Forbes article by Dave Chase
Healthcare Impact Investing Transforming Flawed System
I had the opportunity to present to a large gathering of family offices focused on impact investing in New York last week. For the families investing in health-related enterprises, it has typically been in Life Sciences where the capital requirements and risks (and rewards) can be extremely high (e.g., trying to cure cancer). The combination of high capital requirements and risk with the fact that most Life Science ventures have demonstrated they further accelerate healthcare’s hyperinflation and the fading fee-for-service world rewarded that. This has caused some families to seek investment in healthtech . There was high interest in how the Quadruple Aim investment filter could make a big dent in the flawed healthcare system. The Quadruple Aim filter contrasts with most healthcare investing that has made the clinician experience worse (see Dr. Bob Wachter’s The Digital Doctor book for more) and/or increased the cost of healthcare with modest impact on outcomes.
As pre-reading for the event, I co-authored a paper with Healthfundr co-founder Sean Schantzen on high impact investing opportunities for healthcare. The text below is the executive summary of the paper. [Disclosure: I have been an advisor to Healthfundr which makes investments in some of the areas outlined which is why I have closely studied these trends.] Some raise the question that even though they understand healthcare’s long-term shift towards value, they wonder if it’s too early. I saw a similar dynamic during my detour away from healthcare in the digital media arena where incumbent media organizations dismissed high growth next generation media companies as they were relatively small at the time (late 90′s/early 2000′s). The articles below debunk any myths that it’s too early. The next generation organizations highlighted in these articles are rapidly growing, receiving tremendous funding and/or having multi-billion dollar exits:
I’ve Seen The Future Of Healthcare. I Like What I See.
The Hot Spotters Sequel: Population Health Heroes
Economists Have No Idea How Hard It Is To Be A Healthcare Consumer
The 7 Organizations That Will Turn Healthcare Upside Down In 2016
The Silver Bullet To Solving Healthcare’s Most Vexing Problem
Health Insurance’s $4.4 Billion Bunker Buster
The Amazing Power Of Deflationary Economics For Health
The companies highlighted in the articles above prove the point frequently made by Dr. Peter Diamandis.
“The world’s biggest problems are the world’s biggest market opportunities.”
In other words, with the proper focus in healthcare, there isn’t a need to sacrifice investment returns in order to achieve positive social impact. Speaking personally, this dynamic caused me to align my philanthropic focus which had been separate and compartmentalized from my commercial focus. After completing my tenure at WebMD (my last startup was acquired by WebMD), I have found there is great alignment between the “give back” part of my life and my business focus. For example, the Health Rosetta, 95 Theses for a New Health Ecosystem and the documentary I’m working on are all designed to accelerate the shift to a health ecosystem that radically out-performs the broken status quo system that is falling short for both citizens and clinicians. Fortunately, those “give back” projects have a positive spillover benefit to the tech industry where I’m an investor.
Transforming Our Flawed Healthcare System
The current U.S. healthcare system is a deeply flawed and wasteful system that has caused enormous damage to our economy and society. It has decimated household incomes, retirement accounts, education budgets, government services budgets, and more. It’s estimated that nearly half of all spending in the current healthcare system is waste.
However, a generational transformation is happening right now to change this system. It’s a Copernican shift that is expected to transfer $1 trillion of annual healthcare spending to new players and business models over the next ten years. It is accelerating the widespread adoption of a better system (the Optimal System) that substantially outperforms the current system (the Traditional System).
Catalyzing this transformation are two enormous drivers. The first is a fundamental transformation of the economic incentives that drive the entire healthcare system. The second is dramatically increasing demand from aging baby boomers, maturing millennials, and newly insured patients from the Affordable Care Act.
The Quadruple Aim
A powerful lens for understanding the Optimal System is the Quadruple Aim. The Quadruple Aim’s four elements provide a broad baseline for assessing opportunities to invest in this transformation.
Significantly lower costs
Dramatically improved health outcomes
Improved patient experience
Improved clinician experience
Remarkably, trailblazing business leaders and new players have demonstrated how to create a thriving health ecosystem by adopting the Optimal System. For example, they’ve shown how to substantially improve health outcomes and simultaneously lowering costs 30-50% per capita, while providing far better patient and clinician experiences. In some cases, companies have used the savings to fund education for their employees, dependents and even their community, reducing crime rates by 67% and more than doubling high school graduation rates to nearly 100%. Some have been doing it for 20+ years. One mid-size employer has cumulatively saved $240 million and another spends double on R&D what its competitors do.
These organizations are the Lewis and Clarks. They represent a tiny fraction of what is coming, but have shown what is possible. We’re now entering the Oregon Trail period that will take these proven paths and accelerate widespread adoption to millions of people. Investing in the innovative companies driving this widespread adoption is where the greatest financial returns and impact opportunities exist.
For the first time in recent history, the most promising investment opportunities in healthcare nearly completely overlap with the most promising impact opportunities. Historically, successful healthcare investing often magnified the flaws of the current system. This is no longer the case and is spectacular news for investors looking to maximize financial returns and impact.
Understanding the Investing Opportunity
Understanding the significant flaws of the Traditional System is the first step to investing in its transformation. The core flaw is that the Traditional System’s economic incentives don’t align with improving care or lowering costs. In fact, they promote the opposite.
This core flaw manifests itself in a number of ways.
It optimizes business models and technology to maximize usage because more usage and health problems means more profitability
It creates a highly fragmented, siloed and opaque system with very little exchange of information among providers or between provider and patient.
It is reactive and centered around treating disease instead of preventing disease, or maintaining and improving health
Negative Consequences of the Traditional System
As a result, the system has caused substantial damage to our economy and society. Here are a few of the more widespread consequences.
