Podcast - Noteworthy Value-Based Care Mergers and Acquisitions Transactions

Morgan Ribeiro: Welcome to Counsel That Cares. This is Morgan Ribeiro, I am a director in the firm's healthcare practice and the host of the podcast. And on today's episode, we are launching our miniseries on value-based care. Joining me is Daniel Patten, who is a partner in the firm's healthcare regulatory and enforcement group. And on this episode, we will be discussing a report that was recently published by VMG on healthcare M&A, and in particular their findings on value-based care transactions and risk-bearing organizations. From VMG, we have a Chance Sherer. And Daniel and Chance, thanks for joining me.

Chance Sherer: Yeah, thanks for having me.

Daniel Patten: Thanks Morgan.

Morgan Ribeiro: So before we get started on the meat of the conversation, I want to provide just a minute for each of you to tell us more about yourself and your practice. So, Chance, I'll start with you. And in addition to your background and your practice, would love to just hear more information also about VMG.

Chance Sherer: Yeah, sure. Sure. So I'm Chance Sherer, I'm a managing director in VMG Health's Valuation and Transaction Services Division. I'm based in our Denver office, so what I do is I do valuations, mostly compliance-based valuations, you know, fair market value opinions for everything from a one doc practice all the way up to the merger of large health systems. And that includes everything in between, inpatient and outpatient health plans. You know, you name it, we do it if it's in healthcare from a valuation perspective. I've been at VMG for over 16 years. VMG Health as a larger organization has actually been around since 1995. And, you know, we try to position ourselves as almost a one-stop shop for transaction or consulting needs within the healthcare space. So we have folks that are also other teams that also specialize in business valuation, but we also do contractual-based valuation, which would be like physician compensation or medical directorships and things like that. We have a real estate division. We do due diligence and quality of earnings analyses. We have a coding arm, and we also have a pretty in-depth strategy division. So that's VMG Health in a nutshell.

Morgan Ribeiro: Awesome. And then you did talk a little bit about your practice. I'm curious, just as we think about today's episode, is there a particular aspect of your, or growing area of your practice, that is focused on value-based care?

Chance Sherer: Yeah, so we're looking at it from a couple of perspectives. You know, our contractual valuation division, they're thinking about ways for physicians to participate in value-based care, how to think about any costs for the management of basically the technology and everything that goes along with, you know, managing that, that process of achieving that value-based care dollar. From the business valuation perspective, we're looking at it in terms of some of these large payviders as they're acquiring, you know, a lot of times primary care practices and thinking through that from a fair market value and a transaction perspective. And then on our strategy side, obviously we're working through with health systems as they're thinking through —they have these large captive position groups, thinking through their value-based strategy and how that aligns with their overall payer and kind of setting of care goals going forward. And of course, we have, you know, in our coding team and everything, we're doing coding audits and everything and making sure that everything is recorded appropriately so that as you go into a value-based model or you acquire a practice, that you're going to transition to a value-based model, billing and everything, you know makes sense.

Morgan Ribeiro: Thank you. All right, and Daniel, a brief introduction for you.

Daniel Patten: Yeah, thanks, Morgan. So in the healthcare regulatory enforcement group here at Holland & Knight, my practice focuses on a variety matters, but value-based care has been a big part of my practice, especially in the last two, three years. I represent mostly providers, you know, physician practices and the like, as opposed to maybe the payvider side. And so, you know, my role there can be from contract negotiation to understanding, you know, risk-based organization status and requirements around those rules, but also, you know, helping individuals and entities get into the value-based space. You know, what are, what do they need to be thinking about? How are they prepping? How do we need to stay flexible, and how do we need to organize and be nimble to transition into that space? So kind of all over the map, but definitely more focused on the provider side of the house there.

High-Level Report Findings

Morgan Ribeiro: Excellent. Thank you both for that introduction. And while we want to focus on value-based care in this episode, before we jump in, I wanted to learn from Chance more about the report that you all published, which I mentioned earlier. It's a healthcare M&A report, covers a lot of different sectors, value-based care being one of them, actually a newer section for your annual report this year. And just any high-level findings regarding the healthcare M&A landscape?

Chance Sherer: Yeah. So, you know, the healthcare M&A landscape has been very interesting the last few years, right? So, we went from, you know, in 2020 when we had the pandemic, you know, transactions slowed for bit. And we also kind of saw a fundamental shift in healthcare to more outpatient and telehealth became very popular, or it accelerated that in the marketplace. And then so we get into 2021, where we saw a tremendous amount of transaction activity. Again, this was a reaction to certain participants, you know, struggling through the pandemic, an enormous amount of capital out there to deploy, and then also easy access to expensive debt. So then we get to our 2023 report, which is based on our observations of what we saw in 2022 and then the early part of 2023. I think what I would say about 2022 is really you can kind of almost break it into two halves. You kind of have that first half that was very, very much like 2021 with a lot of transactions, a lot of bigger deals, easy access to capital and whatnot. The second half was a bit different because we had a different factor, especially if we think about our financial investors, you know, because starting in June is when the Fed started increasing the rates and increasing the cost of debt, and the access to that debt changed and everything. So, we saw a little bit of a change in the market as far as tightening and access to that debt. That being said, overall, in 2022, we saw, I think, a few less transactions than what we saw in 2021. But from a total value perspective, there was actually an increase in total deal value because there were some really large transactions in '22, and actually some of them were in the value-based space. Kind of just overall what we saw, again, financial investors, you know, private equity and whatnot were heavily involved. You know, we've seen a 10 percent annual increase over the last 10 years related to private equity investment within healthcare. We also saw in 2022 that continued interest in physician practices and even behavioral health. We saw that continuation. And then, of course, you know, germane to this conversation, we're seeing, you know, further payer provider convergence and the entrance of kind of nontraditional entities in the healthcare space. So, you know, 2022 was an interesting year driven by a lot of what happened in the previous years.

