More health systems launch venture funds to back healthcare innovation

As healthcare innovation advances at a dizzying pace, hospitals are getting in on the action.

Over 40 health systems have started venture funds to support fledgling healthcare startups, and more are likely on the verge of launching. Investing gives health systems the chance to partner at the first phase of promising new healthcare technologies and services. But it also allows systems to have an attractive investment, given modest returns from securities and low bank interest rates.

"Investing in a fund gives health systems the ability to share in the upside they create through commercial relationships while avoiding the challenges of managing a dedicated investment vehicle," said Richard L. Gundling, vice president of healthcare financial practices at the Healthcare Financial Management Association. "A health system needs to determine the right strategic co-investor. This can have an impact on the ability to accelerate commercialization."

Thomas Thornton, said investments are made by the venture division of the North Shore-Long Island Jewish Health System in Great Neck, New York, said the investments give the system the chance to test how it can work with new technologies. North Shore will be renamed Northwell Health in January.

"We invested in CirrusHealth, which provides mobile health instructions through an app. We co-developed the technology and piloted it. We're using our capital to build the platform under the guidance of people who live the healthcare world," said Thornton, senior vice president of the hospital's North Shore Ventures fund. The venture business, established about a year and a half ago, also gives the system "a mechanism to learn from the marketplace and engage in early stage entrepreneurial companies," he said.

Jerry Sokol, health law partner at Chicago-based McDermott, Will and Emory, said the typical goal is to profit from investment. Hospitals often engage in these ventures with a hope of monetizing their intellectual property.

"Investments are typically in healthcare-related businesses and selected based on the perceived ability to add value and a hospital's intellectual property, reputation and know-how. For tax-exempt hospitals, it's best if investments further charitable purposes so income remains tax exempt," he said.

Gundling said each health system determines how it selects innovations to be funded, based on mission, strategy and finance.

"There will be a dynamic between wanting to invest and launch as many promising companies as possible and expand a portfolio while optimizing return on investment," he said.

Most health systems have strategic partners in these venture funds. Gundling said large venture firms typically perform research while health systems act as strategic investors, performing their own due diligence.

"With venture-capital funding comes a reduction in management control," said Gundling, who advises "performing due diligence to ensure the system is aligned with the right partner."

But while setting up a venture business may be a great idea, it is typically more difficult to execute than expected, Sokol said. Health systems should be careful and make sure they line up a stable of experienced advisors before jumping in.

"Hospitals, setting up a business to pursue ventures, need to consider choice of entity and tax implications. They also need to consider conflict of interest, tax-exempt issues and whether the investment will create unrelated business taxable income, fraud and abuse implications, particularly if referral sources will be part of the venture division."

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Thornton -- who said an investment committee and senior leadership examine investments managed by NSV -- calls a clear investment strategy essential.

"Engaging the entire system to evaluate and come to an investment thesis is important. We wouldn't do an investment in the group purchasing space without GPO input," he said.

"We believe innovation comes from many places. Encourage it internally and prepare to source it externally. Celebrate it. We are doing this to affect patient care."

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