By Mark Blum
President & CEO, Solidaritus Health
The terms “value-based payment” and “value-based health care” are in vogue. They’re buzzwords in current health care investor circles. The terms, originally coined by scholars Michael Porter and Elizabeth Teisberg in their 2006 book Redefining Health Care, refer to alternatives to the conventional fee-for-service reimbursement method of paying for health care services. Conventional fee-for-service reimbursement incentivizes providers, from primary care doctors to sprawling for-profit hospital systems, to maximize the number of billable services they can justify, needed or not, in order to maximize their billing incomes. Overall, fee-for-service reimbursement makes healthcare more expensive, even as population health outcomes worsen. By contrast, value-based healthcare rewards providers for improving patient health. The goal of healthcare, after all, is not to consume lots of services. It’s to achieve better health…and keep it.
In well-designed, value-based care, financial value is shared among the direct participants. In her work, Teisberg emphasizes the critical importance of alignment between interests of patients, providers, and payers. But she doesn’t address alignment of private investor interests, and that’s a serious omission. Alignment of investor interests can increase aggregate value for all participants. But misalignment of private investor interests with those of direct participants in health care is likely to drive not just faster cost growth, but also alarming consequences for patient safety and care quality as investors endeavor to pump up target company profit margins and gorge the value of stock shares they own. This isn’t just a hypothetical, unfortunately. Such consequences are being reported in real time as ownership of value-based primary care companies becomes increasingly concentrated in the portfolios of a few investors.
The highest value healthcare savings opportunity within ready reach of most self-funded health plans is a well-designed, value-based primary care offering for the plan participants. Consider that 90% of all health care services can be provided at high quality and much lower cost in a value-based primary care setting than compared to expensive hospital emergency rooms (ERs), urgent care centers, or specialist practices where primary care is too frequently provided. Consider also the CDC and the World Health Organization findings that 80% of heart disease, type II diabetes, and stroke and 40% of cancers that account for a large part of US health care spending can be prevented with provision of primary care that includes regular and appropriate health screenings, monitoring for emerging health issues, and other preventative care services.
The value of a well-designed, value-based primary care offering that improves population health is incalculable. The sustainability and magnitude of potential savings is a game changer.
With the laudable goal of capturing a share of these savings, self-funded employer and union health plans spent millions of dollars to provide value-based primary care to their members at scores of new onsite and near-site clinics constructed coast-to-coast over the decade following enactment of the ACA. This rising demand from self-funded plans that pay the health care bills for 2/3 of all American workers proved to be an irresistible field of opportunity for private investors — venture capital, private equity, retailers, and health insurer investors – and their investment dollars flooded the marketplace.
In 2010, the year the ACA was enacted, private investors reported $15 million dollars invested in companies focused on provision of alternative primary care. By 2021, as Americans struggled through the bleak days of the COVID pandemic, private investment in alternative primary care management companies had increased to $16 billion, according to Harvard University researchers – a 1,067-fold increase in investor dollars pumped into ownership of equity in alternative primary care companies over a single decade. According to McKinsey & Company, investments in value-based primary care companies increased by 400% in the period from 2019 to 2021. The sheer scale of private investor dollars chasing opportunities to purchase equity in primary care companies produced a froth of merger and acquisition activity that drove value-based primary care company share values soaring with repeated rounds of private investments, strategic acquisitions, and initial public stock offerings.
Venture capital and private equity investors purchase shares of companies they’ve targeted with a singular focus on their exit via a profitable sale to another private buyer or conversion to an IPO with a stock price at a significant multiple of their initial investment. When stock prices are relatively high in a rising speculative market like the current one, financial investors face an imperative from the date of acquisition to increase target company profit margins in the service of driving up their share prices. Tools at their disposal include service cuts, staffing reductions, customer charge increases, and other measures to cut operating expenses and boost revenues.
Amazon’s acquisition of One Medical presents a disturbing case study in the context of acquisition by a different kind of private investor, a retailer, responding to similar financial incentives. As background, visionary physician-entrepreneur Rashika Fernandopoulle, MD founded Iora Health, a novel, value-based primary care company, in 2011. After experimenting in various kinds of payer markets including individual employers, multi-employer Taft-Hartley, and finally Medicare Advantage plans and raising tens of millions of dollars in investor financing along the way, Iora Health was purchased in 2021 by One Medical for $2.1 billion. At the time, Iora cared for roughly 38,000 Medicare Advantage patients at 47 primary care clinics across the country. Then in 2023, One Medical was purchased, in turn, by Amazon for $3.9 billion.
In a recent Washington Post report, Amazon’s One Medical came under fire for a host of business practices that potentially impact patient safety. These include:
The alarm bells at Amazon’s One Medical echo a disturbing 10-year study of Medicare patients at 51 private equity-owned hospitals published in the Journal of the American Medical Association (JAMA) in its December 2023 issue. The study shows that, after a target hospital becomes acquired by private equity investors, patients experienced a 25% increase in hospital acquired complications, 27% more falls, 50% more surgical infections, and 38% more blood steam infections caused by central lines (despite 16% fewer central lines being administered than before a private equity buyout).
Cases like these raise concerns about the likely impact on Taft-Hartley health plan cost, patient experience, patient safety, and quality of care in the aftermath of last year’s mega-merger between Marathon Health and Everside Health.
Their saga begins back in 2012 when dialysis behemoth Davita Health purchased a Milwaukee-based direct primary care startup, ModernMed, for an undisclosed sum. Davita rebranded it’s acquisition Paldaina Health and, in 2018 , resold Paladina for approximately $100 million to Silicon Valley venture capital giant New Enterprise Associates (NEA). NEA led the raise of an additional raise of $165 million for Paladina Health the same year. Immediately, Paladina acquired value-based primary care provider Activate Healthcare, followed by acquisitions of HealthStat in 2020, and R-Health in 2021, consolidating the four companies under its new brand of Everside Health.
Meanwhile, Marathon Health, a family-owned manager of employer clinics since its founding in 2005, took on Goldman Sachs as a partner in 2016 for an investment of $30 million. Goldman Sachs, in turn, sold its share to private equity investor General Atlantic, which became majority owner in 2019. In 2023, Marathon acquired Cerner Workforce Health Solutions from Oracle (which had recently purchased Cerner Corporation, including subsidiary Cerner WHS, for $28.3 billion).
Last August (2023), the acquisition-gorged Everside and Marathon merged under the legacy name of Marathon Health. The merged company manages 680 primary care clinics across 41 states. The costs of merger under the Marathon banner are not publicly known, but it’s reasonable to assume they were significant. Cases like the patient safety issues at One Medical and the JAMA-reported increase in accidents and adverse clinical events following private equity acquisitions of 51 hospitals provide a window into what should be expected by clients of the new Marathon. Complaints have already surfaced regarding reductions in service and high turnover among clinical staff.
The cases above illustrate a disturbing pattern: The predominant venture capital/private equity business model generates a virtually intractable clash of interests between private investors and the clients and patients of the health care companies they target for acquisition. When value-based care becomes managed with the paramount goal of driving investor stock values, rather than value of care, the consequences for patient health and safety, quality of care, patient experience, and healthcare costs are deeply concerning.
The key for self-funded health plan capture of value derived from value-based care will be found in an alternative model of financing that aligns the interests of private investors in value-based care with those of direct participants in it. Fortunately, such an alternative financing model has been launched with exciting prospects to drive value for all stakeholders. More to come on this topic in a future blog post.
If you want to learn more about how to successfully align financial interests and achieve an effective approach to value-based primary care, we would love to share our secrets with you. Contact our team today for a personal consultation.
