October 22, 2020

Should Your Health System Centralize Innovation?

by Teresa Breen and Michael Cuello

THE GIST

A centralized innovation function accelerates health systemwide innovation efforts, supporting both incremental, business unit-driven innovation as well as spearheading more disruptive innovations that result in new business or delivery models.

THE FACTS

  • Over 40 percent of health system leaders said the COVID-19 pandemic has accelerated innovation projects at their organizations.
  • Just under two-thirds of health system leaders report their organizations implement and scale innovation either slowly or very slowly.
  • Organizations that invest in innovation throughout a crisis outperform their peers by 30 percent during the recovery period.

OUR ANALYSIS

1. Use the COVID-driven momentum as a catalyst to remove existing barriers to innovation, aiming to build an approach that will be sustainable over the longer term.

Many internal barriers that have stifled health system innovation for years were broken down in just a few short weeks in the wake of COVID-19. Simply by necessity, health systems were forced to quickly adapt to a new normal, with many rushing to create or optimize their digital front door and virtual suite of services. Instead of taking months—or even years—to pull off, provider organizations revolutionized certain aspects of their care delivery model, practically overnight.

While this quick action has been commendable, the pandemic has not actually solved health systems’ natural tendency to be risk-averse, hierarchical, and slower-than-average to market. We fear many changes won’t outlive the pandemic, and that once it’s over, the bubble of innovation will burst—with some backpedaling already occurring today.

Still in the trenches of a crisis, healthcare leaders have been appropriately focused on core business operations and “keeping the lights on.” However, most executives believe COVID-19 will change the way we do business over the next five years, and many are feeling unprepared for that change; only one in five feel they have the right expertise and resources to pursue new growth successfully amid the pandemic. As health systems continue to chart their course in a world full of uncertainty, there is an opportunity for today’s ambiguity to fuel innovative growth and push organizations to reexamine their innovation approach and strategy.

2. While most innovations are evolutionary rather than revolutionary, a centralized innovation function accelerates and supports all types of innovation—particularly those that are more disruptive.

Health systems can either let innovations occur organically or provide a more centralized service infrastructure to help support them. However, the speed at which those innovations happen is often much slower in organizations lacking a formal structure. As the graphic below shows, health systems with a formal innovation structure are twice as likely to innovate more quickly than those without a structure. While not a requirement, an innovation infrastructure can hasten and expand current innovation capabilities.

Health system innovations come in all shapes and sizes—the idea of “innovation” can easily get tied up in the excitement of a radical new business or care delivery model, but the majority of innovations tend to be more evolutionary (changes on a smaller scale that are not as invasive to the entire organization) than revolutionary (more complex changes that impact people, processes, or workflows across the organization).

As the graphic below shows, we find it helpful to think about health system innovations across two axes: proximity to the consumer (x-axis) and level of organizational disruptiveness (y-axis). Plotting innovations on these axes creates four main “innovation domains.” More evolutionary innovations, like opening a drive through vaccination site or implementing digital voice scribes, fall into the bottom two quadrants. These are innovations that improve operations and service delivery, and happen mostly at the business unit level.

On the other hand, innovations falling into the top two quadrants focus on building new business or delivery models. These more disruptive innovations, like implementing a hospital at home program or direct primary care model, require a formal innovation structure and process to manage tasks ranging from market analysis to piloting to managing input from multiple stakeholders across the organization. Health systems can use these four quadrants to plot their planned, upcoming innovations to help inform the level of infrastructure and centralization they need.

3. Taking a hybrid organizational approach to innovation ownership supports business unit-level innovation while leveraging the benefits of a centralized innovation team.

Two popular organizational innovation models lie on opposite ends of the innovation centralization spectrum: on one end, a business-unit driven (decentralized) model, and on the other end, a dedicated (centralized) innovation model. The benefits of a decentralized model, where business unit leaders own innovation, include closer proximity to the patients or problems as well as easier adoption of new ideas. However, this often results in inconsistent processes and may not always align with the organization-wide strategic plan. A centralized innovation model can mitigate some of these barriers by establishing a shared approach and culture around innovation while having a dedicated team own the most internally disruptive, organization-wide innovations.

We recommend taking a hybrid approach that falls between these two ends—having the centralized innovation team support business unit-driven innovations and ensuring that relevant leaders are involved in more disruptive innovation efforts as needed, especially to aid with the rollout and scale of new strategies and models. In the graphic below we’ve plotted the four “innovation domains” discussed in the previous four-quadrant graphic along the innovation centralization spectrum.

