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Hospital-Backed Venture Fund Bets on Incentive to Fuel Innovation

 |  By Philip Betbeze  
   January 28, 2011

Venture capital has lost a little bit of its swagger from the wild Internet speculation frenzy that fueled such unforgettable dot-com disasters as Webvan (a home deliverer of groceries), and But apparently, not in healthcare, which positively screams for innovation.

Apparently, some health systems don't feel like they can do that effectively in-house, as several have seeded venture capital startups through funds set up to innovate healthcare delivery.

Most recently (in fact, this week) a group of for-profit and nonprofit hospital chains joined forces to form a strategic venture fund called Heritage Healthcare Innovation Fund LP. To borrow a line from Bill Murray's character in Ghostbusters, what's next? Human sacrifice? Dogs and cats living together? Mass hysteria?

Community Health Systems, Vanguard Health Systems, and Lifepoint Hospitals, all based right here in my backyard in the Nashville area, will join two other nonprofit health systems in investing $10 million each to fund startup or early-stage companies focused on healthcare innovation. Is it strange? A little. Is it a good idea? Probably.

They're not the first to do this, after all.

I wrote a story a couple of years ago about a similar fund owned and managed by the nation's largest Catholic nonprofit health systems, Ascension Health. Ascension not only funded the group, but the group of former Wall Streeters even opened and staffed an office at the St. Louis-based system's headquarters to fund innovative healthcare companies.

Now called Ascension Health Ventures, the fund dwarfs the new $50 million fund announced earlier this week, and it should. It's been around a long time, and has an impressive portfolio of companies you may have heard of, including Accretive Health, a revenue cycle management company; Augmenix, a medical device company; and Emageon, a now-Nasdaq-listed archiving and workflow software company. In fact, they started the whole thing about the time of the implosion of those dot-com companies—in 2001.

Joining the three for-profits in the Heritage startup will be nonprofits Iowa Health System and Trinity Health of Novi, MI. Both are big, successful players and are seeking to take advantage of the significant dollars available to companies that can help hospitals become safer, more efficient, and more innovative.

When you think beyond the immediate incongruity of nonprofit hospitals investing directly in for-profit companies, this kind of investment vehicle makes perfect sense. Nearly all nonprofit hospitals and systems have an investment portfolio to smooth out the financial highs and lows inherent in a business that depends on as much as 50% government reimbursement (which often doesn't even cover the cost of the treatment provided).

Those hospitals and systems have wide latitude to invest that big pot of money as they see fit. And as Ascension CEO Anthony Tersigni suggested when we talked about Ascension Health Ventures a couple of years ago, it makes a lot more sense than buying a basket of stocks or a fund of funds filled with companies unrelated to healthcare.

"Why shouldn't we take a portion of our investment portfolio and invest in companies that not only will give us an investment return but also the potential to transform the healthcare industry and significantly enhance quality patient care?" Tersigni said back in 2008.

Why indeed?

Philip Betbeze is the senior leadership editor at HealthLeaders.

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