American Healthcare: Under All the Noise, Psilos Finds Cost-Effective Solutions

Private Equity 22 Feb 2012

by Doug Friedenberg

We had a chance recently to speak with Lisa Suennen of Psilos Group, a venture capital firm focused on health care companies.    She is bemused by the fact that the current crop of institutional investors views healthcare investment currently as having slightly better prospects than the Costa Concordia which ran aground recently.  Lisa notes that it’s true that emerging pharma and biotech investments may have been sluggish lately, but the world is fairly teeming with smaller companies in health care subsectors that are part of a new wave in the field.  It makes as little sense to bypass the healthcare sector as to have the view that Harvard educated Asian basketball players lack talent.  But we’re getting ahead of ourselves.

Psilos was born very late in the last century. The group’s niche is healthcare IT, services and medical devices.  They sift through some 800 companies a year looking for the special company whose product or service has the ability to improve quality of care AND reduce its cost.  The technology in and of itself is relatively less important than the company’s ability to achieve that goal. When Psilos began, the idea of linking care quality and cost reduction as a primary lens was not intuitively obvious.  Understandable, perhaps, in view of that era’s rock and roll IPO market wherein one could quite reasonably wonder why cutting costs would ever matter.  Conventional wisdom once said that better quality healthcare cost more.  That has turned out not to be so.

Issues in American Healthcare

As we talked to Lisa, it became clear that a realistic understanding of today’s healthcare jungle is essential to its improvement, and the problems are anything but simplistic.  She noted that the government, through its programs, pays for 50% of all healthcare in America; private or public, costs are growing across the board, and all players have an interest in reducing costs.  The single payer system may not be the cure-all some hope, if the experience of some European programs is a guide.

There are three primary drivers of cost increases in the US:  the aging of America, and a significant rise in chronic illness, and the misaligned financial incentives of patients, payers and providers.  The aging problem will likely not be solved by more wrinkle cream, but the rise in chronic illness is special.  Lisa noted that 50% of all adult Americans now have some chronic illness, rising to 80% of all people aged 65.

The American healthcare problem is complicated by the way costs are paid.  The American system has fewer restrictions on how costs are incurred. Users of services are surprisingly disconnected from its payers; they have small incentive to check prices, and consumers have little accountability in the way they use or overuse services.

One obvious example of a chronic disease is type 2 diabetes, which can lead to a number of increased costs as complications occur.  The link between diabetes and obesity is clear.  American exceptionalism sees perhaps its finest hour in its substantial lead over the rest of the world in the percentage of obesity in its citizenry, 30%.  The Brits run a poor third, at somewhere like 23%.  So our domestic readers can shout, “We’re number one!” for years to come. Against this backdrop Lisa made the point that many chronic diseases and their attendant costs are avoidable.  It is well known that nutrition or its lack contributes to the development of disease.  It is ironic that for the most part, doctors are not well trained in nutrition, which leaves them more likely to fix problems than to prevent them.

How Do You Get People to Eat Their Broccoli and Make a Profit for your Fund?

We had made a note to ask Lisa a variant of this question when we read in her blog Venture Valkyrie:  “I was reading about the kinds of activities individuals can and should do to minimize the risk of such afflictions as diabetes and cancer. The lists always include eating broccoli and getting proper sleep.”

We had found a bit of research about broccoli, which symbolizes healthy eating.  Broccoli has surprisingly comprehensive and substantial benefits for diabetics. The compound sulforaphane, found in broccoli, has been found to improve heart function and may even reverse arterial damage caused by diabetes. In a seminal study done in the UK, researchers found that broccoli consumption could reverse some damage to heart blood vessels, as it reduced the molecules that damage the heart. If you suffer from diabetes, this is tremendously important: diabetics have five times the risk of developing heart disease and stroke.

One area venture funds have been working in is their web presences.  Websites like zipongo, shopwell and fooducate are providing consumers with ways to assess in real time how different foods will affect them and to engage in personalized nutrition management through smarter grocery shopping.  We ourselves see someone in the morning mirror who was diagnosed with type 2 diabetes and was stunned to discover how much in a supermarket was now toxic.

Lisa mentioned a consumer health and wellness conference she had recently chaired where it was clear that more and more food companies, large and small, are part of the trend towards healthier consumer food products.  She noted that many such products turn out to be more profitable than traditional fare.

One company in Psilos’s portfolio worth noting is SeeChange Health.  SeeChange is a health insurance company that provides financial incentives for positive actions taken by their insureds, linked to a comprehensive analytics system screening for people who are getting or already have a chronic illness. They have devised ways to lower customer deductibles or co-pays in exchange for certain compliance milestones and regular biometric testing.  And it seems to be working.  Customers are enthusiastic, and yet, annual premiums the last two years have increased by 2.5% per year, compared with a 7 to 10% industry average.

Lisa mentioned two other portfolio companies.  PatientSafe Solutions, using an Apple wireless platform, is assisting in the reduction of medical errors on the part of hospital staff.  There are reasons to avoid hospitals, apart from the fact that so many people there are sick or dying.  One such reason is that there’s are many more human medical errors than you could imagine– personnel may give wrong dose at the wrong time to the wrong patient, in all the combinations you can imagine.  Lisa cited statistics reporting that 19% of all medicines are given in error.  PatientSafe technology gives nurses a handheld device that   brings patient info directly into the nurses hand while at the patient bedside, provides alerts about potential errors, improves nurse tracking of vital signs and helps monitor patient movement to prevent falls.

Mauna Kea is public in France and has developed a supermini microscope.  It allows physicians to view a suspected cancer more effectively.  They can actually see the tissue at the cellular level while still inside the body with resulting precision in dealing with cancerous tissues. This saves substantial time and invasive activity by minimizing the number of biopsies required to address cancers, as traditional endoscopy provides much weaker resolution, resulting in many more biopsies than are often necessary.

This Thing About Alpha

Lisa concluded her comments by noting that there are many areas in health care seeing phenomenal growth, particularly healthcare information technology and healthcare services.  She pointed out that the ongoing changes in the health care system and health care reform are creating substantial growth opportunities in the new medical economy, in contrast to current conventional wisdom on the subject.  Which causes us to wonder once again whether the phrase ‘conventional wisdom’ is itself an oxymoron.

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