How do you feel about projecting excessive profitability in a health care business plan?
Over the weekend I saw the pitch for a brilliant business plan, with great technology, for developing medical electronics that could significantly reduce some kinds of complications in some kinds of surgeries.
“The world needs this,” I thought. “I hope these people succeed. I hope they get the investment they need.”
But then they got to the financial projections.
Their sales forecast soared to tens of millions of dollars, but their technology was so good that it seemed credible. They had PhDs and patents and a strong team. No problem there.
But they also projected 80-85% EBIT (earnings before interest and taxes). And that got my attention. It’s not just my chronic skepticism about absurdly high projected profits in business plans; it’s also about intentions, exploitative pricing, what Wikipedia calls price gouging. And about ethics.
It reminded me of the Steven Bill cover story in Time Magazine a couple of months ago, called Bitter Pill. Or if you want the short version, watch this Jon Stewart interview with Steve Brill. He says:
It’s the people who organize the care, who sell the equipment, who sell the drugs; they’re the ones making the money.
Later I asked the inventor about the ethics of pricing. He understood the problem. He gave me a sensitive respectful answer. He said he trusted his more-businesslike co-founders who set the prices. He explained that pricing is set by the whole system, pretty much what Brill’s piece suggests. He didn’t say that profits from this one product would go straight back to research for other products, more inventions, and more improvement in surgical equipment. Insurance companies set the price. His company can beat the existing costs with something much safer. So, if they can execute their plan, they’ll make huge profits.
Medical costs will still go down, if it works, because it reduces complications. Patients will benefit too, with less pain, illness, and death. But according to their own numbers, they could charge a third of their planned price and still make healthy profits.
What do you think?
(Editorial note: I’m not giving specifics on purpose. I don’t want to make this about a specific company. And at this point it’s all hypothetical anyway, just a few numbers in a business plan.)
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Sounds to good to be true. I have seen to many Doctors opt-out of the insurance companies and start their own pay me a lump sum and I’ll be your doctor for a year type deals. I see Doctors giving out samples supplied by drug companies wanting their products used and giving the doctors kick-backs when they are. It would be nice to see the medical industry actually care for the patient again instread of basing everything on earnings and profits. When my dad comes to visit he has a shoebox full of pills for all his ailments which in turn cause a shoebox full of side effects. Tim I like your buisiness plan information and am currently working on one with the company I work for. Each department is making one up. I found one of your articles and am a little more prepared to start one now. Thanks.
And Wall Street wonders why Main Street dislikes them so much.
Thanks for the thoughtful post, Tim. I often wonder if predatory pricing/price gouging in healthcare technology is just price gouging. Not a long-term way to lower costs. Not an obfuscated way to reward inventors and innovators. But simply gouging. In the 25+ years I have been selling technology in healthcare not one company I have represented has based pricing on a time & materials to development, ROI time basis, or any other standard pricing model taught in B-schools.
I am a sales focused entrepreneur. I have no problem with firms putting a profitable pricing model in place. Rewarding innovation is essential. But I think your un-named company is typical and we’re all going to have to name names and pressure healthcare vendors to place ethical pricing into their business planning matrix.
Good read Tim yet I’m not sure the current health care stats in the USA back up this statement, “Medical costs will still go down, if it works, because it reduces complications.” as every new invention in this space over the last 30 years has not lowered costs.
If you look at other countries health care expenditures per family I think you can clearly see that our USA health care profit chasing trend is feeding another trend which is Health care abroad in Thailand and other Asian countries which now treat 100k’s+ patients every year due to this insane idea to make exorbitant profits off of people’s plight of disease.
I think better ideas are coming in the software space like Practice Fusion (http://www.practicefusion.com/blog/) and others lowering costs for doctors who actually deal with the end customer, the patient, who ultimately bears the burdon of expense.
Clint, Deb, Tom, thanks for welcome additions. It’s a tough problem, and not simple to piece apart.