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New Market Realities

By Christopher Cheney  
   March 01, 2017

In 2007, FII received $780,000 in loans from El Camino to pay for "tenant improvements" for the institute's office and incubator space, McNamara says. FII pays El Camino $156,000 annually for use of the 13,000-square-foot basement space where the institute's "Fog Shop" incubator is located, and the hospital donates the use of medical office space that is considered a $250,000 noncash contribution to FII, she says.

San Carlos, California-based Prescient Surgical, an FII startup company that received FDA approval for its CleanCision surgical-site device in December 2016, is poised to generate significant cost reductions at El Camino, Pope says. "We're especially proud of that one because of the immediate return to the hospital's bottom line by preventing infections that we know are going to happen. Nobody likes to talk about hospital-acquired infections, but they exist—and every time they happen and they require a readmission, it is $20,000 to $40,000 that the hospital has to eat."

For hospitals, innovation activities generate benefits far beyond direct financial impacts, says Jonathan Coe, cofounder, president, and CEO of Prescient Surgical, which raised $7 million of equity investment to develop CleanCision.

"It's important not to focus too much on the financial piece, because if you are a hospital system CEO, you have to say, 'We need to deliver better care, we need to deliver it at less cost, and we need to deliver it with less variability.' You can't constrain yourself to the existing technologies that are out there and cannot necessarily rely on the external community to drive new innovation. The people outside may not be solving your problems."

New nonpatient service activity imperatives
As health systems and hospitals adapt to the shift toward value-based care, optimization of nonpatient service activity requires generating benefits that can be just as significant as boosting operating margins, Coe says. "I think hospital administrators are realizing they need to go through a phase of housecleaning and figure out how they can improve upon the things that they already have today. It is not so much about how they make more money. It is about how they get more customers by doing the best care and avoiding the costs that have limited their profitability."

Manchester, New Hampshire-based Catholic Medical Center (CMC), a not-for-profit 240-staffed-bed acute care hospital, and home of the New England Heart Institute, has a multipronged strategy for nonpatient service activities, says Edward "Ted" L. Dudley III, executive vice president and CFO. For the fiscal year ending June 2016, CMC posted total revenue of $377.9 million, with net patient service revenue of $355 million and other operating revenue of $22.9 million.

Christopher Cheney is the senior clinical care​ editor at HealthLeaders.

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