Tired of Sleep Deprivation…

For over 30% of our lives, we are sound asleep. While we all need sleep, actually crave sleep, it is an enormously complicated and dynamic process and yet its biological purpose is not well-understood. Clearly there are restorative powers associated with a “good night” of sleep including the removal of metabolic wastes and the increase of brain’s supply of adenosine triphosphate (ATP). It is not just the brain that needs quality and recurring sleep but virtually all of the organs do to reduce risks from high blood pressure, cardiovascular disease, diabetes, depression, and obesity.

According to the National Institute of Neurological Disorder and Stroke, there are broadly two types of sleep (rapid eye movement (REM) and non-REM) which cycle between 4 – 6 times each evening, lasting around 90 minutes for each cycle. Non-REM sleep has three different stages which culminate with REM sleep, which is characterized by elevated brain activity, heart rate and breathing. It is also when one most often dreams. During REM sleep, one is effectively paralyzed which is believed to shield us from actually acting upon our dreams and hurting ourselves. The combination of the pandemic, the elections, and the economic crisis often leave many of us literally short of breath, further disrupting sleep. Interestingly, over the course of a typical day humans take approximately 25k breaths.

Obviously, sleep can be disrupted by a number of environmental and physiological stressors. Notably the Covid-19 pandemic has created a “sleep crisis” for many. Express Scripts reported that in the first month of the pandemic sleep medication prescriptions spiked by 14.8%. Obviously, the presidential election was an enormous contributor to many restless nights over the last few weeks. Oura, which sells the Oura Ring to track personal health data, reported that election night caused the loss of nearly 139 million hours of sleep across the country while increasing our collective heart rates by 1.4 beats/minute that night.

A recent Harris poll for the American Psychological Association (APA) reported that 68% of respondents said the 2020 election was a “significant source of stress.” Quite forebodingly, the APA also reported that the “grief cycle” tends to last at least six months, after which time, individuals start to exhibit more normal sleep patterns. This does not augur well for the nearly 74 million voters struggling with the election’s outcome. As we have now entered into this terribly confusing, disorienting lame duck period between the inauguration and an unlikely Trump concession, clinicians are reporting precipitous declines in worker productivity due to extended poor sleep.

In addition to impairing sleep, stressors also triggers more intense, more vivid dreams. In an effort to better understand the role of dreams, researchers at Cambridge University have created a DreamBank of 38k dreams that have been annotated and digitally curated. While this research is nascent, the goal is to develop better behavioral health diagnostic tools through “dream catcher” technologies. Early results suggest that men tend to have more aggressive, negative dreams. No surprise there. Disturbingly, one of the most common dreams is being attacked by bugs.

In addition to numerous academic studies, there are a handful of commercial initiatives to better understand – and treat – dream disorders. Nightware recently received De Novo FDA clearance for its Apple Watch and iPhone app to diagnose and treat nightmare disorders linked to post-traumatic stress disorders. The promise of such technologies is to address behavioral health conditions that might lead to suicide or other devastating outcomes.

There are several hundred apps, devices, and therapeutics to address issues confronted during the 70% of the time when we are awake, yet there are relatively few (credible) products focused on when we are asleep. Quite clearly the landscape is fundamentally changing in the face of the pandemic. Regulatory frameworks, reimbursement levels and consumer proclivity to use these types of products have meaningfully improved their commercial prospects. Juniper Research suggests that there will be 1.4 billion users of digital therapeutics and wellness apps alone by 2025.

For example, Pear Therapeutics recently released its Somryst prescription digital therapeutic for chronic insomnia. Using cognitive behavioral therapy for insomnia (CBTi) to retrain the brain to better embrace sleep, this product has demonstrated a 45% reduction in symptoms of chronic insomnia. Big Health, another exciting digital therapeutic company (which recently raised a large round of financing), has released its Sleepio product, armed with numerous clinical studies claiming to improve sleep by 76%.

In addition to this class of products, there are a number of traditional medical devices now in the market from mundane sleep monitoring wearables to sleep robots – true story. Somnox is now selling what is claimed to be the first “spoonable” sleep robot that helps regulate breathing and heart rate. Sounds intriguing. Perhaps a more appropriate device might be the headband from Ebb which distributes cooling fluids around one’s frontal cortex to reduce forehead temperature, presumably lowering brain activity. For a mere $500, one could purchase the UrgoNight headgear system which is to be worn just three times a week for 20 minutes at a time during the day to retrain the brain to increase the production of sleep-promoting brain waves. Wow, that sounds slick.

Of course, one could turn to more “traditional” sleep aids like psychedelics which are experiencing a (legal) renaissance as numerous states are now decriminalizing treatments like psilocybin (magic mushrooms) or 3,4-Methyl​enedioxy​methamphetamine (MDMA, the active ingredient in Ecstasy or “molly”). Since this spring, have been three IPOs of biotech companies repurposing psychoactive compounds to treat sleep disorders and depression for what is estimated to be several million Americans with “treatment resistant” conditions.

One very real step to improve sleep conditions for all of us being put forth by the American Academy of Sleep Medicine (AASM) is to get rid of Daylight Saving Time. The AASM argues that simply better aligning biological clocks to “social clocks” (people should wake up with the sun and prepare for sleep when the sun sets) will meaningfully improve everyone’s sleep. Hard to argue with that.

Not to be overlooked is the 2018 study by Mattress Advisor which determined that 58% of respondents slept naked. It is not at all clear if they slept better than those properly attired.

Enjoy your food-induced sleep coma this week…


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Digital Health: Sprinting to Year End…

Notwithstanding the election results tomorrow / next few days / next few weeks (God forbid), the investment activity in the healthcare technology sector will continue to power ahead. The pandemic and its assault on public health infrastructure and the healthcare system has exposed significant shortcomings, all to be solved by transforming the “busines of healthcare.”

In part a response to COVID-19, investors have poured $4.0 billion this past quarter into 97 digital health companies (per Rock Health), suggesting that this sector will likely see more than $12.0 billion invested in 400 companies for the year. Interestingly, the average round size in 3Q20 was $41.2 million, greater than the year-to-date average of $30.2 million, suggesting increasing investor enthusiasm as a number of emerging winners become clearer. Across all industries, venture capitalists invested $37.8 billion in 2,288 companies in 3Q20, implying that the digital health sector is now nearly 11% of all venture investment activity.

A MobiHealthNews analysis tabulated an even more robust $4.6 billion invested in 109 digital health companies in 3Q20. In addition to the obvious investor interest in telehealth and virtual care models, a number of other themes emerged this past quarter such as prescription management and on-demand pharmacies, remote monitoring, patient triage and advanced data analytics. Year-to-date MobiHealthNews identified 24 companies that raised rounds larger than $100 million which accounted for 41% of all dollars invested in the sector so far. The three most dominant themes in 2020 have been on-demand services ($2.0 billion, of which $1.6 billion was for telehealth), technologies to accelerate R&D programs ($1.3 billion), and the fitness/wellness sector ($1.3 billion).

