5 – Elizabeth Holmes | VC Updates | PCE Index Increase | CommonSpirit Health

Marcus: [00:00:00] All right. We’re back. Episode five. What’s up, Vic? How you doing? Hey, I’m good. Good to see you. Um, we, uh, we had a lot of great feedback to the last episode. Yeah, I’m glad

Vic: people

Marcus: are

Vic: listening.

Marcus: Yeah.

Vic: Like wow.

Marcus: People, I didn’t know people were listening up until the last episode, but yeah, people are definitely listening.

Um, I think we got, Feedback on both sides, right? You know, feedback on the, Hey, thanks. This was a great, you know, rundown on this. And then also, Hey, maybe you were a little too hard on, on paratherapeutics, um, you know, and the folks that were involved.

How did you feel about the feedback that we got?

Vic: I mean, I think it’s a, it’s a, it’s an important topic with emotions on both sides, right? Like, I think it’s an, it’s important for people to [00:01:00] understand. What happened with pair because if we don’t learn from the past, we’re going to repeat the same mistakes.

And I also think that there are really passionate entrepreneurs working on great innovations. And many of them felt like we were somehow attacking them. And I, I, that wasn’t my intent. I don’t think that was your intent. It’s hard to build successful healthcare innovations and get them to market, get them reimbursed and paid for.

And that is just part of the part and parcel with doing healthcare.

Marcus: Yeah, I agree. I mean, we, we ended the show with a quick review. It was pretty quick of a 16 Z’s post on their website or bound. Um, it’s time to [00:02:00] build in healthcare. And I almost think we need to kind of pick up there. Um, cause we didn’t really make that in the title of the show.

It wasn’t something, you know, we, we, there’s so

Vic: much. Focus and attention and research around hair. And then we just threw that in there.

Marcus: Sure. Sure. And, and I think, I think they were related, um, but maybe we didn’t, you know, fully express why we took the time to, um, review that like literally line for line, you know, calling out specific aspects of it.

And I, I think for me, um, I just think that what we’re doing in healthcare venture capital. What the founders are doing, who are trying to build innovative healthcare companies. Um, it’s serious business. Um, especially when you compare it to, um, like a digital marketing, social networking, e commercy [00:03:00] kind of

Vic: examples.

I mean, what triggered me as examples that a 16 gave as success stories that could be replicated in the healthcare setting did not resonate with me as, as the same, right? So at all lift Airbnb are not, those aren’t the same kind of markets.

Marcus: No, and they were very, um, you know, we spent a lot of time talking about the impact of the regulatory environment.

On the entire class of innovation that is digital therapeutics. Right. Like, you know, we, we were directly connecting the actions of a little bit, the FDA, but more CMS and the results of what happened to that company. Right. Yeah. And to just sort of say that the hotel industry or, you know, the taxi industry are highly regulated in the same way.

Is. It’s not even an understatement. It’s just not true. It’s just not. It’s misleading is what I think. It’s just, it’s just [00:04:00] not true. And I think that was, you know, there were a couple of key things we were trying to point out in the pair breakdown. One of the key things was the importance of having a clear path in the regulatory environment to produce innovation that actually can become viable.

If you don’t have that, it’s not You don’t have a real shot. And I mean, that’s, that’s the, that’s the unfortunate truth. And it’s really, really important for venture investors to understand that whether you’d be like a fund manager or you’re an LP, you know, who’s in a fund and you’re trying to figure out whether or not your fund manager knows what they’re doing or you’re trying to build something.

Yeah, yes, exactly. Like you need to understand. That there’s a time and a place for pushing the boundaries of what’s going on in the regulatory environment, spending significant amounts of venture capital, probably not the right place for that.

Vic: Yeah, I mean, I think the difference to me in the, as I was thinking about it over the last seven days is [00:05:00] the infrastructure in the federal government to regulate health care.

Is stronger because they also are buying half either directly indirect or they’re they’re paying for a half of health care, right? We’re in hotels. Taxi cabs or other markets that are regulated, they are the referee, but they’re not, they’re not the buyer. They’re not, they’re not spending the kind of money that they spend in health care.

And that’s just a different thing. They have a lot more market power because. There’s such a big buyer hat, basically half the spend and they set the price that all the other, all the other buyers look to them and yes, they, they set the reference price and then you, you price your against that,

Marcus: but they set the, they set the fundamental price that we all use.

As reference. So I

Vic: think it’s important just to go back to pair quickly. I mean, it is true that, [00:06:00] that digital therapeutics offer a lot of promise, promise, but it’s also true that pair was the celebrated poster child for how this was going to be changed, changed the whole landscape

Marcus: because of their financial results, not because of their clinical results,

Vic: because of their financial results because of the.

The strategic partners, they assembled that we went through last week. And what was disappointing is that when they spacked and to get public, all of those credibility stamps, all those strategic partners sold. And I am sorry, but I think that is. Challenging for the digital therapeutics market right

Marcus: now.

I agree. And, and we don’t need to harp too much on pair. I mean, today, as we’re recording this, Elizabeth Holmes is she’s going to jail today, [00:07:00] today, and that’s yet another case, right? Where. A promising set of technologies is going to have a black eye for a very, very long time, right? Because of a found and what’s so incredible, especially like being in healthcare as a VC, what’s so incredible is that she’s going to jail for defrauding investors.

She’s not going to jail for any harm done to patients. That’s that part is just,

Vic: that was, I mean, I wasn’t paying attention, but I think that probably was the easier thing to prove. And the DA, whatever wanted to. See her go to jail and the, the reality is that if you’re going to innovate and bring new technology to market in healthcare, people’s life is at stake and it’s just not the same as a ride home after dinner.

Marcus: No,

Vic: and it was frustrating. They 16 [00:08:00] Z sort of pretended that a, they knew healthcare totally. Because we’ve been in this for a long time, and I’m learning. The reason we’re doing this podcast is it allows us to sort of dive in and learn things, and it has to be taken seriously. And that provides huge opportunity to impact the world, impact people’s lives.

