Why VC’s Shortchange Healthcare IT—And How to Change It

Some are celebrating the increasing levels of venture capital flowing to health information technology startups. But I’m in the business of cloud-based electronic health record services, and I’m not celebrating. In fact, I consider current levels of VC funding for my industry to be tragic. In a 2013 first quarter report, Mercom Capital Group reported that “the sector continues to explode in another record quarter with almost half a billion dollars ($493 million) raised.” But VC levels pale in comparison to what the federal government has ponied up: $30 billion under the HITECH Act to encourage adoption of health IT.

Some are celebrating the increasing levels of venture capital flowing to health information technology startups. But I’m in the business of cloud-based electronic health record services, and I’m not celebrating. In fact, I consider current levels of VC funding for my industry to be tragic.

In a 2013 first quarter report, Mercom Capital Group reported that “the sector continues to explode in another record quarter with almost half a billion dollars ($493 million) raised.”

But VC levels pale in comparison to what the federal government has ponied up: $30 billion under the HITECH Act to encourage adoption of health IT. Venture funding for other health sectors—biopharmaceuticals, medical devices and equipment, and health care services—has been significantly stronger than for medical software and information services.

Why does health IT get such short shrift from investors? Three reasons:

1. Healthcare consumers don’t shop. Insatiable hunger for better gadgets has fueled constant innovation in the consumer technology market. Shoppers are engaged, eager, and willing to snatch up new products as quickly as they hit the shelves. Would the iPhone have come to market if consumers didn’t have choice and deep pockets? The same economy is not at play in healthcare.

With hardly an exception, patients can’t shop for healthcare. Why compare prices if you have no choice? Caregivers can’t shop for healthcare either. Few doctors know the true cost of tests and treatments they refer patients to. The setup leaves caregivers with little incentive to differentiate themselves by embracing innovative care delivery practices.

2. The biggest buyer stifles innovation. The government is the biggest buyer in the healthcare market. In fact, it represents more than half of all healthcare buying in the U.S. Unfortunately, the big spender has not prioritized supporting innovation, but rather minimizing the scenario of maximum regret: the audit, the lawsuit, the death. This compliance burden breeds risk-averse behaviors among healthcare providers, not creativity. Furthermore, the government rewards caregivers for a narrowly defined set of activities, limiting their appetite for innovation and thus for entrepreneurial services and technology.

3. Service, quality, and competitive pricing aren’t rewarded. By and large, doctors continue to be paid based on how many services and tests they provide. Here and there, they are also paid for reporting some data. They are not commonly incentivized to compete on price and quality, and there’s no obvious way to display that information for shoppers.

What if an imaging center wanted to run a sale during low utilization periods, and a primary care physician could find that out before referring a patient for an MRI? The patient could save money, the caregiver could be reimbursed for saving the system money, and the insuring party and patient employer could, in the long run, reduce their premiums.

Only recently have doctors been introduced to alternative health management payment models that reward them for reducing cost while keeping patients healthy—imagine that! As these models become more common and bring about an increasingly competitive and transparent market, the best caregivers will rise to the top and those who don’t perform will lose.

How can healthcare IT innovators overcome these obstacles and attract VC money? Three thoughts:

1. Do good and do well. In healthcare, there’s no point in doing well financially if you’re not improving outcomes or supporting caregivers. Be more than a bright idea. Move the needle in a measurable way toward improving patient care, helping caregivers be more efficient, or making or saving money. If you’re solving real problems and alleviating pain, you stand a chance to make it and the money will come.

2. Get noticed. It all falls apart if the product isn’t as good as or better than the next guy’s. But amidst the noise and shortened attention spans, being seen and heard is paramount to those investment dollars finding you. If you’re the best in the world at what you do, you better also be best at telling your story and explaining your value to a room full of people who don’t get it, don’t care, and have other priorities. It’s all in the pitch and oftentimes you’ll have one chance to make it sing and make it matter. Be ready.

3. Serve the market that has a lot of buyers! Outside of consumer products, not many industries have expansive target markets. But think about how many folks touch healthcare delivery—from doctors to specialists, from nurses to technicians, and more. Build a strong solution and make sure it’s not so unique that it’s only useful to small audiences.

To be sure, the healthcare IT sector is not just suffering a shortage of capital. There is a dearth of entrepreneurs and innovation here too. One reason is that companies like athenahealth, which still feels sometimes like the startup we once were, need to step up. It’s what our More Disruption Please program aims to do. A couple of times a year, we host three-day innovation confabs at our hilltop facility on the coast of Maine, bringing together the latest ideas for health IT in a collaborative setting.

We do more there than just share our thoughts and visions. We seek out talent and if we can find a good fit, we’ll capitalize you. We’re looking for true innovators—like Entrada, iTriage, and WellFrame. If you’re a game designer, put aside the mad birds and flying bricks for a second and work on one with needles and bandages. It will be fun! And we can heal the world together.

Funding health IT innovation with $1.2 billion per year in VC money is bubkus. The steps above will change mindsets and, we hope, drive the exponential increases in VC interest and capital commitments that our industry requires.

Jonathan Bush is Chief Executive Officer, President, and Chairman of the Board of Directors at athenahealth, Inc. He co-founded the company in 1997 and has been a director since its inception.

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