Brailer's New Quest

IN VIVO Blog had the opportunity to talk with David Brailer in a previous professional life. He’s thoughtful, intelligent, and proved to be a very good pick to be the federal government’s first health care IT czar. He gave a face to the important need for IT and health care integration, and it’s a concept that has since stuck with the American public.

In that conversation, which came after he’d already announced his decision to resign his post and go back to California, Brailer more than hinted that private equity or venture capital might be in his future. Smart money had him joining an established firm, probably some big name technology investor with a fair amount of dough already being invested in multiple industries. Brailer, in this scenario, would head up a foray into health care-IT investing, and he’d be a great pick to do so.

What was not envisioned, however, is what actually happened. The California Public Employees' Retirement System--eager to find new technologies to save money on its $4.9 billion in annual health care costs--gave Brailer $700 million from Calpers to invest in health care-IT and health care services companies.

Acccording to reports like this one in Modern Healthcare, Brailer's new firm, Health Evolution Partners, will invest $500 million of that money directly into companies. The rest will go into a $200 million fund of funds that will be committed to other venture firms that invest in the space.

Okay. Does this concern anyone?

No knock against Brailer. He isn't an experienced investor, but he's got street cred, clout and spent the past 15 years doing some level of due diligence. In 1992, he founded CareScience Inc., a supplier of technology tools used in practice management and patient care. He took it public in 2000. But he resigned in 2003 citing differences with the board over the strategic direction of the company. This opened the door for him to be Health Care-IT Czar, giving him an extraordinary perspective on the industry.

But…

Is this sector, which just emerging from the hangover of the "e-health days" of 1999-2000, going to be able to absorb $700 million? According to the published reports, Brailer expects to run through this dough in five years or less. That's $100 million per year or roughly 10% to 15% of what's gone into the health care IT sector and health care services sectors over each of the past two years, according to VentureOne. That’s an enormous influx of cash in a sector that only recently has begun showing some nice returns, albeit mostly on the clinical/hospital sides with companies like Visicu and Emageon.

Perhaps the Internet bubble has us conditioned to think that too much money is always a bad thing. Maybe this is just what the health care-IT czar ordered, a shock of cash to give this somewhat moribund business new life.

But is this good investing? Calpers, according to the reports, is more interested in finding companies with technologies that may someday save it money rather than making money on investments. This sounds an awful lot like a corporate venture capital program in which the parent company is more interested in identifying new technologies than seeing returns. But those corporate investors bring a lot more to the deal than capital. They bring distribution, marketing and usually an established customer base along with decades of expertise.

Brailer brings some of that to the deal, no doubt. He's promising discipline. He told the Sacramento Bee. "We're not going to give them money and say, 'Good luck.' It's going to be very hands-on with these companies." And Calpers could be a huge help if it quickly adopted the products put forth by Health Evolution Partners' portfolio. Brailer, in fact, boldly suggested to the Sacramento Bee that Calpers members could begin benefiting from these advances as soon as next year. (We placed a call at Health Evolution Partners and hadn’t heard back yet. We hope to run an interview with Brailer in an upcoming post.)

The fear here is Calpers is throwing money at a complex problem, and that money will be wasted because the infrastructure—customers, public investors, other sources of capital, regulatory freedom—just isn't in place to support these businesses. It certainly helps that they signed a talent to do the throwing for them. But time will tell whether money is all that was missing.