Will The San Francisco Bay Area Dominate Digital Healthcare?

Data compiled by Rock Health, a San Francisco digital healthcare accelerator/investor, shows that the Bay Area is gaining ground in digital healthcare investing (see chart below). Three years ago, Boston and the Bay Area were on par. Now the Bay Area is 2x Boston or New York. What’s happening?

Listening to the entrepreneurs and presenters at recent healthcare conferences on the east and west coasts, I heard distinctly different thinking about innovation. I attended the Health 2.0 conference in the Bay Area, which describes itself as the leading digital health conference, and two in Boston: the Connected Health Symposium organized by Partners Healthcare, a leading provider organization, and the Xconomy Healthcare Summit.

West coast investors tend to take the view that digital technology (software, cloud, mobile) is eating the world, and healthcare is the next meal and biggest of them all. For example, Vinod Khosla, a prominent Silicon Valley venture capitalist, made these comments at the Connected Health Symposium.

Technology will replace or change 80% of what an MD does in 20 years. Diagnosis, prescription, and monitoring will be done by technology. MDs will need more EQ and less IQ.

Error rates in medicine are unacceptable. Google’s driverless car, which has ~1 accident per week, has a better error rate than US medicine.

In 10-20 years we will move the practice of medicine to the science of medicine … by capturing the data, making it usable, applying machine learning … providing a “bionic assist” that up-skills providers … enabling them to ask questions that rule out rare conditions the average provider has never seen … and recognize signs of serious illness earlier.

This clear vision and bold pursuit of a radically new model can have huge power. Some of the most disruptive and fastest growing digital healthcare companies have come from the Bay Area: e.g., CastLight, which aims to empower patients to be consumers by making healthcare price and quality transparent; Theranos, which claims to be able to perform a wide variety of diagnostic tests very cheaply with a few drops of blood; and 23andMe, which offers personal genetic profiling for a modest price, including [at first] interpretation that suggested potential health issues. 23andMe CEO Anne Wojcicki talks about Silicon Valley’s “beautiful unreality” – it’s ability to imagine how things could be very different from status quo.* These companies have achieved dramatic success – fame, unicorn valuations, an IPO for Castlight – and also hit some big bumps. Theranos and 23andMe have struggled to gain approval from the FDA, a key part of the healthcare system, and CastLight has traded down about 90% from its IPO price and seems to be evolving to a more conventional benefits management company. But, 23andMe recently raised $115 million and gained FDA approval for a major product, a strong sign that it’s back on track to deliver on its vision.

Eastern entrepreneurs are more likely to look for ways to make significant improvements that are consistent with the way the healthcare system works. Consider Rock Mackie, CEO of Wisconsin-based HealthMyne, who spoke at the Xconomy Healthcare Summit in Boston. HealthMyne provides software that analyzes and characterizes radiological images, e.g., the shape and texture of a tumor is a good predictor of prognosis and best therapy, but radiologists classify tumors subjectively. HealthMyne provides consistent and quantitative classifications, and it integrates this information with the major hospital EMR systems. The result is both more accurate diagnosis and treatment, and improved workflow and productivity for radiologists.

Rock also used driver-less cars as an analogy: “HealthMyne is looking for ways to improve cost-effectiveness without disrupting the system … we’re more like adaptive cruise control or lane-change warning versus a fully self-driving car.”

Dr. Zeke Emanuel, a well-known healthcare policy thinker from U. Penn, played the role of the designated techno-skeptic at the Connected Health Symposium. He points out that tracker users are mostly the worried-well people who consume 3% of US healthcare dollars, while the people who consumer over 65% of healthcare dollars rarely have trackers: they skew older, less tech-oriented, and lower-income. And most healthcare is delivered through big institutions: they will be the “bear in the path” for digital health if it threatens their revenue. Dr. Emmanuel thought some aspects of digital health make good sense, e.g., drug compliance tracking and telemedicine. They extend the effectiveness of the system, and the incumbent players can adapt to them.

A different outlook is not the whole reason for greater digital health deal activity in the Bay Area, of course. The Bay Area is a great ecosystem. It has unequalled density of talent and capital. Valuations are higher and hot companies seem to accelerate faster. The big Internet companies are mostly there, increasing opportunities for platforms, alliances, and acquisitions. And then there is the weather … However, one well-known healthcare investor tells me he avoids the Bay Area because the valuations are so frothy.

It’s really hard to bet against the Bay Area. But, healthcare is a very hard industry to change, because it is huge and complex, it has a tight web of vested interests, and providers hold great power over the consumer. I expect there will be spectacular successes from the Bay Area, and I also think that most of the progress in reforming the healthcare system will come from forms of innovation that aim to streamline the system and improve its results without declaring war. The Eastern turtle may do well in this long race with the Western hare.

Notes:

*From an interview in the Marketplace Weekend Edition episode that was podcast on 11.13.2015.

I am a partner in NAV.VC which is a venture capital fund. Neither NAV.VC nor I have any financial interest in the companies mentioned in this post. We do invest in similar companies.

Source: Forbes, Todd Hixon
Opinions expressed by Forbes Contributors are their own.