The fee-for-service model in U.S. healthcare is going to become more and more unattractive. However, shifting to a value-based care paradigm can move the healthcare system towards better outcomes, lower costs, better patient access and experiences–and also, provides investment opportunities.

In this episode of The Capital Corner, McGuireWoods’ Geoff Cockrell is joined by Andrew Clark, managing partner at Leavitt Equity Partners, to discuss investment opportunities in value-based care. 

Tune in to hear Geoff and Andrew explore the evolution of value-based care and how it will continue to shape the healthcare industry. They discuss the different sectors that lend themselves to value-based care investment, including primary care, chronic care, episodic care, and women's care. They also address the disruptive potential of non-healthcare participants like Amazon, payer and provider convergence, and the role of artificial intelligence in driving efficiency and improving patient care.  

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

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at The Corner Series, we bring together thought leaders and deal makers to discuss private equity investing in healthcare. If you've been listening to our podcast, you'll know we kind of separate The Corner Series into a few different corners. We have a Capital Corner with investors, a Bankers' Corner with investment bankers, and a Professor's Corner where we discuss a little bit more technical aspects of investing. Today, I'm thrilled to be joined in our capital corner with Andrew Clark, managing partner at Leavitt Equity Partners, one of the leading healthcare investors in private equity. Andrew, maybe start with a little introduction of yourself and Leavitt and then we can jump into some questions.

Absolutely. Thanks for having me, Geoff. I appreciate the opportunity to be here on your podcast. So yeah, I've been with Leavitt since we raised our first fund about nine years ago, in 2014. We created the fund within Leavitt Partners, which was a healthcare consulting firm. And that firm has now merged and sold to Health Management Associates, and so are now an independent fund. We're separate organizations, but still have lots of ties and relationships there with the Leavitt Partners, HMA family of businesses. And so our background is really kind of a strong regulatory policy healthcare background stemming from our founder, Mike Leavitt. Mike Leavitt was the three-term governor of the state of Utah and then became Secretary of Health and Human Services in the Bush administration from '05 to '09. He really built a strong network of former Medicare and Medicaid leaders, policymakers, regulators, as well as CEOs and executives of health systems, health plans and healthcare corporations that help stand up both those businesses, the consulting firm and the investment firm.

And so we leverage a lot of those relationships and the know-how, the knowledge, and the intelligence just around healthcare in the way we invest. So our themes and theses really stem from the idea of moving the United States healthcare system to value in the value-based care paradigm and improving our system in many ways. Whether it's provider groups, payers, services, product organizations, we think there's opportunities to continue to move the system towards better outcomes, lower costs, better patient access and experiences just across the continued care. So that's kind of how we think about investing, and it's been a pleasure to be with the organization from the founding or the beginning, and we're now investing out of our third fund. So that's a little bit of our story and history.

Andrew, when I think about investing on a thesis of expanding value-based care, the primary area where I've seen a lot of investment is kind of aggregating primary care providers and then that enables you to do direct contracting with Medicare Advantage. And there's been several versions of that, but the whole thesis of value-based care extends well beyond primary care and Medicare Advantage ideas. Can you give your broad thesis of where you think there will be value-based care investment opportunities outside of the primary care/Medicare Advantage universe?

Absolutely. Yeah, value-based care is a very broad term. And yeah, it's easiest to identify where the payment systems need to be refined through the primary care lens just because primary care providers control a lot of the downstream costs of patient care. And so that you've seen a lot of examples of successful organizations engaging in value-based care payment arrangements in the primary care space. Many have done it successfully. I think we still have a lot of work to do as a market to continue to prove that out, but there's a lot of varieties of value-based care. There's a lot of varieties of payment structures.

And so while global risk contracting full kind of capitation is certainly the goal, the ultimate way to do it, there are organizations that are engaging in shared risk, engaging in unique ways of negotiating with payers, how to show outcomes can improve payer relationships, improve payment. Whether that's through historically the bundled payment kind of model or through upside sharing, there's been ways of tying commercial insurance payer rate improvements to outcomes. There's just a number of ways to think about engaging in value-based care, and that's really identifiable through the provider lens. But we've seen as well product businesses in the pharmacy and device side engaging with payers on ways to participate in bundles or participate in different ways of engaging in kind of a new payment paradigm. And so we're trying to find investments that we think kind of hit on all those fronts. So while a lot of our investments certainly are in the provider space, we do have investments on the tech side, investments on the product side, certainly provider groups that are engaged in commercial or even in Medicaid that also are being thoughtful about the value-based care world.

