David Mayer’s column in peHUB last week reminded us of one of our favorite industry aphorisms: “The only things that change in healthcare are the acronyms.” Behind the snark is a longstanding truth: healthcare is a highly complex, slow-to-evolve industry with powerful and durable relationships.
It’s a worthwhile point to ponder alongside Mayer’s piece, in which he asks which is more important to successful investing in healthcare, and particularly healthcare IT, in the current cycle: specialized industry knowledge on the one hand, or the sort of consumer-centric industry disruption in which some technology investors seem to specialize on the other.
To get at that question, let’s first consider what is said to be different in the current cycle (suspending for the moment another useful aphorism, that the four most dangerous words in business are “it’s different this time”).
Mayer proposes three major developments that in his view make the present healthcare environment uniquely well-suited for transformation: cloud computing/SaaS, consumer engagement, and connectivity. Aside from the acronyms and buzzwords, we wonder how unprecedented these developments really are.
Far from being a novel development, cloud computing was actually how the healthcare IT industry got started. In the 1990s, one of the largest companies in the HCIT industry was Shared Medical Systems (remember them?), so named because hospitals would “share” time on remote, hosted mainframe computers. Despite the cost effectiveness of that approach, IT adoption in healthcare has lagged other industries quite significantly.
As for consumer engagement, we doubt that the costliest and sickest consumers (or to use a quaint healthcare term, patients) are any more or less focused on their own good health than in the past. Nor are today’s mechanisms for consumer financial engagement unprecedented: It was failure to control cost growth of the old indemnity insurance system, with its deductibles and other cost sharing, which led to the development of the HMO industry in the 1980s.
Today’s pervasive and near-instantaneous connectivity is something new in healthcare as in every other industry, and has genuine transformative potential. However, we suspect that the manner and pace in which connectivity will impact healthcare will be more shaped by regulation emerging from Washington, D.C., (e.g. the Affordable Care Act and its future legislative fixes, HIPAA and the HITECH Act) and industry structure (e.g. the fact that a majority of physicians now are employed by or affiliated with a hospital) than by the nuances of the connectivity technology.
To be sure, technology will reshape healthcare over the long haul. In our view at NaviMed, adoption of new IT models into the workflows of hospitals, insurers, doctors and life science companies will grow dramatically over the coming decades, but also fitfully. Similar to the price of oil over the next 30 years, a sure long-term vector (“up and to the right”) will be colored by wild short term swings. In fact, we view healthcare IT as the most cyclical space in healthcare – perhaps even more so than biotech.
Why is this?
Because when some external stimulus (most recently the HITECH Act — $19 billion in federal grants for healthcare provider adoption of electronic medical records) drives HCIT adoption in the short term, IT investors tend to see that and pile into the space, thinking that adoption cycles in healthcare will resemble those in other verticals. This is clearly not true. The healthcare industry has wildly different adoption – and 30 years of IRR data show that when IT investors pile into healthcare, limited partners would be wise to push back.
Consider this: Healthcare has experienced several past periods of rapid structural change and technology adoption: the development of the HMO industry in the 1980s, the shift to desktop computing in the late 1980s and early 1990s, and the original Internet and resultant “e-health” bubble in the late 1990s. If external perspectives were more valuable in these periods of disruption, we’d expect to see that reflected in the data.
However, a deep look at 30 years of venture and growth equity returns shows that when tech investors cross over to invest in healthcare companies, the results have been poor.
These data clearly show a massive advantage for firms with healthcare expertise when making healthcare investments. And why shouldn’t they? Don’t we assume, for instance, that energy investors do better at energy investments vs. those firms without any energy focus or experience? Healthcare is at least as complex and regulated an ecosystem as energy and yet it repeatedly experiences cycles of outsiders driving up investor frenzy.
Change does come to healthcare, but often slower than outsiders would expect, and on the industry’s own terms. Those terms are usually driven and shaped by the nuances of regulatory change and the priorities of insurers, both governmental and commercial. All of this makes any period of substantial change in healthcare a very good time to be a healthcare specialist.
About the authors: Dr. Bijan Salehizadeh and Ryan M. Schwarz are co-founders and managing directors of NaviMed Capital in Washington, D.C. Salehizadeh has 13 years of healthcare operating and investment experience. He was previously a general partner at Highland Capital Partners, where he focused on venture and growth stage healthcare investments. He may be reached at firstname.lastname@example.org and followed on Twitter @bijans. Schwarz has nearly 20 years of investment and financing experience in healthcare. He previously led the U.S. healthcare venture and growth capital practice at The Carlyle Group for 14 years.
Image credit: Healthcare photo courtesy of ShutterStock