How UPMC Turned Innovation Into an Enterprise

UPMC Enterprises provides an inside look into the philosophy and framework that built this successful innovation engine and commercialization model.

UPMC in Pittsburgh operates ahead of the curve. As healthcare transforms to value-based care and health systems explore investing in innovations that will change healthcare delivery, many eyes are turning to western Pennsylvania to get a closer look at a model that successfully combines both initiatives in a rather unique fashion.

UPMC Enterprises is the innovation and commercialization arm of UPMC, which is affiliated with the University of Pittsburgh. While the medical center has a long history of innovation, the organization formalized these operations in 2014 and is widely regarded as one of the most successful such ventures in the country, launching multiple companies.

Take Arlington, Virginia-based Evolent Health, for instance, which helps physicians and hospitals create population health programs and their own insurance operations. The company was originally backed by people, capital, technology, and intellectual property contributions from UPMC Health Plan and The Advisory Board Company. Its June 2015 IPO had a valuation of $1 billion.

HealthLeaders' associate editor Jack O'Brien spoke with Tal Heppenstall, president of UPMC Enterprises and executive vice president and treasurer of UPMC, about the organization's approach to innovation and what other healthcare executives can learn from UPMC Enterprises' experience. Following is an edited version of that discussion.

Heppenstall's colleague, Rasu B. Shrestha, MD, chief innovation officer, UPMC, and executive vice president at UPMC Enterprises, will present more insights at NEXT Hospital Innovation October 7-9 in Dallas.

HLM: What's the story behind the establishment of UPMC Enterprises?

Heppenstall: We've used the name UPMC Enterprises to describe our innovation efforts since the fall of 2014, but UPMC's innovation efforts go back more than 40 years. When [former UPMC vice chancellor] Thomas Detre, MD, [who is credited as the visionary who transformed the UPMC healthcare system] arrived in 1973, he said, "you cannot survive as a research institute on federal grants. You need to combine research with clinical care."

He started with what is now called Western Psychiatric Institute and Clinic and used clinical revenues to support the research division. That worked into the 1990s [and expanded into other areas]. Today, University of Pittsburgh's academic medical center is supported by $9 billion in clinical revenues.

HLM: How does your health plan factor into the equation?

Heppenstall: University of Pittsburgh and UPMC are different [entities], but they are inextricably intertwined. In the 1990s, UPMC decided that to continue to support our research mission, we needed to get into the insurance business. [Editor's note: The UPMC Insurance Services Division, including the UPMC Health Plan, offers a full range of group health insurance, Medicare, Special Needs, CHIP, Medical Assistance, behavioral health, employee assistance, and workers' compensation products and services to more than 3.4 million members. Its local provider network includes UPMC, as well as community providers, totaling more than 130 hospitals and more than 20,000 physicians throughout Pennsylvania and parts of Ohio, West Virginia, and Maryland.]  

Today, we have about $10 billion in insurance revenue that we add to our $10 billion of clinical revenue, all to support the academic mission of Pitt.

From this history you can see that we're a forward-looking organization. We try to stay ahead of the next trends, and the next trends are really what UPMC Enterprises are about. We track our history of enterprise back about 20 years. Since that time, we've made significant investments in two focus areas: translational science and digital enterprises.

HLM: Why is the work you're doing important?

Heppenstall: We believe that technology is going to change healthcare. Our biggest competitors aren't necessarily the hospitals that are around us; they are actually the Apples and Amazons and Googles of the world. Our investments in digital enterprises are going to get ahead of the change that’s happening in healthcare, creating a direct relationship between the consumer and the provider that is enabled by technology.

When you look at the healthcare industry today, it's centered around providers and payers. It's not consumer-centric. We believe here in western Pennsylvania that we can build the tools that will change the way we provide great quality care at the lowest possible cost.

HLM: How are you able to provide the best care for your consumers while also trying to compete with systems or companies that have billions of dollars in revenue?

Heppenstall: The key to being able to do this differently than others is [rooted] in our history and [our] health insurance [business]. In addition to making our risk tolerance much different than any other nonprofit hospital system, it also allows us to control the dollar upfront.