Much of this investor interest has been reflected in the public stock market as well. According to SVB Leerink, the public “HC: Tech/Services” index has increased 44% over the last twelve months, dramatically outperforming the S&P 500 index which only gained 8%. Furthermore, valuation multiples for this sector are quite robust. At the end of 3Q20, the average Enterprise Value (EV)/Revenue multiples for 2020 and 2021 were 6.9x and 5.6x, respectively, while the average EV/EBITDA multiples were 15.0x and 13.9x, respectively. The average P/E multiples were 24.0x and 20.9x for 2020 and 2021, which according to a Barron’s analysis is still below the current S&P 500 Information Technology index P/E multiple of 27.0x.   

In addition to the promise of disruptive novel technologies creating valuable new venture-backed companies, the size of the healthcare technology markets are also quite seductive. Pitchbook recently sized just the health and wellness sector to be $640 billion, growing to $1.3 trillion by 2025. Additionally. the impact of the COVID-19 crisis has identified a number of new urgent priorities that policymakers, employers, and healthcare organizations will need to address, which should drive increased investment in this sector and further consolidation. Flare Capital has identified this as the “Response to Pandemic” phase of the healthcare technology sector.

In the wake of the $18.5 billion merger of Livongo and Teladoc, TripleTree flagged a number of specific M&A themes that have taken on greater prominence: improved risk and compliance solutions, enhanced payor technologies, greater attention on post-acute models, and improved risk-bearing primary care services. Two other themes were flagged: increased M&A activity by SPACs (see MultiPlan, Clover Health, Augmedix) and the continued engagement of corporate venture capital entities, currently participating in ~15% of all digital health financings.

Notwithstanding all of the investor excitement, it is quite clear that the entire healthcare system will not be virtualized. Even with COVID-19 cases surging now, the number of telehealth visits are declining as a percent of all visits. According to an analysis by The Commonwealth Fund, the incidence of telehealth visits has settled in at about 6% of all visits, which somewhat tempers the starry-eyed enthusiasm of uncapped upside to these solutions. Quite clearly while hospitals and doctors’ offices are still operating below pre-COVID levels, the role of traditional in-person care models will be quite enduring. In fact, the leading public medical real estate investment trusts (REITs) continue to trade in a relatively robust range of 18x – 22x operating income, suggesting quite a bright future still.  

Obviously, the next few days will be nerve-wracking, anxiety inducing, sleep depriving. I am glad that I do not wear a Whoop which would be firing all sorts of alerts (although it did just raise $100 million round which will be reflected in 4Q20 data), further elevating the stress levels. I may be enticed to purchase hologram machine from PORTL Hologram which just raised a seed round to build a machine to transport ourselves far away (of course, the first generation of their machines will just be our images). In any event, the volatility index (VIX) clearly is anticipating a very rocky period in the public markets. Any resemblance to my EKG chart is coincidental. Thank goodness it is not a flat line…

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Investor Amnesia in 3Q20 Sets Up Year-End Push…

Do you remember that the President was impeached earlier this year? Easy to forget amidst the pandemic, recession, stock market crash, then raging stock market bull, record low then record high unemployment, and a nasty presidential election. Head spinning. Through it all, the venture capital industry has shown extraordinary resilience with another terrific quarter – $37.8 billion invested in 2,288 companies.

Confoundingly, 3Q20 saw a strong, yet incomplete, financial resurgence alongside a staggering resurgence in COVID-19 cases; three days ago we saw an all-time daily high in cases. As cases surged over the last few months, the S&P 500 index increased 7.9% in 3Q20, while the NASDAQ was up 9.2%. U.S. large cap stock funds powered ahead 11.8%. On the heels of unprecedented job losses this spring, the unemployment rate is steadily improving – although too slowly for many and still miles from where we were pre-COVID.

According to National Venture Capital Association (NVCA) data, $112.3 billion has been invested in 7,891 companies year-to-date. One might have expected a pause this summer, but that did not happen. While the deal count is decreasing, the amount of capital invested continues to be quite robust. The size of the average investment in 2020 so far is $16.5 million, well ahead of the $11.7 million this time last year. Quite clearly, there is a greater proportion of Later stage deals and a greater number of large financings this year, perhaps signaling further concentration around fewer companies as well as a greater degree of risk aversion among VCs who may be shifting attention to more mature businesses. The number of financings greater than $50 million in size so far this year was 6% of the total count yet accounted for 63% of all dollars invested.

This quarter saw the continued collapse in seed investments, both in numbers and dollars. There were 469 seed deals, nearly half as many just two years ago, and a more modest $2.0 billion invested (average size of $4.3 million). Interestingly, angel investment activity remained relatively consistent over the past five years with between 500 – 600 deals per quarter. Early stage also continued the steady decline in activity first seen in early 2019. This past quarter $9.2 billion was invested in 657 Early stage companies for an average round size of $14.0 million. Later stage also saw a marked decline in the number of deals, decreasing to 662 in 3Q20. The quarterly pace was between 750 – 850 over the last six quarters. The amount invested in Later stage companies was $26.6 billion for an average deal size of $40.1 million.

The story in 3Q20 centers mostly around the number of “mega rounds” of greater than $100 million in size. The chart below shows the median round size by stage, highlighting the impact of a few large financings when only focusing on average round size (above). There were 79 “mega round” financings this past quarter, totaling $17.7 billion; strangely ten of these were considered Early stage. Companies raising such large rounds tend to be meaningfully de-risked and are now scaling, maybe (again) suggesting less risk tolerance among venture investors. To underscore this development, there were only 542 first-time financings this quarter, which is the lowest level in a over a decade.

There were a handful of other interesting insights in the 3Q20 data. Year-to-date $63.7 billion has been invested in West Coast companies, which is more than the rest of the country combined. While the dollars are more concentrated in fewer geographies, the number of companies appear to be more distributed, perhaps in response to the pandemic. So far this year, only 38% of companies raising venture capital are on the West Coast. The top three states (California, New York, Massachusetts) represented 75% of the capital invested but only 53% of the number of companies.

One other observation in the funding data worth highlighting: the level of participation by corporate venture capital groups continued its sharp decline and was only 17.6% in 3Q20, a level not seen in nearly a decade. This participation rate tends to be between 20 – 25% of all financings. Such a pull-back may be a direct result of the financial pain inflicted by the pandemic.

Arguably, the strong investment activity this past quarter was bolstered by the exceptional level of exits, driven by a very robust IPO market. The $103.9 billion of exits in 3Q20 was the second-best quarter, nearly 4x the prior quarter and only below the high-water mark of the “Uber IPO quarter” of 2Q19 ($144.8 billion). More typical quarterly exit activity for venture-backed companies tends to be between $20 – $30 billion. Globally, M&A activity surged 80% in 3Q20 while in the U.S. merger activity increased 23.5% quarter-over-quarter.

Exit activity is best considered alongside private round valuations. Median valuations have steadily increased by stage over the course of the last decade and saw no appreciable COVID impact. In fact, given the impact of “mega rounds,” the average Later stage round valuation was $672 million (versus median valuation of $90 million). Median Early stage round valuation of $30 million year-to-date is modestly higher than $28.1 million in 2019, underscoring the significant step-up in valuations available to companies once important milestones are achieved. Given average round sizes, these data also imply that investors tend to end up owning roughly one-third of Early stage companies.

