January 26, 2018
Interviewed by: Matt Malone
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Where PE is going in health care

Roger Holstein of Vestar Capital Partners, Adam Dolder of Great Point Partners, and Carole Faig of EY discuss how private equity is seeing opportunity in healthcare’s move to “value-based” care.

Roger Holstein of Vestar Capital Partners, Adam Dolder of Great Point Partners, and Carole Faig of EY discuss how private equity is seeing opportunity in healthcare’s move to “value-based” care.

Where PE Is going in health care

Matthew Malone, Privcap:

Hi, I’m Matt Malone from Privcap. I’m very happy to be joined today by Carole Faig of EY, Roger Holstein of Vestar Capital Partners, and Adam Dolder of Great Point Partners. Welcome, everyone.

Unison: Thank you.

Malone: Today we’re going to talk about the transformation in the U.S. healthcare system and private equity’s role in it. Adam, how would you say private equity is attacking this opportunity, and what is the nature of the opportunity for private equity funds?

Adam Dolder, Great Point Partners:

As we think about it, fundamentally, this shift from a volume-based system to a value-based system provides numerous opportunities. We think of the healthcare universe from our investment platform in three legs. One of them isn’t applicable today, and that’s from a products and services infrastructure space. But healthcare technology, techenabled services and we think about the provider universe’s alternate site care and hospital outsourcing. Fundamentally, the meta-theme for the firm is if you don’t either lower the cost of the care or increase the efficiency of the system, you’re just not going to get into the Great Point Partner’s portfolio. We view those as the two fundamental drivers. It doesn’t mean people can’t make a lot of money being an outofnetwork provider in some rural place. Of course, they can. But that opportunity for private equity is rife. You’ve seen a lot of capital form behind very large, multi-specialty physician practice groups. You’ve seen very large capital form around the traditional hospital systems. Then you think about the technology space, The HITECH Act [Health Information Technology for Economic and Clinical Health] under President Bush, $44 billion of spend to drive EMR adoption.

When you boil the water a little bit further, what you realize is that drove about half of healthcare technology spend during that window of time. So, now, those tech companies have their own challenge, which is their overlaying services. If you think about Athena Health, it’s got obviously a wonderful underlying technology platform, AllScripts, but they are layering on tons of services over the top. We can partner with those entities. We’ve co-invested in a business called Citra Health Solutions that helps some of that value-based care, but we’re partnering with AllScripts in that business. So, I think there are lots of novel ways to attack what is roughly 35%—if you think about the provider universe—35% of all healthcare spend. We’re really excited about the next five to seven years of opportunity.

Roger Holstein, Vestar Capital Partners:
To reinforce the point [Adam] made, if you think about its long devalue, it’s that the system will reward those who embrace efficiency, effectiveness and, I feel strongly, quality. As we look at it at Vestar, regardless of whether it’s a consumer-facing service, consolidation of physicians, payer and payer analytics, it’s something we’re very interested in.

Carole Faig, EY:
In a very simplistic term, just the setting of healthcare is changing. So, all the different opportunities for the consumer to access healthcare and for the care to be delivered, create tremendous opportunities for investment in the space.

Malone: Now, consolidation and roll-ups are very often a part of the PE playbook. Carole, what are you seeing in terms of consolidation and the merging of different providers as it relates to this move to value-based care?

Faig: [That’s] where it’s interesting. If you went back maybe 20 or 30 years ago, the physician roll-ups, where you took a lot of physician practices as a big investment play—it didn’t really work out that well, generally. It’s interesting when you step back today and you see how different the environment is, and the physicians are much more interested in being a part of a bigger group to create the scale to really be able to play and be effective in this population health or value-driven health eco-system we’re in. So, I think that’s interesting. I think we’re going to continue to see consolidation within healthcare systems themselves. You’re going to continue to see very creative partnerships between providers and payers, because again they’re going to need to understand how to address or, this new norm, how you’re going to get reimbursed for the care you are providing.

Holstein: Yes. As you move from volume to value and you think about it from a physician perspective, you’re dealing with three types of issues. They’re consolidating because, in order to achieve the administrative efficiency that probably wasn’t available 30 years ago, but now with the revenue cycle management and EMR type of infrastructure that’s there, it’s expensive. And, in order to survive, you’ve got to be able to leverage that expense across a number of physicians.

Secondly, I think with things like MIPS coming, which is the new performance Measurement for Individual Physicians, which scales into the next several years but will have a real impact on reimbursement, I think commercial payers will follow. The access to that data and the interpretation of that data is not something that a small group practice is largely going to be able to do on their own. So, they’re going to consolidate for that reason.

