Why venture capitalists shouldn’t try to solve health care

I recently wrote a post about the clueless, but endearing, enthusiasm of technology people as applied to solving the health care problem.

Dr. Davis Liu published a post describing the vision of Vinod Khosla, the famed venture capital maven, of replacing doctors with machines. It turns out that Mr. Khosla wrote a series of three articles at the beginning of the year in a technology publication describing how his pioneering vision will replace people in industries where either he or his wife are investing capital. Venture capitalists (VCs), although I’m sure they wouldn’t agree with this assessment, are a combination of professional gamblers and loan sharks. The secret to success is pure luck and ruthlessness, and when the combination works and the ball lands on the exact number on the spinning roulette, venture capitalists make lots of money. This is very different than running a business a la Warren Buffet or even Mitt Romney, let alone inventing a business like Apple or Microsoft.

In return for risking funds, venture capital gets its juiciest pound of flesh when the funded business sells itself to the public, hopefully for more than it is really worth, and hopefully for a lot more than the venture capitalist risked. For that to happen, you have to create demand for whatever your fund is investing in at the moment. This is why you find VCs shedding tears at the mere thought of global warming, or telling us that the future is all about “I Robot”, or miraculous genetic “I am Legend” drugs , or “gamification” or whatever happens to make up their current investment portfolio. The problem with letting venture capital dictate humanity’s agenda is that the globe is getting warmer; people are getting poorer, sicker and dumber while a few VCs are getting richer.

So what is Mr. Khosla selling us now? It seems that his machines, outfitted with “bionic” software are set to replace the 80% of “middling” doctors and also 80% of equally “middling” teachers. Only physicians like Dr. House will remain standing (for a short time) so they can be “leveraged” to create even more “bionic” software, and may I suggest that Albus Dumbledore could be used to illustrate the surviving human teachers of the bionic era. If you are a little bit familiar with the startup world, then you probably know that a business based on services provided by people is not an appealing investment gamble, because it doesn’t scale well, i.e. revenues and EBIDTA cannot go simultaneously through the roof at the same incendiary rate, because people need to be paid for labor. The trick is to find a business model where no labor is required or to find laborers who don’t require payment. A couple of centuries ago we “imported” such laborers from Africa. Today we are “exporting” labor to where those laborers naturally reside. For tomorrow, we are proposing to make machines that work for free. And this in a nutshell is Mr. Khosla’s vision.

Let’s pause for a moment and address the technorati among us. This is not about medical technology for Dr. Leonard McCoy and Dr. Beverly Crusher or about the holographic doctor in Star Trek Voyager, all very awesome and super cool. This is not about stardate 43632.8 or a galaxy far far away. This is about a time frame of “five or ten years” for “bionic” software and “a decade or two” for an army of “Dr. Algorithm” practicing independently. It should be obvious even to the most ardent believers that, in such a short period of time, neither the science of medicine nor technology will be anywhere near the creation of the medical droid that administered to Padme in childbirth. However, these time frames are short enough to appear on corporate financial projections and startup pro-forma budgets. This is about real money and about some flimsy machinery deployed to play doctor to the poor (China and India are mentioned by Mr. Khosla, but the Mississippi Delta can’t be far behind), and if folks are harmed in the process, oh well …. (See below).

Now, how about this “bionic” software that Mr. Khosla envisions to be a temporary bridge between human cognitive endeavor and full machine control in “a decade or two”? Turns out that the term was introduced by a serial entrepreneur in the social media/marketing, hotter than molten lava, sector.  Later adopted by the O’Reilly AlphaTech Ventures folks who invest in clicks and links and data as well, “bionic” software has something to do with “programmable people” and “it has the potential to unlock a massive amount of unrealized human potential”, presumably as programmed and networked by VC funded programmers. According to Dennis K. Berman, a WSJ journalist writing about technology and “corporate scandals”, also cited by Mr. Khosla, we should accept the “rise of the machines” just like we accept earthquakes and hurricanes because it is simply inevitable.

And if we still have any doubts regarding the superior intelligence of Jeopardy winning machines, we are reminded that “systems are now of such scale that they can analyze the value of tens of thousands of mortgage-backed securities by picking apart the ongoing, dynamic creditworthiness of tens of millions of individual homeowners. Just such a system has already been built for Wall Street traders”. I am so totally convinced now, but if you need more real life examples, you should read about the $108 million in venture funds going to “bionic” software helping pharmaceutical companies track social media activity to identify doctors more likely to influence their peers, or the $84 million venture investment in “bionic” software to spy on customers and make them buy more fatty food stuff.

According to Mr. Khosla, soon we will advance beyond simplistic “bionic assistance” to “lazy” doctors, and we will no longer be “free to be stupid or political” and “reject” the “cost optimization” served by “Doctor Algorithm” in its medical practice and none of us will need those multitudes of “average” doctors stuck in the “18th century tradition of “first do no harm””. Since VCs are only interested in engineering, as opposed to social engineering, their off the cuff suggestions for the “middling” 80% in any profession or occupation, where wages are proposed to be eliminated from the expenses column, is usually something vapid like “empathy, advice and caring”. Of course “empathy, advice and caring” doesn’t pay anything like actual doctoring, and it is precisely those large wages that need to be eliminated. Highly educated professional workers are also much harder to transform into “programmable people”, like say, the young girls working in one of those infernal laptop assembly lines in China. So once the new troves of captive cheaper-than-machine labor pools have been secured, all that is left in the quest for zero COGS, within the short cash horizons of venture capital, is to eliminate those expensive and volatile knowledge workers from the balance sheet. And since Mr. Khosla’s educated estimate is that “medical diagnosis or 90% of it is an easier task than Jeopardy”, and since he urges us “not to extrapolate the past and what has or has not worked”, it should be easy as pie to imagine a future almost completely free of professional physicians, classroom teachers and non-programmable people in general.