In a period of extraordinarily low interest rates, returns generated by venture capital funds both on a relative and absolute basis continue to be very compelling. Since 2011, according to NVCA data, the venture capital industry has generated net cash distributions each year through 2019 and is expected to do so again in 2020 given the level of exit activity. This dynamic likely accounts for the strong fundraising environment many established firms now enjoy.

Eighty funds raised $13.9 billion in 3Q20, averaging $173 million per fund; this level already exceeds all of 2019. For the year so far, venture capitalists have raised $56.6 billion across 228 funds. Notably, 35 of these funds were larger than $500 million, furthering the concentration of capital with a relatively small number of tenured branded firms. Year-to-date, there have been 30 “first time” funds which have raised $19 billion; in 3Q20 only 16 “first time” funds raised $390 million ($24 million average size).

Separate but related, this past quarter saw the explosion of Special Purpose Acquisition Companies (SPAC), blank check public shell companies that have a limited window to close an acquisition, often of mature venture-backed companies. There are now 185 such vehicles with $58 billion of capital trolling around the market looking for assets to acquire. While in recent weeks there is evidence of waning public investor appetite as a number of pending SPACs have been downsized, this is undeniably an important development in the venture industry, offering yet another potential path to liquidity.

Of course, there are a number of other significant issues weighing heavily on 4Q20 activity. According to the U.S. Treasury, the national debt now stands at a daunting $27.1 trillion which tends to put everything else in sharp focus. Unfortunately debt isn’t what it used to be. According to Blackstone, debt incurred today has much less of an impact on GDP growth than it did decades ago.

And then there is the pandemic, elections, elevated unemployment levels, tensions with China…oh wait, all of those have existed for some time now. Let the good times roll.

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Pandemic Further Exposes Systemic Racism…

This will be ugly and sad. Racism has cost this country $16 trillion over the last twenty years according to a recent Citigroup report. Much of this loss ($13 trillion) was attributed to discriminatory lending practices and the 6.1 million fewer jobs created as a result, while disparity in wages ($2.7 trillion) and discrimination in housing policies and lost income due to restricted access to higher education accounted for the balance. The report estimates that if these gaps were to be closed, an incremental $5 trillion can be added to U.S. GDP over the next five years alone. Obviously, this does not even begin to account for the extraordinary pain and suffering racism inflicts on our country, much less the dramatic implications to the health and wellbeing for those impacted by racism.

The dramatic increase in unemployment since the onset of COVID-19 has garnered significant attention. While the overall unemployment rate of 7.9% in September is down from the pandemic-high of 14.7% in April, this improvement masks the dramatic discrepancies in rates for minorities; according to U.S. Bureau of Labor Statistics, white Americans are 7.0% unemployed while the Black unemployment rate is 12.1%. Somewhat jarring, last week Columbia University published an analysis showing that eight million more people are now living in poverty just since the expiration of Cares Act three months ago, disproportionally hitting minorities.

The story is even more dire when looking at the “True Rate of Unemployment” as defined by the Ludwig Institute for Shared Economic Prosperity which presumes that one needs to earn a minimum living wage of $20,000 to be deemed employed. Under such a definition, Black unemployment is 30.4%, although an improvement from what was seen for the ten years after the Great Recession of 2008.

Data: Ludwig Institute for Shared Economic Prosperity; Chart: Axios Visuals

It is estimated that 100.6 million Americans are out of the labor force now, many of whom are from disadvantaged segments of the population. In fact, for those earning more than $60,000 annually, the unemployment rate is a mere 1.0% below where it stood at the onset of the pandemic. For those who make less than $20 per hour (equivalent to salary of approximately $27,000), the unemployment rate is 17.5% below where it was in February 2020 according to Opportunity Insights. Shockingly, America’s billionaires net worth has increased more than $850 billion since April.

The difference in life expectancy between white and Black Americans is criminally high – nearly five years, even when adjusted for gender, according to Centers for Disease Control and Prevention (CDC) data. While the underlying causes are complex and fraught with political overtones, this issue is now front and center as the country struggles with the pandemic.

Sutter Health recently published COVID-19 data that attributed the 2.7x increase in hospitalization rates in their hospitals for Black patients versus white patients to, in part, more advanced illness at the time of admission, arguably reflecting a cultural aversion to the healthcare system or challenges around adequate access. CDC data are even worse, tabulating a 5.0x higher rate of hospitalization, 2.3x greater mortality rate, and 3.0x greater infection rate for Black versus white Americans, respectively.  This is particularly troublesome now with case counts spiking 17% just this past week and as winter sets in.

Life Expectancy

The Kaiser Family Foundation (KFF) forecasts that Medicaid roles will increase by 8.4% in 2021; in June there were 67.9 million Medicaid beneficiaries. It is quite clear that the pandemic is hitting minority and less educated segments of the population harder, often because they tend to be front-line essential workers and/or struggle with greater levels of unemployment. McKinsey recently estimated that as many as 10 million Americans will lose employer-sponsored health insurance due to COVID-19 by the end of 2021.

KFF also highlights the discrepancies in private health insurance rates by race: in 2018, white, Black, and Hispanic uninsured rates were 7.5%, 11.5% and 19.0%, respectively, which further exacerbates difficulties for minorities to access effective healthcare. The Affordable Care Act had a dramatic impact over the past decade as uninsured rates in 2010 were 13.1%, 19. 9% and 32.6%, respectively. This year the average family health insurance premium rose by 4% to more than $21,000.

While there is a heightened level of concern about the pace of coronavirus vaccine development, and whether there will be inappropriate political pressures applied to compromise long-cherished safety protocols, the Black community is expressing a particularly high level of skepticism. According to another KFF study, just under 50% of Black respondents would not take a free and safe vaccine, while only 17% would “definitely” do so. While further underscoring long-held distrust of the healthcare system, this phenomenon risks perpetuating the relatively poor health conditions experienced in many of those communities.

Recognizing this and the other numerous challenges introduced by the pandemic, the Healthcare Anchor Network (HAN) of 39 provider systems (many of whom are Flare Capital LPs) reiterated in September that racism is a public health crisis, putting forth a number of steps to chip away at these issues. First and foremost was a commitment to dramatically improve access to testing in underserved communities, as well as more robust inclusive hiring practices and greater spending with diverse suppliers and vendors. 

Importantly, the HAN spotlighted that systemic racism uncouples the public health infrastructure from the private healthcare system, often leading to “generational trauma and poverty.” A profound characterization. A recent Wall Street Journal analysis of CDC data showed a strong link between racism and mental health: in the week following the murder of George Floyd in May, 40.5% of Black adults exhibited symptoms of anxiety and depression (a five point increase from the week just prior). While somewhat similar to post-traumatic stress disorders, racism is chronic and on-going much like an injury and should not be considered a disorder. Clinicians have now developed a “Race-Based Traumatic Stress Symptom” scale when evaluating minority patients.

Advances in healthcare technology hold profound promise to improve the health and wellbeing of those most afflicted by racism, particularly during such difficult economic times. According to a provocative analysis by McKinsey (below), many of the most seminal transformative reforms in healthcare have come on the heels of major recessions. Arguably, what has been unleashed on the U.S. economy by COVID-19 may lead to a dramatic restructuring of the healthcare industry, which could usher in a wave of significant innovation to improve conditions for those most disadvantaged.

