Connecting Corporate Venture Capital to Business at Blue Cross Blue Shield of Massachusetts

February 7, 2017

Tuoyo Louis has a very clear objective at Zaffre Investments, a corporate venture team that is part of Blue Cross Blue Shield of Massachusetts: Finding healthcare startups that can solve a problem for someone in the insurance company’s ecosystem, whether that’s a patient, an employer, or an administrator sitting behind a doctor’s front desk. Louis works with business-side leaders inside Blue Cross Blue Shield to get pilot tests underway that leverage new technologies from the startups. He also coordinates efforts with a relatively-new innovation group at the 3,600-employee, Boston-based company.

“We’re a 77-year old insurance company,” Louis says, “and we’re risk-averse naturally because that’s what we do — we’re health insurers. So you have pockets of folks that really want to move fast, but they need to be enabled to move fast. That is the job of the innovation group and Zaffre — to enable folks to move fast.”We spoke with Louis, Managing Director of Zaffre Investments, as part of our research for our Q1 report, “Innovation Teams & Business Units: Allies or Adversaries?

What were the drivers for BCBSMA to create a separate VC group and how are you set up?

We created this [investing] function in 2006. It was part of Blue Cross Blue Shield of Massachusetts; we hadn’t spun off Zaffre yet. The reason why we started this function is that we were looking at how do we grow and diversify our revenue; how do we identify new products and solutions that weren’t currently contemplated within our health plan; and also to identify technologies that would help us run our business better.

In 2014, our board asked us to accelerate what we were doing, so our two or three person team expanded to a team of 10 as we created Zaffre. There are a number of reasons why. We wanted to hold all of our assets in one entity…as it’s easier for financial reporting purposes. We had been flying under the radar for a few years, and we wanted to establish a brand that was associated with innovation and collaboration. We’re actually not a fund; we pull our dollars off the balance sheet of the parent company.

…There’s also the Blue Venture Fund that is a Blue-owned venture fund managed by Sandbox Industries, and a number of Blue plans [in different states] are investors in that, so we collaborate through that.

How many portfolio companies do you have?

For just Zaffre Investments we have 11 and outside, mostly pre-dating Zaffre, we have 26 in total.

We typically make minority investments, but we have also created a few wholly-owned subsidiaries, like Indigo Insurance Services, where we sell ancillary products like cancer care or pet insurance. We’ve [also] created three companies, the latest of which [was] Qcentive, [which focuses on simplifying the creation of value-based contracts between healthcare organizations], in December 2015.

How do your portfolio companies work with BCBSMA?

Zaffre is very hands-on. We’re strategic investors at heart, so we make investments where we see some value to our stakeholders. Our stakeholders are the parent company, so that’s the health plan; our employers that we insure; our members that we insure; and then our providers – the doctors and hospitals that are in our network. When an investment is made, our assumption is there’s an opportunity for that company to work with any one of our stakeholders to solve some particular problem.

An example of that right now is a company we invested in, Livongo Health, which is a diabetes platform and has a smart cloud, a smart device, and also gives smart advice. One of our pain points is diabetes. If we look at some of the benchmarks for diabetes, the average cost-of-care for a person with diabetes is $5500 higher annually than someone without diabetes. And then if we look at the prevalence of diabetes in certain segments of BCBSMA members, we’ve noticed that there’s a higher prevalence than some of the national benchmarks. So there’s a lot of money spent on care and a lot of sick people out there. [With] Livongo, we wanted to do one of two things: offer it up to our employees, and offer it up to the people we insure to help improve their quality of life.

We’ll take our portfolio company and try to figure out how we solve problems. That happens through meeting with the different subject matter experts in the health plan; taking them to different meetings across the [Blue Cross Blue Shield] Association; introducing them to different Blues; and introducing them to some of the providers in our network if it’s a solution that can help them. It really depends on the company, what they do, and how we engage them. We’re actively trying to work with the company to help grow their business and then also to help the company develop into a strong, viable company. We do early-stage investments and we do later-stage investments, and we’re typically on the board of most of these investments, so we try to give them guidance, access to our network, and subject matter expertise to help them develop their product or service.

Do your portfolio companies pilot and test with employees there?

