Here’s why General Catalyst is trying to buy Summa Health

Dr. Marc Harrison is a different kind of venture capitalist.

He’s not looking for the next Mark Zuckerberg or Elon Musk. He’s not hanging out at startup demo days. He’s definitely not posting life advice screeds to founders on X. (He hardly posts at all.)

Far removed from the internet hub of Silicon Valley, Harrison went to medical school in the late 1980s and has spent the bulk of the past two decades at the upper ranks of medical systems, most recently as CEO of Intermountain Healthcare, a Utah-based nonprofit with 33 hospitals and over 63,000 employees.

In late 2022, Harrison joined venture firm General Catalyst, which has backed tech highfliers like Stripe, Snap and Airbnb. But the move to VC from health care hardly represented a career change.

In January, General Catalyst announced it was buying Summa Health, a nonprofit integrated health system that supports more than 1,000 inpatient beds across its network of hospitals, community-based health centers and its multi-specialty group practice. Summa operates across five counties in northeast Ohio and also runs a health insurance entity. 

Under its new structure, Summa will become a for-profit organization, and General Catalyst says it will introduce new tech-enabled solutions that aim to make care more accessible and affordable.

General Catalyst set the stage for the deal when it brought in Harrison and, a year later, introduced a new company called the Health Assurance Transformation Corporation, or HATCo, that would operate on a “decades-long time horizon.” Harrison was named HATCo CEO, and is now in charge of overseeing its work with Summa.

“This is the first time that anybody has done anything quite like this,” Harrison, 60, told CNBC in an interview. “There are many digital health solutions that are out there as point solutions. This is the first holistic transformation of a health system to a thoughtful combination of digital and in-person care.”

The deal isn’t done.

Over the next several months, HATCo and Summa will engage in a due diligence period, work to craft a definitive agreement and begin to map out the specific challenges they hope to tackle. In the latter half of the year, the transaction will go through the regulatory approval process. 

The parties declined to share specific financial details about the acquisition with CNBC, but HATCo wants to make clear that this isn’t just “another ‘private equity’ deal,” Harrison wrote in a statement. By that, he means the objective isn’t to overhaul Summa by cutting costs. 

While buying a hospital is an unprecedented move in the venture industry, where firms rake in big piles of money from institutional investors and seek to outperform the market, General Catalyst has a rich history in the broader health-care sector.

The 24-year-old firm has closed the most deals in digital health since 2020, according to data from PitchBook. Its portfolio companies in the space include insurer Oscar and digital health company Livongo, which was acquired by Teladoc almost four years ago.

Hospitals are different though, and many are nonprofits for a reason. Providing health care is expensive, and reimbursement rates can vary dramatically. With patients shouldering so much of the load, a study last year by the Urban Institute found that 73% of adults with medical debt owe hospitals at least some of that money. 

An October report from Fitch Ratings said labor costs “remain stubbornly high,” and that controlling these expenses will be crucial if nonprofit hospitals want to reduce credit pressure and deliver stronger margins. 

Conditions are not likely to change overnight.

“We expect weak margins to persist through 2023 and into 2024 due to an inelastic revenue model and higher labor costs due to still very tight labor conditions,” Fitch said. 

General Catalyst says it wants Summa to serve as a “blueprint” that shows other health systems how delivering better care for patients can also be “good for business.”

Experts like Ceci Connolly have concerns. Connolly, CEO of the Alliance of Community Health Plans, which represents nonprofit provider-aligned regional health plans, said she’s excited to see if the deal presents a new approach that can address some of the problems in health care. She’s just not sure how it will work.

“I would be lying if I didn’t say it gives me a little bit of pause that you are going to take a nonprofit, community-based health-care entity, and now have it answering to investors and needing to generate profits,” Connolly said. 

Connolly’s viewpoint makes sense. Limited partners — the endowments, sovereign wealth funds and pensions systems that put money into venture capital — look to the asset class as a bet on innovation in tech. It’s where billions can get minted on a single lucky bet.

