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BFD Expert Voices - Health Tech Deals

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General Catalyst plans to buy Akron, Ohio-based nonprofit health system Summa Health and convert it to a for-profit, per the first interviews with the firm's chief executive and hospital leaders.

Why it matters: The project is a bellwether of a venture firm's aptitude to transform an industry that's long proved resistant to Silicon Valley's move-fast-and-break-things zeal for disruption, Erin writes.

What's happening: Summa — an integrated delivery system that spans emergency, acute, critical, outpatient, and home care services — will become a wholly-owned subsidiary of General Catalyst (GC) via its new company, HATCo, pending regulatory approval.

Post-deal, the company will retain several Summa executives, involve some of the more mature startups in GC's portfolio, pursue value-based care arrangements, and avoid staff reductions, the companies tell Axios.

Summa CEO Cliff Deveny, COO Ben Sutton, and board chair George Strickland will maintain leadership positions in the organization.

By the numbers: HATCo CEO Marc Harrison and the Summa executives declined to provide specific deal terms, but Deveny tells Axios the system's annual revenues are roughly $2 billion.

GC aimed to spend $1 billion-$3 billion on the transaction, Harrison previously told Forbes.

What they're saying: "When you're taking full risk for a group, you can be more nimble in how you use those dollars to provide care," says Deveny. "Our benefit is we don't have a wide-ranging region, we've got a very tight group of people that we can get our hands around and actually show the models can work."

"We do not see this as a place where very early startups will be brought into play," says Harrison. "We will be looking for much more mature companies that actually have a proof of concept and are getting to that product-market fit stage."

In evaluating the effort's progress, Harrison says he'll look to see whether the project draws high-level talent and sees other health systems try to emulate the plan.

Harrison also stressed the plan was not aimed as a private-equity play, adding that he did not envision staff reductions. "I want to be very clear: We do not anticipate reductions in force or job loss," he says.

"Building trust starts with working with the [Summa] management and thinking through the low-hanging fruit to build trust with the workforce, then bring innovation in," says GC CEO Hemant Taneja.

1 big thing: General Catalyst to buy and convert Summa Health to a for-profit

Illustration of a bandaid with a barcode in the middle area.

In tripling venture capital's traditional 5-10-year exit timeline and shifting its typical return vehicle, the effort will test the patience and flexibility of both GC and Summa's stakeholders.

Zoom in: Taneja views the project and GC's other existing health system relationships as "cross-pollinating," meaning learnings from the systems will inform its work at Summa and vice versa.

"Our hope is that a lot of our portfolio companies are some of those [solutions] and if they're not, there are other solutions and other companies," Taneja says.

"One of the core principles behind our partnership with the health systems has been to be truly honest brokers and be in service of them, rather than treating those partnerships as ways to sell the solutions of our portfolio companies," he says.

Zoom out: The partnership could create a more appropriate mechanism than a venture for startups to sell into hospitals, health care leaders tell Axios.

"The VC model as we've known it may have come to an end," says Mayo Clinic Platform president John Halamka. "How about creating value over time by building a product that has real impact, [so] you're not exiting by selling an asset, you are creating a desirable product."

"I think the ability to short-circuit the time it takes to go from idea to proven solution is going to be shorter," says UCSF Department of Medicine chair Bob Wachter, who consulted for General Catalyst on one of its portfolio companies.

A digital health startup experienced in such a way could say in its pitch to a health system, for example, "'We knew it was hard and we struggled, but we solved it, and here's the study that shows it,'" Wachter adds.

Meanwhile, the partnership could also give tech startups pitching systems deeper insight into the complex stakeholder negotiations required to sell their products.

"I run the biggest department. I've got 1,000 doctors, but I can't buy any of this stuff myself," says Wachter. "All I can do is hear there's a problem [and] make a case to the financial people and the informatics people."

Yes, but: Tools being developed at a venture capital-run hospital won't be weighted the same as products used at top-notch health systems, like the Mayo Clinic or Massachusetts General Hospital (MGH).