I want us to come to the investments in technology surrounding value-based care. But before we do that, let's stay with the provider side a little bit. From where I sit, there's been a few sectors that have leaned more heavily into the kinds of contracting that you're talking about. From your perspective, is that opportunity to engage in value-based contracting, particularly with commercial payers, does that spread evenly across different sectors or are there particular sectors that lend to that sort of contracting more than others?

Yeah, it's a great question. I don't think it's even yet. I think over time, maybe we will see that. It's certainly any patient care that is high cost chronic where there's opportunities to better manage the patient experience, keep patients out of hospitals, keep them well, keep them at home. And so you think of things like cardiac care, pulmonary care, you think of things like diabetes and kidney care. There's a number of ways you can think of engaging with Medicare or commercial insurance providers in those particular sectors to just better arrange how risk is shared and how the payment model works. And so we've been trying to be thoughtful about that as well. There are also areas where there's episodic care that maybe you can have a better understanding of the risk around that episode. And so orthopedics has certainly had a little bit of that. You've seen that in bariatric care as well.

We just made an investment in a multi-specialty ASC rollup called SurgNet. We just announced this a couple of weeks ago with Fulcrum Equity Partners as the other sponsor on the deal doing that and as a partnership. We're very excited about that. We think that's a space where there's opportunities to engage in value-based kind of paradigms and arrangements with payers. It's a space we really like. So we'll continue to think through the surgical market and how that market engages in the value-based care world. We also have an investment in a woman's care business. We think there's opportunities to demonstrate cost savings by better managing both maternal-fetal medicine and that paradigm. But you think about OB/GYNs, they really act as a primary care doctor for most women. And so that's another opportunity to think through how do you engage with OB/GYNs in a value-based kind of paradigm as well. So there's a number of sectors where you can focus on it outside of primary care.

In primary care investing for value-based contracting, there seems like there's a priority given to scale that it's difficult to kind of take and manage that kind of risk unless you have scale. Do you think, A, that is true, and B, does that translate into some of these other sectors where you're not talking full capitation risk, you're talking about incremental risk? Are you able to enter that fray with a little bit less scale?

You can. I do think healthcare still is very much a local market gain. You see a lot of these primary care value-based care groups start in one state. It certainly takes a little bit of scale in that state to be successful as you contract with Medicare and managed plans and as you think about building the network or creating the system of clinics that work for you. And so you can certainly have on a small scale, a successful value-based care primary care group. And we've seen that.

And sometimes that means there's partial fee for service on top of shared savings arrangements before you get into full global capitative risk. And so we've seen a number of primary care groups that learn over time, because you have to learn a couple of new skills. One, you have to learn how to assess and manage risk, but you also have to learn how to acquire lives and how to aggregate them, and then how to manage all the downstream costs and incentivize your physicians and work with them on the best way to treat patients and to stay engaged in the preventative medicine and that kind of care that prevents all the unnecessary downstream costs in our system.

And so we have a couple of investments. MyCare Medical is one we've done. Florida, they became successful in Florida, have moved into Texas. We're also in P3 Health partners. They started in Nevada and Arizona have expanded into California and Oregon. So there's just a number of ways to start and show success before you really go after the scaled approach.

I can certainly see this thesis around kind of being ahead and on the leading edge of investing in value-based care type businesses that there'll be more tailwinds than headwinds in that. But the wind has been slower than what I think people originally thought when there was the first movement and government-led pilot programs and some commercial payer pilot programs around value-based care. It felt like we were on the edge of the entire system shifting, but that isn't exactly what's happened. How would you describe the pace of evolution towards value-based care and do you see that changing in the near and intermediate future?

That's a great question. I think we always thought that it would take a while for it to really mature. You think about the Affordable Care Act in 2010 and all of the initiatives coming out of that act that created some of the innovation around value-based care and the approach that CMS is now taking. We're 13 years in. We thought this might be a 20- to 40-year evolution and maybe now we're trending towards that 40-year mark. So there's kind of ways to go.