That being said, overall, in 2022, we saw, I think, a few less transactions than what we saw in 2021. But from a total value perspective, there was actually an increase in total deal value because there were some really large transactions in '22, and actually some of them were in the value-based space.

Main Drivers of Interest and Investment in the VBC Sector

Morgan Ribeiro: Very nice job summarizing quite a robust report. I think that's really helpful perspective as we look at the value-based care transactions. As I mentioned earlier, this is the first year that you all have included that sector in your annual report. And really that's a great indicator of the heightened interest and investment in the space. What is, you know, from your perspective, what's driving the activity in the value-based care sector?

Chance Sherer: There's just been a notable increase in the number of entities seeking to capitalize on this shift, from fee for service to a value-based care model. And I think what's important to understand is when we say value-based care or risk or whatever, that can mean a lot of different things, and there's a lot of different players in that market. So that could include payers, payviders, meaning payers that have interest and actual providers and physician practices. Health systems are involved obviously, and obviously private equity. But I think another big aspect of it is what I would call kind of the enablers or technology- based platforms that help either health systems or payers or practices navigate through the value-based care landscape and whatever level of financial risk they're going to participate in. So a lot of activity there and the emergence of those types of companies, this is actually quite a complex space, I think as everyone would recognize. And so you need that capital, you need that help in a lot of instances. And so a lot of people are looking to those types of entities. Also, just given the variety of participants in the value-based care space and it being an emergent market, it is very highly fragmented. And so anytime you have an industry that's fragmented, that's just ripe for consolidation, which is what we've seen, you know, and I think we'll continue to see.

There's just been a notable increase in the number of entities seeking to capitalize on this shift, from fee for service to a value-based care model.

The Push Toward Medicare Advantage (MA) and Its Impact on VBC

Morgan Ribeiro: So the shift towards value-based care has been in discussions for many, many years. And I'd say over the last decade we've really been kind of going round and round about this, but it does seem like over the last few years it's really increased. And I think this was most notable when CMS, the CMS Innovation Center, was established in 2010 as part of the Affordable Care Act. And so since then, CMS has continually pushed containing healthcare costs by moving lives from that traditional fee for service Medicare to Medicare Advantage. Can you speak more to some of the trends you're seeing as it relates to Medicare Advantage and kind of how that ties back to this overall conversation around value-based care?

Chance Sherer: Yeah. So, I mean, if you think about it, it's shifting of risk, right? And so the CMS is basically shifting the risk of the cost of care to private organizations, right. And they did that through Medicare Advantage. I think everyone understands that. But it's actually, you know, more importantly, I think everyone, including CMS, is believing this to be successful. And so there's a lot of incentives to push members into an M&A-type product for the payers. I think most importantly, what we tend to see in the data is that the PMPM payment is actually higher than what the fee for service payment would be. So that incentivizes the plans to participate based on the bidding process and everything. A lot of times what that allows for is the Medicare population to actually participate in some extra benefits, whether it be dental or vision or zero premium type plan. So all of that is leading to the shift. And also, you know, there's just been more access. The average Medicare beneficiary has access to almost 40 MA plans today, whereas, you know, in 2011, that was closer to like 19. So what we expect, and we expect this to continue, and we're going to see more and more of Medicare beneficiaries moving to an M&A-type plan. I think what's interesting to note about this is that market penetration of Medicare beneficiaries to MA plans varies by geography. Some geographies are very heavy MA and some are very light and more traditional Medicare. But all this means is that as there's more transition to Medicare Advantage type product for these beneficiaries, that allows more players to participate, whether it be the enablers, the payers or whatnot. And so we're going to, you know, anyone that you kind of capitalize on managing that life, you know, we're going to see a lot more entrants and a lot more vertical integration for the future.

I think what's interesting to note about this is that market penetration of Medicare beneficiaries to MA plans varies by geography. Some geographies are very heavy MA and some are very light and more traditional Medicare. But all this means is that as there's more transition to Medicare Advantage type product for these beneficiaries, that allows more players to participate, whether it be the enablers, the payers or whatnot.

Morgan Ribeiro: Are there particular markets or for some reason why certain markets are more concentrated with MA plans?

