Investors hope to profit from sharing Medicare bundled payment load

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 naviHealth. Cardinal Health said it will buy out the remaining stake in naviHealth 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. Two-thirds of Medicare's 50 million enrollees are covered by traditional Medicare, and that's where companies like naviHealth see an opportunity for growth.

The Bundled Payment for Care Improvement initiative “is the first step in accessing that market,” said naviHealth 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.”