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HIStalk Interviews Grahame Grieve, FHIR Architect and Interoperability Consultant

Grahame Grieve is a principal with Health Intersections of Melbourne, Australia and was the architect-developer of HL7’s Fast Healthcare Interoperability Resources (FHIR, pronounced “fire”) specification that allows EHRs to exchange information.


Was it weird to see FHIR as the only universal topic of HIMSS19?

Not so much weird. Obviously it was gratifying for us to see the community investment that so many people have made becoming justified. It’s definitely worth saying that we really value HIMSS’s active participation in driving the conference in that direction. There was an organicness to the fact that FHIR became the big issue given the way the industry overall is, but HIMSS definitely actively drove that and that was an important part of the picture. I thank Hal for pushing that.

I thought there was maturity at the HIMSS meeting this year. You and I talked about bad FHIR puns and expected to see them all over the place, but we didn’t actually see anything like that. We saw instead quite a lot of maturity around the discourse and the challenges of sharing data. I thought that was really good.

I always call you the father of FHIR without asking you if you accept that title. Is it fair or unfair to call you that?

I did initially draft it and propose it and I’ve curated the passionate community input over the years. If that makes someone the father, then I guess I am. The community is the real father. I get undue attention as if it was some magic that I achieved, where actually it’s just thousands of people passionately contributing to the common values that we hold.

I’ll repeat a question that I asked you last time we spoke. Are you worried that non-experts mistakenly believe that we’ve figured out interoperability because they keep hearing about FHIR and APIs?

That definitely happens. People assume that since FHIR is now the designated answer, it is the answer to all of the problems faced. But it’s not.

As HL7, we can only take on and mandate solutions that everybody completely agrees to. This is healthcare, so there’s a very limited set of things that everyone completely agrees to. Additional agreements are required. The scope and scale of the agreements required are beyond any single organization. We’re spending increasing amounts of our time investing in collaboration with other organizations to get a seamless process around scaling up agreements and consistency across multiple organizations like IHE that are helping out with the problem.

As long as hospitals buy an EHR and then spend a $100 million customizing it to their workflows, then interoperability is going to be a challenge. On the other hand, the fact that hospitals make those kinds of investments indicates the complexity of healthcare. There is no easy win. There is no easy victory to get interoperability with some kind of tick mark against it. It’s an ongoing process that we’ll be going through for a long time yet.

It seems like every EHR vendor has at least some customers exchanging information with the EHRs of other vendors and now CommonWell and Carequality are connected. Can product shortcomings still be given as an excuse for lack of interoperability?

The vendors work really hard, and from my perspective, the vendors are committed to making patient data as easy to move as possible. On the other hand, the vendors basically fight with their old legacy code bases that are extensively customized and very had to work with. That’s the nature of any mature software product. I think that if I was a consumer, I would be unhappy with where they are, rather than if I’m an engineer looking at their problem. It’s kind of a challenge for the vendors.

But increasingly, as I observe the space, the challenges are with the providers. To what degree do the providers want to share information? To what degree are the providers prepared to standardize their record-keeping practices and their clinical practices to make it easier to exchange data and to transfer patients seamlessly? Not many of the colleges really understand that problem. I would like to call out the American College of Obstetricians and Gynecologists, which understands the problem very well and has very standardized record-keeping practices on paper. That puts them in good stead to get interoperable.

A lot of doctors I talk to think about this as a technology problem, but it’s not a technology problem. It’s an information problem, and so technology can’t solve it. It needs clinicians to make clinical agreements in order to get clinical interoperability.

There’s one more thing I’ll say, which is that interoperability is not a binary thing. We get a degree of interoperability. We can routinely exchange patient summary information. But seamless transfer of care will require a deeper agreement. We’re not there yet. We’re working on those as a community. But I believe that increasingly the load will move away from the IT side or the technical side to the clinical side as time progresses.

Efficiently accepting patient information from an outside source requires placing it into the receiving clinician’s workflow and being willing to use information that was entered elsewhere. Not that we need another interoperability frontier, but is figuring those issues out the next one?

The trust issue is really important. I’m glad you brought it up, because increasingly as I look at projects around the world, the question, is who trusts who and why? A lot of the complaints I hear from patients about poor record-keeping actually comes down to no established trust framework. If the patient provides you with a written statement concerning their medical history and you read that, are you liable for not asking them verbally? Can you rely on that written statement? If you get a written statement from another institution, can you rely on that? The interplay between trust and liability is something that we’ll have to revisit as a community and make that a fundamental part of our interoperability considerations.

