by Ross Armstrong, Senior Vice President and Head of Market, Lumeris
“Not all smart people work for you.”
Bill Joy, Co-Founder of Sun Microsystems
Why innovation is needed in healthcare
Innovation in healthcare continues to grow, not only because of the multitude of bright and curious minds serving the industry, but because of the numerous challenges that need to be solved in our highly sub-optimized care delivery system. In light of COVID-19, stakeholders across the industry are seeing the drastic impacts of the pandemic (read another post about how healthcare organizations need to rethink their business in light of COVID-19). The ability to fully re-organize our highly fragmented and misaligned system isn’t a reality, so healthcare organizations understand that de-risking their future requires a significant shift towards embracing population health, prepaid revenue models, virtual care, and social determinants of health. There is a new realization that returning to the status quo is not a viable option.
As traditional players such as health systems, physician organizations and payers imagine what their future looks like in a post-COVID world, the question becomes how they will get there? How can they create a sustainable new normal with more diversified and less risky revenue streams and participate in a more rational and consumer-focused care delivery system?
Internal innovation is not fast enough
Finding better and more efficient ways to deliver high value care must be part of every healthcare organization’s DNA, but often it is difficult to execute upon given the priorities of day-to-day responsibilities and extinguishing fires. Often, internal product development teams are dedicated to providing incremental changes and are narrowly focused on enhancing existing offerings. There can be an unwillingness from organizations to explore significant transformation because it requires looking beyond the core offering, which can be difficult to do. While important, these teams are rarely structured, resourced or empowered to drive full-scale transformation.
In contrast, organizations that commit to being platforms for outside innovation and partnerships are able to harness the best thinking from the market and create healthy discord by challenging current thinking. A commitment to this philosophy can accelerate transformation in a guided way and will reduce the risk that the organization is left behind as industries evolve. Besides, innovation across the market is happening too quickly in healthcare for any one organization to remain at the forefront. So, what other options do healthcare organizations have?
What is open innovation?
Open innovation involves reaching outside of the four walls of the company to find new concepts and ideas that create a broader approach to problem solving. This model has been applied by both tech and non-tech companies and over time has proven to be a core function of most innovative companies. It should be noted that open innovation is not a counter model to innovating internally—the two can and should be conducted in conjunction with each other.
In looking at innovation by industry, few currently have the potential of healthcare, and investors are well aware. In 2018, more than $26B of venture capital had been poured into healthcare (more than in 2012 and 2013 combined) and new companies are being developed almost daily.1
Many people have made it their mission to innovate in healthcare because the problems are so pervasive, advancements can literally be lifesaving and the cost conundrum is having tremendously harmful impacts on our economy. Unfortunately, what many innovators that don’t have depth in the industry fail to understand is that the problems in healthcare have largely arisen because of a perverse reimbursement model that misaligns incentives in the supply chain. While many of the solutions being developed have strong use cases and a strong value proposition in a rational market, there often isn’t an effective reimbursement structure for them. Additionally, given the separation between patients and the purchasing of healthcare, many of these innovators must work through the incumbents to get access to the supply chain. In addition, the healthcare industry is highly regulated, and organizations spend significant lobbying dollars ensuring their sector remains unchanged, creating high barriers for entry. The pervasive culture is rooted in protectionism, conservatism and risk aversion. As a result, finding a good partner for a startup company to pilot their innovation is nearly impossible. This must stop.
How can health systems pursue innovation?
There are three broad categories for open innovation, and healthcare incumbents should consider all of them:
- Partnerships are essentially collaborations between companies that aim for new features. This typically involves working with organizations that are not competitors but live in the same sphere and have complementary services.
- Ventures are investments into early stage startups. These investments can bring revenue in the case of an event, but they can also provide access to new technologies and services from which an organization looking to innovate could benefit.
- Accelerators provide startups with an innovative and empowering environment to create new solutions and prove or modify concepts by providing them with a testing environment and feedback. Products stemming from the startups could become part of an organization’s portfolio and provide equity, warrants or royalty fees from these companies.
Partnering with innovators in the industry has the potential to create accretive value and should be evaluated carefully as to how they align with a healthcare organization’s business model. As members of a poorly optimized industry, we need to support an environment that backs innovation through an openness to exploring mutually beneficial partnerships. Below are key attributes that make a partner organization a good candidate for an open innovation model in today’s healthcare market:
- Easily identifiable value proposition and an offering that is aligned to accomplishing your vision
- Highly talented team of smart and motivated individuals. One with a founder that has a history of success is a bonus
- A model that is hard to replicate or has intellectual property protections
- Rapid learning models to test new ideas, gather feedback, and apply solutions in real-world scenarios
- Openness and flexibility to pivot as more feedback comes in or the market evolves
- Willingness to try to integrate as seamlessly as possible to secure adoption
- Development of scalable solutions rather than singular pilot programs or point solutions
Innovating for the future
Success with an open innovation model requires a thoughtful and deliberate approach to leverage the work of a growing ecosystem of innovative companies. Conversely, healthcare organizations can fail in an open innovation model by limiting efforts to dabbling in ad hoc corporate venture capital projects or by keeping an arm’s length relationship with the startup community. Deploying an open innovation model requires visionary leadership, a nimble culture and commitment to disrupting the status quo.
1 Healthcare Startups Have Raised More This Year Than in 2012 And 2013 Combined Forbes Magazine, November 2, 2018.