Lola Butcher–(H&HN)–Health systems are putting money behind start-up companies to solve some of health care’s biggest problems.
University of Pittsburgh Medical Center is partnering with a Silicon Valley startup to create technology that helps health systems measure and manage risk for populations of patients in the new era of value-based health care.
Providence Health & Services invested in a wearables startup and is working with its community partners in five states to roll out the technology — think FitBit for kids — in health and wellness programs.
And, in a major partnership with Regeneron Pharmaceuticals Inc., Geisinger Health System is collecting genetic data from its consented patients to develop new ways to prevent, diagnose and treat medical conditions before they cause harm.
These innovations are among hundreds of investments supported by U.S. health systems that are seeking to solve the biggest problems in health care — and make money for the mothership while doing so.
UPMC, with several profitable endeavors in the past two decades, has proven that health systems can score big in the innovation investment arena. “We’re not in this for short-term wins of a couple million dollars,” says C. Talbot Heppenstall Jr., president of UPMC Enterprises, as well as treasurer and executive vice president. “We’ve had some of those, but our goal is really to be a part of the solution to health care problems in the country, to commercialize them and to keep the revenues here in Pittsburgh to support the mission of the academic medical center.”
Providence Health & Services, the nation’s third-largest nonprofit health system, is new to the game. It launched a $150 million venture fund last fall with the primary goal of increasing the pace of change within the Providence system. While investing in startup companies may be a high-risk approach to self-improvement, standing still in the roiling world of health care is even riskier.
“If you disrupt your own business through innovation, you have a say in the future,” says Aaron Martin, senior vice president of strategy and innovation at Providence. “If you don’t, you’re basically leaving it to others to dictate the terms of how the future will go.”
Surveying the innovation landscape
Many of the nation’s most prominent health systems — including Kaiser Permanente, Ascension Health, Partners HealthCare and Cleveland Clinic — have had venture funds or other formal mechanisms for developing and commercializing innovations for years. Now they are being joined by many others.
Jim Peters, chief strategic industry partnerships officer at Geisinger, says he has received more calls seeking advice about starting an innovation initiative in the last 18 months than in the previous decade.
“Everybody and their brother is thinking about it or trying to do it,” says Lisa Suennen, a venture capital investor and adviser who specializes in the health care sector. “As a group, they are becoming a major player” in health care innovation funding.
Some health systems opt to invest in innovation through a third-party approach. Iowa Health System, LifePoint Health, Trinity Health and several other systems are limited partners in a health care innovation fund run by Heritage Group, a venture capital firm.
Meanwhile, Allina Health, Sutter Health, Cleveland Clinic and many other systems are limited partners in Health Enterprise Partners, an equity firm that invests in companies that provide technology or services to improve value or profits for health systems or health plans.
Thinking like Amazon
Health systems are so accustomed to incremental change that they will not reinvent themselves unless they get an outsider’s perspective, says Rod Hochman, M.D., president and CEO of Providence Health & Services. That is why he hired Martin — a former Amazon executive who built its self-publishing business and helped get publishers onto Kindle — to guide Providence’s innovation strategy.
“Here’s a company that owns the book-selling business, and what do they do? They disrupt themselves by developing the Kindle,” Hochman says. “That’s the person we wanted working for us.”
Providence Ventures is one of three major strategies to reposition Providence for the future. The others are building a digital innovation group and a new approach to consumer engagement.
“The first thing that we had to do was figure out a way of getting early-stage innovative companies to come work on the problems that we care about,” Martin says.
The venture fund is focused on companies that work in six areas: online primary care access, care coordination and patient engagement, chronic disease management, clinician experience, data analytics, and consumer health and wellness services.
Providence has about 12 technology pilots underway. If a company appears to have a solution to a particular challenge the health system wants to address, it is assigned a sponsor within Providence to test it. If the technology pans out as hoped, Martin’s team evaluates whether to simply buy the software for its own use or invest in the company as well as use its software.
To date, it has made investments in Binary Fountain, which provides near-real-time monitoring of online patient-experience reviews and ratings via social networks; Sqord, which makes wearables for children; InDemand Interpreting, an online video interpretation service for the health care industry; and Avia, which brings health systems together to accelerate innovation in, for example, referral management, patient engagement and other big challenges.
All health systems are trying to remake themselves to succeed in a consumer-centered, value-oriented world that is not supported by traditional health care principles. The ones that will survive are those that are willing to change, Martin says. “If I sit on my hands and let the next startup come along and do this for me, they are going to dictate a quite different set of economic terms and business model,” he says.