What could I do as Provider A if I find that I’m regularly receiving incorrect or unreliable patient information from Provider B?

Looking around the world, I routinely hear that more than half of patient records contain wrong information about the treatment history. Some of those are really, really wrong, and you can easily find examples of that in the media. Surveys that I’ve seen show that it’s more than half the records contains something wrong, and yet we make those available to the patient without any consideration for what a patient should do if they look at it and say, that’s not right, I’m a guy, so I don’t think that a pregnancy test was actually performed. Life’s a bit more complicated than that, but what do they do?

You asked the same question about providers with each other. There’s one organization working on the policies and technologies associated with this, which is Carin Health. But we should start moving towards a culture where it’s a professional obligation that if you share your records with somebody, you have an obligation to have some sort of error detection and correction process running so that your records can be corrected. But in today’s environment, we’re a long way away from thinking like that.

What has been the impact of Apple exchanging information with EHRs using FHIR?

There’s certainly discussion happening around Apple in particular, but more generally patient access to information and what kind of difference that will make. Obviously that was a subject of the keynote at HIMSS. Apple brings a particular sharpness to that debate because of its global consumer reach, the style of its consumer reach, and the potential for Apple to disrupt health in the way they’ve disrupted other industries. I certainly hear discussion about that. Some people are wildly in favor of any disruption. Other people are very much not in favor of any disruption. Some people are concerned about what a consumer company like Apple might do.

My perspective is that getting patients their data doesn’t really make much difference to patient satisfaction or behavior, because it’s all historical data. What makes a difference to a patient is the services that you provide. You need data to support the services, but it’s the services that matter. As long as healthcare services are fundamentally delivered in the flesh in the physical world, there’s a limited degree to which the consumer electronics companies can disrupt health.

In order to provide substantial healthcare services, you have to put people on the ground. That raises all of the classic “how do you manage healthcare” problems, for which I don’t think there’s any magic bullet. I think that their impact will be significant, but ultimately limited by real-world constraints.

Joe Biden and Seema Verma have recently expressed disgust that they, even as high-ranking government officials at the time, were unable to get the medical records of their relatives, and Verma in particular seems outraged. Do you think the government sees its role now differently than it did originally?

It has become more clear across the industry that what we have is not a technology problem. We have a business and an information problem. The government laid down a whole lot of money as far as stimulus, partly to spend money — which it did effectively — and partly to move past the technology barrier to the information barrier. Aneesh Chopra has told me that what happened was relatively predictable. We’ve now solved the technology problem. We can focus on the business and the information problems, and here we are doing that. The NPRM focuses on cleaning out the technology problems and moving the business and information problems to front and center.

But as the government, the levers that you can pull have limited effectiveness. That’s even true in autocratic countries. I was in one country where they showed me that certain things were happening in a particular way. The next day, I would meet with the programmers. They would say, “This is how we do it, but don’t tell the bosses, because they’re not allowed to know.” The levers that you can pull as a policymaker and a money-spender are a lot more limited than people believe. At least the US government is acutely aware of that, much more so than other governments I deal with.

Nothing leaps out at me as any quick solution here, so since the NPRM is marginal improvements being made over time, we can look for improvements. I’m particularly hopeful that we can solve the access to healthcare records problem through thoughtful change. I already saw that happen with vendors. When I started dealing with health information exchange, vendors were suspicious about exchanging patient data. They saw that as a business threat. Now when I deal with C-level people at the vendors, they’re all like, “Well, why wouldn’t we do that? We can’t not do that. It’s part of our business. It’s a business opportunity.” Whereas if I talk to providers, I see providers very much being, “Why would we do that? Why would we spend money doing that? Isn’t that a business threat?” It’s about making that same cultural adaptation to their thinking.

That’s the key thing that we need to chase — the understanding that exchanging patient data with the patients is a business opportunity, not a business threat. But it’s a cultural transition that needs to be bedded deeply through the provider before the provider is ready to see healthcare as a different kind of business model. There are a number of institutions around the USA that are pushing that as hard as they can. Hospital in the home, seeing the hospital as part of a wider network, the whole ACO thing is pushing that. There’s a bunch of things happening, so I’m not particularly pessimistic about it.

Does anybody still care about Blue Button?

There’s a really active community around the new Blue Button work that CMS is doing with FHIR. The FHIR community is picking up and processing the data. There certainly is interest in cross-correlating data from Blue Button with data from the Argonaut interfaces that patients can get, and creating a market in that space. The White House is interested in that. It makes a lot of sense to try and leverage some efficiencies out of the system by cross-correlating payment data and payment efficiency data with individual healthcare data.

