Beyond the Byline: Venture capital firms lure health system CEOs

Senior Operations Reporter Alex Kacik and Deputy Editor of Digital Health Business & Technology Gabriel Perna talk about why more health system CEOs are joining venture capital firms.

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Alex Kacik: Many health systems CEOs delayed their retirements or job changes during the pandemic. Now we're seeing a wave of top executive departures at the sector. A notable portion of those large health system CEOs are joining venture capital firms. What's the draw and will more likely follow? Welcome to Modern Healthcare's Beyond the Byline, which offers a behind the scenes look into our reporting. My name is Alex Kacik, senior operations reporter, and I'm joined by Gabe Perna, deputy editor of Digital Health Business and Technology. Thanks for coming on Gabe.

Gabriel Perna: Yeah. Thanks for having me, Alex. Excited to be here.

Alex Kacik: All right, Gabe, let's start with the most recent news from last week with Intermountain Healthcare CEO Dr. Marc Harrison announcing he was leaving the health system to join General Catalyst. What can you tell us about the venture capital firm? And what about it could be attractive to health system CEOs?

Gabriel Perna: Yeah, so General Catalyst is one of the most active digital health venture capital firms out there. And in fact, it probably is the most active. In 2021, the company had 37 investments, according to our database. The next closest VC had 20. And it's been a similar story this year and the company actually just closed the new $670M fund centered on health insurance. So as some companies are peeling back investments, they're going full throttle. General Catalyst Managing Director Hemant Taneja is one of the most foremost investors in the digital health industry. He helped Glen Tullman famously build up and sell Livongo, and he's been at the forefront of many other big health tech deals. He's also formed a lot of relationships with health system CEOs including a few who have switched over to the VC world. Along with Dr. Harrison There's Dr. Stephen Klasko, Ron Paulus, and from the pharma world, he brought over Ken Frazier from Merck. And in fact, he and Dr. Klasko wrote a book together on health system innovation. So, he's a well-connected guy.

And I think for health system CEOs who are interested in this switch, it's easier to do it when you know someone like this, and you have a strong preexisting relationship. And in fact, Klasko and Harrison both created formal partnerships with their health systems, Jefferson Health and Intermountain, and General Catalyst before they left to work at the VC.

So, I think in general, these guys are looking for an opportunity to change the entire healthcare system, not just their corner of the world. You know, we've seen a lot of progress with digital health since COVID. But the industry has a long way to go and transforming itself and General Catalyst gives them the chance to be kind of at the forefront of this transformation.

Quickly, I asked another doctor turned to VC this question, particularly as it relates to Dr. Harrison. And he said positions and those who have been executives have seen kind of the challenges with the healthcare system, and they want to be part of that larger change. So, I think that's a big part of it. Now, obviously, we can't ignore the money aspect. There's a lot of money to be made in the digital health world. That being said, it's not like these guys can find positions where they get a nice paycheck. So, I do think that's part of it. But I think it's really about making the impact.

So Alex, what have you heard about why CEOs may be leaving the provider sector?

Alex Kacik: So this news broke at I don’t know 4pm CT on August 11. And I reached out to different consultants and industry folks to learn more about their reaction and why they thought Dr. Harrison was leaving Intermountain. This is one of the most interesting takeaways, we decided not to include it in our update because it just it didn't fit. But in the narrative, but an executive search consultant said, with the caveat that he didn't know if it applied to Intermountain but leading a health system is becoming so challenging that most CEOs, especially ones with a lot of years left in their career, will jump at the opportunity to get out of the provider space. Many CEOs are leaving ahead of the posse worried that they will be blamed by their boards, clinical leaders for the turmoil in the system. It's a tough space to operate in right now because you just have this confluence of factors related to you know, the labor shortage, some financial issues is if COVID funding runs out. The pandemic has taken a toll on everyone. And it's leading to a major restructuring of the health system. So, some may not want to stick around for that. We've seen some retire from the industry altogether after hitting a bit of a delay during the pandemic. Others are switching jobs. So more than 60 hospital and health system CEOs have left their posts through the first half of the year. And that's a 50% year over year increase. More expect do so through 2023. But less than half of the hospitals and health systems surveyed last year had a written completed succession plan. Meaning they could be dealing with a range of financial and organizational consequences if they're not prepared.