Entrepreneurship has been one of the great elixirs in the face of such devastating economic conditions and is often looked upon as one approach to reduce economic disparities due to racism. Here, unfortunately, the record is mixed. Given how critical access to capital is, the evidence that racial discrimination compromised many minority groups from accessing emergency funding programs like the Payroll Protection Program (PPP) this past spring is particularly painful. According to the Center for Responsible Lending, 46% of white-owned businesses had accessed bank credit over the past five years (compared to less than 25% for Black-owned businesses) which meaningfully facilitated their ability to secure PPP loans from those same institutions.

Furthermore, a 2016 Federal Reserve Bank study found that only 40% of minority credit applicants secure the full requested amounts of credit when applying as compared to 68% for white-owned applicants. Consistently minority-owned companies pay higher interest rates and have more onerous borrowing terms according to the Department of Commerce’s Minority Business Development Agency. The financial landscape confronting Black-owned businesses is materially more hostile than what white-owned businesses face. Full stop.

Source: Federal Reserve Bank of Atlanta

Rock Health, a leading seed stage healthcare technology investor (and partner of Flare Capital), recently conducted an extensive diversity survey. These sober findings further highlight the issues around access to capital for minority entrepreneurs. White and Asian founders were nearly twice as likely to backed by venture capitalists; 48% of Black founders bootstrapped their companies versus 25% of white founders. Of the nearly 250 founder respondents in the survey, 12% identified as Black but only a disappointing 5% of the 425 senior executives in those companies were Black. Just over 80% of Black respondents felt that the digital health sector was either the same or less inclusive from when they initially joined the industry. Obviously, much work is still to be done.

These issues are not at all lost on my partners and our firm. Since we started Flare Capital over six years ago, we have been committed to diversity and inclusion. In addition to simply being the right thing to do, it is the best thing for our business. We will make better investment decisions with a broadly diverse set of perspectives and experiences. 

But as inclusive as we felt we were, it is time to do even better. There are systemic causes to these inequities in our industry that we can help address. Over the last four months we developed a set of new initiatives (summarized below) that we implemented earlier this summer. In summary, we identified two broad dimensions that we are committed to improving upon: more equitable access and accelerated career development. Structural challenges exist for many underrepresented entrepreneurs to meet with venture capital firms, much less successfully raise capital. These are fundamental problems that require deliberate, measurable steps from engaging with more diverse founding teams, recruiting more diverse management teams, and partnering with venture firms equally committed to diversity.  

BIPOC = Black, Indigenous, People of Color

We recognize that it will take time and significant effort to address these inequities, and that success will be built, in part, upon many small victories. Arguably, Black Lives Matter is the largest movement in our country’s history. The New York Times recently estimated that between 15 to 26 million Americans likely participated in demonstrations since the death of George Floyd in late May. We are proud to be a part of that movement.


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Need Eyes on Our Kids…

There were a staggering 7.8 million children across 4.3 million child abuse and neglect cases referred to Child Protective Services in the U.S. in 2018. Of those cases, 2.4 million were deemed serious enough to require intervention. The Centers for Disease Control and Pevention (CDC) estimated that in 2018 over 678k children were “victimized.” What role can technology play to address this vicious scourge of society, further exacerbated by the pandemic with so many children hidden in the shadows, not in school? Clearly, better analytics and monitoring solutions should improve public healthcare infrastructure’s abilities to fight this type of abuse.

In the very earliest days of the pandemic, before the scope was fully appreciated, school closures in the early spring were thought to be temporary; a significant inconvenience for many, but manageable. The scramble to virtual curricula was challenging, and nearly always a very poor replacement for the in-person classroom experience. By April, though, it became apparent that this impact was going to be meaningfully more devastating with disruption to regular meals, social interactions, and most critically, separation from a social infrastructure of teachers, care givers and other trained professionals.

What a terrible tradeoff: open the schools and risk widespread COVID exposure or keep them closed and introduce a host of other risks. A recent analysis by The 74 Million, a leading non-partisan news site covering the education sector, in partnership with the Organization for Economic Cooperation and Development, found that the long-term economic impact in the U.S. tied directly to school closures to be nearly $14.2 trillion over the rest of this century. Should schools be closed throughout this fall, the cost will increase by another $28 trillion.

What is not fully understood is the incidence of child abuse during the pandemic. Initially, the number of reported abuse cases dropped dramatically. In New York City alone, case count dropped 51% through the summer; California and Texas dropped 45% and 30%, respectively. But while the number of reported cases dropped, the number of actual cases admitted to hospitals remained largely unchanged, a pattern eerily reminiscent of 2008 during the Great Recession. Without the ability of other adults to monitor children, the pandemic has pushed the abuse out of the purview of trained professionals. This week Mayor de Blasio announced a delay to New York City school re-openings and is instituting a “blended learning model” for the 1.1 million school children, 114k of whom are homeless.

What is absolutely understood is the profound emotional and financial costs of child abuse. Often caused by parental stresses, financial pressures, and substance abuse behavior, the CDC considers child abuse (and other domestic violence) “preventable” – really? More than 67% of abuse referrals are made by community professionals such as teachers, law enforcement and social services staff; teachers alone account for over 20% of all referrals. That essential window for many children is now closed.

Importantly, while 83% of abusers are between the ages of 18-44, more relevant is that for 78% of cases, the perpetrators are one of the victim’s parents. Women account for 54% of all abusers. Experts are now most worried about “opportunity crimes” with newly unemployed relatives or quarantining college kids back in homes with housebound children who otherwise would be in school.

The CDC tabulated that the economic costs of child abuse in 2015 (most recent year) to be $428 billion of “lifetime economic burden.” Setting aside the staggering direct financial costs, the other costs from future violence, increase in substance user disorders, lower education and employment levels, and greater likelihood of future victimization are immeassurable. In 2018, over nine per 1,000 children were victimzed; one in five reported being bullied in school while one in seven were “electronically” bullied on social media. Tragically, 1,770 children died of abuse in 2018; 47% of whom were younger than onen year old.

The pandemic has had other devastating implications for child welfare. The last 20 years has seen significant improvement in the reduction of childhood mortality rates (from mid-70 per 1,000 to the mid-30s per 1,000). According to the global health organization PATH, this progress has been jeopardized by the pandemic, principally by the inability for children to access reliable healthcare services. In models that assume the most “severe disruption” the progress has been set back a decade.

Data: PATH estimates from disrupted maternal, newborn and child health services, drawing on modeling from Lancet Global Health; Chart: Axios Visuals

In addition to losing regular connection with many children who are now homebound, there is a staggering incidence of food insecurity. The U.S. Census Bureau estimates that 13.9 million children now suffer from food insecurity, an unprecedented level when compared to 2.5 million in 2018 or 5.1 million during the Great Recession in 2008. In June alone, it is estimated that one in three Black children did not have sufficient food access. Perversely, the Trump administration this month made eligiblity requirements more stringent for low-income students to access meals will not in school.