That’s the logical place to look for where you, as a funder, could seek to provide more efficiencies in the healthcare system. In the end, the providers of healthcare are not motivated to perform systemic repair to healthcare. It’s the funders who are motivated to perform systemic repair. That’s an important part of the overall picture.

Health IT from the Investor’s Chair 5/14/18


HLTH The Future of Healthcare – Convening, Collaborating, and Curating – Or, Do We Really Need Another Conference?

With over 20 HIMSS conferences, 10 Health Evolution Summits, and somewhere in-between as many times hanging out in Union Square for the JPMorgan Conference under my belt (not to mention eight or nine times to Health 2.0), I really wondered what the point of another event was – especially as I just described part of how I spend each January, February, March, and April. That doesn’t count all the other conferences I occasionally attend, such as ANI, AHIP, or RSNA. Oh, and add in the fact that I felt like I’d already paid my Vegas dues for the year.

Still, having seen countless ads, been asked if I was attending by over a dozen friends and colleagues, and more importantly, written about most of these events for this column, I decided to head to Vegas to see what HLTH’s inaugural conference was all about.

In case you somehow missed the online ads or even the billboards (yes, billboards by the highway in San Francisco during and after JP Morgan), HLTH breathlessly states, “We are the hottest, newest, largest, and MOST IMPORTANT HEALTHCARE EVENT.” Its website excitedly adds that it is creating a much-needed dialogue focused on disruptive innovation. It proudly adds that it is backed by more than $5 million in VC funding (why that’s relevant is curious – perhaps they hope like attracts like?)

All in all, HLTH’s inaugural conference attracted 3,500 attendees, which according to its media briefing, included 600+ founders and CEOs and 1,600 companies. Thirty-eight percent of attendees were from the C-level, 35 percent were from potential purchasers (payers, providers, and employers), 20 percent were investors, and 15 percent were media from such notable outlets as NY Times, Bloomberg, CNBC, and yes, HIStalk (yours truly.) Just to give a sense of scale, HIMSS and JPMorgan “convene” tens of thousands, while Health Evolution Summit admits fewer than 750.

To answer the “why another conference” question, I asked Nancy Brown, a venture partner at Oak HC/FT (the aforementioned venture fund) and good friend of over 15 years. Oak’s investment in this conference is particularly noteworthy for several reasons. Oak’s managing partner, Annie Lamont, is arguably one of the best healthcare investors ever, with such hits as Athenahealth, Castlight, CareMedic, and more than a few other successes. Annie knows healthcare and how to invest. Next, Nancy Brown’s substantive knowledge of our beloved sector would be hard to overstate as she was a serial entrepreneur (co-founder of Abaton.com, chief growth officer of MedVentive) and developer of Athena’s clinical products in between before going to the venture side. When Nancy told me she had curated the content for HLTH, I had to sit up and take notice. 

My instincts were correct. Many attendees commented how strong the content was and the breadth of tracks and sessions made for tough choices, a conference rarity. While a sponsoring company’s CEO observed to me that HLTH “had more TED Talks than people there to do business,” that’s not necessarily a bad thing, especially as it helps draw people to the event. Some presentations were more company pitches than substance, but I still give it an A+ for content and I’m a tough grader.

A banker friend of mine who’s been an operator and investor observed that the sessions “with their common focus on disruption and innovation, were brilliant due to the speakers.” The 375 speakers were either on small panels with multiple views or served as solo speakers. These folks were predominantly CEOs and other C-level executives. Part of the formula was that they were specifically encouraged to make it fresh and interesting rather than reusing their typical pitch or speech and/or to use HLTH to make announcements involving new products, venture funds being launched, and collaborations.

OK, great content, but that doesn’t say why we need another conference. HLTH’s founders have a track record. Jon Weiner and Anil Aggarwal, who are also venture partners at Oak HC/FT, founded and sold two successful conferences: Money20/20 (fin tech) and Shoptalk (commerce). They seem to have observed how many healthcare conferences exist and the need to consolidate attendance. The goal appears to be to create content that draws people into a setting and further helps both “convene” and encourage good and serious conversation among the participants.

I think they nailed it. As I’ve written about JPMorgan, it’s not about the conference, it’s about seeing other “attendees.” I use the quotes because not all are even officially attending – they’re hanging around Union Square meeting in coffee shops, hotel suites, or rented conference rooms all day. HLTH, in contrast, deliberately made opportunities for conversation easy.

