Hot healthcare investing trends for 2011
— Dr. David J. Brailer is the chairman for San Francisco-based venture firm Health Evolution Partners and served as the National Coordinator for Health Information Technology under President George W. Bush. The views expressed are his own. —
2011 will be a chaotic and unpredictable year for investors.
We will see the first big changes of health reform play through – regardless of what the incoming Congress does. No one can predict what health reform means, particularly alongside the dwindling of the financial crisis and the ongoing jobs bust. The only sure thing is that 2011 won’t be a replay of the last two years where safe deals got done and a lot of companies traded from investor to investor.
Here are a few trends – and a few pitfalls – to pay attention to:
1. Please, no more meaningful use. Health information technology has been hyped into the stratosphere, and every entrepreneur is trying to raise capital while they can. Many are spinning their wheels because they mistake the investment bubble for their own shrewdness. The market will figure out in 2011 that federal subsidies will happen far slower than planned or that they may be cut back by a deficit-hawk Congress. Once the bubble pops and people get their feet back on Earth, deals will start to happen again. There are some very good health information technology companies coming to market in 2011 and they are going to rock healthcare in the coming years.
2. Life science is still alive – barely. The venture pullback and a draconian FDA have thankfully euthanized many me-too bio-therapeutic and device companies. But a lot of promising new treatments got killed in the onslaught as well. Disease hasn’t stopped trying to eradicate the human race, so the unmet demand for new treatments is still growing. And, regardless of what else is happening, Americans won’t tolerate being sick when there are treatments that may help them. Look for a crop of new life-sciences companies – therapeutics and devices in particular – to get traction. They will be different from their predecessors – way more cash-efficient and more attentive to demonstrable clinical value (i.e., if it needs a statistician to prove that it works, it probably doesn’t). Look for the shakeout of biomarkers to continue. The ones that a clinician would really want to use will get funded and others will fall apart.
3. Accountable care wannabes. Investors are searching the globe now for physician groups and other health providers who will be recognized as Accountable Care Organizations (ACOs). Not to matter that the Government hasn’t told us what ACOs are yet, or that some real group of physicians could actually do it. And, let’s remember that many people had the great privilege of losing their fortunes the last time investors funded physician management companies in the 1990s. A sub-trend here is the search for the next generation primary care network. Everyone is on the lookout for the doctor-meets-retail iteration of basic medical services now that more Americans will have health insurance.
4. Accountable care picks and shovels. Owning physician groups will be different this time because of the communication, financial and management software tools that can manage risk. Or at least, this is the new conventional wisdom. So, investors are out looking for any information technology that claims to do this and are snapping them up. Look for a lot of software deals with ACO in the press release.
5. Health plan skeletons and zombies. If nothing else, the health reform bill has signaled the beginning of the end of the health plan as we know and love it. Some will become integrated care delivery organizations (as Humana appears to be doing), and other will become information companies (check UnitedHealth’s last several acquisitions). Other health plans will hollow out by spinning off their non-core assets and turning over some core operations to outsourcers. A lot of deal activity is gearing up now that the Medical Loss Ratio (MLR) rules are out. Pay particular attention to Medicare Advantage plans as they face the end of the musical-chairs subsidy game.
6. Buy yourself a hospital. Community non-profit hospitals are in serious trouble. If the credit crunch and health reform didn’t kill them, the fiscal melt-down of states, counties and municipalities (which will crescendo in 2011) will bring many down. Look for a lot of community hospitals to be sold to or joint ventured with for-profit operators, hedge funds and buy-out funds.
7. Well, well, well … wellness. Wellness has been just around the corner for a decade. And, now it can’t be that far off again, particularly since employer-sponsored wellness gained favorable tax treatment in health reform. Expect to see continued investment in solutions that prevent obesity and smoking, promote exercise and healthy eating and other things that we should do, but don’t do enough. There is a mini-boom in wellness companies, but a few will survive and be important companies