We actually offer some affordable rent at our corporate headquarters in Boston, and currently have three startups in our building, so we work with them quite often. One of them is working on APC [Ambulatory Patient Coding], which is actually a gap for us. We took this company to the business area and said, “Here’s what they can do. Is there any interest?” And the business unit said, “Yes, let’s do a small pilot and see.” They did that and there were some great results, so those are some of the ways that we add value.

How does your team and the portfolio companies work with the innovation group at BCBSMA?

They’re very new, and I think that they have a tall task in front of them. Their first order, which they’ve done a really good job on, is around design thinking. I think there’s a huge cultural shift that needs to happen in our organization for us to get better at accelerating the pace of innovation — to get comfortable with having some failure [as we’re] trying to learn new things. So they started off focused on design thinking and offering a toolset and training for our associates and our leaders. The second is [that] as we try to identify new solutions [in the startup realm], they work with the business to figure out what the gaps are and help them solve problems, so we really work in partnership in that way.

For example, let’s say they’re working on problem X. They’ll approach us to find out what companies we know in the problem X space, and we’ll direct them to a company in our portfolio as a starting point, or maybe we know three companies. So we’ll come together, put our heads together, and figure out what’s the right company and what’s the best way to engage the business area [here in working with them].[The innovation group has] a big internal focus right now, and I think we’ve been both internal and external [at Zaffre], but I think you’ll see a shift from that group from being internal to [becoming] more external — working with our provider network to solve problems, and then we can bring solutions to the table to help them accelerate what they’re doing.

Are there some examples of successful interactions or collaborations with the business units that come to mind?

Livongo is a good example because there’s a problem, which is the impact of diabetes, and there’s a solution for it, which is Livongo. I think it worked well for a number of reasons. Our employers that we insure are asking for Livongo, and it worked well because we were able to get alignment, both internally and externally, about the company, about the product, about what impact it was going to have to outcomes.

Outcomes can mean different things, but specifically we were looking at having better glycemic control, so that patients were having fewer high and low readings of their A1C (a blood test that shows average levels of glucose), so they were able to manage their diabetes better. There were also cost savings from that. Everyone could see the results, and it was reducing the number of doctor visits and hospitalizations. There are eyes on the data 24/7, so when you’re taking your readings with a Livongo device, you can get a phone call within 90 seconds that says, “Your A1C is low. Why don’t you take a drink of orange juice and check your A1C again in 15 minutes.”Our promise is to always put our members first, and this is an example of how we think about our members and improving their care. We want them to just go out and live a healthy life, and not have to worry about diabetes all day. There was alignment internally about the value of the company, about the team, and then there’s external validation from our stakeholders asking for this technology. So for all those reasons we’re beginning to deploy the solution.

How about some ways that you maybe haven’t worked as well together with the business units, things that have been learning experiences?

I can’t really think of any. We’re somewhat unique in that we typically don’t make investments unless we know we’re going to use the product or service. I’d say the reason something hasn’t worked well has been a bandwidth issue – people have day jobs. We’re an older company that needs to upgrade our systems, so it’s not easy—there’s no such thing as “plug and play” for us. It takes a lot of resources and technical capabilities to connect the pipes to some of these innovations. I think there’s faster ways to do that and we’re working on that.

If something hasn’t worked well, it has been slower than we would’ve liked because there are a number of barriers. I think our culture is very consensus-driven, so that can also impede progress because everyone needs to sign off and so forth. We’ve gotten better at it, but being a consensus-driven culture makes it take a longer time to get things done. Also, being a health insurance company, HIPAA compliance is a major concern, as are rigorous security reviews in order to do business with us. There’s absolutely no way around that. We have to do it, [and] that can extend the life of a project as well.

Anything else you’d share with other innovation folks? Do’s or don’ts?

Make sure everyone is solving the same problem. …Sometimes we diverge and are talking about two different things. [You need] flexibility in understanding that it might not be right the first time, but we can get it right — it just might take the third time to do it. Starting small — these are all pretty standard. And have fun. It is a lot of fun, and don’t ever lose sight of that.

Make sure you have metrics to figure out if you’re on the track. Make sure you know what to measure going in, before you even get started. If it’s associate engagement, you [may] want to have X percent of people use [a new service], or you may want 30 people to download the app or use the solution. What defines success and how do you measure it?