Chance Sherer: So if you think of California as the traditional kind of home of a managed life, right, and so it's just, you know, with Kaiser and everything, that's kind of where it objectively started, right? And then you have geographies that it's more demographic-based why they're so MA-based. Maybe it's a Florida or a marketplace like that. As far as why certain marketplaces are behind, I don't have a good answer for you, but the ones that come to mind, New Jersey is top of my mind. Relatively little MA penetration there relative to other markets. So I think it's just because it's such a populated area and it's so fragmented from both payer and an employer group and everything that the management of a whole life is just a little bit behind there because it's unique. You have a dense population but very fragmented as far as healthcare services and types and everything like that. So it's just, I'm assuming it'll get there relatively soon.

Notable Regulatory and Reimbursement Trends

Morgan Ribeiro: OK. So we cannot have this conversation about value-based care without talking about the regulatory and reimbursement landscape overall. And we'll get to this in a minute, really talking more about notable deals and investors and transactions in the space, but, you know, the regulatory and reimbursement piece of this is a huge driver. Both you and Daniel are equipped to really share with us more information and sort of lay the foundation for what's going on here. Daniel, do you have anything in particular as we think about kind of the reimbursement piece of this, anything notable that's happened over the last year or so that may be driving some of this additional activity?

Daniel Patten: Yeah. I think overall you're seeing CMS, right? Centers for Medicare and Medicaid Services, which really drives a lot of policy for, you know, downstream to commercial MA obviously is really doubling down. You know, Morgan, you said earlier it's been 10 years we're still talking about this. And, you know, I think a good example — and we'll explore in a later podcast — is the new enhancing oncology model. So CMS is really part two of the oncology care model that had a lot of mixed results. And, you know, there are a lot of opinions about it in the industry, and maybe it wasn't as big of a success as CMS had originally hoped, but really doubling down. A lot of similarities in the program. And so that's probably one piece. The second is we've exited the PHE, the public health emergency, and, you know, the two biggest drivers and growth we've seen is really on the telehealth and behavioral front, right, with reimbursement changes there and telehealth, some of the waivers extending to the end of this calendar year, and you see a lot more acceptance of the behavioral health as well. So CMS, in its rule for the physician's fee schedule update that was released last November, talked a little bit about the telehealth and behavioral health, really, expansion, right? Maybe bringing in lower level providers to provide some reimbursable services and finding more ways to use telehealth to create greater access to care. You know, outside of that, you know, I wouldn't say falls squarely into value-based, but you're seeing more and more, you know, initiatives like CMS' program: emergency triage, treat and transport model, the ET3. Seeing more developments across the states in terms of how do we put more control in the provider's hands and some of these lower level providers to work together, you know, ambulance providers and primary care physicians, hospitals, home health agencies. And I've seen a lot of drive there. And so, you know, as Chance mentioned earlier, we're looking you know, Medicare is trying to shift risk, right? Financial risk. Right. But there's still a cultural component of trusting those providers. So I think it's important to look in parallel as we're seeing some of these other programs explore new models and strategies for care delivery and seeing a lot of satisfaction from patients, which I think just adds gas to the tank and promotes more in this in this value-based space.

So I think it's important to look in parallel as we're seeing some of these other programs explore new models and strategies for care delivery and seeing a lot of satisfaction from patients, which I think just adds gas to the tank and promotes more in this in this value-based space.

Morgan Ribeiro: I mean, and I think it's, you know, related, but I guess more so on the regulatory front, if there are any noteworthy shifts happening on that front.

Daniel Patten: You know. That's right. I think they're related, obviously, the telehealth, behavioral health, I think you're seeing really more on the state level. As you know, I'm based in Tennessee, but I'm not necessarily a Tennessee attorney, right? Communications, all different agencies across the board. And my general impression is these occupational boards, medical boards and nursing boards are really having to kind of confront and look at these new issues with telehealth. Right. Who's the provider where they're at? Is this appropriate — you know, scope of practice laws have always been written extremely broad, and I'm sure they'll stay broad. But approaching some of these questions hasn't been addressed by these medical boards, right? Value-based care requires a lot of delegation and push down to, you know, home health aides and RNs, LPNs, things of that nature. And so this idea of delegation is really being challenged. And for the most part, I'm not seeing a ton of activity there, but it's definitely been a lot more conversations with, with, with medical boards, nursing boards and the like.

Value-based care requires a lot of delegation and push down to, you know, home health aides and RNs, LPNs, things of that nature. And so this idea of delegation is really being challenged.

Medicare Shared Savings Program (MSSP) and Accountable Care Organizations (ACOs)

Morgan Ribeiro: That makes sense. And I think Chance, the report from VMG talks a good amount about ACOs and goes into some particulars about that. I feel like you can't have a conversation about value-based care without looking at some of the things happening around ACOs. And you were also talking about Medicare Shared Savings Program. Anything noteworthy from the report that you'd want to call out to our listeners?