"We want to hear that Kaiser used [the new tool] and it worked, or MGH used it and it worked," says Wachter. "I don't think it's going to be the same to hear that it was used at [a] General Catalyst hospital."

Be smart: Innovating in a precarious environment like a hospital requires thorough checks on safety and fairness, engagement with patients, and a healthy dose of transparency.

"Hospitals are public goods," says Jefferson Health president Baligh Yehia. "We're here to serve. We're a safety net in many different ways."

"Say upfront: 'We are not profiting off your data. We don't monetize your data and we don't track you,'" says Eric Perakslis, former chief digital officer of the Duke Clinical Research Institute.

"General Catalyst will need a strong research partner to demonstrate that this is going to be transformative for Summa," says SCAN Health Plan CEO Sachin Jain.

"The use of technology here, we want to be very intentional and careful about how we bring in innovation," says Taneja.

2. Inside the vision 

Illustration of a medical red cross under spotlights on a stage.

Transforming a nonprofit institution, with its more lax annual financial reporting requirements, into a for-profit entity with quarterly requirements — without leaders with experience in running the later institution — will prove a steep challenge.

Context: "There's going to be a lot of work on a practical level over the next year to figure out what does a for-profit company look like that's different from a not-for-profit," says Summa's Sutton. "I don't think there's anyone actually here at the table this work in a for-profit health system in a meaningful way."

The above change could see GC push physicians to have full patient panels regularly, rather than depending on seasonal spikes, according to a source familiar.

The federal tax code also tends to favor nonprofit status, with many government subsidies and programs excluding for-profit entities.

On average, for-profit institutions also pay health workers including nurses less and tend to staff at or below standard nurse-to-patient ratios, which may contribute to burnout.

Plus, the firm and hospital will need the approval of state regulators and Ohio Attorney General Dave Yost.

GC and the Summa executives say they met yesterday with the AG office and the Ohio Department of Insurance to inform them of their plans.

Of note: Summa wasn't the first health system General Catalyst approached, Taneja confirmed.

Overall, the hospital purchase process spanned more than a year, and conversations between General Catalyst and at least one previous health system stalled before sputtering out due to disagreements about price and decision-making workflows, according to two sources who requested anonymity because they were not cleared to discuss the matter.

Discussions with Summa lasted roughly nine months, per Harrison and the Summa executives, after a mutual friend introduced Deveny and Harrison.

Flashback: A proposed $6.1 billion merger between Summa and Michigan-based Beaumont Health in 2020 collapsed roughly six months before close when the Beaumont board pulled out amid negotiations with another partner, per Deveny.

Between the lines: Unlike fields like banking and retail that have benefited from massive and sudden disruptions, health care has resisted major top-down shifts, primarily because lives are at risk.

Most innovations thus far have remained small and relatively basic, industry experts tell Axios.

"When I'm on the wards, the most important digital innovation I've seen is a video interpreter program where I bring in an iPad and speak to a patient who speaks Mandarin," says Wachter.

"Some years ago a Big Tech sent some engineers to Boston to visit a Medicaid clinic," Halamka says. "I said sure, I'll take you to one. So they walk in, they talk to a homeless gentleman, and say, 'What's your favorite wearable?' And he said, 'Socks.'"

"You have to do this collaboratively. This is not a top-down, command and control, I'm going to change things, trust me. It's: How do I engage the community?" says Halamka.

What's next: GC and Summa will hammer out the details of the relationship to finalize a definitive agreement "in the next several months."

The bottom line: A formidable challenge for a venture capital firm accustomed to investing in startups, the partnership could, if successful, position General Catalyst as one of the industry's most formidable developers and sellers of health care technology.

3. An uphill battle

Illustration of a tiny researcher looking up at a giant hurdle.   

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5. It's Personnel

🐪 Happy hump day, Health Techies! Today we have all the details on General Catalyst buying its hospital.

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January 17, 2024

1 big thing: General Catalyst to buy and convert Summa Health to a for-profit