What it takes to invest in innovation
When health system executives come to Jim Peters looking for advice, the chief strategic industry partnerships officer at Geisinger Health System gives them all the same answer. “You can’t just look to Geisinger or any of our peers and try to copy and paste,” he says. “That won’t work. The most successful will be those institutions that identify what is unique about themselves and the challenges they are trying to solve.”
Determining the challenges that a health system wants to address is just one of the foundational questions that must be answered before embarking on an investment program. Another tricky issue: figuring out the top priority for the program.
“Do you want to maximize financial returns or to build something that is of specific strategic advantage to your own business?” says Lisa Suennen, a venture capital investor who helps organizations design venture funds. “Those are hard things to do at the same time.”
That said, most health systems favor a hybrid approach: They strategically invest in innovations to help their own operations with the goal of spinning the product or service as a moneymaking enterprise. That is a worthy effort, Suennen says, but a complicated one.
“If you build it for yourself and it can’t survive out in the wild, is that good for you or bad for you?” she asks. “That depends on your goal. If you want it as a competitive advantage only for you, that’s great. But if you care about a return on your money, that’s not good.”
Other words of advice:
Brace yourself for failure. In the venture capital world, half the companies that get startup funding end up being worth no money, says Talbot Heppenstall, president of University of Pittsburgh Medical Center Enterprises. “When that happens at the typical nonprofit health system, a lot of people get their fingers out and start pointing: ‘We shouldn’t have done this, and we shouldn’t have done that,’ ” he says. “That doesn’t happen at UPMC because everyone from our board down to all of our employees understand that we are more than happy to take the risk, and that means taking the winners with the losers.”
Make a deep commitment, Part 1. Seeing a return on a health care innovation investment is likely to take seven to 10 years, Suennen says. Thus, the decision to start an investment program should not hinge on the CEO’s passion, because the CEO may change. “You have to be in it for the long haul, and it’s got to be a corporate strategy, not an individual leader’s strategy,” she says.
Make a deep commitment, Part 2. Health system leaders new to innovation investment want to start with a quick, small win, followed by another, gradually expanding their vision. “That is probably the biggest misstep that almost everyone takes when they start getting into this,” Peters says. “It’s a logical thing to do, but I don’t think it tends to work in this environment.”
That cautious approach carries a risk that fledgling investment executives may not see. A series of small failures may discourage the effort entirely or detract energy from a bolder, better opportunity. “Sometimes when you pursue a single or a double, you’re doing so at the risk of pursuing what could be a home run, which takes a lot longer to swing at and hit,” he says.
Reinventing the organization again & again
UPMC’s first startup — the for-profit UPMC Health Plan created 20 years ago — has grown to cover 2.6 million members and accounts for nearly 50 percent of UPMC’s revenues. And it is key to a more recent startup that just went public; Evolent Health, founded in 2011 by UPMC Health Plan and the Advisory Board Co., provides technology and support to provider organizations that are working to become integrated delivery and finance systems — better known by the acronym as IDFS — in UPMC’s mold.
“We essentially take the things that we have done here in Pittsburgh and share them with our brethren across the country to solve health care problems,” says UPMC’s Heppenstall.
Evolent has 750 staff members working with health systems in more than 25 markets around the country, and UPMC is an active partner in the fast-growing organization. “I think one of the reasons that Evolent has been so successful is the ability of other health systems to come here and see that there is somebody who can actually become an IDFS as successfully as UPMC has done it,” he says.
Evolent is one of several startups emanating from UPMC’s own operations. Others include Stentor, a picture archiving and communication system, and Prodigo Solutions, a health care supply chain company. Most recently, UPMC announced a significant investment in Palo Alto, Calif.-based Health Fidelity, which worked with UPMC Health Plan to develop risk-adjustment solutions for organizations that participate in Medicare Advantage, health insurance exchanges and Medicare accountable care organization programs.
UPMC Enterprises also works with partners to bring innovations to the marketplace. Omnyx, a joint venture of GE Healthcare and UPMC, developed the technology that allows pathology departments to digitize their workflow. Launched in 2008, Omnyx LLC was the first stand-alone company in GE’s history to be formed with an academic medical center.
“We are a large enough place and have made a big enough difference in this space that our pathologist could say, ‘Hey, here is something that we can do,’ ” Heppenstall says. “Obviously, building equipment isn’t something that we do every day, but GE does. So, we decided that our skill sets were complementary, and that’s how it came to be.”
Is your CFO a VC expert waiting to happen?
Finding the right mix of expertise is a challenge for health systems that have innovation investment programs.
Health-related startups want to partner with health systems to access their knowledge and the opportunity to use its hospitals and clinics as a learning laboratory. The health system needs leaders who know how to structure an investment deal, how to protect the organization’s interests and how to work successfully with entrepreneurs and young companies, says Lisa Suennen, managing partner of Venture Valkyrie Consulting, which helps organizations design venture funds.
