Circulation and “On Demand” Healthcare…

This morning Circulation, one of our portfolio companies, announced a very exciting Series A financing of $10.5 million to scale one of the emerging leaders in the “on demand” healthcare economy. Circulation is the second of our Flare Ignite seed companies and with this financing, both companies have now successfully converted to be significant core holdings of the fund (Bright Health was the other).

There are several elements to this story which are quite instructive. First and foremost, it is very rewarding to work closely with world-class entrepreneurs (Robin Heffernan and John Brownstein) who are also great friends of mine. Robin and I have worked together for nearly a decade over three companies – she was an investor at my prior venture firm, we backed her when she helped start one of our other portfolio companies, and now at Circulation. In parallel, I have been collaborating with John as a member of his advisory board at Boston Children’s Hospital where he is the Chief Innovation Officer. And with this financing, one of Flare’s Executive Partners, Chris Kryder (who founded D2 Hawkeye, Generation Health, and ran Verisk Health) has also joined the board.

There are two other more fundamental observations to be made here. One is how the team rapidly iterated both the product and business model. Today, the company which launched less than a year ago, has over 50 active accounts touching well over 1,000 locations, and can already demonstrate outstanding metrics for better health outcomes, cost savings and rider satisfaction. The broad theme of “on demand” healthcare is profoundly interesting and echoes many of the forces at work in other industries. The team felt it was critical to get out early to assume category leadership versus being too deliberative.




Being early can be hard in healthcare given unique customer demands and that the cost of failure is so high and visible. Robin and John readily identified a very significant market opportunity with non-emergency medical transportation and envisioned a powerful launch partner with Uber, where John is the Healthcare Advisor. Rather than debating who should be Client #1, the team determined that being first to market was more important than being the “first second” entrant in the market.

In addition to breaking from the gates quickly, the company has embraced working with strategic investors early on. Some entrepreneurs are leery to engage with strategics or expose the “secret sauce” to them too early but in healthcare doing so can often be quite powerful. As evidenced by the composition of the Circulation financing syndicate, four of whom are Flare limited partners, it was important to have leading healthcare companies under the tent early to provide feedback on the product roadmap and possible use cases. In fact, each of the strategic investors will be board observers/advisors and come to this with substantial needs that the Circulation platform will quickly address.

One other observation, and a theme we have been developing, is that there are a series of other successful and innovative business models outside of healthcare that will be translated for the healthcare industry. At its core, this theme underscores the transition from a “passive” model where patients receive care to an “active” model where patients consume care. Patients will increasingly insist on convenience, choice, and price transparency. This “always on” approach to healthcare consumption makes essential the precisely coordinated logistics of patient, product and service movement. The move to “on demand” platforms introduces no shortage of other opportunities for care at the right time, right place, right cost.


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Crazy Crypto Times…

Several years ago, chatter started to emerge about Bitcoin and blockchain technologies. Given that one of our core healthcare investment themes at Flare Capital is broadly labelled “Payment Reform,” we have been getting smarter about the implications to the “business of healthcare” as these technologies became more robust, more established. Little did I know what this search would uncover.

Analysts are already now talking about Digital Currency 2.0. How did I miss 1.0? Regularly there are spectacular stories of wild Bitcoin trading activity or some instance of fraud or a “flash crash” as what occurred two weeks ago, when the digital currency, Ether, collapsed from $300 to $0.10 in minutes. Undoubtedly, while these cryptocurrencies are still somewhat under construction, there is something profound emerging that may have far reaching impacts – maybe in healthcare but certainly on my industry, venture capital.

crypto currency for blog

The graphic above from the Digital Currency Group nicely captures the rapid evolution of the cryptocurrency ecosystem in the last half a dozen years, which is not unlike the cycle times of Web 1.0, 2.0 and 3.0. First enabling infrastructure must be built to allow for enterprise products and applications to then develop. Blockchain is often described as digital ledgers managed (validated) by a network of computers (“miners”) to enable transactions and commerce. Specific capabilities around security, governance and payment settlement needed to be developed before wide-spread application usage would occur.

A handful of cryptocurrencies like Bitcoin had relatively broad applicability, while most other cryptocurrencies have been introduced as payment methods for the very specific products and services of a specified network. This has become a very robust method to crowd source development capital for certain companies. These cryptocurrencies for open source networks allow the developers to capture the value of the networks they are building, unlike earlier iterations of other open source networks such as Wikipedia or Linux, where the developers were unable to monetize what became extraordinarily valuable networks. Ironically, new concerns are emerging for Bitcoin as a widely used currency given the data processing framework only allows for seven transactions per second, which is leading to fees of up to $5 per transaction (there are estimated to be 260k daily transactions now).

