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Will High Prices Follow Private Equity Investment in Primary Care?

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Provident’s Dustin Thompson and Brendan Schroeder were quoted in Health Plan Weekly.

Will High Prices Follow Private Equity Investment in Primary Care?

Reprinted with AIS Health permission from the February 18, 2022, issue of Health Plan Weekly.

Primary care practices are consolidating at a rapid pace: Independent physician practices are combining on their own, and growth-oriented, outside investors — such as private equity funds, health insurers and health systems — are taking stakes in prac­tices or buying them outright. Experts tell AIS Health, a division of MMIT, that the impact of such deals will vary, but warn that consolidation and investment by private equity firms has raised prices across the board in other areas of health care.

According to a July 2021 report by investment bank Provident Healthcare Part­ners, 41 primary care transactions worth over $2 billion closed in 2020, a higher deal volume than any year since 2010. Meanwhile, 2019 set a record for capital invested, with $5.1 billion spread across 26 primary care deals. At the time, investors were on pace to shatter both records in 2021: 31 primary care deals worth $4.8 billion had been announced when the report was published. A February 2022 Provident report made note of several major transactions in the last quarter of 2021:

  • Rubicon Founders LLC took a majority position in U.S. Medical Management in November as Centene Corp. sold its controlling stake but held on to a minority share;
  • Bain Capital LP acquired a majority stake in Innovacare Health in November;
  • Goldman Sachs Group Inc. and Charlesbank Capital Partners acquired MDVIP in October; and
  • Walgreens Boots Alliance spent $5.2 billion to move from a minority position to a controlling stake in Vil-lageMD in October.

Experts say the COVID-19 pan­demic is a catalyst for consolidation in primary care. Many primary care prac­tices were strained by shelter-in-place orders: Visits cratered, decimating reve­nue in practices reliant on fee-for-service revenue. Some primary care practices, often with the financial backing of in­surance firms, shifted to risk-based or value-based reimbursement models (see story, p. 5).

According to a November 2021 commentary in NEJM Catalyst regard­ing private equity investment in primary care, 26% of surveyed primary care organizations in Massachusetts “were considering selling to entities such as [private equity] firms.”

Khin-Kyemon Aung, M.D., a primary care resident at Brigham and Women’s Hospital and a coauthor of the commentary, tells AIS Health that the pandemic deepened preexisting financial strains on primary care practices. She adds that it also highlighted the need for major capital investments, particularly in tech, that many independent practices can’t afford without third-party financ­ing.

“With the pandemic, a lot of these challenges have been exacerbated, in terms of staffing shortages, or even thinking about where you get PPE [personal protective equipment],” Aung explains. She also cites data analytics and telehealth software investments as other areas of budget-busting capital invest­ment for primary care practices. “Early on in the pandemic, something like 60% of practices were thinking about cutting salaries for employees, cutting services or other operating expenses or laying folks off. And then another 20-40% of those folks were thinking about…selling or closing their practices.”

Aung emphasizes that private eq­uity investment in primary care “is not necessarily good or bad.” But the NEJM commentary suggested that “successful PE partnerships” require the “‘right type’ of investors,” need to align incen­tives and “resolve conflicts in strategic and business goals before starting the partnership,” and have to set transparent benchmarks for financial and clinical outcomes.

“There’s a lot of different types of investors with nuanced business mod­els,” Aung says. “Venture capital is very different from growth equity, which is very different from leveraged buyouts. The reasons they want to enter health care may be different….It’s important to take each type of model independently and weigh how best to create an eco­system that supports that model while protecting patients.”

Clinical practices need to be honest about how long it takes to re-align incentives and integrate more efficient, leveraged primary care models.

Dan Mendelson, CEO of Morgan Health, JP Morgan Chase’s health care division, makes a similar point — par­ticularly when a transition to risk-based contracting is part of a deal. Morgan Health, which controls a $250 million venture fund, has taken minority po­sitions in primary care firms including Vera Whole Health.

“Clinical practices need to be hon­est about how long it takes to re-align incentives and integrate more efficient, leveraged primary care models. We increasingly need practices that inte­grate nurses, pharmacists, and a range of other talent. And it takes time and a commitment of clinical talent to make this happen. Bad outcomes can result if practices don’t understand or aren’t honest about how long it will take to drive change. And likewise PE firms are always driven by getting a strong return for their investors,” Mendelson tells AIS Health via email.

