Are disruptive startups or big tech like Amazon or Google the only solutions to improving the $3.3 trillion U.S. health care industry? Prevailing wisdom holds that hospitals and payers are too entrenched and risk-averse to solve problems or even adopt new solutions.

Except when it comes to UPMC. This integrated health care delivery system is staking out a successful innovation approach that is pioneering for the health care sector, let alone academic medical centers. Its formula? Take calculated risks on new ideas and have skin in the game.

While many UPMC peers and most health care nonprofits see risk in terms of dwindling assets, Tal Heppenstall, executive vice president and treasurer, UPMC, and president, UPMC Enterprises, sees more peril in failing to lead as the core health care business faces new challenges. Ensuring UPMC’s good health lies in its continual reinvention, so UPMC Enterprises proactively seeks opportunities to be a testing ground for innovation and a preferred investor or business partner.

“We don’t describe UPMC Enterprises as an incubator, a venture capital fund, or technology transfer office because we actually are a continuum of all of those things,” explains Mr. Heppenstall. “While our peers might participate in some part of these processes, we engage in the whole spectrum of the entrepreneurial health care innovation ecosystem from original ideas all the way to public companies.”

Problem Solving First and Foremost

UPMC Enterprises’ approach begins at home: identify a problem within the UPMC system, such as an unmet need in patient care or an inefficiency in supporting business operations. Then find a potential solution, which, if successful, will be ripe for adoption across its entire integrated health system. Only then does Enterprises decide whether to engage or invest in the company.

“If we see a promising startup company that can help solve our problem, we proactively will reach out, but we also want entrepreneurs who are starting health care companies to come to us since UPMC knows how to nurture the best ideas,” Mr. Heppenstall said.

For young companies, UPMC Enterprises may offer two things: capital, which others can bring, too, and the ability to pilot and then deploy solutions at scale across UPMC.

One example is Lantern, a San Francisco-based company developing a mobile-first platform to deliver wellness support to patients using cognitive behavioral therapy techniques. The team at Enterprises envisioned Lantern’s consumer-friendly platform as a good fit for UPMC primary care settings to help reduce patient anxiety. UPMC Enterprises led Lantern’s $17 million Series A funding round, and now Lantern’s application is being piloted among various UPMC patient populations.

UPMC’s broad reach is ideal for developing new technologies to improve quality, lower costs, and benefit patients as well as providers. The system is a $16B health care provider and insurer that tallies more than 30 hospitals and more than 600 physician offices and outpatient sites as well as many rehabilitation, retirement, and long-term care facilities. It also employs more than 80,000, including some 3,800 physicians, and its insurance services cover 3.2 million members.

The fuel for UPMC Enterprises engagement is about $120M annually, which is part of the UPMC R&D budget. While sizeable for such an effort, this investment represents less than 1 percent of UPMC revenue. UPMC Enterprises has participated in numerous funding rounds since 2015 and now has a portfolio of more than a dozen companies.

“Our report card is based not just on financial returns from UPMC Enterprises,” Mr. Heppenstall notes, “but also on our ability to innovate health care and realize life-changing medicine. Comparatively, we do much more than an insurance company or a hospital.”

Realizing Success Inside and Out

UPMC’s successes have delivered disrupting improvements that range from new divisions within UPMC to independent start-up companies. For example:

Disrupting Insurance. The UPMC Health Plan is the most successful investment effort of UPMC to date. Out of the need and commitment to provide better health and financial security for patients, it began in 1996 with no revenue and grew to reach $8B in 2017. Today, Health Plan and other components of the UPMC Insurance Services Division partner with UPMC and community network providers to care for 3.2M members.

Disrupting Payment Models. UPMC and The Advisory Board Company developed Evolent Health to help physicians and hospitals create population health programs and their own insurance operations in a rapidly changing health care landscape. This approach is based on a model developed by UPMC’s integrated delivery and finance system (IDFS) in which the incentives of the provider and the insurance arm are aligned around the needs of the patient. Evolent went public on the New York Stock Exchange in 2015 with a market capitalization exceeding $1B.

Disrupting House Calls. UPMC Enterprises created the telemedicine company Curavi Health to improve post-acute care based on the work of UPMC geriatrician Steven Handler, MD, PhD, CMD. Curavi aims to reduce potentially avoidable hospitalizations and optimize care of nursing home residents by enabling live video consults with UPMC geriatricians and other specialists.

Disrupting Cost Management. UPMC Enterprises became a strategic partner and customer of Health Catalyst in 2016 to create cost-management solutions for the industry. Today, Health Catalyst licenses technology developed by UPMC, and the two organizations collaborate on its refinement and commercialization. The company, which also provides data warehousing and analytics technology, has more than 250 hospitals and 3,000 clinics as clients that collectively care for more than 70 million Americans annually. Moreover, Health Catalyst, a Utah-based company, now has 10 people working in Pittsburgh.

Not all of UPMC Enterprises’ endeavors pan out, Mr. Heppenstall notes. But no risk, no reward, and the positive effect on the health and well-being of patients at UPMC and elsewhere makes the approach more than worthwhile for everyone.