Fee to Value: Private Equity Explores Patient-First U.S. Healthcare Delivery

There’s been a steady flood of PE investment into U.S. healthcare delivery over the past decade, a trend that has raised eyebrows among regulators and policymakers. Critics point out inherent conflicts of interest that can occur due to potential misalignment of incentives between the private equity owners focused on increasing financial performance within a relatively short time period, and those of patients and physicians. Stories of higher negotiated prices and more instances of surprise billing abound from groups who like to point to these high-profile instances and blame private equity-owned physician groups.

However, context matters in the wider world of PE-backed healthcare delivery – as groups attempt to move from fee-for-service (FFS) to value-based payment models, it’s important to consider the ways in which this shift might better align incentives between PE owners and care delivery organizations while improving access, quality, and affordability to patients.

Fee-for-service (FFS) has a long history of criticism from patients and advocacy groups alike as it perpetuates a system of misaligned incentives – where the financial performance of care delivery organizations is disconnected with wider goals of value and quality. As care delivery providers work to shift towards value-based care (VBC) and assume accountability for both cost and quality outcomes through strategies like instituting accountable care organizations, risk-sharing among providers, and capitated payment arrangements – private equity firms are taking notice and seeing an opportunity to amplify this trend while still achieving necessary financial targets. 

We see PE’s initial exploration of VBC in investments like Oak Street Health (which IPO’ed recently in 2020), a primary care group that services older adults. Founded in 2012 and backed by investors like General Atlantic and Newlight Partners, Oak Street Health has rapidly scaled to over 50 locations across 10+ states while maintaining a focus on capitated payments (over 65% of patients are ensured a structured and transparent payment model). This focus on VBC has also manifested in other positive patient outcomes against standard Medicare fee-for-service benchmarks, with 51% of patients reporting experiencing fewer hospital admissions, 42% reporting fewer 30-day readmissions, and 51% reporting fewer emergency department visits – all while maintaining average NPS scores of 90 across all patients. 

It's important to take a step back and acknowledge, however, the innumerable complexities surrounding private equity's involvement in the wider healthcare industry. There are known potential risks surrounding PE's involvement in care delivery organizations including overutilization, practice instability, and market consolidation resulting in increased regional competitive barriers among others - but it is also likely in PE's best interest to continue to explore the momentum push behind value-based care.

As PE continues to explore the VBC delivery model, examples like Oak Street Health's show it's possible to do well for business and do good on behalf of patients.