Stuck Inside the U.S. Healthcare System with the Patient Navigation Blues Again

As a venture capitalist, I am encouraged by the innovation pouring into the U.S. healthcare sector. As a typical healthcare consumer, however, I still find it surprisingly difficult to navigate the system. For example, my wife told me a year or so ago that I didn’t hear her well enough. So I used an online service to book an appointment close to work during lunch to remove some excess earwax. When I was in the waiting room googling the doctor, I discovered that the doctor’s wife once set fire to his office in retaliation against him for secretly slipping an anti-psychotic drug into her fruit juice (he successfully removed my earwax by the way).

But if you require an important procedure, more thought should go into the selection. I asked one of our advisory board members, Dr. Alan Guerci who is CEO of Catholic Health Services, how he would go about finding a doctor if he wasn’t a healthcare insider. He said he would first try to find a healthcare institution close by that gets high marks from U.S. News and World Report in the specialty of interest. Next, if it is a teaching hospital, he would call the Office of the Chief Resident in that specialty and ask the Chief Resident for a referral. For a community hospital, he would ask for a referral from the Office of Medical Staff Affairs.

Dr. Guerci’s suggestion mirrors the advice of other experts. Dr. Marty Makary, in his book Unaccountable, emphasizes that hospital employees possess essential inside knowledge. In fact, you do not want to get your care from a hospital where its employees wouldn’t want to receive care from their home institution or otherwise assign low ratings to their department’s teamwork or safety culture relative to peer institution departments. Unfortunately, Makary reports that at over 50% of the 60 reputable hospitals his team at Johns Hopkins surveyed, more than 50% of the hospital employees would not want to have their own care performed in the unit in which they worked. At only 12% of the institutions his team surveyed would 85% or more of the employees surveyed seek their own care from their department. One can hope that in the future regular consumers will gain access to this type of survey data so they can use it to make better decisions. Until then, you have to be a sleuth to make sure you get a quality doctor in a great department at a strong hospital. If you succeed, you can dramatically improve your chances of achieving a good outcome. Any and all detective work you perform could help you avoid “never events” such as the surgeon operating on the wrong side of the body or leaving sponges or instruments inside you.

Remind yourself that appearances can be deceiving as you investigate. A prestigious hospital can have a terrible department with 4x to 5x the complication rate of a less well-known hospital in the same city. The medical profession is rife with stories about the tall, good-looking, charming doctor with all the right credentials who is an absolute hack in the operating room. The nominal percentage of physicians impaired by substance abuse is 2%, but the actual rate is believed to be much higher and no authority governing physician licensure makes it easy to find out who they are. Do your best to make sure your surgeon wasn’t on call the night before your surgery and therefore didn’t get adequate sleep, because your chances for complications go up 83% in that scenario according to one study Makary cites.

Seeking a physician who performs high volumes of the procedure you require is a smart way to avoid trouble, because, according to Makary, and a New England Journal of Medicine study he cites, surgical death rates are directly related to a surgeon’s experience with that particular operation. However, Makary also points out that a surgeon who has orchestrated their practice to produce high volumes of the same procedure is often focused on efficiency more than a friendly bedside manner. Therefore, in the case of choosing a “proceduralist”, as opposed to a diagnostician where listening and patience are critical, Makary suggests, and Guerci concurs, you should focus on the surgeon’s experience more than their personality, especially when the procedure is very specialized. Experienced surgeons are more likely to have seen every variation of the procedure you need and be able to handle unanticipated problems expertly. When interviewing surgeons, ask how many procedures they perform per year and what their complication rates are.

A number of established companies and start-ups make procedure volume data like this available but the consumer experience is still cumbersome. Medical societies such as the American College of Surgeons and the Society of Thoracic Surgeons are creating scrubbed longitudinal databases that track patient outcomes which are risk-adjusted to account for hospital size, demographics and patient complexity. If the doctor you are considering has a low complication rate, you should find out if it is because he or she is really good or if he or she just operates on less risky patients.

The other place to be aggressive in the interview process, according to Makary, is to make sure you get minimally invasive surgery if it makes sense because when compared to open surgery it results in less pain, fewer infections, shorter hospitalizations, fewer medications, and lower costs. He is troubled by how random your chances are of receiving minimally invasive surgery. If open surgery is being proposed, he thinks the surgeon should tell you the percentage done open versus minimally invasive in the U.S. as compared to the doctor in question, complication rates for each method, and average days in the hospital for each. He also recommends getting a second opinion on the spot.