“A lot of people feel like a PE or venture capital company owning a hospital is kind of like asking Freddy Krueger to come babysit your kids,” said John Bass, CEO of the health-care venture studio Hashed Health. “It just makes people a little nervous, and it doesn’t feel quite aligned with this concept of health care being a human right.”

Still, Bass said he’s “thrilled” to see General Catalyst take big swings in health-care innovation, given all the challenges the industry faces.

HATCo is capitalized outside of General Catalyst’s funds structure. It operates as a holding company within General Catalyst and is completely independent from its venture business, the firm says, though it will collaborate with the investment team. 

General Catalyst said HATCo is not designed to realize returns through increases in volume-based revenue or cost cutting. Instead, it will work to generate new revenue streams by introducing new solutions and models of care.

Chris Bischoff has been leading General Catalyst’s health investments since 2021. The firm has been in the space for more than a decade, and Bischoff said it’s come to view the health-care business as having two distinct but interrelated parts. 

The first is the “innovation side,” or the more traditional venture business, where General Catalyst works with entrepreneurs to create and scale new solutions. The second is the “transformation side,” which now includes HATCo. The goal there is to partner with health systems to try and speed up delivery and roll out new tools. 

“We see a really powerful flywheel between the two,” Bischoff told CNBC in an interview. 

General Catalyst has teamed up with more than 20 health systems across the U.S., Canada, the U.K. and Israel as part of its transformation business. The partnerships are designed to share best practices and encourage collaboration. Bischoff said they help reduce friction when it comes to tech deployment, eliminating the need for a bunch of third parties to get involved. 

Some partners include HCA Healthcare, University of California Davis Health and Intermountain Healthcare, Harrison’s former employer. In a book published last year about his work at Intermountain, Harrison wrote that General Catalyst was helping the hospital build a new marketplace, much like the App Store, for health care.

“Think of it this way: Major airlines don’t build their own air-planes,” he wrote. “They work with a range of partners to help them deliver their offerings. To revolutionize how we care for patients, we in health care are doing the same.”

The matter is personal for Harrison.

In 2009, he was diagnosed with bladder cancer, which was remedied thanks to “aggressive surgical treatment,” Harrison wrote in his book.

But almost a decade later, he was diagnosed with multiple myeloma, a form of blood cancer, and things looked dire. After a failed bone marrow transplant, Harrison said he “scrambled” and tried a novel immunotherapy that eventually helped him get his condition under control.

“I don’t know how long this treatment and others I might try will contain my disease, so I’m not wasting a minute,” Harrison wrote.

If his athletic accomplishments are any indication, Harrison isn’t one to back down from a grueling fight. He’s a nine-time Ironman participant who represented the U.S. in 2014 at the world triathlon championship.

Michael Greeley, co-founder and general partner at the health tech VC firm Flare Capital Partners, said the health-care provider world is in “acute distress” as many organizations are trying to operate on “razor thin profit margins.”

“There’s a lot of unused capacity, like beds that are empty, because they literally don’t have the labor to clean the rooms,” Greeley told CNBC in an interview. “It’s a high fixed-costs business that, if you can’t drive the volume through it, you’re gonna lose money.”

On its FAQ page about the acquisition, Summa said it’s in “sound financial standing” and on track to meet its targets. The organization reported $1.79 billion in revenue in 2022, up from $1.67 billion in 2021, according to Summa’s annual reports. 

However, the organization said it would have a limited capacity to invest in growth or other improvements within its existing structure since challenges like supply costs will continue to hurt its bottom line.

Summa had been on the market for a partner since 2018. The next year it announced plans to merge with the Michigan-based system Beaumont Health. The organizations reached a definitive agreement that December, but Beaumont, now Corewell Health, suddenly pulled out months later without offering a public explanation. 

Dr. Cliff Deveny, Summa’s CEO, said that in the years that followed, the organization hadn’t been able to find a health system with adequate digital health resources and technological ambitions, especially since many large providers are contending with similar financial constraints. 

“We had been on about a 10-year journey of growing, but not really making the transformational changes in and how we run our business,” Deveny told CNBC in an interview. “We saw this as a way to really pivot and change how we provide care.”