Technology has a role to play here. As much of healthcare delivery has gone virtual during the pandemic, the ability to be connected with children in-home remotely via Zoom and Facetime has afforded the potential for new insights into what children may be suffering, not unlike what is being experienced with elder care. Obviously, inadequate wireless infrastructure and poor access to devices disproportionately affects low income students. In spite of that, novel behavioral health platforms are being deployed to assist families deemed at-risk. Anecdotally, typical no-show rates for medical appointments dropped from ~30% to low single digits with the advent of virtual visits.

Dr. Christopher Greeley, a leading national expert on child abuse at Baylor College of Medicine (and my brother), points to the emergence of better predictive risk modeling in the field of child welfare. Such an approach allows clinicians and policy makers to identify circumstances that create clusters of common characteristics most associated with child abuse. Determining the “gradient of health” in a certain census tract  facilitates the deployment of resources (i.e., child care centers) into a particular community. Big data analytics allows for the creation of a “Social Vulnerability Index” to determine how best to prioritize resources. This summer the Office of the Inspector General issued guidance to CMS to utilize Medicaid data to better identify patterns of child abuse, acknowledging the potential of these new analytical tools.

Of course, the proliferation of virtual visits and improved analytics does not solve the “last mile” issues, forever chronic with social services. In addition to enhanced public engagement and education campaigns, there needs to be a strong legislative approach. For instance, corporal punishment of children needs to be more aggressively persecuted. Tax policy can play an important role as well. CDC studies have shown that child tax credits can meaningfully move families with children out of poverty: a $1,000 tax credit can lower childhood poverty rates from 26% to 23%; a $4,000 tax credit can lower it to below 15%.

In addition to the various (often inadequate) public safety nets in place, ordinarily families would look to the private childcare industry for assistance. Barron’s recently estimated that school closings may cost the economy up to $700 billion in lost revenue and productivity this year which is approximately 3.5% of GDP. Analysts at the Center for America Progress estimate that roughly half of day care centers will fail which would reduce capacity by 4.5 million slots, leaving 4.2 children for each available slot. The day care industry received $3.5 billion of aid from the CARES Act and only 25% of childcare operators received Paycheck Protection Program loans. Even the private backstops are significantly compromised during COVID.

With everything that we are struggling with today, one thing we absolutely should not have to worry about are ridiculous QAnon conspiracy theories that leading Democratic figures are consuming children for their “Adrenochrome,” a magical psychedelic drug in their blood. There are simply too many real-world problems our children face.



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Staggering to the Halfway Mark…

Well, that sucks.

2Q20 GDP

In the face of unprecedented economic devastation, investors were expecting a very challenging 2Q20. Au contraire. Domestic equities crushed it: the Russell 3000 Growth and Russell 3000 Value were up 28% and 15%, respectively – admittedly on the heels of a dramatic 1Q20 downdraft. The broad U.S. bond market unexpectedly increased 2.9%. Price of gold increased 12.5%. According to Refinitiv, through 1H20, venture capital performance was up 26%. Does this mask deeper concerns?

Venture investors for the first time this past quarter invested more in Later Stage than Early Stage deals, highlighting the desire to invest in what is familiar and arguably more “de-risked.” Similarly, VCs invested in more follow-on opportunities than first time financings. Notably, 37.5% of Early Stage investments in 1H20 were greater than $10.0 million, which was also a highwater mark. In fact, 15.0% of Early Stage investments were greater than $25.0 million which is somewhat oxymoronic.

2Q20 VC Activity

Given that the first part of 2Q20 was spent triaging existing portfolios, not unexpectedly the level of venture capital activity was down across all stages. According to Pitchbook and the National Venture Capital Association, the number of deals declined by 23.2% to 2,197 with $34.3 billion invested, which is still a robust pace, in large measure due to the prevalence of “mega” financings. In 2Q20, there were 57 venture rounds greater than $100.0 million.

Round size is closely watched by industry analysts. When economic times are good and capital is plentiful, round sizes tend to drift upwards as investors are flush and entrepreneurs are eager to exploit new market opportunities. Year-to-date median round sizes have stayed consistent with 2019 levels – Early Stage at $6.0 million and $8.8 million for Later Stage in 2020.

A potential warning sign involves the level of venture-backed exit activity which was at a decade quarterly low of $21.2 billion across 147 transactions. At $45.3 billion year-to-date, the venture industry is on pace to have the lowest level of exit activity in the past five years. Of greater importance are the valuations realized upon exit which remained reasonably strong: the median acquisition, buyout and IPO valuations were $82.5 million, $120.0 million, and $636.0 million, respectively. According to Pitchbook, the number of U.S. M&A transactions in 2Q20 declined 24% while the overall transaction values dropped 41% when compared to 1Q20. Capital efficiency becomes even more critical to generating compelling returns when M&A outcomes are below $100 million.

Significantly, 2019 was the first year in the last decade when limited partner contributions to the venture capital was greater than distributions made by venture capital funds. The robust exit environment and strong returns over the last handful of years facilitated the raising of larger and larger venture funds. In 2Q20, there were 148 funds which raised $42.7 billion. Year-to-date there were 24 funds raised by established firms that were greater than $500 million causing the average fund size in 2020 to be slightly larger than $300 million (median fund size is $101 million year-to-date).

The theme of concentration, be it around fewer established venture firms or fewer Later Stage companies, is echoed in the global data as well. Preqin tabulates that $61.3 billion was raised by 292 firms in 1H20 which is 35% fewer firms than in 1H19. Globally, $112 billion was invested in 6,379 deals, which while a modest 2% decline in invested capital, it is a 20% reduction in the number of companies. In 1H20, 31% fewer private equity firms (552 firms) raised $259 billion, which was only 4% less than was raised in 1H19.

Analysts estimate that there is approximately $120 billion of “dry powder” managed by U.S. venture capital firms. Much of this capacity is a function of recent venture capital performance, particularly when compared with private equity which was quite exposed to the early 2020 downdraft. According to Refinitiv, through 1H20 venture capital performance was up 26% while private equity was down 11%. Venture capital benefited from the strong performance from the healthcare and technology sectors during the early days of the pandemic. Interestingly, Preqin estimates that there is $1.45 trillion of private equity “dry powder” globally but that approximately 85% of it is held by funds raised between 2017 – 2019, which would not be able to bail out older struggling leveraged portfolio companies – expect the number of busted LBOs to spike.

The economic uncertainties in 2Q20 caused more than 40% of the companies in the S&P 500 Index to withdraw full-year earnings guidance. Corporate earnings in 2Q20 are estimated to have decreased 44% which would be the largest quarterly decline since 4Q08 (69% decrease) which was the depths of the Great Recession. In 1Q20 net profit margin for the S&P 500 Index was 7.1% which is meaningfully below the five-year average of 10.6% and the lowest since 4Q09 according to FactSet. Paradoxically, in the face of falling (collapsing?) earnings the public equity markets keep surging.