In particular, if you look at the sectors where that opportunities presents itself, there are those who would lend themselves to being rolled into a health system. Primary care is the best example, right? And there are those who are going to resist it because, in the end, economically, they can do all the same things to be done by the larger health system in their own outpatient kind of facilities. So, there’s this competition that’s forming. There’s real opportunity in the providers space, but I think it’s very selective and the values right now are extremely high, so you have to be very selective in terms of how you approach that.

Malone: We talked a bit about the provider part of the equation. Clearly, the evolution of how the consumer accesses healthcare or thinks about healthcare is critical in this transformation. Roger, you were talking about technology from the consumer side in terms of transparency. Where does opportunity lie and what does that look like from an investment perspective? Where is the money going?

Holstein: I will give you a couple of really specific examples, because that’s where we have a history of an investing investor. That began with Press Ganey, the largest provider of patient experience, patient satisfaction scoring and measurement on behalf of health systems and physicians in the U.S. We recognized several years ago that the government was likely to include that within the valuebased kind of purchasing, of scoring for hospitals. And that actually came to pass. Even though we acquired the company at 50% market share of all hospitals in the country and people thought we were crazy, when we exited the investment, we were at 70%. What we were investing behind? We were investing behind the fact that, in the end, health systems needed to become more consumer-facing. They needed to realize that the satisfaction of that patient—that outcome is somehow defined by how well they perceived that outcome to be.

And, while we’re going to move from the administrative and customer service aspects of what we traditionally think of as patient satisfaction, which is around, “Did they communicate well with me? Am I likely to recommend that facility?” The world is now moving toward, and hospitals are moving there, patient-reported outcomes. So, if you’re an orthopedic surgeon today, what you really want to know is how does the patient’s quality of life change at six months, 12 months, 24 months post-surgery? Obviously, these services need to be inside the provider community because they need to sense themselves how well they’re doing.

Malone: Carole, what do you think needs to be put in place to make good of this notion that empowering the consumer to make more informed decisions is therefore going to drive down costs?

Faig: What’s a driving part of it is the responsibility for the cost. The more that the consumers are carrying the costs, they start to ask more questions. I’m going to the imaging comment that Roger made: you can now get a price on an MRI. I don’t want to go that healthcare system. My physician wants me to go here, but you know what? I’ve called and I can go down the street and it’s $400 less. So, I’m going to go there. You’re already seeing some of those basic consumerdriven decisions that way. Also, just the data to the point. I mean, everybody reviews. How many stars did they get? Our populations or our consumers today are so focused on the amount of data that they can get to make a decision about anything and where they are going to eat, much less where they want to have their healthcare provided. So, again, I think Roger’s point on the data—the ability to compare physicians and to really hone in on those specialists—is going to be critical.

Dolder: Just expanding a bit on what Carole said on this idea of transparency and information first-hand. Something we have in-pharmacy that—I’m loath to give best investment ideas and have it posted on the web. This company doesn’t exist. We’ve been looking for years. If somebody finds it, I just want it to exist so like Howard, who works at—I just want to see it built. When you go to your pharmacist, it doesn’t matter, whatever you’re getting. You know on the spot if you’ve got a $10 copay, $20 copay, $50, or you want to pay and shift to generic—you know exactly the cost. There is no real-time adjudication within the healthcare services paradigm, and it’s ludicrous that it doesn’t exist. I’m not talking about acute incidences—if there’s a motor-vehicle accident and you’re unconscious. But you should know more than just being able to price out an MRI, which is what we are able to do today. You should be able to know on a prospectivepricing basis: this is what it’s going to cost me if I use physician A versus physician B or go to facility C versus facility D. It’s still opaque. We don’t know if there’s a $1,500 coinsurance coming down the pipe and we should [know] on the spot.

Holstein: Let’s talk to that. I was at Medco in 1991 when we invented just that ability so that a consumer going into a pharmacy could have their claim adjudicated in real time. And I think what people don’t recognize is what does that mean? It’s like when we’re using our American Express card. The system in real time is asking and answering questions and saying, “Are they eligible for the benefit? Is the drug covered, if you will? What are the alternative drugs that might be appropriate for this patient, which might be on the form and be cheaper than the drug that’s been prescribed?” Then, what’s really interesting is that the world moved from administrative—that is, benefit plan guidelines—to clinical. Does this drug pose a problem for this consumer, based on the drugs in their profile? You begin to think about that took place in 1981—here we are almost 30 years later, 27 or so years later, and we don’t have that ability. Yet, if you think about if you had that ability, what if you went to a physician or hospital, and you could know in real time what these issues are. “Where do I stand against my deductible, for God’s sake?” and then, go further than that.

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