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Checkup on Obamacare as Start Date Nears

Apr 22, 2013

Reuters Venture Capital Journal – April 22, 2013 – Tom York, Contributor -- It takes a decade to build a new hospital in the U.S., thanks to the jungle of bureaucratic approvals required, not to mention the complicated design work that goes into a medical structure.

Hospital operators spend the first five years getting the requisite permits, and then spend the next five on construction, which often includes monitoring by onsite inspectors.

The founders of venture-funded Aditazz think they have developed a better way.

Two of the three founders, Deepak Aatresh, a former Intel Corp. chip designer, and Zig Rubel, an architect, has built an innovative design-build tool for hospitals that melds methods, microprocessor designs and commercial shipbuilding.

"You can build a half-million square-foot ship eight stories high, complete with 1000 rooms, plus power plant and kitchens in four to five months," says Ajit Singh, a general partner at Artiman Ventures, in East Palo Alto, Calif., which has invested an undisclosed amount in the 3-year-old company from its third fund. "Yet, it takes four to five years to build a new hospital."

San Bruno, Calif.-based Aditazz bested more than 100 competitors, including a number of heavy hitters in health care construction, in a year-long competition sponsored by managed health care provider Kaiser Permanente. Kaiser then announced it would use Aditazz's template to construct a small hospital in the suburbs of Southern California, Kaiser will design and test the structural components before the first shovel full of dirt is turned, says Singh, who adds this will save months, if not years, of time.

Aditazz represents a new wave of healthcare related deals spurred by the Affordable Care Act of 2010, or Obamacare, that is expected to bring sweeping changes to the U.S. health care industry in January 2014.

The ACA will add as many as 44 million uninsured in the system, a crush of epic proportions. And the White House is expecting to install new or adapt existing technologies to help providers deal with the flood of patients.

VCs are also stepping in to help.

Halle Tecco, co-founder and CEO of health care-focused business accelerator Rock Health in San Francisco, says that more than $1.4 billion has been invested in digital health startups, according to a regulatory data she's been tracking.

The total includes all Series A rounds of $2 million and more, which is up 46% over 2011.

"The fact that digital health jumped so much year over year was pretty incredible," she says. "Overall, venture funding was down 10%, while biotech funding was

Tecco says the fact that hospitals face penalties under Obamacare is generating a demand for technology tools to help identify high-risk patients and make sure they're getting properly treated."

"This is a great time for innovators to come in," she says. "The industry is looking at how to change how they operate."

Tecco's said she's seeing more new businesses starting up to develop new products and services to help hospitals with the business end of delivery.

Under Obamacare, hospitals will be penalized for readmissions, so operators are looking for ways to reduce costs and perform at higher levels while under increasing scrutiny from regulators.

Tecco sees big things ahead for Benefitter Inc., a company just graduating from the Rock Health accelerator after raising $3 million in angel funding. The company is developing tools to help employers navigate the ACA in terms of choosing coverage for their workers.

Meanwhile, one area getting a lot of attention ahead of national health care reform on the part of VCs is IT, especially so-called "big data."

AI Waxman, the New York City-based co­founder of VC firm Psilos Group, says the industry is trying to catch up as quickly as possible.

"Health care is aware of the fact that it's extremely deficient in data," Waxman says. "The challenge is how to give all of that information to a multiplicity of doctors."

With that deficiency top of mind, Psilos has invested in HealthEdge Software Inc., a Waltham, Mass.-based startup building industrial-strength suite of tools for payers and insurers, comparable to what Oracle has developed for managing large enterprise databases.

Psilos has also invested an undisclosed amount in Studio City, Calif.-based SeeChange Health LLC, a combined technology and insurance company, and participated in a $20 million Series C round in January in San Diego-based PatientSafe Solutions Inc., which has developed a hand­held IT system that allows nurses to check in on patients remotely, and ensure that their medications are taken as prescribed.

Another company, called HealthPocket, which raised $2 million in Series A funding from Lightspeed Venture Partners last year, operates a free website that compares and ranks health care plans.

Jason Brown, a principal at Thomas McNerney & Partners in San Diego, agrees that health care IT, especially in the area of electronic medical recordkeeping, or EMR, is getting a lot of investor attention ahead of the arrival of Obamacare.

As a result, he doesn't expect to see much of a bump in biopharmaceuticals and medical device investments, an area in which his firm focuses.

"There is no question that there is intense focus on costs. So, it's important to invest in new products that can deliver value," Brown says. "It's more important than ever to find investments that can deliver true improvements to patients where the cost is easily justifiable to payers."

He says VCs are shying away from investments in medical devices makers because they might get hit with a new tax to help underwrite the cost of Obamacare. But he likes that Washington regulators have loosened the lengthy approval processes for new drugs.

"We've seen some improvements on the FDA side recently," he says in a signal that the agency is going to speed up the drug approval process.

Brown also says he was encouraged by the passage of the GAIN (Generating Antibiotic Incentives Now) Act of 2011, which encourages new antibiotics, as well as the recently adopted FDA procedures to approve innovative therapies to get to the market faster.

"There are real efforts on the part of the FDA to get compounds that are needed through the process more quickly," he says. "It's a little early, but we are certainly looking at companies that will benefit from the initiatives."

McNerney is an investor in Keystone Dental Inc., in Burlington, a Mass.-based maker of dental implants, often used in cosmetic surgery not reimbursed by insurance. It's not Obamacare related, but attempts to profit from a new trend in health care that will help dental providers looking for more income in an era of belt-tightening.

"Self-pay is an area that's been growing a lot with the improvement in the economy," Brown says. "Providers don't rely on public or private insurers for reimbursement."

Singh says that Artiman, which is focused on early stage ventures and which has $750 million under management, likes to invest in "white space investments untouched by innovation." In August, the firm participated in a $58 million round in CardioDX Inc., a Palo Alto, Calif.-based developer of a genetic test for diagnosing coronary artery disease that is less invasive but more accurate than traditional methods, and the firm participated in an undisclosed seed round in ClickDiagnostics Inc., a Lexington, Mass.­based company developing mobile diagnostic applications for infectious diseases.

He says that he's looking for emerging companies innovating in diagnostics, particularly in the area of developing new algorithms to deal with the flood of new patients that will be walking into clinics and doctor offices.

"We could save $100 billion a year if we could cut down the diagnostics to three minutes from three days," Singh says.

"You don't have that leverage in any other industry, where a small component controls a much larger component," he says. "It comprises 2% to 3% of the overall cost of health care, but controls 70% of the cost downstream."

Tom York is a San Diego-based contributor. He can be reached at