Strategic Healthcare In...

Editor’s note:   Dave Chase   is  the CEO of  Avado.com , a patient portal & relationship management company that was a  TechCrunch Disrupt finalist . Previously he was a management consultant for Accenture’s healthcare practice and founder of Microsoft’s Health platform business. You can follow him on Twitter  @chasedave . This is the second part in a two-part series on strategic investors in healthcare. Healthcare IT departments have focused much of their attention on the $19 billion portion of the stimulus bill that is providing billions of subsidies for the adoption of electronic health records. While this is logical given the available money, it is paying for health IT systems optimized for the “do more, bill more” model of reimbursement that is rapidly being replaced by a value and outcomes based – a 180 shift in focus. It’s hard to argue with modernizing the record-keeping in healthcare that isn’t far beyond how medicine was recorded in the time of Hippocrates. Thousands of lives are saved as a result of this modernization (e.g., avoiding frequent, deadly prescription errors). On the other hand, most companies benefiting from the stimulus have two massive gaps that will need to be addressed for health systems to thrive in the new environment they are facing. The core of the legacy healthIT systems was optimizing the reimbursement model where the “patient” isn’t much more than a vessel for billing codes . For entirely rational reasons given the legacy reimbursement model, their success was measured by their ability to get as big of a bill as possible out as fast as possible. The shift to a value and outcome based model of reimbursement literally flips provider incentives on their head (e.g., hospital readmissions are penalized rather than rewarded). These systems were designed for a static healthcare system with rigid technology architecture not known for its nimbleness . There is one area of consensus about the future of the U.S. healthcare system — it’s destined to go through radical transformation. Nimble systems will be required to respond to a rapidly changing landscape. Filling these gaps present an opportunity for investors of all stripes — particularly strategic investors such as those associated with health systems and pharmaceutical companies. It is becoming crystal clear to healthcare providers that what they thought was going to be their 100% solution is really best optimized for just 25% of where healthcare money is spent (hospital-based care). Critically, 75% of healthcare spend is directed towards chronic disease. Legacy healthIT have their strength in automating internal workflows of hospitals and other clinical settings. In those high intensity settings, healthcare providers make the decisions that drive the patient health outcomes. With chronic disease, it’s an entirely different story. The decisions a person (or their family) make drive the health outcomes. For example, does the patient fill a prescription and take it properly (more than half don’t)? Traditional healthIT does virtually nothing to ensure that people make the necessary lifestyle choices to optimize their health. “Getting patients to adopt healthy behaviors represents a tremendous economic opportunity for life sciences companies and health care systems.” Ernst & Young Perspectives 2012 Manufacturing vs. Service Orientation – The Difference Between Throwing Rocks or Birds at a Target  Healthcare providers who have demonstrated the most impressive positive results with challenging patient populations recognize that there are two main care approaches. Many leading hospitals have adopted a manufacturing-based model borrowed from Toyota. In contrast, with chronic disease, a service-based approach is necessary to effect behavioral change. In a manufacturing setting, with enough practice a machine will do what it is intended to do and doesn’t have a mind of its own. However, as anyone who has been in a service-based business knows, human interaction frequently leads to the best outcomes if there is any complexity. The following is an analogy from Dr. Douglas Eby who is a leader in one of the health systems that has the most impressive results in a very tough environment (click here and see video at the end of the article for more). Think about throwing a rock at a target. Similar to a manufacturing scenario, with enough practice a well trained professional can hone their skills and hit the target most of the time. Now imagine rather than throwing a rock, you are throwing a bird at a target. Perhaps you can impact 10-20% of whether that bird hits the target. However, the other 80-90% is going to be driven by understanding the bird’s motivations. Perhaps putting food or the bird’s babies at the target would be necessary to drive the bird’s behavior. Like the bird example, doctors push patients toward a desired health target. However, only those healthcare providers that have systems and processes optimized for engaging patients have had significant success with chronic conditions. Rapid Iteration Imperative  for Disruptive Innovation in Care Delivery “Necessity is the mother of Invention” Aesop As highlighted in The Rise of Nimble Medicine  , the healthcare providers driving