Health Investors' New Calculus: Save Money To Make Money

Over the last two decades, venture capitalists helped make possible striking advances in health care, including robotic surgery, cancer vaccines and genomics. But such innovations also fuel higher health care spending, and now private investors see new opportunities in betting on companies that could curb those costs.

America's health care spending is "twice what it was ten years ago, and it's forecasted to grow in an unaffordable way for the country," said John Doerr, the Kleiner Perkins Caufield & Byers partner who backed Google, Twitter and other technology giants. Doerr’s answer to the health care problem is Essence Group Holding Corp., a St. Louis health plan he bought in 2007 and converted into a laboratory to develop software and services to help doctors and insurers tackle costs.

Doerr isn't alone in spotting an opportunity in health care's high costs. Venture capitalists are increasingly interested in nuts-and-bolts businesses like data mining and grassroots care management. Meanwhile, the appeal of companies that seek high-ticket, high-risk medical breakthroughs is on the wane...