VCs AWOL on Health Care IT Investments

Venture capitalists gave a bad prognosis to health IT care reform in 2008. While the VCs lavished almost $5 billion each on general software and biotechnology and another $3.4 billion on medical devices, the industry dropped just $195 million on health care services. President Obama's $19 billion dedicated to health IT initiatives in the American Recovery and Reinvestment Act will help, but health care inflation still looms as a major barrier to investments.

Perhaps the $19 billion in the economic stimulus dedicated to health IT initiatives will move venture capitalists, but the much touted new health care economy is likely to be slow out of the blocks without a large increase in venture funding for health care innovation. Despite widespread consensus on the need for health IT reform, a recent survey shows venture capitalists invested less than three percent of their funds into health care services in 2008. According to the NVCA (National Venture Capital Association), VCs pumped just $195 million into health care services last year, a fraction of their total $28.3 billion in investments.

Backing up that report, is data from Dow Jones VentureSource showing only $354 million invested in health care IT and $357 million for health care services in 2008, less than three percent of all venture investments.

Whatever number you pick, health care investments have been slim to none.
"As long-time health care investors, we're optimistic about the incredible growth and opportunities ahead in the new health care economy," Dr. Albert Waxman, the Psilos Group's senior managing member and CEO, said in a statement. "At the same time, we can't ignore the shocking contrast in priorities between President Obama's health care plans and the venture industry's traditional investment focus. The bottom line: It's time for 'change' to come to venture."
According to NCVA, health care IT and services funding in 2008 was dwarfed by general software ($4.9 billion), industrial/energy ($4.6 billion), biotechnology ($4.5 billion), medical devices ($3.4 billion) and digital media and entertainment ($2 billion). The NVCA report shows 2008 to be the worst year in a decade for health care deals and dollars invested in the sector.
VentureSource shows declining figures for health care IT deals and dollars for the last six years.
"We hope the venture industry sees President Obama's plans as a wake-up call to get serious about the economics of health care, not just the science of biotech," said Waxman. "The risk-and-reward dynamics of this new environment are tailor-made for venture capital, and our nation needs us as a partner in this important venture."
Waxman warns, though, health care investing in 2009 "will not be for the faint of heart," citing a tough economy, spiraling health care costs and the "significant uncertainty and risks" involved in the Obama administration's health care plans.
"Health care inflation in the United States is well over twice the core inflation rate, and that is unsupportable," Waxman said. "Plus, changes have to be made to address the explosion in America's aging population over the next two decades. We're predicting a 10-year transformational cycle that will re-define the health care economy, and should reward young companies that apply innovation to cut costs and improve care."
Waxman said smaller companies and private ventures can afford making riskier long-term investments, while larger health care providers and payers should focus primarily on managing costs and navigating reforms. Longer term, Waxman predicted innovations will be adopted by mainstream providers and payers.