Welcome to the "Lessons from the C-suite" series, featuring Advisory Board President Eric Larsen's conversations with the most influential leaders in health care.

In this edition, Robb Vorhoff, General Atlantic’s Managing Director and Global Head of Healthcare, shares with Eric some of his overarching healthcare investment hypotheses, the origin stories around Oak Street Health and Alignment Healthcare, and the type of business he would start if given the chance.

[Edited by Ben Umansky, Managing Director and Expert Partner, Advisory Board.]

Question: First off, Robb, congrats on your recent recognition as one of GrowthCap’s Top 25 Healthcare Investors of 2021.  For those who might not be familiar, this award recognizes not just the highest return-generating health care investors but also those who most diffused innovation across the sector.  More than 750 investors were considered, and you were named #2 on the list of 25 finalists.  Very cool. 

Vorhoff: Eric, thanks a lot. It's really nice for them to include me, and great recognition of our team’s work over the last several years.

Q: You’ve been one of the most active, and I might add prescient, health care investors now for a while.  And a bunch of your companies have taken off – Oak Street, Alignment, Doctor on Demand – a veritable “who’s who” of some of the most innovative players (with huge valuations to match) in their respective spaces across the healthcare landscape.  And while most everyone in our space knows these companies, many incumbents in our industry – payers and providers – may not be as familiar with the capital investor behind them.  Which is why I’m excited for our conversation, Robb – I’d like our readership to get to know you, General Atlantic (GA), and the broader capital allocator ecosystem you represent. 

Recently, in my conversation with Jeff Rhodes of TPG – Demystifying Private Equity and Healthcare – we talked about deconstructing the powerful role private equity plays in healthcare.  And with this conversation, I’m keen to explore how earlier stage healthcare investors – venture capital and growth equity, which have already deployed some $20 billion in capital this year alone into healthcare – play such a dynamic and vital role in stimulating innovation in our industry.  So with that backdrop, Robb, I’d like to ask if you would offer an orientation—a “demystification”—of venture and growth equity in healthcare, and some of the gradations therein?

Vorhoff: Sure thing. So as you mentioned, Eric, venture investing tends to happen in earlier stages of a company’s growth when you’ve got a talented entrepreneur with an idea for a new business. A venture investor is trying to assess the fundamental thesis of the business, the talent of the entrepreneur, the addressable market, and so on. There’s a significant amount of what we call “stage risk” there—you’ll have some home runs, you’ll have others that do well, and across a portfolio you hope the great and good investments outweigh the bad.

Where you cross into growth investing is when the unit economics of the business are established. There’s a product or service, and a price point. You can look at existing clients and customers and assess how they decided to purchase the product versus its alternative. In that situation, the calibration is more about whether the business will continue to grow, take market share, and the maturation and durability of the unit economics. There is not the expectation that some percentage of investments will not work. The expectation is that they will all work, to varying degrees.

GA has been focused on growth investing since the firm was founded 41 years ago. In the early 1980s the investing focus was enterprise software. In the 1990s, we expanded to technology-enabled businesses more broadly. And since the early 2000s, growth has been the primary filter. What we don’t do is big turnarounds, pure consolidation plays, traditional leveraged buyouts—all we talk about is company building and thematic growth investing.

That does include growth buyouts. You may have a business that fits all the right thematic criteria and it's growing 20%, 30%, 40% a year where there happens to be an opportunity to buy more than half of the business. We're just as excited about those because the thesis is the same, the company building plan is the same, we just have the opportunity to own more of the business.

Q:  So GA is 41 years old, with 14 offices around the world, 400 employees, and more than 150 companies in the portfolio. And when you assess the portfolio, how do you tally the total valuation?  What is GA’s current assets under management (AUM)?

The current value of our holdings in those companies is over $65 billion, and they’re all high-growth. Capital-weighted top-line growth last year was about 40%. We’ll probably invest around $7 billion this year across all sectors and geographies—about 40% or 45% of that will be in the U.S., and the remainder will be in the major emerging economies.

Q: Healthcare is obviously a big sector for GA, but it’s not the only one—you’re in technology, financial services, consumer, and just added life sciences last year. 

Vorhoff: That’s right, Eric. Healthcare is about 20% of our business.  All of our sectors are performing well and growing.  And with life sciences, we’re scaling up with great leadership from my partner, Brett Zbar, and the strong team he’s building.

Q: An impressive portfolio—and your description of the sector is elucidating.  I always try to listen through the ears of a health system or a payer CEO, many of whom have launched their own corporate venture capital groups and are trying to find their way. So perhaps we could take a deep dive into a few of GA’s most noteworthy investments, starting with Medicare primary care player Oak Street Health.

