From the July 2002 issue of Entrepreneur

Health care is a $1.4 trillion industry. It's been estimated to consume 15 percent of our gross domestic product. But it's also an industry in flux. Consider hospitals, which are struggling to improve their financial performance as they compete increasingly with private clinics and urgent care centers that offer specialized services at less cost. "That's revenue that won't go to the hospitals anymore," says Jody Root, a partner and chair of the health law department at Foley & Lardner, a law firm in San Diego. "The traditional model of health-care delivery has changed."

Today, health care is a Pandora's box of problems. Well-trained health-care professionals are in short supply. Providers and insurance companies are trying to meet a spring 2003 deadline for compliance with the Health Insurance Portability and Accountability Act (HIPAA), which sets new federal privacy standards for patient documents. Meanwhile, employers--stymied by rising insurance premiums--are looking to shift more cost to employees at the same time that consumers and doctors, tired of managed care, are wanting more control over their health choices. As a result, insurers are moving far away from the HMO model toward defined contribution health plans that offer more choices. State governors, driven by deficits, have asked the federal government for $6 billion to cover expected Medicaid shortfalls, an amount they're not likely to receive from politicians in Washington who so far have been dragging their feet on the health-care issue. The list goes on.


"There are a lot of opportunities if you can solve a business problem through a process change, outsourcing a service or creating a new technology."

The good news? Your business plan could emerge from all this chaos. "There are a lot of opportunities if you're an entrepreneur who can solve a business problem through a process change, outsourcing a service or creating a new technology," says Lewis Redd, head of the health practice segment of management consulting firm Cap Gemini Ernst & Young in Atlanta.

Consumer choice will be the trend over the next few years, says Victor Tabbush, faculty director of the Johnson & Johnson Healthcare Executive Program at the University of California, Los Angeles. Cost-conscious patients will be picking up more of the tab in exchange for more control, and they'll start shopping around for the best service at the best price. Is a PET scan better than an MRI? Is it worth the extra cost out of my own pocket?

Patients will have to make these choices, and while their primary doctors may offer sound advice, more and more of them will go to independent sources for information, Tabbush says: "Businesses that cater to the added need for patient information, cost and effectiveness have a real future."

Your fledgling health company could end up in critical condition, however, if you're not careful. Health care isn't an industry you just jump into and hit the ground running. It's highly regulated, start-up costs can be steep, and long sales cycles can make it difficult to land new clients.

To be successful, "you really have to do your homework," says Richard B. Siegrist Jr., president, CEO and co-founder of health-care software firm HealthShare Technology in Acton, Massachusetts, and an adjunct faculty member at the Harvard School of Public Health. "You need to get an understanding of the language of health care and how health-care organizations work." Here are the stories of three start-ups that did their homework and are already pictures of health.

A Study in Success

There's no question about it: The drug-discovery business is booming. It's estimated that pharmaceutical companies invested $30.5 billion in research and development last year, marking an 18.7 percent increase over 2000, according to the Pharmaceutical Research and Manufacturers of America, a group that represents leading research-based pharmaceutical and biotechnology companies.

But research doesn't happen without risk. Studies can go wrong, and when they do, things get ugly. Consider cancer drug company Imclone Systems, which saw its stock price plummet earlier this year after the FDA questioned its study design. The government isn't shy, either, about suspending federal research dollars when research universities don't follow the myriad of rules and regulations. The FDA created a committee last October to follow clinical trials at both universities and private companies even more closely.

COMPANY: MonitorforHire.com
CO-FOUNDERS: Scott Freedman, 42, and Rod Saponjic, 35
NICHE: Matches trial monitors with clinical studies
LOCATION: Lower Gwynedd, Pennsylvania
EMPLOYEES: 4
STARTED: 2001
2001 SALES: Just under $5 million

With so much at stake, there's a lot of room for products and services that help research projects succeed. That's where Scott Freedman, 42, and Rod Saponjic, 35, spotted their opportunity. They recognized a growing demand for clinical monitors--independent outsiders who, like good auditors, will make sure researchers play by the rulebook. Their privately held Gwynedd, Pennsylvania, Web-based start-up, MonitorforHire.com, pairs experienced trial monitors with sponsors of clinical studies. Says Saponjic, "We're answering a need that's out there."

