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.