by Dave Eichler, Managing Partner at Psilos Group
April 2017 As a healthcare venture capitalist for the past 18 years, I am often asked how our investment strategy has been impacted by Obamacare, and more recently by efforts aimed at its repeal and replacement. I understand the impulse by some to stay on the sidelines given all of the uncertainty, but I remain bullish. The complexity and misalignment of incentives that characterize the U.S. healthcare system is precisely why there are so many outstanding opportunities to back innovations that achieve the overarching goals of reform.

Healthcare is a $3 trillion economy on its way to representing one-fifth of our country’s GDP. The imperatives around lowering healthcare costs and improving quality are politically agnostic. They are as relevant today as they were a decade ago…and will be a decade from now. What has me excited as an investor is the convergence of technological, economic and social factors that are catalyzing real systemic change. We are still in the early stages of disruptive, transformational – and I believe inevitable — trends involving market based reforms around the following key themes:

1. Value Based Reimbursement / Alternative Payment Models – In the old ‘fee-for-service’ world, providers were generally paid based on the procedures they performed. This incentive toward volume versus value was a root cause of the runaway healthcare cost inflation we have experienced for the past 20+ years. Today, the rollout of value based reimbursement arrangements is putting an onus on providers to improve quality and patient outcomes while lowering overall cost of care. For example, hospitals are no longer reimbursed for additional services provided as a result of avoidable errors and readmissions – so there is a demonstrable value proposition and ROI for solutions that avoid these “never events.” More recently, Medicare has initiated bundled payment programs for various procedures such as hip and knee replacements, surgical hip and femur fracture treatments, heart attacks and coronary bypass surgeries. Under these payment models, hospitals will earn bonuses or suffer financial penalties based on the total cost of these episodes relative to historical averages. Don’t expect a timely or perfectly smooth implementation of these programs, but the direction has been set and providers need to get on board. With more providers assuming economic risk through these alternative payment models, there will be huge demand for technology, tools and services that help them improve clinical workflow, post-acute care coordination, and hospital readmission reduction as they navigate the windy road toward true Value Based Care.
2. Consumer Engagement – For too long, America’s healthcare “consumers” have been uninformed, unengaged and disenfranchised. Our experience with accessing healthcare involved a small co-pay for an appointment or filling a prescription. We rarely challenged a doctor’s recommendations and didn’t have any information to make a cost/quality value judgment when it came to important healthcare decisions. All of that is changing for two important reasons. First, individuals have assumed much more financial responsibility through higher deductibles, co-pays and share of premium contribution. Second, we have become much more empowered in the way we access information and connect with healthcare through the internet and smartphones. While technology is advancing rapidly, we are still at the beginning of a cultural change from passive to active participants in our healthcare, and our expectations around consumer experience are shifting accordingly. There are many exciting companies that are providing cost transparency, tracking health status, enabling communication directly with consumers and helping them make more informed decisions. Consumer engagement tools are equally important for payers and providers in order to affect patient behaviors around care directives, medication adherence and chronic disease management that drive cost and quality measures.
3. Healthcare IT Platforms – Consider the way we have transacted in industries like financial services, travel and retail for the past 15 years. Now think about how we continue to interact with our doctors and insurers in 2017. Despite $22 billion in federal funding from the 2009 HITECH Act – the majority of which was intended to incent adoption of electronic health records by physicians and hospitals — healthcare remains a sector characterized by decades-old IT platforms and siloed access to information. If value based medicine and consumer engagement are the way forward, then payers and providers must modernize their infrastructure as a strategic imperative. Where the first wave of IT adoption targeted the low hanging fruit of revenue cycle management improvement, the next wave of innovation is about creating next generation, SaaS/cloud based systems that provide the functionality, flexibility and interoperability necessary to compete effectively in the new healthcare world order.
4. Data Analytics – As much as a third of all healthcare costs are due to waste from redundant, unnecessary or error-prone care. Increasingly the collection, analysis, and exchange of healthcare data is improving the practice of medicine. Using data to manage population health through risk stratification and evidence-based care protocols – and even achieve personalized medicine through advances in genomics and molecular diagnostics – will drive better efficiency and outcomes. Companies that help access, store, analyze and communicate actionable data from comprehensive sources (i.e., beyond claims) will deliver a compelling value proposition for both payers and providers.

Each of these four themes fall under a burgeoning sector that’s commonly referred to as Digital Health. However, I think about them as fostering an ideal of “Connected Health.” Connected in the way lines between payers and providers are blurring with an alignment of economic incentives around population health management, care coordination, and measuring quality and cost as components of value. Connected in the way individuals will access their personal health information, interact with doctors, and improve their consumer experience with insurers. Connected in the way we will access data in real time to create actionable care directives, inform clinical decisions and care management strategies and personalize medicine for optimal outcomes.

All of this is in stark contrast to the dysfunctional, disconnected healthcare we’ve been experiencing for decades. I wouldn’t bet on any particular direction when it comes to the politics of healthcare reform, but as an investor I am confident in the course we are on when it comes to Connected Health. That train has already left the station and we’re not going back.

About the Author
David Eichler is a Managing Partner at Psilos Group where he brings over 18 years’ experience focusing on venture and growth equity stage investments in the digital health, healthcare services and medical technology sectors. He has also held senior operating roles at Caregiver Services, Inc. (a Psilos portfolio company), including Chief Financial Officer from 2005-2007 and EVP of Operations and Strategy during 2016. Prior to joining Psilos in 1999, Dave was an investment banker at Wasserstein Perella & Co., where he worked on M&A and restructuring assignments as a member of the firm’s Healthcare Group. Earlier in his career, he worked as a defense policy analyst for DynCorp, focusing on issues relating to nuclear nonproliferation and export control. Dave earned an MBA from the Darden School of Business at the University of Virginia. He holds another masters degree in National Security Studies from Georgetown University and a B.A. in Government and International Relations from Cornell University. He can be reached at daveeichler@psilos.com or https://www.linkedin.com/in/david-eichler-2078b/.