Building alternative revenue streams source will play a bigger role in healthcare providers’ strategies, according to a new study.
Ninety percent of hospital and health system executives surveyed indicated that new revenue streams were an urgent priority expected to yield a return in the next three years, a new study from Boston-based Partners Health Care and healthcare private equity firm Fitzroy Health found. Every participant acknowledged the need to diversify revenue.
A crescendo has been reached because of the downward revenue pressure, said Chris Coburn, Partners’ chief innovation officer and president of Partners HealthCare International. But there is no one-size-fits-all approach, he said.
The study looked at more than 1,400 novel revenue streams—defined as any revenue that is not based on traditional reimbursable medical services, government support or non-operating investments like securities and real estate—across 74 academic medical centers and large health systems. It broke them down into three parts: bringing care model innovations to market; transforming cost centers into profit centers; and increasing royalties from drugs, devices and diagnostics.
Licensing intellectual property, like Geisinger Health System licensing its patient-care management model to Epic Systems Corp. and Cerner Corp. for their clinical-decision support systems, would fall under the first category. Researchers also point to UCHealth’s (Colorado) digital health co-development fund and its partnership with RxRevu, which manages and measures medication prescribing patterns. An “outside-in” partnership between a health system and early-stage company can boost the market value of a venture through product development or proof of impact, according to the study.
The second track involves internal departments that serve external customers, like clinical-trial management support services. There are also wholly owned subsidiaries, such as Bon Secours Mercy’s revenue cycle service company Ensemble Health Partners, as well as independent companies like Prodigo Solutions, a supply chain management spinoff from the UPMC system.
A number of organizations have built massive ecosystems that offer the gamut of functions in healthcare, said James Stanford, a managing director at Fitzroy. As margins wane, many health systems’ have since outsourced services that aren’t part of their core businesses, he said.
“But for those that have developed commercial-grade offerings, there is a big opportunity and slice of revenue that would be going to other vendors,” Stanford said.
As for royalty generation, the study cited Children’s Hospital of Philadelphia’s spinoff of gene therapy company Spark Therapeutics, generating more than a $450 million return. Also, investment firm Deerfield Management has committed nearly $500 million to early stage drug research—including oncology, gene therapy and central nervous system treatments—at academic institutions, giving universities a financial buffer while allowing them to own the intellectual property.
The cost of failure has traditionally been so high and the probability of success has been so low that academia typically hasn’t been willing to produce novel therapies on their own, said James Flynn, a managing partner at Deerfield.
“But as science validates these treatments and cheaper pathways form, these institutions and investors will become more engaged,” he said.
There is more happening in therapeutic innovation involving efforts like mapping the human genome than ever before, Coburn said.
“This is a historic time we are in,” Coburn said, adding that alternative revenue sources should play a more prominent role in bond ratings given all the activity.
Health system operating margins hit 10-year lows in 2018 as costs outpaced revenue, according to a 2018 Moody’s Investors Service report. While its uncertain whether that pressure will subside in 2019, hospitals will likely have to pursue a combination of cost-cutting and revenue growth as they seek sustainable financial footing.
Non-operating income has buoyed providers amid the financial headwinds. But 2018 demonstrated how tenuous that dynamic was. Ninety-seven percent of the Partners-Fitzroy study participants excluded investment income from their budgets given the volatility.
“Inpatient admissions are declining, length of stay is declining—health systems have to adapt and find alternatives,” Beaumont Health Chief Operating Officer Carolyn Wilson told Modern Healthcare in March after the system announced a new commercial real estate venture.
This requires a mindset shift, said Lyndean Brick, CEO of healthcare consultancy Advis Group.
“Is healthcare a business? Yes of course,” she said. “But a lot of institutions have a hard time saying that it is a business. It is a business with a big social purpose.”
But it also requires a balance. Generally, new endeavors should align with organizations’ broader mission. It shouldn’t overburden a company’s core business as resources are reallocated, experts said. The portfolio of alternative revenue streams should also distribute risk, return and timing. That mindset shift also requires well-equipped personnel who can juggle consumer marketing, automated data analysis and venture capital management while keeping healthcare’s broader mission in perspective.
If a health system is contemplating spinning out a company, executives need to weigh whether the offering is more valuable as a product marketed externally or as a closely held source of proprietary differentiation, researchers recommended. Executives need hard data to determine if the endeavor fits within its target market. They also need to address the potential friction of the spinoff selling services at market rates back to the system, the extra work for senior leaders, new hires, or a potential exit if the relationship sours.
The more sophisticated organizations clearly define upfront what they want from each investment and set up milestones accordingly, Stanford said.
There will be more opportunities to partner and invest in new ventures. The hard part is realizing when strategies don’t align and saying no, Coburn said. “Saying yes is the easy part of the business,” he said.