Forget those fixed-income investments. Many organizations are funding early-stage healthcare ventures that can yield not only healthy financial returns, but also improved efficiencies and better quality care.
Bob Schulz runs a venture capital fund. In fact, he runs three. Like the thousands of other venture capital funds in the investment universe, Schulz's funds place risky bets to provide much-needed capital to early-stage companies. Some of those companies will fail quickly. Some will die a painfully slow death after Schulz and his partners spend considerable time and effort in the hope of making them successful. One or two--or, if he's lucky, several--that have the right idea, excellent management and diligent oversight will become profitable. Those companies will either grow organically within their niche or be acquired at a hefty premium by a larger, more established company.
Schulz's funds aren't much different from many other venture capital funds except for two unusual characteristics: They focus on healthcare innovation, and their investors are primarily hospitals and health plans. The funds are among a small number of funds that have been introduced since the dawn of the century that feature hospitals and health systems, rather than financial institutions, tech companies or wealthy individuals, as investment capital partners.
For a hospital investment committee used to safe investments in fixed income instruments and equities, investing this way may sound risky. But hospitals are uniquely positioned to benefit financially from discoveries in the medical field--not only in cutting edge research but also in more mundane areas, such as billing, collections, supply chain and quality of care innovations. What's more, hospitals can prove to be essential development partners for nascent companies that hope to sell hospitals on the effectiveness of their goods and services.
Academic medical centers have long developed the occasional incubator company based on their physicians' discoveries and entrepreneurial ideas. But more recently, based on a philosophy that nurturing healthcare innovations is directly tied to a nonprofit's mission, hospitals and health systems of all sizes are funding many more ventures through a variety of formal investment vehicles. Many hospitals have found prudent financial and mission-driven reasons to invest in young healthcare businesses that are creating the very products and services they will eventually use, says Schulz, a founding partner for New York City-based Health Enterprise Partners, a private equity partnership formed by four investment professionals from the healthcare-focused private equity firm CB Health Ventures. Whether through a wholly owned venture capital investment arm or through a fund-of-funds approach, hospitals of most sizes stand to benefit from such innovations through both investment in the company itself and through efficiency gains as such companies test and perfect their products on hospitals' operational side.
A different kind of risk
Schulz argues that such investments are compelling for hospitals because the complexity of healthcare and the myriad cost pressures affecting the industry make healthcare fertile ground for entrepreneurs. Among healthcare's problems, say many pundits, is that its providers are largely unable and unprepared to deal directly with the healthcare consumer based simply on the growth in bad debt expense experienced by most hospitals. That's why innovative solutions to those problems are necessary, he says.
But getting hospitals to buy into the idea that they should be funding healthcare ventures that are designed to profit from their facilities is foreign for many, although Schulz says his sales job is getting easier over time.
Sophisticated hospital executives and board members are increasingly realizing the potential benefits of such an investing philosophy.
"There's a long decision cycle for a lot of these strategic investors, and many are relatively new to alternative investments, so they have to get their investment committee comfortable with the asset class," Schulz says. "Many choose to dip their toes in with funds of funds." A fund of funds helps decrease the relative risk through its diversity of holdings, but management fees are typically higher than for more direct investing because another layer of management exists between the investor and his investments. That distance is one reason hospitals are becoming more directly involved in their venture investing.