How do you attract people? Start by inviting CEOs and leading sector venture investors (speaking slots help – see content above) and then more will follow. Offer hosted buyer meetings to subsidize the attendance costs of provider. I heard there were close to 1,000 buyer meetings, a Funding Founders VC speed-dating event that involved 300 investor meetings, and more, along with one official and countless other parties each night. It’s all part of the formula that has clearly worked – Money20/20 sold for over $100 million (before an earn-out) and Shoptalk seems to be doing wonders. A brief glimpse at those two websites showed a similar look and feel.


Speaking of look and feel, HLTH definitely focuses on UI/UX. A great downloadable app (with schedules and attendee messaging capabilities), excellent food, easy registration, and a really spiffy opening video (with all the stats you might want to see) all made it seem hip, cool and easy, although a few attendees I chatted with expressed concerns that this could change with growth (and a venue shift from Aria to MGM Grand excites no one).


More importantly, though — and this comes back to the “convening” aspect — where the hoi polloi struggle for meeting space at HIMSS and JPMorgan, here it was easy and intentional. All sponsors and speakers could have space available (for a fee, of course) that ranged from private conference rooms to these company-branded “meeting pods”. Would I negotiate a major deal from within one? Certainly not, but as a place for an easy chat, they were great. I saw them used by a number of leading venture funds as well as vendors of all sizes. Even for those who didn’t have access (like me) there was plenty of comfortable seating with not only USB and AC power for charging, but spiffy branded throw pillows (attendees were welcome to take them home at the end, but I figured neither my airline nor my bride would really have appreciated it.)

Turning to the exhibit hall, it was a reasonable size, where each booth had a somewhat similar look and feel. Sizes ranged from tabletop to small, i.e. no city blocks like at HIMSS or RSNA. They were there to sell, but it felt more to inform as well – I’d be surprised if folks show up to this conference with checkbooks. Vendors included legacy players like Athenahealth and Change Healthcare; newer yet established ones like Castlight or Teladoc; new entrants like Lyft; quite a number of very early-stage companies seeking to launch; and quite a few of the usual suspects.

Each time I wandered through the exhibit hall, a decent if not overwhelming number of attendees seemed to be browsing through it. Utility for exhibitors seemed to vary based on their target customers. Chats with some employer- and plan-focused vendors yielded mixed reviews with a slight positive bias. The proof there will obviously be how many sponsors and exhibitors re-up for 2019.

For vendors, I’d call this a marketing and business development event rather than a sales one. When I asked a few investors if they would encourage a portfolio company to exhibit, the impressions were equally mixed, with a positive bias.

Bottom Line: What is the Future of “The Future of Healthcare”?

I confess, having spoken at a few proprietary conferences over the years and been consistently underwhelmed, I was skeptical on my flight to Vegas. That said, I was pleasantly surprised, as were most people I spoke with. More than one attendee compared it favorably to both JPMorgan and HIMSS. “HIMSS is a CIO conference and HIMSS is a noun. This conference is more of a verb,” one thoughtful attendee and loyal HIStalk reader stated in summation.

I can’t disagree. Where JPMorgan is by its nature exclusive and Health Evolution Summit even more so, HLTH was designed to be open, approachable, and easy to navigate. Quite a few others asked rhetorically, “If I have this, why do I even need the rain and chaos of JPMorgan, especially for smaller companies?”

Speaking from the Investor’s Chair, I don’t think HLTH will displace JPMorgan as “the Burning Man of Healthcare” any time soon, especially for later stage companies, but I see HLTH as a great addition and have already encouraged a protégé to try to attend next year as a way to broaden their industry exposure and grow their personal brand. That said, it’s not clear how many organizations will pay for their employees to conference-hop the way the C-suite does, although one sponsor I spoke with specifically commented on liking the prevalence of more day-to-day workers vs. CEOs.

The challenge I see is twofold. First will be keeping the great user experience as HLTH grows, given that the first time out of the gate almost 3,500 people were in attendance. If everyone wants intimacy and everyone wants to attend, those goals ultimately conflict. I’m curious if the formula has an answer to that dilemma. That said, the founders’ other two conferences seem to be going strong.

Second is competition. HLTH competes with the other conferences I mentioned (to name a few) for the cost and time required for CEOs and investors to attend. From JPMorgan to HIMSS to Health Evolution and now to HLTH is distracting and tiring. Fall might have been better for scheduling purposes. That said, I predict success given the buzz it generated, the quality of folks who attended, and the all-powerful FOMO (Fear of Missing Out) as a go-forward motivator.


Ben Rooks, to his surprise, has at this point advised companies through ST Advisors longer than he was an equity analyst (10 years) or an investment banker (six years). When not writing for HIStalk, enjoying leisure time, or attending conferences, he actually does real work. He’s grateful to Premier for sponsoring the Headshot Lounge at HLTH (another nice touch) because he wanted a new one.