We would of course love to hear how our readers are “hacking” the system, as “Patient Navigation” is an investment theme we are pursuing with our portfolio company Vitals and one we intend to mine going forward.

Digital Health Landscape Notes and Observations

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The growth in U.S. healthcare spending is outstripping GDP growth once again, which places enormous strains on governments, employers and consumers.  U.S. healthcare spending is now $3 trillion per year or 18% of GDP and grew 5.3% in 2014.  The current estimate is that it will grow at a 5.8% annual clip through 2024. This growth is driven by 10,000 baby boomers hitting age 65 every day, millions of newly insured Americans, and a moderately expanding economy. As a result, entrepreneurs and investors correctly perceive a multi-decade opportunity to grow cloud, mobile, software and data services companies that will improve the quality and lower the cost of care in our dysfunctional system.

2014 was the breakout year for the Digital Health sector, as most data sources agree that venture capital investment in the sector grew by over 100% to approximately $4bn (the range of estimates varies between $3.5bn and over $6bn). In 2015, the growth rate for venture capital investment in the sector was flat and a greater percentage flowed into later stage investment rounds given the proliferation of corporate investors and growth equity investors. We also saw more private companies merge with other private companies as they tried to appeal not only to customers, who want broader solutions and fewer vendors, but also to investors who want companies with more scale and a quicker path to exit. A disproportionate amount of value creation will accrue to entrepreneurs and investors who know how to overcome, quickly, the usual obstacles of merging private companies together.

Many of the new technology companies in the sector believe that risk shifting is the key growth driver. Risk is being shifted to healthcare providers from government and commercial payors, which will increasingly only pay for the quality of care delivered rather than the volume of procedures they perform.  In order to adapt to this new environment, providers will need better care coordination software, data analytics, and mobile solutions. They will also need better digital engagement with and compliance from their patients. Consumers are also being forced to assume more risk. In the next three years, 44% of self-insured employers will offer high deductible health plans as the only health benefit option.  In fact the vast majority of health plans sold on the public exchanges are high deductible plans.  As consumers are forced to spend thousands of dollars from their own pockets before insurance kicks in, they will need technology and data to make better decisions and to monitor their health.  They will also need to seek out a better value when they purchase healthcare just as they do with other major expenditures.

The importance of restoring market-based price signals to the healthcare system is the thrust of a great book I read recently, Catastrophic Care: How American Health Care Killed My Father and–and How We Can Fix It, by David Goldhill. His father died of a hospital-acquired infection in a New York-based hospital, which motivated him to use his considerable skills in business outside of the healthcare industry to figure out what is wrong with our system. He is a life-long Democrat and proponent of universal healthcare. He was dismayed to discover that hospital-acquired infections kill over 100,000 people each year, which is 2x as many who die from car crashes and 5x as many who are murdered each year. He is dumbfounded that waste accounts for as much as 25% of all healthcare spending.  He points out that healthcare spending has increased from 6% to 18% of GDP in 30 years and yet the 5 year increase in a longer average lifespan achieved during that period cannot be tied to our massive increase in spending. For example, while the reduction of early cardiovascular death has been the most important driver of increased longevity, a study published in the New England Journal of Medicine estimated that lifestyle changes (reduced smoking, better diet, and exercise) contributed 7x more to reduced death rates than costly procedures such as angioplasty and bypasses.

Surprisingly, seniors are spending 50% more of their income today on healthcare than before Medicare. Goldhill is rightly concerned that seniors are being over-treated. Between 1995 and 2008, seniors between the ages of 65 and 74 increased their annual number of doctor, clinic and hospital visits per person by 30%.  Furthermore, 30 years ago physician visits by seniors skewed toward general practitioners and geriatricians while today they skew toward specialists, which visits are much more likely to result in costly new procedures and prescriptions. Fully a third of Medicare patients have surgery in the last year of life, but, surprisingly, the rate isn’t much different if the patient is 65 or 85.  Even at age 90, 20% of Medicare beneficiaries have surgery in their last year of life. Atul Gwande’s powerful new book, Being Mortal, which is about geriatric care and how choices are made at the end of life, also examines how suffering, complications and the length of the recovery period are often poorly factored into care decisions at the end of life.

Goldhill’s solution is inspired by Singapore’s health system, which spends 4% of GDP on healthcare and has outcomes that compare favorably to U.S. outcomes.  Singapore’s citizens pay a significant part of their income into the system and there is a safety net for everyone, but consumers are invested in their care decisions because “patients make a meaningful financial contribution at the point of purchase” and subsidies vary according to service level and the patient’s income. These ideas are thought-provoking and of course require greater study, but with $36 trillion in unfunded future liabilities we will have to consider all manner of reforms if we are to create a better system. Otherwise, in 70 years, the U.S. will spend 100% of its budget on healthcare.  Milestone hopes to play its part in this reform process by investing our capital in technology companies that facilitate this transformation.

