Welcome to the Heart of Healthcare podcast. Hello listeners and welcome back to the show. Today I'm with Hemant Taneja, the CEO of General Catalyst, one of the largest and most influential firms in technology and healthcare. Over the last decade, Hemant has become a leading voice in how innovation can and should reshape systems for good. He's backed a ton of healthcare companies including Cityblock Health, Devoted, Sesame, Transparent, Row, and many more. In his new book, The Transformation Principles, he explores what it really takes to build enduring mission-driven companies in sectors like healthcare. I just read it last weekend. It's fantastic. Hemant, thanks for being here.
You came into healthcare through the lens of technology and systems change, not necessarily the traditional healthcare medicine route. What was that moment that you realized healthcare was like that next frontier that you wanted to tackle?
Well, first of all, I came into healthcare with complete serendipity. What happened was this was 20 years ago when I got a call from Partners Healthcare. I was in Boston at that time and they asked me if I would want to look at this data set they've been building around electronic medical records. And my first question was, what's an electronic medical record? So that tells you I knew literally nothing about it. And that train of thought led to the creation of a company called Humatica, which eventually got acquired into Optum Analytics, and then that's where I had met Glenn. Glenn was running Allscripts and he invested in Humatica with us. So then he and I and Lee decided to start Levongo in like 2012, 2013. Once that started working, the confidence grew that we sort of understood the limitations of technology. I had seen some of that at Humatica and we also understood the power of creating a true culture that was at the intersection of technology and healthcare at the ground floor and that we could build great experiences for consumers. It just felt like we figured something out. We should lean into it and here we are sort of a dozen years after that.
Now you're a healthcare person. When I came to healthcare from Boston as well without a background in healthcare, I got a ton of pushback and I met a lot of what I call the COG or the cranky old guard and these were folks that were just so stuck in their ways and not open to the possibility of doing healthcare in new ways. Did you face any of that?
The good news is I am the COG, so maybe I didn't face much resistance there. No, I think we always took it with the lens of building technology companies just intuitively focusing on bending the cost of healthcare and the principles that eventually became health insurance. I think it led to an interesting value creation path and in our team the confidence grew because Levongo ended up becoming a great outcome. Then we started Camir in 2016, 2017 with a couple of friends and that started working. So I think there was also the sense that if this industry needs a lot of help, we've clearly figured something out. It was hard to articulate what that was, but we figured something out and we really should go lean into it and make a difference. And obviously in 2020 when COVID happened and I was publishing my book, talk about having a prepared mind and a black swan moment to go execute that against. Sometimes things happen for a reason. What's one idea or assumption about healthcare that you've changed your mind about over the last 10, 20 years?
What's one idea or assumption about healthcare that you've changed your mind about over the last 10, 20 years?
Look, in technology companies, you always look at how the revenue is growing and the unit economics and that's generally very good because the reality is it's a rational market that you're selling software into in most cases and it's growing because customers are making rational decisions and deriving a lot of value. You can make that leap. A lot of revenue growing in healthcare has no correlation with you actually doing good to the world. So I just don't pay attention to that as much in the early days and I very much focus on how is the system truly being impacted by this company and I've resisted just chasing companies that can grow revenue very fast. Now we have really fast growing companies but if you look at a lot of them there's a sense of purpose to them on what they're also trying to impact in the system. And that's been a true north for me in everything I have tried to do. I feel like revenue is such a leading KPI for most investors. So what is it that you're looking for in the early stages?
I feel like revenue is such a leading KPI for most investors. So what is it that you're looking for in the early stages?
Well, look, you want to see that it's a business that's going to be large, is going to have good margins, but everything meaningful that you'll do in healthcare will just have that. So I just think it's almost like an outcome as opposed to that's the input. My pillars of health insurance very much have been, is this something that's going to move us towards proactive care? Is this something that's going to move us towards affordability and accessibility? We're talking about City Block, for example. That's very much focused on that with your community care model or homeward. Same idea. And so we've tried to focus on those principles and test against that rather than can you build a billion dollars of revenue. I think you can sneeze and get to a billion dollars of revenue in healthcare. It's just not interesting.
It's too big of a market not to. You've said that capitalism needs to be more responsible. Do you think that you can convince other VCs of that? Because I don't know in a lot of ways they view their core job as just simply generating return for their LPs and thus themselves and it's kind of just how the market works. So I'm just curious your take on that.
They're not wrong. So I think the journey I'm on and we're on is to prove that this is the way to create the best returns. We're going to keep working towards can we create a really high performance investment business that also simultaneously has the greatest impact and is there a flywheel of profit and purpose that makes our companies and our own business more successful as a result of that. I think that's a journey we're on. I deeply believe it. A lot of the people at GC are here because they believe it and no one should follow us if we can't actually demonstrate that. I don't address people for having the traditional view because that's worked for the industry. I just think if our companies are building with the intention that I described for example in healthcare that they'll be the most successful and if that's the case then others will follow and that's the only case in which they should follow.
And in your book you contend that profit-only capitalism, which is what you kind of call that chasing shareholder value only, has run its course and will now do more damage than good. And curious why does the current global context make capitalism unsustainable?
