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Health Systems Accelerate Investments in Innovation

Analysis  |  By 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.

"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. 

At CBIT, developing innovative products that benefit patients and cut healthcare costs is just as important as generating return on investment, says Executive Director Christopher Loose, PhD.

"The funding projects we participate in, like Connecticut Innovations Pipeline, seek projects that are within 12 months of being ready to raise funding to develop new technology that has a solid business justification and can have huge patient impact. The best ideas both improve patient health and take costs out of the healthcare system," he says.

ROI is more of a practical goal than an investment imperative for CBIT, Loose says. "It is important that a new product concept has a favorable ROI that will justify the follow-on investment needed to take the product through development, approval and launch so that it reaches patients who need it."

During last month's National Symposium on Value Innovation at Yale, Yale-New Haven Hospital CMO Thomas Balcezak, MD, MPH, said the health system's participation in CBIT is patient-driven.

"We're not an investment company, but I do know we have problems we need to solve," he said. "Because this is not our core business, we need strategic partners that we can leverage to improve the clinical care that we deliver."

YNHHS, Balcezak said, is relying on CBIT to help answer a key innovation investment question: "Where do we need to partner with organizations that improve value at the bedside for our patients?"

CBIT focuses on patient need when targeting projects for financial support, Loose says. "CBIT looks to the size as well as the intensity of the unmet need in prioritizing projects. It often takes the same cost and effort to solve a small problem as a big problem with a new biomedical technology."

In North Carolina, WakeMed Health & Hospitals is seizing on a geographical advantage to engage in ad-hoc innovation investing, says Michael Browning, executive vice president and CFO of the Raleigh-based health system. "We are in the Research Triangle in North Carolina, where there is a lot of innovation that is amazing," he says.

"We are investing in companies that are developing technology that is aligned with healthcare. People are coming to us and asking, 'Will you help us put this together?'"

First, he says, "they need investment of financial resources to develop technology, but then they also need our assistance with piloting and supporting the product. One of these companies has the capability of providing very quick access to a primary care physician on your smartphone. This is available today."

"With today's younger generation," he continues, "they want immediate access to a physician and their smartphone is their tool of choice. It is important for us to be part of this innovative way to treat patients. It will be an avenue for us to align practitioners and patients with our organization. Being part of the Research Triangle has opened my eyes to how innovation and technology are an integral part of the future of healthcare."

WakeMed's senior leadership team is considering whether to advance from ad-hoc innovation investment to a more permanent internal approach, Browning says.

"In the near future, we will be assessing a proposal to allocate a portion of the investment portfolio to healthcare innovation."  

Christopher Cheney is the CMO editor at HealthLeaders.


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