It’s why I’m in Healthcare Venture. It’s why I think it’s why you’re in Healthcare Venture. It’s, it’s important stuff. And part of that is. It’s regulated and digital therapeutics and blood testing, all of these things that came out on the wrong end of the regulations, unfortunately, set us all back because people didn’t didn’t follow the rules correctly.

And that just is I mean, people can be mad about us saying it, but. It just is, [00:09:00] it is what it is kind of.

Marcus: Yeah. And, and, and we did, you know, we, we had some good exchanges, uh, afterwards with, with some listeners and, and, uh, one of the points made in those conversations was that, you know, we could have pointed out that there were many other SPACs.

That companies that were going, you know, out via SPAC, I thought that we did highlight that, but you know, the wall street journal has done us a favor here. Um, you know, on May 30th,

Vic: they obviously were listening,

Marcus: right. Uh, you know, company insiders made billions before SPAC bus. So like, we’re, you know, everyone, we just, we’re saying the quiet part out loud.

Right. I mean, this is, you know, this is not the kind of PR you want having a picture here of, uh, you know, Chamath and Richard Branson, uh, at the virgin galactic, you know, SPAC, I mean, yikes. Um, you know, but, but just look the sub headline. I mean, I think that’s, that’s worse than the PPE thing. I mean, you know, executives and early investors sold shares worth 22 billion.

I mean,

Vic: in financial [00:10:00] markets is always going to be people that take advantage of. A market opportunity for their own personal financial gain. That’s just part of the financial markets. I don’t love it, but it, it kind of is, you can’t have wall street without having that potential.

Marcus: And, and this is why in publicly traded markets, we have regulation.

This is exactly why, right? Because, um, you’re this behavior, the incentives for this behavior are always there and there’s always going to be this kind of behavior. It’s just. We’re not getting out of that,

Vic: right? Yeah. So, yes, there were, I don’t know how many, a lot of SPACs beside pair pair was the one that I think you and I believed would be illustrative to entrepreneurs that are building today.

Yeah. And Theranos certainly. Is too, I think that’s been pretty broadly covered where pear had not been covered. Right.

Marcus: Agree. Agree. So let’s, let’s continue on because we we’ve got some, some, some more articles [00:11:00] here from the wall street journal that are relevant, relevant to us. Yeah. I

Vic: mean, these are in the last couple of weeks.

Yeah. May

Marcus: 16th, um, an article about venture fund performance. This is not healthcare specific. This is the broad asset class category. Um, and the headline venture fund returns show worse slump in more than a decade. And if you’re able to see the graph, you’re watching this on YouTube, which by the way, if you’re listening, we also do this on YouTube.

We’re video recording. And every time we reference something, you can see it on one of

Vic: the comments. Last week, we should try to illustrate it with words more people were listening.

Marcus: Okay, let’s, so, so let’s try to do this, uh, basically in 2021, uh, money go up and in 2022 money go down. That’s the, that’s just

Vic: for a frame of reference.

I mean, some of the returns were. 60, 70, you know, approaching, you know, the top of the graph is 80 percent didn’t quite get there and then it goes negative for the first time, I think the first time in my career, I haven’t gone back to every 12 [00:12:00] months quarterly return, but it’s not negative that often.

Marcus: Yeah. So that’s, that’s the environment we’re operating in as venture investors right now. And that’s what founders

Vic: have to. Deal with because it just flows down like we are under pressure to find the highest potential best deals and that that just automatically puts pressure on all the founders.

Marcus: Yeah, um, this, this is an ongoing thing.

I mean, I’m noticing just as a general trend in conversations that, um, founders are just not spending that much time. And I kind of get it. I remember being a founder founders, not spending that much time focusing on what VCs are actually dealing with. And so when they get bad news from a VC, they’re kind of, you know, Looking at it in isolation as just this VC is, you know, being mean or bad or unfair to me, [00:13:00] like totally missing this context, negative returns, like the markdowns are so severe that we’re in negative territory right now.

Yeah. I mean, I think this is a threat. This is a like threat to the entire profession. Yeah. Right. And so

Vic: if, if half of the VCs out there fail. Which I think is likely to happen is going to be a lot fewer people writing checks sort of obviously, right? And I know I understand I mean It is really frustrating to raise money two years ago Hit all of your operating metrics do everything that you told the investors the time you would achieve Come back to market for your next round as expected because you raised two round two years of of cash to get you to the next Kind of threshold.

Yep And then hit this market environment, and I don’t like it either. I mean, I wish it wasn’t like this, but, but we have [00:14:00] to sort of help entrepreneurs understand the market realities that we’re all under.

Marcus: Yeah. So, so while that is true, yeah, well, Uh, it’s mixed news actually. Right. So, so then this, this article came out on, on May 25th, again, wall street journal, uh, headline venture fundraising and healthcare rises as investment in startups slows.

So, and then I’ll actually read the subheader, um, looking past recent negative returns. So acknowledging we’re in a slump,

Vic: their article for right.

Marcus: Acknowledging, uh, VCs bet that biomedical innovation coupled with Declining startup valuations will one day yield fat profits. So basically down rounds getting, you know, great innovations on the cheap in the healthcare space, which is a space that investors, you know, like.

A 16 Z feel like is the untapped, uh, potential landscape for venture.

Vic: Yeah. And I [00:15:00] mean, it is, it’s why we’re in it. It’s a huge opportunity. And also it’s complex because people’s life is at stake and it’s very regulated. And if you don’t have approval from the FDA and reimbursement from CMS, it’s really challenging to get your product to market because you can’t get reimbursed.

Marcus: Right. So our friend, Emily Evans, uh, who. Leads health policy at hedge eye, uh, who we had on the show. I think episode two, she came on, uh, and we talked to her every week. So she’s, she’s a big part of how we stay smart on the policy side, specifically on the policy side, she sent out a note on Sunday. And I think we both talked on Monday that we didn’t even understand what the note was.

So we had to like have a late night conversation

Vic: translation of. Policy, I couldn’t understand the translation, right?

