Matthew Holt Interviews Brad Fluegel of Health Evolution Partners

Brad Fluegel is the Executive-in-Residence at Health Evolution Partners, and he’ll be speaking about commercializing and scaling Health 2.0 on the  Investors & Incubators panel at Spring Fling: Matchpoint Boston. Health Evolution Partners is a health care private equity firm that buys and invests in rapidly growing companies that are commercial leaders in the industry. Read the Spring Fling: Matchpoint Boston interview series here.

Matthew Holt: Before we get into what you’re doing now, why don’t you tell people what you used to do until relatively recently at WellPoint, and also other places in between?

Brad Fluegel: I had a long career, primarily in the health plan industry, but before joining Health Evolution Partners last year, I was the Executive Vice President and Chief Strategy and External Affairs Officer for WellPoint, and responsible for strategy, M&A, and then a variety of external affairs functions including public policy, our lobbying activity at the Federal State level, communications, marketing as well as a variety of strategic ventures that we wanted to integrate outside of the core business. And then before that, I ran the Strategy Group at Aetna, and also ran the National Accounts business at Aetna. Prior to that, I was a consultant in the industry for a number of years.

Matthew Holt: So you came to [Health Evolution Partners] from a large health care corporation background. You’ve seen the challenges of innovation changing and also various outside political ramifications around the whole health care business. Tell us about the move to Health Evolution Partners and why that came about?

Brad Fluegel: I was a consultant as part of Ingenix, so I have been in three out of four big insurance companies, and I certainly saw the need to do something that’s focused a little bit more on earlier stage companies that were really trying to build businesses that will restrict some of the problems within health care, and do that a little bit more flexibly than what’s often the case within big company environments.

So it seemed like a great next step for me to spend some time in a private equity firm, that’s focused in the health care industry and on trying to identify and support and find the next big ideas of health care.

Matthew Holt: Health Evolution Partners a little bit unusual compared to many of the VC firms or private equity firms. So can you give us sort of quick summary of both the philosophy and the activity that helps, perhaps to be active?

Brad Fluegel: It’s a $500 million fund and it’s the sole limited partner, at this point, to CalPERS. So it’s really a way for CalPERS to get broad exposure to the health care landscape. And so the funding has two component parts. One is the fund-of-funds approach, which where we are a limited partner in a variety of VC and credit facility kinds of companies like Silos, Cardinal, Chrysalis and the like, and that gives us a little bit of exposure to very early stage companies as well as other vehicles for getting exposure to health care landscape more broadly.

On the gross equity side we are generally looking for companies with $20-100 million of revenue. So have teams that are focused on health information technology, life sciences and services. These are companies that are primarily selling services into hospitals or into managed care organizations.

Matthew Holt: In terms of those early stage companies-the ones that trying to sort of get over the chasm and get from the first round of VC and really get into the market-what kinds are you promoting and what healthcare technology do you think is the most exciting at the moment?

Brad Fluegel: Obviously, the big issue in health care remains affordability. I know there’s certainly a lot of noise around Supreme Court rulings and Medicaid expansions and everything else. But at the core of what the major issues for individuals and families and employers and the government (both Federal and state), is how we’re going to pay for this expensive system.

And so, what we’re looking for generally, are companies that can help address and solve that problem…whether that is technology that enables more efficient administration across the system or that provides constant decision support to help physicians practice medicine more effectively, or support for consumers that will allow them to take better care of their health.

That space is a little bit overheated and argued right now, so it’s a little bit difficult to make those investments. But again companies that are providing services and technology that help address that affordability issue.

Matthew Holt: And in terms of the challenges of the space, what do you see are the main challenges for introducing these new technologies, getting these new companies sort of up-to-scale, and what do you guys think you can do to help?

Brad Fluegel: I think there are a couple of challenges. One is sort of on the company or product side and the other is just on the distribution side in terms of how you scale these companies up.

I think in terms of the ability to be successful, I think the major issue is it’s quite difficult to get folks to change behavior, to get individuals to act differently, health plans to act differently, physicians to act differently…and so sometimes the application of technology just adds a little bit more efficiency to a sort of very broken system. Particularly given the fragmentation that continues to exist.

So I think it’s very difficult for some of these programs to really gain scale and really achieve their desired objectives in terms of driving efficiency across the system.

I think the second issue is, just in terms of scaling up, regardless of who you are selling it to whether that’s hospitals or docs or health plans or even to some extent consumers in this industry, it’s just the sale cycle times are very, very long. And given the amount of energy and money that’s focused on the health care space, if there is any good idea out there, there’s already 10 other people trying to do it-big companies and the small startup companies as well. So it takes a long time to get traction and the sales pipeline fully developed.

I think one of the values that we try to add to our portfolio of companies as given the network that we have across Health Evolution Partners, both folks that work within the firm as well as our ecosystem more broadly, that we’re able to help accelerate that distribution process.

Matthew Holt: Last question: you were in the health plan world for a long time, and are now still very closely connected to it. We’ve been speaking with the health plan world, and they’re saying “this time it’s different.” We’re really seeing fast movement and big changes. We think that things like payment change and technology change are happening very fast.

Obviously companies like United and Aetna made some big announcements, big changes in recent months. Where do you come out on that?

I mean you have talked about long sale cycles and things that really helped the change, and that we have a lot of good rhetoric and action happening from some of the big players-how much do you agree that it is different this time, and how much do you think it’ll still be an issue of being one of the long cycles that we’ve been seeing for the last 15, 20 years?

Brad Fluegel: Well, the risk of being in the industry for the course of 30 years as I have is that we had seen everything and seen most everything fail. But I continue to be, I guess, a cynical-optimist.

In fact, why it’s a little bit different this time-and I think what you’re saying is particularly within the health plan marketplace as you point out, as I’m more closely connected to-you really do see some major strategic moves.

United and Optum have been building out that Optum platform for about 15 years now, and Aetna has been really trying to building that out over the last couple of years. Humana is getting itself back into-to some extent-the delivery side with its Concentra and other acquisitions. And WellPoint of course, with the CareMore acquisition which is beyond the Medicare Advantage lives, includes a bunch of docs and clinics.

So, I do think that the drive towards integration to try to get to a better cost and quality outcome, I do feel is different this time. And certainly we have seen this play out before and it didn’t work, but I’m hoping that given all the economic and regulatory pressures that are being applied to the industry right now, the industry will in fact realize this promise and actually deliver more affordable better quality care.

Matthew Holt: Great. I’ve been speaking with the cynical-optimist Brad Fluegel, who is the Executive-in-Residence at Health Evolution Partners. He’ll be joining us at Health 2.0 Spring Fling: Matchpoint Boston on the 14th and 15th of May. Brad, thanks for your time today.

Brad Fluegel: Thank you.

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