#36: General Hospital
Why General Catalyst is buying a health system.
Buying Summa Health
Last year, General Catalyst made headlines by announcing its intent to buy Summa Health, an Ohio-based health system that supports more than 1,000 inpatient beds and employs approximately 8,500 people. My initial reaction upon seeing these headlines was confusion. Sure, private equity has been buying up healthcare practices left and right, but what business did a global venture fund have acquiring a hospital in Akron?
According to a blog post about the purchase, the objective is not to overhaul Summa from day one with volume-based revenue targets and drastic cost-cutting measures. Instead, GC aims to show that health systems can deliver better care for patients while also being good for business by implementing new technologies and platforms, some of which will come from their portfolio of healthcare companies.
The deal’s terms include a $485M purchase of Summa Health, which operates across five counties and runs its own health insurance entity, similar to Kaiser. Some reports also claim that the deal will eliminate roughly $850M of Summa’s debt. According to the non-profit health system’s CEO, this isn’t a rescue act—Summa reported $1.79B in revenue in 2022. GC plans to introduce new tech-enabled solutions that make quality care more accessible and affordable, taking Summa to the next level.
Healthy Track Record
Although buying an entire hospital system is unlike anything GC has ever done—or any venture firm, for that matter—they have been the most prolific healthcare investors since 2020. GC’s healthcare portfolio includes a mix of direct investments and incubations, such as Oscar, Transcarent, Hippocratic AI, and Livongo. These four companies alone are collectively worth upwards of $20B, so it’s little surprise that out of GC’s latest $8B fund, $1B will be allocated toward further healthcare innovation.
The Summa Health purchase was actually completed separately from GC’s venture fund, under GC’s new Health Assurance Transformation Corporation (HATCo). HATCo was announced in October 2023 but had been years in the making, representing GC’s broader Health Assurance thesis: investing in companies that shift healthcare toward a more affordable, accessible, and proactive system of care. The anticipated result of such a shift is encouraging: reduced healthcare spending while achieving health equity.
An important principle of HATCo is the alignment of stakeholder interests, making value-based care a crucial part of Health Assurance. By moving in this direction, GC hopes to create new revenue streams and resources and bolster overall innovation.
“HATCo is grounded in the belief that by making health systems more profitable, vibrant, and innovative, they will be better equipped to serve everyone in their communities with greater impact.”
— Dr. Marc Harrison, Co-founder and CEO of HATCo
From GC’s website, here are some of HATCo’s core principles:
Alignment of stakeholder interests (through value-based care)
Decades-long time horizon rather than typical venture time scales
Putting technology in rather than taking costs out
Collaboration with 20+ hospital systems
Today’s hospitals often operate on extremely low margins, typically around 2–8%, with two in five hospitals having negative margins. GC argues that because healthcare organizations have poor financial health, they aren’t able to invest in—or adopt—platform technologies that could improve patient care and generate new revenue. Their challenge is to prove that community-based providers can be profitable without cutting costs or neglecting patients.
New Playgrounds
Venture investors often shy away from companies whose products or services sell directly to hospital systems. The logic is that you can’t move fast and break things when it takes years just to launch a pilot with enterprise health systems. Slow adoption within traditional healthcare has led many VCs to favor consumer health and D2C companies.
Still, if a startup manages to secure a health system contract, there can be hundreds of millions of dollars at stake. If startups could accelerate distribution in these health systems, investors would definitely pay attention.
Certain venture studio and accelerator models are helping startups do just that by cultivating unique relationships with hospitals and provider groups so their incubated companies can integrate more easily:
25m Health runs a health tech venture studio in partnership with LifePoint Health.
Aegis Ventures launched the Digital Consortium last year, an alliance of 11 health systems that will help build and invest in new technologies.
a16z has an ongoing partnership with New York’s Bassett Healthcare Network to implement technologies from the firm’s portfolio.
At least 23 health systems currently have VC arms, including Mayo Clinic, UPMC, Northwell Health, and Wellstar, which makes it easier for their portfolio companies to access enterprise-level distribution.
GC’s acquisition of Summa Health is similar to some of these partnerships, though GC will have more discretion about when and how to integrate new technologies into existing care standards.
Not So Fast
The Summa Health deal is still going through regulatory approval processes with the state of Ohio and the FTC, so it’s too soon to tell whether implementing a “full stack” of innovations in a health system will yield better business and patient outcomes. It’s been a year since the original headlines, giving healthcare economists ample time to raise concerns. Though there are opposing viewpoints, private equity is generally not popular in healthcare due to its potential negative impact on cost, quality, and access to care.
In reality, however, private equity activity in healthcare continues to increase. In the past decade alone, private equity healthcare deals have totaled nearly $1T, with more than 450 hospitals now owned by PE firms.
Bull case: PE provides much-needed capital to improve operations and streamline administrative processes, allowing providers to focus on patient care.
Bear case: In trying to make healthcare organizations more efficient, PE imposes structural changes and cost-cutting measures (such as reduced staffing) to maximize profits, which can compromise patient care and outcomes.
A recent JAMA study found that patient care experience measures worsened after U.S. hospitals were acquired by private equity firms. These patient-experience scores declined more than they did during the pandemic, paired with decreased hospital staff responsiveness. (Patient experience scores are linked to outcomes like safety and mortality.) A second study reported that Medicare patients admitted to private equity–owned hospitals experienced a 25% increase in adverse events compared with patients in non-PE-owned hospitals.
The Long Game
Healthcare, at the end of the day, is a business in the U.S. So if you want to make the industry more proactive, reduce healthcare spending, and close health equity gaps—all goals of HATCo—you have to help providers and health systems improve their bottom line. General Catalyst CEO Hemant Taneja says these businesses need 20% EBITDA margins so they can invest in their communities.
Despite the prevailing concerns about private equity in healthcare, GC has struck an optimistic tone from the outset of the Summa Health deal. They insist that HATCo breaks the mold of the typical five-to-seven-year investment strategy, embracing a longer-term horizon with a focus on value-based care. For now, all we can do is watch and see what happens to Summa Health—its business and its patients. I’d be lying if I said I wasn’t rooting for this to succeed.
What I’m reading this week:
The Shkreli Awards, Heart of Healthcare Podcast
Trump’s Choose-Your-Own-Adventure Health Agenda Is a Wake-Up Call for Cities and States, TIME
As beverages aimed at kids boom, new guidelines recommend water and plain milk, STAT