Marcus: Right. And that’s, that’s, that’s how Byzantine health policy is, especially when you start to blend in economics, which is what she did here. Right. You [00:16:00] start to look at the economic aspects,

Vic: but we’re going to try to translate it for the audience because I think we can,

Marcus: I think we can.

Right. So she came out with this, with this note and the headline once a week, again, this is, I’m going to go ahead and plug, like it’s not that expensive is product health policy pro with hedge eye. If you want to get really, really smart, you should sign up for this. Okay. Um, chart of the day, PCE plus, uh, healthcare it’s the price is stupid.

So she’s, she’s focusing on the core metric that the fed uses to look at inflation. We talk a lot about CPI. Right. Right. There’s a lot of talk about the CPI print.

Vic: Yeah.

Marcus: But that’s what people

Vic: know about mostly. Right. But that’s not what the Fed follows.

Marcus: Yeah. What they are actually looking at is PCE, which is personal consumption expenditure.

Which is basically, what are households spending, [00:17:00] right? Right. On a, on a monthly and annual basis. What are they actually spending?

Vic: And I, I mean, I think, I think it’s well publicized. They’re gonna keep rates high. Until that comes down,

Marcus: right? So we’re reading this, we’re reading this. And she had this graph in here that basically has a bunch of bars.

It’s a, it’s a, it’s a bar graph and then there’s a line against it. And this is kind of a hedge. I think is to take two different data sets that you wouldn’t necessarily always look at together, combine them. So you can see a correlation and a relationship there and understand what that relationship means.

So. Uh, in this chart, the line that’s going from left to right, um, that is reflective of the PCE index, which is a measurement of the price of things. So not the, not the price and the volume that equals one big number that the household is spending, but actually an index of the actual price of something.

Yeah. And then the rest of the bar is just the total amount that we spend Total spend. The total spend, which is a function of [00:18:00] both price and volume, right?

Vic: Yes. And, and. There’s a lot of data here that makes it, there’s a lot to sift through, which is why I

Marcus: had trouble understanding. Yeah, there’s a lot. So for those listeners who are not looking at this, the healthcare PCE index.

Increased 2. 9 percent year over year. Okay. It was 3. 3 percent year over year at hospitals in April. All right. So we’re, so we’re seeing that the price is going, she’s trying to make the point that the price is the price of healthcare is going up. Correct. So we spoke to her and then she. She gave us an even better, more clear chart about how impactful this really is.

So the

Vic: timeframe we actually care about,

Marcus: she tightened up the timeframe from the beginning of 2020 to where we are today, uh, April 23, because we don’t, you know, we were wrapping up May today and. What you can see on this chart is that the line, which represents the index, [00:19:00] which represents price is way outstripping the volume.

And as Emily explained it to us, when you have these, when you overlay the index with the total expenditures, what you want to generally see to know that price is. You know, kind of being maintained at a, at a, at a, at a clip that makes sense for inflation is that the line is basically it close to in parallel with the top of the bar graph, right?

And for those who are listening, but not watching this, this line, the index line breaks out at around, uh, may of 2022. And is now pulling away considerably, pulling away considerably. So what that means is that the actual price has become more of a function of the total cost in terms of what we’re spending as households on healthcare than the volume.

Vic: Right. So I think that the government, [00:20:00] people in government. Are looking to control both price and utilization and they move the levers back and forth for a long time, starting with the Affordable Care Act. Or even maybe a little before that government has been trying to figure out how can we reduce the utilization people are getting a lot of health care procedures a lot of health care services and that was believed to be driving the total spent and I think what the point of this is, is that that is shifted now and the The volume, the utilization, how much services we all are buying is not growing very quickly and the price is the real driver is the real

Marcus: concern.

Right? So, so then, you know, we asked her for some source data on this. Um, you know, she [00:21:00] pointed us to the actual. Be a site. So the actual government site, um, so collects all

Vic: this.

Marcus: Yep. Yep. So be a. gov, uh, is where, is where you can, you can find all this stuff. And, uh, this was a, this was a news release that they pushed out on May 26th, uh, talking about the personal consumption expenditures in April.

Uh, it, it rose about 40 basis points. But then when you, when you scroll down to, to actually read the details on it, it says that the increase was largely driven by financial services and insurance, healthcare, and other, which is notably professional and other services. So again, Labor prices being durable, going up, the cost of labor going up is driving up personal household expenditures.

Vic: Yeah. So I think we switched to the overall economy here. Yeah. Yeah, we did. And so this is [00:22:00] literally what the Fed looks at to decide, are they going to Raised rates, keep rates the same or drop them. And it is stubbornly high. It’s it continues to increase and healthcare is one of a very few of the real drivers of this.

Marcus: We’ve been talking about the durable nature, not surprised. Yeah. We’ve been talking about the durable nature of the cost of labor for five straight episodes. We’re going to continue to talk about it because quite frankly, like It’s the thing we have to solve for in healthcare. Like, yes, it’s driving the price increases.

Right. And, and I think we’re about to move into an area that really proves healthcare is a different kind of industry. Right. So we have these price increases, but what makes it particularly challenging in healthcare. Is we don’t have price transparency. Yes. Even after a bill was passed in the Trump administration

Vic: that like didn’t work.

Right. Eight. Well, I don’t know, six to eight years ago, [00:23:00] the Trump administration with, with some friends in Nashville that we know decided the best way to affect change in healthcare would be to show all the prices of everything because of course they were Republicans and free market people. And they thought.

If we show this, the market dynamic will make a difference.

Marcus: And by the way, yes, Republicans, yes, you know, free market, but also, I mean, households pay for this at the end of the day. So it is, it is slightly weird in America, a system, you know, based on capitalism that we do not understand the prices on things.

And that they’re, and that they’re secretly negotiated between large healthcare entities. I mean, this was like looking at the healthcare industry versus every other industry that actually flows down to household spending. This is, you know, regardless of how you feel about it, you have to acknowledge it’s different than [00:24:00] pretty much everything else that we pay for.

