In a massive story this week, Summa Health, Summit County’s largest employer and hospital system, is in talks to be acquired by Health Assurance Transformation Corporation (HATCo), a venture capital firm owned by General Catalyst.
The two sides announced Wednesday that they had signed a non-binding letter of intent and anticipate finalizing a formal agreement in the coming months. The move will transform Summa Health from a nonprofit to a for-profit hospital.
Signal Akron’s Doug Brown spoke with Case Western Reserve University’s J.B. Silvers about what this means for the hospital system, its patients, and its employees. Silvers is the interim co-dean and professor of banking and finance at the Weatherhead School of Management, with a joint appointment in Case Western Reserve University’s School of Medicine.
What was your first reaction when you saw the news?
I was very surprised, I didn’t expect it. Summa has been looking for a partner for a long time and they’ve talked to all the systems in Cleveland. They had a deal lined up with a big system in Michigan – Beaumont – that fell through a couple years ago.
It’s no secret that they’re looking for a partner. With the competitive situation here and the need for capital, they feel they’d be better off as a part of a larger operation. But I did not expect it to be this group, you know, a for-profit, so I was surprised.
It was not a surprise Summa was partnering with somebody, but it was a surprise that the partner was a for-profit and they were going to merge into it.
Why do you think this firm is interested in Summa and why do you think Summa was interested in this particular deal?
The HATCo folks would be interested in Summa for good reasons. Summa is a very sound system, it’s financially in good shape, it does lots of good things, it’s got good leadership.
[Summa Health President and CEO] Cliff Deveny is an excellent doc who’s been around a long time and done all the right stuff. Summa also has a long history of what’s called “value-based care.”
They were one of the first to get into accountable care, which is a method for Medicare to pay you a flat rate, but then more if the outcomes are better in terms of quality. They took that bet earlier than most and have done well with it.
Value-based care means that you don’t have to cut costs as much as you have to make the value higher, have a better product, better outcome, and you can take a longer point of view. They’ve been one of the more successful systems doing that. And now they’re thinking ahead.
The General Catalyst people, they’re looking for a test kitchen. They’re looking for a good system where they can try out things from their portfolio of companies. There are more than 100 companies in the healthcare business that they’ve made investments in, and they’ve got a network of about 20 other hospitals where they try things out.
But they want to be able to take those 100 companies, and other partner companies that have to do with healthcare, and have them try out, develop, co-develop, and use new technology in a good-quality system. That’s Summa. They want to have a place that’s more than just a customer, they want a partner. That’s what they say in the literature, and I think that’s true.
I think they’ll do stuff in Summa that will prove their point, show the outcome, and use it with the others they work with throughout the country to change health care. They’ve got a pretty grandiose plan in mind in terms of health care, not by cutting costs and trying to crank the profits, as is often the case with private equity firms, but by increasing the value and the net outcome for the customer, and that’s a real interesting proposition.
Coming from the journalism world, I’m always concerned when private equity firms or venture capital firms buy a news outlet, that they’ll just swoop in, chop it up for parts, and squeeze every possible cent out of it.
Were you at the Beacon Journal?
No, but I did write for Deadspin, owned by Gawker Media, years ago, and I know what happened to them and a bunch of other outlets.
You’re absolutely right, that’s the history.
It seems like you don’t have those concerns about this deal?
If it were a pure financial transaction, yes I would. Private equity has bought into a lot of hospitals around the country and that’s what they’ve done: They cut costs, try to get the profits up, flip it, sell out. Those are financial transactions.
This one, they say, is not just a financial transaction, though it’s a very expensive transaction – we’re talking a billion, two billion, three billion dollars. But the story they give has credibility to it. It has credibility because, one, the kind of investments they’ve had in the past and, two, the people involved.
This isn’t just a bunch of Wall Street guys coming in and doing what they want to do — the principals here are very interesting, and that’s one of the reasons why I’m more optimistic than I might have been.
