While primary care tends to be overlooked by investors, the industry is shifting to give it the interest it deserves. Regulatory changes, a focus on value-based care, and the potential to achieve both scale and savings, simultaneously, all have investors looking closer at primary care opportunities.

On this episode of The Banker's Corner, McGuireWoods' Geoff Cockrell discusses investing in primary care with Craig Sager, Director at Provident Healthcare Partners. In his current role, Craig leads sell-side M&A in primary care and behavioral health. 

Investors in primary care are typically private equity firms that have shorter timelines on when they expect to see a return on their investment. Alternatively, sometimes payer-owned entities invest. They have the ability to make long-term plays that might take decades to show a return. 

“These consolidations in primary care, in particular, have an easier to envision backend scenario. You have these massive companies like CVS or UnitedHealthcare, that can be those backend purchasers. It changes some of the dynamics for the private equity investors as well,” says Geoff. 

Craig also shares his insights on investors working with fee-for-service healthcare groups. Some investors may find it too risky and prefer to wait for the transition to value-based care before investing. Others see an opportunity to enter at a lower price and facilitate the conversion to value-based care. 

Looking at the end of 2023 and into 2024, investors can be confident that there is always going to be interest in this sector and there is capital available to be deployed. 

Featured Guest

Name: Craig Sager

What he does: Craig Sager is a Director at Provident Healthcare Partners. He has over nine years of healthcare M&A experience via principal investing, corporate development, and sell-side advisory. He has executed over 30 transactions on both the buy-side and sell-side.

Organization: Provident Healthcare Partners

Connect: LinkedIn

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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 Banker's Corner, a McGuireWoods series exploring investment trends, solutions, and business issues relevant in today's private equity and finance 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 in the Private Equity Group at McGuireWoods. Here at The Corner series, we bring together thought leaders and deal makers at the intersection of healthcare and private equity investing.

Thrilled to be joined this week by Craig Sager, Director at Provident Healthcare Partners. Craig, maybe give a quick intro of yourself, and then we'll jump into a discussion. We're going to be talking about investing in primary care. But Craig, give a little intro of yourself and Provident.

Great. Thanks, Geoff. Happy to join you today. Yeah, like you said, I'm a Director here at Provident Healthcare Partners. I was with the firm years ago for about four-and-a-half years. Had about five years on the buy side and a few years led the tri-state M&A team for Optum, and then I was at a private equity firm down in Nashville called Council Capital, where we were healthcare service investors. And then recently returned to the firm last year.

For folks that may not be privy to Provident Healthcare Partners, this is our 25th anniversary this year. We are healthcare sell-side M&A. That's what we live and breathe. We sort of think ourselves playing in three buckets within healthcare services. One is physician practice management, single specialties, multi-specialties in primary care. Post-acute care is the second. Home health hospice, anything really serving into the home or the SNF health setting. And then the third would be behavioral health, where there's upper kind of sub pockets. But then there personally, I lead our efforts in primary care and behavioral health.

Craig, looking at investing in primary care, primary care is an interesting sector to me. For a long time it was kind of viewed by investors as a lower margin area. There's not a ton of kind of direct ancillary services. There's not the opportunity to kind of fold in ambulatory surgery centers to connect to those practices as cleanly. And so for a long time, that was an area of less investment. What have been some of the drivers of the now pretty pronounced interest in consolidating primary care providers?

Yeah, I think you're spot on. I wouldn't say it was ignored. There's always been investments into this space, but over the last five years, and I think what we see here at Provident over the next five to 10, there's going to be a significant investment. I would say, Geoff, the predominant reason is regulatory and what's coming from CMS, and the innovative models that have been rolled out and are continuing to be rolled out across Medicare, Medicare Advantage and commercial payers and even Medicaid. So in primary care, we like to think about it as non-linear in terms of growing a business. If you are thinking about single specialties like an ophthalmology, a cardiology, et cetera, sure, there's a little bit of value-based care programs going on, but the predominant way to scale the business and to create cashflow is to see more patients, right? And that's what a fee for service model is built around.