It’s

Vic: different and terrible.

Marcus: I

Vic: mean, I was a seed investor in a thing called change healthcare. Yeah, I think it was in 2007, 2007, 2008 that set out to try to bring this out into the open and it was somewhat successful. We sold it and then it got acquired and the mission shifted and they don’t do that anymore.

And I believe that’s because it was. Not something that the big players really wanted. And I mean, I, I think it, it passed, right? So the bill passed, Trump signed it. It is a law. And of course, Biden came in, he has not overturned it. And yet the health systems and the payers are doing their best to avoid it and not really, not really live up to the spirit of the law.

I, [00:25:00] I, I don’t know. There’s a lot of technicalities in it, but

Marcus: in all practical terms, it’s had no impact. Yes. I mean, I think that’s the important part,

Vic: right? No one knows. I mean, people go to the hospital and have services done and you get a bill 30, 60, 90 days later and it’s over. You don’t have any ability to make a decision that’s not true in any other purchase decision in America.

That’s un American,

Marcus: like that

Vic: doesn’t

Marcus: make sense. I can’t think of any other thing that I spend money on where that’s the case. Yes. Nothing. That’s right. So anyway, just need to point that out as like one of the clearest differences in our industry. When it comes to innovation, right? So, so Emily always, you know, hawking all the bills that are working.

She pointed out this, this, uh, this act that’s currently in the house. Um, you know, it’s, it’s, uh, I think it’s in its second drafting right now. Uh, the patient act of 2023, and it’s a new price transparency act. And it’s being [00:26:00] driven by this understanding that the price of healthcare is literally pushing up.

Household expenditures and keeping inflation high.

Vic: And so all of us that want the Fed to relent and stop raising rates and let us come back to a more traditional. Right. That won’t happen until we start to get some modulation in price, at least in health care. And so Congress is attempting again to now basically close some of the loopholes, right?

Another bill that will do the same thing mandate price transparency. You can charge anything you want. But you have to publish it openly and hopefully it will work this time.

Marcus: Yeah. So, uh, for anyone who wants to [00:27:00] Google this, um, 1, uh, is the bill that’s currently, um, being worked on and it’s called the patient act of 2023, um, which stands for promoting access to treatments and increasing extremely needed transparency.

Vic: Yeah, and it’s, uh, I mean, it’s in committee, but, and of course it’s in the house. So the Republicans are driving it, but I think it has reasonable bipartisan support because everyone wants the prices, you know, Democrats and Republicans don’t want their constituents. Getting bills that they don’t even know what it is.

Marcus: Right. All right. So let’s, let’s stop here. Let’s take a break. Um, and, uh, uh, play a quick ad and then we’ll circle back to talk about how this, this price issue, this cost issue is actually. Creating real challenges that are opportunities for us as healthcare innovators, um, to, to, uh, take on.

Vic: I want to take a minute to talk about our investment vehicle, jumpstart foundry.[00:28:00]

It is the product that Marcus and I put together first. It invests in pre seeds companies at huge scale. 30, 40, 50 assets a year. Every year, JumpStrike Foundry invests in across the U. S. the best and brightest entrepreneurs that are really making a difference, making something better in health care. If you listen to this podcast, you hear all the challenges, everything we’re facing in health care.

Bottom line is we spend 4 trillion a year and we don’t get great outcomes. JumpStrike Foundry allows individuals. For a very small minimum 25 K you can come in and get to deploy that capital across the entire portfolio. You get immediate justification. There are no management fees, super easy to get involved and really make a difference.

You can have an impact. Come learn more at www. jsf. co. That’s Jumpstart Foundry. Thanks for listening. Now back to the show.[00:29:00]

Marcus: All right, we’re back. Um, So we left off talking about HR three, five, six, one, the patient act. Uh, and really that was to wrap up an entire segment talking about price. Um, now we want to shift to a place where price isn’t just affecting households, um, but it’s affecting really large, important institutions.

And I think we wanted to make this. We wanted to cover this because we wanted to ground everybody going through it. I think it grounded you and I, Vic, right. As we started to really dig through it and how important the work is that we are trying to do and why we have to take this seriously and why we have to understand all of the aspects, as many as we can, all the aspects of the problems.

Um, because many, many, many, many, many, many lives are. [00:30:00] Currently at risk because our institutions are challenged in an unprecedented way, like very important institutions are challenged in some unprecedented ways.

Vic: Yeah. And we, I mean, at least for me, I see the headlines and I almost get numb to them. Like, okay, another headline, another headline, another headline, but I think it is.

It’s part of what I like about this show. It’s what I wanted to do to find one and dig into it to really try to understand more of the, more of the reality.

Marcus: Yep. And so, so for this one, uh, we, we picked common spirit. So common spirit, um, recently released. Their, uh, unaudited quarterly report. I think a lot of people may not know that as a nonprofit, you know, um, you may not think you can get access to, to their financials, but, but you can, they, they do share this information.

So the journalists don’t have scoops. I mean, the, the financial report is available.

Vic: Yeah. Well, I mean, if, if you have. [00:31:00] Uh, debt, outstanding, especially bonds or publicly traded debt. You’re mandated to put it out in that case.

Marcus: Yeah. Um, and common spirit, certainly not just because of the debt, the bonds, but really it’s the scale of the organization.

You you’ll be able to regular, they’ll always have some, you know, reason to go to, to comply and produce these reports. It’s not

Vic: the same. Attention and pressure as a publicly traded, you know, earnings per share. That’s right. Platform, but they do disclose a lot of information.

Marcus: That’s right. So, so we’re talking about common spirit health.

Common spirit is the largest nonprofit health system in America. Um, we’re going to quickly just talk about how big they actually are. So they have over a thousand care sites in 21 States serving 20 million patients.

Vic: They are huge [00:32:00] and, and that makes them really important to dig into.

Marcus: Uh, and again, 20 million patients.