The primary care space is so dynamic and complicated right now, especially coming out of the pandemic. Collectively, the 229,000 U.S. primary care physicians might have lost as much as $15 billion over the past 15 months, but with huge variability from group to group. And those that had exposure to population-level risk, who were getting some per-member-per-month payments, tended to do much better.  So getting in early on Oak Street looks prescient, especially with its market capitalization now worth over $12 billion. Can you tell us about how GA identified that opportunity?

Vorhoff: Well, some years ago we started to notice companies like INSPIRIS and XLHealth that were focused on complex, very costly populations. It was eye-popping to realize how much medical spend was concentrated in a tiny percentage of patients—and how poorly the traditional, siloed, fee-for-service system served these patients who were most in need. A lot of us have personal experience with a friend or family member who struggles to navigate the complexity of healthcare. Everyone talks about the economics now—but back then I don’t think many people appreciated how much more expensive these populations were, and yet still weren’t having their needs met to get to the best outcomes.

Consider a market like Florida, where you’ve got experience with risk, high Medicare Advantage penetration, and very high benchmarks for cost. You’ll still see surprisingly high variation in the total cost of care. Look at the models that are working, and you’ll first see that the clinical outcomes are great and the patients love it—they never leave. Unpack it a bit more and you’ll realize that what patients in those environments are getting is much more akin to a concierge medicine experience. We got really enthusiastic once we realized there was such a huge problem and unmet patient need.

At the time, we also had the Obama administration beginning to push massive healthcare reform. It was clear they were going to use a balance of carrot and sticks to try and drive the whole system. They were, perhaps unusually for Democratic administrations to that point, supportive of Medicare Advantage, but they were also driving technological adoption and new incentives to try to get at the triple aim (better health outcomes at lower costs and a superior patient experience). We looked at those signals and concluded that value-based care wasn’t just talk—it would be a big long-term shift in a massive market, and it would happen first within MA. And in that market, some of the right models and incentives already existed, so we could do due diligence and look for opportunities to scale those models more quickly.

Q: And these were some of the market dynamics and industry tailwinds you identified before backing Oak Street.

Vorhoff: Exactly. We looked at a bunch of different businesses and then we met the co-founders of Oak Street: three exceptionally bright young entrepreneurs (they were in their early 30s at the time). They said, "Look, there's no reason why this approach should only work in Florida and California. This should work anywhere. We want to go back to our hometown in Chicago and show that it can work there.” At the time, the argument against Chicago was it wasn't a particularly high benchmark state, and there was low penetration of Medicare Advantage. So the macro reasons would weigh against it. The plan was to deliver better care in a multi-site model to high-cost, poorly served populations and bear risk at some point. That’s about as complex and about as operationally intensive as it gets. So the execution risk was substantial.

But for us, there was not a question about whether the model itself could work. I even went so far as to say that if I were to leave GA to start a company—this was in late 2014—that Oak Street would be the kind of business I would start. We tracked the company closely for the next twelve months. By the end of 2015, Oak Street had enough member-months of experience to demonstrate actuarially that the model could manage risk effectively. We invested in December 2015.

Q: That was still a contrarian bet at the time, though. In 2015 and 2016, there wasn't a lot of delegated risk out there – easy to forget there weren’t a lot of analogues back then for what you were trying to do.

Vorhoff: That’s right, Eric. To the team's credit, there was a real focus on enhancing the patient experience, improving the quality of care delivered, and driving consistency in the care model and unit economics. The Oak Street founders are maniacal about course correction and lessons learned – and deeply committed to delivering on their mission. Whenever we made a mistake, there was a deep dive into the root cause. "Here's what went wrong and why.” And then they would immediately drive change throughout every aspect of the organization to prevent making that mistake again. The focus was really on patient satisfaction and outcomes, experience within value-based contracts, and consistency in the unit economics.

Everyone talks about how healthcare is local, and when we added more health plan partners, more locations, and moved into new markets, we expected there’d be lots of differences. And things are a little different in each market—but it’s actually remarkably consistent. That’s the power in the model now. Cohorts improve over time, but across plans and markets, performance is very consistent. That’s what gave the team and the board confidence to accelerate the growth path. A growth investor should be looking for those sorts of leading indicators that the model is scalable and the equity value creation opportunity is there. Oak Street is public now, and its market cap is over $12 billion. The historical cohorts are profitable, consistent, and increasingly predictable.

Q: Tell me about the decision to take Oak Street public. Not only did the IPO take place in the teeth of the pandemic – August 2020 – but it also followed a multi-year dry spell for healthcare company public offerings.  What was that environment like?

Vorhoff: Well, a lot of things were different. Virtual roadshows—there was a question whether companies could make their cases as effectively to new public investors if meetings were not in person. As it turns out, it’s incredibly efficient to do that virtually, and I expect it may even be the norm even after the pandemic.

