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 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)

and

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.

February 25, 2010

Follow the Money – Re: Healthcare Reform

Approximately 47 million Americans are uninsured.

 The average individual health insurance premium is between $300-$400 per month, or $3600 – $4800 per year.

(Multiplying)  Today it would cost $188-$225 billion to provide health insurance to all of the uninsured.

 This cost is currently rising between 8-10% per year.

Generally tax revenue growth is proportional to GDP growth.

How can our government finance an additional $200 billion per year growing at 8+% per year when historically GDP growth has been well below 8+%. 

Can they keep raising taxes?

Most reasonable people would say no, we cannot raise tax rates year after year (or perhaps even now for that matter).

To accomplish universal coverage we need to discover enough healthcare initiatives that together result in reducing healthcare inflation to the level of inflation of the economy in general (about 0-4% over the last 10 years or so).

If we can achieve this goal, then we can realistically and responsibly begin to create proposals for getting everyone insured.

The two biggest areas of potential cost savings are: (1) waste and redundancy (estimated at a total cost of $700 billion/year) and (2) the expansion of the prevalence and cost of chronic illness (about 70% of the $2.4 trillion healthcare economy, or $1.7 trillion per year).

Initial approaches to healthcare reform should focus on measuring these costs and implementing initiatives to reduce them over time.  Many of the technologies and proven approaches  to tackling these issues are currently available, but are going largely ignored by lawmakers as they craft reform.  Many more are in development and will appear over the next 5-10 years.  Many of them cross my desk as potential investment opportunities everyday.

Look for insights on modern and novel approaches to improving healthcare quality and reducing costs as this blog develops.

Blog at WordPress.com.