“It’s critically important for medical groups to have clear expectations going into a partnership like this,” Mendelson adds. “Medical groups can get a lot out of private equity affiliation — most importantly the tools, technology, and capital necessary to move to a value-based payment framework. This is increasingly important for clinical practices as employers like JPMC move toward value-based arrangements in areas where we have concentration. I do think agreement on the timeline is key.”

Dustin Thompson, a director at Provident, tells AIS Health that the pan­demic isn’t the only reason for increasing private equity investment in primary care.

“It’s definitely increased during the pandemic, but I don’t know if we can attribute it all to the pandemic or just timing. That’s the great unknown,” Thompson explains. He agrees that the sharp drop in visits during 2020 was an important factor in consolidation. But he points out that deal volume increased even as utilization rebounded.

Value of Newly Public Firms Plays a Role

“I think the other big factor here is seeing the profitability and the val­uations of those companies that went public during 2021 that were primary care focused — they went to pretty lofty valuations,” Thompson adds. “Whenever we see those lofty valuations, it drives people’s interest in thinking about, ‘Should I also be entering this space?’”

Thompson also draws a distinc­tion between primary care providers focused on Medicare Advantage and those focused on the general population. MA-focused providers are more used to working under capitation and other aspects of risk-based reimbursement.

“Those valuations were largely driv­en by Medicare Advantage rather than fee-for-service,” Thompson explains. “I would say investors currently tend to be looking a little bit more on the Medicare Advantage side. And not just based on recent deals — there’s always the option to convert either immediately or down the road to Medicare Advantage from a fee-for-service model when you take on risk.”

That said, there is significant momentum toward taking a similar risk-based approach to other aspects of primary care.

“I think there’s a lot of macro fac­tors that are contributing to [accelerated consolidation] over the last five to 10 years,” explains Brendan Schroeder, a senior analyst at Provident. “The moti­vation for sellers to kind of align with a model that’s more readily available to capture value-based care tailwinds is one that we’ve seen quite a bit of — one that we’ve seen private equity groups looking to capitalize on.”

Consolidation Could Have a Hidden Upside

So what does all this investment mean for patients and carriers? Loren Adler, an economist and associate di­rector of the USC-Brookings Schaeffer Initiative for Health Policy, thinks results will be mixed. Adler has studied the effects of private equity investment on specialist physician and air amblance prices and tells AIS Health he is beginning research on private equity investment in primary care. In both cases, as with a large body of research on  health system mergers, private equity involvement and consolidation have tended to drive up prices.

“But primary care is a bit interesting compared to some other specialties. The argument for there being a net benefit to a large wave of investment is a little easier to envision,” Adler explains. “A lot of specialties…it’s largely just consolidat­ing what wasn’t very consolidated be­fore. That’s going to raise prices, but it’s hard to see where this is going to have any more than modest improvement in quality — it seems like a way to just increase prices a bit and maybe shift to some higher margin procedures.”

“In primary care, that’s the main interaction that people have with the health care system,” Adler says. “[For] newer primary care entities — whether private equity or the large, One Med­ical-type companies — some of their value adds is to be a better customer experience. That is where you go most often to see a doctor. So easier appoint­ments, they see you on time, it looks nice, better bedside manner — that has real attraction and value to patients that people might be willing to pay more for. That’s an even trade. The doctors make more money and people are happier.”

Some Players Will Likely Game the System

That said, Adler continues, “there’s certainly a horizontal consolidation side of this, in terms of, the less primary care doctors or groups are competing against each other, the higher the prices. They may be doing some stuff on coordination of care. Fee-for-service is notoriously bad at managing care, so in certain ways, there may be gains there. But there’s also slide decks of consul­tants to these companies that are very much, ‘Here’s how you code like crazy and game the system.’ And the sort of alignment in MA between the insurer and the primary care group will increase the over-coding and just bilk money from the taxpayer. That part is almost certainly happening.”

Contact Adler at ladler@brookings. edu, Aung at khin-kyemon_aung@hms., Mendelson at and Schroeder and Thompson via Gina Casiello at gleone@

Read the artciel on AIS Health here.