Health Care In The States

Forget The Robots: Venture Capitalists Change Their Health Care Investments

By Sarah Varney

March 9th, 2012, 7:20 AM

This story is part of a reporting partnership that includes KQED,  and Kaiser Health News.

It wasn’t that long ago that money flowed steadily to entrepreneurs who dreamt up whiz-bang medical devices.

Hospitals souped up their surgical suites with robots or high-tech radiation machines for cancer treatment. Cost wasn’t an issue: They just got passed along to insurance companies, who passed them on to employers and patients.

Venture capitalists are spurning high-tech surgical robots like this for more practical health care investments. (Photo by Nick Dawson via Flickr).

But after the Great Recession hit and the 2010 health law passed, the financiers behind the medical arms race started to rethink their investment calculus.

“If you come in with [a device] that’s 10 percent better and twice as expensive, it’s hard to get anyone to care,” said Bryan Roberts, a Palo Alto, Calif.-based venture capitalist at Venrock, a Silicon Valley company that invests in firms working on health services, medical devices and drugs.

“The changes in the health system are rocket fuel for entrepreneurs,” says Roberts’ partner Bob Kocher. He is a former Obama health policy adviser who was hired by Venrock in part to capitalize on the expertise he cultivated working on the law in the White House.

The share of venture dollars flowing to seed and early-stage investments in biotechnology and medical devices has plummeted since 2007, when investors pumped $3.6 billion into 332 deals in which a price was disclosed, according to data compiled for Kaiser Health News by FactSet Research Systems. Overall venture investing declined by nearly one-third as the economic recession set in.

Kocher is eyeing businesses that do things like help hospitals keep patients from returning to the hospital with complications soon after treatment — a big-ticket cost that the health law will now tie to new penalties. Like other investors, he also anticipates that many people who gain coverage under the law will face high insurance deductibles. So, Venrock and other firms have funded Castlight Health, a technology company that helps patients choose the cheapest care.

The opportunities within complex health care ecosystems are in things as mundane as billing. “There’s a half a person per hospital bed on average that sits in the hospital doing coding and collections and trying to get paid,” Kocher says.

Their solution? Drop the manual coding and create “a software system that learns as it codes and keeps getting better and better. And all of a sudden you can say to the hospital, Look, we’ll charge you 50 or 70 percent of what you’re paying now. You guys save 30 percent. But by the way, we can make great margins and make a terrific business because our costs are so much lower, because we’ve actually used technology rather than just people to attack the problem,” Roberts gushes.

On the treatment side, the investors in Silicon Valley understand that hospitals don’t want space-age solutions for tomorrow as much as they want cheap, pragmatic products that can solve basic problems. When it comes to controlling urinary infections, for instance, the future is indeed in plastics. Plastic catheters.

Vicki Farrar started a company called Catheter Connections, based in Salt Lake City. She’s almost evangelical about building a better catheter – one that kills the microbes that cause infection – and it’s not hard to understand why. The infections are totally preventable and Medicare won’t pay for them.

“It’s directly impacting the hospital’s bottom line, so they don’t want this out-of-pocket cost. It’s about $50,000 per infection rate,” she says. Meaning, the hospital loses $50,000 for every catheter-related blood stream infection. The DualCap catheter she sells, which looks like a spark plug and smells of rubbing alcohol, costs less than a dollar.

DualCap investor Anne Degheest figured the catheter was a good business to bet on, because it prevents hospital readmissions. She points to another promising investment: In-room televisions that walk a patient through a doctor’s orders – from bed rest to getting prescriptions filled.

“Like while you’re in the hospital, they educate you on the TV so that you cannot see your shows until you’ve gone through the education, and they test you,” she says.

It’s a bit like not getting dessert until you’ve had your vegetables. Maybe this all sounds incredibly simplistic, but venture capitalists say one of the trickiest things about this new world of investing is that their returns, in many cases, hinge on humans changing their behavior. And that’s a lot harder than building a robot.

–Christopher Weaver contributed to this report.

5 Responses to “Forget The Robots: Venture Capitalists Change Their Health Care Investments”

  1. Mitch says:

    Gee! Common sense! Common sense is something we haven’t seen in health care in a very long time. Just like buying gasoline at the pump. If the oil companies get too greedy and try to raise the price too high, people simply change their driving habits. No different with health care. It’s just the simple laws of supply and demand. Not rocket science. An ever increasing number of Americans are feeling the pinch and getting priced out of the health care market. Yet, the neanderthals in the health care industry keep thinking they can raise the price higher and higher. Hey you greedy health care providers, consumers aren’t as dumb as you think.

  2. Paul Brown says:

    Please clarify: “Overall venture investing declined by nearly one-third as the economic recession set in.” So, what was the percentage decline in venture investing in the medical devices?

  3. There is over $1 Trillion per year wasted by U.S. healthcare, about 10% of U.S. GDP. Payers are willing to share the cost savings with vendors that provide solutions. A shift to wellness and outcomes changes how product and service companies view their business and their offerings. Lifestyle changes, e.g, obesity, patient compliance with treatment, disease management, prevention, etc. are all concepts representing significant returns when addressed by solutions. New technologies like cybernetics, genomics, biomarkers, device connectivity, medical Apps, mega data analysis,computerization, etc. all represent not only U.S. but global healthcare cost extraction opportunities. U.S. healthcar is not a drag on the economy, but a gold rush that will explode between 2012 and 2020…The opportunity is about $12 trillion available for profit sharing…and many of the potential products will help drive U.S. economic growth and job creation. We need to insure that tax policies reward these investments rather than pushing them overseas.

  4. This is early evidence of the new price sensitivity that soon will overwhelm the health sector and, by extension, the financial markets. Dartmouth Health Atlas estimates that as much as 60 percent of Medicare spending is unnecessary, and driven by business models in which consumers (Medicare) are price (cost) insensitive. The new public and private payment models all envision large, distruptive improvements in productivity, achieved primarily by idling this excess capacity. Some investors will make money from the destruction of the current business model, but most will take a bath. Financial exposure to the old model probably totals more than $1 trillion.

  5. samuel g. says:

    The few smart health care providers out there are beginning to see the handwriting on the wall. The gravy train that they have enjoyed for the past several decades is slowly coming to an end and designer health care and boutique health care and the Marcus Welby style of solo-doctor health care will be ending. Big box health care is is our future. What WalMart did to the expensive neighborhood boutiques and shops, what Home Depot did to hardware stores all across America, what Jiffy Lube did to slash the cost of getting an oil change, health care in America is about to see that same type of change. He will see a future where only the richest among us will choose to visit a solo-doctor practice. The vast majority of insurance plans will subscribe to the Accountable Care Organization (ACO) model and begin to incentivize their members to go to an ACO rather that continue to see a traditional doctor in a traditional one-doctor setting. Fact is, greedy providers have milked the system dry! Fact is, the cow is on life support! Fact is, the goose that has been laying golden eggs for so many years is dead! Insurance companies are getting squeezed and the current broken model must change for them to show any profit. I applaud the “traditionalists” for their brave efforts to try to save the status quo and try to keep our broken health care system alive. They have sunken their collective heads in the sand and they are hoping against hope that the tsunami will go away. Fact is, a tsunami in health care delivery is one it’s way. Smart providers will adapt and survive the storm. The dummies will not. I fear there are many more of the latter.