Nonprofit hospitals, awash in cash, seek yet higher returns as health care VCs

hospitalinvesting-khn-300x106In an unbelievable fiscal oasis surrounding a spot that a newspaper columnist dubbed Baghdad by the Bay, slick dudes who call themselves VCs (as in venture capitalists) scurry around carrying the equivalent of magic wands and sacks of money in pursuit of elusive unicorns — rare start-up enterprises that Wall Street will value at $1 billion or more.

The sky-high stakes in this modern equivalent of an investing casino typically deters more cautious investors. But apparently not an increasing number of hospitals, which, of course, describe themselves, especially for tax purposes, as nonprofits, reports Jordan Rau of the Kaiser Health News (KHN) service.

As he laid out in a recent article:

“Eager to find new sources of revenue, hospital systems of all sizes have been experimenting as venture capitalists for health care startups, a role that until recent years only a dozen or so giant hospital systems engaged in. Health system officials assert many of these investments are dually beneficial to their nonprofit missions, providing extra income and better care through new medical devices, software, and other innovations, including ones their hospitals use. But the gamble … has been harder to pull off than expected. Health systems have gotten rattled by long-term investments when their hospitals hit a budgetary bump or underwent a corporate reorganization. Some health system executives have belatedly discovered a project they underwrote was not as distinctive as they had thought. Certain devices or apps sponsored by hospital systems have failed to be embraced by their own clinicians, out of either skepticism or habit.”

To be sure, the rising number of institutions venturing into roles as health care VCs is small, Rau reported. Only a few of the largest hospitals and health care chains are sinking major sums into what amount to speculative ventures. But the big takeaway here may be the flood of cash that surges through medical institutions and the inclinations of the suit-wearing MBAs who run them, as KHN reported:

“Though their tax-exempt status is predicated on charitable efforts, nonprofit health systems rarely put humanitarian goals first when selecting investments, even when sitting on portfolios worth hundreds of millions of dollars or more, according to a KHN analysis of IRS filings. Together, nonprofit hospital systems held more than $283 billion in stocks, hedge funds, private equity, venture funds, and other investment assets in 2019, the analysis found. Of that, nonprofit hospitals classified only $19 billion, or 7%, of their total investments as principally devoted to their nonprofit missions rather than producing income, the KHN analysis found. Venture capital funds are a potentially lucrative but risky form of investment most associated with funding Silicon Valley startup companies. Because investors seek out companies in their early stages of development, a long-term horizon and tolerance for failure are critical to success. Venture capitalists often bank on a runaway success that ends up on a stock exchange or in a sale to a larger company to counterbalance their losses. As an asset class, venture capital funds assets annually return between 10% and 15% depending on the time frame, according to PitchBook. While they lack the experience of longtime venture capitalists, health systems posit that they have advantages because they can invent, incubate, test, and fine-tune a startup’s creations. Children’s Hospital of Philadelphia, for instance, parlayed a $50 million investment into a return of more than $514 million after it spun off its gene therapy startup Spark Therapeutics.”

That kind of ka-ching resonates throughout the industry, Rau found:

“Many hospital-system venture capital funds, both established and new entrants, have grown rapidly. The largest, run by the Catholic hospital chain Ascension, has been in business for two decades and this year topped $1 billion, including contributions from 13 other nonprofit health systems eager to capture a piece of the returns. Providence, a Catholic health system with hospitals in seven Western states, launched its venture capital fund in 2014 with $150 million and now has $300 million. Cleveland-based University Hospitals launched its own fund, UH Ventures, in 2018. ‘We were candidly late to the game,’ said David Sylvan, president of UH Ventures. UH Ventures yielded $64 million in profits in 2020, Sylvan said, which pushed University Hospitals’ net operating revenue from the red to $31 million. Sylvan said the largest income contributor from UH Ventures was its specialty pharmacy, UH Meds, which provides medications to people with complex chronic conditions and helps them manage their ailments.”

The KHN story spotlights apps and software developed by hospitals and health systems, particularly those that assist patients in their care or increase institutions’ operating efficiencies. Other news articles have reported that doctors, notably specialists like orthopedists, neurosurgeons, and others, are developing from their practices hardware- and gear-based enterprises that can prove more lucrative to them than the highly compensated time they spend with patients.

Doctors and hospitals should be allowed to earn a fair return for their efforts, of course. But is it queasy-making for regulators, politicians, and the public to see nonprofit institutions jumping into “capitalism deforming” practices that a Stanford engineering professor with plenty of experience with VCs described as a wasteful “money-hungry mob?”

In my practice, I see not only the harms that patients suffer while seeking medical services, but also their struggles to access and afford safe, efficient, and excellent health care. This has become an ordeal due to the skyrocketing cost, complexity, and uncertainty of treatments and prescription medications, too many of which turn out to be dangerous drugs.

As patient advocates look at ways to slash at bankrupting health care costs, they have put hospitals squarely in their sights, as these institutions have become a major driver of spending, taking up roughly 1 of every 3 dollars spent in this area (~$1.2 trillion in 2018 alone). Even as hospitals and the people in them argue they need to invest in medical innovation and institutions’ futures, too many of them are  grinding down patients and their families by grubbing mercilessly for every penny in a poor and unacceptable way for any enterprise to treat its customers. This is exponentially more so with hospitals exploiting the poor and uninsured to pad their financial statements.

Patients’ medical debt, including sizable sums held by hospitals and sold to collection agencies, alone amounts to a staggering $140 billion, a recent study found.

It doesn’t take a finance Einstein to ask whether hospitals, for their own sakes or pushed by regulators and politicians, should not only do better by those who profit off them but by strapped patients, too? We have a lot of work to ensure that health care in the wealthiest nation on the planet is a right not a privilege and it is as affordable, accessible, and safe as possible.

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