But the overall environment was different, too. In 2019, the equity markets were choppy. WeWork dominated the headlines and investors were pretty negative on high-growth but money-losing businesses. We didn’t want to take the risk that Oak Street would get a poor reception just because of the immature margin profile.

So in January 2020, we did a crossover raise instead. But the other thing, as you pointed out Eric – and this is sector-specific – is that for years in healthcare, there had just been a dearth of new healthcare companies coming to the public markets. There were the huge health systems and huge health plans, but otherwise it really was a pretty small universe...and it kept getting smaller as companies got acquired or picked off by buyouts from larger private equity firms. The consequence of that was that it was difficult to find appropriate comparisons. You’d see banks using comparable lists that had nothing to do with the population Oak Street served, nothing with a similar business model, nothing to do with the value-based revenue model. There’d be a list of “healthcare disruptors” that would just be a basket of all different types of higher growth companies.

A big change occurred when One Medical went public early in 2020. That's a primary care-oriented business—not risk-bearing, but a higher-growth, primary care platform—and it commanded a favorable valuation. It became a relevant public comparable as we thought about how the public markets would view Oak Street. Then the debate became whether the markets would think differently about Oak Street because it was risk-bearing. Would they think of it more like a health plan, which tended to be mature, relatively low growth businesses that traded on their earnings? Or would they think about it as a high-growth provider business and appreciate the inherent advantages of being one of the first and most successful of the value-based primary care business models?

We tried to be conservative in how we brought the story to the markets because it was the first of its kind. When all things are said and done, you're selling a tiny percentage of the company in that moment, and it's more about setting the company up for success, bringing on the right set of new shareholders that can be long term holders for the business, and then giving the team the opportunity to perform and to meet and exceed those expectations that you set with the market.

The management team did a great job explaining the story—how the model is different, the size of the opportunity, how much better patient outcomes could be—and how quickly it would grow.  But also, we chose to share more information on the unit economics than I think most others had. The point of that was to substantiate our own confidence that we could generate very attractive consolidated margins on that gross revenue base. I think a big reason why the stock moved considerably in the early days and why it commanded a growth multiple on that gross revenue base is that people saw the power of the unit economics, and believed in the size of the addressable market, the mission and growth potential of the business, and the mature margin potential of the model.

Q: This is fascinating to deconstruct because Oak Street went public in August 2020, right around the same time that another primary care MA player – private equity-backed CanoHealth – was also looking to do a transaction.  With the capital markets heating up for healthcare, and newly-popular vehicles like SPACs (special purpose acquisition companies) gaining momentum, risk-bearing primary care models became one of the hottest things going. And by November 2020 CanoHealth completed a SPAC transaction valuing them at $4.4 billion (and as of late August 2021 they are almost at a $6 billion market cap).

So these valuations are, shall we say, quite high.  How do you think about sustainability of these valuations for primary care players like Oak Street, Cano, Agilon, Aledade, etc.?  Will it endure?  Are there other instruments of measurement that we ought to be using, given so many of these are pre-profitability (a nice way of saying they are still losing money)? 

Vorhoff: First, valuation is in the eyes of the beholder. Everybody's going to have their own views and expectations around how quickly a company will grow, how its financial profile will evolve and mature over time, and then, very importantly, how that business will be valued whenever the investor decides to exit the investment. With mature businesses that are lower growth, there's less room for deviation and judgment on those factors, so you see less variability in how those businesses are valued. It's much harder at an earlier stage when you have very high-growth companies.

There, it becomes as much art as science, but all investors triangulate to try and figure out, first, "What risk do I think is inherent in this thesis or this execution plan?” And then, “What’s the right target reward for this level of risk?" When a company is growing quickly and before it’s profitable, there's a lot of estimation that goes into how that financial model will mature and ultimately, how it would get valued down the road. When you're in really robust valuation environments like we're in now, people tend to lean in and either make more aggressive assumptions across those variables or, in the absence of more attractive investment opportunities, target lower returns than they might otherwise.

Things that I think are always considered are: First and foremost, what’s the size of the addressable market? Second, what's the growth momentum and the potential of the business? Third, how recurring is the revenue stream? Does the company have to go out and win it every new year, or is there a recurring nature to the business and the client relationship? Fourth, to what extent is growth within the company’s control? Is there big customer concentration or big renewal risk, or, are you in control of your own growth, as may be more common in direct to consumer businesses? Fifth, what are the unit economics?  The contribution margins, consistency across cohorts, that sort of thing. Finally, and over time, how capital-intensive is the business? How much capital is required to scale the economic engine?

All that gets balanced, so you could take a model like Oak Street and say, yes, it’s capital-intensive, it’s a J-curve for each clinic’s unit economics, but once you’re on the other side, it’s profitable, highly recurring revenue, patients love it, and it can grow very quickly because the market is enormous and there hasn’t been a major competitive influence yet.

