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Venture Capitalism and Medicine: A match made in heaven? Or someplace Hotter?

Venture Capitalists

First, what is a venture capitalist?

A venture capitalist (VC) is an investor who provides capital (money), to companies in exchange for an equity stake in that company. This funding could be used to fund a start-up or to support a small company that wants to expand. A VC could be an individual (sometimes called an Angel Investor) or it could be a firm. If they work for a firm, then the firm’s money is used. The money that is invested is referred to as Venture Capital and is a type of private equity. Private equity refers to shares and debts of a private company; which is a company that is not listed on a stock exchange.

If you have ever watched “Shark Tank” you have seen venture capitalism in action.

A new business owner comes to the show hoping to raise money. The “sharks” offer money in exchange for a stake in the company. Typically, the “shark” or VC helps the new company in the short term. They invest the money, help the business grow to a point that it reaches the size that is of interest to a corporation or institutional public-equity markets, and then exit the company. VC recoup their investment when the company is either purchased by another or through an IPO (initial public offering); meaning the new company is now listed on a stock exchange.

Over the past decade or so, VC investment in companies in the healthcare field has increased.

Because investment in medicine is no longer exclusively born from providers within the delivery system, and increasingly from innovators outside it, patients and policymakers need to pay attention. Between 2010 and 2017, the value of an investment in digital health increased by over 800 percent! This growth far exceeds the growth of venture capital funding (166 percent) as well as growth in healthcare spending (34 percent).

There are likely three reasons for this exponential growth:

1. Doctors need to be able to monitor patients, and challenges with patient compliance have driven the need for digital technologies to deliver care.
2. More care is being provided outside of a hospital setting and by an increasing number of specialists. This drives the need for better patient-provider as well as provider-provider communication.
3. Changes in insurance and payment models that encourage cost control have created incentives to substitute high-cost services with low-cost, higher-value services.

Herein lies the concern of patients, providers, and policy-makers.

Angel investors are giving their money to a company in the hope that it will thrive and he or she will get their money back with interest. A VC firm is investing the money of that firm and also wants to see a return on its investment; it also has stockholders and shareholders who want to see that same return. This change in ownership creates a new operating reality. The previous central tenet of healthcare-do what is best for the patient- now has a competing imperative: do what is best for the investors and/or shareholders.

This does not mean that all venture capital firms are inherently evil. It also does not mean that all physician-owned and operated practices are ethically sound either. There are many examples of not-for-profit healthcare systems behaving in a predatory way while for-profit healthcare systems operate altruistically. Let’s face it: bringing a new idea, a new way of doing things, or a better gadget to market is expensive. Private capital does create opportunities to transform healthcare delivery.

This is where policymakers come in.

Recently, legislators in California introduced legislation requiring the State to approve any transaction in which a healthcare provider organization is being acquired by private equity. This could be seen as a reaction to the belief that private enterprises cannot be trusted to do what is in the public interest. Investor-backed healthcare needs an ethical structure that can allay these fears. There are several ways to accomplish this:

1. The Board:
Boards must commit to a dual obligation to their investors/shareholders and to the patients; also that if these interests are in competition, the patient comes first.

2. Organizational Structure:
This could be done by having its Chief Medical Officer report both to the CEO and to the Board. The Chief Medical Officer should have a level within the company commensurate with any other corporate officer, as well as direct access to the Board.

3. Independent Clinical Director
This dedicated board position should be a practicing clinician. The board should also dedicate itself to allowing decisions of a clinical nature to be done by clinicians. This person would serve as a “clinical conscience” for the Board. There must be a clear boundary between the clinical side and the business side of the company.

4. Compensation
Be vigilant around the design of incentives so that no harm comes to patients. Watch for use of incentives that call for the overuse, under-use, or misuse of clinical services or anything to enhance billing documentation. If possible, tie incentives to clinical outcomes (fewer office visits, fewer infections, reduced hospital stays, etc).

In Summary, given the cost of bringing a new idea to fruition, I do not see VC moving away from healthcare. However, the potential for abuse is real, and patients will pay the price. For this reason, policymakers have a role to play. Regulatory guidance is needed. The FDA, CMS, and NIH should study the effect of startups in healthcare and facilitate research. Too often, patients and clinicians have to rely on studies done by the same company selling the product or service. Publicly funded, independent studies of the impact of venture capital-backed innovations on clinical and economic outcomes are needed to establish an evidence base that patients and providers can trust.

I relied upon several articles to write this blog:
The Burgeoning role of Venture Capital in Health Care by Suhas Gondi and Zirui Song
Health Affairs Forefront Jan 2, 1019

How does venture capital operate in medical innovation? By P Lehoux, FA Miller and G. Daudelin
BMJ Innov 2016; 2:111-117

When Private Equity Calls: 3 things for physicians to know
Staff writer for the American Medical Association August 15, 2019

Practicing Medicine in the Era of Private Equity, Venture Capital and Public Markets
by Sachin H Jain Forbes Magazine 7/27/2020

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