We’re kind of really focused on that, right? When we’re talking about them, we’re not talking about some stock. Uh, we’re talking about an organization that is caring for 20 million patients. That’s, that’s the thing we want to anchor everybody in. Yeah. As we start to roll through

Vic: the

Marcus: situation.

Vic: Because we’re VCs and we have friends in for profit hospital systems, health systems.

We talk a lot about for profit health systems, but the majority of patients and the majority of health systems are non profit. That’s right. And Comet Spirit is the largest in of that.

Marcus: Yeah, so They are not as we I think we should say this on the front end as we start to unpack some of you know These these results from this financial report.

Um, this is not representative of the entire You know, segment of nonprofit health systems. [00:33:00] They have some things we’re going to dig into that are unique to them, but in general, um, nonprofits do have, you know, a bit of a different mandate than the for profits do, and they have a little bit less optionality.

We’re going to dig into that as well in terms of who they care for. Um, and so that’s why I think it’s particularly important as healthcare innovators that we don’t just say, Hey, you know, let’s only focus on the for profits that are, you know, And these wonderful markets with this, you know, these great payer contracts, um, you know, generating these, these great returns.

Like if we really care about healthcare in America, we have to pay attention to this.

Vic: Yeah, no, no question.

Marcus: Okay. So I think we’re going to start by just going right to the headline. Uh, so this is in page seven of the, of the, uh, of the report. Um, and Vic, what are we, what are we looking at here?

Vic: I mean, the, the, the basic headline is they lost a little over 500 million.

In the [00:34:00] quarter, so like from a operating loss point of view, it’s a sort of as they actually lost 658, 658, but when they adjusted it for a bunch of things that they think are non recurring, et cetera. Right. And so somewhere between 500 million and 650 in the quarter, they, they lost.

Marcus: Right. And this is not the first quarter that they’ve recorded, um, this kind of loss, you know, last year, um, uh, common spirit, I think in total lost 2 billion.

Vic: Which so they’re basically on track for the same.

Marcus: Yeah, yeah. You know, based, based on this quarter, which is Q3 of this fiscal year, which will end, uh, in, in June. Yeah. Of this year. Um, so obviously no organization wants to be. You know, producing these kinds of results, right? Um, this is, this is really, really tough.

Um, we know all health systems had a very, very tough time coming out of COVID. There was a need for significant [00:35:00] stimulus. Um, but again, just going back to that, to that price, right. To that price that’s really being driven by the cost of labor. This is a really, really durable issue for health systems. This labor issue.

Now, um, I want to skip down to their liquidity section just because they, they, they make a clear statement around what, you know, I’ve kind of, as I read the report, I said, these are the four horsemen they’re really sort of dealing with. Um, they’re, they’re very honest about what, yeah, they’re, they’re transparent.

It’s, it’s actually very helpful if you want to be, you know, uh, in the business of trying to help health systems, this is a good thing to read. Yeah. Right. So you can actually understand what’s going on there. So when you’re talking to, Contacts in the organization, you can be reasonably well prepared and, you know, and thoughtful in what you say.

Yeah. Um, so this, you know, the liquidity section, uh, they’ve, they’ve gone down in their overall base. They were at 16. 2 billion, [00:36:00] uh, at June of, at the end of June of 2022, um, at the end of March of 2023. Uh, their unrestricted cash and investments were at 15 billion. So that’s obviously a decrease of 1. 2 billion, um, in nine, nine months of the fiscal year.

And at the end, and that’s always an area, you know, liquidity is critical, right? For any organization,

Vic: especially when you generate losses,

Marcus: right? So we’re really, we’re obviously going to focus on this and sort of look at this. And. The last sentence of this paragraph, I’m just going to read in its entirety, because I think it really talks about what the core issues are that the organization is dealing with, and that I think many nonprofit health systems are also dealing.

Vic: Well, let’s just mention the day’s cash on hand, because that’s the number one thing that I look at that. I think a lot of debt holders

Marcus: look at that’s fair,

Vic: which is. They have 161 days of cash on hand right now, or at least when they publish this, and that’s down from 176, which is [00:37:00] not good. That’s a, that’s a not a good time for, yes, not a good trend.

So when you, when you read the next line, um, they have to turn that around.

Marcus: Right. So, so this sentence, uh, that’s again, it’s in the liquidity section. It’s the last sentence of the paragraph. Common spirit is actively monitoring liquidity given the operational disruption related to inflation, inflationary pressures.

Payer mixed shifts, continued concerns of a looming recession. I thought that was a really interesting one and the impact of the cybersecurity incident on receivable. So we should just quickly note, they had a significant cybersecurity incident. You can read about it. They, they detail it quite well in the, um, uh, in this financial report.

And this again is an issue that many, many, many healthcare organizations, especially health systems, because of the EMR data, uh, that we have. That they have to be stewards of, which, interestingly, you know, everyone talks about how that’s an asset. But I think [00:38:00] when you think when you think about the cyber security risk, it’s quite frankly, a liability that they have to house this data.

Um, so obviously, anytime you have a cyber security thing, you have a ransom. You have to pay out to the ransom. That’s very unfortunate. It’s not something you can necessarily predict. When and how and how much it’s going to cost, et cetera, but it’s a, it’s a real issue. Um, but sticking with the top three ones with that are more macro, less acute inflationary pressures, that means labor.

Vic: And it, and it, it’s hard to see a how they can control that. Or B how it’s going to get less challenging.

Marcus: Right. The second one, payer mix shifts, and we’re going to spend some time talking about common spirits, payer mix. Cause I think once we, once you and I dug into that, that just completely changed the way we were even thinking about them as an organization.

Yes,

Vic: that’s right. And let’s. Let’s put a pin in that and come back to it.

Marcus: Yeah. And then, and then this third one is continued [00:39:00] concerns of a looming recession. Yeah. That one kind of confuses me. I mean,

Vic: I, I think there’s, I think we’re in a recession now. I think there’s a looming recession that’s going to, it’s going to be worse than now.

I’m not sure how that. Affects their liquidity.

