How Britain’s NHS is killing digital-health startups

(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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