When Summation Health Ventures has questions about a surgical sponge or a medical app in which it wants to invest, it has 4,800 doctors it can turn to for advice.

That’s because Summation’s investors are Cedars-Sinai Health System and MemorialCare Health System, two of the most prominent hospital networks in California. The groups, headquartered in Los Angeles and Fountain Valley, respectively, joined forces in May to invest in early and midstage startups working on products and services that increase the value of health care, reduce costs, or improve quality and patient experience.

The fund, run out of offices in Long Beach, can look to its wealth of physicians for advice when picking its portfolio, and those companies benefit from the doctors’ feedback as they hone their products.

“We’re atypical in that we’re not just seeking the highest payout in two to five years,” said Barry Arbuckle, MemorialCare’s chief executive. “We’ve got the luxury, since we’re the investors and not trying to appease outsiders, that we can handpick serious opportunities to make a difference in population health or value in health care.”

It’s a practice that has been employed by such systems as MemorialCare, Oakland’s Kaiser Permanente and Ascension Health of St. Louis, and has recently been gaining momentum with others across the country.

Brant Heise, Summation’s senior managing director, said the fund had from $50 million to $100 million in its coffers, declining to be more specific. Cedars and MemorialCare contributed equally to the fund. It has invested in six companies.

Earlier this month, it invested in HealthLoop, a Mountain View startup that has developed an automated, personalized platform that helps doctors keep in touch with patients during acute episodes of care.

“Summation, through Cedars-Sinai and MemorialCare, has a great opportunity to help bring the company to scale and realize all the benefits the solution brings to them as a customer,” said Todd Johnson, HealthLoop’s chief executive.

“When you get into the weeds of health care, there’s all sorts of things that affect the scalability of a company,” he said, referring to regulatory influence and clinical work flow. “We want this to be as effortless as possible for a large health system to consume, and we can work together to make that happen.”

Other investments include Gauss Surgical, a Los Altos maker of a mobile platform for accurate, real-time monitoring of surgical blood loss; Avia, an accelerator in Chicago that helps health care providers implement emerging technology products and services; Prescient Surgical, a Mountain View developer of a surgical device for the prevention of site infections during surgery; and Austin, Texas’ Pristine, a Google Glass hands-free communication app for health care professionals.

Funding seeds

Heise was executive director of an independent physician association when he was tapped in 2002 to join MemorialCare’s for-profit arm, National Healthcare Services, as a vice president. He gradually shifted to MemorialCare’s Innovation Fund, which was started about the time he joined the system as the health system’s first foray into the investment space. Also formed with a commitment of about $50 million to $100 million, it is still running and operates, under Heise’s leadership, separately from Summation. The fund has seen 13 of its companies acquired by significant players, including Medtronic and Covidien Ltd.

“It was an evolutionary process,” Heise explained. “MemorialCare had been looking in essence to the Innovation Fund to bridge the gap between the entrepreneurial community and the health care system, to look for innovative products, services and technologies.”

Heise characterized the Innovation Fund’s returns as being highly competitive with other venture funds.

“If we’re not getting a good return on these financially, I wouldn’t be doing this job very long,” he said.

He noted that the Innovation Fund, which has a staff of four, has never had to ask MemorialCare for additional commitments and all returns have been funneled back into other investments.

Expansion

MemorialCare sought to build upon its work with the Innovation Fund while widening its footprint. Heise explained he can tap the same physicians for help a limited number of times before overwhelming them, and by working with another health system, he has doubled the pool of available advisers.

Cedars-Sinai proved a natural partner. Staff at several levels in the two systems have enjoyed good, long-term relationships, including Arbuckle and Cedars-Sinai Chief Executive Thomas Priselac, who have both been with their institutions for decades. MemorialCare also provides back-office support for some of Cedars-Sinai’s managed care activities.

The idea of a hospital-backed investment fund also aligned well with Cedars-Sinai’s values.

“We have a long tradition of innovation in health care, but what we’re better known for is innovation in medical treatments and scientific discoveries, bringing them into medical care as quickly as possible,” Priselac said. “This is about applying that same innovative thinking to delivery of medical care itself through Summation.”

Portfolio companies can have return time lines that vary from a year up to a decade, though ideally it would be within a two- to three-year window, Heise said.

As with the Innovation Fund, getting a usable product to market is the main focus.

“We expect that these companies will be successful and the return on investment, that’s secondary to the goal of helping these companies come up with more effective products in the market in a more timely way, helping us and other health care organizations have higher-quality, more-efficient organizations,” Priselac said.

The concept makes sense to Jonathan Spees, senior vice president of the transactions practice at the Camden Group, a health care consulting firm in El Segundo. He said that a private equity fund essentially is doing the same thing, but it either has to bring in people with expertise on the subject matter to sit on a portfolio company’s board or as part of its talent pool to evaluate potential investments.

“Here are two very large companies immersed in the business and understanding it in ways private equity folks never do and with the ability to deploy some of these innovations within their own institutions,” Spees said. “It’s a pretty significant strategic advantage.”