Marcus: It’s interesting, right? I mean, it could, but they don’t explain it, but if we had to sort of just throw some things on the wall, one thing you might point to could be the continuing banking crisis, because, you know, when you’re in this kind of situation, having, um, you know, the financial ecosystem.

You know, having credit collapsing is not great, right? Cause that, that, that removes some optionality that you might have. And then another issue might be, um, continued contraction of commercial payers and the payer mix. Um, if, if employment decreases in some of their markets or something like that, [00:40:00] again,

Vic: yeah, that, that.

I can imagine someone thinking that I don’t think that’s what the data actually shows. I think, I think

Marcus: people use more health care,

Vic: health care when there’s a recession and if they’re worried about losing their job, they actually, I think you use more health care, but, but it’s, you know, if the CFO is looking for things to throw in.

You know, it might make sense to throw in. There’s definitely going to be recession. Yeah.

Marcus: Or maybe they’re just smarter than us about this because they run this thing. And we are, and we’re all speculating. So

Vic: we should say we don’t have any direct connections. Zero. At least I have no connections. I don’t either.

Marcus: Zero, zero. Yeah.

Vic: So we are spending time digging into this, but we have no insight other than what’s publicly available.

Marcus: Yeah. We’re spending time digging into it because it’s the largest nonprofit health system in America. Be smart investors. Yeah. Yeah. And certainly portfolio companies we have are trying to sell in and all this other kinds of stuff.

Right. So, [00:41:00] okay. So now let’s, let’s shift and look at, um, common spirits footprint. Um, so we are, we already said it’s in 20 different States. Um, if you’re looking at this on YouTube, you can see. Complete coverage of the West coast from Washington, all the way down to the Southwest, Texas. Um, they fill in some of the Midwest coming up through the Northern Midwest, North Dakota, Minnesota, Wisconsin, and Iowa.

Uh, and then they actually have reasonable coverage in, in, you know, the, the, the Southeast and sort of the Midwest that is above the Southeast. Yeah. They’re in a lot of, they’re in a lot of States.

Vic: Yeah. They, they have a. They cover a lot of Americans across the country. They’re not in the most lucrative market, which is Florida.

Yes. Um, but Florida is well, healthcared. Yes. Plenty of, of health care to the health care. Yeah. Um, they’re in [00:42:00] some markets that they’re needed. Yep. Right. So like, it’s interesting thinking about a nonprofit, which early, I think is mission driven, and then they have to figure out how to, Run to finances, right?

A for profit would flip those. And like, we are trying to build shareholder value and we want to deliver on the mission.

Marcus: Yeah. Um, so, but let’s, let’s be really clear, the, the financial performance of common spirit over last year, extending into. You know, this, this third quarter of their fiscal year, if this was on the public markets, I mean, it’d be killed, be killed.

This would be killed, right? So no

Vic: for profit is performing like this. Maybe not. No, none, none of this scale,

Marcus: none of this scale. And look, there’s someone, I mean, HCA just had a fantastic Q1 from a financial perspective, right? Fantastic. So. So really, really broad coverage and a lot of markets, you know, a lot of middle America, quite frankly, a [00:43:00] lot, you know, the West coast.

Yes. But besides that, it’s a lot of middle America. Yeah. It’s a lot of middle America. So now we’re going to go to the payer mix. Right. This was

Vic: the most insightful thing for me.

Marcus: Yeah. And I love the fact that they, that they cover year over year Q3 to Q3. They’re

Vic: very transparent.

Marcus: It’s great. Yeah. It’s great.

So the first thing you see is The majority of their payer mix is in Medicare. Okay. So this year it’s more than 45%. Last year it was less than 45%. So they’ve increased their Medicare share year over year. Then they have, uh, the, the next category is commercial. So they’re somewhere in the 26%. Of, of, uh, of, of, uh, of their payer mixes commercial that is down from last year, where maybe it was 27 percent last year.

Okay. Medicaid pretty flat, uh, about 21, 21 and a half percent. Okay. [00:44:00] And then the rest of the self pay and other. So the important thing here is when you combine Medicare and Medicaid, that is over 65%. It’s probably near 67%. Of their pair mix.

Vic: I almost fell out of my chair when I saw that, like, that is the number one predictor of a individual hospital or a health systems financial health and success is how low that is and how high the commercial book is.

I don’t study this all the time, but I’ve never seen it this high. Yeah. I mean, it is challenging to run a health system at 65 percent Medicare, Medicaid,

Marcus: very challenging. Um, and the trend is that their Medicare Medicaid [00:45:00] specifically Medicare is increasing and commercials decreasing and commercials decreasing.

So. Um, look, after, after, after seeing this, that was when I was like, okay, if 65 percent of the payer mix. Is directly coming from CMS. It’s it’s Medicare and Medicaid. This thing, it’s not just a nonprofit. It’s getting really close to being a national utility. I mean, this, this, you know, we, we typically think about safety net hospitals as like community hospitals.

They’re just in like a city or a rural town or something like that. This is just by payer mix. I’m not saying this in any other way, but just by payer mix, this is almost that at scale, like they are taking care of our senior citizens. And our most vulnerable populations in 20 states at a two to [00:46:00] one level that they’re taking care of everyone else.

Vic: Yeah. So it is 20 million patients. So 12 to 13 million are on Medicare Medicaid. So they’re elderly. And, you know, paid in and earned the right to have retired. Yeah, right. Yeah. Or they are very vulnerable, really low income or have really challenging health care. And that’s our society says we should take care of them.

You know, the, the, the basic recipe. Would be, you should not do as much Medicare and Medicaid and increase the commercial book, but that would, that would probably a band would be hard on their mission. So, like, it’s, it’s one thing for me as a VC in Nashville to say, like, just fix this, but there are, there are 12, 13 million people [00:47:00] that have to be

Marcus: taken care of by somebody.

That’s the point. That’s the point, right?

Vic: And so whether it is, um, common spirit, or they continue to struggle and days cash goes down and down and down, and they can no longer be the same entity, those people still need care. And so it really changed my perspective. Um, because of the scale of common spirit and this mix that is crazy big, but it also, you’re right.

