Medicare Advantage (MA) focused companies, like Oak Street
Health (14x revenues), Cano Health (11x revenues), and Iora
Health (announced sale to One Medical at 7x revenues), reflect
valuation multiples that appear irrational to many market observers. Multiples may be
exuberant, but they are not necessarily irrational.
One reason for high valuations across the healthcare sector is the large pools of capital
from institutional public investors, retail investors and private equity that are seeking
returns higher than the low single digit bond yields currently available. Private equity
alone has hundreds of billions in investable funds seeking opportunities in healthcare.
As a result of this abundance of capital chasing deals, there is a premium attached to the
scarcity of available companies with proven business models and strong growth
Valuations of companies that rely on Medicare and Medicaid reimbursement have
traditionally been discounted for the risk associated with a change in government
reimbursement policy. This “bop the mole” risk reflects the market’s assessment that
when a particular healthcare sector becomes “too profitable,” the risk increases that CMS
will adjust policy and reimbursement rates in that sector to drive down profitability.
However, there appears to be consensus among both political parties that MA is the right
policy to help manage the rise in overall Medicare costs and, thus, incentives for MA
growth can be expected to continue. This factor combined with strong demographic
growth in the overall senior population means investors apply premiums to companies in
the MA space compared to traditional providers.
Large pools of available capital, scarcity value, lower perceived sector risk and overall
growth in the senior population are all factors that drive higher valuations for the MA
disrupters. However, these factors pale in comparison the underlying economic driver
for these companies. Taking full risk for MA enrollees and dramatically reducing hospital
utilization, while improving health status, is core to their business model. These
companies target and often achieve reduced hospital utilization by 30% or more for their
assigned MA enrollees.
In 2019, the average Medicare days per 1,000 in the U.S. was 1,190. With about
$14,700 per Medicare discharge and a 4.5 ALOS, the average cost per Medicare day is
approximately $3,200. At the U.S. average 1,190 Medicare hospital days per thousand,
if MA hospital utilization is decreased by 25%, the net hospital revenue per 1,000 MA
enrollees is reduced by about $960,000. If one of the MA disrupters has, for example, 50,000 MA lives in a market, the
decrease in hospital revenues for that MA population would be about $48 million. This does not include the associated
physician fees and other costs in the care continuum. That same $48 million + in the coffers of the risk-taking MA
disrupters allows them deliver comprehensive array of supportive services including addressing social determinants of health. These services then further reduce utilization and improves overall health status, creating a virtuous circle. This is very profitable.
MA is only the beginning. When successful MA businesses expand beyond MA, and they will, disruption across the
healthcare economy will be profound and painful for the incumbents. The market is rationally exuberant about that
From 2003 to 2017, private equity firms focused their acquisition crosshairs on larger hospitals with higher operating margins and greater patient charge-to-cost ratios, according to a new review of healthcare investments published in Health Affairs.
These private equity (PE)-owned hospitals also saw greater increases to their operating margins and charge-to-cost ratios over the course of the 15-year study period than their non-PE-owned counterparts.
Combined with a decrease in all-personnel staffing ratios, the study’s researchers said these data make a case for further investigation into how PE investment may be influencing operational decisions to boost profits and secure favorable exits.
“[Short-term acute care] hospitals’ large size, stable cashflow environment and prevalence of valuable fixed assets (that is, properties) make them highly desirable targets for acquisition,” researchers wrote in Health Affairs. “Broadly speaking, PE acquisition of hospitals invites questions about the alignment of the financial incentives necessary to achieve high-quality clinical outcomes.”
To inform that discussion, the researchers reviewed PE deal data collected by Pitchbook, CB Insights and Zephyr. They also collected information on hospital characteristics and financials from the Centers for Medicare and Medicaid Services’ (CMS) Healthcare Provider Cost Reporting Information System database and the American Hospital Association’s Annual Survey.
Their efforts yielded 42 PE acquisitions involving 282 different hospitals during the 15-year time period. These deals were most frequent among hospitals in Mid-Atlantic and Southern states.
Of note, 161 of the acquired hospitals were tied to a single deal: Bain Capital, Kohlberg Kravis & Roberts and Merrill Lynch Global Private Equity’s roughly $33 billion (more than $21 billion cash, $11.7 billion debt) acquisition of HCA Healthcare in 2007.