One of the things that was interesting from the reporting last week, Intermountain sent us an internal video that Dr. Harrison sent to the employees. He was hinting at what that new healthcare business General Catalyst is going to be standing up. He said it will, “make healthcare more equitable, accessible, and affordable for millions of people across the country and around the world. It is not competing with health systems and will make them healthier,” he said.

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So, looking at the partnerships that GC has made with health systems and the current companies that has funded around digital health, what could that new venture be?

Gabriel Perna: Yeah, I thought that was interesting, too. A few weeks ago, I spoke with Christopher Bishop, he's the managing director of General Catalyst, one of the top guys there. And he said, the company has really zeroed in on what they call’ health assurance’ not to be confused with health insurance, health assurance. And as you said, it's kind of about improving equity, lowering costs, improving access. That's really at the center of what the firm is investing in. And in fact, Bishop said companies need to be aligned with that vision to even be considered for an investment. But what's interesting to me is, he's not, Dr. Harrison isn't really going in as an investor, he's going to start a business. So that's kind of a switch.

A few months back, I spoke with Taneja. And he said, there should be no Amazon of healthcare, which is kind of ironic, because Amazon recently made a pretty big purchase into the healthcare world. But what he really meant is venture capitalists in healthcare should be building this ecosystem, not Amazon. He said the company is interested, “an ecosystem of companies that collectively view health assurance as something that they strive for.”

I think this platform business is going to be a big part of that mission. They're going to, they have so many companies that they invest in, if they're able to connect them on some kind of platform. That could be very powerful. I mean, we're talking. I mean, like I said, there was 37 companies last year, there's more this year, we're talking about a lot of different kinds of digital health companies connected together. So, I'm interested to see what this develops into. I do want to ask you about this succession thing, because I think it's a big missing piece.

What are the consequences for these health systems if they do not have a completed succession plan?

Alex Kacik: So, like I mentioned earlier, only 44% of 260 hospitals surveyed in the 2021 Governance Institute Report maintain a written updated CEO and senior executive succession plan. A bad executive hierarchy and cost a health system between five and 15 times their base pay. That was from one source who was quoting a report from Acadia, which is a consulting firm.

So outside of the financial consequences, if the transition isn't communicated well regarding the intent behind the transition and the process, you know, you more employees may leave. Rumors circulate about job changes, layoffs and restructuring, and things snowball quickly. I was talking with health systems to figure out what their plans are. And one anecdote from Scripps Health, down in San Diego, told me, their CEO has a prewritten letter locked in a safe that he has written his picks for the next in line for his position and other senior executive positions. Only he and his secretary have access to it in case of an emergency and something happens to him. But as their communications team regularly updates a draft of an internal memo briefing employees on an unexpected leadership change. When it comes to planned departures, they have three levels of executive training programs, where employees can familiarize themselves with how different departments work, they can have these Q&A sessions with leadership. All that being said, this is a profitable, well-established system. I imagine organizations with fewer resources and a less experienced Board have a difficult time breaking away from day-to-day operations to get their succession plans sorted out.

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So, Gabe, I had another question. And it's something that we brought up earlier. But I if I were to ask you five years ago that major health system CEOs were going to leave that position for a venture capital firm that invests in healthcare tech, what would you have said?

Gabriel Perna: I would have been downright shocked. Now obviously, no one could have predicted a pandemic. Not only did that create turmoil within health systems, as he said, and gave a lot of these people an incentive to leave. But it's created this opportunity for digital health and transformation. You know, people have realized that they can get care out of the hospital and out of the doctor's office in their homes, it's very appealing. We went from less than 1% of visits being done via telehealth to 80%, to where it's kind of settled and now around 20%.