Healthcare’s Reformation

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One of the more enjoyable and edifying things I have done recently was to read a 32-year-old book titled The Social Transformation of American Medicine and The Making of a Vast Industry by Paul Starr. Starr was a young sociologist at Harvard when he published the book, which won both the 1983 Pulitzer Prize and the Bancroft Prize in American History. Starr traces the arc of the U.S. medical profession from humble beginnings to unimaginable power and excess. In the process, he illuminates two of the more important healthcare trends fueling investment opportunities for our fund: 1) patients acting more like consumers; and 2) healthcare providers being more efficient and changing the way they are compensated.

Healthcare “consumerism” is a trend in which patients are being forced to think and act like consumers because they are assuming a large and growing financial burden for their healthcare costs. Between 1999 and 2012, workers’ earnings increased 47% while inflation increased 38%. Over the same time period, workers’ contributions to health insurance premiums increased 180% to over $4,000 (out of a $16,000 average premium). In addition, employers are increasingly offering, exclusively, high deductible health plans to their employees, in which the employee is personally responsible for the first dollar of their healthcare costs up to a few thousand dollars before insurance kicks in. As a result, Americans are starting to look for value in the healthcare market like they do in other markets.

What I didn’t properly appreciate until I read Paul Starr’s book is that Americans used to be very self-reliant with respect to healthcare, particularly from colonial times into the late 1800’s. In pre-industrial America, work was close to home and managing illness was one of many skills families, with the help of the community, dispatched with great self-confidence. Women were responsible for much of the care, and books that explained medicine and healthcare free of jargon were very popular. Just as importantly, the medical profession was viewed with ample skepticism. The democratic ethos disposed Americans to distrust groups claiming special expertise, status and privilege. As a result, physicians had very little respect or income during this period. In addition, without hard roads or telephones, it was beyond the means of most Americans to afford a physician’s services given that charges for transit time often exceeded the cost of the actual medical advice. Thus, for reasons of choice and economic necessity, Americans used to manage their own healthcare. If Americans can adopt a similar attitude today and embrace the increasingly sophisticated software and information services available to aid their decision-making, our healthcare system will be more consumer-centric and effective.

However, patients are only half of the equation. Healthcare providers will have to do their part too. One of the detrimental elements of our current healthcare system is that providers are largely paid by third party insurance companies for the volume of care they deliver to patients, not for the quality of care they deliver. There are important exceptions, including integrated healthcare systems such as Kaiser, Geisinger and Intermountain, but I had not fully appreciated why his type of healthcare system was not more common until I read Starr’s treatise.

In fact one reading of the history of American healthcare is that because the market for healthcare services did not reward physicians during the first 100 years, the profession spent the next 100 years organizing the U.S. market for its own benefit. When compared to the rest of the world, the “cultural authority” and economic success the U.S. medical profession secured was quite rare. Unfortunately, this rise to preeminence was in conflict with the organization of an efficient, cost-effective healthcare system.

Starting in the late 19th century, the medical profession rose in prominence and power through numerous interlocking initiatives. It had to quell and/or coopt rival medical sects like homeopathy, osteopathy, and chiropractic. The American Medical Association cleverly mandated county and state membership, which enabled it to establish state licensure laws and control over medical schools, thereby restricting the supply of physicians. Private physicians wrested control of hospitals away from trustees in order to fill beds with paying patients.

Remarkably, the medical profession also managed to resist the corporate control of medicine and more rational, risk-bearing payment arrangements. Setting aside important exceptions, physicians managed to avoid becoming salaried employees of an independently- governed corporation that uses modern management techniques to relentlessly increase productivity, decrease errors and produce a better customer experience. The provider industry also used its considerable power to marginalize payment arrangements in which a provider is responsible for comprehensive, preventative healthcare services in exchange for a prepaid subscription. In this arrangement, a hospital admission is a costly failure for the provider rather than a profitable transaction.

The future health and financial viability of our nation depends on shedding these anachronisms. Fortunately, there are so many opportunities to create high growth, high value businesses to facilitate this transformation, that investors and entrepreneurs will be busy for decades. We are fortunate that innovative technology-enhanced services businesses, Milestone’s investment sweet spot, will play a central role. We are honored to be working with our current portfolio companies and financing the next wave of exciting companies.