HATCo set its sights on Summa after scanning the broader health-care environment. Harrison said he was fortunate to meet Deveny early in the search.

Summa’s executive leadership team will remain intact, and the organization says it will continue to provide the same services to patients and the greater community. 

Harrison said the executives will have to remain careful and rigorous about managing traditional operations, but that they will now have additional “money, time, people, technology.”

“This is not like a turnaround, this is not a distressed system,” Harrison said. “This is an excellent system that has weathered maybe the most difficult time in health care that anybody’s ever experienced, and they’ve done it well. And now they’re ready to go to the next level.”

HATCo said its primary objective is to bring sustainable and agile innovation to Summa, particularly through the introduction of new platforms and tech solutions. The organization will also transition to what’s known as a value-based care model, which incentivizes preventative care and keeping patients healthy as opposed to charging fees for services like appointments and procedures. 

It’s an expensive undertaking, and aligning insurance payers, clinicians and patients behind a value-based care model is often easier said than done.

Harrison said HATCo will likely use tech solutions from some of General Catalyst’s portfolio companies, as well as from others. The tech companies HATCo taps will be on the mature side, not early-stage startups, he added.

Ben Sutton, Summa’s operating chief, said the two organizations are also still evaluating what introducing new technologies will look like in practice. 

“We want to build it from the ground up,” Sutton told CNBC. “We really want to make sure that we’re tailoring those solutions to the challenges that we’re having here in Akron and in the region that we serve, and make sure that we’re implementing things that are most impactful immediately.”

Additionally, Summa will no longer operate as a nonprofit system. Summa said on its website it will start a new community foundation in order to maintain its commitment to charity care, but the Summa Health Foundation will no longer be operational. 

We’re not ‘guinea pigs’

Summa supports a workforce of around 8,500 people, making it the largest employer in Summit County, home to the city of Akron. There’s some fear among the locals about what happens next. 

At a luncheon in late January, Akron Mayor Shammas Malik said residents and employees have expressed some confusion and concern about the deal, according to a report by Ideastream Public Media. More than 450 people have signed a petition urging Summa to remain a nonprofit and to halt negotiations with HATCo.

James Hardy, a member of Akron’s city council, said during a meeting on Jan. 22, that he opposed the sale, citing a “moral objection to the use of Summa, its staff and its patients as ‘guinea pigs’ for venture capitalists.” 

During his more than six-minute speech, which was met at the end with scattered applause, Hardy went on to ask that Summa pause the process and consider alternatives like converting the hospital to a “county-owned system.”

“The community has not been consulted at all and we stand to gain or lose the most at the outcome of this proposal,” Hardy said. “At the very least, Summa owes greater Akron a transparent process where concerns and questions of the general public are asked and answered.”

Mayor Malik met with Harrison and Summa executives early in February, following the city council meeting, and had a “positive and thoughtful conversation” about their ambitions to create a “new model” for health care instead of making cuts, the mayor said in a statement to CNBC. 

“When looking at the proposed Summa acquisition, there are plenty of fair and understandable concerns,” Malik said in a statement. “There is also the potential for this to be a very positive and transformative step for Summa, stabilizing a pillar of our community.” 

Harrison has dealt with competing concerns in the past. In his book, he wrote about steering Intermountain during the Covid pandemic, when health-care workers, government officials and Utah residents openly disagreed about the right path forward.

“Rather than avoiding conflict or seeking to ram through it, we’ve accepted it as a fact of life and attempted to manage it adroitly and compassionately on behalf of progress,” Harrison wrote.

HATCo has a complex, decades-long road ahead, and Harrison is now at the center of an effort to show that community-based health-care providers can be profitable without cutting costs or abandoning patients.

Flare Capital’s Greeley said other VCs are unlikely to follow General Catalyst’s lead because of all the costs and complexities involved in owning a hospital system. But he said he’s cheering the firm on from the sidelines.

“Hats off,” he said. “If anybody can pull it off, I think they’ll have a reasonably good shot.” 

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