Chance Sherer: Yeah. So, you know, as of January 2023, there is about 456 ACOs participating in MSSP. They're providing coverage to about 11 million beneficiaries. So if you think about the shared savings program, there's basically all the different tracks. There's kind of the basic tracks, you know track A and B, and then you have the more two-sided tracks where there's upside and downside to different levels of C, D and E. And then lastly, you have the enhanced track. What we're seeing right now is that in 2022 about 33 percent were in the kind of upside only tracks. And then as far as in the upside downside tracks — and before you get to fully into the enhanced model, there was, about 35 percent of ACOs were in the enhanced tracks. And so what that shows to me is that there's more and more ACOs moving through the spectrum of risk to where they are taking on a more downside risk. And so I think we'll continue to see that as there's more, you know, technology, sophistication and understanding, especially at the individual physician level, much less at the higher ACO levels.

What that shows to me is that there's more and more ACOs moving through the spectrum of risk to where they are taking on a more downside risk. And so I think we'll continue to see that as there's more, you know, technology, sophistication and understanding, especially at the individual physician level, much less at the higher ACO levels.

Market Entry via Initial Public Offerings (IPOs) or Special Purpose Acquisition Companies (SPACs)

Morgan Ribeiro: Perfect. That's really helpful. All right. So I want to shift our attention more to the kind of transactions component of your report. Over the last 10 years or so, we've seen similar trends toward the reallocation of risk and the containment of healthcare costs across the spectrum. So we just talked about, I think this includes Medicare, primarily through the Medicare Shared Savings Program and commercial players. And recently, several market participants have started to tout the importance of technology, which I think you mentioned early on in your introduction, and enhancing patient care and lowering the cost of managing a patient population. And many of these companies have entered the market through IPOs or SPACs, which is pretty interesting. I think the buzz around SPACs has maybe dwindled a little bit, but it was pretty high there for a bit. And can you share more with us on what you're seeing with respect to value-based care companies in the market and the interest there and around kind of IPOs and SPACs and are the expectations where they should be?

Chance Sherer: That's an interesting question because, you know, there is, like you mentioned, there is a tremendous amount of activity through, you know, SPACs, which are, you know, special purpose acquisition companies. So we saw companies go public through those or through IPOs or whatnot. And so there's a tremendous amount of interest in these companies because this is novel. Everyone understands this is where there's some returns to be had if you can manage these patient populations effectively. So I think the market was excited. Compound that with some COVID factors to where patients weren't necessarily using healthcare in the traditional ways kind of pre-COVID and kind of like they are today. So there is relatively low on a per patient basis. You know, people weren't going to the doctor, they weren't getting that knee surgery, they weren't doing this, so the cost of care relative to what was actually being paid through a VBC-type model was actually very, very favorable. So again, a lot of market excitement. And then once kind of these, you know, in 2021, once these companies kind of hit the public markets, I think what we all saw was that, you know, some of the promise of acquiring lives was it wasn't quite as easy as was promised. Also, it takes time to recognize profitability in a value-based arrangement, takes time to educate the providers and how to operate within that. It takes time to ultimately just get the payments in a shared savings model or whatever. You have to build the foundation, and then ultimately it takes several years for that to kind of come into fruition. So what all of this kind of compounded — and then, you know, also life kind of sort of returned to normal and so expectation for readjusted ultimately. So as far as initially, maybe expectations were high, then they were brought down. They're probably where they should be. I mean, these are still very desirable entities in the marketplace. I mean, we're seeing some companies [continue] to do very well. If you look at some of the reports and how they're projecting what their actual beneficiaries are versus what they were projected, you know, it still remains an attractive subsector. So, I mean, take, for example, CVS has announced the acquisition of Oak Street as it closed. But, you know, it's a relatively large valuation. And so I think there was some initial overestimations that were right sized. And now the market seems to have a better understanding of how these entities operate.

I think there was some initial overestimations that were right sized. And now the market seems to have a better understanding of how these entities operate.

Vertical Integration: Nontraditional Entities Investing in the Value-Based Care Space

Morgan Ribeiro: OK. And then let's talk about vertical integration or vertical consolidation in the value-based care sector. There's a lot of nontraditional players, I feel like, that are entering the space. We've talked about providers, payviders, health systems, but there's some other organizations that have entered the field. So maybe tell us more about that.

Chance Sherer: Yeah, I mean, the biggest ones that come to mind are obviously Amazon, Walgreens, CVS, you know, those types of retailer-type entities. You know, what they're doing is, you know, they've identified opportunities to leverage their national reach within their existing operations and their existing technology platforms and everything to hopefully improve outcomes, reduce costs and ultimately lead to profitability. And the way that they're going to do that is through a VBC model, basically, right? Since they have the technology platform. We've seen a huge influx of these since 2021. And so it's not necessarily, there's the initial acquisition of the platform and then, you know, the continued bolt-ons and further technology enablement. And so there's kind of a frenzy of transactions around any kind of one retailer moving into this space. And we'll kind of get into that later, I believe. So, really, I mean, there's just a lot of well-capitalized players that can enter the space, that have the background, have the ability to manage this technology and the membership in a way that they see that they can make profit. So it's interesting, but you know looking, hindsight is 20/20, maybe not surprising.

