Evolent Health, a publicly traded company with UPMC as a major investor, is acquiring most of Valence Health for $145 million in cash and stock, merging two large, competing consulting firms that work with hospitals, doctors and insurers on value-based payment designs.
The deal could be worth another $50 million depending on "future business activity," according to the two companies.
The lone component of Valence that will be left behind and turned into a new stand-alone company consists of consulting contracts for the Affordable Care Act's not-for-profit co-op insurance plans, Valence CEO Andy Eckert said. That new company will be called Cicerone Health Solutions and will work exclusively with co-ops.
Evolent and Valence offer technology and services to help hospitals and doctors move away from fee-for-service reimbursement and toward a payment system that rewards low-cost, high-quality care, which is a central theme of the ACA. Providers hire the two companies to start their own health insurance plans, create accountable care organizations and develop capitated payment contracts. Smaller insurers also partner with each company.
The UPMC health system in Pittsburgh and consulting firm Advisory Board Co. co-founded Evolent, headquartered in Arlington, Va. Evolent went public last year and has struggled financially, although its stock price this month is trading slightly above its initial public offering of $18 per share. Valence, based in Chicago, is private.
UPMC owns 24.5% of Evolent's stock, and the Advisory Board Co. controls 19.3%, according to filings with the Securities and Exchange Commission. Private-equity firm TPG owns 22.8% of Evolent, which posted $97 million of revenue in 2015. The acquired portion of Valence's business is expected to tally up to $85 million of revenue this year.
The deal between Evolent and Valence is expected to close before the end of the year, giving the combined organization 125 health system and insurer clients across 35 states. Some of its most prominent clients include Indiana University Health in Indianapolis, MedStar Health in Columbia, Md., NorthShore University HealthSystem in Chicago and Passport Health Plan in Louisville, Ky.
Evolent CEO Frank Williams said the acquisition will speed up the company's timeline to break even by 2017. Valence also gives the company deeper experience with hospitals and health systems that operate Medicaid and pediatric health plans.
The deal “gives us scale and a very strong set of financial characteristics,” said Williams, who used to be CEO of the Advisory Board Co. He added that many providers have asked the company to help with the “emerging market” of value-based care, which Williams said could be worth $45 billion.
But many providers have also realized how difficult the shift to population health is, especially if they choose to build their own health plan. Catholic Health Initiatives, for instance, told bondholders last month that it “decided to exit the health insurance business” after a few years of poor results. However, CHI will continue to pursue value-based payment design and population health, Dean Swindle, CHI's chief financial officer, said during a bondholder call last week.