This post started as an effort to codify some learnings we’ve gleaned from a couple of decades of investing in the healthcare industry. What advice would my today-self share with my 1997-self if given the chance? I guess its also an effort to remind my today-self not to forget the lessons of the past. What follows is Part 1 of that effort.
So, here it goes.
- Always remember The New, New Thing (even though it won’t be written until 1999). I’m referencing the book by Michael Lewis about Jim Clark’s run at revolutionizing the healthcare industry via startup Healtheon. Like many other bubble-era companies, Healtheon failed to achieve its vision. In recent years, catch-phrases such as “consumerism” and “bending the cost-curve” once again suggest major shifts in the healthcare landscape. The lesson from The New, New Thing is that large-scale, rapid changes in the healthcare industry are extremely difficult to pull off . My addendum to the lesson is that large scale industry changes will occur at generational-speed and not internet-speed. Direct-to-consumer telemedicine is a great example of this. We first looked at some of the current leaders in the industry ten years ago. Our primary concern was the uptake rate, which at the time was below 1% of covered populations. Despite ongoing legal challenges from medical associations, uptake rates have improved, but less rapidly than hoped. I suspect this is due in some part to a patient’s desire to consult with his/her physician rather than a stranger on video chat. Curiously, price doesn’t seem to be a big driver of patient behavior (argh!). A study published in the August 2017 edition of Health Affairs, only 3% of patients polled (n=3,000) had price shopped before seeking care (c’mon, what?). Further complicating the situation is the fact that the direct-to-consumer telemedicine model is a disruptive threat to the primary care physician community which derives a large portion of its income from office visits. Phew. Tiring, isn’t it? I’m actually a big fan of telemedicine and am pumped that our health plan recently added MD Live-powered tele-consults. On the other hand, I’m amazed and frankly frustrated at how long its taken for that benefit to arrive. I'm hopeful that telemedicine is finally beginning to take-off. In summary, the industry will change in the coming decades, but those changes will be incremental vs. large-scale.
- Invest in Solvers, not Exploiters. Money, in the form of hard-dollar ROI, is a reliable predictor of a young company’s success. But, due to the pseudo-economy in healthcare, interpreting ROI for healthcare innovators can be nuanced. I reference here a post written by my friends at Healthcare Growth Partners on the difference between Exploiters and Solvers in the healthcare community. I really like those monikers - they capture the difference between the two types of companies. The thesis is that within the inefficient healthcare economy there are those who exploit the inefficiencies and there are those who eliminate or solve the inefficiencies. Our belief at SSM is that investing in Exploiters is a highly speculative game. Exploiters tend to get run out of town (HGP points to Martin Shkreli as an archetype). Many new investors are attracted by the high margins and scale of Exploiters. In our view, a great looking healthcare investment solves big economic problems for at least one of the “three P’s” (patients, providers and payers) and at most presents very few problems to the remaining “P’s”. A Solver with a hard-dollar ROI and quick payback is what we’re looking for.
- Love and appreciate physicians, but don’t bet on them changing. If a business thesis assumes significant physician behavior modification, odds are it will fail. I’m not saying it will fail, but over the long haul physicians have proven to be very resistant to change. The struggle for efficiency often comes into conflict with physician psychology and work-flow. In my opinion, their resistance is explained by their training. Physicians are prepared to be on the hot seat… to take in myriad inputs and coordinate care based on algorithms that are ground into their brains through a course of rigorous and often grueling preparation. Training a fighter pilot takes far less time and is less complicated. Who can blame physicians for being resistant to processes/procedures that simply maximize throughput or, to be a bit cynical, decrease their income? Lets face it, being a physician is very difficult work almost any way you look at it. I’d like to see that change; in fact, our nation must take steps to improve physician conditions. But, as an investor, I can’t take on that fight. I just have to steer clear. So, don’t bet on the efficiency vs. physicians battle to reach a peaceful detente anytime soon.
Okay, just writing this down has made me tired and a little depressed. My 1997-self would probably roll his eyes and say, “you’re a real bummer, man”. Fair enough... and, uh, good talk Russ.
More thoughts to come in a future post. For now, I’d love to know what you think; what you would add or subtract.
About SSM Partners. SSM has partnered with talented entrepreneurs for more than 25 years. The growth equity firm invests in rapidly growing companies that have proven and differentiated software, technology, or healthcare business models. Starting with a relationship built on trust, SSM offers its entrepreneur-partners a thorough understanding of the growth company lifecycle and a collaborative approach to building great businesses. Learn more at www.ssmpartners.com.