The Provider Innovation Trend

Lauren is a Principal at Oxeon Partners, working across the holding company and increasingly in the health system and provider technology space. This focus area has been honed over a variety of management, strategy, and operational leadership roles - starting at the Advisory Board Company and most recently from five years at the McKesson Corporation, where she worked in the Corporate Strategy and Business Development group before launching a new business line focused on clinical data interoperability, as well as the supporting industry nonprofit, the CommonWell Health Alliance. The night before the JP Morgan Healthcare Conference started in San Francisco, I had a dinner conversation about likely industry buzzwords at the event and for 2016. While some derivation of consumerism received the most votes, my suggestion of “provider innovation” got a lot of head nods once people thought about it. And I don’t think it was just because five minutes prior I had offered to angel invest in their future companies if I won that week’s $1.5B Powerball lottery.

Within the provider world, innovation has traditionally focused on tech transfer and commercialization - supporting and developing internally sourced inventions into intellectual property that can be licensed or sold to external parties.

While a handful of hospitals and health systems have more broadly defined innovation for more than 10 years, an increasing number of health systems have started dabbling in three other areas of early stage innovation as well:

• Internal company development: Incubating internally generated ideas into externally viable products or services.
  
• External partnering and anchor relationships: Establishing relationships with early stage externally developed companies, either as an initial anchor customer or marketing partner, in exchange for equity or a reduced customer fee.
  
• Investing: Deploying health system capital into externally developed companies in exchange for equity.
  

In a sector that is stereotypically risk-averse, what’s changed?

My Oxeon colleagues and I talked with 20+ health system and corporate ventures groups inside and outside of health care to understand this trend better. We found four main reasons for the increased interest in innovation and growth: a previously lost revenue opportunity (e.g., absent a forum to support and develop a staff idea, the system had lost out on the upside of a new venture); a desire to diversify beyond the clinical core; an opportunity to drive brand value; or my personal favorite, good old FOMO – seeing their peers doing it and fearing they are missing out.

While the rationale for starting provider innovation groups were quite consistent, the ways that health systems have executed on them vary widely. Most innovation groups operate & organize to align with health systems’ strategic priorities – in fact, many groups prioritize clinical or mission value vs. financial returns. There are thus only a handful of leading health systems that are solely or primarily focused on venture investing. In these cases, they are typically deploying sizeable chunks of capital from their own health system balance sheet and/or on behalf of other limited partners into externally created early stage ventures across the health care space.

The vast majority of health system innovation groups though are trying to do a little bit of everything across the four areas of innovation noted above. And while trying to accomplish multiple types of innovation on one team is possible, the reality is that most of these groups are small and often struggle to execute myriad objectives. After all, wanting to be innovative does not automatically generate results. Ultimately the right ideas, people, and capital deployment are necessary to create outsized impact.

We thus saw several best practices that in combination can set up health systems for a higher likelihood of innovation success:

• Clear mandate, strategy, and understanding of core competencies: Like any business, you need clear expectations, focus, and milestones to manage and track towards. Not every health system should be dabbling in every area of innovation or subsector of health care. Identifying and playing to your strengths is also more likely to attract the right types of investment or partnership opportunities.
• Balance of C-suite/board support with autonomy to execute: C-suite champions help innovation groups maintain funding that requires a different lifecycle than a traditional hospital service line. However, innovation groups also need latitude to make decisions and move quickly in the non-clinical, early stage space – so a separate legal and compensation structure is structurally ideal.
• Independent compensation structure: Incentive systems are ideally structured to build and support a culture of innovation across the health system. For example, health system employees that support the development or assessment of a new technology could receive equity or upside bonuses, without subjecting them to the traditional early stage venture risk. Employees that are dedicated to investing or early stage ventures though should be able to more directly experience the risk/reward upside, which is often challenging if entities are held to the same compensation structure as other health system employees.
• Ability to run like a venture portfolio: Regardless of where a health system focuses in innovation, they need to approach it like an early stage portfolio manager and realize that not every investment or incubated company will succeed. Innovation and growth requires the discipline to manage a pipeline of ideas, converting them into a series of bets, and manage expectations that success is a mix of risk and returns, not a home run every time.

Speaking of investment home runs, I won $8 in that Powerball drawing. So until the next $1B+ drawing, I look forward to working with many of you and our other clients on making provider innovation not just a buzzword, but a sustainable trend in 2016 and beyond.