HEALTH CARE
Research by
Stefanos Zenios
Charles A. Holloway Professor
Stanford Graduate School of Business
Lyn Denend
Director, Program in Healthcare Innovation
Stanford Graduate School of Business.
FOR FURTHER INFORMATION: Helen K. Chang, 650-723-3358, Fax: 650-725-6750
Venture Capital Should Invest in Improving the Health Care Safety Net
Young companies trying to enter parts of the health care industry by focusing on helping patients stay healthy and allowing safety net providers to use their resources have a hard time attracting venture capital funds that focus more on traditional profit. A recent article by two Stanford Graduate School of Business researchers argues that it's time to change this pattern.
AUGUST 2011
STANFORD GRADUATE SCHOOL OF BUSINESS — In 2010 a young San Francisco company was nagging uninsured teenagers with severe asthma into being healthier. The firm, BeWell Mobile, offered customized disease management software via devices like cell phones, and was trying to grow.
An eight-month study of the effectiveness of the BeWell system asked the young patients to record their symptoms at least once a day and then sent them regular feedback, reminders, and other interventions. The study found the teens' drug compliance more than doubled, their need for rescue medications was cut in half, and their visits to the emergency room and days of missed school fell dramatically.
In most businesses, results like these would almost certainly pique investor interest. But despite the promising results of its technology, venture funding still didn't materialize for BeWell. Companies trying to enter underserved markets made up of low-income people and the safety net healthcare providers who serve them face a common problem. Although their products have the potential to reduce costs, improve outcomes, and increase access for millions in underserved populations — it is unclear within the constraints of the current health care system whether they can generate the high financial returns that investors expect. Simply helping patients stay healthy and allowing safety net providers to use their resources more efficiently isn't enough. As a result, many companies continue to struggle to secure capital to fund the development and commercialization of their important innovations.
In an article titled "Investing for the Safety Net," Stefanos Zenios and Lyn Denend of the Stanford Graduate School of Business Program in Healthcare Innovation argue that VCs and corporate investors have traditionally evaluated technologies like BeWell's — that reduce cost and improve care for underserved patients — using the same demanding criteria they apply to mainstream commercial opportunities. Under those standards, the safety net opportunities can't compete. Moreover, these investors are seeking significant rewards to compensate for the risks they take, and they typically don't believe that big, unbounded returns can be generated from resource-constrained environments represented by the underserved groups like the asthmatic teenagers. Investors also believe that companies trying to improve results for safety net providers incur higher-than-average risk when it comes to market adoption, business models and reimbursement, and return on investment.
The article was one of several exploring potential solutions that appeared in the August 2011 supplement to the Stanford Social Innovation Review, entitled "Innovating for More Affordable Health Care," and sponsored by the California HealthCare Foundation.
Zenios, the Charles A. Holloway Professor of Operations, Information and Technology, and Denend, director of the health care program, argue the time may be right for a change in these attitudes. Nearly all health care stakeholders now believe that the future of the entire system depends on gaining better control of rising costs. As a result, interest is growing in innovations that enable more efficient and cost-effective care, and traditional investors appear more open to funding such projects, as long as they can generate sufficient financial returns.
This is where social investors — foundations, social venture funds, and individual philanthropists — can play an important role. According to Zenios and Denend, they can help alter the risk-reward equation by funding meaningful pilot studies that demonstrate the value of these technologies, reduce the perception of safety net-specific risks, and increase the attractiveness of this market to commercial investors. In addition, such studies can be used to demonstrate how technologies optimized to reduce costs and improve care in the safety net can effectively cross-over into mainstream U.S. markets and large overseas markets where cost control is imperative. Importantly, foundations can also work to change reimbursement policy so that the providers who keep patients healthy and out of the hospital are paid for these desirable results.
In terms of how social investors can help fund innovative new medical technologies, the authors recommend providing companies with flexible, long-term capital, including targeted grants, program-related investments, social venture funds, and endowments. Through these mechanisms, they say, donors, investors, funders, providers, and innovators can help ensure that high-impact innovations find their way to the patients who need them the most.
— Cathy Castillo