2Q20 Real GDP

While the merits of causing such deliberate economic devastation at the pandemic outset might be debated, it is instructive to look at other parts of the world, specifically China, to see how the approach to dramatically locking down the “hot zone” around greater Wuhan to arrest the spread of COVID-19 allowed the economy to recover more swiftly. In 2Q20, China’s GDP rose 3.2% year-over-year, after “only” decreasing by 6.8% in 1Q20. SMH…shaking my head.

All things considered, U.S. IPO activity in 2Q20 was reasonably strong with 62 offerings that raised $18.5 billion, which was an increase of $8.7 billion from 1Q20 but $14.2 billion lower than the 2Q19 level. In June 2020 alone, there were 28 IPOs that raised $13.5 billion, pointing to a strengthening market heading into the summer. Much of this activity was driven by the explosion in SPACs (Special Purpose Acquisition Company) or “blank check” companies.

According to SPACInsider, there were 48 SPACs which raised $18.6 billion in 2020, which easily beats the $13.6 billion raised in all of 2019. In 2Q20, there were 24 SPAC IPOs which raised $7.2 billion or nearly 40% of all IPO proceeds. Of the 318 SPACs ever created, there are now at least 108 with $40 billion per Barron’s trolling around for something to acquire (recall that SPACs have a pre-determined amount of time to close an acquisition or they are liquidated). In 2020, the average SPAC IPO was $400 million in size.

Of course, financial alchemy in the pursuit of investment returns often turns out poorly, and now it is further complicated by a pandemic, recession, and disruptive national election cycle. Through 2Q20, the number of corporate defaults globally equated to the entirety of 2019. So, while investors seem cautiously enthusiastic about the “recovery” since 1Q20, there are a number of flashing warning lights, not least of which how quickly it all can be reversed as witnessed in March 2020.

2Q20 Defaults

Source: S&P Global.


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Digital Health: What the Heck is Going on Heading into 3Q20…

Understandably the headlines this past quarter have been consumed by pandemic updates or the financial crisis, both inextricably linked. On April 1, there were sadly 3,746 deaths in the U.S.; on June 30, there were 119,761. Heading into the second quarter, analysts expected a wave of bankruptcies unlike anything seen before, and surprisingly, that did not occur – yet. While the default rate on high yield bonds was estimated to be 5% at the end of 2Q20 (up from 2.3% a year ago), the level of Federal Reserve intervention allowed the capital markets to function relatively well. And in the background the digital health sector recorded a terrific quarter, keeping the sector on pace for 2020 to be a record year for new investment.

It is worth pausing for a moment to put the level of intervention into some context as it will inform how the remainder of the year may play out. Just over $1.02 trillion of debt was issued by Corporate America in 1H20, more than double any previous first-half year ever before according to Dealogic. And while S&P Global Ratings projects default rates to be 12.5% by March 2021, with a range of 6.0% – 15.5% (upside to downside cases), it certainly appears that for much of the rest of this year access to capital will not be as dire as was feared this spring. According to Epiq, over 3,600 companies filed for bankruptcy in 1H20. More than 180 companies in the S&P 500 Index have withdrawn guidance for earnings.

Of course, the pandemic (and perhaps the distraction of the election) will dictate how quickly healthcare technology companies will scale and how predictably they will be able to raise funds. Even in light of the devastating progression of Covid, according to Rock Health nearly 100 healthcare technology companies raised approximately $2.4 billion in 2Q20; five of those financings were more than $100 million in size. For 1H20, this sector saw $5.4 billion invested, putting it on pace to likely be more than $10 billion for the year. While this would be a high-water mark, it also reverses the trend where 2019 was slightly lower than the activity of 2018.

2Q20 Rock Health Funding

One potential telltale sign to assess the balance of the year and how venture investors have recalibrated to an all-virtual investment model is the 2Q20 monthly activity. In April, as the shock / heartbreak / interruption of the pandemic set in, investment activity was only $500 million; by May it spiked to nearly $1.1 billion, but notably had dropped to $800 million in June. Arguably, 2Q20 was a time when investors shored up existing portfolio companies and closed on “in-process” new investments. Tough decisions were made as to appropriate reserve assumptions for existing portfolio companies. By the end of 2Q20, most venture firms were making new investment decisions based largely on Zoom interactions – expect there to be some moderation in activity as everyone gets adjusted to the new “abnormal.”

Obviously, there were some powerful tailwinds that developed last quarter: Centers for Medicare & Medicaid Services (CMS) expanded reimbursement, the reduction (hopefully to be permanent) of state licensure barriers, and the lock-down requiring dramatic adoption of virtual on-demand care. Consumers and employers are scrambling to utilize novel modalities to engage with providers.

While the dramatic reduction of service revenues for providers will undoubtedly compromise technology budgets, there is a market momentum that traditional care delivery models must change in response to current conditions. A Morgan Stanley CIO survey this quarter flagged that should the economic conditions worsen, AI, machine learning and process automation initiatives will be eliminated first. A recent American Hospital Association report estimates the four-month total through June 30 for lost revenues to be $202.6 billion. Research analysts at The Chartis Center for Rural Health estimates over 450 of the 2,000 rural hospitals in America are now at risk of closing. Tragically, this past week only 14% of adult ICU beds were available in Florida given the resurgence of Covid cases due to idiotic state re-opening pressures.

Florida Cases

Rock Health identified 52 M&A transactions of healthcare technology companies, and while slightly lower than the 2019 pace, it still suggests a robust appetite for these innovative solutions. This is particularly notable in light of overall M&A activity which declined more than 50% globally and was down a staggering 90% in the U.S. according to Refinitiv.  MobiHealthNews tracked 34 M&A transactions in the healthcare technology sector in 1H20, 23 of which were in 2Q20 for an announced transaction value of $1.2 billion (only 5 disclosed purchase prices so not a terribly useful number). There is likely to be increased consolidation given the large number of start-ups created in the healthcare technology sector as emerging winners become more evident. Additionally, given the investment surge in 2018 and 2019, many of those companies will need to raise capital over the next 12-18 months, leading some to decide to sell.

The Rock Health Digital Health Index of public stocks increased 30% in 1H20 as compared to Leerink’s Healthcare Tech/Service Public Company Index which was only ahead 0.6% for the year, but was up a robust 32% in 2Q20 (although relatively flat in June with an increase of 1.8%). Market valuations have been reasonably resilient as well. The Leerink index trades at 5.7x and 4.7x revenues for 2020 and 2021, respectively. According to FactSet, 2Q20 revenues and earnings for the S&P 500 Index are projected to decline 11.5% and 43.5%, respectively, which would be the greatest year-over-year decline since the onset of the Great Recession in 4Q08. The healthcare sector earnings are only expected to decline about 10% in 2Q20.

S&P 2Q20 EPS

To underscore the relatively healthy state of the healthcare technology sector, it is informative to look at the job losses and subsequent re-hiring. According to Bureau of Labor Statistics data, there were 43k lost healthcare jobs in March; that number spiked to 1.4 million in April, but May and June saw significant recoveries of 315k and 358k jobs, respectively. Overall, there are 15.6 million U.S. healthcare workers today which implies that net job loss (so far) during the pandemic is approximately 5%.