The study outlined differences between the PE-acquired hospitals and others that were not acquired before any of the deals (in 2003) and after (in 2017).
Nearly three-quarters of hospitals acquired by PE were for-profit in 2003, versus about a quarter of those that were not acquired, the researchers wrote. By 2017, those respective proportions had increased to 92.3% and 25.3%.
Acquired hospitals were significantly larger in terms of beds and total discharges both in 2003 and in 2017. In fact, while acquired hospitals increased in size during the 15-year window, other hospitals decreased in beds and discharges by 2017.
Nurse staffing ratios were similar on both ends of the study period for both categories of hospitals. However, all-staff ratios were lower among the soon-to-be-acquired hospitals in 2003 and saw a slight decrease over the years, whereas hospitals that had not been acquired instead recorded an increase over time.
In terms of financials, the researchers reviewed measures including net patient revenue per discharge, total operating expenses per discharge and the percentage of discharges paid out by Medicaid. Differences among these three areas were not significant with the exception of a larger 15-year increase in total operating expenses per discharge among non-PE hospitals.
The primary financial differences between the PE and non-PE hospitals were instead found among the organizations’ percent operating margins and charge-to-cost ratio, the researcher wrote.
In 2003, both measures were higher among the soon-to-be acquired hospitals. By 2017, the percent operating margin and charge-to-cost ratio increased 66.5% and 105% among the PE-acquired hospitals, respectively, versus changes of -3.8% and 54.2% for the non-PE hospitals.
These and the study’s other findings outline the playbook an investor could follow to identify a profitable hospital and increase its margins, the researchers wrote.
“Post-acquisition, these hospitals appeared to continue to boost profits by restraining growth in cost per patient, in part by limiting staffing growth,” they wrote.
The trends affirm findings published in a 2020 JAMA Internal Medicine study, which similarly tied PE acquisition to moderate income and charge-to-cost ratio increases over the same time period, the researchers wrote.
The data also contrast “the prevailing narrative” that PE investors target distressed businesses to extract value for a quick turnaround sale, they wrote. Outside of a few outlier acquisitions, the researchers said that PE’s goal for short-term acute care hospitals appears to be the opposite—operations refinement and further profit improvements among potential top performers.
Still, the differing structure of PE investments warrants questions as to whether these groups are promoting high-quality outcomes alongside their high margins, Anaeze Offodile II, M.D., an assistant professor at the University of Texas MD Anderson Cancer Center and the study’s lead author, said during an accompanying Health Affairs podcast.
In contrast to the public market, PE investments often lean on leveraged buyouts that are higher risk and higher reward, he said. Partners are targeting a three-to-seven-year exit window for their investments and often need to hit 20% to 30% annualized returns.
More investigation is needed to determine whether these economic incentives come in tandem with better care or are instead hindering patient outcomes, he said.
“The question becomes ‘Are there unintended consequences or tradeoffs invited due to pursuit of profitability?’” Offodile said during the podcast. “I think someone could make the same argument that if there is a value enhancement strategy by PE firms, then it behooves them to actually raise the level of care delivery up because that enhances the value and engineers a better sale.
“In seeing that sort of exploratory result and how it challenged the prevailing narrative, we’re glad that we took this sort of [setting the] stage approach, and I look [forward] to seeing what we find—which we’re doing now—with respect to quality, spending, access domains,” he said.
Finding a good long-term care facility for a loved one has always been a difficult process. A new National Bureau of Economic Research working paper suggests that families should also be paying attention to who owns the facility, finding a significant increase in mortality in nursing homes owned by private equity investors.
Examining Medicare data from over 18,000 nursing homes, 1,674 of which were owned by private equity (PE) firms, researchers found that PE ownership increased Medicare patient mortality by 10 percent—translating to a possible 20,150 additional lives lost. PE-owned facilities were also 11 percent more expensive.
Counterintuitively, lower-acuity patients had the greatest increase in mortality. Researchers found staffing decreased by 1.4 percent in PE-owned facilities, suggesting that shorter-staffed facilities may be forced to shift attention to sicker patients, leading to greater adverse effects on patients requiring less care.
Antipsychotic use, which carries a higher risk in the elderly, was also a whopping 50 percent higher.