Some specific examples of the current landscape are quite informative and harken back to the late 1990’s investor frenzy (are you old enough to remember’s IPO?):

  • According to, there are 400 cryptocurrencies today that trade on 35 exchanges (coincidentally, there were 486 and 406 IPOs in 1999 and 2000, respectively)
  • Ethereum, one of the most popular cryptocurrencies today to support online services and apps, was valued at $10 per token at the beginning of 2017 and now trades at $250, creating an aggregate market value of nearly $24 billion – its token price chart is below
  • Bitcoin, the grandfather of cryptocurrencies started in 2008, was trading at $5 per token; now one can buy a Bitcoin for $2,500. There will only be 21 million Bitcoins created – 16.4 million have already been mined
  • There are 16 million Bitcoin addresses with less than $60 account balances but only 1,780 with more than $608,000 in value each
  • It is estimated that between 0.5% – 0.75% of Americans have ever used Bitcoin, which while sounding like a small number, equates to between 1.2 – 1.9 million people


Arguably with the dramatic price appreciation of tokens, popular investor interest has been stoked. Trading volatility is dramatic with daily double-digit percentage price swings the norm. In an environment of epic low volatility in other financial assets, speculative cryptocurrency trading activity is staggering. A criticism of many central banks around the world has been that much of the stimulus spending went to financial assets and not to real economic activity (thus record high public stock prices with very modest real economic growth). Now as those same banks look to reduce liquidity and tighten monetary policies, expect to see some potential sharp token price corrections. Compounding this is the expectation that many of these start-ups funded by novel cryptocurrencies will undoubtedly fail.

Now through the VC lens, what I was most struck by the last few months is the ability for these novel currencies to upend how capital is raised and invested – particularly by the magnitude. Many VCs were rattled in 2012 when Pebble raised $10.3 million to build a smartwatch in one of the largest Kickstarter crowdsource campaigns ever (notably, the company was shut down four years later). Notwithstanding the hyper-unregulated nature of these platforms and the chronic association with illicit activities, a few recent anecdotes underscore the disruption these platforms may poise, particularly with “Initial Coin Offerings (ICO)” and special purpose investment funds denominated in tokens.

  • In mid-June 2017, raised $185 million in five days which represented only 20% of the 1 billion tokens they will ultimately sell
  • This eclipsed the $150 million raised by Bancor a few weeks before that
  • And was blown away by Tezos’ “ICO” of $212 million which took three days in early July
  • Brave Software raised $36 million in digital coins in 30 seconds
  • Blockchain Capital was able to raise $10 million in six hours to launch a dedicate cryptocurrency fund
  • Hedge fund, Polychain Capital, was established to invest in tokens pre-product launch and will hold no equity

So, should Wall Street investment bankers be nervous? In some cases, quite clearly yes. Wall Street had been breathlessly waiting for many months for the $300 million Blue Apron IPO in June, which ultimately was quite disappointing. On the other hand, “ICOs” allow companies to create proprietary digital currencies that are to be redeemed later for products and services developed by that company (or that can be sold on crypto-exchanges) very quickly. And this is completely unregulated with meaningfully lower issuance costs. In the past 18 months, there have been 124 “ICOs” which raised $984 million according to, not including Tezos’ “ICO” in early July.

Interestingly, year-to-date 2017, venture capitalists have invested $295 million in cryptocurrency companies which pales to the nearly $1 billion raised via the 78 “ICOs” – in both cases, proceeds were to effectively do the same thing – build the product and scale the company.

Now to come full circle back to where this exploration started – what is the impact of cryptocurrencies on healthcare? Without debate, the handling of medical data today is poorly managed. Blockchain promises to meaningfully improve the security and provenance of data as they will be stored across a distributed architecture (not in one location). Additionally, security is improved given the encryption technologies core to blockchain, which should then further improve the quality and fidelity of the data. Arguably these architectures should also lower the cost of data management through better standardization. Frost & Sullivan anticipates more immediate opportunities to reduce the need for prior authorizations as an initial use case.

But this may not happen in the near to medium term in healthcare. Obsessive concerns around privacy and HIPAA are heightened with each Mt Gox incident (in 2014, $450 million of bitcoins vanished from this exchange, which subsequently went bankrupt) or last week’s hacking of Bithumb, one of the largest cryptocurrency exchanges (32k accounts were compromised), and with any “flash crash.” These technologies need to be more mainstream before more than just pilot activity develops in healthcare.