Clinical care consumes 88% of all health dollars, even though it only accounts for 20% of health outcomes
It’s made healthcare the second largest expense for most companies, hindering innovation, salaries, and growth
It robs education, infrastructure and public services by bankrupting government budgets
It worsens the lives of care providers, causing record levels of doctor burnout
It causes of 62% of all bankruptcies, even though 78% of all filers had health insurance
It has decimated personal retirement accounts through increasing costs that greatly outpace inflation
The Optimal System Can Reverse the Damage
Fortunately, the Optimal System fundamentally changes these economic incentives and can reverse the damage. It’s most defining characteristics embrace the Quadruple Aim.
It aligns economic incentives with patient interests, putting their health at the center of the universe
It optimizes business models and technology to reduce usage and improve care
It is far more proactive, reducing the number of serious health conditions and better maintaining health
It accommodates all drivers of health outcomes: clinical care, social & economic factors, physical environment, and health behaviors & genetics
It can meet increased demand from baby boomers and millennials
Accelerating the adoption of the Optimal System means that more patients stay healthy, fewer have chronic health conditions, and substantial financial resources can be diverted to better use.
A baseline for how to invest in this transformation
Because the Optimal System is fundamentally different than the current system, it requires a fundamentally different approach to successful investing. Some broadly applicable guidelines can help investors better assess potential investments and intermediaries.
The Quadruple Aim
Does the company dramatically lower costs or lead to lower costs?
Does the company produce substantially better health outcomes?
Does the company improve the patient experience?
Does the company improve the clinician experience?
Look for picks and shovels – Many of the most promising opportunities are picks and shovels, technology and services companies that enable widespread adoption of the Optimal System. These companies make successful approaches repeatable, digital, accessible, automated, and scalable.
Many opportunities are early stage – Because we are in the early days of this transformation, many promising companies are earlier stage. Having access to these companies is critical to avoid being shut out of investing in the winners. However, seeing through the noise can mean avoiding the earliest investment stages or making many small bets in the earliest companies
Tip: The emerging post-seed pre-series A stage is a promising place to make first investments. This stage has a good balance of de-risking (companies with products, revenue, and growth metrics) and reasonable valuations. Investment sizes also tend to be smaller, letting investors make more bets, then double down as long-term winners emerge.
Many promising opportunities share some common characteristics
Their business models are built for the Optimal System’s economic incentives or built to optimize these business models
They often look very different from traditional health IT, services, or life sciences companies
They leverage data to accomplish Quadruple Aim goals
Their teams often possess deep cross-functional expertise
They base their business models on ways to better share risk between different actors (e.g. employers, insurers, providers, vendors, and patients)
They simplify complexity and make the system far more approachable
They prevent health conditions from worsening by creating models to intervene before this happens
They digitize and automate manual and paper-driven processes
As with any emerging market, there are substantial risks to unwary investors. Here are some to watch out for.
The transformation itself is highly complex with many moving pieces, requiring broad understanding and context
Changing economic incentives can manifest themselves very differently
Adoption curves will vary substantially and may be contingent on other changes happening first
New and diverse types of expertise are needed to assess a new breed of companies that don’t look like traditional life sciences, services, or IT companies
At a time of complete industry transformation, being a seasoned healthcare investor can be a liability
Healthcare’s geographic spread can complicate accessing dealflow and assessing competitive landscapes
Many markets may not become winner-take-all or winner-take-most markets
There are a lot of great stories and noise, making it difficult to distinguish the wheat from the chafe
How to select intermediaries to help invest in this transformation
Most investors will work with intermediaries or fund managers at some point, but there are some specific issues to keep in mind when assessing them. Remember, this is a fundamental transformation to an entire industry that requires specific access and expertise that are very different than traditional healthcare investing.
The most promising intermediaries have some key traits.
They focus on healthcare, specifically the current transformation
They have effective means to attract and pick the best companies
They have access to expertise, relationships, and tools to magnify their reach and depth
In a time of increasing capital options for private companies, the best intermediaries proactively market the proprietary value they add to their portfolio companies.
Worth noting is that the private capital markets are also going through a dramatic transformation that is bringing more players online. Many of the best emerging intermediaries will leverage large networks of expertise, technology, and automated tools to better source, screen, and support investments. Private investing in the general technology industry is a good place to look for examples of how these new tools, networks, and audiences can be leveraged.
Magnifying impact and returns by coordinating investing and grant-making
Naturally, impact investors want to maximize their returns. Leveraging both well-placed grants and investing can create a “1 + 1 = 3” dynamic that enhances the impact and returns of both. It’s beyond the scope of this summary to address grant making in the transformation, but we see grants to certain types of projects that have the potential to create outsized impact on accelerating this transformation.
Open source/innovation projects – Open source projects can be a powerful to advance the emergence of markets. Think of the effect WordPress and Linux have had on the emergence of the internet. Within healthcare, the Reproducibility Initiative identifies and rewards high quality reproducible research via independent validation of key experimental results. These projects can create enormous impact with modest budgets and staff.
Media projects – Documentaries, video, and other digital media projects can have a strong catalyzing effects and are an effective means of changing the public consciousness around key issues. Examples we’re all familiar with include An Inconvenient Truth and Food Inc. A recent example within healthcare is The C-Word. The C-Word asks “if 70% of cancers are preventable, what are we waiting for?” and follows the story of a doctor diagnosed with cancer who substantially outlived his prognosis by digging deeply into already-published research and putting it into practice.
Source: http://www.forbes.com/
Posted by: The Wealthy Doctor
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