breakthrough results aren’t tweaking an existing model. Rather, they have developed new models that are repeatedly tested and optimized. As one who has implemented traditional healthIT systems at healthcare providers ranging from small rural facilities to large inner-city hospitals, the process is very involved with months of planning before go-live. During that process, there is a boatload of process planning and re-engineering before configuring the system to reflect what has been decided. The process is weighted 80-90% toward pre go-live with 10-20% focused on post go-live to deal with go-live issues and further training. Contrast that with highly dynamic environments where the pre and post live weighting needs to be flipped on its head (i.e., 20% planning, 80% analyzing, refining, testing, etc.). While some areas of healthcare will be stable, the most critical area to manage is where the greatest costs reside — chronic disease. Best practices have begun to emerge, however one can expect rapid iteration to address the various areas of chronic disease management. Some of the legacy systems such as Epic have strengths in its ability to address different workflows after significant customization (this is why even small to medium sized health systems spend north of $100 million on their implementations. However, healthcare providers report that if they need to reorder workflow, the system has to be reconfigured with significant time and expense involved. Eric Page of Amplify Health has shared his experience doubling the national average for outcomes related to sleep disorders. Page described their experience as one that involved repeated testing and re-ordering of steps in the process. Changes were made day by day. I expect that rapid iteration will become the norm for the leaders of the next generation of healthcare delivery as they hone their craft. In a piece for the New Yorker , Dr. Atul Gawande outlined how, early in the 1900s, more than40% of household income went to paying for food and food production consumed roughly half the workforce. Beginning in Texas, a wide array of new methods of food production were tested. After many pilots, tests and information dissemination, food now accounts for 8% of household budgets and 2% of the workforce. As a wide array of small innovations ultimately led to the transformation of farming, so too is a rapidly building wave of innovative new care and payment models leading to similar breakthroughs in healthcare. I call this Nimble Medicine . Human Centered Design Trumps Procedure Centered Design “Listen to your patient, he is telling you the diagnosis” William Osler, M.D. Health systems have begun with modest efforts to weave in patients into the care process. Amazingly, simple secure messaging has been held up as a great breakthrough in medicine. That a technology (email) that has been around for 40 years is held up as a breakthrough, in and of itself, is a statement. I liken the limited efforts to invite the patient into the process to sipping from a muddy puddle of water in the Sahara Desert — it’s a welcome improvement but far from arriving at the promised land. Healthcare organizations that will thrive (not just survive) recognize that a tweak to systems (both healthIT and business process) that were designed around the patient as billing vessel will fail miserably. As we’ve seen in many areas, tweaks to an architecture designed around a different model never succeed in the new paradigm.  If they did, AOL and Yahoo would be the leaders in social media and Siebel would be leader in CRM. Before long, you will see the equivalents of Facebook and Salesforce.com emerge in healthcare. Healthcare Soon to be Driven by Deflationary Economics All men are prepared to accomplish the incredible if their ideals are threatened. -Maya Angelou Behind virtually every business model in healthcare delivery has been an assumption of real estate bubble like perpetual healthcare inflation. It’s not hard to predict that deflationary economics will drive healthcare in the future given the government budget crises from Main Street to DC that are largely driven by healthcare costs. While one expert warns of health care bubble another calls the upcoming period The End of the Third Bubble (PDF). Unsurprisingly, those who thrived after past bubble bursts were those with lower costs structures and systems that were nimble. The diagram below is one of the drivers for why employers such as IBM have aggressively changed their healthcare buying approach. Cost-cutting isn’t limited to the government. Why? It is employers who foot most of the ever-expanding healthcare tab and are starting to flex their muscle. For example, IBM has shifted from thinking about healthcare as an employee benefit to a large cost driver that will impact their profitability. IBM recently made a decision as to where to locate 4,000 new hires based on their analysis of where they received the best value from their healthcare expenditure. Consequently, they determined that Dubuque, Iowa was the best location to expand their employment. With wide cost differentials, it’s conceivable that CFOs and CEOs will believe that their fiduciary responsibility to shareholders will necessitate the kind of analysis IBM acted