Government as an Engine for Innovation

I’ve been thinking a great deal about the newly formed Center for Medicare and Medicaid Innovation. (CMI). This entity was established as a result of the Affordable Care Act (the new healthcare reform legislation) and its purpose is to “research, develop, test and expand innovative payment and service delivery models that will improve the quality and reduce the costs of care for” patients covered by CMS-related programs.  The legislation gives this entity over $10 billion dollars initially and broad authority to figure out new ways of doing things better and differently than before.   What is great about CMI is that they have the authority to run their programs much more like a business would without many historical governmental constraints.  That’s great news for innovation, which is sorely needed in the U.S. healthcare system.

Among the key objectives that the administration has discussed is how to transition the collective mindset from one of healthcare to one of health.  In other words, if a person is healthy, they do not need health CARE. This is a very important distinction; it puts the emphasis on prevention and wellness as opposed to what you do when somebody is already sick.  In order to affect such a transition, there must be an emphasis on innovation to change the way we have traditionally looked at the healthcare world.

This is an interesting challenge and one that requires a great deal of thoughtfulness in how to approach the universe of innovation opportunities. As venture capitalists, I and my colleagues vet, select and monitor deals and specifically focus on how we pick winners and avoid losers.  It’s a little like being asked to handicap who’s going to win the World Series, but then again, that is pretty much our job as VCs: to act like Billy Beane and pick those most likely to succeed in a capital efficient way based on detailed analysis of trends and meaningful data, not solely based on experience.

For those of you who don’t know him, Beane is the General Manager of the Oakland A’s baseball team and is known as the guy who introduced “sabermetrics” to baseball, which is the science of using detailed analysis of objective player statistics, instead of relying on conventional wisdom/traditional scouting to identify the best players. He was famous for being able to identify nascent baseball superstars who he could hire very cheaply by comparison because they didn’t fit the traditional mode. Beane was profiled in the truly awesome book, Moneyball, by Michael Lewis, in which Beane is famously described for drafting a short, fat catcher who nobody wanted based on his statistically-proven ability to draw walks.

Beane’s is in many ways a great model for venture capital in healthcare, in particular, because his goal is to find the best value in baseball—in other words, the highest quality players who could produce a winning season at the lowest cost. Sound familiar? This will be the same challenge our government officials will face as they think about all of the options available to them in order to identify which of those crazy caterpillars is going to actually turn into a butterfly.

This will be interesting, because many of the potential areas of improvement may be in organizations that don’t yet exist, such as specialized new health plans, provider organizations and payment structures that have been much discussed but barely tried in practice. This effort will require a broad range of public and private views, including that of entrepreneurs who have those “not yet existing” ideas, to be considered.

We need to nurture companies that come out of left field with disruptive ideas that blow up conventional wisdom and replace it with completely new ways of doing things, particularly thing that impart convenience, personalization, health-optimization and cost-effectiveness into the healthcare equation. Will today’s healthcare giants be tomorrow’s healthcare leaders? Good question, but not likely unless they are willing to reinvent themselves completely—something very hard to do. It’s a little like shooting your dog because he’s ugly, even though he gave you years of companionship.

It appears that CMS and their colleagues are seriously committed to innovation and to doing the work to find great new ideas.  What they do and the money they can bring to bear can make a big difference, particularly since VCs have underfunded healthcare services and IT for eons. I saw an article today that said VC funding of healthcare IT almost doubled in Q2 2010 as compared to Q2 2009 to $157 million. Healthcare services consistently takes less than 1% of VC money that goes to the healthcare sector; in Q2, total healthcare venture funding was $2.7 billion so services probably got about $27 million, if I did my math right.  $27 million sounds like a lot when you are talking about buying a house (actual cost of recent house bought by Charles Schwab), but its downright microscopic when you are talking about healthcare system innovation. It will be interesting to watch the progress in Washington as it unfolds.

Lisa Suennen is a partner of Psilos Group, co-headquartered in the Bay Area and New York City, The firm has funded and developed more than 38 innovative companies, including ActiveHealth, AngioScore, Click4Care, Definity Health, ExtendHealth and OmniGuide. Lisa regularly posts on her site, Venture Valkyrie.

16 replies »

  1. Let’s be real here, the road to fitness wasn’t exactly fast-going for me. I grew up in Texas, where big means BIG – especially when it comes to food. Think unlimited soda refills, lunch buffets, all you can eat pizza for $7.99. As a result, food (in large quantities and portions) has always been a part of my life. The key—and the hard part—was gaining control. I soon became host to that ever-present extra twenty pounds. In an effort to lose it, I mapped out a diet plan that wasn’t the healthiest and a workout regime that wiped out my energy level. It wasn’t working. A few years ago I made the ultimate decision to change my life and gain the knowledge necessary to propel me into a well-balanced and healthy lifestyle.

