Health Systems Accelerate Investments in Innovation

Christopher Cheney, May 16, 2016

Health systems are boosting their level of investment in startup companies and new technologies.

Health systems have been hotbeds of innovation investment for two decades, but their interest in bankrolling startup companies and new technologies appears to be reaching a fever pitch.

Paul Wallace"This is a very popular trend right now," says Paul Wallace, MBA, managing director for Heritage Group, a Nashville-based firm that has been investing in healthcare innovation for 30 years.

Market forces and regulatory pressure to launch reform efforts are compelling health systems nationwide to jump on the innovation investment bandwagon, Wallace says.

"They want to be seen by their market, their employees, their doctors, and their boards as innovative. As we move from volume to value, these organizations are going to be making significant changes in the ways they deliver care. They need to make sure they are leaders and not followers."

He says health systems have three primary innovation investment strategies: external funds such as Heritage Group, internal investment houses, and an "ad-hoc" approach. "There's been a proliferation of these multiple platforms over the past few years."

Earlier this month, Heritage Group announced it had closed its second nine-figure healthcare innovation investment fund at $220 million. Heritage Healthcare Innovation Fund II exceeds the value of Fund I by more than $50 million, Wallace says. "It's considerably larger."

Heritage Group has raised capital from more than a dozen health systems that operate more than 550 hospitals, including Adventist Health System, Intermountain Healthcare, Memorial Hermann Health System, Sutter Health, Tenet Health and UnityPoint Health.

"We're backed by strategic partners rather than financial partners," Wallace says. "All of my limited partners are interested in solutions for patients, increasing quality and delivering value… If we can't bring value to the table, we're going to look for other opportunities."

An Internal Approach to Innovation Investment

In the internal healthcare innovation investment category, there are several established health system players, with a handful matching or exceeding Heritage Group's level of committed capital:

  • Kaiser Permanente Ventures: More than 15 years of innovation investment experience, high-profile limited partner investors such as Tufts Health Plan, and about $400 million in committed capital

  • Partners HealthCare, Partners Innovation Fund (PIF): Established in 2007 with a commitment of $35 million from two of Partners HealthCare's hospitals, Brigham and Women's Hospital and Massachusetts General Hospital; focused on innovations in therapy, diagnostics, information technology, and medical devices. PIF has attracted more than $800 million in startup capital for the fund's investments

  • Cleveland Clinic Innovations: CCI has helped launch more than 75 companies; the investment house has more than 2,700 patent applications, with about 700 issued patents; and companies associated with CCI have drawn more than $910 million in equity investment

Yale-New Haven Health System, which has three hospital campuses in southern Connecticut, is one of the recent entrants in the internal healthcare innovation investment market.

In 2014, YNHHS and several Yale University partners such as the Yale School of Management launched the Center for Biomedical and Interventional Technology.

CBIT specializes in startup and gap funding as high as $50,000 per project. Yale's internal healthcare investment house has identified and supported more than 100 faculty- and student-driven medical device projects such as new technology for scoliosis braces. 

Christopher Cheney

Christopher Cheney is the senior finance editor at HealthLeaders Media.

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