One other item: the Paycheck Protection Program (PPP), which over two installments is nearly $670 billion in size (~$130 billion has yet to be distributed), extended loans to 265 healthcare technology companies. While the disclosure requirements established by the Department of Treasury make it virtually impossible to tally the total amounts, only four companies took between $5 – $10 million, 15 took between $2 – $5 million, and 43 took between $1 – $2 million, suggesting a relatively modest amount of PPP loans went to this sector. To put that into context, Pitchbook calculates that over 8,100 privately funded companies took $13.4 billion in PPP loans so far.

While a 3Q20 event, Walgreens’ bold $1.0 billion investment in VillageMD underscores the profound role innovative healthcare technology and tech-enabled models will play in transforming the business of healthcare. That is not lost on venture investors, and more importantly, great entrepreneurs who look at the nearly $4.0 trillion of medical expenditures (per CMS estimates) that must be improved upon. Expect continued strength in funding and the consistent creation of important valuable new companies.

This is thankfully nothing like the recent history in the energy sector, which is forecasting 2Q20 earnings to be down more than 105%. Oil prices started the year at more than $60 per barrel, dropping below $0 per barrel (!), before ending 2Q20 at $40 – an increase of 92% in the quarter. Head-spinning…

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Another Member Joins the Band…

As it does not happen very often, we are particularly excited to announce that Margaret (Gaby) Malone has joined the firm as a senior associate, adding yet another important member to the Flare Capital team. While the pandemic has created unique challenges, we are even more excited about our investment strategy today than before COVID (and we were super excited back then) to address a number of the acute issues confronting the healthcare system. Expect us to continue to add to the team in important ways as we navigate this new “abnormal.”

Margaret’s passion for the business of healthcare is reflected in her professional experiences and her academic work. After nearly six years of working with early stage healthcare technology start-ups as an investor and advisor, Margaret earned her MBA from the University of Chicago Booth School of Business. Notably, we have already worked with her for over a year as she was a Flare Scholar (more below) in the great Class of 2019 and was with our terrific co-investor (7Wire Ventures) when we together invested in higi, a leading telehealth company based in Chicago. Before all of that, Margaret received her BA in Medicine, Health and Society from Vanderbilt University.

There were two other elements of her background that resonated with us, even more so now given the current healthcare crisis. Margaret has significant experience advising providers, having worked with a number of leading academic medical centers to re-architect clinical workflows. Additionally, she has a keen interest in building highly functioning executive teams given her focus on human capital; undoubtedly, she learned all of that at another one of our favorite firms – Oxeon Partners. She will be a lightning rod for the next generation of great healthcare technology entrepreneurs.

Actually, there was one thing that made me nervous. We use our initials internally when referring to each other so I was pleased to learn that “MG2” would be getting married this summer and slightly modifying her name.

Please welcome M(G)M to the firm.

Quick update on our Flare Scholars program and our recently launched, Flare Scholar Ventures. Earlier this year we announced the commitment to invest a portion of our new fund in the pre-seed rounds of Flare Scholar sponsored projects. Today we have over 150 Flare Scholars, who are younger brilliant passionate emerging healthcare technology entrepreneurs. We would not be surprised, in fact excited, if this initiative did not directly lead to the formation of a dozen or more exciting cutting-edge new companies in relatively short order. Last week we closed on our first Flare Scholar Ventures investment – we wish Susan Conover and the entire LuminDx team all the best. And there are a number of others in pipeline, following closely behind.


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Life on the Edge…Suicide

Over 1.2% of us will commit suicide.

According to the American Foundation for Suicide Prevention, 48.3k people successfully killed themselves in 2018, and this was out of 1.4 million attempts, making suicide the tenth most prevalent cause of death. Each day over 130 Americans take their own lives. Setting aside the nearly $69 billion cost in direct medical expenses and work-loss issues ($1.4 million per death), the devastation to each of those families is immeasurable.

Mental Health America, a 110-year old advocacy group offering anonymous online screenings, reported a 4x increase in screenings in May as compared to January. A shocking 42% of respondents exhibited anxiety or depression and a staggering 10% acknowledged that they have considered suicide. Not surprisingly with increased anxiety, social isolation, and for many, crippling economic conditions, the healthcare system is bracing for significant increase in suicide ideation. The act of quarantine has raised real issues of “time distortion” for many, at times equivalent to PTSD symptoms for some. While there is real debate as to the true unemployment rate given data collection issues, the chart below points to the sudden onset of real financial hardship for nearly 20% of working Americans.




Since 2000, the suicide rate increased by approximately 35%. Of particular concern was that the rate spiked in 2008, amidst the Great Recession. Centers for Disease Control and Prevention (CDC) data over the last century (below) points to the collective fears of what the pandemic has unleashed for those most at risk. The prevalence is greater among men than women: 1.5x in the developed countries and 3.5x in developing economies, underscoring the correlation to financial hardship. While suicide tends to skew to older and poorer men, there is considerable alarm about youth suicide which spiked 56% between 2007 – 2017 according to the CDC. In 2017, the second most prevalent cause of death for people between 15 – 24 years of age was suicide (behind accidents). While convenient to point to the increased availability of opioids, access to firearms, and troubling usage of social media, the causes are multifactorial and require significantly more study.


Suicide Rates


It has become quite apparent that the perception that incidence of suicide spikes around year-end holidays has proven untrue. In fact, suicides tend to peak during the spring season, which has tragically coincided with the onset of the pandemic. Speculation holds that longer days, coupled with seasonal allergies and other upper respiratory diseases which may affect certain areas of the brain, exacerbate existing mood disorders.

A leading researcher in the field of adolescent suicide is Dr. Cheryl King at University of Michigan, who has run multiple clinical studies to identify contributing factors and possible protocols to intervene with youth with suicidal tendencies. Her research has shown 50% – 85% reduction in successful suicide attempts, arguing for more research funding to identify scalable approaches to managing at-risk youths. In 2017, the National Institutes of Health (NIH) funded $6.6 billion in cancer research, yet only $37 million for suicide prevention research. In 2018, the NIH funded a total of 295 research areas with suicide ranked #206; neuroblastoma research is #205 and yet has only 650 new cases annually. Dr. King’s work raises difficult questions as to how the healthcare system perceives the “value of a teen’s life” given the absurd lack of funding.


Suicide by Age


According to a recent Wall Street Journal study, 70% of all suicides in 2017 were white male, 19% were white female, 8% men of color, and less than 3% women of color. Over 56% of male suicide was by firearms, poking at another unfortunately confoundingly controversial topic, which is the ready access to guns. CDC data below from 2015 presents a sampling of suicide data by profession, perhaps suggesting that suicide is materially less prevalent for those with well-paying jobs. While more research is clearly required before declaring a precise causality between income and suicide incidence rates, a relationship most likely exists.


Suicide by Job


Globally, according to World Health Organization data, every 40 seconds one person commits suicide. In 2015, there were over 828k suicides placing suicide as the tenth leading cause of death. It is estimated that there are between 10 – 20 million suicide attempts each year worldwide. No community is immune to this. For those who have been hospitalized for attempted suicide, nearly 9% will go onto to successfully take their life post-discharge.

