Capital Sources and Allocation

What Healthcare Innovations Are Drawing Investors?

May 6, 2019 6:16 pm

March 1—Two major investment funds are increasing their funding of healthcare initiatives—with important caveats.

The Google Ventures investment fund—started in 2009 with “a little bit” in the healthcare sector—has increased its healthcare focus to 50 percent of its $1 billion in annual investments, Krishna Yeshwant, MD, a GV (formerly Google Ventures) general partner, told attendees at a recent value-based payment (VBP) meeting.

On VBP, Yeshwant said “we’ve been following this space closely for several years, and it’s probably the biggest macro trend across all of health care.”

Robert Vorhoff, a managing director for General Atlantic, said health care emerged as one of four areas the private equity firm invests a share of $4 billion in each year.

“We’re big believers in the shift from fee-for-service [FFS] to value for a host of reasons,” Vorhoff said. “And we look for what we think are the best companies in each part of the value chain to become investors in and help those companies grow and create value over time.”

The investors’ comments came during the Fourteenth National Value-Based Payment and Pay for Performance Summit.

One warning Vorhoff offered was that even though the shift to value-based care is “inevitable,” that does not mean it will be simple.

“We think it will take longer and be more painful than probably most hope,” Vorhoff said. “The pace and degree of that transition will vary significantly by geography, from market to market, as well as by population.”

Approaches Differ

General Atlantic’s approach is usually limited to a minority ownership position in the generally later-stage healthcare companies in which it invests. Those investments can range from $75 million to $500 million and follow a “top-down study of the space” to find the best companies.

The shift from FFS to value “has been an overriding theme for our efforts over the last six or seven years and really driven the vast majority of the investments we have made,” Vorhoff said.

Investment recipients include Alignment Health Plan, which is a Medicare Advantage insurer with its own vertically integrated clinical model that focuses on the sickest 20 percent of members. Other value-based investment recipients include Oak Street Health, which is a globally capitated risk-bearing primary care group in the Midwest, working with multiple payers in each market.

“A lot of the companies that we invest in we think are the very best of their models,” Vorhoff said.

In contrast, the generally earlier-stage healthcare value investing carried out by the Google investment fund has ranged from a few million dollars to $500 million. In addition, the fund, through its corporate parent Alphabet, provides operational help to companies in which it invests, including design teams, engineering staff, recruiting, marketing partnerships, and other resources.

The Google fund has narrowed its focus to initiatives that move the needle on quality and costs.

“There’s all sorts of technologies that we see pitched out there that make almost no difference to what is actually happening to a patient or a clinical experience,” Yeshwant said.

Innovation Focus

Among the innovations Google’s fund has found to hold promise in reducing costs in VBP is expanded use of machine learning. The near-term benefits of machine learning in health care will focus on increasing back-end efficiency, rather than replacing clinicians. For example, Google uses such algorithms to increase the efficiency of data center energy use.

“To the extent that we talk about 30 percent, 40 percent, 50 percent waste, how much of that is actually in the administrative areas where there might be opportunities to accelerate and bring some of these things forward?” Yeshwant said.

Vorhoff’s fund has acquired a “very good” natural-language-processing technology that can pull medical record data. Initially used for hospitals’ quality-reporting activities, it was redeployed to expedite prior authorization, which used to go through a sequence of clinicians to obtain approval

“Application of this technology cut out all of these steps along the way and gold-carded it, and said, ‘Yes, there’s enough data to satisfy evidence-based medicine,’” Vorhoff said. “It accelerated the path to the physician and provided enormous savings in back-office costs for that company.”

The Google fund has produced good benefits from its efforts to shift care to lower-cost sites of service.

“When a patient comes into the emergency room, is that the best location for most of that clinical care? As a clinician, I can tell you right now the answer is, ‘no,’” said Yeshwant, who is a practicing primary care physician. “So, what are the opportunities to move these clinical interventions to places that are lower-cost [and] more convenient for the patient. There’s tremendous opportunity across all parts of the system.”

Investor Concerns

Among investor concerns is that policymakers will not continue to back the shift to VBP.

“You want all participants in the system to feel like it is an inevitability and they should start thinking about how their models should evolve to thrive in that environment,” Vorhoff said.

Yeshwant said that under Tom Price, former secretary of the U.S. Department of Health and Human Services (HHS), it appeared the federal government was “pulling back” from VBP.

“I’ve been very surprised in the current HHS and Centers for Medicare & Medicaid Services (CMS) stance as to how engaged they’ve been” on VBP, Yeshwant said. “We talk to Seema [Verma, administrator of CMS] and others relatively frequently about where the system can go. They are very engaged and willing to work with companies.”

Vorhoff, a member of an investment council convened by Eric Hargan, deputy secretary of HHS, has helped the Trump administration both identify areas of innovation and think about what HHS can do to help accelerate that innovation.

“It’s a fabulous thing to see people in public services reaching out rather than putting up walls and not engaging,” Vorhoff said.

Another government issue that makes Vorhoff “a little scared” is the support some Democrats have for “Medicare for all” or “Medicaid for all,” which would undermine the growing incentives for people to innovate in healthcare delivery.

One of the biggest challenges investors see for the health system’s shift to VBP is that every entity will start out with different levels of sophistication and resources to help navigate the transition.

“Some business models are more exposed and will require more change and innovation to create something that would thrive in a more value-based environment,” Vorhoff said.

Additionally, investors need to find healthcare providers that are committed to thriving under VBP but that also can straddle a long transition from FFS.

Neither investor foresees advanced VBP, like capitated payments, eventually spreading across the entire healthcare system because there are areas where it is unsuited, such as for patients whose clinicians are struggling to diagnose


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