In most professions, pay-for-performance is the norm. A certain level of performance is expected for an individual to get paid. So why has the fee-for-service model in healthcare persisted for so long? And what’s causing the shift towards value-based care? 

On this episode of The Professor’s Corner, Larry Elisco, Partner at Wipfli LLP, discusses trends in value-based medicine with McGuireWoods’ Geoff Cockrell. The two acknowledge that the compensation structure has had a slow start despite its promising future.

“My view is that value-based care changes the landscape. It's pay-for-performance. It creates risk at the provider level where providers are in fact either going to be paid for performing well or not being paid if they don't perform well. And that's really what I see as a mega trend,” says Larry. 

Some of the subspecialties that have been embracing value-based care are those that have commercial payers and can offer bundled payments, including orthopedics, cardiology, and OBGYN. Areas where a specialty is contained within itself are more likely to engage in value-based contracting. 

Finally, Larry also shares insights into how buyers are approaching deals while incorporating value-based care and the importance of having strong data analytics and infrastructure in place.

Featured Guest

Name: Larry Elisco

What he does: Larry Elisco is a partner in Wipfli LLP’s healthcare practice and works closely with physician practices to provide accounting, audit, and valuation services.  He has extensive experience serving the needs of physicians and their practices. 

Organization: Wipfli LLP

Words of wisdom: “I think in every level of healthcare, that pay-for-performance component really has to be in place at some point.” 

Connect: LinkedIn

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

Subscribe to The Corner Series in your preferred podcast app so that you never miss an episode. 

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Professor's Corner, a McGuireWoods series, exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods's partner Geoff Cockrell as he and specialists share real world insight to help enhance your knowledge.

Welcome everyone to another episode of The Corner series. I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at The Corner series, we try to bring together thought leaders and deal makers with respect to private equity, investing in healthcare, mostly provider services, but also life science and other areas. Today I'm thrilled to be joined by my good friend Larry Elisco at Wipfli. Larry, maybe you could give a brief introduction of yourself and Wipfli's transaction support practice.

Sure. Thanks Geoff and appreciate you giving me a few minutes here. I'm Larry Elisco. I run our healthcare transaction team nationally, which means that we get involved in a lot of quality of earnings, due diligence, really assist investors, sellers, buyers in the transaction quite often, even when transactions are taking place, a sell side quality of earnings really helps, I think make things happen. I've also been heavily involved in healthcare for the past 30 years, and I have a lot of clients that are your normal accounting tax clients. So I feel I've had a lot of experience in this. I'm also a certified coding specialist by a group called AHIMA, and I'm also certified by the AICPA to do business valuation. So kind of got a lot of water under the bridge in my career and I really enjoy the opportunity to help physicians, providers, and those in the healthcare space.

So Larry, I was thinking we might talk some about value-based medicine. It's by all accounts, it's the wave of the future, but it's been slow to roll in. I see it in certain areas, certain sectors with certain kinds of payers, but it has not swept over the entire market. When you think of value-based medicine in the healthcare provider services arena, maybe let's start with how you would define that and then we'll talk about what the specific sub-sectors are, where that comes into play.

So I think in most businesses you would be remiss if you didn't believe that you were being paid for your performance. I, as an accountant and consultant, need to perform at a certain level in order to earn what I'm compensated for. Geoff, same with you on the legal side. Doctors and providers are really provided on a fee for service basis where whatever CPT codes you bill, whatever you're able to bill, the higher the volume, the more you get paid, the more complex the procedure is, the more you get paid. And quite often there's a lack of alignment between the providers and the payers. Payers are interested in denying claims and they go to great lengths to do that historically. They're also interested in controlling costs. Their job is to collect insurance premiums and to pay as little as possible, quite frankly, while still maintaining a level of care that meets all standards that are required.

So my view is that value-based care changes that landscape. It's pay for performance. It creates risk at the provider level where providers are in fact either going to be paid for performing well or not being paid if they don't perform well. And that's really what I see as a mega trend. If you look at the Center for Medicare and Medicaid Innovation, they believe that by 2030 every Medicare, every Medicaid contract is going to have some sort of a risk-based component to it. The idea of fee for service, at least from the government's perspective, without any risk, without any pay for performance, is not planned to exist in the relatively near term.

Value-based medicine can take a number of forms, whether that's kind of full capitation, where the provider is paid a certain amount per person, per month or something like that, and then is responsible for taking care of whatever happens versus bundled payments where a particular episode is going to connect to a certain payment and then the provider has to manage the pros and cons of navigating that particular episode. So I've seen value-based medicine coming alive in more limited context. So you see a lot of primary care practices being gobbled up with the principle idea from a value-based care perspective connects mostly to Medicare Advantage contracting where you can contract with the federal government on a capitation sort of basis.

I also see it in certain bundled payment areas with commercial payers where, take orthopedics, where everyone has to bundle kind of hip and knee replacements, but you can bundle other things. And so there's some pretty specific risk bearing that the providers can lean into. What sectors do you see this coming to beyond some of those limited primary care for Medicare Advantage, certain bundled payment types of sectors? Where do you see this becoming a more feasible idea?

