Inside Fort Knox - Goldfinger

$500,000,000.  That's a lot of money to arrive as a windfall - any direction.  You may recall that $500M was the agreed settlement between Google and the DOJ (tons of coverage including mine over on The Health Care Blog). Crime committed, punishment exacted, money collected, now back to our regularly scheduled programming - right? It does make me wonder though. Is that a lump sum payment or installments? What GL account does the CBO post that to? How much were the legal costs to arrive at that settlement? In the same way that we held Google accountable for their mistakes, shouldn't we have some accoutability for the money itself - and shouldn't those dollars be applied directly to healthcare - instead of just being added to the general coffers?  

I know it's a small amount in Big Governmant terms - but the full measure of justice isn't really complete unless and until we account for the use of those funds. Legal is a sunk cost - so that comes straight off the top. Say $5M for the team that arrived at the negotiated settlement. There needs to be a healthy victims fund. I'm sure there are plaintiff attorneys (maybe even class action?) lining up law suits on behalf of innocent victims. Some (most?) will be completely without merit - but not all. I don't know of any pending cases per se, but let's say we escrow $100M for that category.  

That leaves $395,000,000 as the remaining balance. Here's what I propose. Let's take 2% of that - rounded up to $8M and fund a different kind of healthcare reform. The kind I'm thinking of isn't based on legislation - but innovation. The GL entry for large corporations is called "Alternative Investments" and here's how it could work. 

For many that are outside the startup ecosystem - there is a tendency is to think that "chutzpah, vision and foresight" are all that's needed for mega-sized success. Breaking news - it takes putting captial at risk - and the bets at the early stages are the hardest to make and anything but assured. Lot's of really big swings - and misses - on both sides (innovators and investors). For every Facebook or Groupon - there are probably a 100 that either wash out completely - or survive to a liquidity event (either positive or negative). It's also very easy to say in hindsight that Facebook was destined to be a $100B company. Few remember that seven short years ago (almost exactly) a relatively small investor gave an unknown kid out of Harvard a check for $500k. Fewer still know of the really big misses by the very VC's that are in the business of finding and funding early stage startups. For some insight into those misses I've always liked the Bessemer Ventures anti-portfolio page. Neill Brownstein, a Partner at BVP was given a chance to invest in pre-IPO Apple at a $60M valuation.  He declined with a reply that it was just "outrageously expensive." Swing and BIG miss. Point being that VC's don't always fund success even when it does present, that the Facebooks and Groupons are the exception not the rule, and that the ealy stages of a startup are really pure sweat equity. Chris Dixon - who I've personally admired for years - captured this really well in his post - There are Two Kinds of People In the World.  Written in Aprill the abbreviated link to his post has been clicked on over 11,000 times - and captured over 260 comments.                 

Those of us working in the earliest stages of innovation around healthcare are keenly aware of the lack of funding and resources specifically for this vertical. Early stage risk capital and resources are in short supply generally and while that's actually a good thing - it's wildly disproportionate to the size of the healthcare vertical. Healthcare represents 18% of GDP - but only 3% of early stage funding (6th chart of a great infographic). To add some perspective to that - four of the other categories - Gaming, Social, Advertising and Storage - account for 55% of all early stage funding. Sad too that another industry, education (the bookend to healthcare) is another 3-percenter, but that's a separate post.  

We also know that three new "incubators" have arrived just this year specifically focused on healthcare. Not surprisingly, they are located in three great cities for startups - San Francisco (Rock Health), Chicago (Healthbox) and New York (Blueprint Health). Modeled after very successful non-healthcare programs like Y-Combinator and Tech Stars - these incubators use an application process to select the best ideas and teams to "incubate" to the next level. The incubation process typically lasts anywhere from 3-5 months and the companies selected are each given a small seed check (typically about $20k) to start. Most of the incubators, including the ones outside of healthcare, take an equity stake (5% or 6%) in exchange for the small funding. The lone exception to this is Rock Health - with ZERO dilution - and they should be applauded for thier innovation to the model itself.  Another healthcare first is Healthbox - which upped the ante to $50k instead of the typical $20k.  Doubly impressed that these innovations are occurring in healthcare - so while we may have arrived late to the the incubation process - we're already demonstrating strong leadership and innovation.  

For early stage ideas and teams, the incubation process is much sought after. Not, however, as some might think, for the token cash. Team size is typically 2-4 people - so even $50k over 3 mos and 3 people is a life with lots of Ramen. No, the real opportunity is access to an inside network of mentors, advisors, industry leaders, partners and other resources that are all part of the national and global startup ecosystem. That network effect is designed to help position an early stage venture for the next round of funding - through introductions to early stage VC's. That first round of funding (after bootstrapping and mabye Friends and Family) is referred to as Series Seed and is typically between $300k and $1M. The intent here is to fully launch the venture to an even bigger audience, further success and (ulitmately) a big liquidity event.   

I have no insight into the applications for either Healthbox or Blueprint, but Rock Health had over 350 applications for their first cohort of 11 companies. That ratio is farily common - although Y-Combinator's Winter 2011 cohort was 43 companies (99 founders). The sheer number of applications to Rock Health indicates the strength of the Rock Health program (location + strong network + zero dilution). It also highlights the sheer volume - 350 teams (worth repeating) - committed to making a difference in healthcare. That. Is. Awesome! We need to foster, encourage and promote all those people and that activity - collectively - in every way that we possibly can. Maybe he should be, but the next Mark Zuckerberg isn't toiling away inside Harvard thinking how he can move the U.S. Healthcare system into the 21st Century. Whatever "it" is at that age and location - it better involve large doses of the opposite sex, a different type of pharmaceutical and some form of loud music.              