The market has to relearn how to engage in healthcare, and you've got to test a lot of models, some of which are going to be unsuccessful and change. And CMS certainly has done that in the way they've reorganized many of their value-based care programs. I think we'll continue to see that evolution and change. Whether that's the Medicare REACH ACO Program or whether changes to the Medicare Advantage system, I think we'll continue to see evolution there. And so there's a number of things that we like to see. We like to see organizations investing into those innovative models and showing what works and what doesn't, you have to.

I do think that the COVID experience slowed things down. I think we were hitting a little bit of momentum in 2019 into 2020 that just kind of paused everything. I think we're now hitting another wave coming out of COVID. Everyone's gathering themselves, and there's a real need to find ways to save costs, particularly if you're a health system. Health system model might be fundamentally broken and needs to find different ways to engage with patients. And so you're going to see a number of investments, I think, from health systems and then from untraditional healthcare groups like the Amazons of the world. They're going to invest in ways of engaging with patients and technologies to change the way healthcare is paid for and administered. And so there's just a lot of evolution and change that's going to be forthcoming. There may be a tipping point in the next 5, 10 years where it accelerates. We'll kind of have to see how that plays out, but I do think this is a long time or a long-term kind of evolution.

Investing directly into the risk-takers in that equation is one approach to investing surrounding value-based care ideas. The other, of course, is to invest not in the risk-taker, but in the various businesses and industries that are supporting that. When you think about that array of businesses, how would you segment that side of the value-based care investing market? And then let's maybe jump into a few of those segments.

Yeah. So certainly on the tech side, technology, I think, will become a critically important part of value-based care, particularly in understanding patient data, physicians really need to have access to the full patient medical record and their full history to fully assess the risk of that patient. And we've seen a lot of change in the EMR world and healthcare patient data world over the last 10 years, and I think there's another evolution coming in digital health transformation that's going to enable hopefully another successful wave of value-based care. So that's one.

Another one is just the enablement companies. Enablement companies can really help provider groups establish the new skill sets on how to assess risk and how to set up their organization to better manage patients. And so there's those kind of care model paradigms that enablement groups really have been designed to do. And so I think we'll see kind of those models continue to be successful to help providers take on patient risk.

We've made an investment on the tech side, investment in a company called b.well Connected Health. This is a company that is in the patient data. They're really focused on the FHIR API standards and interoperability of patient medical records and engaging with health systems and retailers from the pharmacy side, tech vendors, payers, you name it, with the idea of giving patients control of their medical record and allowing that patient to consent to share that entire medical record with their provider, with their pharmacy and give kind of full transparency.

Once a patient does that, once a patient consents that record to be shared, it sits outside of HIPAA and that provider can then use that record to work with that patient using their entire history. And that's what b.well really is designed to do. They just signed and announced a contract with Samsung Health. They've got a contract with Walgreens. They've announced they're working with Clear on digital identity in healthcare. And so I think we're going to see a continuation of some of those digital health transformation trends that brings patient data into the hands of patients on an app on their phone, as well as to providers and pharmacy groups and you name it. That makes a much better kind of one-on-one patient-centric relationship that enables that kind of risk-taking, that kind of care. Otherwise, it's so hard to take risk on patients where you don't have good data. And so that's one of the bets we're making. I think that trend will continue. We'll see more and more players develop solutions that attack that market.

Let's talk a little bit about disruptors on the horizon, and I'll throw a few out there and then you can tell me if you think that they're overrated or underrated as to their disruptive potential. You mentioned one, so let's take a non-healthcare participants, the Amazons of the world. How disruptive can they be to this evolution towards value-based care, and do you think that they're being properly evaluated as that disruptive potential are being overrated?

I think we need to take them very seriously. Very innovative companies like Amazon, like Walmart, Google, these companies, I think they see a massive opportunity in a very large healthcare market that's extremely fragmented and needs to change. And you think about if you're Walmart and you're Amazon or you're some other organization that's massive and needs to find ways to continue to grow at scale, you need to tap into new markets. And healthcare is absolutely one of the best markets in terms of size and need to tap into. And so I think we're going to see continuation of that trend with those kind of non-typical healthcare organizations acquiring and developing solutions in healthcare.