Notably, the Securities and Exchange Commission has yet to weigh in on whether cryptocurrencies should be regulated securities. And not to be left out, the Internal Revenue Service announced a probe of Coinbase, a popular cryptocurrency exchange with 500k active users, because only 802 people declared Bitcoin capital gains and losses in all of 2015. Recall that Elliot Ness initially brought down Mobster Al Capone over issues of tax evasion. The authorities are slowing trying to get their heads around what this is all about.

But other industries are beginning to explore specific use cases for cryptocurrency and blockchain technologies, particularly in financial services. The NASDAQ is creating an exchange to buy/sell advertising inventory, while many European banks are working with IBM to develop trade finance platforms utilizing these technologies. Last week the leading art and antiques fair (TEFAF) announced that 75% of the 39 top online art sales exchanges are now developing blockchain platforms.

Given venture investors are to invest in technologies that are “over horizon” today, I certainly do not want to wait for Digital Currency 3.0 to realize we missed compelling companies during the 2.0 version. In the meantime, expect to see a new class of “crypto day traders” emerge. Just waiting for the day my Uber driver tells me about the killing he/she made in flipping Siacoin tokens.


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Related Events?

As a partnership, we will make a few dozen investment decisions across any given fund and as a group we will make hundreds of other decisions together in simply running the firm day in, day out. When it comes to expanding the team though, that is a very different matter. Venture firms add very few people so each addition is a big deal.

And as such, we are very excited that Vic Lanio has joined Flare Capital as a Senior Associate. What initially struck all of us about Vic was his passion for the “business of healthcare” and how he was thinking about the implications of the transformation we are all now witnessing. Vic’s depth of understanding of the emerging new business models and novel technologies that are coming to market is exceptional. The fact that he has worked for a handful of successful healthcare technology companies was critical. When those experiences are married to both classic consulting experience (McKinsey) and top-shelf academic credentials (MIT, Boston College), we felt we had a winner. It also did not hurt that Vic is a Flare Scholar alum from the great Class of 2016, so he was someone we knew well.

Coincidentally, the same day Vic joined the firm, StartUp Health published its Mid-Year Insights Report – a “must read” for anyone operating in the healthcare technology sector. It is a wealth of industry data, covering important themes and providing funding data. We were quite pleased to be ranked as the third most active venture firm year-to-date, listed alongside several world-class investors.

 Top Investors 2017 for blog (002)

As much as we think about Vic and his tremendous potential with the firm as an investor, sadly we had to tell him that these were unrelated events!

Please join us in welcoming Vic to Flare Capital.



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“Service-enabled” Tech Models…

Around venture capital water coolers everyone brags about the latest “tech-enabled” service business model but in healthcare maybe these conversations need to be turned on their heads to focus on “service-enabled” tech models with the emphasis squarely on services. As the business of healthcare is transformed, many of the companies that appear to be scaling are fundamentally services businesses. Most healthcare SaaS businesses have always had a large services component, underscoring the balance (or tension) between services and product revenue. In fact, a review of recent funding data suggests that there are significantly fewer pure-play technology companies, raising less capital.

Thanks to one of our star Flare Scholars, Carlos Rodriguez (recently of Harvard Business School), who looked at the aggregate of both Rock Health and MobiHealthNews 2016 funding data (340 transactions and $4.4 billion of invested capital), what is quite evident is that the more labor intensive sub-sectors of healthcare technology were the most active. Carlos – bless his heart – mapped all of these transactions to Flare’s core investment themes, listed below.

Slide 23

Anecdotally, this feels right and reflects much of what is seen in the market today. The emergence of novel care delivery models across healthcare (primary care, elder care (PACE), hospital-at-home, behavioral, palliative, etc) has taken hold over the last few years. Technology has made many of these services better and more efficient, but at a very fundamental level, effective healthcare is one human being helping another human being. Left to its own, technology alone does not provide healthcare.

Ideally, real-time intelligence across a population will make the healthcare delivery system smarter and able to better anticipate both acute and chronic medical issues. The system today is finely tuned for episodic issues, not chronic conditions. A system redesign with more effective services and more robust incentives to prevent disease are expected to reduce the incidence of high acuity cases. The migration to a more integrated care delivery model to better manage all the variability of care and patient hand-offs can be bolstered by technology, but it is still fundamentally a “services” challenge.

The healthcare technology venture landscape continues to be quite active, despite what is clearly a moderation in the overall venture capital activity. Industry analysts are using words like “disciplined” and “normalized” to describe the overall venture capital market for the first 90 days of 2017, which is obviously not how we might characterize the current political climate. As always, the headlines belie what might be more turbulent private capital markets under the surface, as quite clearly there is a continued and pronounced rotation away from the earliest stages of investment. Notwithstanding that, the healthcare technology sector continues to attract significant amounts of capital. For 1Q17, nearly $1.0 billion was invested in over 70 companies, which suggests that we are on pace to have the fourth year in a row with over $4.0 billion invested in nearly 300 companies, signaling continued maturation and depth of the sector.