That's a huge shift, you know, from less than one to 20%, that is a huge shift. And that has basically happened overnight. But even still seeing all that it still is very surprising. I've covered this industry for 10 plus years, and for the longest time, healthcare has kind of had to go kicking and screaming into adopting technology, most famously with EHRs. But it does seem that important people are seeing the value in front of them, seeing the opportunities in front of them and making this switch. I mean, Dr. Harrison, he was the CEO of Intermountain Health, that probably made him one of the more powerful people in the entire state of Utah. So, for him to leave that for a VC, you know that for a VC that invest in health tech, that says a lot I think.

So, I think we'll be seeing more of this that if guys like him and Klasko are setting the standard, I think you'll see others make the switch.

And as the CEOs change jobs, Alex, what will be the impact on pay? We were talking about it earlier, you know, the pay is an incentive for some of these guys, to make that switch. But, you know, from the health system side, what's that impact?

Alex Kacik: With more turnover, you're just going to have upward pressure on base pay and incentive. So particularly now, succession planning, discussions carry more weight, as things are so tumultuous in the healthcare environment. You know, boards are tasked with finding a CEO who can, like you said, manage the shift to remote care, which is a pretty big overhaul, working with new payment models, waning reimbursement levels and a workforce in flux. So those who qualify for the job will get a pay boost, the experts I spoke to said.

We actually, Caroline, our finance reporter, just came out with a good story in this week's magazine about executive pay trends. And part of the data that we got from the exec pay consultancy SullivanCotter showed that total cash compensation for hospital CEOs rose 17.2% from 2021 to 2022, according to the survey 493 hospital CEOs. That's a bit higher than average. And, you know, I imagine, over the next year will incrementally see these pay bumps. Hospital executives pay, though, has increased steadily over the past decade.

I thought one of the interesting things that a source told me was that the pay increases aren't necessarily linked to performance. Obviously, some of the incentives are performance based, but they're often a product of competition. So, you know, as you see different entrants coming into the market, and you are competing for similar levels of talent, you know, that could just be a could be the main driver there.

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Gabe, one of the things I wanted to cover, as you take this into totality and see these transitions happening. What's your general outlook for the digital health sector? How will these major health system CEOs shape the industry?

Gabriel Perna: Yeah, it definitely remains to be seen. The industry is in a bit of a correction now after kind of the highs of 2021. We're seeing fewer funding rounds, particularly the large size funding rounds have gone down some of the companies that got those large funding rounds in 2021, the so-called unicorns who are valued at over a billion, they're actually paring back spending, and in some cases, even cutting jobs. So, it's a bit of a reality check, I think. Not all companies are going to make it. I think M&A activity will pick up we mentioned Amazon. I think you're just gonna see more of that as the year goes on.

But I think what's to come from this correction will be stronger companies with more defined value propositions. And in that regard, I think health system CEOs who have seen the problems with access costs and equity firsthand and understand them, they can be a huge help and building out those companies. I mean, if you were building out a company in that regard, especially if you're trying to sell to health systems, which is a hard ask, you'd want someone like Dr. Harrison or Dr. Klasko, or any of these guys in your corner, because they know it pretty well. So, I think there's a lot of potential here.

Alex Kacik: All right Gabe this has been awesome. Thank you so much for coming on and sharing your expertise with us.

Gabe Perna: Absolutely. Thanks for having me.

Alex Kacik: All right and thank you all for listening. You can subscribe to Beyond the Byline on Spotify, Apple podcasts or wherever you choose to listen. You can support the reporting of Gabe, myself and our team of reporters by subscribing to Modern Healthcare and giving us a follow on Twitter and LinkedIn. Thank you for your support.