Thus, in Mr. Khosla’s hospital of the future, medicine will be practiced by thinking machines, while floor scrubbing, sheets changing and bed pan emptying will be left to humans. Eventually, the medical machines, or the few human lords remaining, will probably take on the last yard of efficiency and create menial machines for janitorial purposes, at which point the only human beings in a hospital will be the patients in the beds, and venture capital’s ROI will be inching towards infinity. Unfortunately for Mr. Khosla, or future generations thereof, the transactional volume will be trending to absolute zero, since the “middling” 80%, after advancing to the mindless 80%, are now mostly extinct or have reverted to gathering wild berries where vegetation still remains. I hope being the Supreme Ruler of nothing at all proves to be a very satisfying experience for Khosla Ventures.

Margalit Gur-Arie is a partner at EHR pathway, LLC and Gross Technologies, Inc. She blogs at On Healthcare Technology.

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  • http://twitter.com/Cascadia Sherry Reynolds

    VC’s and to a larger extent angel investors are simply playing the investing game within the current rules and by taking higher risks they expect higher financial returns. There are other models of investing however such as social venture capital and even govt R&D (NIH spends over 30 billion a year) in which the return might be new knowledge or a social benefit to the community.

    New products, services and ideas are by definition frequently higher risk and obtaining “support” is critical during the seed stage. In health care what I anticipate being the biggest drivers of change won’t in fact be technological but technology will be the lever to change the culture of health care. We know for example that 80% of visits to primary care are for self limiting conditions – if we could identify and self care for even half of those we would eliminate the “doctor shortage” over night.

    The future I see is one in which the “machine” frees knowledge works up from the drudgery of the analytical side of healing, brings the best in class to those most in need, (tele-medicine by experts to the parts of the US that can’t find a single primary care provider), enhances the relationship between providers and patients and fundamentally transforms our roles (from passive patients to co-creators of our health) and our sick care segments into a community based system of health and wellness.

    • http://onhealthtech.blogspot.com Margalit Gur-Arie

      The question in my mind is how that “lever” is applied and who decides and for what purpose it is applied. As long as the technology “lever” is financed by folks who expect huge ROI and not too terribly concerned with the public good, I think the technology “lever” can be a very dangerous thing.

      For example, Sherry, I don’t think our goal should be to bring primary care on TV to parts of the US where there are no primary care doctors. I think the goal should be to bring the doctors themselves. Pay them more and let them practice medicine. The doctor shortage, IMHO, is artificially created and exacerbated by unbalanced payment models. It’s the penny wise mentality…..

      I agree that the “machine” should free knowledge workers from drudgery, but I would ask the knowledge workers what is it that they want to be freed from, instead of picking freedoms that are financially advantageous to the middle men of health care. After all, they are presumably the “knowledge” workers…

    • rswmd

      “80% of visits to primary care are for self limiting conditions”

      I don’t know a single primary care doc who has a practice anything like that. EVERYONE starts their day with a full schedule of DM, hypertension, heart disease, depression, and then works in the chest pains, new-onset headaches, acute abdomens, lacerations, broken bones, suicide attempts, etc.

      Self-limiting is not the same as not requiring medical attention. I guess we could say life is self-limiting, and up it to 100%.

  • Gordon Terry

    If venture capitalists should not try to fix healthcare, who should, government? One must carefully consider the morality of these methods. VC’s acquired their money by purely voluntary interactions, meaning that every dollar they earned made the payer better off. And any investment they make, technology or otherwise, will only occur if the other party expects to be better off in the end — regardless of how much the VC profits. All transactions are optional for both parties.

    Contrast this with government forces, which acquire funding through death threats (taxation). Because there is no profit motive, massive waste and misallocation of resources occurs. If a task is done inefficiently, it becomes a reason for even more money to be used the following year. Those in power, purely because of human nature, seek first and foremost to preserve and expand their power…Everything else is secondary.

    The free market system has been the engine upon which civilization has improved itself so much in the past century. Nothing in the history of humanity has led to such a huge increase in average wealth and living conditions. If anything can improve healthcare, it is the capitalist free-market system.

    • http://onhealthtech.blogspot.com Margalit Gur-Arie

      I would say that folks who best understand health care should be the ones trying to fix health care. I would also say that the reason we find ourselves in need to fix health care is precisely the notion that health care fits into a market paradigm where people get to profit from other people’s misfortunes.
      Countries where health care is not a vehicle to quick riches (VC style), seem to need a lot less fixing of health care. Just a thought….

    • http://twitter.com/Cascadia Sherry Reynolds

      The primary motivation for govt to “fix” our health care is simple – they are the largest purchaser of it for their employees and it is a growing line item in the national budget.

      Medicare as an insurance broker is one of the most efficient actually compared to any of the Blues and the largest health care system in the US is the VA and it has the highest quality (not to be confused with the DOD) at the most affordable cost. In fact their biggest challenge is that more vets want to get their services there then in the private sector.

      Those in power.. Well most of the “non-profit” health care systems and insurance firms where I live pay their execs over 1million a year.. They have a vested interest in driving people to their high margin services and have built free standing ER’s and private Ortho hospitals that have siphoned off the trauma surgeons from our trauma centers.

      Health care is not only one of the least free market systems but it is also one of the most inefficient so perhaps it is time to admit it isn’t a consumer product but a core measure of the values of our country? We already know what the free market version looks like. 20% lack coverage, 150% higher cost then the next highest cost country, and we rank below every other industrialized country for infant mortality and any number of other measures..

  • Nick

    Can you provide links to the two venture funds you mentioned? The one about social media and the other tracking eating habits. Thanks.