Nursing homes are low-margin businesses, with profits of just 1-2 percent per year—and PE ownership did not improve financial performance.
Researchers found private equity profited from three strategies: “monitoring fees” paid to services also owned by the PE firm, lease payments after real estate sales, and tax benefits from increased interest payments, concluding that PE is shifting operating costs away from patient care in order to increase return on investment. Private equity investment in care delivery assets has skyrocketed over the past decade.
This study draws the most direct correlation between PE investment and an adverse impact on patient outcomes that we’ve seen so far, highlighting the need for increased regulatory scrutiny to ensure that patient safety isn’t sacrificed for investor returns.
Government spending on testing and contact tracing pays for itself more than 30 times over, according to yet another paper published in JAMA (good series!).
What they found: Harvard economists David Cutler and Lawrence Summers calculated the total cost of the coronavirus pandemic at more than $16 trillion in the U.S. alone. Of that, about $7 trillion is attributable to loss of life and long-term impairment from the disease, Axios’ Felix Salmon writes.
- Enhanced testing and tracing would cost about $6 million per 100,000 inhabitants, they calculate. Out of that population, 14 lives would be saved, on which they place a value of $96 million, and 33 critical and severe cases would be avoided, representing savings of $80 million.
- That adds up to $176 million in benefits from $6 million in costs — before taking into account any second-order effects from even fewer cases down the road.
The bottom line: “Currently, the U.S. prioritizes spending on acute treatment,” write Cutler and Summers, “with far less spending on public health services and infrastructure.”
- Going forward, they write, “a minimum of 5% of any COVID economic relief intervention should be devoted to such health measures.”
The first coronavirus vaccine will likely get authorized within months, but that will only be the beginning of what’s likely to be a long, chaotic vaccination process, the New York Times’ Carl Zimmer reports.
The big picture: The first vaccines probably will offer only moderate protection against the virus, meaning we can’t ditch our masks even if we get one. And we probably won’t have a good way to choose between these vaccines once several of them are on the market.
- Some vaccines that are in earlier stages of development today may struggle to cross the finish line, even if they work better than earlier vaccines.
- And some vaccines may be pulled off of the market because they’re unsafe.
Between the lines: Some of this is inherent to the breakneck speed of the vaccination effort, but some of it is a result of how that effort was designed.
- Earlier this year, some government scientists had wanted to test vaccine candidates against each other, instead of testing all of them against a placebo. But these kinds of trials are risky for drug companies, because they show the value of one vaccine against another.
- That information could be useful for patients, but is a business risk for manufacturers.
- “You have to have the total cooperation of the pharmaceutical companies to get involved in a master protocol,” top infectious disease expert Anthony Fauci told NYT. “That — I don’t know what the right word is — didn’t turn out to be feasible.”
NeuroBehavioral Hospital in Crown Point, Ind., terminated the employment of a discharge planner last week after she spoke to the New York Times about nursing homes discharging unprofitable patients, a practice known as “patient dumping,” the NYT reports.
In the Sept. 19 NYT article, Kimberly Jackson said that during the pandemic nursing homes in Illinois and Michigan have repeatedly sent elderly and disabled Medicaid patients to NeuroBehavioral Hospital, a psychiatric facility, even though they were not experiencing psychosis, seemingly in an effort to get rid of patients who are not lucrative for reimbursement or require extra care.
“The homes seem to be purposely taking symptoms of dementia as evidence of psychosis,” Ms. Jackson is quoted in the article.
She was fired from NeuroBehavioral Hospital Sept. 24. Rebecca Holloway, the hospital’s corporate director of human resources, told the NYT that Ms. Jackson violated the hospital’s media policy.
Ms. Jackson told the newspaper she was shocked to be fired for speaking to the media.
“I saw something that was wrong, and I called it out,” she said.
NeuroBehavioral Hospital is part of NeuroPsychiatric Hospitals. The South Bend, Ind.-based network has five facilities in Indiana, two in Texas and one in Arizona.
We all agree healthcare providers should prioritize patient well-being and bill honestly. Most do. But, if not, my office, the Office of Inspector General for the HHS, and other government agencies, are watching.
