Investing in Innovation to Disrupt Health Care's Status Quo

University of Pittsburgh Medical Center is partnering with a Silicon Valley startup to create technology that helps health systems measure and manage risk for populations of patients in the new era of value-based health care.

Providence Health & Services invested in a wearables startup and is working with its community partners in five states to roll out the technology — think FitBit for kids — in health and wellness programs.

And, in a major partnership with Regeneron Pharmaceuticals Inc., Geisinger Health System is collecting genetic data from its consented patients to develop new ways to prevent, diagnose and treat medical conditions before they cause harm.

These innovations are among hundreds of investments supported by U.S. health systems that are seeking to solve the biggest problems in health care — and make money for the mothership while doing so.

UPMC, with several profitable endeavors in the past two decades, has proven that health systems can score big in the innovation investment arena. “We’re not in this for short-term wins of a couple million dollars,” says C. Talbot Heppenstall Jr., president of UPMC Enterprises, as well as treasurer and executive vice president. “We’ve had some of those, but our goal is really to be a part of the solution to health care problems in the country, to commercialize them and to keep the revenues here in Pittsburgh to support the mission of the academic medical center.”

Providence Health & Services, the nation’s third-largest nonprofit health system, is new to the game. It launched a $150 million venture fund last fall with the primary goal of increasing the pace of change within the Providence system. While investing in startup companies may be a high-risk approach to self-improvement, standing still in the roiling world of health care is even riskier.

“If you disrupt your own business through innovation, you have a say in the future,” says Aaron Martin, senior vice president of strategy and innovation at Providence. “If you don’t, you’re basically leaving it to others to dictate the terms of how the future will go.”

Surveying the innovation landscape

Many of the nation’s most prominent health systems — including Kaiser Permanente, Ascension Health, Partners HealthCare and Cleveland Clinic — have had venture funds or other formal mechanisms for developing and commercializing innovations for years. Now they are being joined by many others.

Jim Peters, chief strategic industry partnerships officer at Geisinger, says he has received more calls seeking advice about starting an innovation initiative in the last 18 months than in the previous decade.

“Everybody and their brother is thinking about it or trying to do it,” says Lisa Suennen, a venture capital investor and adviser who specializes in the health care sector. “As a group, they are becoming a major player” in health care innovation funding.

Some health systems opt to invest in innovation through a third-party approach. Iowa Health System, LifePoint Health, Trinity Health and several other systems are limited partners in a health care innovation fund run by Heritage Group, a venture capital firm.

Meanwhile, Allina Health, Sutter Health, Cleveland Clinic and many other systems are limited partners in Health Enterprise Partners, an equity firm that invests in companies that provide technology or services to improve value or profits for health systems or health plans.

Thinking like Amazon

Health systems are so accustomed to incremental change that they will not reinvent themselves unless they get an outsider’s perspective, says Rod Hochman, M.D., president and CEO of Providence Health & Services. That is why he hired Martin — a former Amazon executive who built its self-publishing business and helped get publishers onto Kindle — to guide Providence’s innovation strategy.

“Here’s a company that owns the book-selling business, and what do they do? They disrupt themselves by developing the Kindle,” Hochman says. “That’s the person we wanted working for us.”

Providence Ventures is one of three major strategies to reposition Providence for the future. The others are building a digital innovation group and a new approach to consumer engagement.

“The first thing that we had to do was figure out a way of getting early-stage innovative companies to come work on the problems that we care about,” Martin says.

The venture fund is focused on companies that work in six areas: online primary care access, care coordination and patient engagement, chronic disease management, clinician experience, data analytics, and consumer health and wellness services.

Providence has about 12 technology pilots underway. If a company appears to have a solution to a particular challenge the health system wants to address, it is assigned a sponsor within Providence to test it. If the technology pans out as hoped, Martin’s team evaluates whether to simply buy the software for its own use or invest in the company as well as use its software.

To date, it has made investments in Binary Fountain, which provides near-real-time monitoring of online patient-experience reviews and ratings via social networks; Sqord, which makes wearables for children; InDemand Interpreting, an online video interpretation service for the health care industry; and Avia, which brings health systems together to accelerate innovation in, for example, referral management, patient engagement and other big challenges.

All health systems are trying to remake themselves to succeed in a consumer-centered, value-oriented world that is not supported by traditional health care principles. The ones that will survive are those that are willing to change, Martin says. “If I sit on my hands and let the next startup come along and do this for me, they are going to dictate a quite different set of economic terms and business model,” he says.

What it takes to invest in innovation

When health system executives come to Jim Peters looking for advice, the chief strategic industry partnerships officer at Geisinger Health System gives them all the same answer. “You can’t just look to Geisinger or any of our peers and try to copy and paste,” he says. “That won’t work. The most successful will be those institutions that identify what is unique about themselves and the challenges they are trying to solve.”

Determining the challenges that a health system wants to address is just one of the foundational questions that must be answered before embarking on an investment program. Another tricky issue: figuring out the top priority for the program.

“Do you want to maximize financial returns or to build something that is of specific strategic advantage to your own business?” says Lisa Suennen, a venture capital investor who helps organizations design venture funds. “Those are hard things to do at the same time.”

That said, most health systems favor a hybrid approach: They strategically invest in innovations to help their own operations with the goal of spinning the product or service as a moneymaking enterprise. That is a worthy effort, Suennen says, but a complicated one.

“If you build it for yourself and it can’t survive out in the wild, is that good for you or bad for you?” she asks. “That depends on your goal. If you want it as a competitive advantage only for you, that’s great. But if you care about a return on your money, that’s not good.”

Other words of advice:

Brace yourself for failure. In the venture capital world, half the companies that get startup funding end up being worth no money, says Talbot Heppenstall, president of University of Pittsburgh Medical Center Enterprises. “When that happens at the typical nonprofit health system, a lot of people get their fingers out and start pointing: ‘We shouldn’t have done this, and we shouldn’t have done that,’ ” he says. “That doesn’t happen at UPMC because everyone from our board down to all of our employees understand that we are more than happy to take the risk, and that means taking the winners with the losers.”

Make a deep commitment, Part 1. Seeing a return on a health care innovation investment is likely to take seven to 10 years, Suennen says. Thus, the decision to start an investment program should not hinge on the CEO’s passion, because the CEO may change. “You have to be in it for the long haul, and it’s got to be a corporate strategy, not an individual leader’s strategy,” she says.

Make a deep commitment, Part 2. Health system leaders new to innovation investment want to start with a quick, small win, followed by another, gradually expanding their vision. “That is probably the biggest misstep that almost everyone takes when they start getting into this,” Peters says. “It’s a logical thing to do, but I don’t think it tends to work in this environment.”

That cautious approach carries a risk that fledgling investment executives may not see. A series of small failures may discourage the effort entirely or detract energy from a bolder, better opportunity. “Sometimes when you pursue a single or a double, you’re doing so at the risk of pursuing what could be a home run, which takes a lot longer to swing at and hit,” he says.