  2. Dennis,
    I believe I mentioned the military, thus Los Labs and military research. It is CLEARLY the goal of the military to innovate. We developed the first 5th generation fighter. No f-16 has ever been shot down. We developed the first infrared invisibility cloak. Having worked with LMC, innovation really only comes from the private sector because they can reap the benefits of innovation. Also, there was a Medicare/Medicaid innovation lab before this one. It didnt do much of anything. It is not like a center directed at innovation will have a alternative result. Those that are practicing in the field have the incentive and value driven motive to innovate. It has been shown time and time again that the government struggles with innovation, while the private sector speeds past almost any government competitive body. Private sector individuals understand and account for risk. They get rewarded and punished. Government bodies generally do not feel the same pressures as the private sector to innovate, a prime example is Fannie and Freddie.
    patient-centered medical homes – They are having a hard time selling these because patients think it sounds like a hospice and patients like hope more than anything. I cant speak yet if it is a good idea or not, but I thought I would add that to the conversation.

  3. Government as an engine of innovation? I havent seen cows flying and giving champagne. Government caters to powerful health care interests and innovation will be more of the same medicocentric palliative biomedical care that has been around for a century. The innovation engine is run by the same experts who created the status quo of poor error ridden health care- they dont believe in innovation or real change.

  4. Until you change the demands of patients for care they cannot afford themselves and would not buy themselves, you will fail.
    Every person cannot access “the system” for a million dollars of reassurring negative tests.
    Every doctor will not stop ordering these tests until the legal environment is less toxic.
    Bottom line must be to change patient demand.

  5. Well, aaron and Doc99, the examples you gave weren’t established with innovation as the guiding principle–clearly the case with the CMI. NASA is a government tool and was quite successful as an innovation source as long as they had government attention and government-sponsored goals.
    As for the claim about the military not counting, uh, the military are government tools and they account for over 60% of government spending. They count in spades. Sadly, they also have as many failures as successes, but again, their goal wasn’t innovation.
    All the nay-sayers aside, I think the best way to get the most bang for our buck will be patient-centered medical homes (PCMHs). Organized teams pushing wellness with the goal of avoiding medical procedures and hospitalization is a proven money-saver. The biggest stumbling block is paying the doctors. We need to get away from the CPT model, which pays based on procedures, and the ICD9/10, which pays based on diagnoses. I think the best payment model is the Harris Berman model (the Matthew Thornton Health Plan), currently an approximation of the Mayo Clinic model. Doctors work for a salary, with every specialty (including GP, pediatrician, and OB/GYN) starting at the same pay grade and getting the same opportunities for advancement. The Berman model disintegrated when he couldn’t find an orthopedic surgeon willing to start at the same flat rate as everyone else. CMI and, ultimately, CMS, needs to convince up and coming medical students that all specialties really are created equal. Just because you have the manual agility to become a superlative laparoscopic surgeon doesn’t mean you rate a higher starting salary than all your cohorts.
    For the PCMH to reach optimum quality, efficacy, and value, I think it needs a few other adjustments. I’ve already outlined–at http://ow.ly/2hNcP –some of the adjustments that I believe would help achieve that optimum.

  6. Innovation is a necessity in healthcare given the striking rise in costs and the declining healthstatus of the American population. However, government is rarely a source of innovation. Also, is radical innovation what we need? There are so many ideas on the table already — patient-centered medical home, evidence-based formulary management, value-based benefit design to just name a few. The challenge is developing the evidence justifying each idea and determining the best way to implement these solutions. Evidence often takes years and years to develop. Maybe what we need is to focus on sorting through the ideas we have and constantly moving forward. Quantum leaps are great but incremental progress is often better. Remembering back to our childhood, the tortoise beat the hare.
    Robert Kaminsky, MedSpan, http://medspanresearch.wordpress.com/

  7. Government? Innovation? As in The Indian Health Service? As in The Post Office? I recall the brouhaha about care rendered at Walter Reed. So far, what I’m seeing is the formation of multiple bureaucracies which promise to function with the efficiency of the Department of Motor Vehicles with the Warm Fuzzy Feeling of the IRS.

  8. Refering to Barry’s statement about lobbying issue it may appear that only hope would be people being healthier by their own volition and in their own wisdom.
    Like Barry I am not so optimistic. However the best thing they can do is to bring about transparency in dealings and attack the health ignorance that could be the best use of money.

  9. BTW, the title is a oxymoron. Government is hardly EVER the engine for innovation. It is only when they fund private researchers is there some hope. To me the only successful government innovators, are the military (which do not count as a member of the government) and the IRS (for being the most shockingly “reverse” innovative body in the history of the US government, ha ha.)

