Why Venture Capitalists Wants To Spend Billions In Hospital Ownership?
Can VCs outperform Private Equity?
The traditional Private Equity strategy entails pinpointing hospitals serving wealthier patients, 🔻 reducing expenses, ⬆️ increasing earnings, and later selling at a higher value after a few years.
But General Catalyst thinks there are better opportunities in having a long-term vision. The VC firm intends to launch an innovative healthcare company (HATCo) that will own and manage a hospital, serving as a testing ground for the technology developed by General Catalyst's portfolio companies ( I love the idea).
The strategy is designed to address two primary hurdles encountered by digital health startups:
Firstly, it often requires several months, if not years, to finalize agreements with hospitals, which is why many companies initially target consumers and employers before engaging with sluggish healthcare systems.
Secondly, as more companies delve into the development of healthcare-related artificial intelligence tools, a significant bottleneck arises in obtaining access to high-quality patient data for training models. This type of data is particularly valuable because it will include not only information about care and treatment, but also outcomes, meaning it provides a much better understanding of what works and what doesn’t in improving patient health.
HATCo’s mission is to expand access to – and deliver – health and wellness collaboratively, compassionately, and courageously for all people.
The goal is to find a hospital in the $1 billion to $3 billion range because that’s where “the majority of Americans get their healthcare.”
When considering the acquisition of a hospital, General Catalyst faces two alternatives: the purchase of a non-profit hospital, which would require a conversion to a for-profit status as part of the transaction, or the outright acquisition of a for-profit hospital. The firm is likely leaning towards acquiring a non-profit hospital, as there are approximately 3,000 non-profit hospitals in the U.S., which is more than twice the number of for-profit hospitals.
General Catalyst has raised a total of $8.6B across 15 funds, their latest being General Catalyst Health Assurance Fund.
Based on an analysis of Medicare cost data conducted by Ge Bai, a professor of health policy and accounting at Johns Hopkins University, nonprofit hospitals in the United States had a median profit margin of 5.9% in 2021, while for-profit hospitals achieved a margin of 10%. This data indicates that an owner with a focus on cost reduction and operational efficiency could potentially boost profit margins by several percentage points.
I am highly excited about this strategy. In some ways this is breaking new ground for venture capital, which has historically focused on incubating and growing new companies, rather than attempting turnarounds of decades-old institutions.
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+ Tech in healthcare is good,
Martin
P.S. I used some of the following sources to obtain the data for this article:
(1) Generalcatalyst.com (2) Sciencedirect.com (3) Forbes (4) Crunchbase