The Business of Health Care

The Affordable Care Act: Like It Or Not, It’s Catalyzing a Golden Age In Health Care Investing

Now that President Obama has been re-elected and the Supreme Court has upheld the Accountable Care Act, healthcare reform is here to stay. So what does reform mean for healthcare investors? I believe it will usher in a new fertile period for innovative,venture‐backed companies that can navigate the brave new world of healthcare delivery and management.

The Accountable Care Act impact on healthcare IT investing is already being felt.Venture investment in 2013 is showing significant growth from last year. In 2012,according to PWC, a global accounting firm,the life sciences sector which includes healthcare IT accounted for 25 percent of all venture capital dollars invested which totaled nearly $1.2 billion in 163 deals,more than double the $480 million in 49 deals in 2011 and almost six‐times the $211 million in 22 deals in 2010.

Now is the time to make order out of chaos and to set the stage for a next‐generation healthcare system that can effectively service our nation. At Psilos Group, we have just released our fifth Healthcare Economics and Innovation Outlook and identified the following four areas as the most promising opportunities for healthcare investors in 2013 and beyond: Private health exchanges, consumer‐focused insurance programs, 21st century healthcare technologies, and innovations that reduce error and waste.

Investing In Exchanges

The healthcare insurance marketplace—and the way insurance is bought and sold—is facing massive change.Healthcare insurance exchanges, both public and private,promise to create a more organized and competitive market for buying healthcare insurance, which could moderate price increases that are currently spiraling out of control.

From our perspective, exchanges are an intelligent place to invest. Software and services will power the exchanges. Psilos envisions massive opportunities for technologies that enable operators of both public and private exchanges to build high functioning platforms, including the shopping software and back‐end administrative technology and service products needed to serve tens of millions of people efficiently.

There are also opportunities to invest in the exchanges themselves.One of the first private health exchanges to receive venture funding was Extend Health back in 2007. Psilos was the lead investor in Extend Health, which is currently serving corporate retirees at companies like GE, IBM, and FedEx. Extend Health is an excellent example of how private health insurance exchanges will radically reshape the way Americans shop for health insurance, delivering more personalized plans and services at lower cost to employees and consumers alike.

Investing in the Consumer

As consumers begin to actively engage in the market of buying insurance through healthcare exchanges,they will become far more aware of the impact of healthcare costs on their own pocketbooks.When this happens, we will start to see the impact of true alignment of financial incentives in the healthcare industry.Psilos sees significant investment opportunities for insurance and benefit programs and ancillary support programs that encourage consumer awareness, prevention and accountability. On the clinical side, products and services that proactively help consumers take better and more cost‐efficient care of themselves and their families, will proliferate .Companies like SeeChange Health, a PSILOS portfolio company which is now the fastest growing private insurer in California and Colorado, is getting lots of attention. SeeChange was the first independent value‐based health insurance company in the nation. SeeChange offers personalized health plans that provide financial and other incentives to encourage individuals to play an active role in their health management and improve their quality of life.

Investing in 21st Century Healthcare Technology

Massive healthcare changes are looming large. But the industry as a whole is still ill equipped to operate in this new environment mandated under reform. Payor and provider organizations,for example, are struggling with computer systems that are decades old and lack the ability to administer new business models and customize benefits. These capabilities will become increasingly important in a post‐reform world.

To emphasize this, a recent survey conducted by Healthedge, a PSILOS enterprise software company,found that most technology companies don’t have the capacity t odeal with the new environment.This is why technology infrastructure companies are so important.Healthcare needs to take a lesson from the finance industry by adopting data portability, price transparency and financial management technologies that enable price flexibility in a landscape of payment reform.Technology startups that can help providers transform from pay‐per‐volume models to pay‐for‐efficiency models, where they make more money by giving optimized care, will be well positioned to capitalize on healthcare reform, as will companies that help consumers manage and track their health finances in this new paradigm.

Investing in Error Elimination and Waste

The Accountable Care Act naturally leads to another huge opportunity: investing ininnovationst hat help healthcare organizations eliminate waste and error, which is estimated to account for one‐third of all healthcare costs.Under healthcare reform,hospitals are now being held financially accountable for outcomes. What’s more,there is a movement afoot to pay them not for volume, but for optimizing care delivery. Hospitals and large provider systems need new tools that can eliminate waste and error. This is an area ripe for investment. Psilos’s investment in PatientSafe Solutions, which improves workflow and enables nurses to avoid errors at the patient bedside, is just one of many that offer enormous opportunity in the new healthcare environment.There is still a huge amount of work to be done to heal our healthcare system. While healthcare reform does not address all the problems, it does create significant impetus to focus more intently on the spiraling cost of healthcare in America. With massive change comes massive opportunity to make money while also greatly improving the lives of our citizens and fixing the national economy.

Find Psilos’ Group’s fifth Healthcare Economics and Innovation Outlook .

Al Waxman is co-founder, CEO, and senior managing member of Psilos Group, a healthcare-focused growth capital fund.