Cliff Deveny has been a really good leader at Summa, he’s done good stuff, a well-regarded doc. I was on the SummaCare board for about 10 years, and he was on that board with me and he’s definitely a great guy. He really wants to do the right thing.
[HATCo CEO] Marc Harrison is the other guy. Those are the two guys making the deal. Harrison is a well-known commodity, he was at the Cleveland Clinic for years, ran the Abu Dhabi operation, and I think he was one of the candidates to take over as CEO.
He went off and became the CEO of Intermountain, which is a very reputable and large organization in Salt Lake City that pretty much dominates the whole mountain area from Utah to Nevada. They’re very innovative and have done a lot of “firsts” in terms of quality and patient innovation systems and things like that. He had been working with some of the companies in this Catalyst Group and used them as CEO of Intermountain to do some innovative things there.
You’ve got two people who are really stand-up people. You’ve got good histories, a history of Marc’s relationships with this organization, and a meeting-of-the-minds about how they’re going to do it. It gives me much more confidence about it than if it were Wall Street swooping in to do a financial deal. This is not just a financial deal.
One of the big points from this deal, it seems, is that Summa will be going from a nonprofit model to a for-profit model. I’m a Summa patient, and I’m not sure what that means for my healthcare or the average Summa patient.
Immediately, it’s not going to make any difference, there’s no big difference. They’re talking about a five-year transition here and they’re going to do stuff over a longer period of time.
What it means to go from not-for-profit to for-profit has to do with taxes and access to capital. Summa has about $800 million of debt, it’s all tax-exempt debt. That means whoever lent them the money doesn’t have to pay taxes on the interest payments they get back, so as a result the interest rate for that debt is significantly lower, a big drop. They’re going to lose that tax advantage when they go from nonprofit to for-profit status, and that’s a big deal. They also might have challenges with their property tax exemptions and things like that. It has tax implications, that’s one.
But on the other hand, it changes their access to capital. The company is going to put in a lot of money to the organization when they do this acquisition. That’s real cash. This is interesting because what happens – it’s called the “conversion” – the money goes into a foundation and, in this case, the Summa Foundation, it’s already there. It’s not huge now, but the Summa Foundation will become a very large foundation overnight when this happens. Hundreds of millions of dollars will go into that foundation and it’ll be dedicated, I presume, to the Summit County area in terms of making grants to organizations, investing in education programs, food, medical outreach.
They plan to keep the same level or more of their community benefit that they have right now. That’s a big deal. Those conversion foundations have been instrumental in healthcare – there are three of them up in Cleveland here that give healthcare grants. It’s somewhere short of a billion dollars they’ve got invested. Summa’s going to have the same thing. That’ll be pretty important.
When will Summa patients know the difference the transaction has made and how will they feel it?
That’s a very good question and nobody knows.
My guess is that this will be a gradual change over time. It won’t be obvious. Summa’s already built new buildings, the campus looks like it’s really grown very well. It’s a first-class academic medical center down there. Patients going in aren’t going to know the difference at all. What they will notice over time is, probably, that the level of technology will get better, innovative technology advances, things like that they may not have seen before will show up.
I recommend looking through the portfolio of companies that General Catalyst lists on their website and ask them what’s going to be first, second, and third in terms of application into this test kitchen that you now have with Summa. Like telehealth, nobody used it much until COVID came along and then boom, everybody used it. There’s going to be other stuff like that that may be already there but not used very well yet.
The other thing is, I was talking with someone down there and they said they turn back about 18% of the volume they would otherwise have because they don’t have enough staff and capacity to take care of it. Part of the trouble with staff is they sometimes do unproductive things, and so if you can get the staff stabilized, the workflows are better and people aren’t burnt out as much. They might be able to increase the capacity to take more patients and access times would get better. That sort of thing.
It all depends on what this company is going to bring to the table, and we won’t know that until they get all this hammered out over the next six months.
