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Healthcare systems are engaged in new approaches to innovation:

Are they driving advancements or is it innovation theater?

It seems that every week there is an announcement about a new health system innovation center, incubator program, or venture capital partnership. The potential benefits of a dedicated innovation center can be significant: it has the potential to drive breakthrough advancements towards improving cost, quality, and population health, it can be a competitive differentiator (with customers and as a staff recruitment tool), and it can provide an alternative revenue stream for an industry with tight margins. But be warned: the likelihood of failure, or at least insignificance, is also large. With entrants announcing formal launches into the space more and more frequently, leaders of health centers must consider what their formal innovation strategy is and whether it is optimizing the unique advantages of their system.

“Innovation center,” “incubator program” and other trendy terms are often used in an attempt to label a system’s innovation approach. But these titles aren’t particularly clear about what activities the initiative does or does not entail and which title, if any, is right for each type of system. This article offers a framework to organize models of (or approaches to) innovation by the types of activities, the benefits and challenges of each, and recommendations for which organization could best benefit from each model. Of note, many organizations (especially the larger health systems) choose to combine aspects of different models for their specific innovation strategy.

The four models of health system innovation

Before diving into health system innovation models, let’s clarify what exactly is meant by “innovation.” The word often conjures up images of exciting breakthrough technologies, like Steve Jobs on a stage introducing the iPhone. But innovation is not just about the latest shiny object. One definition states that innovation is the practical implementation of ideas that result in new or improved goods or services. This description suggests that innovation is not simply about technology advancement, but also basic improvements to the way care is delivered and the processes that support that care delivery.

In fact, technology alone rarely results in healthcare improvement; it is only when technology is paired with change management and process improvement that value is created. When such initiatives are aligned with and guided by an overarching strategy, intentional transformation can occur. Circling back, the framework in exhibit A suggests four models to consider when developing an innovation strategy: Inside Out, Outside In, Joint Development, and Financial Focus.

Exhibit A

Inside Out Innovation

The Inside Out model is the movement of “inventions, discoveries, research tools, and other intellectual property [from within the health system] to the world outside”. Historically this has been most common in academic medical centers. Technology Transfer Offices (TTOs), for example, were developed to help individuals or groups within the organization that have a viable new idea; TTOs secure patents and/or develop licenses for which others pay them to use their innovation.

Before getting to that phase, TTOs can help build the supportive infrastructure that allows innovation to flourish. This infrastructure includes helping to identify opportunity areas (problems in the organization that could benefit from an innovative solution), creating safe spaces for creativity that facilitate cross-disciplinary collaboration, and finding talent to build out the team with the necessary skills. TTOs can then help prioritize which ideas to pursue using feasibility analyses, and by providing business and legal counseling and resources to secure funding. They can also develop industry partnerships that help bring an innovation to market.

As the healthcare industry evolves, innovation is more commonly taking the form of digital health. Digital health is more difficult to patent than traditional, tangible innovations, so the Inside Out model has evolved in kind. TTOs don’t just patent and license new innovations, but they also build and then spin out new companies when appropriate. For example, Providence lists a number of companies that have spun off from their TTO, including software applications, medical devices, and more.

The Inside Out model can also generate alternative revenue streams for health systems and act as a recruitment tool for both innovative employees and innovative-minded customers. “Children’s Hospital of Philadelphia, for instance, parlayed a $50 million investment into a return of more than $514 million after it spun off its gene therapy startup Spark Therapeutics.” However, “some systems have found the business case for using their own innovations is weaker than anticipated.” This model requires a lot of time and resources, with the financial benefits often not realized for 10 or more years.

Outside In Innovation

In the Outside In model, organizations look to bring innovations developed outside their organization in-house to solve key challenges within the organization. Utilizing this approach, an Innovation Center can be developed to organize activities such as: identifying new innovations in the market (including partnering with accelerators like Plug and Play), screening and prioritizing pitches received from innovators, organizing and accelerating the decision-making process, organizing funding for new innovations, and organizing resources to implement the selected innovations.

There are many benefits to the Outside In model, as compared to the Inside Out model: It is a substantially less resource intensive and less risky way to introduce innovation, it provides a much bigger pool of potential solutions, and it can identify existing solutions that do not require as long of a timeline to implement.

However, it is important to note that with this model, innovative solutions are not likely to be customized to meet the specific needs of the organization. The model also does not provide an alternative revenue stream that systems often seek, and when fewer resources are devoted to innovation, it can lead to less cultural and organizational buy-in as compared to the Inside Out model. The Outside In model is ideal for systems looking to test innovation approaches before committing significant in-house resources.

Joint Development Innovation

In many ways, the Joint Development model allows for the best of both the Inside Out and the Outside In models. There are three primary types of programs that fall in this model: Incubator Programs, Partnerships, and Healthcare Utility Models.

