Digital health investment red flags to look out for, per 9 hospital innovation execs

Last month, hospital innovation leaders shared with Becker's the No. 1 thing they seek in a potential innovation investment. Now, they're detailing what red flags to look out for.

Editor's note: Responses have been lightly edited for clarity and style. 

Thomas Graham, MD. Chief Innovation and Transformation Officer at Kettering (Ohio) Health. Those colleagues who carry titles involving innovation, transformation and strategy. CIOs and CMIOs are getting inundated by both organic (coming from one’s own institution) and external opportunities to explore new digital health investments. Honestly, that is good news for the future of healthcare delivery. 

However, whether the new offering is intramural versus emanating from an emerging company or established entity, we must filter these carefully. Our approach includes a disciplined evaluation process and checklist: Is the new tool a "buy or a build," meaning do we already maintain capacity/capability? Will it be accretive, not redundant, to platforms we are already operating? Does it deliver a measurable outcome? Will the relationship resemble a partnership vs. a vendor-client arrangement? Does it interface with or further activate our EMR? Is the offering mission-aligned and strategic for our enterprise?

Any new investment we make must enhance access, improve outcomes, elevate patient experience and/or manage cost of care. 

Daniel Durand, MD. Chief Clinical Officer at LifeBridge Health (Baltimore). I look for the following red flags, which are enough to knock out easily 80 percent of potential investments in digital health:

  1. Do they have a legitimate sustainable competitive advantage? Porter’s Five Forces model provides a useful framework to determine whether there are legitimate barriers to various competitive forces. Typically I want to see that a start-up has either intellectual property (e.g. devices or patented software algorithms) or at least the chance to develop legitimate “trade secrets” (e.g. proprietary data or analytics). Don’t forget about network effects, which are sometimes called “Porter’s sixth force” – these can provide a non-linear boost to firms with large initial user bases (think Uber and AirBnB).

  2. Is the stakeholder whose problem they are solving going to be willing or able to pay them? One of the tricky things about healthcare is the complexity of the flow of money and the "principal agent problem" - the idea that the party paying for something is rarely the party "shopping" for the service. It's generally far easier to figure out how to create value in healthcare than it is to figure out who is willing and able to pay for whatever value you are creating.

  3. Are they vastly overestimating the cost of new revenue? Firms run by "non healthcare' entrepreneurs often simply cannot fathom just HOW fragmented the system is due to both the regulatory environment as well as the startling lack of consolidation relative to other sectors. As much as they think they understand the degree to which each customer is a "one off build"… they rarely get it right quantitatively, and most start-ups systematically underestimate the degree to which they will pay dearly for each new implementation. 

Kolaleh Eskandanian, PhD. Chief Innovation Officer at Children’s National Hospital (Washington, D.C.). Digital health includes a broad range of categories spanning from health IT to fitness trackers to sophisticated software assisting clinicians to make decisions. My area of focus includes the digital health software and applications that are regulated due to their intended use as a medical product, adjunct to a medical product, or algorithms that assist in medical decision-making. In this context, a red flag I look for is the rigor given to testing and validation that should go into the development process to obtain regulatory clearance or approval. Another red flag is when developers insist on masking a 'software as a medical device' as a consumer product thinking investors shy away from regulated technologies. 

Jason Joseph. Senior Vice President and Chief Digital and Information Officer at Spectrum Health (Grand Rapids, Mich.). Digital health has a lot of attention and investment right now, and rightly so. There is a huge opportunity to use digital technology that can make therapeutics and programmatic management of health and disease better and more efficient. However, there are more good ideas than there are companies that have figured out how to make those ideas truly impactful — which means there are going to be a lot of failures over time. That’s OK if you are looking to place some investments in things that have a higher risk but may carry a return. 

As a health system looking to improve health for our patients and members, we look for the fundamentals. Is there a reasonable business model that will sustain this company into the future? We want partners that have some staying power. Are there measurable outcomes that have been demonstrated in the real world? Does the tool or platform know its place in our ecosystem, and fill a need without infringing on other areas that will be duplicative or confusing to consumers? If these things aren’t aligned in the right way, it’s wise to proceed with caution and some guardrails.

Kathy Azeez-Narain. Chief Digital Officer at Hoag Hospital (Newport Beach, Calif.). Digital health has become one of the trending topics across the healthcare industry. On top of that there are new start-ups entering the space daily, which make it increasingly important to vet and thoroughly assess potential investment areas. The first red flag is whether the tool is being introduced for the right reasons. Is it being pitched because it is solving a real problem that either physicians, patients or consumers are experiencing? Does it solve a gap in the marketplace today that would bring positive impacts to those we are caring for? These answers are important because we are focused on solving the gaps versus building the trending technology. 