In primary care, yes, there's an aspect of fee for service, and today that still makes up more than half of the payments that are flowing through the system. But CMS has pushed out a ton of different models, some pilot in nature, some that are going to stay here for the long haul. And when investors look at that, they say there's about a million doctors in the country, 300,000 of them are primary care. There's an ability with primary care given the cost that they control in the system, where if you aggregate enough docs under one umbrella, and obviously if you throw mid-levels in there, you can certainly create scale in the fee for service. But most importantly, you can drive significant savings to the system. And with the models out today and for the foreseeable future, there's a way on top of the fee for service to really capture a lot of the value-based care payments back to the provider. So I think people get really excited about, again, that non-linear growth that you don't see in other specialties.

It's also interesting that in a lot of different sectors, the typical buyers would be kind of a private equity fund or a private equity backed platform that is just getting bigger. You grow that and then you might sell to another bigger financial sponsor. In primary care, the grouping of buyers is a little different. It's very heavily invested in kind of by private equity funds that are consolidating, but also on big health system, the kind of Optum, United Healthcare versions of the world. How would you describe that dichotomy of different kinds of purchasers and do they have different objectives?

Yeah, I think they definitely do. I guess we'll start with private equity, which is common across healthcare and obviously really all segments in the industries. Private equity's ultimate goal, right, is to get a return in five years. Sometimes it's three or sometimes it's seven years, but they have a duty to their LPs to get a profit back. And so they look at it more from a short window standpoint. How can we build a really interesting primary care business, be differentiated, but ultimately flip it to another private equity firm or flip it to an Optum, et cetera, and get a return out? Listen, and they're players that do things the right way, maybe not so much the right way, but that's primary care that we all kind of know. The other big piece is what we'd call the [inaudible 00:06:16], right? So when you look at what Optum has done, and they're the ones that really rocked the boat.

Call it 13 years ago when United Health Group rolled out Optum, they have other arms, but they wanted to own the physician from a payer standpoint. Payers as we know, they're capped at their profits. They have to pay out 85%. And so Optum said to themselves, "Well, if we own and employ these physicians, we're not capped anymore." So the MLR is not to be 85%. It can go lower, right? If we can build a really strong system and strong clinical care, et cetera. And so CVS obviously made a huge splash earlier this year with Oak Street Health pouring in almost $11 billion into that asset. Village MD with Walgreens is another massive player. And so that cohort of buyers or cohort of primary care strategics, their angle is very different. They're in it for the long haul, right?

If you look at the CVS acquisition on Oak Street Health, they paid almost $50,000 per patient, right? No private equity firm in the world would ever be able to do that. But when you're CVS and you're a Fortune 500 company with that healthy of a balance sheet, you're in it for the long haul, right? It might take 20 years to recoup that investment, but what you're trying to do is build an incredible platform serving the country. So yeah, I would say they're vastly different, although from a patient standpoint or people going through the system, you might not realize it.

It also kind of adds to the allure of the sector for private equity investors, I think. When you look at some of the other sectors, one of the lingering questions is, okay, you acquire a platform, you do a whole series of add-ons. You sell to maybe a bigger private equity fund who does some version of the same thing. Who sells to a bigger one? What's the end game? What are the last buyers? Is it the public markets? Is it a big kind of consortium of large institutional investors? But kind of the backend scenarios of that progression can be a little difficult to know exactly how that's going to play out. And kind of one of the maxims in investing is it's dangerous to buy something when you don't know who the ultimate purchaser is. And these consolidations in primary care in particular, have an easier to envision backend scenarios where you have these massive kind of companies like CVS, like United Healthcare, that can be those backend purchasers. It changes some of the dynamics for the private equity investors as well.

