Midsize hospital systems taking the VC plunge

Spectrum Health wants to help shape healthcare delivery of the future, not react to it.

The 12-hospital health system based in Grand Rapids, Mich., has just created a $100 million venture capital fund to invest in personalized medicine, information technology, population health management and other emerging technologies. It's looking for companies offering solutions to providing better, lower-cost care, said Roger Jansen, Spectrum's chief strategy officer.

“We're looking to invest in great ideas that we can use,” said Jansen, a former researcher in the field of brain trauma.

That Spectrum, a midsize health system with annual revenue of $5.5 billion, would start such a large investment fund is indicative of a trend of hospital companies wanting to be on the ground floor of delivery innovation, said Derek Baird, vice president of Chicago-based Avia, a national network of health system innovators that itself receives venture capital from health systems.

In recent years, Cedars-Sinai Health System in Los Angeles, Providence Health & Services in Renton, Wash., and Inova Health System in Falls Church, Va., have joined pioneers such as Ascension and Kaiser Permanente in opening venture funds to pursue commercially viable health technologies

Baird said hospital-sponsored venture funds, like any venture capital fund, are looking for a good return on their investment. Some have hundreds of millions of retained earnings to invest and they are breaking out a portion to apply to healthcare startups, he said.

But another motive is to give the funds access to clinicians and professionals who can test their wares and advise how best to implement the technology into workflows, Baird said. Allowing such hands-on testing helps the funds calculate how best to roll out the products.

When a hospital system puts its own money at risk in young companies, it has an interest in seeing that the technologies not only work inside its walls, “but are set up to succeed broadly,” he said.

Spectrum Health Ventures is searching for its first investment. Since opening in January, it has received about 100 deals to review. It expects 1,000 proposals this year, he said. Of those, Spectrum probably would invest in one or two, Jansen said.

The fund has hired private equity veteran Scott McLean, a CPA and former chief financial officer, to manage the investments. Recommendations would be reviewed by a committee consisting of the system's CEO, CFO, general counsel and appropriate physicians and other staff before money went into a firm, Jansen said.

The venture fund was established as a wholly owned for-profit subsidiary of not-for-profit Spectrum Health. The structure enables it to move as expeditiously as possible and operate as an entrepreneurial organization outside Spectrum's traditional mission, Jansen said.

The fund is less interested in seeding startups than it is in pursuing a strategy that puts capital and expertise behind emerging technology companies that already have some revenue, multiple customers, a track record for raising equity and the ability to grow, he said. The fund expects to have other investors in any deal it enters, but it also wants to develop products and services that Spectrum can use rather than just act as just a passive investor.

Providence Health is an investor in and customer of Binary Fountain, a reputation management company with proprietary technology for compiling customer satisfaction and social media comments about hospitals and physicians.

Providence Ventures put $1 million of seed capital in Binary Fountain in 2014 and took another $4 million position in the company in a $16 million Series A funding completed in late 2015, said Binary Fountain CEO Ramu Potarazu.

In September, Providence began using the Binary Star Ratings system for 2,000 Providence physicians, allowing consumers to see star ratings and patient comments when searching for a Providence physician on one of its websites.

That widespread deployment at one of the nation's largest not-for-profit health systems followed a successful pilot in 2015, when star ratings and reviews were published on the profile pages of more than 500 Providence physicians.

From an analysis of 150 physicians, Providence found that primary-care and specialty-care physicians with star ratings saw a 25% and 29% increase in page views, respectively. Providers without star ratings saw only a 5% increase.

Potarazu said other analytics developed by Binary Fountain can be used by healthcare managers to see what patients are saying about providers in real time, such as tweeting an angry message about service in an emergency room or other physician office.

The data is not to punish but improve the patient experience, which in the age of social media is becoming an increasingly important differentiator between hospital and physician competitors. “It allows systems to get ahead of problems,” Potarazu said.

Spectrum Health's venture fund is still looking for what it hopes will be its first big breakthrough technology. “It's our job to identify the strategic assets that will help us perform better,” Jansen said.