upon. If they don’t, they are liable to get lambasted by Wall Street. This kind of analysis is a scary prospect for communities that are high cost locations for healthcare. It may shift how communities think about economic development. Having a great ROI for healthcare may be of greater benefit than a tax break. Conversely, communities with expensive healthcare have what amounts to a healthcare “tax” that will push businesses away. Many health systems operating at a loss or a razor thin margin, may wonder how they can deal with these changes. Smart healthcare providers are taking painful lessons from the failings of another industry that consisted of local monopolies and oligopolies that seemed protected by capital infrastructure barriers to entry — the newspaper industry. The few newspaper organizations that have thrived realized that it can still be profitable to operate on a lower cost structure. With the majority of hospitals operating as non-profit, mission-based organizations, they should have a relatively easier time making the transition. Non-profit organizations don’t have to explain to public markets why a flat or declining top line revenue figure can be a good thing (assuming they get costs optimized for the new normal). As an example, already forward-looking organizations have already bucked conventional wisdom thinking they need to acquire practices to develop an accountable organization. I have seen both non-profit and for-profit health systems recognize it is more capital efficient to create strong physician networks via open software solutions than acquiring practices and mandating a closed system. The New Normal Given where most revenue comes for a health system, their optimization has been focused on hospital-based care. Even there, the new reimbursement framework takes into account what happens after a patient leaves the hospital. That is, there will be large and ongoing penalties for hospital readmissions. In the old world, hospitals have been rewarded when someone was readmitted. Consequently, there was little focus on addressing post discharge patient engagement…until now. However, the biggest changes are coming with the shift from a reactive to proactive model when it comes to chronic disease management. In the old reimbursement model, health systems waited for someone to present themselves at the hospital and that was viewed as more revenue to add to the coffers. Going forward, health systems will be accountable for people even when they leave the facility, and so will face an entirely new set of information technology demands. It’s why you see some hospitals going around floors with iPads ensuring patients about to leave have a scheduled visit with a doctor after they leave. The healthcare providers understand that is one of the best ways to avoid readmissions. To get a feel for the scale of change, you can look at the change from a reactive, hospital-centric model to a proactive, human-centered model that took place in Denmark. These figures were provided by IBM’s Director of Healthcare Transformation that has been actively involved in Denmark as well as leading a large employer coalition actively driving the reimbursement model changes. The following are a few examples from what happened before and after their change in Denmark: Before, 84% of people died at the hospital. Today, 90% die at home which is greatly preferred by most people. This is enabled, in part, by video conferencing, remote monitoring, etc. Before they had 157 hospitals. Today they are down to 21 (with corresponding reductions in hospital days). 80% healthcare encounters are asynchronous which better fits people’s schedules for non-emergent item. To sum it up, to support the array of new demands, healthtech will need to be human-centric, affordable and nimble . These aren’t the adjectives typically applied to traditional healthIT systems. Just as we have observed the military frequently spending money on capital built for the last war such as aircraft carriers and other slow moving military tools. Over time, the military learned that it was as much or more important to focus on the hearts and minds of those they were trying to work with and that remote intelligence tools have been highly effective at winning battles. When it comes to managing chronic disease, winning the “hearts and minds” of patients and remotely monitoring health are similar skills not factored into systems developed for the legacy reimbursement model. Therein lies opportunity for healthcare investors to look to innovative approaches from startups experienced in engaging consumers. Strategic investors, in particular, have extremely high motivation as their traditional businesses get disrupted. As we saw with the shift from analog to digital media and landlines to cellular technology, entire new categories of software emerged that trumped tweaks to legacy systems. The early customers and partners of the new categories of software were the ones that were able to manage the industry shift. The shift from the “do more, bill more” reimbursement model to the value and outcome based reimbursement model in an industry larger than any other creates an opportunity strategic investors seek to capitalize upon.

Study Shows Facebook Re...