Globally, according to Mercom Capital, over $1.6 billion was invested in 165 companies in the healthcare technology sector. Notably, Mercom also counted 49 M&A transactions in 1Q17, underscoring for investors that more predictable liquidity is available for many of these companies. For all sectors of healthcare, there were 390 announced M&A transactions with an aggregate value of $38.5 billion in 1Q17.

And the enthusiasm for healthcare services models has not been lost on public stock investors. On the heels of unprecedented political uncertainty last year, in general healthcare stocks are ahead 9% year-to-date while the broader S&P 500 index is up only 7%. More specifically, the iShares U.S. Healthcare Provider ETF has increased by 13% while the NASDAQ Biotech ETF has gained only 10%.

Last month Flare hosted its annual investor meeting. Several important observations emerged over the course of the day including: (i) tremendous opportunities exist as the healthcare system develops effective approaches to manage chronic conditions; (ii) notwithstanding the issues confronting the public insurance exchanges, there was consensus that affordability and not adequate coverage was the central concern; (iii) more effective management of social determinants will play a critical role in how the healthcare system is transformed; (iv) significant opportunities exist in the Medicaid population, particularly with improved access; and, (v) while somewhat elusive, the “tipping point” from fee-for-service to value-based models is now on the horizon. All of this overlays nicely with our core investment themes.

Slide 3

One of our keynote speakers, who was also a CEO of one of the country’s largest health insurers, articulated a migration path to more fully developed integrated care models which highlighted the need to directly impact downstream healthcare costs. Wholesale healthcare system redesign, including the introduction of meaningful incentives to prevent disease, should materially lower the incidence of high acuity episodes. Specific areas of focus to reduce “friction points” in the delivery of care included more comprehensive and transparent network design and more effective scheduling capabilities.

Many of the speakers observed repeatedly two significant unaddressed market opportunities: (i) healthcare delivery systems that dramatically reduced variations in care by provider, which will likely be addressed by evidenced-based approaches; and, (ii) solutions that will better manage end-of-life situations.

In addition to highlighting the need for business model innovations, it was important to review developments in the field of artificial intelligence (AI) and how these emerging solutions might either impact existing products and services, or should be incorporated into product design plans. One of the country’s foremost authorities on the field of AI in healthcare is Dr. Zak Kohane, who chairs the Biomedical Informatics Department at Harvard University and sits on the Flare Industry Advisory Board. At its essence, AI will – sooner than later – enable computers to replicate existing human behaviors. It is quite clear that, as Zak so eloquently stated, the “high-touch shamanistic” aspects of medicine will be significantly reinvented as AI proliferates across healthcare. According to HealthcareIT News, 35% of all healthcare organizations will “leverage AI” within the next two years; 52% will not for another five years.

Ironically, per a recent Circle Square study of 31 million EHR, it was determined that physicians now spend less than 50% of their time in face-to-face patient interactions with the balance being “desktop medicine” (3.1 hours vs 3.2 hours daily, respectively).

Separate, and only slightly related, Sanford C. Bernstein’s restaurant analyst (Sara Senatore) recently published a report on the “restaurant of the future” which will have far fewer employees, and all interactions will be electronic in virtual reality environments with robotic chefs and servers, replicating 5-star meals in almost any setting. Senatore concludes that there will be significant reductions in time and a much more pleasing overall experience, which will encourage greater patronage. How much of that promise could we see in healthcare, another labor-intensive industry? Actually, do we even really want to see it?

So, go ahead healthcare service models, embrace your lower gross margins.


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Not Really a Ho Hum Quarter…

Now that most of the investment data are in for 1Q17, analysts are using words like “disciplined” and “normalized” to describe the activity of the first 90 days of 2017 – obviously not how we would characterize the current political climate. As always, the headlines belie what might be seen as more turbulent private capital markets under the surface, as quite clearly there is a continued and pronounced rotation away from the earliest stages of investment. Modest but encouraging exit activity has continued to generate strong limited partner interest as 58 new funds raised $7.9 billion, according to NVCA and PitchBook data.

Nearly $16.5 billion was invested in 1,797 companies in 1Q17, which was the fewest number of companies in the last 22 quarters. Much of this decline was in the Angel/Seed stage which over the past handful of years has accounted for roughly 55% of overall deal activity but only 45% this past quarter, signaling that investors may be somewhat more risk averse as they focus on later stage companies. The number of Seed companies dropped by 46% over the past eight quarters. While Seed rounds have consistently stayed at $1 million in size, average Later Stage VC round size was $10 million as compared to $5.5 million for Early Stage VC rounds.

