Blog Post

Collaboration Opportunities to Support Digital Health Strategy

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With providers anxious to keep up with legislation that promotes value-based reimbursement, technology has vaulted to the forefront of the healthcare space in recognition of its potential to influence the cost of care.

But many digital health tools fall outside of the traditional purview of the hospital and physician office – and regulation by traditional entities – and thus present some concerns to the medical community. James Madara, M.D., executive vice president and CEO of the American Medical Association (AMA), characterized ineffective EHRs, mixed-quality apps passing as cure-alls, and similar unproven technologies as “the digital snake oil of the 21st century” during his address to the June 2016 AMA conference in Chicago.

While Dr. Madara paints the digital health ecosphere with a broad brush, his comments echo the concerns of many hospital and physician providers in the industry who are currently faced with navigating a choppy sea of applications, platforms, and devices – all of which tout their ability to unlock value in the existing system, and many of which lack proven efficacy.

But as reimbursement models move from fee-for-service to fee-for-value, hospital and physician partners must be willing to take risks and explore innovative solutions to care delivery. Whatever form this business model takes, it will no doubt be based on the delivery of “well” care instead of “sick” care – a paradigm that will rely on digital health solutions, which tend to focus on prevention.

A Collaborative Approach to Digital Health

Currently, many hospitals and health systems are exploring digital health technologies in a piecemeal manner, often as a one-off solution to a single identified problem or opportunity. Such Band-Aid approaches, however, fail to account for the organization’s broader strategic goals.

Organizations that take a more global approach to the digital health space and the potential application of digital health tools across the enterprise will be best positioned for success. This approach relies on providers’ ability to collaborate with both internal (e.g., physicians, staff) and external (e.g., technology firms, investment partners) stakeholders in a manner not traditionally supported by the organization’s core business model.

There are several different structures that allow hospitals and their physician partners to expand their approach and be actively engaged in the continued development of digital health tools as a co-inventor, investor, or development partner.

Accelerator/Incubator: Traditionally, technology accelerators contribute a small amount of seed capital (e.g., $10,000 to $20,000 for a 6% stake) to a class of hand-picked start-ups. In addition to funding, they typically offer three to six months of intensive mentoring, which includes product development, business plan development, networking, coworking space, and introductions to industry-based advisors. Many healthcare-delivery-focused accelerators are now partnering with academic, municipal, and/or provider entities, which establish a presence in the accelerator’s space and work alongside its portfolio companies.

Network Model: In the network model, a central entity, often an outside operator, brings together a consortium of providers to collaborate on addressing common pain points (e.g., readmissions, patient engagement, care coordination). The central entity organizes cohorts around those pain points, then works with member organizations to identify key performance indicators and other characteristics required of technology platforms that will meet the members’ needs. The entity then identifies potential platforms, pilots a solution with members, invests, and may eventually help integrate the solutions. Health systems usually pay a membership fee for participation.

Limited Partnerships: Health systems can become limited partners in venture and private equity funds specializing in healthcare technology and services. This approach has become more common over the past five years as hospital executives have been faced with immense changes and uncertainty. Venture and private equity limited partnerships allow for hospitals to play a more passive role in early-stage technology investment but explore new ways to experiment and seek growth opportunities outside of their core business.

These funds typically charge a fee of 2% of assets managed and 20% of returns generated but are expected to drive a minimum of an 8% return on capital. Providers also see these funds as a way to gain exposure to the growing healthcare technology sector and to source potential new innovative solutions.

In-House Venture Arm and Pilot Programs: These are venture arms created by a health system to directly invest into technologies and solutions. The venture arms can vary in size but consist of in-house deal execution and operating teams that evaluate the needs of the health system and then source, structure, and execute direct investments into firms that can help address those needs.

  • The deal team requires nontraditional health system expertise and is usually composed of leaders with strong banking experience.
  • The operating team is focused on helping the portfolio companies grow their business by better understanding the intricacies of the provider environment.

A pilot program is operationally similar to an in-house venture arm, except the health system would simply work with the technology firm/start-up to test and then roll out the solution in a small, controlled study; there may or may not be an investment into the firm by the health system. A successful pilot with leading health systems can make or break a healthcare start-up’s future.

Looking Ahead

Digital health tools and the flood of investment dollars into the space will continue to influence care delivery, and forward-thinking organizations are exploring a multitude of models for gaining exposure to this budding sector of the industry. By working collaboratively with tightly aligned objectives and incentives, health systems and providers can prevent digital health tools from becoming our generation’s “snake oil.” With a detailed and developed structure that supports an underlying digital health strategy, health systems will be able to identify solutions that provide the most value for all stakeholders across the healthcare ecosystem.

Operating Model Pros Cons
  • Minimal additional operating resources needed on the part of the health system
  • Investment and technology development led by experienced professionals
  • Exposure to a wide range of solutions in a short period of time
  • Health system does not have the amount of influence on the targeted technology solutions as found in other vehicles
  • Very early stage firms/solutions which will take time to scale
Network (Consortium Model)
  • Minimal additional operating resources needed on the part of the health system
  • Investment and technology development led by experienced professionals
  • Opportunity to be an investor as well as a user of technologies
  • Collaborative relationships with fellow providers
Depending on whether the health system takes part in the cohort solution development, may or may not have the level of influence on the targeted technology solutions as found in other vehicles
Limited Partnerships
  • Minimal additional operating resources needed on the part of the health system
  • Investments led by experienced professionals
  • Later-stage investments (if lower- to middle-market funds) allow for exposure to firms with solutions mature enough to integrate with health system
  • Opportunity to be an investor as well as a user of technologies
  • Health system does not have the level of influence on the targeted technology solutions as found in other vehicles
  • Relatively costly management fees and percentage of returns
In-House Venture Arm and Pilot Programs
  • Health system has the most amount of influence on the targeted technology solutions than in the other vehicles
  • Ability to have early access to technologies and solutions and also help provide strategic and operational guidance
  • Opportunity to be an investor as well as a user of technologies
  • Highest level of dedicated resources to create and manage
  • In-house venture is the most amount of risk; multiple investments may mean multiple solutions being concurrently tested in-house