Risk and Reward: Public and Private Funding in Healthcare Innovation
Risk and Reward: Public and Private Funding in Healthcare Innovation
Examining the unique characteristics, conditions, and impact of government funding and private equity investments in driving healthcare advancements.
This blog was inspired by topics covered in Episode 8: Venture Capital in Silicon Valley - From Clinician to Investor with Dr Oliver Keown.
If you haven’t listened to it yet, check it out on Apple, Spotify, Substack or wherever you get your podcasts.
The story of healthcare is a remarkable journey of innovation, marked by both subtle advancements and paradigm shifts.
But for the longest time, we were stuck.
The Greek physician, Hippocrates, was hailed as the father of modern medicine through his analytical approach to disease and patients more than 2000 years ago.
However, building on the work of others, he also refined the catastrophic concept of the four humors. This proposed sickness was based on an imbalance of blood, yellow bile, black bile, and phlegm. A pernicious belief that led to the harmful practice of bloodletting.
It was not until the 1850s, that the germ theory of disease finally emerged, positing that it was microbes that were responsible for the disease and revolutionizing medicine.
(Not to put this all on Hippocrates, the Greek-Roman Galen also popularised the idea, and other cultures across the world independently had practices of bloodletting1).
Overcoming dominant paradigms is hard, often requiring considerable time, effort, and money. In the past, accessing funding for research was limited to a few, primarily through wealthy patrons, religious institutions, and governments. However, in modern times, we’ve seen the risk of sophisticated funding sources covering both public and private sectors, each with its unique characteristics and conditions.
How these funds are then managed and utilized plays a pivotal role in shaping the landscape of healthcare innovation. Determining which innovations become a reality and reach people - and which do not.
Public Funding of Innovation.
Today, governments around the world formally invest in healthcare innovation through respective health departments and specialized agencies. This funding then flows to Universities and Institutions to do the work. Other forms of funding arrive via endowments, donations, and gifts.
In 2022, for example, the National Institutes of Health in the US, provided $45 billion to academic institutions, with John Hopkins University leading the award with $610 million.
The research is often categorized as either ‘basic’, driven by filling a knowledge gap, or ‘applied’ when it aims to address a preidentified need.
Basic research creates new knowledge or improves on existing knowledge. Regularly this has laid the groundwork for serendipitous discoveries and profound innovations such as supporting the birth of the internet, numerous medicines, mRNA vaccines, modern radiology, CRISPR gene editing, and so much more.23
Public funding also goes into healthcare innovations in other ways too, through specific new programs, grants, and tax incentives.
Private Funding of Innovation.
Private sector funding of healthcare innovation can include internal research and development spending (Pharma’s $244 billion in 20224), direct grants, Private Equity (PE), Venture Capital (VC), and more.
Focusing on PE and VC; Private Equity firms use pooled capital from investors, to buy, invest, or create leverage in companies, in the hope of creating future value and financial return. The word ‘private’ comes from investing in companies that are not publicly traded.
Traditional PE firms target well-established companies that are underperforming or have untapped potential, for a majority ownership. They then look to realize this potential by instituting a variety of tactics; from restructuring, streamlining operations, cutting costs, raising prices, and adopting new technology systems.
For instance, consider a scenario a financially struggling nursing home. It has high operating costs due to an inefficient operating model. The business is left to either fail or is saved. The theory goes, PE could reinvigorate this business with a capital infusion to restructure management, reduce labour costs by using modern digital tools and perhaps leverage economies of scale with its other networks of nursing homes.5
These changes offer the opportunity for innovative models of care, services, products, and technology.
PE also uses ‘leveraged buyout’, where a significant amount of borrowed capital is used to buy an asset, often with a high debt-to-equity ratio. The acquired asset, such as a healthcare facility, is then used as collateral for the loan. In other words, the target company’s assets can be used as leverage against it. This approach, while risky, offers significant short-term financial and tax benefits.67
Venture Capital (VC) is a subset of PE that invests in start-ups to accelerate their innovations and early-stage growth. Funding is provided in rounds, where negotiation for money, equity, and control. VCs take a minor stake in the company and spread their risk across multiple companies, providing guidance, partnerships, access to networks, and other support.
This infusion of capital into healthcare innovation fosters ‘riskier’ bets, allowing novel ideas to be pursued and scaled. VC’s experiences with building other companies and markets allow them to bridge ideas and commercial viability - circumventing more conservative funding sources. ‘Success’ is typically touted when a company becomes a unicorn, which is a billion-dollar valuation.
Other start-ups outside the healthcare sector, such as Open AI, which is VC-backed, now offer the opportunity to revolutionize healthcare.
The Harms to Healthcare.