Q: That competitive dynamic is so important. The perception has tended to be that risk-bearing primary care groups are threatening to acute-care-centric health systems because they’re so good at preventing or diverting admissions, emergency department visits, etc. But Oak Street and others are actually forming some really interesting partnerships with incumbent health systems. So what’s the right way to think about it? Is there more scope for partnership? Should we expect “coopetition?” Or out-and-out competition?

Vorhoff: You know, it’s interesting that for as long as we’ve been invested in this business, and as attractive an opportunity as we believe it to be, we talk so little about the competitive dynamic. I think that’s mostly because the market is so big that success and failure are going to be dictated by how well we execute the model and not by some external variable.

We never really talked about competing with other provider groups, whether they were multi-specialty groups or health systems or even other value-based primary care platforms. I remember the first time when we saw some of the other platforms start to come into Oak Street markets. At the board, we’d ask, "Well, what's going to happen? Are we going to find it harder to find new patients and will it take longer to scale new clinics?" But we didn't see a blip. Nothing. But I suspect those new entrants were successful, too. People were getting exposed to a totally different model of care and that would drive awareness of that model and stimulate demand for it, but it hasn't shown up as a competitive consideration for us at all.

But Eric, as you noted, Oak Street has had partnerships with a variety of different entities. Some of those are opportunities to partner because incumbents want to find a different way to participate in value-based care. Some health systems tried to be in primary care and found it to be a challenge, and not as productive as they thought, but with the right partnership, they saw a win-win. Part of that may be that Oak Street builds clinics in neighborhoods that really do not have a lot of good alternatives for access to primary care. And so, as a result, you have a lot of unmet clinical needs and the existing system might not have been investing in prevention or chronic disease management. That often means either an overutilization of an ED or inpatient admissions for lower acuity cases where the hospital would prefer to use that capacity for a more appropriate acuity profile. Since Oak Street helps address that, there's been more cooperation and partnership than there has been competitive conflict.

Q: Makes sense – the addressable market is so big and so underserved, there is room for multiple emerging players and new combinations with incumbents. 

Let’s pull up a bit, Robb, and talk about the broader macroeconomic environment, and how that influences your thinking and strategy. There’s so much hyperliquidity right now, unprecedented expansionary monetary and fiscal policy, new instruments like the 500+ SPACs chasing acquisition targets, more evidence pointing to rapid inflation, etc. When you zoom out and look at the macros, what do you see?

Vorhoff: I agree with how you characterized most of the environment, Eric. In healthcare, the demand side is insulated from cyclical factors. The medical cost trend is a problem regardless of the interest rate environment. We’re investing in models that are trying to find better ways to solve that problem. So inflation and the economic cycle are not big factors in how we think about where to focus.

But yes, the deal environment has been unbelievable. The amount of deal flow is extraordinary; it's probably twice that in a normal year. The deals in the early days of the pandemic were defensive because everyone was worried about how bad things might get, and companies that were growing quickly but didn’t have cash on the balance sheets had to do defensive capital raising. That transitioned very quickly as companies that realized their business models might be better positioned to thrive in the pandemic environment relative to their competitors started to raise money to go play offense. Virtual care is the clear example there.

Next, you saw valuations start to climb and more opportunistic capital raises where every company in certain sectors said, "I know we don't need it, but maybe it's crazy not to go raise some money now given the valuation environment is so favorable." Then certain companies that wanted to play offense from an acquisition standpoint started raising capital to fund M&A. I think what we’ll see more of now is recapitalizations as existing investors take liquidity either to realize a win on an earlier investment or to harvest returns in advance of a potentially less favorable tax environment in the future.

Q: On the topic of realizing gains, there are a lot of new exits and new vehicles for entrepreneurs to take advantage of. Take the SPAC phenomenon we’ve been alluding to as an example. There are 500+ in total, 60 just looking for healthcare acquisitions, and in the next 18 to 24 months, they’ve got to find their targets or else give the capital back. Unless I’m misinformed, I don’t think GA has done a SPAC before, correct?  So how are you seeing this all play out?

Vorhoff: That’s right, Eric.  We haven’t done a GA-sponsored SPAC. 

I expect SPAC activity is going to slow down dramatically. It’s already started. It seems like the primary motivation for the SPAC is speed to the public market and maybe to sell a little bit more for more liquidity. From a GA perspective: we usually own a material percentage of these companies, and we’re going to continue to own a large amount in the future. To me, how that company’s stock trades once it’s public is everything, and I want the right investor base that's going to continue to buy over time, as our companies perform. The only thing we should care about is, "Are we setting this company up for continued success as a publicly-traded entity?"

