Innovation has become the buzzword of the past two decades in healthcare. Silicon Valley/Alley, technology vendors, health plans, and more recently, health systems all agree that it is the key to the future. Like Miss America contestants seeking world peace, “innovation” has become the canned response of healthcare board members, executives, and industry pundits, to the question, “How do we save the U.S. healthcare system?”

The overuse and generalization of the term “innovation” has led to a loss of understanding of what it is we mean when we say we need more innovation. We lose sight of the specific skills and behaviors needed to be innovative. The word has been overused to the point that national discussion has become circular, “to be innovative, we have to encourage innovation.” However, despite the hypocrisy, we need to be innovative about our use of the word innovation! We should start talking about innovation as a series of separate skills and behaviors that require a different kind of leadership than exists in most healthcare organizations.

As an early stage digital health venture firm largely funded by health systems, we see the great things happening in the U.S. healthcare system today as it relates to the pure definition of ‘innovation’ – which is not ‘doing the same things a bit better,’ but rather ‘doing new things that make the old things obsolete.’ A major premise of Caduceus Capital Partners upon our founding in 2020 was that the COVID-19 pandemic was going to catalyze a new decade of digital health technology-enabled innovation and adoption. There is no doubt that this premise was correct, however the ways in which this rapid creation of opportunities is being dealt with by healthcare systems, vary greatly.

As we began fundraising in 2021, a consistent view at the leadership levels of health systems was that the COVID pandemic was making the hospital business a no-margin pursuit. Many of our friends leading these organizations were seeing empty beds waiting for COVID patients or were overwhelmed with COVID patients. The one thing these two states of matter had in common was that neither was profitable. With the concurrent demand for remote solutions (i.e., software), boards of directors began asking health system CEOs why we’re so heavily invested in people and buildings while doing nothing around software and solutions.

Enter the new age of health system innovation. This new era has brought several health systems reaching out to talk to us about investing in our Early Stage Digital Health Fund, which has been a great opportunity for us. However, we’ve also encountered in our travels and discussions several organizations coming off disastrous (and expensive) attempts to “do it themselves.” Trigger warning: the next few paragraphs may sound like your place, and it may upset you.

Most Common Ways Small-Mid Size Health Systems Waste Money and Time on Innovation

We’ve seen four common ways small to mid-size systems have thought about and attempted to remedy the innovation dilemma, and it goes a little something like this:

  1. Promote someone with limited healthcare experience who has read about investing in early stage software businesses; give them $10MM to play around with (but don’t remove any of the organization’s approval bureaucracy from the process). This one is pretty common around the country. Sometimes the number is bigger, but the outcome is almost always the same. This person sees a great new idea in every pitch; the health system is usually the only investor in the deal (bad idea); the approval process for the investment takes forever (usually a bad idea, but in this case the company in question needs the money and has fewer options so it turns out ok but takes forever); and the organization is frustrated as heck by something that doesn’t really help anyone but is pressured to “pilot” it anyway. The IT leadership wasn’t involved in vetting, so they stall as much as possible until the implementation is scrapped, and the company either goes under or needs more cash fed into it to get to a “minimum viable product.”
  2. Partner with a local “innovation hub” or “incubator.” This one feels great because the health system really wants to support the local business community, and the place down the street seems to have some cool people and events, so why not? Problem here is that, again, the stuff being cranked out of the local innovation hub isn’t necessarily helpful or aligned in any way with the organization’s needs, and the whole concept is bad because what if you hear about a great idea from the state next door? Are you allowed to look at it (usually not)? In this case the IT leadership may or may not be more involved, but the alignment issues are the same in the end.
  3. Give the CIO the “Chief Digital or Innovation Officer” title; without taking away their CIO responsibilities. As former healthcare IT guys, we love our CIOs, however there are a couple of issues here. Nothing about the training and experience of a CIO makes them a good investor. While this approach alleviates the misalignment with organizational needs that plague the first two mistakes, ask any IT leader in healthcare how much free time they have, and you’ll get a pretty quick sense of the problem. Inevitably this turns into another thing someone’s expected to do but can’t really do (i.e., unfunded mandate – time or money), and generally doesn’t work out.
  4. Not looking outside of your organization for a fresh perspective, new talent with unique skills and behaviors. Some of the most disruptive thinkers may not be inside the four walls of your organization. We see some of the most innovative thinkers emerging from the female and minority ranks who have been, unfortunately, often overlooked. These new early stage leaders are driving, defining, and designing better futures through technology-enabled innovation. Your organization should make a concerted effort to identify and consider leveraging this untapped talent pool of energetic young leaders to help drive your organization’s most important innovation initiatives.

Obviously, your organization is not limited to only one of the mistakes above – in fact most places we see struggling with innovation efforts suffer from two or three of these mistakes. It does not have to be this way. Here are some guidelines for your organization to correctly set up or fix your innovation issues:

  • Set clear objectives for the program that align to your long-term growth strategy.
  • Put someone in charge who is both healthcare-aware, has experience with start-ups and is familiar with venture capital/private equity investing.
  • Budget for it – doing good deals requires good lawyers and often outside assistance. $25-50MM per year is a good starting number. $10MM likely isn’t enough – starting too small will sub-optimize returns.
  • Have a small but powerful oversight group of strategy, IT, and operational leadership which understands that in addition to regular meetings, there will be lots of weekend morning calls because innovation never sleeps.
  • Give this committee freedom to allocate capital as they see fit (i.e., remove the traditional health system bureaucracy, even if you need to get board approval).
  • Partner with a firm that does this for a living so your organization benefits from broad-based deal flow and professional investing experience.

And, hey, don’t feel too bad if your place is doing/has done these things already. Not a capital offense and as you can see, it’s not uncommon. Fortunately, it’s relatively easy to course correct. For many of our health system investors, our group functions as their innovation arm. We’re involved in innovation and digital health planning and work collaboratively to help each of our health system members achieve their goals. It’s viewed not just as a financial investment in a digital health venture fund, but a long-term strategic alignment with the firm that acts as an innovation pillar for their organization.

This tends to have a “virtuous flywheel” effect in which the organization gets early access to great ideas and management teams of new digital health companies that add immediate operational value to the organization. And for our portfolio companies, this means access to an engaged and motivated potential customer base that is committed to living at the intersection of investment and innovation in healthcare.

In any case, healthcare innovation is complex, and requires deep experience to get it right. No matter where you are in the process, it’s not too late to change and adopt a structured approach that gets results.

Dave Vreeland and Scott Kolesar founded Caduceus Capital Partners in 2020 as a response to the exponential rise in importance of digital health during the COVID-19 pandemic. Both have each spent the entirety of their careers in the healthcare industry, with a specific focus on digital health and health technology.

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