Due to the short-term investment cycles, PE and VC can clash with traditional values in healthcare and its long-term nature. Services may be cut, staff downsized, and a shift to high-margin activities can be at the expense of quality, safety, and cost.8910
Public funding, while less risky, can be hindered by bureaucratic processes and a tendency to maintain the status quo. Accountability to taxpayers favours conservatism and established researchers and approaches over novel ideas. Innovative projects may struggle to scale outside the local environment to become self-sustaining.11
A Path Forward Together.
Despite the four humors, Hippocrates had lasting positive contributions to healthcare, including the systematic practice of studying medicine and coining the Hippocratic Oath. Similarly, the effect of funding healthcare innovation is not inherently negative. Instead, it relies on the norms, rules, and policies that guide it.12
Large funders need to forge strong, lasting, intentional relationships with innovators across both public and private spaces, guided by the ‘Quadruple aim’ of population health, improving patient experience, reducing cost, and improving the work-life of the workforce.
Governments have a key role in optimizing the allocation of funding, streamlining deployment, and balancing accountability with nurturing innovation. Innovator-friendly policy, along with tax, and financial incentives, should focus attention on underrepresented problems and community health needs. A re-examining of the overarching goals for health and well-being offers an opportunity to set a strategy that guides public and private innovators. This would include updating regulatory pathways to ensure coherent, efficient, and transparent pathways to approval.
In her book ‘The Entrepreneurial State’, the economist Professor Mariana Mazzucato, emphasizes just how innovative states can be, in not only saving markets but in helping them to thrive. The collaboration between public and private sectors saw the rapid development of safe and effective COVID-19 vaccines demonstrating this potential. However, its global equitable distribution remains a stain on this success.
The private sector, in turn, could co-create accountable, value-based, transparent, and equitable principles for their funding and management decisions - acknowledging their responsibility and role in society.
Each sector has a role to play, but for this to work, the healthcare sector needs to invest and upskill its workforce. Clinicians are key to harnessing this vision, due to their scientific training, medical ethics, and first-hand clinical experiences.
Several countries, like the UK and Australia, are leading the way by creating clinical entrepreneurial development programs, to foster this talent and bridge this gap.
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Thank you,
Jono
T Bell. A Brief History Of Bloodletting. https://www.jlgh.org/JLGH/media/Journal-LGH-Media-Library/Past%20Issues/Volume%2011%20-%20Issue%204/Bloodletting.pdf
Ceejay Lee. Not So Basic Research: the unrecognized importance of fundamental scientific discoveries. https://sitn.hms.harvard.edu/flash/2019/not-so-basic-research-the-unrecognized-importance-of-fundamental-scientific-discoveries/
Philip Barrett, Niels-Jakob Hansen, Jean-Marc Natal, Diaa Noureldin. Why Basic Science Matters for Economic Growth. https://www.imf.org/en/Blogs/Articles/2021/10/06/blog-ch3-weo-why-basic-science-matters-for-economic-growth
Total Global Spending on Pharmaceutical Research and Development. 2022. https://www.statista.com/statistics/309466/global-r-and-d-expenditure-for-pharmaceuticals/
M. Todd Henderson. Everyone Benefits from Private Equity’s Value Creation. https://www.newsweek.com/everyone-benefits-private-equitys-value-creation-opinion-1519725
A. Offodile II et al. Private Equity Investments In Health Care: An Overview Of Hospital And Health System Leveraged Buyouts https://www.healthaffairs.org/doi/10.1377/hlthaff.2020.01535
Felix Barber and Michael Goold. The Strategic Secret of Private Equity. HBR 2007. https://hbr.org/2007/09/the-strategic-secret-of-private-equity
David Blumenthal. Private Equity’s Role In Healthcare. https://www.commonwealthfund.org/publications/explainer/2023/nov/private-equity-role-health-care
S Kannan, et al. Changes in Hospital Adverse Events and Patient Outcomes Associated with Private Equity Acquisition. https://jamanetwork.com/journals/jama/article-abstract/2813379?guestAccessKey=e0cef9be-d55c-4bcf-8892-412af8f24355
A Gupta et al. Does Private Equity Investments in Healthcare Benefit Patients. https://bfi.uchicago.edu/insight/research-summary/does-private-equity-investment-in-healthcare-benefit-patients-evidence-from-nursing-homes/
T Ling, R Romanelli. Fixing the Problem of INnovation in the Health and Care System. https://www.rand.org/pubs/commentary/2023/10/fixing-the-problem-of-innovation-in-the-health-and.html
M Cerullo, et al. What Happens When Private Equity Firms Buy Hospitals. HBR 2023. https://hbr.org/2023/03/research-what-happens-when-private-equity-firms-buy-hospitals