by Mark Tomaino

January 2012 – During a now distant 2011 holiday party, a social acquaintance asked me why I was so excited about the future of private equity investment in healthcare information technology (“HCIT”) companies. My somewhat bearish friend contexted his question with a litany of relevant observations, including that the HCIT landscape was inhabited primarily by “small game” – many small, one-product companies that were subscale, yet harbored valuation expectations that defied gravity – or larger, publicly traded companies whose astronomical valuation metrics served to fuel the seemingly unrealistic and unfounded aspirations of the former species. I did not disagree with his comments, and bolstered his cynical glee by highlighting the challenge that both small and large HCIT companies face in winning over new customers — purchase decisions were often paralyzed by innumerable choices of vendors that use indecipherably similar parlance to describe their solutions, IT priorities that outstripped annual budgets and a regulatory environment that is unsettled and in flux.

I will not dispute that an attitude of skepticism, undeniably, is healthy when it comes to assessing the prospects for generating appropriate risk-adjusted returns from private equity investments in HCIT companies. Prevailing comparable valuation metrics, a largely fragmented market and an overriding fog of complexity that characterize existing administrative, financial and clinical processes of payers and providers alike threaten to rain on any HCIT investor parade.

However, in contemplating my response to my friend, with a faint smile I recalled one of my favorite lines from one of Hollywood’s memorable creations, the movie “Back to the Future”featuring Michael J. Fox who played Marty McFly. When McFly was dismayed and dejected about his prospects for getting back home, to the future, Dr. Emmett Brown (“Doc”) adeptly pointed out to Marty that his problem was that he was not thinking “fourth dimensionally”! McFly acknowledged that he had a real problem with “that”, a plight shared, unceremoniously I imagine, by those investors dissuaded from making investments in HCIT companies because of the perceptible challenges of moving the U.S. healthcare system “forward to the future” within a reasonable time horizon.

Indeed, in order to embrace with optimism the potential for attractive returns from private equity investments across the HCIT landscape, it is imperative that investors embrace fourth dimensional thinking. This is not the fourth dimensional thinking that Doc would have espoused but, rather, a simple unyielding focus on the combustible opportunities that will result from the powerful convergence of existing 4 dimensional forces (e.g. regulatory, demographic, socio-economic and technological) in combination with entrepreneurial innovation, utilization of technologies, such as electronic health records, that will allow for the collection, analysis and reporting of cost and quality information, and access to private equity capital. In short, private equity investors and the HCIT community have the opportunity to create the equivalent of the U.S. healthcare system’s “flux capacitor”, the fictional device that transformed Doc’s DeLorian into a time machine, to achieve a future of increased access to healthcare with lower costs and improved quality, the “trifecta” promised by optimal use of healthcare information technology by all constituents in the healthcare value chain.

Compliments of federal government stimulus, hospitals and physicians are adopting electronic health records that will capture clinical data in electronic format. In parallel, physicians will be reimbursed, increasingly, for satisfying quality measures, rather than for simply rendering service. However, the digitization of clinical data following the widespread adoption of EHRs should be equated merely to “paving over the cow path.” EHR adoption and payment reform present the foundation for the exchange of healthcare information between providers and patients, which will enable more informed decisions regarding treatment protocols and options for patients. Information technology will enable physicians and patients to work in concert to stamp out incidences of over and under utilization in favor of optimizing care delivery within the parameters of cost and efficacy.

Ever spiraling healthcare costs continue to accelerate a change in employer-sponsored healthcare benefit designs to favor high deductible plans that impose a greater financial burden on employees. Greater accountability for the financial implications of healthcare consumption is contributing to a greater demand for cost and quality information. The information transparency enabled by healthcare information technology will enable patients to behave as consumers with concomitant increases in competition on the supply-side of the healthcare ecosystem. While, undoubtedly, healthcare information technology will lead to more perspicacious patients, so too will healthcare providers rely on information technology to capture and report data on outcomes, and other attributes influencing patient satisfaction, as a means of distinguishing themselves from their competition. The result of this information technology-enabled transparency and competition will be lower costs and improved quality.

The aging of the population leading to more Medicare recipients than ever before, coupled with the largest wave of projected healthcare professional retirements ever, will contribute to an unprecedented supply-demand imbalance in the healthcare services marketplace. Healthcare information technology will be instrumental in ensuring access to care and the maintenance of equilibrium, without compromising efficiency and effectiveness of care delivery. Software as a Service (SaaS) delivery models and cloud computing methodologies have lowered the financial burden of adopting new functionality, which will accelerate the migration away from legacy systems and foster increased information exchange that will be the cornerstone of collaborative care in the future.

The movie, “Back to the Future”, illustrated that time travel is indeed possible; as Marty McFly said, “if you put your mind to it, you can accomplish anything”. Similarly, private equity’s resolve to invest in HCIT companies will help propel the U.S. healthcare system forward to a time and place where patients will not have to bet on the “trifecta”.

About the Author

Mark Tomaino is a Senior Industry Executive at Welsh, Carson, Anderson & Stowe, where he focuses on healthcare information technology investments. Mr. Tomaino can be reached at 212-893-9527 or


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