Health care plan spurs opportunity

In the hallways of the U.S Congress, representatives are debating how to fix the nation’s health care system.

Meanwhile, in the offices of venture firms nationwide, managing directors are looking at President Obama’s plan to reduce care cost through technology a possible area of investment.

There is a great potential to invest in electronic medical files, accessible databases and other medical tools, says Albert Waxman, senior managing director of Psilos Group Managers.

Waxman ought to know. Long before Obama promoted an updated electronic medical files, Psilos invested in Active Health Management Inc., a provider of electronic medical files management, in 1999. The firm invested $8.5 million in the company, which overall raised more than $72 million from venture investors before Aetna bought the company for $400 million in 2005.

Waxman, who served as chairman of Active Health, says that Psilos will no doubt invest in the sector again, but it hasn’t yet found the right opportunity.

Meanwhile, the health care debate is a hot news item, and it shouldn’t be any surprise that VCs are putting money to work in the sector despite the downturn. Since the economic crisis took hold one year ago, funding across the board has decreased, but health care is taking a larger slice of the overall portion of venture investments. Health care investment dollars increased to 19% of total VC investments to date in 2009 from 16% in 2008, according to Thomson Reuters (publisher of PE Week).

Waxman says he believes that demand for digitization of health care records is poised to skyrocket thanks to government programs already in place. The U.S. Congress passed measures to tackle the modernization of the health system in February as part of the American Recovery and Reinvestment Act, which designated $19 billion for the digitalization of medical files.

Some of that money allotted by the Recovery Act will likely go to startups and VCs are putting their bets down now on which companies are destined to reign in federal subsidies.

For example, Medsphere Systems Corp., a developer of electronic medical record management, raised $12 million from Azure Capital Partners, Epic Ventures, Thomas Weisel Venture Partners, Western Technology Investment and other undisclosed private investors at the end of August. Company management is bullish on the government-funded opportunity and expects to receive a part of the payout.

“The nationwide push for health care reform and the focus on electronic health records as a key component in reform are having a measurable impact on health IT demand,” says Medsphere CFO Irv Lichtenwald.

But managing patient records isn’t the only opportunity. Other VC-backed companies are venturing into health care payment process technology.


Inc., which aims to make the health care payment process easier through a self-service platform, is nearing the close of another round of financing, says Claremont Creek Managing Director John Steuart. The Carlsbad, Calif.-based company raised a $3.5 million Series A from Claremont Creek and Labrador Ventures in 2007, according to Thomson Reuters. Prior to that, the company raised venture financing through angel investors, including the Band of Angels. WiredBenefits has raised nearly $5.7 million to date.