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How Britain’s NHS is killing digital-health startups

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(Bloomberg) — Peter Hames was born in the northern English city of Leeds, educated at Oxford, and founded a digital health startup in London in 2010. Six months ago, he and his company moved to San Francisco.

Hames had the backing of doctors, patients and venture capitalists for Sleepio, an online insomnia treatment. But he couldn’t see a way to sell the idea to the U.K.’s National Health Service, which controls virtually all medical spending in Britain. In California, by contrast, he’s marketing to companies that self-insure their employees.

“The bigger opportunity was here,” Hames, 35, said by phone from San Francisco’s Mission District. “I wanted to see it happen in the U.K. but it was clear it wasn’t going to.”

Venture capital investors plowed more than $4 billion into digital health startups in the U.S. last year, more than twice the total of 2013, according to Rock Health, a fund in San Francisco. Though no directly comparable data exists for Europe, the total is likely less than 100 million euros, according to the European Private Equity and Venture Capital Association.

The gap means fewer opportunities for European entrepreneurs in one of the fastest-growing areas of technology, so there’s less likelihood that a startup might grow into a major employer. And it means any health benefits and cost savings from digital initiatives will take longer to reach the region’s medical systems and taxpayers even as the NHS — projecting a 30-billion pound ($47 billion) shortfall by 2021 — says it’s counting on innovation to cut costs.

Backing Skype 

Index Ventures, a fund with offices in London that was an early investor in Skype, Soundcloud and Dropbox, backed Hames and encouraged his move to the U.S. The firm has looked into another half-dozen or so digital health companies in Europe, but could never envision a market, said Ophelia Brown, a principal at Index.

“We see so many great ideas, but health-care solutions don’t have a great revenue model,” Brown said. “You need to see who will pay for it.”

The problem is particularly acute in the U.K. In Germany and France, not all medical services are free for consumers, so they’re willing to pay for online products. In Britain, by contrast, the NHS covers virtually all health expenses, so entrepreneurs can’t avoid dealing with its bureaucracy.

To sell to the NHS, a vendor must first become an approved supplier by getting on one of the lists the government maintains. The lists, called frameworks, cover everything from pacemakers to office shelves to ambulances, and can expire after three to five years. Figuring out how to get on them can be baffling for startups, particularly those with technologies that don’t fit into neat categories. Once approved, a supplier must convince buyers at each of the NHS’s 209 regional units or one of dozens of other groups that control health-care spending.

“The complexity is massive,” said Mark Doorbar, chief executive officer of Safe Patient Systems Ltd., a company outside Birmingham that makes software for monitoring vital signs via mobile devices.

In 2011, Doorbar got his company onto a national framework for mobile health providers, and started signing up local NHS units. When the framework expired last year, his sales stalled and while he has a few existing contracts, he’s struggling to find funding. After months of talks with venture capitalists in 2013, he came away empty-handed.

“It was frustrating and disappointing,” Doorbar said. “We got fairly consistent feedback: ‘How can you penetrate the market?’”

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Simon King, a manager at Octopus Investments in London, said his firm evaluated Safe Monitoring Systems for several months. While the technology might save health systems money, “we just couldn’t get comfortable that they could” win enough contracts with the NHS, King said.

Insomnia treatment 

The agency is aware of the obstacles faced by startups and wants to work with them to improve both care and efficiency, said Michael Macdonnell, who oversees NHS strategy in England. The service this year started a program to test innovations to determine whether they can back up their claims of saving money or improving health.

Technology “is absolutely central to making the transformation that’s required,” Macdonnell said. “We just must have the right sort of innovation, value-added innovation. We can’t just be a route to market for people who want to sell the latest version of a scanner with a few more bells and whistles.”

James Wise, a principal at Balderton Capital, a venture capital firm in London, says the NHS has gotten more open since centralized attempts to re-organize its computer systems failed about a decade ago.

For entrepreneurs “the prize is big,” Wise said. “When you prove to a 100 billion pound organization you have something, companies can go from zero to very successful overnight.”

Hames came up with the idea for Sleepio after developing insomnia. Frustrated that the only available treatments involved drugs, he read up on cognitive behavioral therapy and improved his sleep. Seeing the business potential, he formed a company called Big Health and recruited an Oxford sleep medicine professor to give the project scientific rigor.

Sleepio, which costs about $10 a week, includes a sleep diary, online support groups and an animated therapist that guides patients through relaxation techniques. Hames rolled out the program in the U.K. in 2012 and began to attract paying customers. Last year, he got $3.3 million in funding, but he couldn’t crack the NHS and moved to the U.S. last February.

“We assessed it and it was just not feasible,” Hames said. “We could waste years with no impact.”

The NHS, though, hasn’t given up on Hames. In July, he was named one of 17 “NHS Innovation Accelerator Fellows” in a program designed to guide promising entrepreneurs. Hames is optimistic that the service can change, but still sees barriers for companies like his.

“The NHS is optimized for people with large sales organizations, and/or specific knowledge about how the system works,” he said. “Although U.S. health care has its problems, and there are some messed-up incentives, at least there are incentives.”

—With assistance from Marie Mawad in Paris.

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