Henry Ford Health using tech spinoffs to buoy bottom line

As an industry-wide recession grips the health care sector, some hospitals are looking beyond providing care to make money.

Late last month, software developed by Henry Ford Health for specialty pharmacies launched nationwide. Henry Ford's pharmacy group developed the software, which aids pharmacies that specialize in managing pharmaceuticals that are high cost or very complex, in 2013.

DromosPTM aids specialty pharmacies in finding financial assistance for expensive prescriptions as well as provides input points to monitor whether a patient needs a drug and when they need it.

In the years after its creation, DromosPTM expanded across all of Henry Ford's specialty pharmacies and its innovation division smelled a larger return on investment was possible, deciding to shop it around to potential buyers that could license the technology and take it nationwide, said Joe Jankowski, senior advisor to the Henry Ford Health Innovation Institute, with plans to expand.

But no software companies emerged, so Henry Ford created a spinoff company called Semita (which is Latin for pathway. Dromos is Greek for avenue) to commercialize DromosPTM.

In 2019, Washington state-based CarepathRx, which is owned by private equity firm Nautic Partners, acquired Semita to expand its use outside of Michigan-based Henry Ford.

DromosPTM is now used by seven hospital systems, Jankowski said, with plans to expand.

Henry Ford maintained a minority stake in Semita and receives a royalty fee for use of DromosPTM.

The technology is already bolstering the hospitals bottom line, bringing in more than $5 million in revenue to the system. While just a drop in the system's massive topline of nearly $6 billion, the sales are unencumbered compared to the very small margin enjoyed by hospitals in providing care.

"Operating margins are in the low single digits," Jankowksi said. "Nationally, you're seeing hospitals diversify revenue as quickly as they can. They need free cash flow, so getting in revenue without the costs of providing care is now very important."

Jankowski said DromosPTM is projected to bring in $20 million for the health system in the coming years.

The specialty pharmaceuticals market is expected to grow 8 percent annually through 2025, according to a report by Shields Health Solutions, leaving $118 billion for grabs in the market.

Health systems are projected to capture 25 percent, or $29.5 billion, of that market growth.

The number of specialty pharmacies grew 315 percent to 1,570 specialty pharmacies in 2021 in the U.S., from just 378 in 2015, according to the 2021 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers by the Drug Channels Institute. And hospitals are quickly getting on board, now owning about a third of specialty pharmacies — because they are lucrative.

In 2019, only 4.9 percent of commercially insured patients took specialty drugs, but made up about 50 percent of all drug spending that year.

But hospital-owned specialty pharmacies are inefficient, Jankowski said.

"Because of the costs associated with specialty drugs, insurers want a lot of info and, meanwhile, because these drugs are given to usually a very sick patient, a lot of monitoring needs to occur," Jankwoski said. "If the insurers is going to pay $18,000 for an injection, we need to make sure the patient should require this injection and ensure they are physically able to take the injection and when they should take it."

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However, there was no software to manage all the data, leaving pharmacists to manage the patient load, insurer requests and information tracking separately.

"These drugs used to be a niche but have become a focused class and the emergence and maintenance of specialty pharmacies grew alongside the rise of these drugs," Jankwoski said. "But there's never been a good software to manage the difficulty in administering these drugs. Pharmacists have to check your medical record, maybe take diagnostics and provide a lot of info the payer. We can monitor that in once place now."

Jankowski said because of streamlined information monitoring, the DromosPTM system also provides pharmacies with preferred access to specialty drugs that can often be hard to source.

"Drug companies want a lot of data," Jankowski said. "DromosPTM can provide that data and because the supply is controlled by the drug companies, you have a better chance of giving them the data and, thus, receiving the supply using the software."

Healthcare spinoff companies usually occur at major research institutions like the University of Michigan Health or the Cleveland Clinic or Johns Hopkins Hospital.

For example, UM-Health spun off post-operative distress monitoring software firm Fifth Eye Inc., which closed on a $11.5 million venture capital funding round in 2019.

But traditional health systems don't often venture into technology spinoffs. McLaren Health Care and Corewell Health East both said they do not have any technology spinoff companies.

Henry Ford created Henry Ford Innovation Institute in 2011 as part of its attempt to extend beyond a regional system to a full-blown research system with national and international notoriety.

In 2019, the institute also spun off Navv Systems Inc., an indoor tracking platform that provides real-time locations of equipment in the hospital to improve efficiency. Last year, the spinoff secured a $3.2 million in seed financing from Ann Arbor venture capital firm Arboretum Ventures along with co-investments from Detroit Venture Partners and Narrow Gauge Ventures.

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"We're doing a lot to try to put our technology into the commercial sector," Jankowski said. "We adopted a mission to touch one billion patients. We simply can't do that at our hospitals, but we can expand worldwide through our technology. If a patient receives care or an intervention because of a technology that emanates from our system, we're accomplishing that mission."

The success of the spinoffs couldn't come at a better time for Henry Ford as it battles the industry recession plaguing all hospitals across the U.S.

Hospital operating costs have climbed 10 percent year-to-date — inflation and labor costs are largely to blame — chewing up the typically low margins the healthcare industry generates. The median margin for hospitals through July this year is nearly negative 1 percent, according to a recent analysis by Kaufman Hall. That pain reverberates through the entire nearly $1 trillion industry in the U.S. In Michigan, the sector is simply struggling to remain solvent while also maintaining all the healthcare services patients require.

In 2021, Henry Ford Health reported an operating loss of $168 million, or a negative 2.5 percent operating margin, on net patient revenue of $4.2 billion. However, the system was able to post a positive total income of $41 million, or a margin of 0.6 percent, thanks to $200 million in returns from its investment portfolio.

But the stock market hasn't been kind this year, with the S&P 500 down more than 18 percent year-to-date.

"It's a good time to raise money in venture capital (due to investments doing poorly in the market) and it creates a beneficial return to our bottom line. It's a win-win," Jankowski said.

This story first appeared in our sister publication, Crain's Detroit Business.