Should Your Health System Explore Venture Capital Investment? 3...
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Should Your Health System Explore Venture Capital Investment? 3 Things to Consider

By Nick Beale, Director & Bill Hanlon, Principal and Co-founder, Hammond Hanlon Camp LLC

Venture capital investment in digital health technologies reached blockbuster levels in 2018, with $9.5 billion in deals made. Meanwhile, 2019 deals demonstrate continued appetite for innovation, with $4.2 billion in funding secured through June 2019. One of the biggest trends fueling growth: venture capital investment from health systems.

Historically, health systems have taken an intellectual property approach to healthcare IT investment, testing the waters with promising new products and services they have developed. In recent years, however, we’ve seen direct investment in technologies that meet critical needs or provide opportunities to experiment with new ways of delivering care:

• In 2013, Catholic Health Initiatives (CHI), now part of Common Spirit Health, invested $65 million for a minority stake in Med Synergies. The move gave CHI’s physicians access to revenue cycle and scheduling services as well as advanced analytics. Eight months later, when Med Synergies was purchased by Optum, the value of CHI’s stake in Med Synergies significantly increased.

• Mayo Clinic partnered with Nevro Corp. to bring one of its own technologies to market: a high-frequency spinal-cord simulation device to treat chronic pain. Investments such as this have generated millions in revenue to support research, education, and advancements in care.

• Allina Health, Partners HealthCare, Kaiser Permanente Ventures, and Indiana University Health’s CHV Capital have made direct investments in Health Catalyst to access the firm’s data analytics capabilities.

Since 2014, more than 160 healthcare technology venture capital investments have been made by healthcare organizations—and this trend is accelerating, with Kaiser Permanente, Mayo Clinic, and Ascension accounting for 10 or more investments each. The average deal size among health systems also has increased. Hammond Hanlon Camp LLC (H2C) research shows that about 20 transactions by health systems, or 12.5 percent, accounted for more than 20 percent of healthcare technology venture capital investments last year.

EXHIBIT ONE:

Keeping a Pulse on Innovation: 6 Health System Venture Capital Transactions in 2019

Meanwhile, more than 40 health systems have started their own dedicated venture funds, leveraging in-house clinical expertise to identify promising new innovations.H2C also is seeing systems that do not have dedicated venture funds begin to invest in limited partnerships with HCIT companies.

What’s driving this trend? For some health systems, direct investment satisfies the need for alternative investment vehicles to boost portfolio returns at a time when low interest rates have yielded paltry returns on large cash reserves. For others, direct investment offers the opportunity to gain access to innovative technologies and services that could help shape their future while providing a vehicle for strategic growth.

But direct private investment isn’t the right move for every system. While high potential returns make direct private investing a seemingly attractive alternative, these investments carry significant risk. They also require leaders to carefully develop the right model for implementation and oversight and determine how to measure success.

How can health system leaders determine whether direct investment in healthcare IT is the right approach? Here are three key considerations.

Consideration No. 1: What is your organization’s risk appetite? Generally, health systems that make direct investments in healthcare services and technology companies have operating revenue of $1 billion or more. Knowing your health system’s appetite for risk not only helps determine whether to invest, but also the size of the investment and the stage of investment to pursue. For example, while some health systems double or triple their investment, there are no guarantees. Even when these investments are profitable, it may take seven years to realize a return. That’s why some organizations, such as Intermountain Healthcare, start by forming a limited partnership with a healthcare technology startup. As Intermountain gained experience in venture capital investment, the health system formed Intermountain Ventures, a separate entity focused on investing in startups that align with the organization’s mission and vision.

It’s also important to consider the stage of venture capital investment that best suits the health system’s risk profile. Two-thirds of health system venture capital investments are focused on late-stage venture capital opportunities, a report by Inova found, and 90 percent of health system capital is directed toward “B” rounds or later. However, the tendency of leaders to focus on late-stage investments may be holding health systems back from shaping early stage technologies to better meet their needs.

Consideration No. 2: Would direct investment give your organization a competitive advantage? The Inova report shows most venture capital investment by health systems—both in terms of deal count and dollars invested—is directed toward technologies or services that could help organizations better manage their operations. Examples include CHI’s purchase of a 20 percent stake in Conifer Health Solutions, a move that gave CHI access to Conifer’s revenue cycle technologies and services without having to build an expensive in-house model. But direct investment also enables health systems to experiment with breakthrough approaches that could disrupt legacy models of care and give their organization an edge in their market. These include Northwell Health’s collaboration with Clarapath to bring artificial intelligence to pathology.

Consideration No. 3: How will your organization manage the investment? Governance for venture capital investment is one of the biggest challenges health systems that have made these investments face, one recent survey found. Often, determinations around who will manage the investment internally are made after the investment is complete. It’s important that healthcare leaders designate a team to “own” the investment, oversee progress toward key goals and milestones, and measure success. Make sure team members represent both the finance and innovation departments as well as clinical care.

Disruption Through Innovation

The rapid pace of direct private investment by health systems is a trend that demands further exploration by healthcare leaders. It necessitates careful consideration not just of where to invest, but also the capabilities needed to manage investment. Taking the time to explore venture capital opportunities from a number of angles empowers leaders to strike the right balance between risk and reward.

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