!).

« Previous Page

Blog at WordPress.com.