Whether that's directly in the provider side, like Amazon, acquiring a primary care asset or on the pharmacy and product and distribution side, I think we could continue to see movement in that direction where they own primary care, they own some pharmacy assets, they own different home-based medical health providers, and I think they've demonstrated an ability to be innovative and learn fast. Certainly some of the innovation or initiatives from Amazon and others have failed and they've regrouped and gone in a different direction and started over. And so I think we have to take them very seriously. And I think if you're a health system or you're a health plan, you've got to really watch closely what they're doing. There is a future day where we, as patients, might be accessing a large part of our care through some of those organizations rather than a traditional hospital or health system.

Amazon already comes to my house three times a day, one more visit won't hurt anything, I suppose. Next disruptive effect, payer and provider convergence, whether that's United, Optum, take your pick. How disruptive is that convergence overrated, underrated?

I think it is disruptive. It's been going on for a while. I do think we'll continue to see that consolidation of the payvider organizations just because if you are a large provider group or a health system and you're staring down the realities of your cost structure and the realities of payment, you're going to need to learn how to take risk and how to manage patients in a very different way. And the fastest way to learn that skill is to acquire a payer that already knows how to manage risk and then create a collective solution for that market.

And so I do think we're going to see at least a need for major health systems, one, to continue to consolidate the provider market and integrate payers into that solution. I think there's a day where we continue to see major health systems and providers dominate large portions of the United States, whether that's Kaiser or Geisinger or Intermountain Healthcare, Providence, others. I think that's kind of the future of the health system world is consolidation and integration with a payer solution. And I think that's the model that'll be successful. Fee-for-service is going to become more and more unattractive. I think that's CMS's goal is to continue to make fee for service more and more unattractive. And if there will be groups that'll milk it as long as they can, but in the long run, that'll be an unsuccessful strategy.

Last one, artificial intelligence. In the legal community where I live, there's lots of angst that AI is going to transform in unknown ways, how legal services are provided and paid for and everything. What's your assessment on the impact of AI on the [inaudible 00:20:34] towards value-based care? Is it overrated, underrated? Is it going to make it easier for more people to enter that fray or just different? How would you comment on AI's role in this?

Yeah, I think AI has potential to be incredibly disruptive. I think the challenge is going to be how does the regulatory infrastructure hatch up to the innovation in terms of can the FDA allow AI to be a diagnostic tool and those sorts of things. We've already seen early-stage developers of AI and pathology diagnosing cancer at a kind of higher and more accurate rate than humans. And how do you factor all of that in to a diagnostic that the FDA and our regulatory body can understand and handle?

So I think we'll continue to see AI make inroads and it might come faster than we think. The innovation is so quick. One thing that I'll mention is one way we're seeing efficiency being developed, and I think that's the first way AI will affect the market, is making providers more efficient. So we have an investment in a kind of a provider group that services skilled nursing and ALFs with behavioral health and some primary care solutions. And finding efficiency amongst those provider groups is very important, one, for retention, but also to prevent burnout. And we've seen that across the marketplace providers, nurses and doctors and mid-levels, they're burned out and a lot of the burnout actually comes from non-patient time where they're spending a whole lot of their resources and time and even weekend and off time hours documenting and coding.

And AI, I think, now has many solutions that are solving that problem. So this business, Avantis, has partnered with Ambiance, an AI tool, and we've had a lot of success actually rolling this out where this tool can listen to the provider interaction, provide basically a scribing AI tool that creates the note that a doctor needs to review and sign off on and helps to recommend the right coding for the interaction and doctor needs to review and sign off on, and that can save a meaningful amount of time, improve kind of patient care, improve provider burnout, provider retention, all those things that are really important for those types of organizations. I think we're going to see more and more of those types of solutions create the efficiency that's needed in healthcare to be able to drive down cost and engage with patients in a new way. At some point, I think the promise of diagnoses and other things in healthcare will come, but that's a really a regulatory question.

Andrew, I think we'll call it a day there. We could have talked about this for a long time, but I want to thank you for joining me. This was a ton of fun. It's a super interesting area, and there's nothing but more to come in it. I think you guys are well-positioned to be on the leading edge of that evolution, so we'll have to see what happens.

Well, Geoff, thank you so much for the time today. I really enjoyed it.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host, Geoff Cockrell, at gcockrell@mcguirewoods.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.