Private Equity Focus in Healthcare: Consumerism and Resilience

Oh no, both cars are out of gas! – when is the last time we got gas? Where is my travel toothbrush? – I swear I had one... How do I get to the airport, I haven’t opened any of my ride share apps in 15 months… and, when should I leave the house to get to the airport on time?

Fifteen, transformative, months. Much learned and some forgotten but from the first step back onto the plane, the overwhelming feeling of ‘normal is back’ prevailed. Back to shaking (vaccinated) hands, back to reading the body language of the audience, back to smiling (even if behind a face mask) in person, breaking bread, sharing a drink, discussing partnerships, deals, and harvesting the immense energy of opportunity and optimism that the past 15 months brought to healthcare.

The energy, optimism and sense of growth was, dare I say, infectious at the LE Healthcare Capital Markets & Innovation Summit conference in Columbus, OH this week. Some of the nation’s top and most successful minds in Private Equity, provider organizations, start-ups an established, rapidly growing solutions to the vexing problems in healthcare gathered to learn, share and accelerate the many seemingly unforeseen wins and silver linings of the Pandemic.

But were they unforeseen? What is really this “new” normal? As I reflect on the stories of courage, resilience, innovation and entrepreneurship from the conference, I converge on the following three topics:

How did COVID impact Private Equity in healthcare and what can we expect in the months ahead?

1. Yes, COVID did transform the world, but among the things that remained constant are: the amount and growth of capital to invest (PE firms never lost site of their job – to deploy equity), provision of lessons from the past and guidance to their portfolio companies and focus on the management of the firm at large. The leaders of the PE firms ubiquitously shared that while the pandemic was unpredictable, they also knew the pandemic would end. The message to their employees and to their portfolio companies was: “We’ve been through things like this before – this is time to double down in the businesses and emerge stronger”. The sense of positive energy prevailed and drove winning strategies through 2020 and beyond.

2. We all heard the (paraphrased) adage of “success happens when opportunity meets preparation”. Major health systems and companies (e.g. Cleveland Clinic, Cardinal Health, McKesson, Cerner and many others) already had established innovation engines that thrived in the pandemic as addressable markets expanded, and yielded new investment targets. The volume of dry powder has grown prior to 2020 and healthcare PE deal volumes jumped to 380 in 2020, higher than the record 2018 and 2019 (313 deals) levels despite a 14% decline in volume across private equity globally. Capital is ready to be deployed and opportunities abound.

3. While opportunities for investment abound and are growing, successful PE partnerships are built on two-way diligence and fit. Most of the leaders from the firms in attendance highlighted the importance of a capital partner that “gets them” above the actual willingness to fund. As capital partners, the understanding of a potential portfolio company’s mission, space and approach is critical for mutual success.

What is fueling innovation and where is the dry powder being deployed?

Expectation of the consumer is fueling innovation in the spaces as the patient journey continues to evolve around the customer experience, finally.

The omnichannel customer experience – this is all about access and meeting the patient where they are. Solutions in this space are of primary focus for investment:

• This includes needs and services that have typically not fit the standard notion of healthcare, such as animal/pet healthcare and health oriented retail purchasing, which comprise the broader healthcare spend.
• As a part of the omnichannel customer experience, maximizing the role of the pharmacy beyond dispensing pills. With the PCP shortage we are facing, where else can we meet the patient and bring care to them? (pharmacy can provide flu shots, vaccinations, drug delivery, basic care and save a trip to a pharmacy).
• Ultimately, omnichannel care means bringing care to where the patient is, which includes home. Home-based care solutions and technology enabling it (remote patient monitoring, telemedicine, etc) are in the spotlight.
• Patient engagement – this has never diminished in importance. The dedication to the omnichannel experience and digitization of our lives continues to foster new opportunities for innovation. This theme remains top of mind for the payer side of the healthcare equation.
• Supply chain resilience – not only directly relevant to healthcare providers, but all their partners as well. PE firms have discussed interest in solutions that support the supply chain of their portfolio companies.
• Value-driven payment models – physician aggregators continue taking advantage of the immense economic opportunity in Medicare Advantage and Direct Contracting models.
• Maturity of risk based arrangements transition the discussion from “we should address upstream factors affecting health” to “now have the time, resources and contractual obligation to address upstream factors affecting health”.
• This means solutions that address social determinant of health, effective care management, focus on mental health are those that also include care givers and families.
• The opportunity in Managed Medicaid is maturing – while still complex and burdened by regulation, the addressable market for solutions focused on this population is vast. Over 70M Americans are enrolled in Medicaid, and nearly 50M are being cared for by an MCO. The major Medicaid MCOs all saw an increase in their PMPM premium growth, remaining ahead of the PMPM medical expense. Do not shy away from this, or take your eye off this space!
• Valuations of provider practices and RBEs are now being driven not by their current revenue, but by the number of Medicare Advantage and Medicare FFS lives they have. This is a reflection of a more strategic approach to the market and the big bet being made on value based care. An MA life is worth approximately $2,500 a year.

Work force solutions are in very high demand. The need is not just focused on more workers, but also on upskilling the existing workforce to harness the power of innovations and build resilience across workforce in the event of a crisis. Pay close attention to leaders in this space such as the Western Governor’s University who offer high quality, affordable, and most importantly rapid products for upskilling and enhancing the workforce.

How are we really doing with value based care?

The rift between the theory of value based care and practical deployment remains large. Recent data (RevCycle Intelligence, 2020) indicates that two thirds of the 500 executives surveyed across the healthcare industry had only 20% or less of revenue in a risk-based agreement in 2019. Another 18 percent said between 21 and 40% of revenue was at risk. However, leaders in value based care innovation (e.g. agilon health) have begun to demonstrate that by taking advantage of the vast economic incentives offered by CMS and CMMI, it is possible to focus on the patient and their outcomes, and do good while doing very well. However, to do well providers must:

• Have the “all in” approach. This means, not starting small and expanding value, but to break off reliance on focus on volume and jump in with both feet into workflows, processes and operations that focus on value. Often times required workflows are unconventional (e.g. ensuring that a nurse is present at each of the partner ERs to meet your patient and work with the ER docs to determine if a patient does in fact need an ER admission). This means having access to capital to make the required investment and offset the inevitable impact on revenue.
• Be prepared and do their homework. Being mentally and culturally ready is not enough. Assessment of organizational readiness focused on access to data and meaningful analytic tools, knowledge of patient population and attribution, and competency in risk-based coding are a necessity.
• Be educated on the model of risk. Change in anything is difficult. Value hinges on risk and risk is complex. Partners like agilon health prioritize and ensure provider education and full transparency in what a provider can expect throughout the journey to risk.

Often, we focus our intense, deep healthcare discussions on all the things that are lacking, missing or are done incorrectly: the inefficiencies, lack of integration, coordination, transparency of healthcare. While these certainly are not solved, we are coming out of this crisis stronger than ever before. The upcoming months will see a lot of exciting investment activity, resulting in disruptive, clever and much needed solutions to making healthcare be focused on the patient as a consumer. Are you ready?