Freedman and Saponjic secured nearly $1 million in private investment in 2000, just as many dotcoms were bombing. The site launched last February, and sales in 2001 approached $5 million. So far, more than 600 monitors and over 100 sponsors in the United States use the service.

MonitorforHire.com makes its profits from fees charged to the monitors, independent contractors who average seven years of experience and like the flexibility of working when and where they like. The company's four employees work in sales, administration and registration processing.

MonitorforHire.com plans to open registration globally this year. The founders' advice? Get some industry experience, make contacts and have a solid business plan. "Drug development is relationship-driven," Saponjic says. "If someone doesn't know you, you're going to have a hard time getting the time of day."

 

Filling the Void

Is there a nurse in the house? It's a familiar refrain these days as more and more medical facilities are understaffed after years of cutbacks. A Department of Health and Human Services study released in February 2002 found that 90 percent of U.S. nursing homes are providing substandard care.

"There's a critical nursing shortage because nurses aren't being paid what they're worth," says Pascualita Rodriguez, 47. She's the founder, owner and director of Palm Medical Staffing, a Seattle company that subcontracts nurses to hospitals, nursing homes and private-care situations. The nurses she contracts are looking for more flexibility and better pay than they earn at hospitals. The average licensed practical nurse working in a hospital earns about $12 to $13 an hour, Rodriguez says, a figure that can rise dramatically to $30 an hour or higher when they become contractors.

Rodriguez had 31 years of nursing experience before going into business for herself. At first, she was a one-woman show, running between nursing jobs to build her company. It didn't take her long to land contracts with two major nursing facilities, and she recruited her first nurses through want ads and word-of-mouth. "In a short amount of time, I had people calling me for work," she says.

COMPANY: Palm Medical Staffing
FOUNDER: Pascualita Rodriguez, 47
NICHE: Subcontracts nurses to hospitals, nursing homes and for home-health needs
LOCATION: Seattle
EMPLOYEES: 22 nurses hired on a contract basis
STARTED: 2000
2001 SALES: $800,000

Her start-up costs were about $5,000, and she used her personal savings to finance her first payroll. Today, Rodriguez outsources 22 nurses and has at least five active clients at any given time who assign these nurses to jobs on a month-to-month, as-needed basis. Palm Medical Staffing's sales reached $800,000 last year.

If you want to get into health-care outsourcing, you need to understand medical reimbursement cycles, she says, because cash flow and collection can be a big challenge. Rodriguez has survived situations where she's had $20,000 in payroll and no money coming in, and she's had competitors who have lasted only a few months.

"Some clients pay late," she says. "If you don't stay on top of them, they'll sit on those reimbursements for as long as they possibly can." Rodriguez developed an aggressive collections system so reimbursements "come in like clockwork." The other constant challenge is finding skilled nurses. "It's very competitive," she says.

Given the success of Palm Medical Staffing, Rodriguez plans to expand to Hawaii and San Francisco. "Even in the worst [economic] times, you're going to need a doctor or a nurse," she says. "I feel like I'm making a difference by providing good nurses."

Bill Your Way to Success

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From No-Tech to High-Tech

Who needs a paper trail in the digital age? It's certainly a question in health care, an industry synonymous with paperwork and manila folders. It's estimated that 95 percent of U.S. physician practices still store years' worth of patient records that way.

There's a huge market waiting for entrepreneurs who can help medical professionals convert paper to pixels while complying with HIPAA regulations. "It's a red-hot area," says Monte Regier, 40, president of Infomedx Inc., a 22-employee Seattle start-up that helps hospitals and physician practices store medical records electronically. "The patient chart is the most valuable thing a doctor has," he explains. It's also expensive: The health-care industry spends $1.2 billion annually on file storage alone.