1Q17 investments

The “bread and butter” of the venture market are the Early Stage financings and there the data are also mixed. Deal volume has declined quarter-over-quarter for each of the last eight quarters and in 1Q17, Early Stage accounted for only 30% of all deals, and at $5.7 billion of transaction volume, was only 35% of all dollars invested. The landscape is quite different in the Later Stage VC rounds where the number of deals has increased sharply over the past three quarters, accounting for nearly 25% of all financings yet 57% of all dollars invested. This concentration is underscored when one considers that the top ten financings were 17% of all dollars invested yet were only 0.6% of the companies. Two of the top five venture deals were in healthcare.

Arguably even more striking as a barometer of venture investor risk tolerance is the dramatic pull-back away from companies which are raising capital for the “first time.” Only 497 of the 1,797 companies in 1Q17 raised venture capital for the “first time” which is the lowest number in 27 quarters and half of what it was just three years ago; together those companies only accounted for 10% of dollars invested in the quarter. First time entrepreneurs are not excited about this “disciplined and normalized” market.

Undeniably, corporate venture funds have played an important, perhaps even stabilizing, role in the venture capital industry. Corporates have consistently invested in between 270 to 350 deals over the last five years, with much of their participation being in Later Stage investments. Overall, Corporate VCs participated in 38% of all 1Q17 financings.

Exit activity is what makes the venture model sing, and the news in 1Q17 was encouraging. Overall exit values for venture-backed companies was $14.9 billion across 169 companies. While the number of exits has not been this low for the last 24 quarters (maybe reflecting corporate chieftain uncertainty in light of the election results), the value of deal activity is consistent with that of the prior eight quarters. Unfortunately, there were only 7 venture-backed IPOs but anecdotally investment bankers, who are normally an anxious lot, appear to be encouraged with both the number and quality of companies in front of the SEC waving their draft S-1s. Somewhat disconcerting, though, was that Snap likely overwhelmed the IPO market in 1Q17, raising $3.4 billion of the $4 billion of total IPO proceeds. The sector with the largest number of exits was Software (96) which was 57% of all exits, and compares favorably to the fact that Software was only 37% of all deals financed in 1Q17.

1Q17 exits

This introduces another interesting metric which investors are increasingly grappling with. Since 2013 the ratio of new investments to exits has been between 10 – 11x, which is nearly 3 to 4 points higher than what was experienced ten years ago. Of course, the math is crude given the timing differences, but undeniably, companies are staying private longer, and for some, that has been aided by aggressive hedge funds and mutual funds. For others, this may not be of their own choice. There are many market whisperers now speculating which of the 153 “unicorns” (per Venture Source) are facing a dystopian future should they not get liquid in the next 12 months.

For the past four years, there have been consistently between 60 and 70 new funds raised each quarter. Between 2014 – 2016, the venture industry has raised between $35 – $40 billion annually and appears to be on pace to raise in the low $30’s billion in 2017. This past quarter was the first one in recent memory when there had not been a $1 billion fund raised (Mithril was the largest at $850 million). Notwithstanding that, the ten largest funds raised accounted for $4.3 billion or nearly 55%, yet represented only 17% of all funds raised.

Other fun “quick hit” venture facts from this past quarter:

  • According to Preqin, $31 billion was invested in 2,420 venture deals globally
  • Since 2013, over $1.5 trillion has been distributed back to investors from private equity and venture capital firms
  • This liquidity may account for why there was $90 billion raised by 175 PE and VC firms
  • It is estimated that there are over 1,900 PE and VC funds “in market” now, targeting to raise $635 billion, inclusive of the unprecedented $100 billion Softbank Vision Fund
  • And staying with Preqin, at the end of 1Q17 it is estimated that there is $683 billion of PE and $159 billion of VC “dry powder” capital still to be invested globally

There were two other market developments that many found surprising. Given all of the political volatility, the Dow Jones Industrial Average had the quietest trading quarter since 1965, with average daily price movements of only 0.3185%; for the S&P 500 it was only 0.3172%. The lack of volatility has put many market analysts on edge – ironically.

And business lending (bank loans and leases) increased a very modest 3.8% year-over-year in 1Q17. Over all of 2016, business lending rose 6.4%. Admittedly corporate bond issuance increased 18% as large issuers locked in historically low interest rates (and maybe even paid off some bank debt). Why this is somewhat disturbing is the downstream impact on growth; Goldman Sachs estimated that this deceleration effectively created a $100 billion loan shortfall.