Health IT from the Investor’s Chair 9/17/14

September 17, 2014 Investor's Chair No Comments

Some Musings from the Chair

With summer winding down and Labor Day in the rear view mirror, it felt like a good time to write a quick Investor’s Chair post and share one or two of the more interesting things I’ve noted in the market of late.

The biggest news of the summer was clearly Cerner’s announced acquisition of Siemens’ healthcare information technology unit (or, as we old timers would say, Shared Medical Systems.) When I got a call from a reporter related to the transaction, my first reaction was a sense (as perhaps the Siemens folks would say) of schadenfreude, as this is yet another example of yet another European technology company foundering on the shores of the US healthcare IT market (think Misys).

Recall that Siemens bought SMS 15 years ago for $2.1 billion, only to sell it now for $1.3 billion. Why the decrease in value? Perhaps because in the greatest boom times our sector has ever seen (thanks in no small part to ARRA), revenues over these 15 years were astoundingly FLAT!

With this purchase, Cerner is now the clear sector leader and will enjoy mammoth cross-selling opportunities given the product fit. Cerner is a clinical leader, where Siemens (née SMS) always lagged there and was more focused on financial systems. (In fact, I recall the former CEO of SMS explaining to me that Cerner’s clinical focus was off base!)

From an investor perspective, this was a good use of both the cash hoard Cerner had built up on its balance sheet and its high-multiple stock, allowing the deal to be almost instantly accretive – especially with the $175 million in pre-tax synergies the company guided to in its press release. While the stock traded fairly flat around the release (likely because rumors had circulated for several weeks prior to the deal, causing the deal to already be priced into the stock), Cerner’s shares are up almost 10 percent as I’m writing this post, more than twice the S&P — Ms. Market seems to be more excited.

The vast majority of analyst commentary has been positive and we here at the Chair are fans of the purchase as well. The only thing that gives me pause as a long time Cerner watcher (and fan) is that the company has zero history of large-scale M&A and the sector has not been kind to such large-scale bets in the past.  What’s especially noteworthy here though is that the cultures of the two companies are literally more than an ocean apart, and in the words of famed management guru, Peter Drucker, “Culture eats strategy over breakfast”.

That said, the price Cerner paid clearly de-risks the acquisition, and Cerner is known for its strong culture (and full parking lots).

Another aspect of autumn I’m eagerly anticipating is attending the Health 2.0 Fall Conference in a few weeks. My impressions of the 2010 event can be found here. I missed it last year, so I’m really looking forward to the opportunity to see some of the new thinking and more cutting edge tech that this event usually attracts. With “digital health” so beloved of the venture world these days, I’m expecting both a fair number of cheap but cheerful innovators with apps and dreams, but also know there will be more than a few companies straight out of HBO’s show “Silicon Valley” strutting their stuff and spending their VCs’ money on booths and travel like there’s no tomorrow (and if they’re not careful, there won’t be).

Part of what I like most about this event is the great dichotomy in participants, sponsors, and attendees. I’m also particularly excited to be mentoring the HealthTraction component, Health 2.0’s Startup Championship – CEO mentoring for companies of all sizes is one of my favorite aspects of ST Advisors’ work.

As for the actual sessions, in the past they’ve varied from truly fascinating to really annoying, but that’s the beauty of industry conferences. My big complaint is that the conference moved from San Francisco to “the Valley,” but I’m keeping an open mind and will be writing a debrief post afterwards. Drop me a note if you’d like to drink some sponsor’s wine or coffee during the event.


Ben Rooks spent a decade as an equity analyst and six years as an investment banker. Five years ago he formed ST Advisors to work with companies on issues of strategy, growth, and exit planning (among other fun topics). He lives in San Francisco with his wife and the cutest dog ever!

Health IT from the Investor’s Chair 7/9/14

From a recent HIStalk post:

CareCloud borrows $25.5 million from a growth capital lender. I’m never cheered by a company taking on debt just like I wouldn’t be thrilled about a relative signing up for a home equity loan, but I guess it’s good news to be found credit-worthy and to have your plan for using the money vetted by someone whose objectivity is inarguable given their interest (no pun intended) in being repaid.

Investor’s Chair Thoughts

Let me present an alternative viewpoint on venture debt. Debt can be a great part of a company’s capital structure. Let’s use my favorite fictional company, eEngageLytics, as an example.

eEngageLytics has an outstanding business with high recurring revenues and a good margin profile, but needs growth capital to continue to expand, hire more sales people and finally sponsor HIStalk! In fact, with an additional $25 million, it would grow even faster than it has to date, and I have a fancy business plan to prove it!