We are especially monitoring an area of concern: abuse of risk adjustment in Medicare Advantage, the managed care program serving 23 million beneficiaries, 37% of the Medicare population, at a cost of about $264 billion annually. We have good reason to pay attention. Our recent report found that Medicare Advantage paid $2.6 billion a year for diagnoses unrelated to any clinical services.
Plans used a tool called “health risk assessments” to collect these diagnoses. Ideally, health risk assessments might be part of a Medicare beneficiary’s annual wellness visit and help care teams identify health issues. However, some Medicare Advantage plans use risk assessments without involving the patients’ regular care providers.
Some plans partner with businesses whose primary livelihood entails identifying diagnoses by conducting risk assessments. Some organizations send professional risk assessors, perhaps practitioners with some medical credentials but not physicians or other clinicians involved in the person’s care, to the beneficiaries’ homes. Our study found that 80% of that extra $2.6 billion payment resulted from in-home health risk assessments.
Medicare’s capitated payments vary by beneficiary for good reason. If Medicare paid the same for every beneficiary, plans might favor younger and healthier enrollees. It may not hold true every month, but, on average, it will cost a plan less to serve a healthy 65-year-old than an older person with diabetes or cancer.
Risk adjustment tailors the capitated rate to each beneficiary’s expected costs, so plans should enroll any interested beneficiary and not discriminate. But the risk adjustment is just a projection. Beneficiaries need not actually incur higher costs for the plan to receive higher payments. Some beneficiaries with a seemingly low risk will incur high costs in a given year and some beneficiaries with a high risk will incur low or even no costs.
In fact, one Medicare Advantage plan received about $7 million for beneficiaries who did not appear to receive any clinical care that year — other than the risk assessment, which was the only reason for the higher Medicare payment. Finding beneficiaries with high risk scores but low care utilization can prove a profitable business strategy.
Without gaming, on the aggregate, risk-based payments and utilization should even out over time. But what if plans do game the system? Perhaps making their beneficiaries look sicker? Or not providing care for beneficiaries’ health conditions?
We identified two main concerns:
- bad data — risk of incorrect diagnoses identified in the health risk assessment resulting in incorrect payments to plans.
- suboptimal care — risk that diagnoses are correct, but patients are not getting the care they need.
The question of whether beneficiaries are experiencing quality and safety problems requires more study. For example, it is possible that beneficiaries are receiving care, but plans are not submitting this data as required. Regardless, plans that use risk assessments to gather diagnoses, but then take no further action, are clearly missing an opportunity for meaningful care coordination. We urge Medicare Advantage plans to:
- Ensure practices drive better care and not just higher profits.
- Enact policies and procedures to ensure the integrity and usefulness of the data.
This could include measures like educating patients about the identified diagnoses and sharing them with caregivers. These steps are consistent with the best practices identified by CMS and provided to Medicare Advantage Plans in 2015.
It is not necessarily bad that Medicare allows risk assessments to influence payment, trusting that plans use risk assessments to identify missed diagnoses and not to fabricate nonexistent diagnoses.
However, this practice only helps patients if there is some additional intervention to improve care. If risk assessments are performed by third parties, at minimum, the beneficiary and the beneficiary’s care team should learn the results. Risk assessments should trigger meaningful care coordination, patient engagement and help ensure the care team takes appropriate action. Risk assessments that generate diagnoses for payment purposes, but result in no follow-up care raise serious concerns.
Ensuring beneficiaries receive the care they need should be front of mind for executives as they design risk assessment programs with an eye to quality of care and better care coordination. Failing that, executives should know that government agencies will scrutinize risk adjustment for abuse.
In response to our report, CMS promised to provide additional oversight and target plans that reap the greatest payments from in-home health risk assessments and conditions generated solely by risk assessments for which the beneficiaries appeared to receive no other clinical services. My office has identified red flags in some industry patterns and recommends plans adopt best practices. Executives should champion best practices and make sure their plans are driving correct diagnoses and quality care.
Ensuring that beneficiaries are properly diagnosed is important, not just for the integrity of taxpayer-funded federal healthcare programs, but also for the welfare of the beneficiaries served. Coordinating care and providing appropriate follow up is critical.
My office and other government agencies are targeting oversight to make sure plans do not pad risk adjustments with unsupported diagnoses. When plans find new real diagnoses, the plans deserve the extra payment, but only if patients get appropriate care.