Maybe Softbank can fill that void.


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People Are Expensive…

With much Presidential fanfare, perhaps slightly misplaced, the Bureau of Labor Statistics (BLS) just announced that the economy added 235,000 new jobs in February. Buried below the fold was the fact that healthcare positions accounted for 26,800 of those jobs or 11.4% of the total. The BLS goes on to observe that healthcare will continue to be the single fastest growing occupational category, which challenges one to reconcile the promise of efficiency gains with new technologies with the drumbeat of ever-expanding healthcare job rolls. When will the healthcare system see the benefits of technology’s operating leverage?

Just over a year ago, the BLS published a comprehensive employment survey which projected employment through 2024 across the 819 occupation categories that it tracks. Nine of the top 15 fastest growing categories are in healthcare (although surprisingly, the fastest growing category was “wind turbine service technicians”). In fact, 2.3 million of the expected 9.8 million net new jobs to be created by 2024 are in healthcare; that is, nearly 1 in 4 new jobs. Over 1.3 million of those jobs will be relatively high-skilled medical work with meaningfully above average pay levels (there are 1.5 million Uber drivers). Nearly 10% of the projected 160 million employed Americans in 2024 will work in healthcare. Interestingly, and unrelated, the 145.8 million employees today possess $92.8 trillion in household net worth (pre-Inauguration).

Across all of healthcare the median annual wage in 2014 was $61,700, although the compensation range was quite wide. Practitioners (i.e., surgeons, physicians, dentists) enjoyed median wages of $187,200 – the highest of all categories – while healthcare support jobs had median wage of $26,400 in 2014. Disappointingly, there is estimated to be a $20,000 pay gap between men and women doctors per Fortune research released for International Women’s Day last week. Perhaps not surprisingly, healthcare workers tend to have higher wages on the West Coast and in the Northeast.


For the U.S. economy to add a net of 9.8 million new jobs by 2024, there will need to be 46.5 million new job openings created to account for the 35.3 million “replacement needs.” The dynamic around “replacement needs” is fascinating when applied to healthcare. Given practitioners tend to be older, 3.1 million highly compensated jobs will be created to accommodate the expected net growth of 1.3 million high-skilled healthcare workers. Hard to see that many of those jobs will be held by robots.

There appears to be another fundamental socio-demographic force at work in healthcare today. Researchers at Rutgers University recently released a 15-year study which shows that many “disadvantaged” men (immigrants, less educated, poor) are occupying what historically have been considered positions held by women, particularly in healthcare. While the prevalence of women healthcare practitioners has increased markedly since 2000, most of these positions still are held by men (except for pharmacists and veterinarians). With the bifurcation of the employment landscape to either high and low paying jobs, significantly more men are holding low-skill healthcare jobs than they were in 2000. Sociologists have coined this phenomenon as the “employment trap door.”

The economist Joseph Schumpeter popularized the concept of “Capitalist Creative Destruction” in the early twentieth century. As a venture capitalist, I have been fascinated by the implications of his theories and am often tempted to apply them to the healthcare system. The great promise of novel technologies coming to market today is to drive dramatic operating efficiencies, which unfortunately continue to be quite elusive. One would expect that technology should lower both the financial and human capital intensity of the business of healthcare.

Simply put, the calculus around productivity (output divided by input) is further complicated as the system moves from “fee for service” to value-based models. As patients become consumers of healthcare, the notion of output needs to be redefined, accounting for a number of new variables around patient satisfaction and quality. As the system straddles these two payment models, several structural inefficiencies persist. Simply chipping away at existing “fee for service” workflows likely will never get step-function improvements in productivity.

Given that the behavior of most executives reflects what they get paid to do, it is instructive to look at compensation frameworks. While the proliferation of new technologies demands that executives become digitally literate, it has also led to a very crowded C-suite with the creation of a bundle of new titles – Chief Transformation Officer, Chief Analytics Officer, Chief Information Security Officer, etc. – adding to overall operating costs. These jobs have become meaningfully more complicated given the threat of hacks, as well as the explosion of mobile apps, novel sensors and wearables, just to name a few. As the healthcare system moves to value-based models, C-suite bonuses are increasingly tied to metrics such as patient satisfaction, quality and safety; not just financial benchmarks. These new models reward (and penalize) executives for meeting a host of new targets, which makes it difficult to both strip-out legacy costs while introducing new costs to manage to a number of different and new objectives.

