Government as an Engine for Innovation

I’ve been thinking a great deal about the newly formed Center for Medicare and Medicaid Innovation. (CMI). This entity was established as a result of the Affordable Care Act (the new healthcare reform legislation) and its purpose is to “research, develop, test and expand innovative payment and service delivery models that will improve the quality and reduce the costs of care for” patients covered by CMS-related programs. The legislation gives this entity over $10 billion dollars initially and broad authority to figure out new ways of doing things better and differently than before. What is great about CMI is that they have the authority to run their programs much more like a business would without many historical governmental constraints. That’s great news for innovation, which is sorely needed in the U.S. healthcare system.

Among the key objectives that the administration has discussed is how to transition the collective mindset from one of healthcare to one of health. In other words, if a person is healthy, they do not need health CARE. This is a very important distinction; it puts the emphasis on prevention and wellness as opposed to what you do when somebody is already sick. In order to affect such a transition, there must be an emphasis on innovation to change the way we have traditionally looked at the healthcare world.

This is an interesting challenge and one that requires a great deal of thoughtfulness in how to approach the universe of innovation opportunities. As venture capitalists, I and my colleagues vet, select and monitor deals and specifically focus on how we pick winners and avoid losers. It’s a little like being asked to handicap who’s going to win the World Series, but then again, that is pretty much our job as VCs: to act like Billy Beane and pick those most likely to succeed in a capital efficient way based on detailed analysis of trends and meaningful data, not solely based on experience.

For those of you who don’t know him, Beane is the General Manager of the Oakland A’s baseball team and is known as the guy who introduced “sabermetrics” to baseball, which is the science of using detailed analysis of objective player statistics, instead of relying on conventional wisdom/traditional scouting to identify the best players. He was famous for being able to identify nascent baseball superstars who he could hire very cheaply by comparison because they didn’t fit the traditional mode. Beane was profiled in the truly awesome book, Moneyball, by Michael Lewis, in which Beane is famously described for drafting a short, fat catcher who nobody wanted based on his statistically-proven ability to draw walks.

Beane’s is in many ways a great model for venture capital in healthcare, in particular, because his goal is to find the best value in baseball—in other words, the highest quality players who could produce a winning season at the lowest cost. Sound familiar? This will be the same challenge our government officials will face as they think about all of the options available to them in order to identify which of those crazy caterpillars is going to actually turn into a butterfly.

This will be interesting, because many of the potential areas of improvement may be in organizations that don’t yet exist, such as specialized new health plans, provider organizations and payment structures that have been much discussed but barely tried in practice. This effort will require a broad range of public and private views, including that of entrepreneurs who have those “not yet existing” ideas, to be considered.

We need to nurture companies that come out of left field with disruptive ideas that blow up conventional wisdom and replace it with completely new ways of doing things, particularly thing that impart convenience, personalization, health-optimization and cost-effectiveness into the healthcare equation. Will today’s healthcare giants be tomorrow’s healthcare leaders? Good question, but not likely unless they are willing to reinvent themselves completely—something very hard to do. It’s a little like shooting your dog because he’s ugly, even though he gave you years of companionship.

It appears that CMS and their colleagues are seriously committed to innovation and to doing the work to find great new ideas. What they do and the money they can bring to bear can make a big difference, particularly since VCs have underfunded healthcare services and IT for eons. I saw an article today that said VC funding of healthcare IT almost doubled in Q2 2010 as compared to Q2 2009 to $157 million. Healthcare services consistently takes less than 1% of VC money that goes to the healthcare sector; in Q2, total healthcare venture funding was $2.7 billion so services probably got about $27 million, if I did my math right. $27 million sounds like a lot when you are talking about buying a house (actual cost of recent house bought by Charles Schwab), but its downright microscopic when you are talking about healthcare system innovation. It will be interesting to watch the progress in Washington as it unfolds.