Six Key Investment and Strategic Themes from Payer-Provider Convergence Deals

At the 11th Annual Investment and M&A Opportunities in Healthcare conference in Nashville on June 6th, 2018,  a panel session moderated by Chris Donovan, partner in Foley’s Health Care Practice Group, addressed the topic of Payer-Provider Convergence. Additional panel participants included John Foley, Senior Vice President of Aurora Health Care and President of Wisconsin Collaborative Insurance Company, addressing the provider side, and Jim Agnew, VP of Strategy at Humana, representing the payer side.

Thematically, the panel focused on six concurrent trends generating payer/provider partnerships:

  1. Value-based care models are encouraging collaboration of clinical, actuarial, and distribution skill sets
  2. Expansion of consumerism in health care is requiring more interdisciplinary and convenient health care offerings
  3. Margin pressure especially on the provider inpatient side and with respect to Medical Loss Ratio and other Affordable Care Act requirements
  4. The inability of contractual joint ventures to foster a win/win relationship between payers and providers in the traditional quality-based contracting environment
  5. The perception, if not the reality, that payers risk disintermediation and third party administrator (TPA) status if they continue to resist deeper integration with providers
  6. The inability of hospitals to sufficiently cut costs in order to take on true downside risk

Payer-provider partnerships, whether equity-based, or in the form of outright acquisitions, are seen as a logical evolution from an Accountable Care Organization, where contracts and affiliations are used to develop more aligned structures necessary to create a common goal that includes joint risk on both sides as well as superior clinical and network management. The panel discussed the fact that partnerships can take a number of forms, including joint ownership, minority ownership but with a right to acquire the balance of the equity upon achieving certain financial targets, and hybrid models comprising private equity, payer and provider ownership. Partnership examples provided during the discussion range from Optum’s purchase of DaVita Medical Group and the recently announced acquisition of Sound Inpatient Physician Holdings LLC by Summit Partners, to Anthem’s purchase of Aspire, Humana’s minority interest in Iora Health, Aurora’s 50/50 partnership with Anthem, and Humana’s joint purchase of Kindred’s home health and hospice divisions with TPG and WCAS.

The above strategic themes are combining with concurrent private equity (PE) investment(s) to focus on outpatient services such as rehabilitation, home health, and hospice.  These investments are designed to lower hospital inpatient admissions and readmissions, particularly when combined with digital health care investments in remote monitoring, telemedicine, and consumer-centric technologies. Such investments are also triggered by trends in value-based bundles encouraging direct discharge to home in lieu of skilled nursing facilities or other similar venues. When combined with the financial motivations for payer-provider combinations above, the PE consolidation of many outpatient services will dovetail smoothly with payer-provider partnerships. In fact, in many payer-provider deals, PE is a key player as seen in the  Kindred/TPG/ Humana example where PE owns 60%  and Humana owns 40%  – with a call on the 60% as to home health and hospice assets.

The Future of Payer/Provider Convergence

The panelists were in agreement that payer-provider deals will continue to gain momentum because the factors of margin compression will not slow down. In addition, subscribers, patients, and members will demand more transparent, consumer-friendly, and coordinated services that will require more integrated interactions and seamless product offerings from payers and providers. While the horizontal mergers amongst payers may have faced antitrust obstacles from the Department of Justice, the vertical combinations currently coming to market, on the surface seem less likely to be per se challenged. While each market will present its own opportunities and challenges, different partnership models are evolving to address that uniqueness. Aligning clinical and financial metrics will be required in these partnerships and those that embrace them will be the on the vanguard of the new healthcare model.

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