Now, one thing that I think is interesting about SPACs—and we'll see how long it persists—is that there is more transparency in the information you can share about the business, particularly about where the business is projected to go. And so, if you have a business that, for example, has customer concentration risk or is undergoing a transition in the business or revenue model, and you feel like you can speak with more transparency around that issue, maybe the investor base could understand it a little bit better. On the margin, there's some advantage there.

You’re also starting to see some more industry focused SPACs where the sponsors include senior operating executives with highly relevant industry knowledge, networks and operating experience, which makes a more compelling case on their ability to add value to the company and help attract the right long-term shareholders as a public company.  I believe it’s a better approach, but even those groups have to still face a hyper competitive market for quality assets and the challenges of expiring capital commitments.

Q: That makes me think of another emerging trend in venture capital and growth equity on which I’d love to get your take. I’m talking about large, aggressive funds like Tiger Global and Coatue, which seem to represent a new species of high-velocity investors in healthcare with super-abridged diligence processes and valuations 25% higher than founders are asking for. That sort of approach bids up and speeds up the market, right? Does it change your behavior at all?

Vorhoff: It is very different behavior from what you've seen from traditional players. It’s different than the public crossover investors, it's different than the venture firms, it's different than growth equity or the buyout firms. Let's talk about the differences.

So, speed of getting to a deal is noticeably different. I have been trained that diligence is a core contributor to success. I think it's a huge advantage to spend all of your time dedicated to a sector, not to be a generalist who’s trying to come up the curve on a brand new sector with each new investment opportunity. And we believe that it's even better to be really focused on themes within a sector. For example, I know a whole lot more about value-based care than I know about dental consolidation best practices. So the “watch out” for people that are moving very quickly is whether they bring the depth of understanding of those markets and those business models.

Then there's valuation. It’s hard for me to believe that valuation doesn't matter. That’s just a challenging statement to try and say out loud. With the benefit of hindsight, an investor could look back at the earlier rounds for some of the most successful consumer facing technology companies and conclude valuation was not a material consideration early in those companies’ growth stories. There is of course some selection bias risk, but I'm also just not sure that approach is applicable to healthcare investing.

The other big difference is just the number of investments is extraordinary. By comparison, GA would look at 200 to 300 U.S. healthcare opportunities a year, and we'll make 3 to 4 investments. We plan to spend a lot of time working with those teams building and scaling those companies.  I see some firms investing at a pace of a deal every week or two. That requires a more passive investment model.

GA has been built and we're staffed with the expectation that we are going to be active partners to our portfolio companies, and we strive to exceed the expectations we set with entrepreneurs and partner management teams. There just aren’t enough hours in the day to do that for 10 new companies a year, or 20, or 30.

So, the new species you mentioned: if the entrepreneur wants a passive partner or is purely focused on max value…it’s a strong pitch.  It’s just a very different model, I think, in terms of what they're offering from a value proposition to an entrepreneur.

Q: That's a really thoughtful answer and I totally converge with you on the conclusions here. And it’s enlightening to hear your philosophy on diligence and especially what you said about sticking to “themes.” Can you expand on that idea?

Vorhoff: Sure. I’m proud that we've been very focused on dedicating our team's time and efforts against specific themes, and every member of our team is on one to two active themes that they're prosecuting. The big ones right now won’t be surprises. I’ve already touched on value-based care. Virtual care is another, which has increased substantially over the last year and a half. Same with behavioral health. And then I’d also mention the pharmacy value chain, which includes everything from digital pharmacies to innovative models trying to address growth in medical drug trend.

As an example, we made a recent investment in a company called CareMetx that provides “hub services” that help people get on drug therapy. So we’re helping these patients accelerate the time to starting therapy, adhere to that drug therapy, and in certain cases, get financial support for being on that drug therapy. There's a lot of technology that's deployed to facilitate that, but we’re also enabling access to financing solutions and deploying other toolsto help manage the cost associated with that population.

Often finding a good theme starts with identifying big problems that are not being effectively addressed by the system. We look for new or evolving business models that more effectively address those problems.  Often it leads to the identification of sub-sectors well positioned for growth—“a rising tide that should lift all boats.”  We then study those sectors to identify the best companies with the best teams, the best models, and the best outcomes.  Those companies should be well positioned to capture market share in a growing market.  We expect those compounding drivers of growth to be the primary driver of the returns we work to deliver to our investors.

As an example, we expect hub services as a general space will continue to grow with the growth in higher cost specialty drugs for smaller and more narrowly defined populations.  Most of the players in the space, in our opinion, tend to have more labor-intensive, telephonic models.  One of the reasons why we like CareMetx the most is we think the technology that they’ve built gives them a significant advantage from a competitive standpoint to take market share within that already growing market.