Incubator Programs allow outside innovation companies to pilot their products and services within their system, to conduct research and validate functionalities, and to access subject matter experts. Mount Sinai announced their health tech incubator, Elementa Labs, in 2021. “The 12-week virtual program will help the startup advance development of a product and potentially scale for use across Mount Sinai, and will grant access to subject matter experts and other members of its network,” as described by the organization.

There are also programs, labeled in the framework as “Partnerships,” in which the health system plays a larger role in co-developing innovations. The health system and innovation company jointly validate technologies, assess business plans, and commercialize goods or services. In 2021 Northwell Health and Aegis Ventures announced a joint venture “to create new patient care solutions through collaboration with frontline clinicians, working side-by-side from ideation to implementation, to develop innovations that use AI to predict, diagnose, and manage health conditions.”

These partnerships leverage the strengths of innovative companies (including strong innovative cultures and systems optimized to develop new ideas) as well as the strengths of health systems (experience and deep understanding of the problems, resources, etc). This model also benefits the health system with solutions that are more customized to their specific needs, can provide an alternative revenue stream, and of course serve as a recruitment tool.

A big challenge with this model is its requirement for significant resources and that, when faced with a conflict, the health system may get derailed from the innovation mission to focus on its core mission. This model can lead to products that are not easily scalable- what solves a problem in one system may not work in others. And, because these partnerships bring together two very different entities, misaligned incentives among partners can lead to significant execution and scaling challenges.

The Incubator and Partnership models are ideal for systems seeking unique solutions to their complex problems and prioritize that above revenue diversification. Ideal systems have strong governance mechanisms, experienced commercial leaders, and trusted investment partners with the capacity to focus on long-term results.

Another model that fits in the bucket of “Joint Development” is the Healthcare Utility Model. In this model, multiple health systems collaborate to provide expertise, funding, a setting and resources to pilot innovations, and participation as a customer of the product or service. This model can address problems that no one organization could do on their own, often "market failures" that are unlikely to be solved by traditional commercial initiatives due to complex technical, legal, and privacy challenges.

One example of this model is Civica Rx, a new generic drug manufacturer developed in 2021 when a number of health systems decided to jointly address a market failure causing drug shortages and price increases. Another example is Graphite Health, also a partnership of many health systems to “accelerate digital transformation through the creation of a democratized digital health–care interoperability platform and marketplace.”

This model provides health systems a way to jointly address challenges “in the commons” that would otherwise not be addressed. It is not likely to be a significant revenue generator and it will have limited outputs, but it is ideal for systems interested in addressing problems that have historically been underserved due to market inefficiencies.

Financially Focused Innovation

The last model in this framework is less focused on the operational benefits of innovation and more focused on the financial benefits. Many health systems have formed venture capital or private equity limited partnerships in which they invest funds and have financial managers take the lead on investments (typically focused in the healthcare space).

For example, “Intermountain Ventures Fund’s purpose is to source, evaluate, and invest in innovative companies that represent a high return, high growth opportunity and that align with Intermountain’s mission of helping people live the healthiest lives possible®”.

This model provides the largest stream of alternative revenue to health systems, which can be used to help maintain margins or to sustain their other innovation practices (which, as demonstrated above, can be resource-intensive). This model also requires minimal operational resources. However, this model has limited direct operational benefits and can create conflicts when optimal financial returns clash with the mission of the health system. This model is ideal for systems that have cash reserves and are primarily looking to diversify their revenue streams.

Avoiding Insignificance in Your Innovation Approach

Given the many different approaches a system can take towards innovation, it is prudent that leaders take the time to assess the pros and cons of each option and formally develop the strategy their system will pursue. Without a formal strategy, systems can find themselves in a position in which they passively react to innovation concepts they come across, resulting in a disjointed approach that does not offer targeted solutions to current problems and does not optimize system resources.

There are countless examples of systems investing in new technologies as point solutions, but then not taking the time to understand how processes and behaviors need to change to incorporate the new technology. Without that critical part of the strategy, the system does not fully realize the benefits of the technology and can even end up abandoning it and taking a loss on the wasted resource investment.

When a health system does develop a strategic innovation model that is incorporated into their broader corporate strategy and operations, the benefits to the system and to the health of the community as a whole are profound. To learn more about the innovation framework, or to share your thoughts on the topic, please reach out to Jenine Alves.

Organizations included in this report: University Hospitals Ventures, Providence, Bassett Healthcare Network, Mount Sinai, Northwell Health, Intermountain Healthcare, Kaiser Permanente Ventures, Ascension, Children's Hospital of Philadelphia, Spark Therapeutics, Plug and Play, Elementa Labs, Aegis Ventures, Civica Rx, and Graphite Health.

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