Last week’s announcement that General Catalyst had signed a letter of intent to acquire Summa Health been awaited for several months. Like many of my peers, I was on the floor at the HLTH conference in Las Vegas last October when the well-regarded venture capital firm announced its plan to buy a health system via its Health Assurance Transformation vehicle (usually referred to as HATCo) with famed former Intermountain Healthcare CEO Marc Harrison at the helm.
I took note at the time of the general reaction among insiders and outsiders alike. For my peers—those people who have been steeped in the healthcare world for decades—the reaction was, uniformly, bemusement. So let’s start with the skeptics, and my answers to them at the time:
What on earth are they thinking? Quite carefully, I would imagine. Do they have any idea what the margins of even the best systems are? Yes, I would guess that Marc Harrison has some idea of what those are. Is it just a proving ground for their other investments? Obviously, but I’m not sure I could think of a more expensive proving ground, so that’s not likely the whole story. Why wouldn’t they try some version of what Optum is doing with its health system partnerships instead? Recent experience rather answers that question.
Now for the boosters:
Look at the players involved here; why would anyone bet against them? Solid argument, I’ll agree, but taking on health system economics is just about the hardest task in healthcare. It’s not the one system they’re buying that matters most, but rather the group of systems in the Health Assurance network, right? It’s a big part of the thesis. General Catalyst has assembled a group of 20+ first-rate health systems (and even a health plan or two) as part of its Health Assurance network, all of whom stand to benefit from innovations that truly scale. A game-changing proof of concept at its owned demo system could be scaled quickly, becoming industry standard in no time. Imagine if you had the freedom to redesign care using value-based principles from scratch! Ah yes, the old if-a-frog-had-wings argument. Most who are continually frustrated by the U.S. healthcare landscape often think how much more smoothly it would run if they ran the zoo. But let’s remember that there’s nothing “from scratch” in this deal, even if GC will have enormous flexibility to make changes.
Yes, there are dozens of ways for this gamble to fail, and far fewer ways to succeed. But, for what it’s worth, I think they have a real shot at winning. Read on for a summary of the gamble, plus commentary on its rationale.
(First of all, a bit of disclaimer here. I’ve talked to quite a few people to write this piece, nearly all of whom agreed to chat on background only, so I won’t be quoting sources. I hope I have enough credibility at this point for you to trust my notes and analysis. Also, it’s not like I’m about to reveal some shocking scoop; I would have clickbaited the hell out of this headline if I could).
Let’s examine two big questions:
What is the bet that General Catalyst is making with Summa and how could it succeed?
What should we be watching for to see if success is likely or not?
A big bet on the principles of value-based care and deploying innovation at scale
At its core, General Catalyst’s long-term Health Assurance thesis is that value-based care not only is good for patients, but also can be a successful business model if deployed with innovative technology at meaningful scale. Its rationale for buying a health system is a belief that it can improve on the traditional model of not-for-profit health system governance and management by embedding new incentives. So what can VC bring to the table? In this case: a profit motive, a longer time horizon, and a channel for dozens of innovative companies to demonstrate value.
But wait—haven’t we seen this before?
No. Private equity has certainly stepped into the hospital space before. And while there are long-term-hold PE firms, most PE companies want to strip out excess cost, bolster profitable services, generate a 20%+ return, and sell to the next investor (in the case of Cerberus and Steward Health, the next buyer was a real estate investment trust). And while it’s certainly true that most not-for-profit systems have plenty of excess costs, generating a return on hospital operations is notoriously difficult (more on that below), so it’s a risky bet in the best of situations.
Venture capital differs in that it typically doesn’t go after distressed companies in need of turnaround, but instead invests in promising newer firms with significant growth potential, making its acquisition of an established health system even more perplexing to many. That said, the single biggest barrier to promising young healthcare companies is an inability to scale. Many of their innovations—in digital health, patient engagement, revenue cycle workflow, etc.—require willing health system partners who are famously conservative in their investments and service providers, and rarely take risks on newbies. The addition of Summa provides an open laboratory for those innovations.
And General Catalyst has been quite open about its intent to deploy its long-term capital as a vehicle for proving its investment thesis around the long-term potential of value-based care.
So does Summa provide a vehicle for proving the potential of value-based care?
Mostly, yes. It has decent market share in its Northeast Ohio region, strong physician relationships, and, crucially, a well-regarded health plan enabling it to bake value-based principles into benefit design. And it’s done reasonably well in the Medicare Shared Savings Program, consistently generating savings for the past few years. Back in October, these were exactly the attributes that I and my team said GC would need. And like many mid-size health systems, Summa has struggled with rising costs, so they were unusually open to acquisition and conversion to for-profit status (more on that in a moment).
How will Summa help GC deploy value-based care innovation at scale?
For this bet to work, Summa will have to be a solid proving ground for GC’s portfolio companies. And that means either Summa itself will have to grow, or it will have to act as a force multiplier for its other value-based portfolio companies to justify the considerable capital expended. I have to say, that’s a tall order, but not an insane one. General Catalyst invests in dozens of companies focused on value-based care. And this is where Summa’s health plan comes in. Some of GC’s firms focus on navigating patients to high-value sites of care (such as Transcarent). Others are focused on managing down the risk profile for high-risk populations (CityBlock), or driving down drug distribution costs (Capital Rx). I won’t list all of them here, but any reasonable vision for embedding value-based care principles will lean heavily on patient steerage to lower-cost, high-value sites of care—all of which starts with benefit design.
