Outside the hospital: A new business model for healthcare innovation

Not all innovation centers are alike, and not all innovation centers offer innovators and entrepreneurs the tools necessary for success. The Innovation Institute, a for-profit innovation center based in La Palma, Calif., is trying to remedy that.

The Innovation Institute launched in January 2013 with a $40 million investment from Irvine, Calif.-based St. Joseph Health system. Joe Randolph, formerly the COO and CFO of St. Joseph Health, headed the development of the innovation center and currently serves as president and CEO of The Innovation Institute.

The Innovation Institute is an incubator that helps foster the development of new innovations and ideas. What's different about The Innovation Institute, though, is its business model. The center is a for-profit, limited liability company that is owned by nonprofit health systems.

Its business model has the capacity for seven health system members or investors — it currently has four: St. Joseph Health; Marriottsville, Md.-based Bon Secours Health System; Baton Rouge, La.-based Franciscan Missionaries of Our Lady Health System; and Children's Hospital of Orange County in Orange, Calif.

"The business model was structured to be a collaborative that would operate outside of a health system. We didn't want it to be just another innovation center," Mr. Randolph says. "We wanted to create the right type of environment to advance innovation, and we thought that would be best accomplished outside of a typical hospital/health system model. In order for innovation to thrive, it needs to be in an environment that rewards taking risk and experimenting. Hospitals and health systems tend to be very risk-averse organizations focused on things like Lean, Six Sigma and evidence-based medicine."

innovation lab californiaThe business model
At The Innovation Institute, members pay an initial minimum $10 million investment. As a member, health systems gain access to the institute's internal network of healthcare, technology and innovative expertise provided by The Innovation Institute. Mr. Randolph says that since the institute is profitable today, the investment to become a member provides an immediate ROI.

Physicians and clinicians — or anyone from these member health systems with an idea — can work with the institute's in-house expertise. The team includes PhDs, MDs and MBAs who oversee technology transfer and an initial assessment of ideas. If the team determines an idea has merit and decides to pursue the idea, they leverage The Innovation Institute's strategic alliance agreement with Cleveland Clinic, a health system heralded for its innovation. Cleveland Clinic's commercialization arm was founded in 2000, and in that time has launched 71 companies to flourish and has transacted more than 450 royalty licenses and 465 issued patents.

Mr. Randolph says this incubator is at the heart of what The Innovation Institute is about — a laboratory to develop ideas, tap into physicians and employees to solve problems and transform care delivery. What is unique about the center is the Enterprise Development Group, a portfolio of profitable companies that provide services to hospitals and health systems across the country. Since these EDG companies are profitable, they provide the cash flow to sustain The Innovation Institute in the early years, and they also contribute to further growing the lab and advancing innovation.

Other standalone innovation centers often operate as venture funds, Mr. Randolph says, where they find investors to provide capital and make bets on ideas they want to pursue. In this model, the timeframe from a concept to commercialization can take up to five years before the incubator is sustainable and profitable, he says.

"We wanted to come up with a business model that allows us to be independent but also financially viable and self-sustaining," Mr. Randolph says. “We have achieved this and have been profitable almost from the beginning.”

The EDG includes companies like Far West Staffing Services, Tech Knowledge Associates, Healthcare Property Advisors, Healthcare Design and Construction and Healthcare Coding & Consulting Services, to name a handful. Mr. Randolph likens them to the foundation and economic engine of The Innovation Institute. The ideas are formed in the lab, and EDG helps provide the funding that brings them to life.

The Innovation Institute difference
So what does The Innovation Institute offer that other hospital and health system innovation centers can't? Perhaps most markedly, member hospitals utilizing The Innovation Institute don't have to pay millions of dollars in startup costs to start their own center. There is the $10 million initial investment, but Mr. Randolph says member hospitals start seeing returns on investment almost immediately.

"If someone were to do a de novo start up and say, 'We want to set up an innovation department here in our health system,' they would have to invest a lot of money to develop the infrastructure, systems and staff and then also invest in the ideas to get them to the point of commercialization," Mr. Randolph says, estimating they would operate at a loss for up to five years before being cash flow positive. "It requires quite a bit of investment to get to the point of breaking even. With the EDG and the profitability it provides, somebody interested in innovation invests in us, gets an immediate return on investment while also getting the infrastructure and staff to advance innovation at no additional cost. The health systems also retain the intellectual property."

The business model of The Innovation Institute is what Mr. Randolph calls a "perpetual company," since the company's goal is to remain viable and self-sustaining. Unlike many for-profit organizations, Mr. Randolph has no exit strategy. "Our intent is that this will go on for perpetuity for the benefit of nonprofit systems that invest to focus on innovation and growth," Mr. Randolph says.

And, it appears to be working. Mr. Randolph estimates the institute has had approximately 290 disclosures or ideas move through the lab and already has its first license agreement. "That is pretty amazing given the short time frame [we've been operating]," he says. About 45 percent of the ideas are medical device concepts, 30 percent are health IT and the rest are a mix of other ideas. Half of the ideas come from physicians and half from employees.

Mr. Randolph says that in his previous roles as COO and CFO of St. Joseph Health, physicians would often come to him with ideas that the system just couldn't bring to the market since there was no vehicle in place to assist them. He credits Deborah Proctor, CEO of St. Joseph Health, and the St. Joseph Health System board as being instrumental in agreeing to form The Innovation Institute and enabling innovators to bring their ideas to life.

"Physicians at heart are scientists, and they're always looking for new and better ways to grow and improve care delivery. In community-based hospitals we haven't provided a safe environment or an outlet for them that makes it easy to share their ideas and concepts." Mr. Randolph says. "We're seeing a lot of focus on innovation, and my philosophy has been, whenever there's a burning platform, there's an opportunity for change."

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