In 2015, median compensation for the top 300 U.S. CEOs declined 3.8% while for the top 200 healthcare executives, median pay increased by 8.0% to $6.9 million (112x the median pay of all healthcare jobs), according to Modern Healthcare. Interestingly, over 50% of the compensation frameworks for the top 20 publicly traded hospital companies now have bonuses tied to patient satisfaction, usually accounting for 15-30% of total compensation, according to research conducted by Frederic W. Cook & Co.

For healthcare technology companies (the vendors to the healthcare system), compensation levels are quite different. Just over 40% of senior executives at those companies earn between $151,000 to $250,000, while 20% earn less than $150,000. Approximately 5% earn greater than $400,000 per research from The Tolan Group. Just under 20% had no opportunity for annual cash bonuses, while 10% could only receive additional equity. There exists a classic bell curve to the data with the mid-point of the bonus potential in the range of 25-50% of base pay.

Crawling through the rest of the BLS report highlighted a handful of other interesting nuggets. The “home health aides” category is projected to be the fifth-fastest growing category (38%) to 348,000 people in 2024. Three spots down the list was “nurse practitioners” which is expected to grow by 35%. Arguably much of the healthcare labor to be added is likely to be in non-hospital settings, which hopefully will provide some degree of operating leverage to the healthcare system as technologies offer workers the ability to provide care in other less expensive settings.

At the bottom of the BLS list were other occupational categories that had meaningfully less rosy forecasts:

  • Something called “locomotive firers” will decrease by 70% to only 5,000 jobs
  • “Switchboard operators” and “photographic process workers” will decline by 33% each
  • While “postal service mail carriers” will decline by 26%, there will still be 219,000 mailmen in 2024. Email can only go so far I guess. Separately, I am fascinated by the U.S. Postal Service (USPS) which generated $71.5 billion in revenue in 2016 while losing $5.6 billion. The USPS employs nearly 640,000 Americans all-in to bring bundles of paper to our homes everyday, nearly all of which we immediately throw away.

Finally, there are thought to be 2.8 million Americans who have served in either Iraq or Afghanistan, which is 22% more than the number of new healthcare jobs that will be created by 2024.

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Potential Next Steps – Where to Invest…

Emerging healthcare technology themes quickly reveal themselves at this time of year with the frenetic JP Morgan conference and the industry chatter leading up to the HIMSS (Healthcare Information and Management Systems Society) conference, which is in full swing in Orlando this week. It is also a time to reflect on some of the industry milestones from the prior year. All of this is made more complicated this year by the priorities of the new administration, which have yet to be clearly articulated.

It certainly appears that on the heels of the investor euphoria in 2014-2015, that the healthcare technology sector went through an appropriate period of assessment and consolidation in 2016. Now with the broader public equity markets setting new highs on a regular basis, the momentum from the movement to value-based care should endure with an even greater emphasis on de-regulation, price transparency and increased patient responsibility. Arguably, if V1.0 of the healthcare technology sector was triggered by the HITECH Act of 2009 (Health Information Technology for Economic and Clinical Health Act) which mandated the implementation of EMR infrastructure touching off the explosion of consumer digital health apps, the sector is now entering the V2.0 phase. Much of the commentary today is focused on “AI” (artificial intelligence) and “VR” (virtual reality) solutions to make the healthcare system “capital light” to drive meaningful operating efficiencies from the significant investment of the past three years.

A cottage industry has been created since November 9, 2016 to predict the future regulatory framework for healthcare. If there is an emerging consensus, it tends to center around a handful of core themes. It certainly appears that burdensome federal ACA mandates are under fire which will lessen the role of the federal government while moving more power to the states (likely via block grants). Individual mandates and age band requirements that increase cost of coverage for the young and healthy are likely to end. Much of the Republican commentary seeks to correct what is not working such as leveling subsidies to avoid significant price increases, create greater consumer choice and to move away from narrow networks. And it is quite clear that there are several third-rail features which will not go away such as allowing for pre-existing conditions, allowing children until the age of 26 to stay on their parent’s plans, and retaining a set of consumer protections such as prohibition on annual and lifetime coverage limits.

By implication then, there are several exciting market opportunities that should develop over the next few years. Quite clearly value-based payment models will endure, such as MACRA (Medicare Access and CHIP Reauthorization Act) and MIPS (Merit-based Incentive Payment System) which were implemented in 2016 by CMS (Centers for Medicare & Medicaid Services) to reward providers for efficiency and quality. Products and service to assist the healthcare consumer will be important with wider adoption of HSAs, greater price transparency and other reward systems all underscore the industry embrace of “personalized” healthcare. Expect to see greater innovation in the Medicare Advantage marketplace with the increased convergence of health and wealth management. According to Fidelity Investments, the average 65-year old couple on Medicare will still spend approximately $260,000 during their remaining lives. Below summarizes certain in- and out-of-favor healthcare technology opportunities.