The biggest ones that come to mind are obviously Amazon, Walgreens, CVS, those types of retailer-type entities. What they're doing is, you know, they've identified opportunities to leverage their national reach within their existing operations and their existing technology platforms and everything to hopefully improve outcomes, reduce costs and ultimately lead to profitability. And the way that they're going to do that is through a VBC model.

Morgan Ribeiro: Right? Well, I think it's going where the consumer is, right. It's really that consumerism play here. And if, you know, I'm ordering everything else on Amazon or like, why not go ahead and try to grow that pie? So know, we've talked about Walgreens and Amazon. There's obviously a lot a lot of chatter in the healthcare industry about these two retail players now coming in, their investments in healthcare over the last couple of years. I think a lot of organizations feel threatened by it, and rightfully so, based on some of their recent investments. It seems like this is more than just a lot of talk and they're putting their money where their mouth is, and we're seeing some real traction. You think about things like Amazon Pharmacy and even when Amazon's joint venture they had with Berkshire and JPMorgan, you know, and that was announced that it failed. It was like, oh, OK, see, there it is. It's not going to work. But they've decided to kind of just take a different approach with it. So I think there is some realness to this. And can you dig deeper into what these two companies are actually doing and similar organizations are doing as it relates to value-based care? We talk about this, you know, it's a very large umbrella when we talk about value-based care, but what are they specifically doing that really plays into that space?

Chance Sherer: Yeah. So Amazon specifically, you know, they're, obviously their big acquisition was with One Medical. So that's a membership-based primary care organization that was a $3.9 billion transaction. So if you think about One Medical, it's subscription-based, they manage your primary care doctor, manage your whole healthcare journey, and everything being subscription-based, that seems to, at least in my mind, line up very well with Amazon. You know, a lot of, most folks have an Amazon subscription, they have the technology platform to manage that. And so in stepping into healthcare, that's kind of a natural progression in my mind. Also, you know, through their One Medical acquisition, they gain access to Iora Health. Iora Health was acquired by One Medical in, I think, June of 2021 for about $2.1 billion. The Iora Health acquisition allowed One Medical to kind of step into a value-based delivery platform specializing in Medicare Advantage and other at-risk types of arrangements. So that was kind of one big transaction. Another one to kind of note would be Walgreens acquired CareCentrix, or a 45 percent stake in it, for $392 million. And then in August of 2022, they bought the remaining 55 percent for $800 million. CareCentrix is a care coordination platform. It's more focused on post-acute in-home health, but it has a membership of 19 million beneficiaries and about 7,400 provider locations. So instead of a direct primary care route, you know, this is a little bit different. This goes in the home health sector and other value-based care models. CVS Aetna in September 2022 announced that it would acquire Signify, which would be about $8 billion. Signify is a technology-based platform that provides provider networks with analytics and other technology that allows them to operate within a value-based model. Lots of big transactions, and I think, you know, more recently in my mind, not necessarily my report, but is the CVS announcement that it's going to acquire Oak Street, which Oak Street manages MA lives and actually has the provider network and everything and provides a full delivery model. And so this would just provide a further greater integrated delivery system for CVS Aetna.

Vertical Integration: Traditional Providers Investing in the Value-Based Care Space

Morgan Ribeiro: Right. And then what about the more traditional providers? I mentioned that earlier, but examples of transactions that demonstrate providers investing in the risk-based arrangements.

Chance Sherer: Yeah. So the big recent one would be the completed acquisition of Summit Health+CityMD by VillageMD, which is a subsidiary of Walgreens. So again, we've kind of got the large retailer, we've got the value-based management enabler, and then we also have the ultimate provider. This investment is valued at $8.9 billion. And so it is quite large because if you think of Summit Health+CityMD's footprint in the Northeast and some on the West Coast, it's 680 provider locations in 26 markets with 20,000 employees once it's all combined with VillageMD. So a lot of geographic coverage and a high ability to kind of manage the whole patient experience and then provide, you know, an effective outcome and ultimately a profitable service while operating within the value-based setting, you know, that kind VillageMD specializes in. Another big transaction was Skylight Health, which is more healthcare services technology company, bought NeighborMD for about $8 million in May of 2022. NeighborMD — this one is a little unique because it is so geographically situated in central and southern Florida — they have about 5,000 lives. And so of that, you know, over 1,000 were full risk Medicare Advantage lives, and the other are affiliated through other providers and practices. But what it allows Skylight Health to do is have a direct relationship with a provider, you know, NeighborMD, it can actually manage the whole life. So interesting transaction. It's their first full entry into total risk type contracts. And then I think one of the bigger players that we all tend to think about in this kind of payvider technology-enabled and solid vertical integration, you know, Optum was very, very active in 2022. Optum is the kind of provider, technology-enabled subsidiary of UnitedHealth Group. UnitedHealth Group, obviously the health plan. So in April, they bought the Kelsey-Seybold Clinic, a large risk-bearing physician organization in Houston, they bought Atrius Health, which was a community-based physician group in eastern Massachusetts, they have bought Healthcare Associates of Texas, a Dallas-based physician practice management company. And so I think that's just a continuation of what we've seen kind of, you know, United and Optum do is just what you would call kind of consolidator of primary care and other even specialists through their platform to, you know, start at the UnitedHealth level and manage the whole dollar of the patient care. Another interesting transaction was CareMax. CareMax acquired all the value-based care seniors associated with Steward Health System. It consists of a direct contracting entity, Medicare Shared Savings Programs, all through ACOs and whatnot. That was for about $25 million in cash and issued about $23.5 million in equity. So, I mean, I could go on and on Morgan, there was so many transactions.

