November 30, 2020

Volume X, Number 335

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Hospital and Health System Innovation Summit: Lessons Learned

In this interactive discussion, health system innovation leaders addressed the impact of COVID-19 on health systems’ plans to pursue innovation efforts; the lasting implications of the pandemic; and the prioritization of innovation efforts and investments post-COVID-19. McDermott Will and Emery’s Partner Kerrin B. Slattery moderated this discussion featuring insights from Lisa Prasad, Vice President and Chief Innovation Officer at Henry Ford Health System; and Damon Broyles, Vice President of Clinical Innovation at Mercy Technology Services.

Below are the top takeaways for Hospital and Health System Innovation Summit: Pandemic to Partnership. Click here to view the full webinar.

Innovation Efforts have Accelerated

In the face of the pandemic’s vast and varied challenges, health systems have prioritized their efforts to adapt and innovate strategically. COVID-19 has accelerated innovation efforts and should be extracted to other areas moving forward.

Renewed Focus on Population Health

The intense demands of combatting the pandemic fueled creative thinking and innovative solutions. For example, Henry Ford Health System’ used virtual reality technology to train healthcare workers on the many different types of ventilators put into place. “COVID-19 really gave unprecedented meaning to population health,” Ms. Prasad said. “The ramifications will be felt for years and maybe decades to come.”

Importance and Maturation of Virtual Care

COVID-19 has permanently changed healthcare culture, and the focus on virtual care will be maintained in the coming years. One significant area is patient triage. Early in the pandemic, the influx of COVID-19 patients placed tremendous pressure on health systems’ phone bank and in-person triage capacities. As a result, many health systems turned to chatbot frameworks and other innovative virtual solutions to triage patients safely and efficiently.

Communication is Key

COVID-19 has emphasized the importance of standardization and communication within health systems to allow for more rapid change and business agility. It has been a crash course in quick decision-making for many health systems and rolling out rapid system-wide change efforts. “That reduction in intransigence in the organization is something that, because of the increased need for consolidation and reinforcement of communication at our health system, we can hopefully sustain a little bit better going forward,” Dr. Broyles said. Increased system agility will make future innovation efforts easier.

Recognizing the Importance of Data

COVID-19 has heavily underscored the value of data in healthcare—and the challenges that must be overcome in order for it to be aggregated and used effectively. Innovations have proven and will continue to prove useful in collecting data. Leaders making changes in the system holistically is really going to be a frontier of work that everyone has to lock arms on and try to advance.

There are many options for structuring an innovation center and there is no one-size-fits-all model.

Innovation centers are often custom-built around the organization’s needs and with the input hospitals and health systems receive from their clinicians, board, patients, and community. Determining what innovation model to pursue involves weighing the amount of financial risk the entity will take on, the complexity of the venture, and the expertise available to guide the center’s development. To date, the most common innovation structures that have emerged are direct investing and direct investing through a subsidiary, which carries different legal and business implications.

Direct investing considerations

Hospitals and health systems may opt for direct investment to avoid the complexities of forming a separate entity. Direct investments allow hospitals and health systems to clearly define roles and responsibilities and have authority over investment decisions and funds. By directly investing, hospitals and health systems can directly integrate investments with clinical care and research operations. However, entities that adopt a direct investment model may be less insulated from tax, financial, litigation, and compliance risks.

Direct investing through subsidiary considerations

Direct investing through a subsidiary can help insulate the system from tax and litigation risks by more clearly establishing a firewall between clinical operations and research and the innovation investment, setting clear lines of authority and accountability, and streamlining the decision-making process of the investment function. This model can also create a vehicle to attract specialized expertise and co-investors, generate an entrepreneurial culture, and promote active involvement by internal inventors.

Forming a fund can “supercharge” an innovation center’s investment.

Formation of a “fund” is another option that can allow hospitals and health systems to have shared involvement in the innovation initiative. This approach carries many of the benefits of direct investing through a subsidiary, such as clear authority lines and streamlined decision-making. However, a system must weigh their goals in being a strategic investor against their obligations to the investors they partner with. At times, there may be tensions between strategic and financial returns.

