Tom Rodgers, Partner

Bracing for the Wave, The Anticipation of True Healthcare Reforms and Their Impact on Venture Investing

The only thing expanding more rapidly than our nation’s healthcare spending is the body mass index of the average American. Therefore, it should come as no surprise that the political winds finally seem to be prevailing in favor of tackling the daunting challenges facing our health care system – a system that has become bloated and ineffective during the past 60 years. It should also come as no surprise that these winds seem to resemble a tornado that shifts course and strength by the minute. Only time will tell to what degree President Obama will succeed where Hilary Clinton, Richard Nixon and Harry Truman have failed.  However, most pundits and legislators would agree that systemic changes are inevitable as our model is, to quote President Obama, “teetering towards extinction” in the face of an aging population tsunami that is on course to swamp the Medicare budget.  Compounding the problem is Americans’ insatiable appetite for sedentary lifestyles, processed foods, alcohol and high levels of stress, which has expanded largely unchecked thanks to a healthcare payment system that demands little personal accountability for poor lifestyle choices, or from healthcare providers who, under our current fee-for-service system, are paid to deliver treatments, rather than prevent the need for future treatments.

The reform debate is producing copious rhetoric, finger pointing and fear mongering – but little in the way of practical solutions to core problems.  Sensationalistic arguments about the negative implications of rationing care, death panels, or scrapping capitalism in exchange for socialism draw much attention from the media, yet overshadow well-founded suggestions on how to rationalize our healthcare system. Frustratingly, our elected officials seem intent on a watered down quick-fix political compromise masqueraded as a systemic overhaul.  Due to haste rather than thoughtful analysis, most of the early focus has addressed what was supposed to be the low hanging political fruit—establishing coverage for the roughly 50 million uninsured and reforming the insurance industry.  We can expect congress to determine who to bill for this expanded coverage in a way that results in the least political repercussions sometime close to the eve of mid-2010 elections (taxing “gold plated” policies that go above the employee mandate levels perhaps?).  After that, hopefully soon after, I expect that our legislators will realize that they have only added complexity and cost to a flawed system and therefore have likely caused the system to fail faster.   At this enlightened junction, we should all hope that the policy makers as well as industry will muster the courage to tackle the more complex and fundamental issues of cost, quality, and behavior modification.  This is when the much more important second phase of healthcare reform will start to take shape.

The Threat to Healthcare Innovation

As part of this second phase, we can expect to hear draconian proposals that the healthcare venture community will rightly disparage as threatening the future of investment in innovation.  These suggestions may include establishing an abbreviated approval pathway for biogenerics (aka “Follow on Biologics”), price controls on drugs and devices, longer and more expensive trials aimed at demonstrating economic benefits in addition to safety and efficacy, reducing reimbursement to institutions and providers, or perhaps eliminating reimbursement all together for some expensive end-of-life treatments and interventions deemed to be “quality of life improvements”.

Most negotiations will probably end with palatable plea bargains, such as extending the patent life on biologics in return for supporting a biogeneric approval pathway, or the “donut hole rebate” proposal put forth already for Pharma in an attempt to stave off dreaded price controls. We can hope that our legislators seriously consider initiatives that will encourage more Americans to take more accountability for their health and lifestyle decisions, despite fears that the specific levers may border on political poison.  A more realistic hope is that policy makers recommend ways to phase out current fee-for-service schemes over time for individuals who end up in the “public safety net”.  Then efforts can be made to transition to team-based schemes where clinicians and care givers are reimbursed for managing an episode of care, or for placing evidenced-based medicine in a more central role.  Additionally, payment levels could be tied to achieving quality outcomes and efficiently coordinating care. Such a transition will not be easy or fast, but it is necessary. 

The Impact of Change

Change is coming in many forms and the impact will be different for hospitals, labs, doctors, payers, patients and investors.  Inevitably, economic impact assessments for new technologies will increasingly move to center stage when it comes to regulatory, reimbursement, and purchasing decision making.  We all must plan and adjust accordingly.  On the therapeutic side, the venture capital community should launch a campaign to quickly improve the efficiency, transparency and predictability in regulatory and reimbursement processes.  Without this, the incentive to invest in early stage technologies will truly be lost.  On the IT and services side, the venture industry should finally take its collective foot off the brake and begin looking for solutions enabled by the long-awaited and now government-funded EMR backbone, and for services that possess compelling cost savings and value propositions that override their reimbursement exposure.  

Investing during these dynamic times is not for the faint of heart.  Many venture capital portfolio companies have faced shifting winds midcourse.  We are all working to steer them towards safe harbors, but not all will make it. Investment cycles are lengthening, the cost of capital is rising, and the LP base is less patient. Going forward, the winners will be those that place bets on disruptive cost reduction and quality improvement solutions.  In this new healthcare economy, the prior recipe of investing in good science, good IP, good teams and improving clinical outcomes sadly may not be sufficient. Those who find themselves—due to good strategy and good fortune—benefiting from the emerging reimbursement drivers and in the good graces of with the kingmakers at CMS will do well.  The losers will have unknowingly placed bets on companies that have technologies that are either incremental or which fail to align the incentives of payers, patients, and providers in the future healthcare economy.  

Bracing for the Wave, The Anticipation of True...