Value-based Healthcare as an ESG Opportunity
Healthcare’s relative resiliency to bear markets in conjunction with aging populations, medical innovations, and other tailwinds have prompted GPs to invest in retail care clinics, insurance providers, software and device developers, and other industry actors en masse—raising 2017’s total disclosed deal value to $42.6 billion, the highest level since 2007. However, as the volume of healthcare deals continues to rise to unprecedented heights, so have criticisms of private equity’s management of portfolio company care providers. Notoriously, in November 2018, the Carlyle Group faced significant public scrutiny over its ownership of HCR ManorCare—with the Washington Post concluding that this was a mismanaged investment that resulted in understaffing, patient neglect, and significant injuries. In the incident’s immediate aftermath, pundits and healthcare economists alike pondered: can returns-motivated private equity firms—entities often associated with streamlining operations, reducing expenses, and pushing revenue drivers—responsibly run medical care providers?
Suffice to say, the private equity and healthcare industries have not been associated positively with one another as of late. However, Malk does not believe that private equity investors are fundamentally incapable of functioning as agents of good within the healthcare vertical as others have asserted. In fact, for every ManorCare horror story, there are opposing examples illustrative of how private equity investors can develop businesses that are simultaneously profitable and conducive to providing better patient treatments. For example, Malk believes that value-based care models, increasingly popular alternatives to existing fee-for-service models, constitute an ESG opportunity in which improved quality of care is rewarded with monetary returns—a win-win for all affected parties (patients, providers, payers, and investors). By encouraging portfolio companies to participate in payment systems that actively reward care providers who produce better patient outcomes, private equity firms can positively impact society, deliver profitable and responsible investments to investors, and distinguish themselves as innovators in a rapidly-growing, highly profitable industry.
Overhauling the Incumbent
Fee-for-service models are the incumbent, predominant payment systems in which physicians and other health care professionals receive compensation by patient, by visit, and independent of outcome. Criticisms of such models are varied, but an overarching concern in contemporary discourse revolves around the overtreatment trends (and subsequent reductions in quality of care and cost efficiency) that they purportedly cause. In short, instead of prescribing equally effective, less expensive treatments where applicable, physicians under fee-for-service compensation structures may emphasize “quantity of care” over “quality of care” and may unnecessarily prescribe (frequently more expensive) prescriptions and procedures that offer minimal additional medical value, if any at all.
To combat this phenomenon, the Centers for Medicare and Medicaid Services (CMS) have allowed innovative care providers to voluntarily participate in several value-based care models such as the Merit based Incentive Payment System (MIPS), Medicare Shared Savings Program, the Pioneer Accountable Care Organization (ACO) Model, and the Bundled Payments for Care Improvement (BPCI) initiative. Value-based care is a delivery model in which physicians, hospitals, and other medical professionals are compensated based on overall patient health outcomes (in other words, on quality of care) instead of receiving a fixed payment for rendering a service. For example, in 2019 under MIPS—perhaps one of the most easily digestible value-based care models—individual physicians’ Medicare reimbursements will be determined by the following categories: quality (calculated from six categories unique to a provider’s practice), promoting interoperability, improvement activities, and cost. Example “quality” KPIs could include reductions in hospital readmission rates, improvements in preventative care, and increased care transparency for patients, amongst others.
A Model to Maximize Complimentary Portfolio Companies
Alternatively, other value-based care solutions revolve around accountable care organizations (ACOs)—attractive options for investors seeking to consolidate/link their healthcare portfolio companies. In practice, when a patient seeks treatment for an illness, instead of compensating his or her primary care physician, specialist, local hospital, and so forth independently of one another (as they would be under a traditional fee-for-service model) for services that may be incompatible with or rendered redundant by one another, CMS bundles these various providers into an ACO and distributes a single payment accounting for the entirety of the patient’s treatment timeline—collectively, an episode of care. This payment is calculated from a combination of cost of care (relative to industry benchmarks) and quality of care KPIs. Essentially, ACOs that provide high quality of care at low cost relative to their peers receive the highest payouts, and those that provide low quality of care at high costs receive the lowest payouts or incur penalties.
Opportunity at the Outset
The Department of Health and Human Services (DHHS) aimed to make 50% of total CMS payments through value-based care delivery models by 2018. In 2017, 34% of payments were facilitated through value-based care programs, and while it may be some time before 2018 statistics are released, tailwinds indicate that value-based care will only gain prominence moving forward as patients and payers continue to seek equivalent or better care at lower costs. Thus, forward-thinking private market investors should proactively leverage this growth opportunity and consider transitioning healthcare provider portfolio companies from conventional fee for-service payment structures to innovative value-based care payment structures. If done correctly, 1.) patients will receive improved, less expensive treatments, 2.) successful care providers will benefit from increased efficiency and CMS reimbursements, and 3.) investors will enjoy ownership of ethical, socially-responsible healthcare portfolio companies without compromising profitability.
This article originally appeared in Malk’s ESG in Private Equity Newsletter, sent out on January 15th, 2019. You can sign up for the quarterly newsletter here.