There are also many opportunities to form a fund by partnering with existing fund managers who can bring experience to innovation pursuits.

Some systems are entrusting existing fund managers to manage investment initiatives. Systems have wide latitude to negotiate for a beneficial innovation structure. For example, as an anchor investor, hospitals and health systems may negotiate for preferential or participation in fund economics, such as reduced management fees and carried interest payable in connection with their investment in a fund. Systems may negotiate to receive a better “most favored nation” right so that the rights they receive are equal to or better than the rights received by other investors in the fund. Other opportunities for anchor investors include negotiating to receive equity in the sponsor’s management company, preferential co-investment rights, the right to serve on the fund’s Limited Partner Advisory Committees, consent rights over fundamental transactions, and more.

Mission Alignment

It is essential for a hospital and health systems to adopt a formal innovation strategic plan that aligns with its overall strategic mission and vision and clearly articulates it specific innovation goals and prioritizes focus areas. Hospital and health systems pursue innovation initiatives largely to support the clinical mission and drive revenue growth and diversification.

Partnerships are Essential Partnerships Drive and Shape Innovation.

There is widespread recognition that today’s complex, multi-dimensional and technology-driven innovation requires partnerships and collaborations among stakeholders who bring different resources and expertise to the effort. Very rarely, if ever, can any single stakeholder provide all the ingredients and resources. However, picking the right partners and the right partnership/collaboration approach is key. “I think a key step is figuring out what are the role of partnerships. And then thinking about what that portfolio looks like over time and how it contributes to innovation,” said Mai-Tal Kennedy, Principal, Vantage Partners. “What types of partnerships you’re going to want to have in your innovation center, and then how you build to be able to meet the needs of those relationships.”

Understand Possible Conflicts of Interest

Conflicts of interest must be evaluated at the front end and continuously revisited and re evaluated during the full life cycle of the innovation, from early research & development and design and implementation of co-investment vehicles through commercialization and deployment in the hospital/health system’s clinical and operational setting. “The potential for conflicts in commercialization of home grown innovation can be particularly challenging and complex if investment interests, royalties and compensation arrangements exist between and among the hospital and health systems, its officers and directors (and/or their families), and employed and voluntary members of the medical staff,” said Bernadette Broccolo, Partner, McDermott Will & Emery. Failure to properly identify, assess and manage conflicts can undermine the integrity of research data supporting commercialization, which in turn can result in denial or withdrawal of FDA pre market approval, create research subject and patient safety risks (and associated liability), lead to false claims liability and civil money penalties in connection with the submission of claims for reimbursement for the innovation by government reimbursement programs. An equally important and very real consideration is that failure to manage conflicts is of great interest to the media and the plaintiff’s bar and can also create significant reputation and public relations risk not only for a hospital and health system but also for other stakeholders as well. Oversight of potential conflicts in innovation by an independent committee with board authority has proven to be an effective step in achieving a disciplined and effective conflict of interest management plan.

Data Strategy Supporting Innovation

Robust, complex data of various types is one of the most valuable assets hospitals and health systems bring to the innovation table. “Many innovation partnerships begin as a data collaboration. Contributing or licensing that data to support the innovation endeavor also presents significant privacy compliance challenges that require careful planning at the outset and throughout the entire innovation life cycle, not the least of which is the HIPAA prohibition on the sale of identifiable data,” said Bernadette Broccolo, Partner, McDermott Will & Emery. An essential ingredient for managing the privacy risk will be development of an effective and sustainable de identification strategy. Key due diligence and contracting questions in that regard include what de-identification method will be used, whether it meets HIPAA and other application de-identification standards, who is going to de-identify the data, whether and how often the de-identification will need to be revalidated, who will be the cost, and who bears the risks associated with impermissible re-identification.

Health IT Solutions Need to Focus on Problems to Solve

Emerging health technology companies often fail to make clear what problems they are trying to solve. To be successful, it needs to be clear what problem you want to solve and you need to be adept at convincing health systems they want to buy your solution.

© 2020 McDermott Will & EmeryNational Law Review, Volume X, Number 325
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