California Health System Launches For-Profit Innovation Institute

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St. Joseph Health System in Orange County, Calif., has founded the Innovation Institute, a for-profit company, to develop and market innovative products and services, including some in the health IT field.

The institute says it is in discussions with several other healthcare systems about them taking equity positions in the new venture. Meanwhile, it has formed a strategic alliance with the Cleveland Clinic, becoming the latest member of that organization's Healthcare Innovation Alliance program.

The Innovation Institute describes itself as "a provider of innovation solutions, business process services, and investment management services to hospitals and health systems." It includes three business units: an "innovation lab" that will incubate "new disruptive breakthrough inventions," an investment fund, and an enterprise development group that will create and sell "shared services."

[ What will they come up with next? Read 9 Cool Digital Health Products. ]

In an interview with InformationWeek Healthcare, Larry Stofko, executive VP and chief technology officer of the Innovation Institute, explained that the innovation lab will take ideas suggested by employees and staff members of St. Joseph and other member organizations and help transform them into marketable products and services. The innovation lab also will present "challenges" for employees and outside developers to meet, such as solving operational problems or using technology to improve care delivery.

Among the areas that the institute will focus on, he said, are health IT, telemedicine, mobile devices, gamification and medical devices. Some seed money for startups will be available through the innovation lab, while the institute will invest its "growth funds" in more mature firms, including medical device and health IT companies.

"They will be our development partners," said Stofko, who was previously CIO of St. Joseph. "They could [bring] their ideas to us to field test and we could participate in revenue, depending on what we contribute to that." The Innovation Institute might also take its own ideas to those firms for development and marketing, he added.

Although it could be years before institute sees any profits from the innovation lab or the investment fund, he noted, the enterprise development group is already generating revenue. Initiated by St. Joseph and brought over to the Innovation Institute, the group consists of a facilities- and construction-management unit and a biomedical device maintenance division. The institute sells the group's services back to St. Joseph.

On the institute's roadmap are cloud-based services that could possibly include shared health IT infrastructure, Stofko said.

If other healthcare organizations contribute similar services that replace those of outside vendors, they will receive extra equity in the Innovation Institute. All profits from the company's operations will be distributed to the equity partners. "Once we become profitable, the profits will be distributed to the member health systems," said Stofko. "Plus they get the benefits of everything we create."

A piece of any financial "upside" will go the Cleveland Clinic in return for the project management and other services it has agreed to provide to Innovation Institute members. These organizations, several of them based in California, constitute the "Catholic and West Coast extension" of Cleveland Clinic Innovation Alliance, Stofko said. Among the other healthcare systems to which Cleveland Clinic is providing similar services are MedStar, Long Island Jewish, the University of Notre Dame and ProMedica.

Over the past decade, Cleveland Clinic Innovations, the system's commercial venture arm, has spun off 55 firms based on its employees' ideas, and three quarters of them have received venture capital funding, according to the organization's website.

Why are healthcare systems across the country interested in commercializing their innovations? Stofko noted that many healthcare organizations are trying to cut their expenses by 15% to 20% to prepare for lower reimbursement under healthcare reform. But they can't just do cost cutting; they also must look at new revenue sources, he pointed out. And Cleveland Clinic has pointed the way to do that.

Federal Meaningful Use Stage 2 requirements will make your medical organization more competitive -- if they don't drive you off the deep end. Also in the new, all-digital Meaningful Mania Part 2 issue of InformationWeek Healthcare: As a nation, we're falling short of the goal of boosting efficiency and saving money with health IT. (Free with registration.)