Rather than sell more shares through a venture fundraising though, I’ll finance it through venture debt, as that can be a much more capital efficient way of funding the company. This fact remains true even if I expect to raise more equity capital in the future: the longer I wait, the more eEngageLytics will grow, and the higher the valuation will be for a subsequent equity round. Raising some debt right away allows me to kick the can down the road a bit, perhaps until after eEngageLytics is actually profitable (another major valuation inflection point).

How does the debt versus equity math work? To help us understand more clearly, let’s start by assuming that eEngageLytics would be valued at $100 million in its Series C round. That would mean that the company would have to sell 25 percent of its equity to current or new investors to raise the $25 million it needs to support its meteoric (but achievable) growth plan. Not only would an equity capital raise involve diluting current investors (who would now own a smaller slice of the eEngageLytics pie), but there would likely be other restrictions and obligations demanded by the investors (such as a board seat or two, some kind of dividend and many other “bells and whistles” inherent in a Series C preferred stock).

Now, there are, of course, other costs and complications inherent in both options:

  • Like all lenders (except maybe Mom), venture lenders charge interest – but we’re currently living in a very low interest rate environment, so the CFO must model out the difference between the interest payments from debt and the dividend payments that equity investors often require. Venture debt for a quality company like eEngageLytics is running between 5-9 percent of the total amount (varying based on how much and when I actually pull down the money from the $25 million commitment – another example of the flexibility of debt financing). Let’s call it 7 percent on average, so that’s a max of $1.75 million per year.
  • Also unlike Mom, debt holders always want to be paid back – often before a liquidity event, so our company must have a way to pay back out of future cash flows (a topic our lender will obviously focus on).
  • Venture lenders have other ways to get paid besides the interest payments. There’s generally a warrant component, which allows them to purchase stock at a preferred rate – but it’s typically less than 1 percent, so dilution is minimal (especially in comparison to an all-equity deal).
  • There’s typically various fees associated with the debt commitment, similar to closing costs for a mortgage; but, again, they are typically fairly reasonable (in this example, the likely fee would be about 1 percent of the total loan amount and some end of term fee to the lender (around 3 percent of the aggregate amount loaned.) Contrast that to the 6-7 percent ($1.5 – 1.75 million) that an investment bank would generally charge for a capital raise of this size.
  • Don’t forget, however, that the availability of debt of this size is highly stage dependent. When eEngageLytics was developing its products and getting its first few customers, it was a bad credit risk and could barely get a corporate credit card – hence its need to fund through equity. Now that it needs money “only” to accelerate growth and tide itself over until profitability (or to buy hardware, or to make an attractive acquisition, etc.), it’s a far better candidate for debt.

Taking the various fees and interest payments together, eEngageLytic’s CFO can generally calculate an effective interest rate (like my mortgage broker does) and we see that, in this case, I’m paying a fully loaded interest rate of 15 percent per year, inclusive of the various fees. That’s about $3.75 million per year. Factor in the effects of compound interest and it costs current shareholders $32 million to repay the loan (assuming they borrow the full amount over the three-year term we’re using for illustrative purposes).

Let’s now flash forward a few years and assume that I’m able to sell eEngageLytics for a cool half a billion dollars (maybe a national payer like Aetna or United will step up – they’re always good for that). Had we sold 25 percent of our equity, the earlier eEngageLytics shareholders would collectively receive gross proceeds of $375 million (75 percent of $500 million). Fortunately, however, the management team are regular HIStalk readers (or get good advice from other sources) and, realizing that the amount of money they raise in no way equals how cool they are, raises the $25 million in debt rather than equity capital. Factoring out the debt repayment discussed above, and eEngageLytics shareholders in this scenario receive $468 million, a whopping $93 million more (which will allow even Inga to buy a few new pairs of shoes!).

So, bottom line, I see using debt as part of a company’s capital structure as a powerful tool to grow a business while minimizing dilution to founders, employees, and other shareholders. Here in the Bay Area (as shown on the HBO series Silicon Valley with occasionally frightening accuracy), the size of one’s capital raise is often viewed as a proxy for all sorts of things – “coolness” being just one of them. The bottom line is that entrepreneurs need to consider all the costs and benefits of different sources and types of capital, and when it’s appropriate, to use each to fund a business.