The second red flag is how the products are built. Assessing whether this is just another great idea driven by great business leaders or if they also have strong engineers who understand that what is built will most likely need to work with legacy systems. We need to ensure the product built solves for that, otherwise you run into many integration problems. 

Lastly, are the estimated costs realistic? You want to ensure that the product you are looking to invest in has founders/leaders that understand that acquisition won’t only be about the patient/consumer but also getting physicians to use the tools which can impact ROI potential. Aside from what I’ve shared there are many other areas you need to be on the watch for but overall these are the first ones I would take a look at before having deeper conversations.

Nick Patel, MD. Chief Digital Officer at Prisma Health (Columbia, S.C.). When assessing a new digital health investment, some of the red flags I watch out for are a lack of maturity of the solution in regards to depth to meet current and future needs, limited interoperability (Fast Healthcare Interoperability Resources application programming interfaces, software development kits), imbalanced deployment ownership, low technical IQ, poor cybersecurity track record, a roadmap to nowhere, and shaky financial stability of the company. Once you have checked some of those boxes, you have validated the vendor’s true track record on successful, on-time execution of their solution. It’s important to have eyes wide open on what’s "Go Ahead" and what's "on the roadmap."

Mark Kandrysawtz. Chief Innovation Officer at WellSpan Health (York, Pa.). When we look at a new investment in digital healthcare for WellSpan Health, there are three factors that we focus on. Problems in any of the three are considered a red flag.

The first is ease of use for our patients and providers. A new technology may advance clinical care exponentially, but if the user experience isn’t intuitive for both the care team and our patients, we know that it will be hard to achieve a positive return on investment. 

Second is how well the tool integrates with our current digital ecosystem. We all know the frustration of having 20 different adaptors, dongles and remotes for various electronic devices, and no one wants that experience with their healthcare. New digital health tools need to connect not only with our existing systems, such as electronic health records and patient portals, but also provide a seamless experience with the technology our patients use.  

Third, of course, is cost. We all know new technology introduces new costs, so it is always about return on investment. ROI, however, will be unique to a solution and may change over time. You need to weigh the price tag of early adoption versus waiting. Being an early mover may have advantages to ROI, but there can be hidden costs while solutions grow and develop.

Ultimately, the benefit to clinical outcomes and patient experience will drive our assessment and decision, but identifying the red flags and performing due diligence will determine the level of success for the investment.

Claus Torp Jensen, PhD. Chief Innovation Officer and Executive Vice President of Research and Development and IT at Teladoc Health (Purchase, N.Y.). I am always looking for clarity in the problem or opportunity being addressed. If the clarity isn’t there, then that is a red flag. Another red flag is if different stakeholders have different perspectives on ‘why’ this is a good thing to address. And if I cannot see a clear path to a delightful unified end user experience, this is a red flag as well. 

Finally, I personally seek an early understanding of both business and technology feasibility of various solution approaches. While you cannot, and should not, do a lot of design up front, broad based experience still tells us whether something is likely to be practically feasible or not.

Prentice Tom, MD. Chief Futurist at Vituity (Emeryville, Calif.). Moving from idea to successful startup in health tech is a difficult proposition. A successful exit, even for digital health companies with great ideas, requires significant additional enterprise competencies. There are a number of red flags that investors should be wary of:

The first is lack of enterprise balance, especially leadership with a deep understanding and expertise in our health delivery system including structure, financing and culture. Healthcare is both large yet nuanced. Does the company understand their market, the relationship between stakeholders and opinion leaders who may not be their customer? 

The second is great ideas without a great execution/operations team. Early-stage companies often begin when someone with technical knowledge envisions a better way of doing something.  The founder’s focus is solely on creating the “best” product. Inspiration is the 1 percent. OK, let’s even say 10 percent.

The third is failure to acquire the necessary financial resources to weather the long healthcare tech adoption runway. Every aspect of healthcare innovation adoption is complex. Business development is certainly the long sales cycle. Does the company have a thorough understanding of how their product integrates into the system? The ability to provide great data is only useful to the customer who can act on it. Is the company willing to partner with complimentary innovations to create an integrated solution? 

Healthcare is an enormous ship with enormous inertia. It takes more than one tugboat to change its direction. 

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