Another great example is our investment in Marathon Health, an advanced primary care provider to self-funded employers.  We spent over a year evaluating the space, and then chose to invest in Marathon because we believed they had the best model with the best outcomes.  This gets back to the triple aim: Marathon had the best results on patient engagement and satisfaction, comprehensive data showing that engagement led to improved clinical outcomes, and the most consistent data showing an ability to reduce medical trend for employers.  An added benefit to the model is that the Marathon clinicians love working in this model, as evidenced by the highest employee engagement and retention levels we saw across the space.  For the last year, we’ve been working closely with the Marathon team to expand the scope of services to include integrated behavioral health, care navigation, and the convenience of multi-modality access from dedicated onsite clinics to near-site community clinics to virtual care.

Q: Technology that enables better access is such a big and active space right now. On that note, I'm curious about your Doctor on Demand investment and how you assess the entire telehealth/telemedicine space. It seems like there are a lot of different lines of thinking right now, from Teladoc’s volatile, up-and-down valuation to Amwell’s own platform-based premise and then the Doctor on Demand/Grand Rounds merger. Can you talk about your thesis around telemedicine/telehealth?

Vorhoff: Sure, it's a really exciting time as people are thinking innovatively about how to deploy virtual care.

Teladoc is a classic first mover. They had to fight to get reimbursement coverage from payors and to satisfy provider licensing requirements across different states; they really were one of the pioneers in the industry. I think Teladoc enjoyed an enormous benefit from being a big brand and a first mover in a space where employers felt that telephonic provider access was an important benefit to offer to their employees.

Most people that have used telemedicine really enjoyed it and yet, the awareness levels and utilization levels were incredibly low pre-pandemic. One of the issues was that it might be a great convenience to facilitate a phone call in the middle of the night, but if that doctor doesn’t actually know anything about the patient, how high-utility is that access point or intervention? Is it really impacting the system? Is it driving a return on the expense?

As soon as the pandemic hit and we knew there would be a spike in virtual care utilization, we also realized it was going to expose a huge percentage of the population to the merits and convenience of virtual care as a modality. I think we're still in the very early days. We're looking at the first iterations of what these models will look like. Historically, they've been pretty narrowly defined. A lot of those companies were focused on a target population with a specific type of intervention with relatively low levels of utilization, and they struggled to make compelling arguments from an ROI standpoint. But now some of those larger players are making moves to expand the breadth of their services and to create broader value propositions.

As for Doctor on Demand—we really liked that they had developed their own technology platform. It was a video-first modality and the data that we saw argued that video was a more enjoyable experience, but also that it enabled a more effective intervention. It was more impactful at reducing utilization after the fact. So, if you called in the middle of the night, you felt like your issue was addressed and didn’t feel like you still needed to go to an emergency room, for example. Also, they were first to market in the virtual primary care space. And last, they had a virtual behavioral health offering. In behavior health there is a huge supply-demand imbalance, and a huge spike in demand during the pandemic. So it’s just a really rich vein of growth.

Those two businesses, virtual primary care and virtual behavioral, by their very nature, require a more longitudinal relationship between the provider and the patient. And that's where we think you're going to see the world in virtual care start to go. It’s less around, ""Okay, great, I've got a whole bunch of point solutions that I can sell you for your different sub-segments of the population."" Instead, it’s ""If you pick up the phone, or you send us a text, or you want to do a video chat, you're talking to the same care team, we know your clinical history."" The richness of that longitudinal relationship is entirely different than a telephonic urgent care use case.

Q: It sounds like what you and GA are passionate about is this longitudinal relationship—that personalization so it’s consistent, and not episodic.  It sounds like this is what drew you to Doctor on Demand.  So let’s dive into that merger.  The merger with Doctor on Demand and Grand Rounds is an interesting one and begins to touch on employer activation and care navigation at the procedural—not the network—level. Can you talk to us about the merger and what it was like to get much more direct exposure to the employers on the second opinion and care navigation front?  And how you’re thinking about that evolving space? 

Vorhoff: I'm not sure employers love being in the healthcare business or its complexity. We know they don't love the medical trend. We know they have vendor fatigue, and they've got brokers and plans and TPAs advising them on who to work with as they’re procuring different point solutions for different parts of their population. And generally, they're skeptical of claims about changing utilization levels or impacts to their medical trend.

Now, as a user, I don't want to have a totally different set of healthcare resources at my disposal if I switch jobs, and I don't want to go to five different applications on my phone for each of my family's five health conditions or needs. For so long, you had really narrowly defined models, whether for price transparency or second opinions, and then all of these point solutions either around a specific disease or a specific use case. Those are all narrow in their scope, which made them probably easier to evaluate and procure as an employer in the beginning, but as a whole portfolio of these have grown up now, it’s harder for any single offering to get the same traction in the market.