Finally, to return to Mr. HIStalk’s home equity loan analogy: assuming I’m taking out equity for a good reason (say, to renovate my kitchen, not to go on vacation), I’d rather have to pay back the loan (debt) than have to share part of my house (or proceeds when I sell it) with another party if I allow them to purchase some of my equity instead. Debt has responsibilities that equity doesn’t (such as an obligation to repay), but it typically allows the borrower more control and the opportunity to maintain their ownership. Which option makes sense depends on the situation.


Ben Rooks spent a decade as an equity analyst and six years as an investment banker. He has many friends who are venture capitalists, but he’d rather see returns go to entrepreneurs then to investors! Five years ago he formed ST Advisors to work with companies on strategic issues, only one of which is capital structure. He lives in San Francisco and absolutely loves e-mail.

Health IT from the Investor’s Chair 4/3/14

M*Modal from $1.1 billion to Chapter 11 – What Were They Thinking?

"Mr H, can you get Ben Rooks to opine on how smart Wall Street types could pay $1B for a $450M transcription company? Greater fool theory or something sinister?"

Sitting here in the Investor’s Chair, few things make me happier than a thoughtful question. I’m wondering what sinister theory you have in mind (and I’d love to hear it), but my view is emphatically one of the Greater Fool Theory. To support my thesis, let’s enter Mr. Peabody’s WABAC Machine and take a look at the events as they unfolded.

Long-time industry watchers will recall MedQuist (the predecessor company) from the 90s, when its growth was in large part driven by acquiring various transcription companies. As so often happened, earnings were ultimately missed, shareholder lawsuits appeared, and in this case, allegations of fraud emerged based on how MedQuist had been calculating its transcription billing rates. The company emerged from that peccadillo with a new management team. and one assumes, a new outlook on life.

Flash forward to July, 2011, when MedQuist acquired cloud-based natural language processing company, M*Modal (the * is presumably silent) for the fairly princely sum of $130 million in cash and stock. Princely in that it was over five times M*Modal’s run rate revenues, and the multiples of last 12 months revenues paid for medical transcription or HCIT companies were (using data from M*Modal’s later Fairness Opinion) 1.7x and 2.2x respectively. Hmm, interesting choice [valuation].

Back into the WABAC and skip forward to January 2012. Our next noteworthy event was six months later, when the company renamed itself M*Modal, according to its then CEO, “Illustrating our progression from a services-focused business to a provider of technology-enabled services and commercialized proprietary technology solutions.” Corporate brand identity is not part of the Investor’s Chair purview in this instance, but it seemed (even at the time) analogous to buying new carpeting and updating the landscaping prior to putting one’s house on the market.

In actuality, SEC filings show that even in October 2011, One Equity Partners had begun discussions with M*Modal’s management about acquiring the business in a Take-Private Transaction. Readers can review my previous post on how these work here.

Meanwhile, over the next few months, the company was approached by a number of other financial sponsors and a competitor referred to in the proxy as “Party A” (which I would guess was Nuance.) M*Modal went on to retain an investment banker, and by March, 19 private equity firms were invited to participate in the auction, of which 16 signed non-disclosure agreements.

As an aside, the value of NDAs is suspect at best, because over the next 10 days, representatives of five additional financial sponsors, having learned of the process from “unidentified sources,” separately contacted the Company’s financial advisors to indicate their interest in participating in the process and were subsequently invited to participate (because in auctions, the more, the merrier – as long as they can write checks — is usually a good rule). Bids were due April 26 and seven PE firms submitted.

Well, one would think that if financial buyers are attractive, strategic buyers should be more so, because they can bring various cost and revenue synergies to bear. That being the case, the bankers contacted five unnamed strategic players in late May, of which three immediately said, “Thanks, but no thanks” and two others said, “Sure, send us some materials.” Tellingly, neither of those submitted a bid.

Hindsight is generally pretty close to perfect, but this to me is the clearest evidence of the Greater Fool Theory in action. ST Advisors has on several occasions advised private equity investors on potential acquisitions. One of our questions to them invariably is, “OK, if you win this auction, you’ve just outbid all the strategic buyers. What will be different when you try to sell in a few years?” One can only wonder what One Equity’s thesis was. From the outside looking in, it appears to be a case of investors with little to no HCIT market insight believing their financial engineering skills could offset the risk of catching the falling knife that is transcription.

Over the course of the next few weeks as due diligence continued, some of the potential financial buyers notified the bankers that “they were withdrawing from the process, citing concerns about the ongoing profitability of the Company’s core transcription business, the nascent stage of the Company’s emerging healthcare technology business, and execution risks involved in the Company transitioning to a high-growth healthcare technology business.” Again, with the benefit of hindsight, good choice.

