Now that the economic stimulus package has been negotiated and signed, healthcare is on deck. Not just for Congressional action, but also for the biggest wave of reform the industry has ever experienced. It *could* be a very good thing – not only for patients, providers and payers, but also for innovators and investors who contribute to the “new healthcare economy” that will emerge.
Everyone knows “change” will have to find its way into the hospitals, clinics, labs, doctor’s offices and insurance providers that make up our current healthcare “system” in America. The rate of healthcare inflation – which is currently twice the core inflation rate – can clearly no longer be supported, and changes are required to address the explosion in America’s aging population over the next two decades. Experts estimate that roughly one third of all medical care delivered in the United States is wasted or in error, suggesting there is ample room for improvement.
In spite of the bleak near-term indicators, we predict that the United States is poised to establish a new healthcare economy. Starting in 2009, we expect to see a ten-year transformational cycle that will re-define many dynamics of the American healthcare system. The new healthcare economy will depend on innovation to simultaneously drive down costs and improve quality of care – core criteria cited by President Obama in his inaugural address. It will also require better alignment of economic incentives across payers, providers and patients.
As long-term healthcare investors, we are optimistic about the incredible opportunities and growth ahead in the new healthcare economy. At the same time, we can’t ignore the shocking contrast in priorities between President Obama’s healthcare plans, which call for billions of dollars in funding to improve healthcare IT and services, and the American venture capital industry’s traditional lack of investment in healthcare innovation.
According to 2008 data released by the National Venture Capital Association, just $195 million of the $28.3 billion invested by venture firms in 2008 went to healthcare services – less than one percent. Similarly, Dow Jones VentureSource shows only $354 million invested in healthcare IT and $357 million for healthcare services in 2008, accounting for less than three percent of all venture investing. Unfortunately, this lack of investment in a critical area of our economy is not a new phenomenon. In fact, NVCA data shows healthcare services in 2008 had fewer deals and dollars invested than any of the past 10 years, and VentureSource shows declining funds for healthcare IT for the last six years.
To address this “innovation gap,” we are urging the venture capital industry to step up “health tech” funding similar to the way it has stepped up “clean tech” funding, which grew 52% in 2008 to reach $4.1 billion. Specifically, we challenge the industry to expand its annual investment rates to more than $1 billion in healthcare services, $1 billion in healthcare IT, and $3.6 billion in medical technologies (including both medical devices and diagnostics).
Combined, those “health tech” levels would represent 20% of the current annual venture funding rate, well above today’s 13% to 14% (which includes medical devices, healthcare IT and healthcare services, but not biotechnology which we include with pharmaceuticals as a separate category of “life sciences”). Since healthcare currently represents 16.2% of U.S. GDP and is expected to grow to 19.5% of GDP by 2017, this increased venture investment would help over-correct the current shortfall and give the new healthcare economy a needed “booster shot” of innovation.
This venture-driven investment will be critical to spur development of the new healthcare economy. As with most mature industries, innovation will be driven by smaller companies and private ventures, which can afford to make riskier long-term investments, while larger healthcare providers and payers focus primarily on preserving market share and navigating reforms. Longer term, we predict those innovations will be adopted by mainstream providers and payers as the only way to achieve the dual but consistent goals of cost reductions and quality improvements.
The bottom line: This is an exciting time for all of us to fix what ails the American healthcare economy. Reforms should naturally reward innovators and investors who apply methods of achieving value and efficiency, as we’ve seen succeed in other industries. In our case, we particularly hope venture investors see President Obama’s plans as a wake-up call to get serious about the economics of healthcare, not just the science of biotech. The risk and reward dynamics are tailor-made for entrepreneurs, and our nation needs the venture capital industry as partners to fill the innovation gap.
Dr. Albert S. Waxman PhD is CEO of the Psilos Group, a venture capital firm with a focus on providing growth capital to companies operating in the healthcare economy. Before founding Psilos, Dr Waxman served as Chairman and CEO of American Biodyne and Medco Behaviorial Care for nine years. In addition to his responsibilities with Psilos, Dr. Waxman currently serves as Commissioner for Healthcare for the state of New Mexico.
This is a great article and everyone has allot of interested things to say about it as well.
thats right. private insurance should reduce the deductibles or reduce the premiums. its very difficut to have a health insurance.
medical billing training
I wonder how often effective innovations go unnoticed or under utilized. The title, ‘Innovation + Economics’ immediately brought Carepath to mind. Carepath has developed a system that increases positive outcome in cases of Traumatic Brain Injury which has been successfully implemented in one or two states. I would think with the possible reduction in Medicaid and other health care costs it would be part of national healthcare reform discussions
It is surprising to me that when we talk about innovations in healthcare, that we are not talking about innovations in how we deliver healthcare, how we manage our healthcare organizations. Having worked for many years in a large healthcare insurance organization, I know first hand that they pride themselves on never being on the front edges of technology. They call it the bleeding edge. But innovation isn’t done from the creamy center of the oreo cookie. And we need real change and innovation in how we deliver healthcare in this country. And yes, it must happen from the top down. Our CEO’s need to be innovative – and if they aren’t (which most aren’t because we reward defend and extend mentality) we need to replace them with ones that are. The change is here – the market is shifting – and Healthcare Organizations need to choose to be Apple or Sears. I frequently read a blog written by Adam Hartung for Forbes and this weeks entry is particularly apropos. It is titled Why Steve Jobs Couldn’t Find a Job Today (http://bit.ly/hltfhL) and talks specifically and eloquently as to what is wrong with the hiring of CEO’s in our companies. And begs the question – do we really want innovation or do we really just want to talk about innovation and reap the benefits of the word without doing the actual work and making the difficult decisions.
This is a little out-dated, but didn’t Obama state in his State of the Union Address he is going to get rid of the many loop-holes in the health care industry and tax fields?
Hi, i think that i noticed you visited my weblog thus i came to return the choose?.I am attempting to in finding things to enhance my web site!I suppose its adequate to make use of a few of your concepts!!