Simple math says that 20 companies (2 cohorts per year) at $20k each plus rent, payroll, legal and all the other expenses should be less than $2M per incubator per year. Our $8M "innovation" fund (from the $395M balance) could easily support 4 more incubators - in say San Diego, Austin, Seattle and Phoenix. 7 incubators running 20 companies equals 140 companies innovating in healthcare - per year.  

Now for all the skeptics, I'll be the first to admit that not all of these "companies" will even survive - let alone succeed. Most will fail and the incubation process itself is no guarantee of success - but it is a very tangible commitment to innovation - and I do guarantee that if you have 14 healthcare "demo" days (the graduation event where the incubated companies present to the early stage VC community), there will be further investment into healthcare innovation - and that some of that will absolutely succeed. As a disciplined invesment approach - it's a far better path to success than waiting and hoping for the proverbial White Knight. As others have suggested, "chutzpah, vision and foresight" are all required for innovation to be disruptive. Trouble is we don't always know it, see it, or fund it when it does present. In the meantime - let's roll up our collective sleeves and support what we know will produce tangible results over time.  Let's take $8M of our $395M and really put it to work doing what America does better than anyone else on the planet - World Class and totally disruptive innovation - applied with surgical precision in this case - to healthcare.

Webster’s has a new entry for mea culpa:  A voluntary payment of $500,000,000 to avoid prosecution. 

That’s almost a rounding error for a company with a Market Cap north of $130 billion – but the healthcare system can definitely use the money.  I remember when some of the first estimates for widespread EHR adoption were announced in 2008.  One that was hotly contested (way too high) was $150 million over 8 years.  Safe to say – we’ve got that fully funded – with change.       

Google stock actually inched up (+$3.25) so investors yawned collectively.  Buried in their long forgotten Corporate Information pages Google had this one called:  

Ten Things We Know To Be True 

“We first wrote these ‘10 things’ several years ago.  From time to time we revisit this list to see if it still holds true.  We hope it does – and you can hold us to that. (September 2009).”

So ok - we'll hold Google to wordsmithing this one: 

            6.  You can make money without doing evil.

Maybe tweak it just a tad to something like: 

            6.  You can print money without too much evil.

As the briefest of backgrounders, from 2003 to 2009 the GOOG basically allowed unlicensed Canadian Pharmacies to illegally advertise prescription drugs in the U.S. using Google’s Adwords program.  According to the allegations, Google actively provided support and advice to the pharmacies to help maximize those campaigns which were very lucrative to both the pharmacies and – of course – Google.

For those of us that have been around the healthcare sector for awhile – nothing new here – just move along.  The U.S. healthcare system has a long history of malfeasance.  The book Coronary details the 3 year FBI investigation into Tenet Healthcare.  That investigation resulted in a $900 million global settlement in 2006.  As unbelievable as it may sound, that was actually their second bite of the big healthcare apple.  Their first was as a prior legal entity – called National Medical Enterprises (NME).  During the ‘80’s and ‘90’s NME was involved in massive Medicare fraud that resulted in over $979 million in settlements.  The allegations were many – including:  maintaining a corporate policy at its psychiatric facilities of paying doctors for patient referrals; imprisoning patients for insurance payments; charging insurance companies for treatment and medication that were not provided, provided at grossly inflated prices or provided when unnecessary; and milking insurance until coverage was exhausted.

In a different case, the investigation and suit against Columbia/HCA dragged on for 10 years – and ended with a fraud settlement of $1.7 billion.  While three executives were found guilty, they appealed – and won.  Chairman Richard Scott walked away with $17 million and was never charged.  The criminal settlements were made in the name of two defunct subsidiaries so that Columbia/HCA would not be excluded from Medicare funding.   

In July 2010, the Medicare Fraud Strike Task Force announced its largest fraud discovery ever when charging 94 people nationwide for allegedly submitting a total of $251 million in fraudulent Medicare claims. The 94 people charged included doctors, medical assistants, and health care facility owners.  Of those, 36 have been found and arrested.  For that year, law enforcement agencies charged about 930 individuals with a conviction rate over 80%.

Earlier this year, twenty individuals, including three doctors, were charged in South Florida for their alleged participation in a fraud scheme involving $200 million in Medicare billing for mental health services.  That announcement was weeks before another takedown that charged 111 defendants in nine cities in connection with their alleged participation in schemes to bilk Medicare out of an additional $225 million.  

The list is almost endless.  Today, various Federal agencies are currently working on more than 2,600 health care fraud investigations.  Google is just another in a long line of healthcare abuses.  Costs aside - it's just so corrosive to the whole system - and severs already diminishing trust with each banner headline.  Tort reform?  All for it - but which direction?  Larger awards - no awards?  At the bottom of all of these abuses (literally and figuratively) is a patient - with an illness, maybe a chronic condition or even a life-threatening disease.          

On the release of his book Coronary in 2008 Mr. Klaidman commented:

"My interest was in systemic flaws in American medicine, not criminal fraud. But the more I thought about it the more obvious it seemed to me that vulnerability to fraud was a major systemic flaw in American medicine."

I wish Google could say it wasn’t so.  Clearly it was.

(also posted on The Health Care Blog - 8/30/2011)