It makes them, I mean, I don’t know, they’re too big to fail, but if someone has to take care of those people.

Marcus: Yeah. And so, and so I actually want to kind of just quickly go to Ascension’s pair mix, courtesy again of Emily and the team at Hedgehive, because like we asked her, we’re like, okay, Yeah. Can you give us Ascension’s just so we can see, like, is, is this kind of what it is?

And, and she presented us with this graph [00:48:00] and no, as Ascension has, you know, in terms of their commercial and, and other managed care part of their book, it’s 50, 50, 50, 50, 50,

Vic: 50,

Marcus: yeah, it’s 50, 50, their, their, their Medicare and their Medicaid taps out, you know, at around 50%. Yeah. Not 65, not 67%. Right.

Vic: Because 67 percent doesn’t work and Ascension is a nonprofit.

I mean, this is not like a super aggressive for profit. This is the other several big nonprofit, but this is Probably the other biggest, the second, second, biggest, I think it’s second biggest. Yeah.

Marcus: So, so anyway, I just wanted to put this out just to say, don’t read what we just showed in terms of the payer mix of common spirit as like, that’s what all the nonprofits are doing.

No, no, no. We’re actually going to talk about common spirit, right? Like this [00:49:00] organization has a payer mix and, and clearly, but in terms of their acquisition and their design and the markets that they’re, it’s clearly in their mission, two to one. Yeah. They’re going to take care of the elderly and the, and the, and the, the vulnerable.

Yeah. So I started

Vic: thinking about what could entrepreneurs do? What could we invest in? How, how could we bring things that would help? And I think we should talk through that common spirit is huge. So that’s a challenge. Just, just,

Marcus: just scale. Anytime, anytime you’re trying to be in innovation space, we’re startup, we’re seed investors, You’re talking about trying to bring something to an organization of that scale.

It’s difficult. Yeah. But just as

Vic: a thought experiment, what could we do? Yeah. Okay. And then I also think that every health system is different, [00:50:00] but there’s a lot of regional nonprofits that sound a lot like common spirit. Yep. They might be in between Ascension and common spirit, but they are in a geographical region that is constrained, right?

They, they have the people they have. And they are only in one city or one state, or maybe they’ve expanded into second state. And there are lots of health systems that are struggling with a, a version of what common spirit’s doing. And so I think it’s, it’s useful, even if we’re going to sell to a, you know, if we’re an entrepreneur in a, in one particular city.

You almost certainly have a nonprofit health system there and common spirit is very transparent of what’s said a couple of times and if you can solve for them. It’s pretty likely that the health system that you [00:51:00] can drive to will have similar things, maybe not quite to this extent, but that makes it a really interesting thought experiment as a venture capitalist or as an investor in innovations that are basic audiences, operators, investors and founders.

And any of those need to think through what would we do if we’re in their seat?

Marcus: And so we were thinking about we were thinking about it and then you you went and you you actually looked up Well, what are they actually saying? Yeah, because they released these these results and you know, there’s lots of articles about the losses You know, it’s an easy headline, right?

It’s an easy money headline. Um, but then you found uh, An actual interview with the president and coo on on becker’s hospital review. Yeah Um, so Marvin O’Quinn and he was talking about sort of what common spirit needed to do, uh, given the situation that it’s in.

Vic: Yeah. And he, I mean, it was a, people should read it on [00:52:00] backwards.

We can link to it in the show notes, but, um, he was very transparent about the challenges and leads with the mission that they’re trying to fulfill. And you know, it’s a, it’s a written article, so it’s, it’s difficult to, you can’t ask questions or get much information, but, but the quote that we have on the screen here that I thought was the most important is there’s lots of tactical things.

There are some strategic things. I have ideas. You have ideas. There’s lots of things. We could think about introducing, but I, I thought it was really telling and, and powerful that Marvin is talking about, you’ve got to create a culture that’s different than the culture we’ve had historically, and this culture involves being comfortable with and embracing technology.

Along with becoming a technically advanced organization where people constantly enhance their skills, such a culture will attract clinicians and staff who want to be part of an organization on the cutting [00:53:00] edge of technology. And so, yes, I agree. That’s exactly what I want to

Marcus: hear the COO of common spirit say.

That’s exactly in a situation like this

Vic: and

Marcus: it’s future

Vic: tense. You’ve got to create a culture like he is talking about what they are going to try to do before they run out of financial, financial flexibility and can no longer do it. And who knows what that time frame is. I mean, It is, as you said, it’s a, it’s a, you know, really important part of the U.

S. healthcare delivery network, and they’re pretty big, and they seem to be, I don’t know, Marvin, but seem to be pretty well run, and it’s hard to change culture. I [00:54:00] don’t know what the time horizon is that they have, but. It’s, it’s a lot of work to change the culture of that size organization.

Marcus: And you’re talking about, you’re not just talking about changing the culture, but let’s just to revisit the quote again, this is, this is quote, this culture involves being comfortable with and embracing technology.

Now you wouldn’t have to call that out. If it wasn’t, unless you aren’t, if it wasn’t a fundamental part of the challenge, and we’ve talked in the past, we talked about it in the last episode about how. Unfortunately, the high tech act and the way that EMR is rolled out have done us no favors in terms of making the health care ecosystem excited about new technology.

It’s not like they’re not excited about new technology, not

Vic: excited. And I think that challenge presents an opportunity for founders and for investors. Like, of course, they don’t like the EMR, EMR suck, they’re not [00:55:00] very good, they take a lot of time, it’s way too many clicks, and typing, and keying in things, and so there’s an opportunity for entrepreneurs and for VCs to really understand what do the workers need, what do they need to make their job easier, and the best products is.

Are ones where you’re like, you pick up your iPhone and you know how it works. I mean, you don’t have to study and go to a class. It’s just intuitive. Of course I want to use it. It helps me do the things I want to do. Unfortunately, technology so far hasn’t met that standard. And so I think common spirit wants to shift their culture.

