House Calls

Can Buddy Systems Inc. persuade doctors, insurers, and patients to accept its new home monitoring device?

Northbrook, Ill., is a Chicago suburb that is in most respects as blandly middle-American as Wonder Bread -- not a place where many folks know when Chinese New Year begins, let alone celebrate it. But at the headquarters of Buddy Systems Inc., in a Northbrook industrial park, the frigid February day when the Year of the Dragon ended and the Year of the Snake began was the occasion for a festive stir-fried lunch party, where most of the guests -- including several Buddy Systems engineers and the company's founder and president, Thomas Manning -- chatted in Mandarin. Of the six technical staffers at Buddy Systems, four are Chinese immigrants. "Their academic qualifications are excellent," explains Manning, who began learning to speak Chinese during a stint in Taiwan in his junior year of college. "But beyond that, they've made some really impressive sacrifices to come to the States and be educated here and get established here. So they are highly motivated people who have something to prove to themselves and to their families. If you can find someone with something to prove, hire them."

It's an apt remark. Buddy Systems, which Manning started in early 1985, is a company with something to prove -- namely, that its product can dramatically cut the cost of caring for patients with congestive heart failure and other serious chronic illnesses without compromising the quality of the care those patients get. The company's product is a computer system, sold to doctors' groups and home-care agencies, that allows health-care professionals to monitor the vital signs of patients who have been sent home from the hospital but are still in need of observation. The system in effect delivers an electronic house call. The patient uses a computer console, chummily known as "Buddy," to measure and record his or her own blood pressure, weight, heart rate, electrocardiogram, and other data, which are then transmitted to the doctor's office and the home-care agency via telephone hookup and printed out for evaluation by doctors and nurses.

The only such machine commercially available now, Buddy is designed to let people go home from the hospital sooner, at a savings of hundreds of dollars a day. And by taking care of routine testing that would otherwise be done by a visiting nurse, Buddy greatly reduces the number and length of nurses' calls -- another significant savings, since each runs $60 or $70. In contrast, depending on the use each doctor and patient make of it, Buddy costs between $17 and $30 a day.

The idea of developing a cost-effective home monitoring system occurred to Tom Manning -- a Harvard graduate with an M.B.A. from Stanford -- during the five years he spent as a consultant in the Chicago office of McKinsey & Co. Manning's clients were companies in the health-care industry, where cutting costs is nothing short of an obsession. In 1983 Medicare and Medicaid, by far the biggest health insurers in the United States, began to crack down on the ever-soaring cost of medical care, which had reached a colossal 10% of the gross national product. Instead of paying hospitals and doctors on a cost-plus basis -- which meant reimbursing whatever the medicos saw fit to spend and then some, no questions asked -- the feds set strict ceilings on the fees they would henceforth shell out for any given treatment. So in order to keep their doors open, hospitals had to start thinking and acting like businesses. They scrambled to find ways to cut costs while they rustled up new sources of revenues, including new departments that oversee the care of patients in their homes. Manning observed that one result of all this upheaval was a tendency to release patients, in the rather flippant phrase some industry insiders use, "quicker and sicker" -- and more in need of clinical supervision.

Moreover, partly because of the aging of the U.S. population, health-care costs seemed likely to keep right on climbing. They've risen more than $140 billion since 1983. Health-insurance companies have been hard-pressed to make ends meet: the Blue Cross and Blue Shield Associations reported a net loss of about $1.1 billion in 1988, which was an improvement over their $1.9-billion deficit the year before. Nor does relief seem near. According to figures released by the U.S. Health Care Financing Administration and analyzed by Sanford C. Bernstein & Co., in New York City, the nation's medical bills rose an average of 8.6% a year between 1982 and 1987 -- but from 1988 through 1992, the cost of getting well is expected to go up at a 12% annual clip. A product that could help cut medical costs without compromising quality, Manning reasoned, should be an answer to a health insurer's prayer.

The idea for Buddy Systems gradually took shape as Manning advised McKinsey clients on how to survive in the harsher and less forgiving world Washington's new cost-consciousness had wrought. "One pattern that emerged right away was the tremendous movement of patients from high-cost sites like hospitals to low-cost, decentralized locations," he recalls. "Home care was growing fast. The main issue, which nobody was looking at in any systematic way, was how doctors could keep tabs on their patients who'd been sent home." Medical technology, meanwhile, had spread from hospitals to doctors' offices, and consumers were becoming less leery of electronic gadgetry. A home computer that would be easy for patients to operate by themselves and would instantly provide doctors and nurses with essential medical information seemed logical.

By late 1984 Manning, then 29, had made up his mind to start a venture that would develop and market such a system. But first, just to make sure it was workable, he took two weeks of vacation from his job and interviewed dozens of doctors and computer technicians. What kinds of data did doctors need to assess the condition of a patient, sight unseen? And could a computer be designed that could measure and transmit the right stuff? Manning got a crash course in both medicine and electronics. "Then I got some good advice from a colleague at McKinsey," he says. "He told me not to overanalyze it, or I'd lose the excitement that could make it work."