So I think you mentioned orthopedics, the musculoskeletal idea of is your back pain going to require surgery? Can you be treated with physical therapy and medication before going that route? I can also give you an example. My wife just had double knee replacement in the last two years and she went to one of the top specialists in this area. That doctor did not take anything other than one payer, and I'm assuming that that payer had a very strong pay for performance structure in their contract. Didn't take Medicare, it didn't take anything other than one payer. My wife basically had outpatient surgery both times and the whole process took about six hours. My guess is that that doctor was well compensated because everybody else, every other patient that was involved in that procedure, usually there's a stay overnight and if you're self-pay, he's probably collecting three or four times the amount that he's being paid from his commercial payer.

So I think that you're looking at, I think an example of pay per performance there in the orthopedic side. I also see cardiology, the idea of being of treatment, the idea of following a regimen, a diet and being able to effectuate a good outcome as opposed to just going in and immediately performing surgery. Some of the other areas, obviously primary care, I think that when you're looking at other specialties, OBGYN is one as well. That's where you have a bundled type of payment for maternity. You're looking at opportunities there for better outcomes, less C-sections, less drugs. What are you using in your pharma when you're treating your patients? So OBGYN is also one of the areas. Geoff, are you seeing anything else in the other specialties?

You mentioned like cardiology, OBGYN, those kind of present themselves more for episodic events. Like you present with COPD, it's easy to wrap a bundle around that kind of condition, similarly with OGYN and pregnancies. So I see it mostly in the types of things that are contained within themselves and lend themselves to bundled payments. What I don't see, and I think will be interesting to watch as it evolves is I've found commercial payers have been, it's been much more difficult to enter into arrangements that are more of a full capitation variety. You can do that with Medicare Advantage contracting as a primary care physician, but that's what the federal government, I've found private insurance has been more reluctant to engage in that kind of value-based contracting. Are you seeing anything different on that front?

No, I think it's slowly becoming more prominent in the commercial side, but it is a slower process. I think one of the reasons for that is that if you look at a typical commercial payer, their population may be much younger than folks like me that are seniors that have greater opportunity for savings because there's more procedures, there's more work that's necessary. I think you also kind of see that in the Medicaid side as well, where there are opportunities with behavioral health and improved diet and really following a stronger regimen. I think that in that population you've got opportunities as well. I think the commercial payers look at somebody that's 30 years old, not a lot of procedures, not a lot of opportunity really to have better outcomes and savings because there isn't that much going on.

Maybe flipping the conversation more directly into what you do in the context of a transaction from if you're representing the buyer, let's say recognizing it’s kind of, if you're on the seller, it's the same dance just in reverse, but what are the kind of accounting pressure points in kind of risk assessment of the financial performance of a target that is heavily engaged in value-based contracting?

Well, value-based contractors really, I think require three things. You really need a clinician that's going to be understanding whether there's potentially avoidable procedures when they're evaluating a practice. You need an actuary. Given population demographics, geographics, what is going to make sense from an actuarial perspective that's going to provide a level of tolerable risk? And then you need the data. You need that infrastructure in order to embark on a value-based care type of environment. And what I'm seeing in transactions is that you'll have a portfolio company backed by a sponsor that is acquiring a practice that has a strategy to acquire say 10 practices in this state. We're then going to have over 100 providers and we're going have the leverage to go back to the payers and negotiate with them.

One of their chief negotiating strategies is to demonstrate that they have better outcomes and are incurring lower costs. And it's really a different approach by buyers. Some buyers will just go the traditional route. We're going to acquire you, we're going to absorb you, we're going to take on all of your employees and you are now part of us. We're going to pay you based upon a multiple of your earnings, your EBITDA. Others that I'm seeing are saying just pay us a management fee. Pay our MSO a 15% management fee and we're going to pay you a certain amount for your practice. And within a three to four year period, because of our ability to negotiate contracts through our improved outcomes and lower costs, we're going to be able to increase your collections to make up for that management fee expense.

And by the way, we're going to pay you twice as much as what the other conventional investors are paying.” I've seen that happening more and more where it is a bit of a leap of faith, but you have investors that are truly bought into this and are becoming more and more risk based. But even without that risk, you're looking at only a shared savings type of opportunity, with no downside.

From a buyer's perspective though, are there certain elements in, let's take a fully formed value-based contracting practice of some scale. Are there any elements that would be a red flag if you were due diligence in that kind of business, that would not be the sort of things that you would worry about in a regular business, kind of trajectory angles that look like their value-based contracting is loading up a lot of forward liability? What do red flags look like in those sorts of businesses?