And so I think that's just a continuation of what we've seen kind of, you know, United and Optum do is just what you would call kind of consolidator of primary care and other even specialists through their platform to, you know, start at the UnitedHealth level and manage the whole dollar of the patient care.

Morgan Ribeiro: And Daniel, you have any additional noteworthy transactions that we've seen not just in 2022, but even more recently in the space? I mean, any transactions that you're watching closely?

Daniel Patten: Yeah, I think, which plays nicely off of what Chance was saying, is the Geisinger and Kaiser combination into Risant Health. Right. Before you're hearing words like Amazon, these large players entering the space, you know, value-based care with risk is going to take deep pockets, right, economies of scale. If you want to take on risk, you're going to have to be ready to pay. A general understanding with providers [is] you're not saving right away. It takes it a little while for the program to roll out, collaboration. There's just operational difficulties that could take a year or two, maybe three, to really see gains. So that's where you're seeing these, you know, outside players coming in. But this Risant Health with Kaiser and Geisinger coming potentially coming together, if it's approved, could be a huge shift. I think that this nonprofit system hoping to kind of tuck in other nonprofits, community-based health systems into this umbrella, offers an exciting kind of I wouldn't say a parallel route, but, you know, players in the system with strong cash positions able to really trying to drive change. So I'm excited to see if that comes through. If Kaiser is committed to making it work and it's committed a lot of cash, which I'm sure is going to be used as some type of risk-based capital to go and get some of these contracts and being able to leverage some of their technology across their existing provider relationships, could be exciting and a good case study to hopefully speed up growth.

Vertical Integration: Technology Companies Investing in the Value-Based Care Space

Morgan Ribeiro: Yeah. And then I think the other component to this is technology companies that are partnering up with providers. I know there were a couple examples included in the report. Chance, any of those in particular you want to call out?

Chance Sherer: Yeah. I think what's interesting is the, you know, what Privia and Agilon are doing and that they're, especially from my perspective, a lot of my work is centered around kind of not-for-profit health systems. And so what we're seeing is, you know, Privia and Agilon partner with, you know, either health systems or large groups and marketplaces, to kind of be their technology-based or management partner as they pursue more depth in the value-based or risk spectrum. So, you know, Privia, you know, has their relationship with Novant. But they've also, interestingly enough, they're, you know, in February of 2022, they're going to work with some physicians and related to surgery partners in Montana on a clinic and surgery center and everything. And they're going to leverage their technology to kind of build a physician platform there. Agilon, you know, it announced its first long-term partnership with MaineHealth in 2022, which would be the largest integrated health system in Maine and New Hampshire. And then throughout the year, also, Agilon announced partnerships with health systems in Michigan, South Carolina, Minnesota, Tennessee and so forth and so on. So, you know, we're seeing it takes technology, expertise and capital to go into these type, like Daniel was saying, to go in to a value-based care type of arrangement as you're transitioning from kind of the traditionally easily understood fee for service model. And so there's companies like Agilon and Privia that have this expertise that are marketing themselves well to health systems and other clinician partners.

So, you know, we're seeing it takes technology, expertise and capital to go into these type, like Daniel was saying, to go in to a value-based care type of arrangement as you're transitioning from kind of the traditionally easily understood fee for service model. And so there's companies like Agilon and Privia that have this expertise that are marketing themselves well to health systems and other clinician partners.

Funding These Transactions and Investments

Morgan Ribeiro: I think that's really helpful. I mean, it's just so interesting how all the different players can sort of tap into this market. And I think, you know, it really does take collaboration as you're seeing in a lot of these transactions where it's, you know, for instance, like you just said, the technology vendors that are partnering up with providers and you've got the payvider side of there. So it's really, I think we're moving in the right direction, even though it has taken us a decade to start to see some of this activity. Of course, the other players in this landscape here that we're looking at are the investors. And I know that they're either PE-backed companies, some of which we've already mentioned, but also looking at funds that are completely dedicated or almost entirely dedicated to investing in this space. Happy to start with either one of you. I know that the report actually gives some examples. So, Chance maybe you want to talk through some of these examples that you all included in the report.

