A venture capital firm founded by David Brailer, the physician entrepreneur who served as the nation's first national coordinator for health information technology at HHS, will be investing $700 million from the California Public Employees' Retirement System, or CalPERS, in innovative healthcare IT and service companies.
The agreement between Brailers San Francisco-based Health Evolution Partners and CalPERS was announced Monday.
"It's two funds," Brailer said in a telephone interview, adding that "$500 million is for direct investment; $200 million is what we'll use to invest in other investment companies."
Brailer, who also holds a doctoral degree in managerial economics from the Wharton School of Business at the University of Pennsylvania, and a medical degree from the University of West Virginia, founded and ran for a decade a healthcare data analysis company, CareScience, which was sold in 2003 to Quovadx. President Bush appointed Brailer to head the newly created Office of the National Coordinator for Health Information Technology in May 2004. He stepped down last summer as head of ONCHIT, but continued to do consulting work with HHS and the Treasury Department and remains a co-chairman with HHS Secretary Mike Leavitt of the American Health Information Community, a public-private panel Leavitt created in 2005 to advise the government on healthcare IT policy.
The CalPERS alliance was something of a coincidence.
"When I left the government, I began then a process of winding down some of my obligations and my consulting work with the White House and decided what I wanted to do," Brailer said. He added that he wanted to remain in healthcare and work to improve the efficiency of the healthcare system. "By the end of last year, I concluded that venture capital and private investing was the way to do it."
Brailer said he quietly started building his venture capital company in November 2006 and opened the doors in January. Meanwhile, "CalPERS got wind of it," Brailer said. The California pension giant, the largest public pension fund in the U.S. with assets as of March 31 of nearly $235 billion, had commissioned a study by McKinsey & Co., to give CalPERS advice on how to use its investment clout to improve its healthcare costs and came independently to the same conclusion, that a venture capital fund would be the way to go, Brailer said. CalPERS will spend an estimated $4.9 billion this year providing healthcare benefits to 1.2 million active and retired state and local government employees and their families in California, making it the third-largest purchaser of healthcare in the country behind only the federal government and General Motors Corp.
"They needed a general partner to do it," Brailer said. "We negotiated that for a couple months. The relationship was, in a strategic sense, the ideal thing." Brailer has the expertise in healthcare IT companies and innovative approaches that could both drive successful businesses and produce systemic savings and quality improvements. CalPERS has the money Brailer's fledgling venture capital company needed to get started. Brailer said the company will publish a more refined set of investment criteria later this summer, but already there is no shortage of proposals.
"I am told that more than 300 business plans have already arrived at our offices, but that does not surprise me," Brailer said. Brailer said he's already looked at "hundreds of companies" as possible investment targets.
He expects the company to employ about 25 people, including three to five seasoned "senior investment partners," which is a bit outsized for the investment portfolio right now, Brailer said, but "we're building to grow." Under the agreement with CalPERS, the pension fund will be the sole investor in the joint venture for the first year, then there will be a determination on how to go forward, and whether outside investors will be accepted, Brailer said.
"Our charter is healthcare only, but we're not stuck with companies with revenues of $3 million. Successful investment strategies have infinite capital. If your strategy works, there is not a capital barrier; it is a know-how barrier and an execution barrier, running the day-to-day affairs of a company. That is hard work. I've done that before."
Brailer said the new company has a five-year target to have all of the $700 million awarded, but, "I think we'll drive through this investment chunk pretty quickly."
Brailer said he enjoys working with AHIC and plans to continue serving as co-chairman as long as Leavitt wants him to remain in that role. While the 18-member AHIC is dominated by members who work for government, three members are executives of for-profit companies: Kevin Hutchinson, chief executive officer of SureScripts; John Menzer, vice chairman of Wal-Mart; and Craig Barrett, chairman of Intel Corp.; and a fourth member is Scott Serota, president and CEO of the Blue Cross and Blue Shield Association, which has both for-profit and not-for-profit members.
"It's his (Leavitt's) decision," Brailer said. "Let's be clear, we're not investing in any companies right now. There has been a question: 'Are those (future investments) in conflict with AHIC?' and even if there is, I'm a private-sector person now. The secretary is fully aware of what Im doing, and I think he admires I'm putting a lot of a capital behind decisions I'm making."
Ron Pion is a physician entrepreneur and adviser to venture capital and other companies on healthcare business and investment strategies, particular in the areas of new technology. Pion hosts "RxRadio: Your Prescription for Health," a talk show on healthcare IT and innovation carried by a startup Internet-based radio network, BigMediaUSA.com.
Pion, a Californian like Brailer, said linking up with CalPERS is a "two-fer" for the pension and benefits plan. "They are very smart in selecting David Brailer who has an opportunity in letting CalPERS know which healthcare IT companies to invest in now and why. They are an organization that could multiply its clout if they're very clever in what technology they have David invest their money in because information technology brings efficiency to everything they cover. They get a two-fer, and the two-fer is they get a good investment and better healthcare for all of CalPERS members."
"I'd like to become one of his advisers because I know a dozen or a dozen and a half companies I know I'd like to have him invest in," Pion said.What do you think? Write us with your comments at [email protected]. Please include your name, title and hometown.