In 2015 total healthcare costs per capita in the United States exceeded $10,000, a notable milestone. In aggregate, the cost of private health insurance, hospital care, physician and clinical services, and prescription drugs in 2015 increased 5.8% over 2014 levels to total $3.2 trillion. Across all sectors of healthcare, there was $12.5 billion of venture capital investment in 2016 according to Dow Jones VentureSource which was a decline of 25% from 2015, largely due to significant decline in biotech investments.

The healthcare technology sector continued to see robust investment activity. According to Rock Health, there were 296 venture financings although the amount of capital invested declined slightly to $4.2 billion from $4.6 billion in 2015. Interestingly, the average round size declined 8.0% in 2016 to $13.8 million. The stage of financing activity revealed another important dynamic in 2016 as just over 50% of all transactions were considered to be Seed or Series A financings. There was a marked increase in the percentage of Series B financings and importantly, nearly 15% of investments were bridge financings. Arguably, 2016 was the period of rationalization given the tremendous amount of investment activity in 2014 and 2015; companies in 2016 either hit their initial milestones and were able to raise a Series B round in 2016 or were less fortunate and were bridged to a more narrow set of endpoints, most likely to a sale. Monthly data provided by Fairmount Partners showed a notable and consistent deceleration in financing activity in 2H16 as well, perhaps tied to uncertainties stemming from the presidential election.


Just three categories accounted more than $1 billion of overall financing activity in 2016: genomics and sequencing ($410 million), analytics and big data ($341 million), and wearables and bio-sensing ($312 million). The next three most activity categories included telemedicine, digital medical devices, and population health management, which underscores the diversity of products and services in the healthcare technology sector. This activity also highlights the V2.0 phenomenon the industry is now entering as more sophisticated solutions are being developed to drive actionable insights that will improve clinical care at lower costs.

This past year continued to see robust M&A activity in the healthcare technology sector as well. According to Fairmount Partners, there were 160 M&A transactions, which while slightly down from the 183 in 2015, was markedly greater in terms of disclosed transaction value – $16.0 billion versus $8.2 billion, respectively. The average revenue and EBITDA multiples paid in the disclosed transactions were 4.4x and 13.1x, respectively. A majority of these M&A transactions included companies selling solutions into the provider space.

The public markets were less forgiving in 4Q16, in large measure due to the regulatory uncertainty. After a very strong 3Q16, the Leerink Healthcare Technology/Services public stock index declined 9.3% this past quarter, ending the full year only slightly positive (up 1.7%), effectively surrendering the gains for the first nine months of 2016. The 4Q16 pain was limited to two specific categories in the index: PBMs/Distributors (down 18.7%) and Providers (down 17.2%). The Healthcare Technology and Brokers categories were both ahead more than 20% for the year, possibly indicating who the net winners and losers might be under TrumpCare.

As we head into healthcare technology V2.0 phase what might be expected over the course of 2017? With some fanfare, late in 2016 Rock Health shared the results of their recent consumer health survey that digital health had reached a “tipping point” as approximately half of all respondents had adopted at least three types of digital health products (which was up dramatically from the 19% in 2015). A majority of respondents wanted a copy of their medical records, 87% wanted to control who has access to their healthcare data, and 39% expressed strong willingness to pay health expenses out of pocket.

Recognizing that there are still another 28 million Americans uninsured, and the new regulatory framework is still a long way from being promulgated, the following are just a few possible developments that drive a number of our investment themes. Exciting start-ups are being launched to address these opportunities.

  • Transparency of provider networks will underscore the move to more consumer-centric purchasing behavior. New tools and services will be developed to facilitate the consumer assuming more financial ownership as to assessing both outcomes and quality (value)
  • More distributed healthcare delivery models will emerge to take advantage of new telehealth and multi-channel interactions. Provision and access to care will be made more affordable and convenient through the usage of passive and “always on” monitoring platforms and support systems. Traditional “bricks and mortar” providers will manage significantly more patients per square foot of real estate
  • Brands will become even more important
  • Advent of specialized clustered service offerings around certain chronic diseases (mental health, diabetes, end-of-life, fertility) will be bundled and branded
  • Personalized and precision medicines will continue to be developed along with better diagnostic tools (and regulators will struggle to catch up). This will transform everything from drug discovery processes to clinical decision support.
  • Continued convergence of the management of both health and wealth will bring financial institutions closer to the healthcare industry, with potentially some fascinating partnerships emerging
  • Technology companies will continue to develop broadly horizontal management platforms for consumers to manage health and wellness needs


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