Technology Will Set Health Reform Free

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NEW YORK ( TheStreet) -- Last year venture capitalist Vinod Khosla wrote a white paper that was a call to arms on medical IT, a field I've been following since 2006.

The big story back then was of electronic health records, or EHRs, which would transform care by giving doctors data on their patients. I naively assumed this would benefit mainstream tech companies, like Microsoft (MSFT) and Google (GOOG) , which had the necessary technology. They assumed as much, too.

We were wrong. Both those companies exited the market with their financial tails between their legs.

The 2009 Recovery Act included $19.2 billion in stimulus for EHRs, and politically-connected CEOs like Glen Tullman of Allscripts (MDRX) assumed they would win the money by selling software as a service, or SaaS, requiring less upfront cost to doctors and clinics, along with faster upgrades done centrally.

The argument made sense, but Tullman, too, was wrong. Since December, he has also been out as CEO, as Forbes reported. Shares in Allscripts now sell for little more than they did when health reform was first proposed.

Instead the gains have gone to incumbent medical technology firms like Cerner (CERN) , which has quadrupled in value under this president, and McKesson (MCK) , which has more than doubled while adding a handsome dividend. The new Allscripts CEO is a former Cerner executive.

More importantly, medical care inflation still outstrips that in the general economy, according to MetricMash. Overall prices from October 2009 through October 2012 were up 7%, medical costs were up 10.5%.

Khosla confronted doctors directly in September, as Wired reported , saying "healthcare is like witchcraft and just based on tradition," rather than driven by data. He said 80% of what doctors do could be done better by computers.

Khosla blames a natural resistance to change on the part of doctors, device makers, and others in the industry. At the Health Care Blog , David Liu didn't disagree with Khosla's diagnosis, but called his entrepreneurial mind set "problematic and dangerous."

My own reading of Khosla paints a different picture. The current market failures are driving people out of the market, he writes, into the arms of companies like Walgreens (WAG) and CVS Caremark (CVS) , which already have clinics manned by nurses and physicians' assistants -- assisted by technology -- in hundreds of stores around the country.

Khosla writes that in just a few years their customers will be able to buy "digital first aid kits" for just $100 with apps that monitor "blood pressure, A1c levels, ECG waveforms, blood oxygen levels, skin/ear/ENT conditions, social interaction, and other indicators of how well patients are managing their diabetes, asthma, depression, and other chronic conditions." Drug stores would then become "healthcare service stations" where the data can be analyzed and people given real care at low cost.