Party A was brought back in, but due to various concerns — especially relating to potential anti-trust issues — ultimately did not win the auction, leaving One Equity and M*Modal to announce on July 2 that it was acquiring M*Modal for $1.1 billion (a 19 percent premium over 180-day trading average and an 8.3 percent premium over the prior day’s close.)

Wow. $1.1 billion (2.4x LTM revenues) for a transcription vendor, albeit one with some spiffy speech rec, though Nuance certainly seemed to have that as well. Readers of this blog (or anyone not living under a rock) should realize that the ARRA-driven growth in EMR adoption is (very) likely to shrink demand for transcription. Based on the market dynamics, transcription pricing has been declining for several years. And other methods of data capture are becoming both more prevalent and easier to use. And other NLP vendors (Coderyte and A-Life Medical) were out there, again, wow. Over a billion seems like a lot here.

But did One Equity really spend over a billion dollars? Well, they did and they didn’t. Recall that the “L” in LBO stands for leveraged. A quick perusal of the data suggests that of the money paid:

  • $425 million was a term loan due in 2019
  • $250 million was a corporate bond due in 2020
  • $75 million was the company’s line of credit

leaving about 25 percent (or $250 million) in cash paid by One Equity and its investors. This left the rest to be borrowed from a syndicate of banks and investors (Fidelity was the largest debt holder, by the way).

Because there was a public market for these corporate bonds, we can track investor sentiment over the subsequent months. The bonds issued that summer at par value (meaning, you pay $100 for the bond for which the company has committed to pay you the $100 back, along with the agreed-upon interest). Shortly after Labor Day, approximately 90 days after the transaction was announced, the bloom began coming off the rose as the bonds started trading in the resale market at the mid-80s, showing that investors were beginning to get a tad skittish about the relative safety of this investment.

The bonds seemed to stabilize for some time, though in April 2013 the debt ratings were downgraded by Moody’s to “Outlook Negative.” Perhaps as a result, in June 2013, a new chairman and CEO were announced – Graham King and Duncan James, respectively – two industry executives with strong pedigrees and track records of creating shareholder value (disclosure: Duncan was QuadraMed’s CEO when it was a client of ST Advisors).

Despite this change, bond investors apparently continued to have misgivings, because by October 29, 2013, the bonds were trading at $60. A month later, they dropped from $58 to $45, indicating investors thought there was little likelihood the company would deliver on its financial commitments. On January 14, 2014, the bonds were trading at $37, and on March 20 of this year, in announcing its bankruptcy filing, M*Modal’s CEO made the understatement of the year (this being the biggest healthcare-related bankruptcy filing of the year so far): “When M*Modal was taken private in 2012, the acquisition was financed with a capital structure aligned with a specific set of assumptions that are no longer relevant.”

It’s hard to point the finger at anything sinister. I’m not privy to One Equity’s Investment Committee’s report or findings, but it definitely appears to be one of two components.

First, there’s sum-of-the-parts: (1) transcription – admittedly not a great business (and, in fact, worse than expected), but one generating cash, which can both cover some debt and fund some development; (2) technology (aka the original M*Modal), whose voice recognition and NLP solutions could be used for things such as data analytics, coding (hello ICD-10) and other sexier (read: high growth / margin / high multiple) businesses.

These two issues, together with a healthy (or perhaps unhealthy) dose of the aforementioned Greater Fool Theory likely drove the valuation discussion. In addition, its competitor Nuance was performing well, the company had a fairly attractive client base, and the new investors ultimately brought in a very talented CEO in Duncan James.

Still, weighing the fundamentals, it’s hard to imagine why One Equity thought this was a company worth over $1 billion or that it could support the debt service that a billion-dollar valuation required. As a result, their equity has likely been wiped out and the debt holders have been both crammed down and converted to a new equity.

This likely raises a follow-up question. Hey Ben, if the original M*Modal business was the gem here, why didn’t a PE firm just buy that? Recall that M*Modal at the time was a technology vendor with less than $25 million in revenues. That’s just not the kind of business that a PE firm can acquire as a platform acquisition, as it can neither be leveraged nor can it be big enough to generate the associated fees that drive the PE business model.

On the subject of transcription in general, I’ll close with a quote from arguably the world’s best (and wittiest) investor, Warren Buffett:

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Thanks again for your questions and keep them coming!


Ben Rooks spent a decade as an equity analyst and six years as an investment banker, where he worked on transactions such as this. Five years ago he formed ST Advisors to work with companies on issues that don’t solely involve transactions. He lives in San Francisco and absolutely loves e-mail.

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