CASE STUDIES
GRADIAN HEALTH SYSTEMS
About Gradian Health Systems
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Gradian Health Systems is a non-profit medical technology company that works to transform the impact of medical equipment in low-resource hospitals around the world. Gradian’s commercial technology was originally developed for and licensed to a foundation whose primary focus was achieving social impact through a commercial business model. Gradian believes medical equipment can be a catalyst for change in global health, but only if it’s designed for the setting where it’s used and supported once there.
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Gradian’s Growth and Unique Legal Structure
Gradian’s Universal Anaesthesia Machine (UAM) grew to be a renowned solution for the social enterprise and health space in developing countries. Different from traditional anesthesia machines, the UAM can operate without consistent electricity or a source of compressed oxygen—concerns for low-resource hospitals. The UAM is also simple enough that hospital technicians can perform repair and maintenance.
While Gradian became an industry pioneer, the organization started as a program of a private foundation. While its work became widely recognized, it grew quickly. While it was successful as an impact-oriented business, operating inside of a private foundation was not ideal. Gradian decided that, if it was going to grow to scale and maximize its impact, it needed to work on the legal side of its organization and select a better legal structure.
The Challenge: Selecting the Right Legal Structure
As the organization developed its new technology, its enterprise within a foundation presented issues that could potentially be problematic. The foundation’s lawyers worried about too much commerciality and the excess business holdings rule. Gradian needed to explore its options and understand the implications of different models to come to a solution to move forward and grow. Working with Allen Bromberger, Gradian evaluated different models and weighed its options:
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Gradian considered continuing to operate its new business within the structure of its private foundation
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Gradian could spin off its technology to a new, for-profit entity
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Gradian could sell the new business to another entity
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Gradian could create a new, separate nonprofit to house its emerging organization
However, some of these options presented problems. Operating medical equipment presented liability issues, and the parent foundation did not want its assets to be at risk. The foundation recognized that, at its core, it was a charity with a mission of helping people, not a business, The business was a means to an end, not the end itself, and it decided that running a company would be a distraction from its core philanthropic purpose and its other activities.
The Solution: Paving the Way for Growth
In legal terms, Gradian was both a “single-member limited liability corporation” and as a “disregarded entity” owned by the parent foundation; functionally, this meant that the foundation controlled Gradian and Gradian’s financial statements rolled up to the foundation’s 990 for tax reporting.
However, Gradian saw a need for growth capital to expand the business and wanted support in fundraising. To achieve its mission, Gradian also needed to be flexible with its location of operations, doing business with other non-profit organizations in remote parts of the world and recruiting team members in developing countries to support its technology, service, distribution, and training. Because of the way it was structured and operated, these were not easy things for the parent foundation to do.
Bromberger worked with Gradian to evolve the organization into a legal structure that allowed the organization to maintain a social mission by retaining its non-profit status, yet operate as a business to expand sustainably. Eventually, it was agreed that the parent foundation should split the social enterprise off into a separate 501c3 organization. Bromberger explained that a 501(c)(3) organization is free to conduct commercial activity and operate like a business, as long as the business serves to further the charity’s tax-exempt mission -- in this case to advance health and improve health outcomes in developing countries.
The parent function provided additional capital as part of the spin-off, allowing Gradian to grow without a for-profit structure. That was important, as the foundation did not want to sell the company to outsiders, and it was very committed to the venture’s success. While this is not always the case, in this situation it was the right strategy.
Gradian’s Impact Today
The change in legal structure - which was surprisingly easy to implement -- worked. Gradian’s work now spans more than 400 locations throughout sub-Saharan Africa, Southeast Asia, and Latin America/Caribbean. More than 1,000 anesthesia providers have been trained to operate the UAM so far, enabling them and their teams to offer safer anesthesia care for surgical patients around the world, particularly in rural, low-resource settings. While the UAM was Gradian’s first product, today the organization also offers Gradian CCV, a full-featured ventilator that combines a long-life battery backup, rugged design, easy-to-use functionality, and low cost of ownership to make it an ideal ventilation device for any hospital.
Bromberger’s work with Gradian Health Systems ultimately enabled the enterprise to blend a non-profit mission with an industry approach to distributing and sustaining medical equipment in low-resource settings.
“Setting up our legal structure correctly from the start was key to setting us up for progress, not getting in the way,” said Stephen Rudy, CEO of Gradian. “Working with Allen allowed us to evaluate all of our options, assess risks and weigh our options that aligned with our values and growth strategy.”
Gradian is now positively impacting healthcare for people in more than 25 countries. In addition, Gradian has established regional service hubs to cover all its markets, partnering with local distributors, technicians, and clinicians to support each and every UAM in the field. This expansion has created jobs and economic opportunity for young people who would otherwise have few alternatives. As its impact grows, so do its revenues -- the perfect example of successful mission-oriented business with socioeconomic impact, all while improving the health of people through access to medical technology.