Strategic Investing in Healthcare

Today’s healthcare marketplace, shifting to value-based care, requires healthcare organizations and companies to recognize, embrace, and rapidly adopt healthcare change. To do so, companies require capital to build the infrastructure that allows them to be effective in coordinating care and managing patient cost.  Enter strategic investing.

While there are many types of investment firms wanting to deploy capital into innovative healthcare companies, these investors often bring limited strategic value beyond capital deployment. As value-based care evolves, providers will face complex issues and need strategic guidance from partners “living in it.” A growing trend is emerging where strategic investors not only provide capital, but also bring a deep-level of understanding and experience with scaling complex healthcare models.

Strategic Investing Defined

In this case, a strategic investor is a healthcare company or organization with capital willing to invest in companies with innovative care delivery models, technology, and/or a valued geographic market access point aligning investor talent-resources with the needs of the company. This strategic capital and knowledge deployment construct increases the likelihood of business success while bending the cost-curve to value-based care. Today’s primary focus for strategic investors is to accelerate value-based care initiatives.

Healthcare’s strategic investors may include: health plans, hospital systems, and large healthcare providers looking to invest in attractive value-based care models, such as: home health, emerging health IT companies, physician practice and/or some other care provider.

Many of healthcare’s large, strategic investors invest to generate innovation and innovation delivery to the marketplace. Generally, this is taking place as larger healthcare organizations experience difficulties innovating in a marketplace dependent upon a fee-for-service model under reimbursement pressure, leading to time constraints for internal innovation to develop and surface. Despite (and because of) these market pressures, these same potential strategic investors require the access and upside to innovation delivery for the company, so they use excess cash to participate with innovating companies, generally further downstream or in a different business life-cycle.

Some recent examples of strategic investing in healthcare include:

  • Amedisys (NYSE: AMED) provides a precedent example through its investment in Clinically Home. As a public, home health company, Amedisys has the cash and resources to strategically invest. As a high quality home health provider, the Clinically Home model provides staff, technology, and an entry point expanding the Amedisys footprint. Here, the business relationship is symbiotic.
  • Other healthcare provider examples as strategic investors include the Mayo Clinic, Cleveland Clinic Innovations, and The Johns Hopkins University. In each respective case, the strategic investor has invested in some technology, value-based care model, or system to deliver value to the marketplace and innovation to the business.

Advantages of Receiving Strategic Capital:

  • Opportunity to scale innovation across the investor’s larger geographic and/or business footprint.
  • The board level and operational input from the strategic investor can expand the perspective of the company.
  • Generally, the Strategic Investor is not solely driven by returns–they want access to the innovation.

Hurdles to Receiving Strategic Capital:

  • Most large healthcare providers are bureaucratic by nature, and very few have an investment process–this can significantly slow down the deployment of capital.
  • All healthcare providers have dozens of challenges they are facing as they evolve and attempt to innovate. Strategic initiatives are being driven from various levels in the organization and knowing who, when, and how to approach a strategic investor can be complicated for many healthcare organizations in search of strategic capital.
  • Structuring an investment from a strategic investor can also be complex. While health systems and other providers are quite motivated to invest in innovative companies, most large health systems have little experience with structuring such deals, and their expectations can vary widely.

In today’s healthcare marketplace strategic investors will play a larger role during a time of fundamental healthcare change. To fundamentally change healthcare, strategic investors and investment acceptors both have opportunities to innovate while remaining true to their respective business objectives and mission goals.