Yeah, I think that's absolutely correct. And I think what's really exciting about the primary care market today and where we're going is it has evolved so much, right? So private equity 10 years ago, it would have to be a perfect asset that's probably already taking a lot of risk with a really strong pop health team, et cetera, to really get in there. Today with all the programs that are rolled out with a lot of operators and systems in place that can really expedite the growth and really figure out value-based care, I think private equity has come around significantly in terms of getting that confidence and comfortability that in five years they can buy a company, leverage what's built, and then take it to that next level with operatives in their network and different ways to play it.

You mentioned Oak Street, which I think is a super interesting company, and their evolution initially, the deals that we saw like Oak Street were all kind of Medicare Advantage place. The landscape has evolved since then. How would you describe the landscape of strategies between Medicare Advantage dynamics and then other strategies?

Yeah, I think, listen, Medicare Advantage for years and even to this day now is what a lot of investors in the strategics will target to get into. Medicare Advantage for a number of reasons from patients being a little bit more tapped in and want to go see their doctor. And so attributions higher. The savings there is, it can be really large. That's within the crown jewel for people. And a lot of models today, especially down in Florida and a few other target markets, that's where people are playing the game. And Oak Street Health, it is an MA business, right? And if you talk to CVS, we talked to them last wee,. I mean, that was the best asset on the market. They talked to every company under the sun and ultimately pulled the trigger. But what is exciting outside of MA is that in just your regular Medicare population with MSSP ACO, obviously [inaudible 00:11:16] ACO which came out about a year and a half ago.

There's different programs now where people are driving savings. And I think although the MA penetration rate is continuing to grow over Medicare, the Medicare population is still very vast. And the models out now I think get people excited where they can play the MA game, right? Like Optum grew up doing, CVS is doing and others, but they also have models within Medicare they can do as well. And then of course, certain markets, if it's more managed Medicaid, frothy if you will, people are starting to play that game as well. And then all the commercial payers, depending on the market, will enter PMPM models or some capitated arrangement. So MA is still the leader in the clubhouse, if you will, but I think people like to diversify and offer services and have programs for all the end populations.

You mentioned kind of commercial payers and the evolution there has felt markedly slower. Getting kind of full capitation contracts with commercial payers is still pretty difficult, and it feels like we're in the earlier innings of the expansion of kind of true value-based contracting in the sense of full capitation into commercial payers. How would you describe kind of that evolution, and do you think that's going to pick up steam here in the next few years?

I think it'll continue to grow. I don't know if it's going to grow significantly in the sense that when investors look at where do the costs lie from a patient standpoint? And people that have commercial coverage generally speaking are maybe $12,000 a year if not half of that, right? And so you have to have a lot of patients, right, if you're going to save $500 a patient to really make it worthwhile from a shared savings standpoint. Whereas Medicare, Medicare Advantage, especially if you're serving in the geriatric population where patients can be up to $50,000, $60,000 a year in total cost of care, you can drive $5,000 to $10,000 per year on a patient, right? So you don't need that many patients to do it.

So I think a cost is an item that investors are aware of. It's harder to make it work in the commercial population. And then secondly, just contracting. You have to go to every single individual payer in every individual market and make that happen. Whereas to a degree, you have to do that in MA, but in Medicare, right, you're going to the government or you're going to an ACO and you can make that work. So there's just some logistics with the commercial payers, it's a little bit harder. But yes, I think it's going to grow. I still think we're a ways away from you're seeing really innovative commercial value-based care models out there.

In looking at how these businesses are constructed. There's also some interesting divergences to my eye. I mean, you look at Oak Street, and I'd describe them as kind of principally just the primary care providers, and then they will control the spend of specialists, but they're usually not employing them. Whereas other models like here in Chicago where I live, Dupage Medical now called Duly, they started with ind of primary care providers and then they've got lots of specialists as a part of their organization. How would you describe that dynamic in the terms of how you structure the growth?

