There have been few times in the past when new ideas and innovation in health care were needed more than they are today. This is a time when patients, clinicians, policymakers and health leaders face many challenges and are in need of new ideas. Many hope that this time of change and disruption is also a time for our aspirations and dreams to soar.
That we need innovation in health care may surprise some people. After all, we are an industry that is proud of our creativity and discovery. Look at the progress we have made in the life sciences -- in biotherapeutics, implanted devices, imaging modalities, genomics and diagnostics. In each of these areas, we have seen near-complete knowledge turnover in the past decade, and many of these ideas have already made it to the commercial marketplace.
But life sciences is only 15% of health care spending. In the other 85% -- the way care is delivered, organized or financed -- we have seen little change across many years.
It is not that we don't know what we want from a better health care system. In my opinion there are five things we should do much better tomorrow than we do today:
- First, when someone seeks treatment, do not kill or maim them;
- Second, get more for our money tomorrow than we do today;
- Third, give consumers a real stake in their health care;
- Fourth, protect society from an inevitable biological or other public health disaster, whether natural, accidental or intentional; and
- Fifth, bring into common use new tests and treatments that add real years to our lifespan within a short period of their discovery.
We have an urgent need to make these aspirations reality -- to bring them to commercial viability and to show the world that they work on the scale needed to matter in health care.
New Money Needed
I do not think it is an overstatement to say that the success of the current round of health reform efforts will depend on whether innovators can succeed in this task. I say this not for philosophical reasons, but for very practical ones.
The gap between what we want to do and what we need to do can only be bridged by a very large amount of money -- at least large by historical pre-bailout standards. There are three places to find this money: new taxes, cuts in benefits or new efficiencies. We will know soon if the president can get more money -- up to $700 billion -- added to health care spending to begin to bridge the gap.
I am quite doubtful that this will happen, and I am quite concerned that this Congress believes they can legislate solutions without the private sector coming along with them. If new money is not found, then the choices are to either cut health care benefits -- a nearly impossible feat with this Congress in this economy -- or to improve efficiency.
This is where innovators come in. We need their companies, ideas, prototypes and solutions that increase efficiency. If we want to change the yield curve of health care spending, we need to bring these ideas and solutions into common use.
Debt, Equity, Early Adopters
An entrepreneur cannot succeed without a supportive environment for investment and adoption. Even during good times, people who take on the biomedical-industrial complex face many challenges. Many great health care entrepreneurs view improvement of health care delivery as unrewarding, unsupported and unachievable. As hard as it has been in the past, the barriers to innovation are immeasurably higher in today's environment. Let's look at three facets of this problem: debt, equity and early adopters.
As all newspaper readers know, debt is not available for many businesses. Many may not know that this is also true in health care, nor how dependent the industry is on debt-financing. So far, there has been only one health care loan transaction in 2009 for $200 million or more, down from 56 in 2007 and 12 in 2008. There were two high yield transactions in 2009 for $800 million, down from 23 in 2007 and one in 2008. Overall, health care debt is three or four times as expensive as in the past, if it can be gotten at all.
Added to this, equity investment has fallen at every point in the company life cycle. In February, the New York Times reported that angel investors are facing liquidity concerns and are risk-averse, so they are fleeing startups. In 2008 we saw the first yearly decline in health care venture investing since 2003 -- an 8% decrease from 2007 -- and forecasted declines for 2009 are substantially larger. Life sciences and devices investment both dropped 15% from 2007 to 2008. Health care services investment dropped 28% year-over-year. There were only three health care IPOs in 2008, all of which were down about 30% from their post-IPO highs. There was $13.9 billion in acquisitions for the whole health care industry in 2008, which represents the smallest number since 2003.
Perhaps most troubling, commercial uptake faces hurdles. The organizations who can be the supportive early customers of good ideas are paralyzed. For example, hospitals are frozen by health reform debate, facing economy-driven volume declines, credit cost increases, and increasing bad debt. In addition, health plans are also frozen by health reform debate, and are facing Medicare Advantage risks, asset investment losses, and recession-driven enrollment reductions.
Furthermore, employers are facing much bigger problems than health care and staring into health reform as a potential disintermediator of their post-WWII role. Lastly, pharma and biotech are under distress because of soft drug pipelines and potentially draconian new regulation.
Two Key Questions
The undersupply of debt and equity and the reluctance of early adopters create an innovator's dilemma: Innovators are struggling for survival at the same time that we need their creativity the most. The innovators' dilemma is really everyone's dilemma because the health care we deliver and receive is bound not by regulation but by our ability to aspire and reinvent.
We should therefore all ask two questions: One, what can we do to help good ideas navigate the financial crisis and survive and thrive? Two, how can we ensure that good ideas affect and find roots in health reform?
We will live with the answers to these questions for a long time to come.