An IRS officer learns that a taxpayer he’s investigating is a comedian who posts a video on a social network to promote previous and upcoming performances. . . Sounds like the start of a “guy walks into a bar joke” but that line comes from the 2009 IRS agent training manual. It goes on to suggest that the agent use this knowledge to track down how much the comedian was paid or use his future dates to arrange delivery of a summons. This is just one of the eye-openers you’ll find in the new Consumer Reports: State of the Net Report . Instead of simply surveying Facebook users, Consumer Reports interviewed developers, lawyers, security experts and non-profit groups that dig out all kinds of hidden information. What they found is that Facebook is become less and less secure. I’m sure you already knew that, but I’ll bet there are a few ideas here you’ve never thought about. For example. Suppose you were just diagnosed with disease. You might want to “like” a support group on Facebook. If your profile is set to public like the 28% of all users, your employer and your insurance company and all your friends now have access to this information. Or maybe you’re one of the 4.8 million people who mentioned specific times they’ll be away on vacation. Can you say, “rob my house, please?” Age old, groundless worry, right? Maybe now, but the risk is rising. Consumer Reports found a 30% rise in people who say they encountered a problem thanks to Facebook. Even with the rise, the percentage overall is small, but you can see where this is going. Facebook is becoming more than just a place to connect with old friends. It’s being used as a lifeline during a disaster. It’s a means of delivering a political message. It’s helping people find jobs, new homes, even new organs. Just this week, Mark Zuckerberg asked users to post their organ donation status on their profile page to help raise awareness. All of these are good things, but they all have the potential to go very wrong. But is that Facebook’s problem? Consumer Reports says that 13 million users haven’t set, or don’t know how to set, their privacy controls. Granted, the privacy settings can be tricky if you only want to block certain people from certain things, but at least Facebook has made the effort. Robert Scoble is on the pro side: “I make everything public on my Facebook account and I’m not worried about privacy because the more I share about who I am and what interests me, the more Facebook can bring me content that I care about. Yes, people have lost jobs because of things they have posted on Facebook, but you can also end up getting jobs and making all kinds of great connections because you’ve posted about your passions.” James Steyer of Common Sense Media has a different view: “Last time I checked, large corporate interests aren’t allowed to trample on widely recognized fundamental rights just because their founders have invented some new, profitable privacy-busting product, yet that is exactly what has happened to privacy rights over the past few years.” The Consumer Reports report details a handful of cases where Facebook was caught collecting and / or spreading information it shouldn’t have. It also talks about how data is the basis for targeted advertising which benefits both the consumer and the business. The final word in this lengthy report is that Facebook could and should be doing more to protect the privacy of users. Consumer Reports also recommends that the government impose stricter rules that hold all companies to the same standard. But in the end, even they admit that it’s not all on Facebook. Much of the responsibility lies with the user (and that includes marketers on Facebook, too.) They end with a quote that aligns with my thoughts on the matter . Security expert Ed Skoudis says; “Maximize your privacy settings, but even then, assume anything you do on Facebook can be seen by all of your friends, your mom, your great-great-grandchildren, your employer, health insurer, and the government.” Couldn’t have said it better myself. Read the full report at ConsumerReports.org. Join the Marketing Pilgrim Facebook Community

US Gov Wants To Spread ...

The Obama Administration’s plan to spread the country’s wealth around has made its way to struggling technology entrepreneurs. This past Tuesday, the Small Business Administration (SBA) began accepting applications for the $200 Million “ Early Stage Innovation Fund .” The new fund will allow venture funds to augment privately raised capitol with a grant up to a 1-to-1 match, to be used for early stage investments (around the $1-to-$4 million range). The program is an extension of the Administration’s StartUp America campaign to catalyze job growth through the engine of small business entrepreneurs. Most importantly, according to Sean Greene , a Special Advisor for Innovation at the SBA, the new fund will inject much-needed capitol in to what the Administration feels are underfunded areas outside of the typical startup zones (i.e. California and Massachusetts). According to Greene, the important details of the project are that a fund must raise at least $20 million in capitol to receive up to another $20 million in matching funds. “This is too small for Sequoia. The more realistic scenario is a small fund in Austin, or Minneapolis,” Greene tells me at the annual Milken Global conference in Beverly Hills, California this week. Venture funds must have “an established track record with good returns” in early stage investments and be able to demonstrate a solid business strategy to the SBA. To be competitive, Greene says that a venture fund should be within the top “quartile” or “half” of their venture peers. Contrary to the myth of a perfect market, venture funding isn’t a cold, calculated process of pouring over the best ideas from around the country. The dumb luck of meeting at VC at a party or having mutual a friend can often be just as important as having a good idea. Since the entire population of tech entrepreneurs can’t squeeze into San Francisco’s already-crowded housing market, the SBA is hoping to give some attention to smart technologists outside of Silicon Valley. The open question is, can the SBA overcome earlier failures to achieve an important economic goal? Greene seems aware of previous criticism of the SBA’s earlier investment programs and it’s current incarnation. A previous equity-based program in the early 2000s was inundated with complexity, and collapsed along with the Tech bubble. “We’ve restructured the instrument”, he says, to make it simpler, with a match-granting program to companies that have a proven track record of success. This is the so-called “fund of funds” model: instead of the government selecting companies, it simply allows already successful private funds to continue what they do outside of the normal cities. In addition to the problem of location-sensitive investing, Greene says that there’s a trend, especially among institutional investors (banks, pension funds), to manage fewer projects and therefore to make larger investments. Additionally, for reasons he would not speculate, viable businesses outside of California and Massachusetts could be worthwhile investments, were there capitol flowing to those regions. As a result, the SBA hopes to close the gap and spur innovation in some of the hardest hit economic areas of the United States. To learn more about the fund and application process, visit SBA.gov

One Year On Passion Cap...