You mentioned it a little bit, but I’m wondering what this move means for Summa employees. If you’re a nurse, a doctor, how are you feeling right now?
You’re probably nervous, because the history of this hasn’t been very good. And they already have staff shortages anyway. So yeah, you’d be worried.
Deveny and Harrison have made public statements that they don’t intend to have any layoffs whatsoever. They expect to maintain the staff and grow it, actually. That could be. One of the reasons you have staff shortages is that the working conditions aren’t very good in many cases in healthcare and people get burnt out, so if you can deal with stuff like that, you may be able to make the staff more productive and happier than they are now.
What is the best realistic outcome for this deal, and what is the biggest realistic concern about it?
Well, they’ve got to do it first.
Summa’s gone to the altar more than once, and hasn’t gotten to the vows. They were all set to go with this outfit out of Michigan, Beaumont, and I thought it was interesting, it was strange because it was basically Michigan versus here. Beaumont was really interested in the insurance company, and they probably would have taken that insurance arm, SummaCare, and expanded it into Michigan. But they couldn’t come to an agreement, so it fell through.
This here is not an agreement, this is an intent, they’re engaged now. They’ve got to get to the courtship and get to the altar. It may not happen, in other words. Given the parties involved and the fact that the two principles get along well, they know each other, they talk about the common interests and all that, I think it’s less of a problem than it might be otherwise. The management is supposed to stay on, and the staff is supposed to stay on, so basically it won’t look that much different.
The board structure will change and the governance will be from this new company. I presume that some of the same people will be on the board, but there will be people from HATCo that will be on the board, too, making decisions that you can’t predict at this time.
The fact that they want to use this as a test kitchen is really important. They really want to continue to be stable and be a good, high-quality organization because they want to build on that. They want to try stuff out. It sounds like boilerplate but I think it’s true, I think it’s what they’re intending to do.
What are the hurdles that would prevent this deal from going through?
The two issues that often cause trouble are money and management. I don’t think they have a price [for the sale] figured out yet, I think they’ve got a range maybe but they haven’t commented on that. But if they had a dollar figure they probably would have told us, so they’re still negotiating on what it’s worth.
Often with these things, they have to specify certain things they’ll do, like maintaining the community engagement of Summa in the community, that they’re not going to back off from social responsibility, from community funding of events, and whatever else. There may be some conditions like that, but I doubt if that’s an issue in this case. I would say it’s probably money – how much is it worth? How much money do they get for the foundation?
And if they were going to come in and replace management and put somebody else in, then they could say no dice, ‘we don’t know what your people are going to do.’ But all the signals are that the same management is going to continue on, so that will probably be less of an issue.
Are there issues related to this acquisition and Summa’s future that we haven’t talked about but should? What else should people know about this?
Well, the uniqueness of it. I am not aware of anybody else that has done anything remotely like this. There are systems that have innovation arms – Cleveland Clinic Innovations, UHS Harrington Discovery Institute, the ones in New York all have arms like this that are basically investing in startups, investing in new technology, partnering with innovative organizations, some of which will come to fruition, others will not, but they will then try to integrate them into the organization to see what works, internally. But it’s a one-off and that’s not their core business.
Here you have a company whose core business is finding good deals, good technology, good managers, good opportunities, and then try to capitalize on it. You’re not, from the inside of the organization, trying to develop a few things that are going to make a marginal difference. These are outside people who want to bring all of that in. It’s the direction of it. Innovation is going to be coming from this private-equity firm with all these companies in their portfolio.
They’re going to bring all that into this, and there will be questions about how well they can do that. You can’t just walk in and immediately do 43 new things that nobody’s ever done before. Managing that process is going to be a challenge, but it will be interesting, too, because the people at Summa now are going to be right on the cutting edge of new things coming out.
That’s exciting. They’ve got a partner with deep pockets, and that’s a big deal.