The Cost of US Healthcare: Could Private Equity be an Answer?

It is common knowledge that the global economy has been irreversibly changed since last Summer. Now nearly two years into serious recession, the United States has scrambled to hold any sort of ground in consumer confidence, losing countless jobs and huge revenues in almost every sector. Real estate and retail have been hit especially hard, forcing bankruptcies and driving up unemployment across the entire country. The one sector of the economy which has held steady in both job creation and economic output, however, is health care.

With President Obama just five months into his first term, his administration has spent furiously in an effort to shore up the financial framework, issued executive orders regarding the withdrawal of troops from Iraq and the closing of the Guantanamo Bay prison camp, and has most recently taken steps towards overhauling health insurance infrastructure. In an article for the Wall Street Journal [“Health Costs are the Real Deficit”], Peter Orszag, director of the White House Office of Management and Budget, explained the administration's urgency in adapting and reforming the nation's health care system. “Health-care costs are the key to our fiscal future, and even doctors and hospitals agree that substantial efficiency improvements are possible in how medicine is practiced.” (http://online.wsj.com/article/SB124234365947221489.html)

Can efficiency be the key to a solution? Instead of simply meaning expedience and ease of practice, Orszag further qualifies the term by linking it to what many in the industry believe to be more successful care. “In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost -- not the opposite.”

Exactly how to go about achieving this new efficiency in the insurance infrastructure has become a sticking point in the political dialogue in Washington. So far there is a disconnect between the President's proposals and the recommendations of the Senate Finance Committee. The New York Times recently published a special section dedicated to illuminating options now on the table. President Obama has sought to take a three fold approach: First by cutting “$622 billion in spending by reducing Medicare and Medicaid payments to hospitals, insurers, drug companies and home health agencies and by eliminating subsidies for insurers that offer the elderly private plans through Medicare”; secondly, by creating a public insurance option that would –in Obama's eyes- “make the health care market more competitive and keep insurance companies honest”; and thirdly, to raise about $326 billion in taxes by limiting tax deductions for charitable donation, on mortgage interest, as well as by closing corporate tax loopholes.

What's left out of this current debate, however, is the connected cost of overhauling the physical health care infrastructure itself, outside of the issue of coverage for all.

The private sector has begun to take an active role in the issue. Take for example Wal-Mart's entrance into the world of medical record digitization. Physorg.com, a well-known science and technology blog, published an article on this when the company first announced its intentions to provide the service, selling “bundles, which include the hardware, software, installation, training, and maintenance” of the technology (http://www.physorg.com/news156003028.html). 

“We feel a great need,” explains Susan Koehler, Wal-Mart spokesperson. “We feel the timing is right given our country's goals for health care reform. This will enable small town physicians to have greater access to health information technology. There was never one single purchase point. We will become that single point to funnel medical professionals through partners like eClinicalWorks and a hardware partner that will make this a streamlined experience.”

With Wal-Mart making a play in the digitization of medical records (a project which also received $19 billion in President Obama?s stimulus plan) the private equity world may have its necessary case study. And, at a time when the industry is looking for sure footing, financing the infrastructural shift in the healthcare system could provide both great returns, and more of that key ingredient – efficiency. The Obama administration has already enlisted the help of private capital to help free the banking system of its famous toxic assets, so why not extend the same invitation in the world of health care?

Enter an entrepreneur like Mouli Cohen, with a history of successful investments in biotech companies and with a current firm, Voltage Capital, working to uncover the emerging opportunities in scientific discovery specific to the healthcare industry. “Research and development is increasingly expensive and the major pharmaceutical companies have reduced their efforts,” Cohen explains. “This shifts the burden onto biotech and academia. In the end, someone or some entity has to sponsor the work that will allow us to innovate and move ahead.”

Simultaneously, with his personal philanthropic efforts, he has concentrated his efforts on working to eradicate blindness in children, further stem cell research, and cure autism. Many times Cohen's endeavors blur the line between business and philanthropy, in the same way that Bill Gates has built his a innovative new platform with The Gates Foundation.

Cohen believes greatly in the future of this combination as the technological and operational aspects of healthcare system continue to improve, “There are many opportunities in both the biotech and traditional health care industries to help to achieve a more efficient way of treating people, while fulfilling our goals from an investment perspective as well.”