When we [launch ventures] like Vivify Health [a remote patient monitoring platform focused on population health solutions], which actually keeps people out of our emergency rooms, we are not cutting our own revenue streams, because as the insurer—which we are for about a third of our patients here in western Pennsylvania—we actually have the dollar already.

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The incentives are completely aligned, which is very unique in the healthcare industry. There are two integrated delivery and financing systems here in western Pennsylvania, including us and Highmark. Outside of that there are Kaiser, Geisinger and Intermountain, and that's about it. The ability for us to make these investments to keep people away from our hospitals is one that every hospital must have, but it's really hard to figure out how you do it without cutting your own revenues.

HLM: Can you go into more detail about that?

Heppenstall: You have to start from the basic issue in healthcare, which is that we're changing from a fee-for-service world to a value-based care. When you look at an integrated delivery and financing system, it is the ultimate expression of value-based care because the insurer and the provider are the same entity. You are incented without doubt to provide the best care for the patient at the lowest cost.

HLM: How do you select your investments?

Heppenstall: Our first investment criterion is that UPMC has to be a customer. Somebody at UPMC has to think this [idea] is the greatest thing since sliced bread, and then we will become an investor. So we're doing it for more than just the investment return; we're actually doing it because we believe that the tool or the product will help us in our mission.

HLM: How many investments does UPMC Enterprises make each year based on that criteria?

Heppenstall: We manage UPMC Enterprises as a pipeline, so essentially, we welcome all ideas and concepts. We see up to 40 [ideas] a week; we progress two to three a month [for projects in more advanced stages of development]. We have about 430 things in our pipeline today, and we're investing money in about 80 of them. We have 200 people who oversee those 80 opportunities.

HLM: What advice do you have for other health systems considering similar approaches?

Heppenstall: You have to be willing to accept risk, and you have to be willing to accept failure. If you want to stay ahead of this healthcare disruption that's happening, you need to figure out the pieces that you want to invest in, and you need to be willing to deal with the fact that some of the stuff that you're going to try isn't going to work.

HLM: What lessons did that teach you?

Heppenstall: We track [our strategy] back about 20 years and have invested over $700 million in about 80 different [ventures]. We've returned over $800 million to our own balance sheet. But when you carve out the number of those investments that worked, it's less than 20. A few of them worked really, really well, but most of them didn't work out nearly as well as we had hoped.

The best example I can give you is Evolent Health. We started in 2011, and it did an IPO in 2015. We had about $38 million invested in it, and we made about $300 million. Those two to three years of continuing to invest in Evolent took a lot of discipline and a lot of risk tolerance for a nonprofit hospital system. It's not a normal return, but it is the one that sticks out from our successes.

HLM: Have there been any changes to your vetting process over time?

Heppenstall: We've added the concept of a pipeline. [When UPMC Enterprises launched, it] took a lot of the entrepreneurial and technology activities that were happening across different divisions [at UPMC] and we focused it in one area. Adding the pipeline process to our innovation efforts is a better way to [manage] from a board and governance standpoint. It's easier to understand where the benefits and risks are located and how they are changing.

HLM: Is your model something that other health systems could implement through their own investment or innovation arm?

Heppenstall: I think so. We see a lot of health systems that are looking at what we and other leaders in this space are doing, and they are beginning to go down that road. They're earlier in their journey, and I think that they're starting to understand that they have to take it on or they're going to wind up being disintermediated by the Amazons of the world.

I'm happy to be at UPMC where we've been doing it for an awfully long time. We're investing with some of our peers around the country and encouraging health systems that are not in Pittsburgh to bring us some of their opportunities, because I think that the customer relationships that we have, and the customer relationships that they have, can be [mutually] leveraged. We likely will do more work across systems in the future.

HLM: How would you summarize UPMC Enterprises' role in terms of how it affects healthcare?

Heppenstall: We're the tip of the speear at UPMC that is changing healthcare. Our motto is life-changing medicine. At UPMC Enterprises, that's really our job day in and day out.

UPMC will be among 10 hospital systems presenting at NEXT Hospital Innovation, which focuses on ideas with proven value that are incubated, funded, and built by leaders at health systems who are experienced in taking products from concept to market. To sign up, visit the registration page.