We’ve felt the combination of Doctor on Demand and Grand Rounds was compelling for a while now.  It brings together the best virtual care delivery with the best care navigation and expert medical opinion into one integrated virtual primary care offering.  The combined model should enjoy stronger employee engagement levels with a unique breadth and depth of capabilities to quickly, efficiently and effectively address employee health needs. 

We believe you're going to see significant consolidation and integration across the virtual care space. We just made another investment in a company called Vida Health, which is in the behavioral health space as well, but also in the chronic disease management space. An employer might say, ""I'm trying to find a behavioral health solution."" Or they may say, ""I'm trying to find a solution for my diabetic population, or, ""I'm trying to find a wellness and weight loss solution."" They may start with any one of those solutions, but what's compelling about Vida is they're integrating all of those into one coordinated care team on the Vida side, with one application to engage with on the patient side.

And it turns out, there are comorbidities with people that are dealing with struggles across those different areas. Vida offers an integrated experience helping you with your diabetes as well as helping you with your anxiety, for example. The employee has one relationship to manage engagement and coordinate the care that's being delivered across both of those conditions. In the Vida example, it's also really interesting because they're leveraging a lot of cognitive behavioral therapy to try and drive behavioral changes which can be very effective in addressing some of the chronic disease management.

Q: I like the way you characterized this opportunity, Robb, and I'm a big believer in AI-enabled Cognitive Behavioral Therapy (CBT) and synchronous/asynchronous communication to help patients with their behavioral health.  But again, returning to one of our central themes, it’s another area where the valuations have gone absolutely crazy.  Look at Lyra, raising at a $2.3 billion earlier this year – and then, a mere four months later, raising another round at a $4.6 billion valuation; Ginger and Headspace announcing last week their plans to merge into a $3b company; or ‘incumbents’ like Teladoc muscling up its own behavioral offering (myStrength Plus).  You name it, just a torrent of activity.  What is your assessment of the behavioral space?  And what is GA’s niche?

Vorhoff: First of all, a lot of the enthusiasm is really warranted because it's a huge sector with an enormous amount of spend already. There are really significant supply and demand imbalances, and those existed prior to the significant spike in demand during the pandemic. In addition to just not having adequate supply across the country, you have a lot of geographies with literally zero supply from a therapy standpoint, which is unacceptable.

If you're an investor and you see a big market and a huge unmet need, you start to keep your eyes open for technological applications that start to address some of those problems. You think about improving provider productivity and increasing capacity. You think about providing access in geographies where it doesn't exist. You think about enabling a more longitudinal relationship between the provider and the patient. You think about meeting the patient where they are.

A lot of it, like you said Eric, can be enabled through AI where you can have more automated check-ins to track how people are feeling. And we are so excited because we think behavioral health is one of the best areas to demonstrate significantly improved outcomes because of the longitudinal nature and the ability to meet the patient where they are and to provide access on such a timely basis relative to what the status quo has offered.

Q: I think that's right. This is one of those rare beautiful situations where the modality – the new tech delivery platform – is actually preferred by the patient. In other words, a patient or consumer may in some cases prefer to talk to a chatbot (and not a human) because there's no stigmatization and no judgment. Add to this the broader societal trend of celebrities and public figures opening up about their own struggles with mental health.  So great movement on the ‘demand side.’ 

And you pointed out on the ‘supply side’ the insufficiency of caregivers—psychiatrists, psychologists, behavioral health specialists, all of which is exacerbated by a geographic maldistribution, and then of course the tragic need for behavioral health magnified by the pandemic. So I’m hearing you say, Robb, we have a defensible thesis here to invest into mental health, and one that serves a great and urgent societal need.

But similar to our conversation on valuations in the risk-bearing primary care space, do you think the market is big enough and underserved enough that it can accommodate all these different players – from Modern to Lyra to Ginger to Vida, etc.?  Or will there be a messy contraction and brutal price competition? How are you seeing that unfold?

Vorhoff: It's a huge market with room for lots of winners. There’s room for multiple billion dollar plus companies.

A lot of the companies out there now have started and scaled rapidly with narrower solutions. Some of them are standalone offerings, some of them are more integrated into primary care.

Ultimately, we're trying to invest in and help build more full-stack solutions. So, you can invest in something that's more narrowly defined in the early phases if that model helps get traction and scale more quickly. If we're coming in at a later point, there's always a question of whether we have influence over enough of the levers that we need to drive differentiated outcomes. We have skewed across all of our investing activities towards more full-stack solutions. Those may be more of a build, they may be more capital intensive, but most importantly, we want full control of the outcome so we can show how differentiated the models can be.

