I had the pleasure of attending a ’salon’ type dinner hosted by Xconomy and its chief correspondent and San Francisco editor Wade Roush recently (and graciously sponsored by Silicon Valley Bank and Alexandria Real Estate Equities). The dinner included about 24 people, all of whom in some way had a connection to the emerging field of digital health. In addition to the sponsors, the group featured many CEOs of newly minted companies, some highly experienced and at their second or third rodeo, and some very new to the big desk in the corner. Also present were a few industry thought leader and advisor types, including representatives of Rock Health and Singularity University, as well as a few venture investors, just to be sure all the air would get sucked out of the room. Because the dinner was meant to be “off the record,” I have not attributed points below to specific individuals.
The theme of the dinner was “The Quest to Disrupt Healthcare,” and at the beginning of dinner we started around the room to introduce ourselves and to answer the question posed by Wade, which was, “What is the single largest headache you face in your business that, if solved, would lead to exponential growth?” It was a very thought-provoking question. I was struck by the fact that while other topics came up, the one that rang out loud and clear was this: the healthcare industry, particularly that defined by traditional institutions such as payers and providers, is just not interested in or committed to innovation.
It was an interesting perspective to hear from entrepreneurs, who have bet the entire farm in many cases that their newfangled idea will change healthcare, make them rich, and/or make them famous. (FYI: venture capitalists always prefer the ones who want to be rich over those who want to be famous — it’s all about alignment of incentives.) In fact, one attendee kicked off the conversation by saying she had recently attended a big conference on innovation that had one session about innovative disruption in healthcare and that no one showed up for it. Instead attendees chose sessions about gaming and social media while the crickets chirped uninterrupted in the healthcare room. Another dinner mate characterized this issue from a different perspective, talking about how the great minds in Silicon Valley need to be focused on changing healthcare rather than on stealing attention by building things like Twitter and games. Or, to say it in a way people will understand, #getonboardthehealthcareinnovationtrainpeopleorwearedoomed.
Payers, providers are too risk averse
There was a lot of talk about how the FDA is limiting innovation, or at least potentially so, through regulatory foot-dragging that makes it far more costly and time-consuming to get products to customers, but that wasn’t the crux of the concern (and some of us didn’t really agree that was a significant limiting factor in digital health at all). Rather the focus of the conversation was how traditional buyers of healthcare solutions talk the innovation talk, but when it comes right down to it, are not interested in paying for it. One health IT CEO summed it up by saying that the healthcare field is afraid of innovation, resulting in impossibly long sales cycles and chief information officers who are risk-averse because they have had a few bad experiences. There was a discussion about how payers and provider systems in particular will dip their toes in the water with small innovation pilots, but in the end rarely commit to rolling out big new ideas, leaving their co-pilots, the entrepreneurs, high and dry and drifting at sea Amelia Earhart-style.
Extending that thought, one of the field’s thought leaders argued that an obsession over who pays and who reimburses for healthcare solutions is limiting the imaginations of entrepreneurs.
“You say you got a real solutionWell, you knowWe’d all love to see the planYou ask me for a contributionWell, you knowWe’re doing what we can” — The Beatles
But investors are too
Inevitably this discussion about how little true innovation is valued in healthcare led to a corollary discussion about how this manifests itself in a lack of funding for early stage companies that are bringing healthcare innovations to the fore. The entrepreneurs at the dinner were almost universally frustrated in their quest to find conventional sources of financial backing for their ideas. Many of them described a venture capital field that has mirrored the risk aversion of the buyer market, leaving healthcare innovators to max out their credit cards and do damn near everything short of selling pencils on a street corner to find ways to finance their ideas for revolutionizing the universally acknowledged mess of a healthcare system.
Those investors among us who caught the arrows slung by our dinner companions described the conundrum that we face because our own backers, the community of institutional limited partners, is wholly unimpressed with healthcare returns and as a result is uninterested in shifting money away from finding the next Instagram. It is classic trickle-down economics: it’s a struggle for VCs to raise investment capital to fund healthcare innovation, so there isn’t much to hand out to those seeking it to deliver healthcare innovation. The good news is that we are starting to see the emergence of non-traditional limited partners (e.g., corporations with a strategic interest and socially-oriented non-profit foundations) investing with a combined business and social mission that is squarely focused on improving the healthcare system. But the volume of capital they bring to the market is no where near enough to finance the changes in the system we all know we need. While there are still a few healthcare-focused VCs, those targeting seed and early stage investments are a bit like white tigers’a genetic mutation known to exist in nature but rarely seen with the human eye.
It is a worrisome state of affairs, in my opinion, to breed a generation of highly frustrated entrepreneurs who ultimately throw up their hands to go build photo sharing websites, or worse, turn to other countries more eager to fund the healthcare innovation that should be Made in the USA. We are already seeing evidence that innovation leadership is moving offshore to India and China and elsewhere in the medical device industry as similar issues surfaced in that sector. We had better be careful or healthcare IT will follow behind it, leaving us with Flintstones-era technology and technology-enabled (disabled?) services while we watch Medicare lapse into insolvency, taking the rest of our economy with it.
Revolutionizing the U.S. healthcare system is truly a matter of national economic security. Nibbling at the edges simply isn’t going to cut it. We need to fundamentally and profoundly change the way our citizens care for themselves by helping them have access to healthy food choices and preventative health products and services, while ensuring that those who are sick get treated in a way that delivers true value, both in terms of quality and cost.
We don’t really have the time for incrementalism. Medicare hits the insolvency brick wall around 2024 and it is estimated that our current trajectory will bring the U.S. from our current $2.8 trillion national healthcare spend to $4.8 trillion by 2020’only slightly more than the likely M&A purchase price of the next Instagram.
Note: this post also appeared in Xconomy.
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By Lisa Suennen Psilos Group
Lisa Suennen is a founder and Managing Member of Psilos Group, a healthcare-focused venture capital and growth equity investment firm. She also writes a popular blog on healthcare and investing issues which can be found at http://venturevalkyrie.com.Visit website | More posts by Author
Sometimes we forget that investors, providers and payers in the healthcare system are not charged with the responsibility of changing anything; instead these actors are concerned with maxing out their own (mostly short term) goals. As a CEO of a venture searching for funding, my frustrations with our current investment environment, FDA and risk adverse Strategics lead me to occasionally forget that these groups are acting true to type and in line with their incentives. We cannot separate our economic situation and national policies from our medical products economy. The Affordable Care Act was a missed opportunity in that regard. We will have another opportunity coming up in November.
Right on. Disruptive health IT companies face a lack of funding sources and challenging enterprise sales cycles. One of these challenges would be manageable but both make it very tough for such companies to survive long enough to get the traction and customers required to sustain them. I was just told by someone at an integrated health system that the national health IT board decided not to look at solutions from startups but instead would look to Intel and others to supply innovative solutions. This seems like a strange way to embrace innovation.
Another great piece Lisa. However I'm not sure its sufficient to help citizens have access to healthy food choices and preventative health products and services. That is obviously important but probably the easier part. The hard part is getting them to care and to actually engage in more financially and physiologically responsible behavior. The companies that can change behavior of the average American on a sustained basis will be the disruptive home runs.