They’re going to try to teach people to be comfortable. It will be a lot easier to do that if we create some products that really give an incredible benefit to people and are easy to learn.

Marcus: And that might be where we [00:56:00] circle back to the A16Z letter. Yes. After everything we just said, tech people, this is actually what we need.

Yes. Right. Like Marvin, talk

Vic: to anyone at your healthcare system.

Marcus: Yeah. And, and, and build beautiful, helpful, easy to understand time saving cost saving technologies to support an institution across 20 States, serving 20 million patients. Two thirds of which are being paid for by Medicare and Medicaid by our tax dollars in a culture that is skeptical about technology,

Vic: right?

With leadership saying, you have to figure it out to their people.

Marcus: Yes.

Vic: And we talked about this before, but I’m going to say it again. This is how we have built products in other markets, [00:57:00] but it has to be with the people in the health systems who they’re doing the work. The people that are. In a common spirit location, and it’s Steve Blank, like you need to sit with the nurse or sit with the doctor or the intake person who is making you for the stupid clipboard for the hundredth time and instead of Insulting them and telling them how terrible it is.

Sit with them for half a day and try to build empathy for what they’re dealing with and then solve their problems. And that is

Marcus: what can work in healthcare. And don’t worry about trying to create the next Google. Yeah. I mean, like, that’s not what we need right now.

Vic: And the, the value chains are super intertwined.

You cannot just. Pluck something out and then act like it doesn’t interface with the healthcare system. That’s right. That’s not real. [00:58:00] And so, what I get frustrated with A16Z about, I love that they’re bringing attention to it. But they were too cavalier about, we know how this is. We took, we read one blog about it and we got it now and we’re going to just come back and build everything in Silicon Valley and then present it to the healthcare system to use.

And I just don’t think that’s real.

Marcus: Yeah. So, so anyway, I

Vic: had lots of ideas and then I read Marvin’s comments and he is on it. The, well,

Marcus: he’s, he’s, he’s on, he’s on the, the most important part. Okay. Like anyone who knows me outside of all this healthcare stuff, like leadership is about creating a culture in which a business can thrive.

There’s literally the only job that leaders. Absolutely have, you have to create a culture in which the business can thrive. So the fact that this is what he’s saying, this is the most important part, [00:59:00] because if you don’t create this culture, we can create as much innovation on the outside as possible. It won’t be received correctly,

Vic: right?

And period. And he obviously knew the report would come out on the 15th. He did the interview three days later, and I take it as a hopeful sign. Now there’s a lot of execution. There’s a lot of work to do in getting from this challenge, which is immense to solving one problem and then another problem. But it seems like there’s a leadership team that is at least interested in.

Making improvements.

Marcus: All right. That was a lot. Like even my head is hurting after the show. Cause we just, I mean, look, we covered personal consumption expenditures. We covered Elizabeth Holmes. We covered SPACs. We covered common spirit. We covered payer mix. You know, we covered a lot, but I think the, the, the point here is that every single, you know, [01:00:00] this industry is already very Byzantine.

It’s already very difficult to understand, but just like every other market, it’s dynamic and we have to keep up with it. I mean, the reason why we’re doing the show this way is because every week there’s something new that we have to try to unpack. Right. And our job as healthcare investors, like our literal job, our obligation to our LPs, like we have people that pay us, you know, our purpose is to try to do our job.

Well, such that the innovations that we bring into the market will improve health for all. That’s, that’s, that’s our, you know, that’s our North star. We have. We have limited partners that we have to, you know, produce for, and we need to make sure we’re placing capital in companies that have a shot to, you know, it’s, there’s never a guarantee in venture, but that have a shot at being successful and studying all these things, not just historically, but in the present time, this is, this is critical [01:01:00] work.

So, you know, one of the reasons why we wanted to do this show is because we looked around and we realized there were no other. VCs doing this show period, you know, in the healthcare space and a lot of founders who want to be healthcare founders, but maybe don’t have a lot of experience in the healthcare industry.

If we don’t do this, you know, they’re going to be listening to all in, or they’re going to be listening to, I don’t know, like, like, like pick a show that does not, yeah, that does not properly frame the difficulty. In this, in this market, it’s a worthy, it’s a worthy thing to do to start a company in this industry, but you got to understand the fundamental challenges we’re all up against.

I

Vic: mean, important things are hard.

Marcus: Yes. I mean,

Vic: they just are, if, if they weren’t hard, they would have already been done. And so, I mean, it’s my career, the last 23 years, and I’m planning to do it another 23 years. And we didn’t pick healthcare cause it [01:02:00] was. Like low hanging fruit, easy. We did it because it’s a huge market.

It affects millions of people’s lives. It affects our parents, our children, people in our community, us. And if we don’t do it, who’s going to, and we don’t have all the answers. I mean, I, I started looking into common spirit. Like three days ago. Right. I don’t think we are trying to say we have all the answers.

What we were trying to is show people that want to invest in healthcare or want to start something in healthcare or want to understand how can. Add a health system. How can I engage with entrepreneurs? We want to show them like, here’s how we think about it. Here’s, here’s how it could work, but I don’t think we have an easy button.

I don’t think there is anything.

Marcus: No, definitely not. [01:03:00] So I think that’s enough for the show. Um, We will be back next week again in studio. I have no idea what we’re going to talk about, but we’ll figure it out. But keep the

Vic: comments coming in. I love the feedback. I love the people that like the show. I love the people that have constructive criticism.

That’s what gets us better. So,

Marcus: but all

Vic: of

Marcus: it. Yeah. And if you’re listening, send Vick a congratulations note. He’s, uh, he’s hitting the milestone as a parent. His, his oldest is graduating from high school tomorrow. So, uh, Uh, so exciting and kind of

Vic: sad. Uh, I felt us is going to head off to college.

Marcus: Yeah.

It’ll be sad for a little bit, but mostly excited. I’m proud of them. Yeah. Yeah. Mostly exciting. Anyway. All right, man. See you next week.