“Serving on the board [of a startup] takes a different kind of skill than it takes to manage doctors at a hospital,” she says. “You have to balance between using internal people and bringing in people who have been successful in the business of venture capital.”
Of course, anyone who has succeeded in venture capital is an expensive hire, and structuring a compensation package may pose a challenge for nonprofit health systems.
“The right people are somewhat determined by your mission — whether it’s innovation creation or money creation,” Suennen says. “But if you aren’t savvy about the venture financing side of things, you can destroy your value proposition.”
Attracting investment
Geisinger Ventures was created more than a decade ago to prove the organization could commercialize technologies, start new companies, build them and sell them. In recent years, that endeavor has given way to the Office of Strategic Industry Partnerships, which has a bigger vision and a different approach.
“The natural evolution was to focus on solving some of health care’s biggest challenges — patient engagement, adherence, patient activation, those types of things — in ways that, frankly, we didn’t think we could do alone,” Peters says.
In fact, Geisinger has no venture fund at this point. Its strategy is to work with industry partners to design and co-develop solutions that can have a broad impact on health care globally.
“We’re not looking to make direct investments as a financial investor,” Peters says. “Over the past four years, given that we’ve proven Geisinger has a track record for innovation, we have been able to attract capital coming in from our partners. By working with Geisinger, they can accelerate and deliver that product or service in a way that’s better, faster and cheaper.”
One example: a five-year collaboration, launched in 2014, with Regeneron Pharmaceuticals to conduct one of the largest genomic studies to date. Geisinger is collecting blood samples and comprehensive medical information from more than 250,000 consented patients, and Regeneron is sequencing and genotyping the genetic material. The patient data will be used to identify and validate associations between genes and human disease.
Although the data will be de-identified for research purposes, patients who are participating in the study have agreed to receive clinically actionable genetic test results. “The goal isn’t to just create peer-reviewed manuscripts as much as it is to actually inform clinical decision-making,” Peters says.
Geisinger also is partnering with Merck to develop tools that increase adherence with treatment regimens. The focus on improving the value of health care is casting attention on the fact that, even if they have the best intentions, many patients do not follow their treatment plans. “Intervening there is, perhaps, the lowest-hanging fruit for us as providers to actually impact health care value by improving patient outcomes and also decreasing costs,” he says.
The two organizations are working on interventions that support shared decision-making and improve patient engagement to increase the likelihood that patients adhere to their treatment plans.
“The path to commercialization starts by designing it right within the context of traditional physician workflow and patient behavior,” Peters says. “Once you develop it and test it within the real world — in our case, clinics and hospitals within Geisinger — and work the kinks out, then we roll it out to non-Geisinger and then move to full commercialization.
The first tool, being tested at Geisinger, is an interactive Web application that helps primary care clinicians to engage patients at risk for cardiometabolic syndrome, the cluster of risk factors that often precede type 2 diabetes and cardiovascular disease. Two other products are in development.
Peters declines to discuss the financial implications of Geisinger’s partnership with industrial partners other than to say the investments run into “the many tens of millions of dollars.” “We’re looking to solve problems that aren’t simple problems and that don’t just apply to Geisinger’s patients,” he says.
Executive Corner
Where are the best opportunities for innovation in health care? That’s impossible to know, but venture capital investor and health care industry consultant Lisa Suennen frequently gets asked a variation of that question: “If you had money to invest right now in health care, where would you put it?” In a recent blog post, Suennen listed five big trends that she believes “offer the most opportunity for those smart enough (and lucky enough) to play them the right way.”
TREND 1 | The migration of care from hospital to ambulatory settings, including the home.
TREND 2 | Providers becoming payers, or at least financial and clinical risk managers. “ … it is irrefutable that the provider community and big health systems in particular are getting a crash course in the world of insurance and coming to school without the tools to succeed,” she says.
TREND 3 | Patients becoming consumers and looking for a true retail experience. “When you go to Amazon, you can identify what you want from a full array of options, compare it, get reviews, purchase it and get it conveniently delivered with a few clicks and a personalized, low-hassle experience,” Suennen wrote. “Anything that can help health care follow that same model will surely prosper.”
TREND 4 | Pharmaceutical and medical device companies seeking technologies and services that make traditional devices and drugs more meaningful, data-driven and personalized.
TREND 5 | The aging population. “There is no opportunity larger than ensuring that (baby boomers’) health care demands don’t tank the economies of most of the leading nations around the world,” she says. “And the challenge is particularly interesting since this group has far less experience and comfort with the technologies that might make their lives better.”