Another potential effect of innovation at scale is the ability to create an “innovation flywheel,” as one insider put it. If GC and Summa are able to scale enough successful innovations, then Summa can become a transformation business unto itself, in which its expertise in scaling innovation can be effectively monetized. We’ve seen this happen with tech firms, to be sure, but usually only after several years of demonstrated success.
How does going for-profit figure into the investment thesis?
It’s hardly a secret that the economics of not-for-profit healthcare rarely encourage (and often actively discourage) efficiency. With no shareholders to enrich, but many stakeholders to please, most NFP health systems aim for a sustainable margin (usually 2.5% for operating margin; roughly twice that for excess margin including investments and philanthropy) rather than maximal profit. NFPs also have the benefit of issuing tax-exempt debt, which tends to come with low interest rates, and are an exceptionally efficient way to finance large, mission-driven, capital-intensive operations (there’s a reason why universities are the other major category of NFP orgs).
Going for-profit may open the organization up to taxation, but it also gives access to equity-based financing—plus the incentive to trim costs, boost revenue, and expand margins. And that, in turn, makes for-profit system leaders more open to investments designed to boost value. As I heard in one conversation: not-for-profit leaders understandably want to minimize risk and uncertainty; venture capital wants to answer questions that justify its risk and increase the chances for outsized growth.
For-profit hospitals are reasonably common, with HCA Healthcare the largest such chain in the U.S. The recipe for historical for-profit success also isn’t a secret: be slightly more efficient on operations than the NFPs, and generate a service mix that leans disproportionately on profitable procedural services (which are typically higher cost). Keep quality scores high, don’t stint care to the underserved, and you’ve got a sustainable for-profit enterprise. That’s not GC’s game with Summa though. Its big bet is that by embedding value-based care innovations designed to curb costs and improve quality, it can build a profitable (for-profit) enterprise that isn’t overly reliant on high-cost services.
Another way of putting this: General Catalyst wants to use the financial flexibility of an organization like HCA with many of the patient-care principles of an organization like Intermountain. And successful innovations could be, theoretically, quickly scaled across the Health Assurance network. It’s a compelling vision, to say the least.
It’s hard to find a news story that better ties together the major challenges facing the healthcare industry right now: preserving margins, funding innovation, deploying new care-delivery and business models, and creating a sustainable path to profitability. But how will we know if GC/Summa are succeeding? For the sake of simplicity, here are four things to watch:
Four things to watch as the story unfolds
Summa’s time horizon
Turning a ship as massive as a health system is never easy, rapid, or painless. To justify the investment, Summa will have to prove that it can be a serious force multiplier, or it will have to start generating growth on its own. The former requires massive growth in scaled businesses, the latter will require exceptional managerial dexterity. Can they pull it off? Sure. But General Catalyst and Summa won’t have a ton of room for error. So exactly how long will they get to for the promise of the deal to start showing results?
Where the physicians stand
This is probably the biggest question. There’s no version of success in this deal that won’t require physicians to alter their practice patterns. Referral strategy, clinical standard adherence, documentation requirements, new technology adoption, new staffing models in both inpatient and outpatient settings—these aren’t just likely but probably necessary. Are the doctors on board? Will the opportunity to work in a new practice environment attract new physicians to Northeast Ohio? What’s the strategy for dealing with vocal objectors? As we have said in this space many times: no matter what the employment arrangement, physicians don’t really have a boss. They can be managed, wrangled, some might even say corralled at times. But rarely controlled. For this deal to work, the clinical staff will need to be enthusiastic in its support.
The ever-fraught regulatory environment
This one’s harder to gauge. There’s certainly been some public backlash at PE’s influence in healthcare, and I wouldn’t rely on most politicians and regulators caring much about the difference between PE and VC. We only have a letter of intent to go on here, and the regulators have yet to weigh in. For more on where we see health policy going in 2024, members can check out our recent Board Briefing on-demand.
The innovations chosen for scaled deployment
In Union’s recent report on the Future of Innovation (which members may download here, and everyone else can preview here), we outline four major categories of innovation that are likely to be put to work solving near term challenges around staffing, funding emerging drugs and care settings, and adapting to the ever-growing demand for chronic care management. Ideally, the principles of value-based care fit in nicely with all of those aspects of innovation. But for GC/Summa, the key will be how they are prioritized. Will General Catalyst deploy solutions that help build the value-based care enterprise by harnessing emerging innovation, or will they shoehorn their portfolio into a platform health system? My guess is the former, but this bears watching.
Summing up
If it’s not obvious by now: I love this story. It’s got true novelty, big bets, high drama, lots of uncertainty, and a serious potential to transform care delivery. It’s the real deal. And like lots of big-deal topics in healthcare, it’s got big hurdles to overcome. But from what we know so far, GC is assembling the right assets to accomplish the goals it’s set for itself. And it’s got strong leadership and a compelling vision. And for that reason alone, it’s worth watching. It will definitely provide lessons and templates for others seeking to shake up the status quo. And it’s a case study our team will continue to follow.
For regular updates on the big topics in healthcare today, don't forget to register for our Board Briefing series. It's free to the public if you tune in live, and members can view them on-demand.