Health IT: Is the U.S. in the middle of a bubble?

With stories earlier this year of outrageous valuations surrounding information technology companies like Groupon and Facebook, there’s been plenty of hand-wringing about whether overzealous investors have created a “tech bubble.”

So it’s only natural to wonder whether that bubble has spread to health information technology, particularly given all the hype and promise surrounding electronic health records (EHRs) in recent years. Of course, it’s virtually impossible to definitively say whether a health IT bubble has arrived — or whether one ever will — but some investors at least acknowledge that it’s possible we’re already there.

Eve Kurtin, managing director with Pacific Venture Group and a long-time healthcare investor, said she didn’t know whether a health IT bubble has started, but said investors and strategic acquirers are at least “in danger” of creating one.

“When you’re in the bubble, you don’t know you’re in the bubble,” Kurtin said.

Similarly, Lisa Suennen, co-founder of Psilos Group and also a veteran healthcare investor, is leery of a health IT bubble, but stopped short of saying we’re in the midst of one. “It depends on where you stand in the health IT picture,” she said. “In some measures, it’s a little frothy, or getting there.”

There are several pieces of evidence and anecdotal trends that suggest the possibility of a health IT bubble forming — either now or in the coming years — and that’s something that at the very least should be on investors’ minds as they review dealflow. “All of the signs are there that we could be in the bubble or the beginning of a bubble,” Kurtin said.

Factors that could contribute to the formation of a health IT bubble include:

• A $27 billion federal infusion of cash to subsidize the purchase of EHRs by doctors and hospitals. “You see that kind of money and it encourages everybody to get in,” Kurtin said.
• The continuing rise of the mobile healthcare movement, and more broadly, the ongoing adoption of smartphones, which hold the potential to put millions of health apps in consumers’ hands.
• A rapid increase in the amount of cash venture investors are pouring into the sector. Venture investment in health IT rose about 20 percent to $460 million last year, according to Dow Jones VentureSource. Expect a similar growth rate for 2011.
• A migration to health IT from drug-and-device investors who are spooked by the prospect of regulatory uncertainty. “You definitely see investors pivoting away from those sectors and looking at the health IT sector as being more attractive,” said Roy Ziegler, venture partner with Chrysalis Ventures.
• A hot market for acquisitions of HIT firms by strategic acquirers, such as health insurers or service providers. Examples include Aetna’s $500 million purchase of health information exchange company Medicity, plus UnitedHealth’s services subsidiary Optum has made several acquisitions over the last year or so, including Connextions, Picis and Axolotl.
• Large venture rounds to HIT firms, including $50 million for doctor-finding service ZocDoc, $60 million for healthcare-price-comparison tool Castlight Health and a reported $30 million to mobile patient monitoring company AirStrip Technologies.

In spite of those factors, it’s still anybody’s guess whether we’re actually in a health IT bubble, absent a glimpse at some key company valuations. Ziegler acknowledged some HIT valuations have gotten out of hand, but said those are limited to “pockets” of the market and he doesn’t see “systemic” evidence of a health IT bubble.

Regardless of whether there is much froth in health IT, Ziegler said the market’s increasing attractiveness to new investors can be a source of pain to investors who’ve been in the market for years.

“It can be frustrating to see companies you like being bid up by people who haven’t been as active in the sector as we have, but sometimes those companies will come back to us,” he said.

Photo from flickr user Roomic Cube