  10. From my Finance/ Economics mindset, I do not see payments or all of these government created problems as the issues. I think there needs to be a study done on the carrot or the stick method of funding healthcare. I am proponent of creating a secondary market in which individuals can invest freely in hospitals. This OTC will be privately held market in which only those who trade know the information, like pinksheets. If hospitals are flush with cash, these small changes in this or that created by the government will matter less, in theory. I am not sure any study or experiment has ever been tried in reversing equation, instead of preventing growth in prices by restriction, open up capital that is there but locked up because of government regulation. The likely hood of someone taking on this free market perspective is limited. The government never lets go of its power, more or less let the “market” determine the life of death of a hospital. Healthcare is messed up because it is determined by government officials instead of doctors and people.

  11. Anon–Okay, valid point on the A’s winningness, but the Yankees have traditionally sought to win at any cost, and we, as a healthcare system, simply cannot afford that model anymore. We have spent more money than anyone and gotten less for it, kind of like the Yankees of 2008. Creating great value for the money has got to be a core goal, even if it doesn’t result in perfection. (the U.S. is ranked pretty low on the health quality curve–see my blog post at http://lisasuennen.wordpress.com/2010/07/01/we%E2%80%99re-number-one-er-i-mean-seven/).

  12. The Oakland As have not won a World Series or AL Championship since Billy Beane has been GM. While he offers a unique approach, it results in a team that is just good enough to lose in the first round of the playoffs. Interestingly, the way people outside baseball have taken to fawning over him is similar to the way he was treated as a baseball prospect which is described in the book. If you want to emulate success you should pick role models like the late George Steinbrenner or the Rooney’s of the Pittsburg Steelers – sports owners who have been successful for over a generation.

  13. I think a critical role in this conversation will be held by the folks on the IT side of the fence. The EMR (or EHR) is changing the way providers are able to deliver care and communicate with each other. We are now better able to address care gaps, identify health trends in individuals and populations, and aggregate data to determine effectiveness of practices. This information rolled out across the country will vastly improve the way we deliver care, and will reduce costs in the long term.
    One item that I see missing is the link between EMR systems. There are several major systems on the market and even more ‘home-grown’ systems that simply do not talk to each other. The power of the information is staggering if we could only harness it. This seems like a lower hanging fruit to me that CMI should be able to address somewhat swiftly.

  14. Barry, I agree that significant systemic changes will be both necessary and hard to implement. There are also a lot of solutions that have already been successful in select areas of the private and public sectors. Wouldn’t it be wonderful if we could find a path to healthcare redemption that capitalizes on known successes and minimizes the role politics plays in making good decisions. Lisa

  15. I can think of any number of approaches that would reduce healthcare costs but they will all meet with stiff resistance for different reasons. Here are a few for starters.
    1. Instead of the traditional fee for service payment model, we could pay primary care doctors on a capitated basis. For expensive surgical procedures like heart bypass surgery or hip replacements, we could provide a bundled payment for the hospital, doctors, therapists, drugs and all other care connected with the episode. In both cases, we are likely to hear that costs cannot be estimated accurately and, in the case of bundled payments, hospitals don’t have the infrastructure to equitably divide up the payment.
    2. To reduce defensive medicine, we could take medical dispute resolution out of the hands of juries and transfer it to specialized health courts which would be empowered to hire neutral experts to sort through conflicting scientific claims. Powerful trial lawyers and their political allies in Washington will resist this approach because, they claim, it could be detrimental to aggrieved plaintiffs.
    3. To combat fraud, we could require every doctor and other provider authorized to bill Medicare or Medicaid to have an ID card that includes a picture, a unique number and a fingerprint or other biometric identifier, along with an address. Both actual billing and the cost of referrals and prescriptions could be tracked to the individual physician level. This is likely to be opposed from both the right and the left on privacy grounds.
    4. Patients and referring doctors could make more cost-effective healthcare decisions if they had access to robust, user friendly price and quality transparency tools that would provide actual insurer contract reimbursement rates for various services, tests and procedures provided by doctors and hospitals. Both providers and insurers oppose this because it violates long established confidentiality agreements.
    5. Even a simple and successful CMS experiment with competitive bidding for durable medical equipment showed that significant savings could be achieved. However, suppliers who stood to lose business under this approach got their friends in Congress to prevent its implementation.
    The bottom line, I think, is that we already have plenty of good ideas that would mitigate healthcare cost growth. We just haven’t figured out how to overcome the opposition from powerful lobbies and their allies in Congress. It appears that regulators aren’t up to the job. I wouldn’t hold out much hope for CMS’ innovation efforts either.