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July 25, 2019 12:01 PM

After shutdown, telemedicine company Call9's founder plans a comeback

Jonathan LaMantia
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    New York City healthcare startups raised nearly $1.9 billion in investments last year as investors searched for the next big tech company.

    Of course, not all bets pay off.

    Investors in telemedicine startup Call9, which had raised $40 million in equity and debt financing since its founding in 2015, learned that the hard way last month, when the company announced it would shut down and lay off its remaining 100 workers after peaking with a staff of about 200.

    Dr. Tim Peck, Call9's co-founder and CEO, said the company's approach to providing medical care in nursing homes through videoconferencing software was ahead of its time and moved faster than the healthcare industry itself.

    "It wasn't viable in the way that we did it," Peck said. "We were very far ahead of the curve."

    But according to people with knowledge of the company's financing, a troubled relationship with one of its lead investors brought Call9 to a screeching halt.

    A healthy start

    Call9 was founded in 2015 by Peck, an emergency room physician who had practiced at Beth Israel Deaconess Medical Center in Boston; Celina Tenev, a postdoctoral radiology fellow at Stanford; and XiaoSong Mu, a computer scientist. The company germinated at Y Combinator, a Silicon Valley launchpad for early-stage tech startups, before moving to New York.

    Its business model was to embed clinicians, such as paramedics and EMTs, at nursing homes so they could respond to emergencies. When a patient needed help, the paramedics could use Call9's software to connect by video-chat with a remote emergency-medicine physician. The doctor could then determine whether a patient needed to go to the hospital.

    The model was designed to attract nursing homes aiming to avoid sending patients on unnecessary trips to the hospital—which could result in an empty bed and penalties from Medicare.

    Its $24 million Series B round in 2017 attracted Redmile Group, a San Francisco–based investment firm that had previously focused on biotech companies.

    ArchCare, which runs the Mary Manning Walsh Nursing Home on the Upper East Side, was one of Call9's early clients. Scott LaRue, ArchCare's CEO, said he was impressed with Peck and Call9's results. But the nursing home was able to get its patients' hospitalization rates low enough on its own that paying the startup no longer made sense.

    "Their model wasn't able to move the needle sufficiently to justify the ongoing expense," LaRue explained.

    Call9 made money through insurance contracts that would reward the company when patients had improved health outcomes and spending fell. At least that was how it was supposed to work.

    Peck found that some insurance companies, including Aetna and UnitedHealthcare, didn't want to create value-based contracts with a small group of doctors like Call9's and preferred to reimburse in the traditional way by paying for each telemedicine visit provided.

    To accommodate those insurers, Call9 needed to allocate some of its team to focus on billing in the more traditional fee-for-service way, pulling it further from its goal of managing the health of a population of patients and earning money for positive outcomes.

    "We had to do services in a particular way that in no way brought value to our model," Peck said. "We had to check very specific boxes to make sure we got paid."

    Redmile controlled a more than 50% interest in Call9 and could dictate its future direction. The investment firm encouraged the fee-for-service strategy.

    Call9 was able to generate revenue, and the company grew to a network of 12 nursing homes around New York. But it ran low on money, thanks to increased spending on staff and other expenditures

    In the spring the company's cash fell below what it owed Western Technology Investment, its Silicon Valley–based lender, and WTI exercised its right to put a lien on Call9 in what Peck called a "friendly foreclosure." Call9 never closed its potential Series C round.

    Turning things around

    Investors take stock of closures like Call9's, but billions continue to flow to health-tech companies. And there's ample evidence the health-technology sector is not in a bubble, noted Bill Evans, managing director of Rock Health, a health venture fund that tracks investment in startups.

    "It's a hard lesson for the industry whenever something like that happens," Evans noted. "My counsel to entrepreneurs is to be thoughtful of the timing of significant capital raises."

    Peck plans to reopen the company under the name Call9 Medical with the backing of WTI. He said he is in discussions about a potential merger or acquisition but cannot yet disclose the partner.

    "We'll start in a much larger network of nursing homes immediately and will also engage primary care physicians," Peck said, "whereas before we didn't."

    Call9 Medical is working with some of the investors and employees from the first iteration of the company, Peck said. (Call9's early investors included Index Ventures, Moment Ventures and Refactor Capital.)

    Redmile will not be involved. A call to the investment firm was not immediately returned.

    WTI is counting on the new company to get paid on its debt.

    "WTI really aligns themselves with the entrepreneur," Peck said. "They aren't going to make the money we owed them back unless we become successful."

    In venture capital investing, it seems hope springs eternal.

    "After shutdown, Call9 founder plans a comeback" originally appeared in Crain's New York Business.

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