Once upon a time there was “ehealth.” That time was the late 1990’s and there was a temporary ripple in The Force when anything that combined healthcare and the Internet had a suddenly popularity in the venture capital investment community. Companies like the original WebMD, the original Medscape, Mediconsult.com, DrKoop.com, Medibuy, Adam.com, PlanetRx, and a host of other online pharmacies, healthcare group purchasing entities and online health portals were born and sought after by investors looking to capitalize on the collision of the Internet and the healthcare industry. The theory at the time was that you could take any traditional industry, add a soupcon of Internet, and “voila!” instant value creation.
Unfortunately, it turned out not to be so easy and by the early 2000’s, the ehealth industry died a painful death, leaving behind a few bedraggled companies, a mountain of cashed checks with venture capital firms’ signatures on them and thousands of vacant Aeron chairs. Healthcare technology became the Mike Tyson of venture capital investment: wistfully remembered for what it might have been but shunned for how it had behaved towards its fans. “Never again,” the VCs muttered, “never again!” and they returned their affections to the siren songs of biotechnology and medical devices, if they continued to invest in healthcare at all.
What a difference a decade makes.
Fast forward to 2011 and healthcare information technology (HIT) is once again the darling of the healthcare investment community. Having shed its “ehealth” moniker, HIT is all the rage, courtesy of at least five major economic drivers:
- the passage of the HITECH Act, whereby Congress bestowed a $40 Billion stimulus gift on those willing to make a go of building companies in the EHR and connectivity sector;
- the passage of the Patient Protection and Affordable Care Act (PPACA), which requires the delivery of sophisticated technology to address massive cost inefficiencies in the U.S. healthcare system;
- the now-near universal access to Internet, broadband and wireless technologies at every significant U.S. clinical organization;
- the sudden ubiquity of smart phone and iPad like products that put cheap computing power in the hands of physicians and consumers alike; and,
- the groundswell of recognition by everyone that the healthcare system just can’t justify the level of waste and inefficiency it has achieved by failing to enter the information age, as every other American industry has done, unless we want to re-invent ourselves economically as a third world country.
The coup de grace that has brought healthcare investors squarely back to HIT has been the increasing difficulty in making biotechnology and medical device investments pay off. As the FDA has made it harder to get products to market and payers are cracking down on reimbursements for new drugs and devices, healthcare venture and private equity investors have had to look up from their lab coats for the next new, new thing, which in some ways has turned out to be the new old thing: HIT.
So what are the signs that HIT is the new black? It is not even tracked as a separate category by the National Venture Capital Association and PriceWaterhouseCoopers, who publish the oft-read MoneyTree report each quarter that reports where the venture money is going. In fact it is almost impossible to get accurate information on how much money is now flowing to the sector from venture and private equity coffers. But the signs are everywhere.
First of all, investment firms that normally stayed on the sidelines are going all in. Investors that would not give HIT companies the time of day are courting them aggressively, networking actively with CMS and Office of the National Coordinator for HIT (which didn’t exist back in the 1990s) and adding partners and advisors who know the difference between a claim form and chloroform (note: they can both put you to sleep).
My firm, Psilos Group, which has stalwartly stayed in the HIT investment business throughout the last 13 years, has been contacted by numerous other investment firms looking to learn about the HIT marketplace and partner with us in HIT deals. While I won’t name names, these are primarily venture firms that have made their names in the biotech/medical device world and whose sudden love of HIT might surprise you. I have of late had the unusual honor of being asked to explain to some of my fellow investors what it takes to get in on the HIT action. Strange days indeed.
More important is the evidence of an increasingly robust exit environment for HIT companies. From April 2010 to April 2011, research firm Health Data Management (HDM) tracked 100 HIT acquisitions, compared with 76 during the same period in 2009-2010. And the deals are getting bigger. In the last 18 months, Allscripts bought Eclipsys for $1.2 billion, Aetna bought Medicity for $500 million; Harris Corp. bought Carefx for $155 million and Walgreens even bought ehealth survivor Drugstore.com for $409 million. OptumInsight (formerly Ingenix) has been on a buying spree, picking up Axolotl, Picis and QualityMetric (a former Psilos investment), among others. I can assure you that where there are exits, there are investors looking to get in between the buyer’s wallet and the acquisition target.
Notably, companies that have never before set foot into healthcare are looking for assets to buy or with whom to partner to take advantage of the wave of opportunity that has been catalyzed by PPACA and other socioeconomic events. This further stokes the interests of investors looking to put their capital to work in the HIT sector. Ten years ago who would have thought that Best Buy or Dell or even Salesforce.com might have substantial commitments to HIT? Would you have guessed that on your next visit to Costco you could buy a year’s worth of toilet paper, a stadium-sized vat of ketchup and a subscription to the Allscripts EMR? In my opinion it is telling that 38 of the 2011 Fortune 50 companies (America’s top 50 companies by revenue) are in the healthcare business in some significant way. As recently as 2001 there were only 5 companies on the Fortune 50 list that derived all or a substantial amount of their revenue from the healthcare industry.
So are we right back where we started in 1998? I don’t think so. There is a much greater recognition today that HIT products need a serious clinical or administrative value proposition, a clear and recurring revenue model and the ability to demonstrate evidence of real cost-savings. There is a much matured customer base demanding IT solutions to solve the real problems inherent in our teetering healthcare system, not just a bunch of technology looking for a problem to solve. There is also a whole new landscape of legislation and regulation that directly supports the evolution of the HIT marketplace, sometimes with cold hard cash.
Yes, it is possible that there will be too much money chasing after the reincarnated HIT boom and that can lead to a lot of lemons. But is clear there is also going to be ample opportunity to make lemonade (cloud-based lemonade?) by investing in those enterprises that truly understand how the healthcare system works and how to make technology work within it.