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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.

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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 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 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.

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