Well, I typically would look at the quality of their data? Is their data clean? Is their data timely? Is it providing the right information? And do they have the infrastructure in place in order to use that data to communicate with their physicians and with their providers? Is it an integrated process? And if you convert from non-risk based to a risk-based environment, there's a lot of changes that have to take place within that environment and I think it all starts with the data. I also would look at what are the assumptions? What were the original assumptions when they went into that value-based contract? Were there issues that they didn't contemplate? As an example, I had a client call me and they had an opportunity to acquire a practice in a large metropolitan area where the doctors were going to nursing homes and to private homes and treating patients at home, wasn't necessarily what you think of as home health, but it is doctors effectively making house calls.

And they didn't really contemplate the idea that, number one, how many visits can you see in a day? How many patients can you see in a day? And what are the costs to seeing those patients? Well, they didn't consider the fact that they had to hire a driver. They had to drive around the block 10 times while the provider was seeing the patient, and as a result, the company had approximately $30 million in revenue and they were losing $3 million a year on that 30 million. Why would that happen? Well, they didn't have their assumptions in place properly. They didn't have the right data, and they put themselves in a position where they were trying to execute a fire sale on the practice and it wasn't very successful. So that's an example of what are the assumptions that went into this and what kind of data is being provided and how often do you have the ability to revisit that contract? So those are the types of things that I've seen.

That's a good example of why private equity backed platforms feel like they are well suited to move into value-based contracting. It's a good example of a setup where a business strategy requires the combination of kind of technical expertise and capital, which means often bringing in particular skill sets onto a management team. It means investing in data analytics and other components to make sure that you’re flying with your headlights on and the example that you gave is a good example of why the absence of capital connected to those platforms can make value-based contracting very dangerous, and also demonstrate why private equity, which brings the capital into these scenarios, is often a good partner for moving in that direction.

One of my clients is a large nephrology practice and they use what I would call, an enabler, where a consulting firm will help execute a value-based care contract for you. We're going to basically take all the downside risk and we're going to take 70% of the savings. You'll get 30% of the savings, and there's no risk to you. So basically last year they made $2 million on that. They had to pay the enabler, a million five or whatever the formula was. And if you were to look at a private equity environment, they could perhaps come in and say, we're going to do that without the enabler. We're going to make that $2 million on our own because we're going to put the infrastructure in place and we know that you've been successful at this.

So I think that having the ability to put that infrastructure in place, having that money to basically invest in your infrastructure and the integration of this practice, is a very valuable commodity, and I think that that's one of the reasons why private equity has such a great interest in this. I also believe that investing in that infrastructure if you're planning on selling in five to seven years, I believe the seller will receivfe a bigger multiple by having that infrastructure in place as opposed to just continuing to deploy our fee for service model. Having that infrastructure in place when you're going to market, I think is going to make a difference in the next five to seven years.

It's also interesting to see how the market is responding at the higher end of the market in the sense that there's a number of sectors where it gets a little trickier to think, what is the ultimate buyer of this consolidated provider services business look like? What are their ambitions? There still is a lot of, for example, consolidation in the dental arena, but at some point you're consolidating, consolidating, and you have bigger and bigger and bigger, and who's going to buy those and what do they need as a billion and a half dollar buyer of that sort of business.

With respect to the kind of value-based contracting businesses, it's a lot easier to wrap your head around who the ultimate buyers of those are. In that you've got a lot of kind of big box buyers that are very, very interested in this space, whether that's CVS paying a boatload of money for Oak Street, Optum buying everything. Any number of payers are interested in this space, such that as you're a private equity investor building those businesses, it's much easier to wrap your head around the ultimate buyer of a business at scale, which is a big driver of value as well.

Absolutely. I think that you see those types of big box buyers, they're really a combination of providers and payers. They have their staff of providers, and, particularly on the primary care side, are being acquired with the idea that, we're going to be able to buy you, we're going to pay you more than your historical earnings because we know what our opportunities are. And it's the ability to create that value because you already have that infrastructure in place.

I also think the imminent death of fee for service in healthcare has been predicted imminently for quite a while. And while the trend line in favor of value-based contracting at some level is going to continue, the death of fee for service is probably overstated, and the bulk of the market is still going to look a lot like the bulk of the market has for a while. So balancing those trends with kind of the existing and continued fee for service arena is still very much a part of how I think buyers are assessing the market.

I agree, but even looking at the idea of pay for performance has to be considered. Look at radiology. How much more can you affect a treatment process than the radiologist performing at the right level? If they miss something, then it's catastrophic. It's not just a matter of billing the CPT codes. It's a matter of how you have performed. So I think in every level of healthcare, that pay for performance component really has to be in place at some point, and I think Medicare's leading the way with it. I think Medicaid will be there as well. But you're right with regards to the commercial payers. Things are going well for them, so why rock the boat?

It will come but slowly.

Right.

Larry, I think we'll break it there. Try to keep these on a consistent timeframe. It's been a ton of fun to explore this topic with you. It's definitely the wave of the future, but not quite here yet, but coming.

Great. Thank you so much for the opportunity, and I really enjoyed it as well.

Thank you for joining us on this installment of The Professor's Corner. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@Mmcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.