The What and Why of Cloud Computing

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At Milestone’s last annual investor meeting in November 2013, we had a lively discussion about cloud computing and its potential as a disruptive force within the information technology (“IT”) industry. Cloud computing is a well-known concept in the worlds of venture capital and IT, and though it is slowly moving into the mainstream, our annual meeting discussion suggested to me that cloud computing is still not well known within the broader business community. Given that my partners and I believe we can make a lot of money over the next decade backing young technology companies focused on cloud computing, I thought I would try to provide a high level explanation of the concept and some reasons why it may prove to be one of the greatest transformations in how businesses use technology we’ve ever seen.

At its core, cloud computing is about freeing businesses of all sizes from having to buy, deploy, manage, maintain, and regularly upgrade their own dedicated technology resources, including software, hardware and other related data center infrastructure, needed to run their businesses. Instead, cloud computing enables businesses to essentially “rent” the technology resources they need when they need them and for as long as they need them. These technology resources are typically delivered as a service through the Internet by leveraging software, hardware and infrastructure housed in data centers owned by vendors such as Amazon (Amazon Web Services), Microsoft, Google, IBM and Salesforce.com. With cloud computing, businesses pay for their technology resources based on usage often measured by either seats (e.g. number of users) or by workload (e.g. amount of computing resources consumed) or by capacity (e.g. amount of data storage utilized). It is this providing and consuming of any technology-resource-as-a-service that is perhaps the simplest, yet most comprehensive, way to think of cloud computing.

There are multiple layers of cloud computing and the services it enables. Perhaps the most well-known and mature layer is software-as-a-service (“SaaS”), led by Salesforce.com. With this layer, businesses access and use software applications through the Web without having to purchase and provision any related hardware. The hardware and the infrastructure required to deliver the application is owned by the SaaS vendor. Gartner predicts the SaaS market will grow from roughly $20 billion in 2013 to $33 billion in 2016. Much of this growth will come as large businesses finally begin to adopt a full range of SaaS solutions.  A less mature layer of cloud computing but with greater disruptive potential is cloud infrastructure-as-a-service (“IaaS”). Using IaaS, businesses can rent computing and storage infrastructure to run their applications and store their data. Similar to SaaS, all of the hardware and infrastructure is owned by the IaaS provider, and is accessed and delivered as a service through the Web. The leader in this market is Amazon Web Services. Gartner predicts this market will grow from $9 billion in 2013 to $24 billion in 2016, not as big as SaaS but growing faster and perhaps having greater market potential in the long term.

Businesses that adopt cloud computing, especially IaaS, will radically change how they budget, purchase, operate and maintain the technology resources they need to run their businesses. As an example, by leveraging cloud computing, businesses can reduce long-term capital commitments for building out data centers and buying infrastructure technology for those data centers. Instead, businesses can, in essence, rent someone else’s data center and infrastructure on-demand. For most businesses, renting can significantly lower their IT costs and can free up capital that can be deployed for other strategic purposes. While cost savings and reduced capital expenditures garner the most attention, the other key benefit of cloud computing is increased business agility and flexibility. Since businesses don’t own the technology resources, all layers of computing (except for the devices used to access the resource) can become virtual as opposed to physical. Therefore, technology resources can be deployed, powered down or reallocated at a much faster rate. This means businesses can react more quickly to changing business or economic conditions without needing to add, sell or depreciate physical technology-related assets.  Adopting cloud computing will likely enable businesses to compress their planning cycles and to accelerate decision making. The days of waiting for IT to catch up to the needs of the business are over.

Many of our current portfolio companies leverage some layer of cloud computing to deliver their solution as a service. As cloud computing continues to evolve, we are bullish on the investment opportunities that it will create. As we saw in the 1990s when businesses moved to the Web, the move to cloud computing will require the need for additional technologies to manage, monitor, secure, and optimize cloud computing environments. We have already made one investment in this area, a company called Cloudnexa, which provides monitoring and optimization services for businesses using Amazon Web Services. In addition, businesses, especially large ones, will likely want automated solutions to help them migrate legacy applications to cloud IaaS environments and analytics to help ensure performance and service requirements are being met. Given the flexibility, agility and speed cloud computing offers, we believe new and innovative business models will develop and new technology services will come to fruition. As in the 1990s, most of the innovation will come from start-up companies that can develop new solutions faster and respond more quickly to customer demands and needs. At Milestone, we will do our best to back some of the big winners in the growing cloud computing space.