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April 21, 2015

Private equity sees an opportunity in primary care providers

Daily Briefing

    The shift to value-based care and population health management is driving a wave of acquisitions of primary care-focused physician groups, Modern Healthcare's Beth Kutscher reports. 

    According to Modern Healthcare:

    • There were 113 deals involving providers in the first quarter (Q1) of 2015. That is a 46.8% increase from Q1 2014 and a total of $18 billion in M&A activity.
    • Private-equity groups increased their activity in the health care market, with 41 health care deals in Q1 2015, including 14 in the provider space. By comparison, private-equity groups made just 28 total deals in all 2014, with 10 in the provider space.  

    Doctor group acquisitions may drive up costs—even without changing prices

    Looking for an edge with primary care

    Todd Spaanstra—a partner at Crowe Horwath, a consulting firm—says private-equity firms are increasingly interested in primary care providers (PCPs) that can demonstrate competency in care coordination and managed care operations. While the business case for value-based care has been mixed for some health care organizations, investors see investments in PCPs as a way to cash in on an emerging trend, Kutscher writes.

    In March, New York-based private-equity firm Harbour Point Capital invested in Oak Street Health, a Chicago-based network of seven primary care clinics that focuses on coordinating care for traditional Medicare and Medicare Advantage plans. According to CEO Mike Pykosz, the group was courted by about 15 firms. "We had a large amount of interest," he says.

    Robert Juneja, co-founder of Harbour Point Capital, says the firm invested in Oak Street Health because it has expertise that is increasingly important in the health care market. "A large part of what Oak Street is doing, with a high-touch approach, is that they're able to prevent small problems from becoming big ones," he says.

    The practice uses a care team approach that matches each patient with a physician, a registered nurse, a medical assistant, and a care manager. Visits can last as long as 90 minutes, and Pykosz says the group's hospital admission rate is 40% lower than that of other providers in the area.

    More generally, Spaanstra says private-equity firms are paying for PCPs to get a piece of the market. It is a "land-grab," he says, explaining, "They're going for crazy multiples just because (private-equity firms) see the potential there." Among other things, investors see an opportunity to sell medical groups to insurers and health systems that need expertise in value-based care as the market matures.

    More hospitals will get value-based purchasing bonuses than penalties in 2015

    Slava Girzhel, managing director at KeyBanc Capital Markets, says the demand is driving large corporate buyers to do deals "at valuations that are above their historical comfort levels."

    Provider groups also invest

    Traditional providers also remain active in the primary care acquisition space for similar reasons. For instance, Alexian Brothers Health System purchased Medical Care Group, a six-site primary care practice in suburban Chicago, in February. "Their experience will provide a lot of value to us," Kimberly Zimmermann, COO of Alexian Brothers Medical Group, said at the time of the purchase.

    According to Kutscher, many hospital systems have yet to realize financial gains from the acquisition of those medical groups. But Jeff Swearingen, a managing director at Edgemont Capital Partners, counters that there is clear value in developing—or purchasing—value-based care expertise. "For the people who are well-prepared and understand how those payments will work, there's a tremendous competitive advantage and clearly a lot of money to be made," he says.

    'This is the beginning of a journey.' The Blues make a $65B bet on value-based care

    Insurers also have moved to purchase providers with managed care experience as they compete for Medicaid contracts and other business, says Dan Hosler, a principal at private-equity firm Sterling Partners. Medicaid patients are a "newly increasing population," he says, adding that the best providers in that space "are the ones who can manage complex medical needs."

    Andrei Gonzales, director for value-based reimbursement initiatives at McKesson Health Solutions, says the move to value-based care will have "winners and losers." He observes that increased investment in primary care groups is an example of "everyone trying to get a slice of the pie that's getting smaller" (Kutscher, Modern Healthcare, 4/18 [subscription required]).

    The takeaway: Primary care medical groups with experience in managed care are being courted by private-equity investors and other provider groups in the ongoing shift to value-based care.

    More from today's Daily Briefing
    1. Current ArticlePrivate equity sees an opportunity in primary care providers

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