Although it’s a year this week since Passion Capital appeared on the tech scene in London, it feels like they have been around a lot longer. It was in July 2009 I sat on the sun-kissed roof of what became known as their White Bear Yard base in London’s Clerkenwell, having had a tour of a vast empty warehouse space which three noted tech angels planned to fill with their invested startups. Unlike on or two other tech angels I knew, these guys were something of a breed apart. A laid-back German ex-DJ who had killed it in ecommerce, a cool-calm-collected Brit veteran of the Internet and a former Valley maven who had seen the early days of Skype. We expected interesting things form these three musketeers and we got it. Many of their early investments are now seen as Passion Capital portfolio companies, but in truth, whatever the brand they work under, the special sauce that Eileen, Robert and Stefan brings to the party is the essential ingredient. I mean, how often do you see an investor actually publishing the average founder salary of their invested startups? (BTW the answer is £32,767 per annum up to £54,000). For those unaware, this is Passion Capital: Stefan Glaenzer (founder of Ricardo.de and first investor/Exec Chairman at last.fm, PhD in derivatives and options trading); Eileen Burbidge (former products director at Yahoo! and Skype, 10 years in silicon valley before that, Computer Science degree from Univ Illinois); Robert Dighero (former CFO of QXL Tradus (publicly listed), acquired in 2007 for £1 billion, Mechanical Engineering MS from Cambridge). Where veteran angel and seed funder Robin Klein once saw all the seed deals in London (and, to be frank, the consensus is amongst VCs I know that he still does), he now has competition and ‘co-optation’ (for often these guys co-invest) in the shape of Passion, which has established itself as one of the “go to” early-stage/seed stage VC in London. Eden and Octopus and others have lately punched a lot higher too, but Passion’s vibe can’t be denied. If there is scrappy competition at the Seed funding stage in London, it’s often between US Angels / VCs like Dave McClure and Fred Wilson versus the locals – Passion Capital. And increasingly they are influential in a Pan-European sense as entrepreneurs flock to London from the continent looking for London’s more liquid and Valley-style investors. Certainly I’ve found them to be similar in tone to Valley VCs: accessible, pretty transparent and former entrepreneurs/operators themselves. To that end, their term sheet is publicly available/downloadable and – if you believe the entrepreneurs I’ve spoken to – pretty founder friendly. You also get the feeling they back people/founders more than ideas. As one-woman-startup ecosystem Eileen Burbidge tells me: “We like investing in early stage because it’s what we wish to do with our time. We love working with early stage teams and helping to build/up. When a company is at a point where it’s looking to optimize profit margins, it’s less interesting to us. We don’t fly business class.” But based on the data they have produced for their anniversary, is Passion Capital really the 3rd most active early stage fund in the world? Could that have happened? Normally you would assume the top 3 (or even 5) most active seed stage funds were all based in Silicon Valley. But it seems that based on the number of investments made over the last 12 months (Passion has made 20), they were third only to SV Angels (Ron Conway’s fund) and First Round Capital. However you need to factor in that this does not include batch/accelerator programs such as Seedcamp, Springboard, 500 Startups, YCombinator, TechStars, etc. It also does not include slightly “pray and spray” investment teams such as Kima Ventures who make the same size investments for all deals (regardless of valuation) and often don’t even see/meet with the teams they invest in. Kima is astoundingly active for a reason – they invest A LOT. But you don’t get the feeling they are as super hands on as Passion. Passion also seems to be ‘on trend’ in terms of government/state investment in (and subsidization of) venture capital funds, GigaOm recently noted . Of Passion’s £37.5 million, £25 million is from the UK government – but it’s hard to see how this cash could be invested more efficiently. It’s in the hands of three amazing experts who can kick the tyres on startups down to the tiniest detail. Imagine if some terrible government ‘board’ had to deploy this money. Disaster. Other firms are also getting these government funds like Notion Capital (which just announced their first $100 million closing 2 weeks ago), Dawn Capital, Eden