Chance Sherer: Sure, sure. I'll start with a larger one. In February 2022, we saw Kinderhook Industries announce a $500 million investment in Physician Partners LLC. Physician Partners is a value-based primary care group, an MSO in Florida, has over 137,000 members and a provider network of over 445 physicians. So this investment by an investor will help accelerate physician partners growth not only in the Florida market, but also a potential entry into out-of-state markets. So just like the traditional financial investor, what you're doing is you're providing capital for growth, right? We also saw Genuine Health Group announce the acquisition of Accountable Care Medical Group, ACMG, in April of 2022. The acquisition follows Genuine Healthcare Group's acquisition of Premier Care Associates and Preventive Med, which are all funded by a $160 million capital infusion from Crestline Partners, the financial investor. So all of these companies have added over 20,000 Medicare patients to Genuine Health Group's membership base. So all set up to really you know, they have ACOs, they have the provider base, and they're going to have a direct contracting entity. So they'll ultimately have kind of two levers of operating within their Medicare Advantage patient population.

Daniel Patten: Another interesting development is with Valtruis, which has several portfolio companies. The fund's dedicated exclusively to value-based care services and, you know, investments from Welsh Carson over the next several years. The areas Valtruis is in, from oncology to nephrology but also mental health, which you're seeing more and more providers interested in. They've got a tech company as well, a spine joint group as well. And just seeing a lot more development, which is interesting beyond the very acute nephrology oncology expansion beyond that, which what I'm seeing in my practice as well is, you know, obviously primary care has been more of a discussion, but, you know, how do you get those lower level providers involved. And so I see, you know, over the next year or two, as individuals and groups are getting more data, more understanding and partnerships and co-operations, just an expansion to beyond just the standard nephrology oncology.

Morgan Ribeiro: And Daniel, based on your knowledge, is Valtruis, remind me, are they actually going out and acquiring businesses, or are they kind of building businesses around an idea? So, for instance, it's something on oncology or, you know, you mentioned behavioral health or mental health. Are they going out sort of building these companies, or are they going out and acquiring businesses and doing add-ons from there?

Daniel Patten: My understanding is originally they were going to just invest in companies, and finance, as opposed to standing up new entities. But once, once they've established their portfolio, expansion can take a variety of forms, right? Finding small physician practices, that takes time and energy. Setting up those, other partnerships or joint ventures. But to scale, right, we keep coming back to scaling is important. Scaling fast is important. Having a game plan is one thing, but then operationalizing it is going to require pivoting and changes and flexibility. So I've seen that across several clients. Right now the game plan is we're on plan E. That doesn't necessarily mean that's the fifth best plan. It's just that's what had to be used for this arrangement to go through. When we talk about value-based care, it's really a coordination and cooperation between a payer and a provider. Right. It's two way, it's trust. And so a provider needs to be what the payer needs, right? So we're seeing a lot of different ways, a lot of pivoting just to get that scale happening fast.

Scaling fast is important. Having a game plan is one thing, but then operationalizing it is going to require pivoting and changes and flexibility.

Healthcare Sectors That Align Well with the VBC Model

Morgan Ribeiro: And are there, we've mentioned a few sectors and you just touched on this, Daniel, but there's a lot of activity, it seems, on the primary care front. But when you look at things like what Valtruis has done with their oncology platform, there are definitely some areas like that nephrology, others that require a lot of coordination of care, are very complicated cases. Are there specific segments or sectors that are of interest and outside the ones we've mentioned, primary care, nephrology, oncology. But are there certain ones that are really ripe for this, this model?

Daniel Patten: It's easiest data-wise to be able to point to a change when there's a very acute specific diagnosis or condition, right? So like maybe post-hospitalization. For instance, home hospitalization, right, with certain, you know, eight to 12 different diagnosis, it's pretty easy to track cost of care and episode payments. This is obviously a 2.0 of that and beyond. You know, behavioral health is really difficult, but we're seeing more people jump into that space with partnerships with primary care providers, which goes to the bottom line of total cost of care of a patient and understanding that, you know, the physical and mental work together. But that's, you know, inherently difficult to quantify, spend, and sometimes cost of care isn't appropriate for just behavioral health by itself. You know, sometimes best outcomes result in longer life. And you know that affects the bottom line, right? The opposite way that you're usually looking at total cost of care, which emphasizes an important point, right? Patient satisfaction, quality, those metrics are still driving a lot of this, not just the, you know, TCC, total cost of care. So I'd predict seeing more, I wouldn't call them, they're specialties, but I work with a dietitian platform right that I think is exciting, it's growing quick. Sylvan Health, where they could work alongside a oncology care partners or an InterWell Health, which is the Valtruis kidney and oncology platforms and kind of help push value there, right? So as these kind of lower level less acute providers that could provide care to really just the entire population are trying to find ways to bolster and help kind of find their niche in this space. But it's a data game, right? So they're going to have to get as many at bats as possible and see what's working and then have a thesis that they can prove out and show potential partners and payers.

So as these kind of lower level less acute providers that could provide care to really just the entire population are trying to find ways to bolster and help kind of find their niche in this space. But it's a data game, right? So they're going to have to get as many at bats as possible and see what's working and then have a thesis that they can prove out and show potential partners and payers.

Valuations

Morgan Ribeiro: Great and Chance, I can't have this conversation with you without asking a question specifically about valuations. Can you give us a broad understanding of where valuations sit in the value-based care sector, especially in comparison to other sectors that are covered in your report? I know there's a lot of buzz around the space, but curious to know more specifically about the valuations.

