Opportunities Abound – Baird Capital on Healthcare IT

Despite high valuations and lingering challenges, healthcare IT is poised for innovation

As healthcare systems become increasingly complex, the demand for innovative, efficient solutions will only increase – and a wave of activity in healthcare IT is driving developments in communication, care and development across the healthcare space.

Two of Baird Capital’s senior healthcare experts recently sat down to discuss the current healthcare IT market, valuations, and opportunities and challenges for both companies and investors.

What are the drivers behind investment activity in healthcare IT?

Nicole Walker, Principal – Venture Capital group
If you look at what's going on within the healthcare ecosystem, you can frame opportunities and challenges in terms of patient focus, provider focus or payer focus. In each approach, you see a drive (or even a mandate) to improve not just quality and efficiency of care, but also the cost of care.

Healthcare IT is striving to create back-office solutions that drive efficiencies, as well as front-office solutions that enhance payer-provider-patient-provider communication and feedback. Clinicians are seeking additional feedback because they're being challenged about their quality of care. Consumers are increasingly engaged and asking more questions, especially those with higher deductible pay plans or private-pay situations.

The retail and financial industries are well acquainted with the challenges of managing and protecting consumer data. What similar challenges does healthcare face?

Nicole Walker
Healthcare hasn’t had the same amount of exposure to these challenges as retail and financial services, but it’s certainly a focus today. Privacy concerns multiply when you think about the contents of a healthcare file. The amount and level of personal data stored inside is a huge concern, particularly in terms of how that data is safeguarded at the clinician and healthcare system levels. In addition, the notion of having a chief security officer within a healthcare system didn’t really exist 15 years ago. Some systems are starting to couple it with a chief information officer or chief technology officer role.

Mike Bernstein, Partner – U.S. Private Equity group
The biggest healthcare IT challenge is interoperability or, really, the lack thereof. Existing systems simply don't integrate with one another. Even in common systems, there are major problems around the fluid transmission of information across all players.

We are a long, long way from solving this problem. Take a common scenario in a healthcare system: the lack of single signature. It’s incredibly inefficient. When a provider is in a healthcare system and signs into the electronic medical record, they often need to manually sign into numerous other systems to make one or several clinical decisions. Another example is telemedicine. Many of the really intriguing telemedicine solutions are physician call centers. Patients can call one of these $80-per-visit systems, but the practitioner usually cannot access their medical record during the consultation. This is a major care-delivery issue, as some patients may be unable to report which medications they’re on, their full medical history and the like.

Are there compelling plays trying to fill this communication gap?

Nicole Walker
On the venture side, we're seeing IT solutions for every step in that process. A key question is, “Where is the appropriate point to place a solution?” Is it better to have multiple single-point solutions, or do certain parts of that care-delivery process require more of a systemic effect? Are there multiple pain points that need a more complex solution? How do you tease that out and work with the providers, payers and the care organizations to understand where they need solutions and how they can attain the biggest bang for the investment dollars they're willing to invest?

From Baird Capital’s vantage point, what are the most compelling opportunities in today’s market?

Mike Bernstein
The solutions that aren’t impacted by interoperability are a major opportunity – for example, analytics. Clinical decision-making analytics solutions can take any rich data set and distill it into actionable insights. These businesses tend to be agnostic as to which system they utilize, and thus aren't thwarted by long-time inefficiencies of the healthcare systems.

Nicole Walker
There are a number of those businesses that are focused on efficiency plays around back-office optimization. While these areas aren’t part of direct-care delivery and perhaps aren’t as close to the patient experience, you can still leverage a lot of the efficiencies built in from other industries.

Take revenue cycle management. There are numerous opportunities to optimize coding, billing and collections processes or add analytics into the claims process to avoid both fraud and waste. It’s the same story in supply chain management.

Valuations are sky-high in healthcare IT. Where are valuations likely to be inflated, and how do you work to create value for investors in such an environment?

Mike Bernstein
On the mature end of the investment spectrum, we’re definitely watching and concerned about valuations. There’s a sense that values are out-of-line and won't stay there, meaning it is risky to invest because there is a very real possibility of overpaying and seeing a devaluation of the business, even if it performs well.

That said, there's a lot of opportunity to take part in this phenomenon by selling. We're sellers right now. Selling businesses bought some time ago is a way to drive value for investors as well.

Nicole Walker
On the venture side, valuations on “coastal” deals tend to be more expensive. If you do have a particular interest in the mid-America corridor or undisturbed markets, there are really attractive opportunities with as much or more potential than deals on the coast.

Baird Capital works with natural pockets of healthcare IT solutions and expertise – the University of Wisconsin is a great example, as is the Ann Arbor, Michigan area. We’re also further establishing our foothold and building relationships in Denver and Tennessee, both areas with a great deal of emerging technology and talent. These areas haven’t received a lot of attention from the coast in the past, but coastal firms are starting to look for opportunities elsewhere because they are also seeking better values as they realize valuations on the coasts are outside of norm.

Finally, what is the next frontier in healthcare IT?

Mike Bernstein
I think interoperability is the biggest challenge. The biggest opportunities are probably the businesses and solutions that don't depend on interoperability.

Nicole Walker
That is the low-hanging fruit. On the venture side, we see a lot of opportunity in hospital/provider efficiency, care coordination and risk- and value-based care. We work closely with providers to get real-time insights on what they are doing to improve clinical workflow and how they might be able to optimize their systems. We also leverage our strong relationships with payers, who provide key perspective on managing costs and the proactive treatment of conditions that can become expensive to manage. We believe technologies and solutions that enable care delivery in lower-cost settings, improve care coordination and analytics, and offer tools for patient engagement will be very compelling opportunities for investors.