Suicide is considered preventable. In addition to a range of more traditional time-tested solutions that exist, such as behavioral health treatments, intervention, reducing access to means of suicide (firearms, drugs), it is clear that technology will likely play an increasingly important role in a coordinated set of treatment protocols. Many of the initial approaches tend to be device-centric: algorithms that review mobility and connectivity data to assess dramatic changes in behavior or that analyze voice patterns or assess radical changes in social media consumption.

While informative, like most diagnostic tools, clinicians will insist on very high and reliable predictive powers to determine the onset of a crisis episode. These initial solutions are not quite there yet. The role of telehealth and how those platforms will be utilized will be important. There is considerable enthusiasm that future iterations of smartphone sensing coupled with powerful AI capabilities, in coordination with other traditional forms of intervention, may create more efficacious suicide prevention tools.

The field has certainly come a long way since 1846 linking that first glass of wine to inevitably taking one’s life…




Related topic of substance use disorder was addressed by one of my partners, Dan Gebremedhin, in his recent article for MobiHealthNews.


If you have any thoughts of self-harm or suicide, please pick up the phone right now and call the National Suicide Prevention Hotline at 1-800-273-8255


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Pulling Back the Veil Surrounding Nursing Homes…

There is a reasonable chance that you will be admitted to a nursing home or cared for in a long-term care facility at some point in your life – certainly, someone close to you will have been. The adult care industry is massive, currently estimated to be $140 billion in size, and remarkably complex. According to the Center for Disease Control and Prevention’s (CDC) most recent industry survey in February 2019 (Long-term Care Providers and Services Users in the United States), 2.45 million people were either enrolled in adult day care or residents of nursing homes and long-term care facilities. Another 4.46 million were discharged from a home health agency while 1.43 million received hospice services in 2015-2016.

The number of service providers were numerous, creating a chaotic patchwork system with 15.6k nursing homes, 28.9k assisted living facilities, 4.3k hospice providers, 4.6k adult day care centers, augmented by over 12.2k home health agencies. And the need for these services is only increasing as the population ages. According to the National Investment Center for Seniors Housing and Care, the percent of the population 75+ years old in twenty years will be nearly 12%.


Nursing Home Ages
Undoubtedly, these very difficult work environments, made dramatically more challenging by the COVID-19 crisis, have been hit particularly hard. The mortality rates are confounding and staggering. Like prisons, the communal settings found in nursing homes and the fragility of the residents have given us heart-breaking stories of loss while exposing significant industry shortcomings. In mid-March, there were an estimated 28.1k deaths among both nursing home residents and staff with 153k reported cases. These residents were only guilty of being old.


Nursing Home Death by Age


Given inconsistent reporting guidelines by state and the profound lack of testing, there is considerable debate as to the true mortality rates in nursing homes. AARP estimates the mortality rate to be approximately 20% – 25% while the Foundation for Research on Equal Opportunity has painfully tabulated results by each state to conclude the rate is closer to 42% (see map). Commentators have taken to estimating that cases in nursing homes tend to be 10% of the total but 33% of all deaths.


Nursing Home Deaths

The nursing home industry is very competitive, and success is largely dependent on case mix and occupancy rates, which have been running around 90% across all senior housing. There was a significant and immediate decline in occupancy rates at the onset of the pandemic, largely attributed to fewer discharges to post-acute settings. At the outset, hospitals were discharging COVID-19 positive patients to woefully unprepared nursing homes in search of beds. In 3Q19, the most recent available quarterly data, “fee-for-service,” Medicare reimbursement rates were on average $523 per day, while Medicaid rates were $214 per day. With expansion of Medicaid rolls, expect this situation to get worse. In fact, 3Q19 was the first quarter where more than half the nursing home days were Medicaid at 51.5%. Analysts estimate that the profit margins tend to be 3 – 4% at these facilities.


Nursing Home Occupancy

The leading nursing home operator in the United States is Genesis Healthcare with nearly 400 facilities and is also a provider of a number of ancillary services (more on that shortly). In 2019, revenues were $4.6 billion and after a handful of years of significant operating losses ($1.8 billion cumulatively for four prior years), pretax income was barely $10 million. With an overall occupancy rate of 84% and 76% Medicaid patient-days, Genesis has a market capitalization of only $170 million, which increased 35% last Friday likely on news that the Department of Health and Human Services would provide $4.9 billion of federal aid to nursing homes and that a number of influential states (now over 30 states) will provide liability immunity shields related to COVID-19.

Given the high fixed cost structure and razor thin operating margins, it is no wonder that these facilities tend to be “under-utilizers” of technology. According to the CDC National Health Statistics analysis in March 2020, residential care facilities that utilized electronic health records (EHR) increased from only 20% to 26% from 2012 to 2016. Of those that actually used EHR platforms, only 55% actually had health information exchange capabilities with doctors and pharmacists in 2016. In general, larger facilities (presumably better capitalized, better resourced) were more likely to use technology, while paradoxically, “for profit” operators were less likely to do so. Shocking.


Nursing Home EMR

Approximately 70% of the nursing home industry is “for profit,” with private equity investors playing a significant ownership role, and not always a great one at that. Since 2000, a recent New York University study concluded that there were 119 leveraged buyouts in the nursing home sector. Often times these nursing home investors controlled companies that were providing necessary services such as cleaning, facilities management, medical equipment leasing, and other ancillary services at significant margins (see Genesis Healthcare above) to those same homes. Notably, in “for profit” facilities the number of hours of care per patient declined 2.4% and according to federal quality guidelines, staff quality decreased by 3.6% since being acquired. Investor appetite has not let up – according to a survey by Senior House News (February 2020), nearly 40% of respondents assumed private equity will continue to be the leading investor in the asset class.

Nursing Home Owners (2)

An analysis by the Journal of Post-Acute and Long-Term Care Medicine, determined that the Omnibus Reconciliation Act of 1987 was a landmark in overhauling nursing home quality assurance systems and led to much more impactful oversight. Given the “lock down” now in place at nursing homes, the first two lines of oversight (family members, government regulators) are blinded to conditions inside of most facilities. According to U.S. Government Accountability data, the number of abuse violations more than doubled from 430 to 875 between 2013 and 2017. It is estimated that 20% of all emergency room visits by nursing home residents is due to neglect. There are now significant concerns about current conditions.

Tragically unforgiveable, there also appears to be a racial overlay to this nursing home crisis. A recent detailed New York Times analysis determined that 60% of all nursing homes with a minority census greater than 25% of residents had at least one COVID-19 case, which was twice the rate in facilities with minority census less than 5%. This phenomenon did not correlate to location, size or quality rating.

The immediate path forward is unclear. Recent Centers for Medicare & Medicaid Services (CMS) guidance strongly endorses that nursing homes should be the last facilities to re-open, providing a nearly unattainable checklist of conditions to be met. Massachusetts recently put forth a four-page “Nursing Facility Infection Control Competency Checklist” with 28 required items! The American Health Care Association estimates that it will take at least 2 – 3 months to have adequate protective equipment and 4 – 6 months before appropriate testing capabilities can be instituted. But what regional case counts will be acceptable to allow visitors? Quite clearly, inexpensive healthcare technology platforms such as telehealth, remote monitoring, and contact tracing will be an essential cornerstone of managing nursing homes going forward.


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