COMPANY: Infomedx Inc.
PRESIDENT: Monte Regier, 40
NICHE: Helps hospitals and physician practices store medical records electronically
LOCATION: Seattle
EMPLOYEES: 22
STARTED: 1998
2001 SALES: $1.5 million

Infomedx's service, iRetrieve, lets doctors create electronic patient charts that are stored on a protected server. Doctors can use computers to retrieve, send and share digital or scanned images of patient documents. The product is also HIPAA-compliant, and Infomedx maintains the system so doctors don't have to worry about software updates. They might also save some money. Physicians' offices can pay $8 to $15 for delivery of a file stored off-site, while Infomedx will scan them for $6 to $7, Regier says.

To date, Infomedx has signed 35 practices in three states and one large Seattle hospital. Sales were $1.5 million last year, and the company hopes to grow 300 percent over the next few years. Regier's future plans include offering digital diagnostic chart services as well as a special e-mail package for physicians--an important step, because doctors are prohibited from using everyday e-mail to transmit patient information.


"There's a huge market waiting for entrepreneurs who can help medical professionals convert paper to pixels."

If you've got a health-care technology idea, be aware doctors can be a hard sell. "Doctors haven't embraced technology because it hasn't solved their problems," Regier says.

Sales within the medical community also tend to occur through word-of-mouth, which can make the time to profitability longer. Infomedx took in $2.5 million in investments before it made its first sale.

Understand the industry, know how your product or service will help potential clients, and start small, suggests Regier. "There are offices everywhere that are willing to try [new] things," he says. "Build your first customer. He'll bring you the next three."

Trends in the Health-Care Industry

Collective Negotiating
Small employers are anxiously watching their health insurance premiums rise 15 to 20 percent every year. And a good chunk of this money--roughly 20 to 25 percent--is going toward administrative costs, according to a recent General Accounting Office report. This opens up another potentially profitable avenue of opportunity for would-be entrepreneurs.

"There are going to be coalitions of small businesses to buy plans in bulk and spread the risk," Root says. Products and services that help employers manage cost will be hot.

Alternative Care
Managed care as we know it is changing. Consumers now want more choice. Providers, too, are getting frustrated about denying patients. "Plans have started to quickly move away from a strict managed-care model in order to offer a greater degree of choice for the patient," explains Victor Tabbush, adjunct professor of business economics at The Anderson School at the University of California, Los Angeles.

But choice comes with a price tag, because more cost will ultimately shift to the consumer. "Pricing is going to be an issue with patients," Tabbush says, adding that businesses that continue to meet the need for patient information about cost and treatment options have a real future.

Billing
For doctors, few things are more annoying than a returned claim that wasn't processed correctly the first time. Not surprisingly, there's increasing pressure on insurance companies to process claims correctly.

A growing number of states are setting time limits on insurance companies that engage in "takebacks"--when they come back months or years later to collect from health-care providers on claims the insurance company thinks were overpaid. There's always room for small firms that can help both sides spot and resolve claim snafus quickly.

Streamlining
HIPAA compliance is expected to cost hospitals an average of $4 million this year, according to Gartner Research. At the same time, hospitals are struggling with Medicare and Medicaid reimbursements while also competing against a growing number of specialized physician-owned private clinics, Root says. There's room for entrepreneurial consulting companies to help hospitals run like a traditional business and maximize revenues.

New Technology
In a post-September 11 world, health-care organizations now want to improve their intranet systems and backup servers in case of a catastrophe. At the same time, HIPAA's privacy standards are also creating software requirements that are new to the health-care industry, not to mention vendors and self-insured employers. There are companies that "aren't even in the health-care industry that HIPAA now applies to," says Jody Root, a partner in the San Diego office of law firm Foley & Lardner and chair of its health law department.

FOR MORE INFORMATION
  • How to Start a Medical Claims Billing Service:Entrepreneur's start-up guide #1345 tells you all about this profitable business. Log on to www.smallbizbooks.com or call (800) 421-2300 for more information.
  • www.amednews.com: The online edition of American Medical News includes the latest about health-care industry issues.
  • www.hhs.gov: Links to the government's Health and Human Services Web site, with information about Medicare and Medicaid issues, grants and more.
  • www.hipaacomply.com: Offers the latest HIPAA news and compliance information, links to federal and state legislative events and more.
  • www.nahc.org: The National Association of Home Care site targets home-health and hospice providers.

Chris Penttila is Entrepreneur's "Staff Smarts" columnist.

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