The transformations in healthcare have gotten the attention of many healthcare investors, including private equity firm NaviMed Capital. It closed a $110 million healthcare fund last month. I recently spoke with Managing Director Bijan Salehizadeh about its investment priorities and how he regards the digital health sector.
The firm’s mandate is to do small buyout deals of profitable companies in healthcare.
Among the areas the firm likes for investments is the service side of behavioral health. Spending has gone way up on behavioral health. The thing is though, if you strip medications out of the equation, what we are spending on therapy is way lower than it was 30-40 years ago, Salehizadeh notes. The supply of hospital beds and therapists for these patients is low.
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“Managing behavioral health co-morbidities is key to chronic conditions and yet our system is not oriented towards doing that. Our view for the fund is we would want to start on delivery of care and back teams that know how to deploy IT efficiently…It’s complex to manage behavioral health. You have to start with the delivery of care to make those handoffs more efficient. That is the model we are focused on.”
Prior to co-founding NaviMed, Salehizadeh was a general partner at Highland Capital Partners, where he focused on growth stage healthcare investments. He had also worked for several years at Medtronic.
Our conversations turned to a broader look at healthcare investment by hospitals in health IT.
Salehizadeh likens the effect of the government’s move to pass ACA and the HITEC Act to the Telecom Act of 1996. It was the first significant reform of the sector in more than 60 years — it opened up the market for anyone to get into the communications business and compete.
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The HITECH Act in particular has spurred hospital systems to invest millions in health IT. Health systems tend to invest in their health IT vendors because they already have a relationship with them.
Hospitals are probably the most conservative buyers of IT and their default stance tends to be no, Salehizadeh observed. He is excited by the potential for increasing interoperability.
The availability of capital has encouraged the launch of more companies and in the past few years it has led to a diverse landscape of health IT companies in different stages of growth. But valuation can be particularly tricky in the healthcare sector. Salehizadeh points out that you can’t overestimate the rate of adoption in healthcare. “If you overestimate the rate of adoption, financing gets ahead of reality and there is a come to Jesus moment.”
Talking about digital health startups, he notes there are two rules when it comes to what interests hospitals: companies that deliver technology efficiently, through a channel such as large vendor sales reps or a more high priced, customized approach. “A lot of startups are somewhere in the middle and that’s a scary place to be.”
He added: “There is a very robust marketplace of products [for] EMRs. I think we are in the middle innings of seeing that marletplace develop.”
Washington, DC is not widely seen as a healthcare town, much to the chagrin of Salehizadeh. NaviMed is one of a handful of private equity and venture capital firms in the nation’s capital. Despite the number of people who work for the NIH, Veterans Administration, teaching hospitals, research institutes in the DC-Maryland-Virginia beltway, relatively few venture and private equity firms are based there. The growth of incubators and accelerators in the region such as 1776, which has built an international profile as it continues to grow by acquiring shared work spaces, is also helping to change that. A CB Insights report showed that DC has been the scene of some big healthcare deals.
Photo: Flickr user Simone Hudson