Ventures, and Amadeus previous funds. The UK government has done well to secure these guys and the rumblings I hear from Number 10 are that this can only improve. This government-backed funding really works. The Israeli’s proved it in the 1990s with the Yozma programme which at one point made Tel Aviv produce more tech startups than Siliocn Valley. Passion is also on trend in terms of the “new/next generation” of venture capital funds being established not by financial/investment managers but by former entrepreneurs and operators. It’s a positive trend and particularly for early stage one that will generate better returns. In this camp there is Notion Capital, Atomico, PROfounders (all here in the UK) and quite a lot more in the US including. First Round Capital , Lowercase Capital , True Ventures , Felicis Ventures . As part of their one year anniversary Passion has produced a couple of interesting info graphics from data they’ve collected. I dare say we could get some nice stats from other players, but it’s one of the first times I’ve seen this done in Europe. Data points from Passion Capital: 1 year on (Apr 2011 – Mar 2012): • 1532 business plans received/reviewed • 652 through our website • 444 conferences and events • 436 through personal referrals/introductions through our website • 20 investments made (18 seed investments, 2 Series A rounds) • average seed round check size £189,936, smallest £15,000, largest £355,000 • £37.5 million / € 50 million / $60 million size of fund • 3 partners • 1 associate • 1 accountant • 20 investments • 42 founders backed • 2% female (1 of 42) • 29 average age (oldest was 39, youngest were 19) • 8 nationalities (40% British, 29% German, 14% Swedish,…) • 17 English • 12 German • 3 American • 1 Welsh • 1 Polish • 1 South African • 6 Swedish • 1 Canadian-Jamaican • 209 employees across all 20 companies. (Average company size is 10 people; largest is 19 people; smallest is 3 people.) Other data points: • Average founder salary is £32,767 per annum, lowest is £7,200 per annum; highest is £54,000 per annum • 7 companies have already gone on to raise follow-on financings at higher valuations w/new investors

Google Wins $35 Million...

Google and its partner Onix Networking just won a $35 million contract to run the U.S. Department of the Interior ‘s new cloud-based email and collaboration system. This wasn’t always a sure bet for Google. In 2010, the Department of the Interior awarded Microsoft a $59.3 million contract to run its email and collaboration system. Google and its Ohio-based partner Onix Networking quickly filed a suit to block this contract. In Google’s view, the Interior Department’s procurement process unfairly favored Microsoft and never gave it a fair chance. Google finally withdrew its lawsuit last September after the Department scrapped its plans to use Microsoft’s solution because its original decision was “now stale in light of new developments in technology and entrants into the market.” The arguments between Google and Microsoft got rather heated at one point last summer. Microsoft even alleged that Google falsely advertised that its solution was certified by the General Services Administration for use in government agencies. Once completed, the Department of the Interior will become the second major U.S. government agency to switch to Google’s cloud. The first agency to make the switch was the General Services Administration. A number of state governments also made the switch to Google’s solution recently . This being a government contract, things are obviously not as easy as just moving all the existing mailboxes over to the new system. Instead, this contract gives Google and its partner the right to “demonstrate they can meet the Department’s objectives for an integrated suite of tools and services, information assurance and regulatory compliance.” Once that is done – hopefully by the end of December 2012 – the actual migration will start. In total, this process will involve the migration of over 90,000 mailboxes away from the Department’s aging systems to Google Apps for Government . Microsoft, of course, was not too happy with this decision and has issued the following statement: Microsoft has a positive, longstanding relationship with the Department of Interior and we are working on a number of enterprise-wide initiatives with the agency. Although we are disappointed by this award, we will engage with our partners and DOI to review and understand the reasons for this decision. Microsoft remains committed to providing our customers with the cloud services that have the performance, security, privacy and other capabilities they expect and deserve.