Yeah, I think people have different philosophies. If you just take Optum, right, they have assets all across the country for their physician group. In some parts of the country, like in California and Florida, it's predominantly all primary care. Some contracted physicians, a lot of employed physicians, they don't have a lot of multi-specialty assets. Look in Texas or in New York or the tri-state where I was, and they've got over thousands of doctors and the lions share are primary care because that's what their strategy is. But they've got, in New York, they have 100s and 100s of doctors that are single specialties. They own ASCs with SCA. That was a big investment for them. They own urgent cares, now they're doing home health. So that's one strategy to point in certain markets.

And then others, like Duly for example, they believe that the campus approach or having a one stop shop for patients as opposed to referring out of the network or referring to a non-Duly provider is the strategy because they want control it all. And I think with that just comes significantly more investment in management of just other variables. And I think some groups rather just think core to the primary care approach. So I don't think one's better than the other. I think the multi-specialty approach, like a true multi-specialty like [inaudible 00:16:23] Imaging Centers, ASCs. I mean, to build a true outpatient model, that investment just from CapEx and infrastructure is significant.

Putting on your banker hat a little more specifically, when you're out talking to groups that might be a target, one of the dynamics around primary care is that to do the types of value-based contracting that we're talking about, you really need to have a certain scale. And from your perspective, does that kind of push you towards, in order to be the starting platform, you need to have a certain kind of EBITDA range scale, and what do you think that scale is?

Yeah, I would say we work with groups that are complete fee for service shops, right, and they've got scale, and investors [inaudible 00:17:18] they'll say either two things. One, "I can't invest in that business. I need to see them move the ball and risk. The execution for us, it's too risky." Or the other viewpoint on that is, "I actually like that, I can probably get in at a lower price." We have a team, we have experience in sort of making that conversion to value-based care. In terms of what scale moved the ball, if you will, to actually get into frothy value-based relationships, it really depends on your lives, but what I can tell you is if you want to get into an ACO, a lot of times you need a lot of the numbers, 5,000 enrolled beneficiaries. And that's pretty significant, right? And so that's why a lot of times you'll join more of a provider led ACO, where you kind of come together with other provider groups.

You kind of all share in getting to that scale that you need and you still get some savings. And in the MA world, it's similar, right? It's really hard to contract with Blue Cross Blue Shield MA or UHC MA if you've only got 800 attributed lives, they've got bigger fish to fry. But I would say that Agilon, Aledade, these value-based care neighborhood companies that have come in the equation over the last 10 years, they aggregate companies and lives from companies that are a little bit smaller, but you can still come together and like the MSSP ACOs and actually start taking risks. So there's options out there. So if you're small, and even if you're predominantly fee for service today, don't feel like there's not interest, there's interest. We just got to find you the right relationship [inaudible 00:18:57] to market or potentially your partner from an investment standpoint.

Looking forward, the market up to this point in 2023 has been a bit choppy for provider services and physician consolidation. What's your prognosis for the rest of 2023 and looking into 2024 for deal activity in this sector as compared to other sectors?

Yeah, I think we're obviously, like you said, in an interesting spot in the M&A environment for credit debt reasons, et cetera. I think valuations have, generally speaking softened and deal flow is down a little bit. But at the end of the day, going into next year, 2024 and beyond for really good assets, whether it's primary care or elsewhere, there's too much capital out there that has to be deployed for people not to pay up and make these investments. So yeah, do I think the back half of '23 is going to be really strong? No, but I think for those out there that have a primary care business for multi-specialty business that's integrated, growing strong clinical care either has taken some risk or is starting to kind of consider that, and we can underwrite it to what can we get investors comfortable with? There's always going to be interest in this sector. It's growing too fast, it has most physicians, and at the end of the day, if you listen to CMS, this is where the payment models are going.

I still think that kind of this sector is the most interesting provider sector in the market from a private equity perspective. I think more than almost any other, the ability to bring together capital and expertise can really move the needle, and that's often a catalyst for private equity investment. So I think we're going to see continued expansion and evolution for quite a while. But Craig, I think we'll wrap it up there. This is a super interesting sector. Your insights have been super helpful. Thanks a ton for joining me.

Thanks for having me, Geoff.

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