In­vestors hope to profit from shar­ing the bun­dled pay­ment load

Modern Healthcare - - NEWS - By Me­lanie Evans

The Af­ford­able Care Act’s ex­per­i­ments in Medi­care pay­ment re­form have their doubters, but in­vestors see op­por­tu­nity.

Sev­eral com­pa­nies have emerged to cap­i­tal­ize on the ACA’s com­plex new pro­grams de­signed to change how tra­di­tional Medi­care spends more than $450 bil­lion a year in pay­ments. Those com­pa­nies plan to make their money through man­age­ment fees or by tak­ing a share of bonuses paid out to providers.

Con­sider two re­cent deals worth $ 1.89 bil­lion. Med­i­cal-sup­ply com­pany Car­di­nal Health paid $290 mil­lion this month for a ma­jor­ity stake in nav­iHealth, a con­sult­ing and tech­nol­ogy com­pany that’s one of the largest play­ers in Medi­care’s test of bun­dled pay­ments un­der the fed­eral healthcare law.

In early Au­gust, staffing firm TeamHealth said that it would pay $1.6 bil­lion for IPC Healthcare, a hos­pi­tal­ist com­pany that also par­tic­i­pates in Medi­care’s bun­dled pay­ments test un­der a con­tract with nav­iHealth.

Through the CMS In­no­va­tion Cen­ter’s Bun­dled Pay­ments for Care Im­prove­ment ini­tia­tive, which started mak­ing pay­ments in Oc­to­ber 2013 and has ex­panded each sub­se­quent year, Medi­care com­bines pay­ment for ser­vices pro­vided by hos­pi­tals, doc­tors and nurs­ing homes into one lump sum. That bun­dled amount is less than what Medi­care would typ­i­cally pay for each ser­vice sep­a­rately.

When fee-for-ser­vice bills add up to less than the bun­dled amount for those ser­vices, healthcare providers get paid the dif­fer­ence. Providers must ac­cept bun­dled pay­ments for any el­i­gi­ble pa­tient with a con­di­tion cov­ered by a bun­dle the provider has signed up for to pre­vent doc­tors from se­lect­ing only the least-ex­pen­sive pa­tients.

Con­sul­tants can share in that gain as so-called con­ven­ers, but they must also share in losses. Still, the po­ten­tial for profit—Medi­care will spend roughly $10 bil­lion a year on care in­cluded in bun­dled pay­ments for four dozen ail­ments—has at­tracted com­pa­nies like pri­vate-eq­uity backed nav­iHealth and Rem­edy Part­ners, which of­fer con­sult­ing and tech­nol­ogy ser­vices for a share of bun­dled pay­ment re­turns.

Other con­sul­tants have cho­sen to act as con­ven­ers for a fee in­stead, as is the case with Premier, a pub­licly traded hos­pi­tal-sup­ply chain and per­for­mance-im­prove­ment com­pany, and xG Health So­lu­tions, a spinoff of Geisinger Health Sys­tem, Danville, Pa.

Bun­dled pay­ment use is ex­pected to grow, even though the Medi­care ini­tia­tive is sched­uled to end in 2018. The CMS In­no­va­tion Cen­ter has the au­thor­ity to ex­tend suc­cess­ful pro­grams, and the Obama ad­min­is­tra­tion has also pro­posed a manda­tory bun­dled pay­ment pro­gram for 800 hos­pi­tals in 75 mar­kets to start in Jan­uary, known as the Com­pre­hen­sive Care for Joint Re­place­ment Model.

The gov­ern­ment’s ob­vi­ous en­thu­si­asm for the model is at­tract­ing the at­ten­tion of pri­vate in­vestors.

“In­vestors are look­ing for the mega­trends in any field,” said Rem­edy Part­ners CEO Steve Wiggins. The in­tro­duc­tion of bun­dles and other new in­cen­tives for providers to more closely man­age the cost and qual­ity of care is “the most pro­found mega­trend” in healthcare ser­vices and tech­nol­ogy, he said.

Wiggins is also a man­ag­ing di­rec­tor for ven­ture-cap­i­tal firm Es­sex Woodlands Health Ven­tures and a healthcare en­tre­pre­neur who has founded seven healthcare com­pa­nies. “In­vestors are look­ing for as­sets that are putting them­selves in the path of change,” he said.

Rem­edy Part­ners, based in Darien, Conn., raised $50 mil­lion in July from pri­vate eq­uity firm Bain Cap­i­tal Ven­tures.

New York pri­vate eq­uity firm Welsh, Car­son, An­der­son & Stowe, where for­mer CMS Ad­min­is­tra­tor Thomas Scully is a part­ner, re­mains an in­vestor in Brent­wood, Tenn.-based navi Health. Car­di­nal Health said it will buy out the re­main­ing stake in navi Health in four years.

Con­vener com­pa­nies say they of­fer scale to man­age costs, fi­nanc­ing for tech­nol­ogy and net­work de­vel­op­ment, clin­i­cal staff and an­a­lyt­ics ex­per­tise to cut waste and

im­prove care.

Wiggins said Rem­edy Part­ners’ 100 cus­tomers have lower over­head costs in the bun­dled pay­ment pro­gram be­cause ex­penses—for ex­am­ple, nurses who staff a pa­tient call cen­ter—are spread across those cus­tomers’ 1,700 hos­pi­tals, med­i­cal groups, nurs­ing homes and home health agen­cies.

Such re­sources are rare out­side of Medi­care man­aged care. Twothirds of Medi­care’s 50 mil­lion en­rollees are cov­ered by tra­di­tional Medi­care, and that’s where com­pa­nies like navi Health see an op­por­tu­nity for growth.

The Bun­dled Pay­ment for Care Im­prove­ment ini­tia­tive “is the first step in ac­cess­ing that mar­ket,” said navi Health CEO Clay Richards. The next one, he said, is the CMS’ new bun­dled pay­ment pro­gram for joint re­place­ments.

There is ev­i­dence the new bun­dled pay­ment mar­ket could be lu­cra­tive, at least for some. Com­pa­nies that hired con­sul­tants and agreed to share in fi­nan­cial re­turns are pro­jected to ben­e­fit start­ing next year, said Kevin El­lich, a se­nior re­search an­a­lyst with Piper Jaf­fray.

IPC Healthcare, for ex­am­ple, has pro­jected that bun­dled pay­ments will add $33 mil­lion to its earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion. That amounts to a sig­nif­i­cant 40% of the com­pany’s an­nual EBITDA, El­lich said.

Physi­cian staffing firm En­vi­sion Healthcare and kid­ney-care provider Fre­se­nius Med­i­cal Care also ex­pect to see big gains from the bun­dled pay­ment ini­tia­tive; both com­pa­nies con­tract with con­vener Rem­edy Part­ners.

Rem­edy Part­ners has earned quar­terly pay­outs for its ear­li­est bun­dled pay­ments, which be­gan in 2013, Wiggins said. The com­pany keeps a per­cent­age of pay­ments, which vary by or­ga­ni­za­tion but he de­clined to say how much the com­pany has made. Medi­care is ben­e­fit­ing from the money that in­vestors like Rem­edy’s back­ers are bring­ing to the pro­gram, Wiggins said. “We are an ex­am­ple of Medi­care lever­ag­ing the pri­vate sec­tor to bring in a lot of cap­i­tal.”

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