California-based Innovation Institute acts as 'friendly shark tank'

By Leslie Small

Joe Randolph's idea for the Innovation Institute started when he was the chief operating officer and executive vice president at Irvine, California-based St. Joseph Health, a system that includes 14 acute-care hospitals.

The coming changes associated with healthcare reform meant many in the healthcare provider community were looking for ways to trim costs, Randolph (pictured right) told FierceHealthcare in an exclusive interview. But instead of focusing simply on "incremental cost reduction," Randolph wanted his organization to ensure that it filled that gap by using innovation to find new revenue sources.

So following a St. Joseph-led summit that brought together leaders from the technology, business and healthcare spheres, Randolph decided to carry the idea even further. Thus the Innovation Institute was born, but not before Randolph tried to mold his new model to succeed where other innovation ventures have sometimes struggled.

Many individual provider-led innovation models, such as those from Kaiser Permanente or Mayo Clinic, are internally focused, so "there wasn't a lot of collaboration in terms of models, the way they were structured," he says. Such initiatives also were by necessity tied to organizations' annual budgets, he noted, which combined with many hospitals' natural risk-averse nature, can make innovation challenging.

"When you think about innovation, oftentimes you need to take risks and fail in order to actually pivot and make the right move to be successful in the long haul," Randolph says. "And you need to reward failure."

In fact, a recent report found that 50 percent of digital health startups fail within 20 months, according to FierceHealthIT.

Thus Randolph's venture, he decided, would have three key characteristics--it would be independent, collaborative and self-sustaining. The result is a for-profit, limited liability company that ultimately will be composed of seven "member-owner" health systems. Four slots so far are filled so far by St. Joseph Health, Falls Church, Virginia-based Bon Secours health system, CHOC Children's Hospital of Orange, California, and most recently, the Franciscan Missionaries of Our Lady health system, based in Baton Rouge, Louisiana.

The minimum investment for a member-owner is $10 million, which can be either a cash investment or a cash and asset contribution. Randolph says the company projects a 20 percent rate of return for its member-owners.

The institute's business model is divided into three key segments. First is the Enterprise Development Group, a portfolio of companies owned by the institute that provides services to hospitals. The member-owners aren't required to use these service companies, but the institute does use these companies' revenue to support its innovation efforts.

Once the institute brings a fifth member-owner system on board, it also intends to start a growth fund to invest externally in companies that produce innovative products, Randolph says.

Perhaps the most important prong of the institute, however, is its innovation incubator lab. Based in Newport Beach, California, the lab brings together business and clinical leaders to come up with innovative solutions to improve healthcare. The lab assesses these ideas' market potential and the science behind them, then develops them all the way up to commercialization with the help of the Cleveland Clinic, which functions as sort of the "back office" of the lab and shares in any net proceeds.

"It's like a friendly shark tank in that we're actually allowing them to vet their ideas," Randolph says.

Often, Randolph says, the products that can be the most successful are "not some scientific breakthrough," but rather simply address a problem that a healthcare worker was experiencing on the front line.

And as he looks to the future, collaboration with providers and other stakeholders is what Randolph says he sees as the institute's greatest point of potential.

"As we bring all these systems up and start vetting their ideas--their employees' ideas--having this network of health systems will allow us to scale these things in a way that others I don't think will have the same opportunity. So we're excited about that."

California-based Innovation Institute acts as 'friendly shark tank'