Chance Sherer: Yeah, I think valuations are going to remain highly attractive, very strong, even when you compare it against other sub-industries. Obviously for all the factors we mentioned, there's a lot of things that make this very appealing to investors and driving the valuations. Obviously the biggest one being a growing M&A population, you know, with just the demographics of our nation. I think, you know, what I get asked more and more is, you know, hey, what's the multiple of EBITDA for this or what's the value per life of that or what's the revenue multiple? And, you know, unfortunately it's not such an established industry where we have these rules of thumb that we might have for other sub-industries. So I don't have a magic, well they should trade it x times EBITDA or x times price per life, because it is so fragmented and there's so many different types of transactions. So what are we talking about when we're talking about valuation? You, are we talking about an enabler? Are we talking about a plan? Are we talking, are we talking about a provider group that has a bunch of MA lives? Are we talking about a provider plan that has a bunch of MA lives and they already went down the VBC path a little bit? So all of that is going to dictate what the valuation is. And just like any sub-industry within healthcare or even any type of valuation you're looking at, there's obviously the factors of, you know, size and scale, profitability and projected growth that ultimately go into that valuation. So, you know, all of these things are what makes this a bit unique right now and that there's no just magic x times EBITDA or anything that we always get asked. So I think as the market matures and there's more transactions and we look at these, there'll be some, some more clarity on that. But I think what everyone's really looking at right now is just a discounted cash flow type of analysis or a projection and return model. And just thinking about, you know, what is the ultimate value of this entity. So it's a bit unique honestly.

I think valuations are going to remain highly attractive, very strong, even when you compare it against other sub-industries. Obviously for all the factors we mentioned, there's a lot of things that make this very appealing to investors and driving the valuations. Obviously the biggest one being a growing M&A population, you know, with just the demographics of our nation.

A Look Ahead: Predictions for the Next 12-18 Months

Morgan Ribeiro: We're nearing the end here. I want to give each of you maybe a minute or so to give us your predictions of what will happen in this space over the next 12-18 months.

Chance Sherer: It's a highly fragmented, relatively new industry. I think we're going to see a lot of consolidation, a lot of vertical consolidation. You know, as we think of the whole spectrum of managing the patient's life and healthcare costs, we're going to continue to see that. I think, like Daniel mentioned earlier, as there's more sophistication and the process is better understood. I think we're going to see a further movement into actual specialty care, and it might be into some specialties that you wouldn't necessarily traditionally think would fall into this in the traditional way, maybe orthopedics or things like that. So I think we're going to see a lot of transactions. I think we're going to see a lot of big transactions like we've seen in the last couple of years, but also a lot of like bolt-ons and geographic expansion type transactions. So all that's going to continue in my mind.

It's a highly fragmented, relatively new industry. I think we're going to see a lot of consolidation, a lot of vertical consolidation. You know, as we think of the whole spectrum of managing the patient's life and healthcare costs, we're going to continue to see that.

Daniel Patten: All right. I got a prediction too, my crystal ball is crystal clear here. You know, we talked about the Amazons getting in the game. We talked about, you know, Kaiser linking up with Geisinger, folks within the game. And so we're seeing different strategies. I'm predicting a bigger push with physician involvement and participation in the way, maybe push towards value-based enterprises and getting physicians more buy-in. Any company can have the best idea in the world. You have to execute on that idea, right? Execution requires your operators, you know, your physicians, your providers walking in sync and have incentives and buy-in. Right, before this podcast, I was on the phone with a client having issues really pushing providers forward, right, and getting that buy-in, changing patterns, viewing that new provider not as a referral source in a cascading dropdown menu, but as a partner, right. And understanding the importance of that integration. And so the reason I think it's going to push that way is look at, you know, macroeconomics right now, look at inflation right now, look at physician compensation over the last 10 years, is flat or stagnant at best. Traditionally, the doctors were making a lot of money, right. The nicest house on the street. You're not seeing that as much anymore. And I think there's going to be a change culturally. There's got to be with these physicians, right, as this continues to happen, as Medicare continues to push fee for service rates down and so maybe seeing more ownership in physicians. So what that what does that look like? What does that mean? I'm not 100 percent sure, but I'm sure we're going to start seeing more complicated setups on how distribution is going to go directly to physicians. Physicians coming to the table more, joining networks where they're going to have either demands or ideas on what that needs to look like and what their payments need to be. And so that's what I imagine seeing and we'll see. We'll check back in, set your calendar date for two years from now to see if that's right.

I'm predicting a bigger push with physician involvement and participation in the way, maybe push towards value-based enterprises and getting physicians more buy-in.

Morgan Ribeiro: Awesome. Well, thank you both so much. Obviously, we could have gone on a lot longer. We had to really skim through some of the details of all the transactions and activity that's happening in the space, but look forward to further conversation. And I appreciate both of you joining me today.

Daniel Patten: Thanks, Morgan. Thanks, Chance.

Chance Sherer: Thank you, Morgan. Thank you, Daniel.