Madison is in a sweet spot when it comes to creating health care IT software, programs and applications, thanks in large part to the success of Epic Systems, the electronic medical records giant located in nearby Verona.
So says Mark Bakken, founder of HealthX Ventures and the former head of Nordic Consulting Partners, which grew to more than 450 employees under Bakken serving primarily Epic customers. Started in 2010, Nordic had more than $100 million in revenues in 2014. In the past year, Bakken has — on his own — invested in more than a dozen Dane County health-tech startups.
“Madison is positioned better than almost any other place in the country to help make health care more affordable, safer and get better outcomes,” said Bakken, who spoke at a standing-room-only luncheon hosted by the Wisconsin Innovation Network Tuesday at the Sheraton Hotel. Bakken, a UW-Madison computer science graduate and serial entrepreneur who has started several other companies in Wisconsin, including Goliath Networks and Bedrock, said HealthX Ventures is raising its first fund of $20 million and has plans to begin investing soon. It has already brought in more than $4 million.
He said having Epic, with $2 billion in annual revenues and 8,000-plus employees, in Madison’s backyard means startups have access to a lot of people who understand Epic and health care software intimately.
“But we also have a world-class university here that knows health care extremely well and lots of organizations in Wisconsin that were some of the earliest adopters (of Epic technology),” he said. “So for us, it makes a lot of sense to focus on this area.”
When he was running his first two companies, Bakken joked that some people on the coasts did not know where Wisconsin was located — other than being somewhere north of Chicago.
“But in health care, because of Epic, almost everyone knows Madison,” he said. “Epic has roughly 54 percent of the market share in the (digital) health care industry, so it is huge, huge. Every Epic customer has to come to Madison to get trained. So Madison is strategically extremely important. Because of that, it gives you access to customers. You can have a cup of coffee while they are in town or talk to them while they are waiting for a plane. That saves them on the cost of time and travel.”
He said his venture capital fund will invest in startups – mostly in Madison and other parts of Wisconsin – in the digital health care sector. The goal is to invest from $300,000 to $500,000 in 12 to 15 companies over the next two to three years, he explained.
“It’s really all about finding (startups) with a great team and a great idea at the right time so that we can introduce them to our connections and the right customers and quickly get them up to maybe $1 million in reoccurring revenue,” he said.
Bakken said health care is undergoing major changes because of the Affordable Care Act and pressure to cut excessive costs. Technological advances that can achieve savings most likely will be snapped up, he said.
“The government now makes up 50 to 60 percent of every health care dollar spent in the form of Medicare for old people and Medicaid for the poor,” he said. “That is a huge chunk of revenue. And the government is changing the way they reimburse hospitals for care. Prior to Obamacare, it was pretty much ‘pay for service.’ So whatever your cost was, you could add 6 percent. And it was that way forever, basically, and costs varied all over the country.”
Now, he said, payments are becoming standardized – which is forcing every health care organization to look internally to streamline their operations and share best practices with others.
“Now the model is shifting and the government is just going to pay you this much,” he said, gesturing. “It’s not happening overnight, but it is a huge driver of the change that is happening. To do that, though, every hospital needs electronic medical records and that is where Epic comes in.”
He also noted that 20 cents of every dollar in the U.S. economy is spent on health care, for a total of $3-plus trillion dollars, twice what every other first-world country spends per capita on medical care. Economists, he said, believe that 30 percent of the money spent on health care in the U.S. is wasted.
Bakken said $6.5 billion was invested last year in the “digital health care space, which is roughly the equivalent of the three previous years combined. So $6.5 billion is chasing $1 billion in efficiencies … and many of the bigger players like GE, Google, Facebook and are becoming increasingly interested in health care solutions and want to add that to their portfolios. There will be a lot of acquisitions.”
Bakken stressed that Wisconsin has national credibility in the health care field, not only because of Epic, but because of Jamie Thomson’s work with stem cells and companies like Promega and Exact Sciences.
“Nationally, the state is well known on the life sciences side, and now it’s also known on the digital health side because of Epic,” he said. “That’s extremely important to have credibility, which leads to customers and investors who understand there are people here who know what they are doing.”
Bakken said there is “a lot of excitement around entrepreneurs, but the key is getting them the capital when they need it. Timing is everything. We’re here to help at least on the health care side. We will focus on seed deals, almost pre-revenue … that we can vet ourselves to see if we think the time is right.”
And if all goes well, he quipped, HealthX will help spawn several more Epics.
— By Brian E. Clark