If we go back to behavioral, what we really like is something that will offer that full continuum. It can be preclinical for people with lower acuity needs, but it can be escalated up to a therapist, to a psychologist, to a psychiatrist so you can provide a comprehensive solution. In the Vida example, that's integrated into chronic disease management. In the Grand Rounds and Doctor on Demand example, it’s integrated into comprehensive virtual primary care. You're going to have better primary care because you've got integrated behavioral, you can have better chronic disease management because you've got integrated behavioral.

Q: As we begin to close our conversation, Robb, allow me to ask about the broader Medicare Advantage space and your investment in Alignment Healthcare.  MA is a tremendously active space that’s perhaps a bit top-heavy—United with 7.5 million MA lives and Humana with 5.8 million, and then a vast array of smaller players.  In fact, if you tally up the enrollment of all the new digital-forward MA players that have launched in the past few years – Clover, Devoted, Alignment, Bright, etc., as of January this year they collectively had 217,000 lives, which is 0.08% of the total pool. Now, GA-backed Alignment is a pioneer here—it's hyper-focused on managing the sickest, polychronic/polypharmacy patients, a heavy focus on managing social determinants – and with a robust technology platform as well. 

With this backdrop in mind, can you help deconstruct the MA space and Alignment's role in the ecosystem? How do you think about these digital forward players that are gathering a lot headlines but not necessarily membership?

Vorhoff: You're talking about a multi-hundred-billion-dollar market growing north of 10% a year. It’s an incredible market to try and build a company in. There will be lots of winners including Humana and United for a long time in that space because I think the market is going to continue to have such favorable tailwinds. The thesis for Alignment was that there's real power in focus on a population and on the clinical needs of that population, and what makes for a successful exchange plan or Managed Medicaid plan or Medicare Advantage plan or commercial plan, I think, might be different.

We felt like there is a real advantage to focus on the MA business model. And we had the benefit of partnering with a lot of the leadership team that came from CareMore. The Alignment idea was to take an evolution of the clinical model that was proven to be successful within CareMore and continue to expand upon that – and actually to start with a clean sheet of paper and begin by building a technology platform that will inform and empower and deploy that clinical model.

It was seven years and a lot of capital to do it, but we said, ""All right, we're going to be focused on delivering better care to that 20% of the population that represents 80% of medical spend, we're going to identify them earlier, we're going to drive interventions either through affiliated providers or employed providers or home-based providers or our virtual providers across the different modalities.""

And if we can do that, we should have higher quality outcomes, market-leading medical loss ratios, and one of the best product offerings in the market, and that should help us take market share. I think that we can grow forever in that space. The large incumbents have been investing heavily in care delivery capabilities, but they're likely trying to figure out how to get it all even more integrated and consistently deployed. One of the benefits Alignment has is it was built that way from the very beginning and it is consistently deployed across all of their markets.

Q: It’s interesting to think about the different advantages that the larger and smaller players each bring to the table, especially as we all try to address the same fundamental challenges.

At the risk of getting too philosophical, Robb, I’d like to close by asking what role do you think venture and growth plays in the ecosystem? It’s obviously having an outsized impact in catalyzing new ideas and solutions. Do you see GA’s role—or maybe the sector’s overall role—as fundamentally different from that of incumbents?

Vorhoff: Let me start on a personal level. I love investing. I love the deliberation over risk and reward. I love making a calculated bet on whether something is going to work or not. And I love it not just as an intellectual exercise or fun debate, but as a data-driven exercise with all the accountability that comes after it.

Now, some investors are looking for things that might be out of favor or mismanaged. I'm thinking of buyout firms that see a company that is not appropriately capitalized, or needs to focus the business model and shed some of the divisions, or their expense base is bloated, and they need to cut costs, whatever. That’s one kind of impact on the system.

But I chose to be a growth investor, not just because I love that investing process, but because I love working alongside a CEO to think about how to scale an organization and setting the strategy that enables growth, but also builds the business in a way where we're increasing the value of that entity relative to its scale.

That could be improving its competitive standing, improving its value proposition, improving the moats around the business, or improving its scarcity value.

So, our companies are all growing rapidly and hiring lots of people. It isn't about expense takeout. Oftentimes, there are opportunities to go out and do really strategic acquisitions that improve your value proposition and may tilt the competitive environment in your favor.

That’s an example where, as a capital partner to those teams, we can add a lot of value to help identify, diligence, execute, and negotiate those types of strategic deals, and then it transitions into our operational support to make sure they’re successful.

It's about finding the best ideas, building the most talented teams, and scaling the models that you think have the potential to have a real impact and improve the healthcare system. As a healthcare investor, the mission of serving our stakeholders is core to what we’re doing.  We’re helping great companies that are solving big problems, delivering better patient outcomes, and at the same time, generating great returns for all the equity holders involved in the business.

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