We believe most innovations will fall somewhere in the middle of this spectrum, benefiting from a flexible hybrid approach in which they receive joint support from both ends. For example, a health system looking to establish dedicated centers for high-risk patients would benefit from having the various service line and medical group leaders who would have a stake in such centers work with individuals on a centralized innovation team that can take the lead on actions ranging from creating the business plan to figuring out the physician- and patient-facing messaging.

4. Investing in innovation as a shared service is not an easy sell—but establishing a centralized innovation team doesn’t have to break the bank.

A centralized innovation function does not “do” all of the innovation at the health system, but rather operates as a shared service, fueling innovation across the organization. As one system executive put it, health systems “need to create a center ‘for’ innovation, not a center ‘of’ innovation.” The centralized team has two primary directives: shepherding internally-grown innovations and coordinating externally-fostered innovations. 

While some health systems, like Mayo Clinic or Cleveland Clinic, have developed very large, multifaceted innovation teams, this effort can begin on a much smaller level. Building an innovation team’s reputation is more important than the size of the team. While leaders may want to direct a new team to move quickly on longer-term, complex innovations, focusing on short- and medium-term projects will help establish credibility early on, leading to better outcomes for more complex projects down the road.

Case in point: an eight-hospital health system launched its central innovation center with a team of two. Using a “SWAT team approach”, the team began directly helping business unit leaders with their own innovation initiatives, providing quick wins and establishing a strong reputation across the enterprise. After five years, its grown to a team of five and has proven its value by leading the launch of over 15 new initiatives, testing dozens of ventures, and managing a systemwide innovation idea challenge.

Health systems looking to establish a centralized innovation team should think critically about the skillsets and expertise needed by dedicated individuals, as well as how the team should fit into the greater organization. Health systems should aim to construct the team with a mix of insider and outsiders in order to blend understanding with “the way things work around here” with new perspectives and relevant subject matter expertise. The team’s key performance indicators and incentives must be aligned with system-level strategic goals.

While easier said than done, system leaders looking to establish an innovation team should avoid being delayed debating the team’s governance structure. These teams commonly report up to a Chief Strategy Officer but need some level of autonomous decision making. Once the team has an established agenda and is off the ground, health system leadership can always revisit where it sits in the org chart. Proving a return on investment (ROI) for dedicated innovation resources can be challenging. Leaders will need to buy into the idea of innovation as a shared service cost center that will eventually justify itself by helping the system achieve its strategic and growth goals more expeditiously.

5. Focusing on innovation efforts outside the organization should be primarily a strategic play, not just a financial one.

As mentioned above, a central innovation team can also coordinate externally-fostered innovations—coordinating with innovation efforts the health system is supporting outside the organization. Partnering with startups has been gaining more popularity among health systems and can serve as a complementary strategy to internally-driven innovation efforts. These investments, or sometimes non-financial partnerships, with external companies can provide early access to new solutions, help develop new health system programs, and can secure both strategic and financial returns for the system.  

Partnering with startups has been gaining more popularity among health systems and can serve as a complementary strategy to internally-driven innovation

The primary ways health systems are connecting with these typically start-up companies are through a business incubator, business accelerator program, or a venture fund—though the three are not necessarily exclusive. Health systems should consider the level of involvement they are seeking—less mature, or earlier stage, startups require more time and involvement, while more mature, or later stage, startups require more financing. Unlike traditional investment firms, health systems investing in other companies should focus on ones that offer both a strategic gain to the organization as well as the possibility of a financial one. 

As shown in the graphic below, establishing a business incubator or accelerator program makes the most sense for systems seeking to partner with earlier stage startups, which typically lack solid business plans and funding. While these programs require more hands-on business and mentorship support, partnering with companies at this stage provides a less risky way for health systems to co-create a product or service rather than building it internally.

Venture funds, on the other hand, are focused on more mature companies and require a much more significant financial investment on behalf of the health system. Systems pursuing this path can either create an in-house fund or partner with an external fund manager. While there are advantages to an in-house fund—like full alignment with the system’s strategic interests and direct decision-making authority over each deal—running a venture fund is financially risky and outside of most systems’ core competencies. Systems would need to hire for specific fund management expertise as well as comprehensive knowledge of healthcare market trends and comparable deals.