Well, take the example of healthcare itself. If the goal was to keep adding cost to the system, that actually makes the whole system untenable. I mean, 50% of budgets in most states are Medicare, Medicaid. So what are those governors supposed to do in terms of education and other places if this is going to keep ballooning?
That's an example, right? Where natural tendency of capitalism would be like just go figure that out without really systemically making it better and shrinking the GDP of healthcare if you will. Another thing is I think if you look in the world of AI, the market forces are such that you could take a lot of the work that gets done in society and the business that gets conducted in society and suck it into a handful of companies. Natural market forces will take you there. In what world is that a sustainable situation? And so you need resiliency where there is inclusive prosperity. Every region is benefiting from AI and creating jobs and capturing their productivity gains that are coming at the expense of labor as opposed to it all goes into just a handful of companies. So I do think this transition in AI does require a lot of intentionality towards the ecosystems we're going to create on the other side of it. How much of this inefficiency in capitalism can be solved by founders versus we need regulation to solve it? New policies, better policy.
How much of this inefficiency in capitalism can be solved by founders versus we need regulation to solve it? New policies, better policy.
I'm not a fan of regulation per se. One of the books I had written was on Intended Consequences which was very much about the builders taking responsibility and focusing on the inputs into building the next generation of companies because I think startups are the most important institutions in some ways in this era. And if they have the right mindset and mechanisms in how they want to bring about goods and services into the world, that's much better than regulation, much better than things like ESG which are bolt-ons that are gamified behaviors, and much better than creating an environment where innovation can't really thrive. Regulation can stop it. I think you've seen that in some parts of the world where you don't see the most innovative companies because the administrations tend to overregulate. But there's trust, there's collaboration between technology and policy, there's a set of principles with which we're building these companies and focus on the right inputs. I think we can get most of the way there. I'm not saying regulation is not necessary, but I do think founders can take us most of the way there if they build intentionally.
On the payment side of healthcare, obviously we're dealing with a lot of unsustainable costs out of our pockets as premiums, out of pocket cost, Medicaid coverage shrinking. How can innovators support new payment models so that everybody can afford preventive healthcare?
Yeah, look, first of all, the thing that sort of says is that the work tax in healthcare is just incredible. Like when we started Camir, I was very inspired by Stripe which was increasing the GDP of the internet. 3% of revenues go to credit cards. How do you really sort of work off of that and turn that margin into all the software that these businesses need to run? And in healthcare, I was like, well, let's learn from that and think about reducing the GDP of healthcare and creating software that eliminates a lot of the inefficiency. It costs us 15 cents on a dollar to process payments, right? That's not what it is in e-commerce, but in healthcare it is. And how do we really compress that? And if you could turn that to 3% someday with AI and a lot of the tools that are getting built, what do you do with that extra operating margin? That's what you can invest back in the communities. That's what you can invest in preemptive care because we need a way to fund preemptive care and finance it. And because we don't think long term, unless every insurance company did it at the same time, no insurance company is going to do it because there's leakage, there's a game theory problem there. How are we going to get there? We need to open up the resources to invest through that.
Yeah. Enrollment is on an annual basis. So why would a health plan have an incentive to invest in your health beyond the any benefit it can reap within 12 months? Beyond that, it doesn't make sense. So you took what you call the outrageous step for a VC firm of buying a health system in my hometown in Northeast Ohio called Summa Health. What does a VC firm do with a hospital?
Well, I think the way I would like you to think about that decision was not because hospitals are great investments. I don't think I need to tell you that hospitals are very difficult.
Exactly. Falling knives. That's what I was told. In fact, that's why we didn't buy it in our funds because we wouldn't do that. We actually bought it on our own balance sheet. It's the mission and the desire to take a risk to do something about it is why we did it. And think about the opportunity our founders now have. I'm working with six of them right now and designing what a cohesive stack is going to look like that can take a shot at helping this system run with high margins like some of the for-profits do, using AI effectively, taking the burden off of the workforce that is so strapped, figuring out how to serve more people in the communities, bring innovation. And it's this incredible collaboration around a lot of these companies. Our portfolio companies are then working with Percepta, which is our AI transformation company that's mapping it all out on the backs of these portfolio companies. So that's an enormous unfair advantage for our companies that are working with us.
Yeah. So it's good for our companies, it's good for society if we take a shot at and make it work. And we're being responsible and taking the risk ourselves on the asset itself and not really putting our LPs at risk. So try to create conditions where everybody wins and the risk is on us. I just don't think you do anything great unless you are willing to take risk and if you have a better way to do it, tell me, I'll go do that.
It sounds like the goal isn't necessarily more beds and expanding that but using this kind of as a hub where the software can be validated and then the software is expanded nationally but not necessarily just keeping it within the Summa Health world.
Yeah, look, we're not developing new technology. Our companies are developing those technologies. We're just putting it together.
And if we can demonstrate it as a model, then others will follow as well. And it's already happening. We already have various health systems that are closely watching this, have confidence in our companies. You look at companies like Camir, Hypocratic, Cityblock, AI, and many others that are working actively, Transparent, these are all companies working with us and helping us through what we're going to do. If that orchestration of these companies together can systemically drive that change, then we have a playbook and then we have 5,000 hospitals to go do this too. That's the way I sort of think about it. It's not going to be easy and it's not going to be quick, but I think it's worth the impact we can have with it.
