Editor’s Note
This article originally appeared on Health Affairs and is part of the Health Affairs Forefront short series “Private Sector Solutions for Health Equity.” The series explores health equity challenges in areas such as cardiovascular health, mental health, and maternal health, and ways in which the private sector is addressing those challenges. Health Affairs is grateful to CVS Health for supporting this work.
Efforts to advance health equity are a recognition that there is significant opportunity to improve health outcomes for traditionally underserved populations. Academic research continues to offer deeper understanding of the gaps in quality, access and outcomes that suggest there is much room for improvement. Policymakers have also made recent efforts to advance health equity using levers available to large, influential purchasers. The Center for Medicare and Medicaid Innovation (CMMI) through the ACO REACH (Realizing Equity, Access and Community Health) demonstration will include some health equity measures, including person-level demographic data and a quality bonus for submission, as well as having a patient advocate on every board. Similarly, the Centers for Medicare and Medicaid Services recently finalized provisions that will require providers to describe their ability to provide linguistically, culturally competent care and strengthen marketing materials to reflect what plans can realistically cover.
Several states have also made health equity a central focus through their Medicaid programs. Medicaid coverage expansion has been linked to improvements in coverage and access to care. But with 11 states still not adopting Medicaid expansion, and millions rolling off Medicaid due to the end of the Public Health Emergency, many Americans are left with little ability to bridge widening access gaps. While these federal and state policy provisions are important, they still seem modest when compared against the scope and scale of disparities in health. The role of private capital in moving the needle on health care is not yet fully realized and could be the next frontier.
The health care sector needs access to private capital to innovate, serve individuals with complex needs, and become more efficient and equitable in service to patients. What is the alternative to private capital in health care if we have a goal of expanding models of care and types of providers, and making the technological advances needed to serve more people better? Public resources are stretched thin and cannot be relied on to grow in perpetuity above the nearly $1 trillion spent on Medicare and Medicaid alone. Federal funders like the National Institutes of Health, the National Science Foundation, and the Centers for Disease Control and Prevention support discrete research or training grants, and while they might incubate innovations, these funds will not support building or scaling new companies.
Foundations serve a meaningful purpose in augmenting public funds but do not command nearly enough resources to drive change at the scale that we contemplate. And even foundation funding can have significant strings attached, with short-term funding cycles that can end programs abruptly. Founders and innovators focused on health equity, with an understanding of what patients need in a fractured health care system, should be given an opportunity to build and grow a business, then successfully exit the business and move on to other ventures.
The Critical Role Of Venture Capital
Venture capital (VC) typically focuses on early-stage investments, from seed rounds to series A, B and onward, as companies move though stages such as proof of business model and building operational capacity. Early-stage companies are higher risk by investment standards. They could be led by founders who are talented but are unproven in business operations. The companies require steering and capital to get off the ground, acquire customers, and refine their products/services. Venture capital is an important source of financing to test and build out new health care models and businesses.
Most of the new companies focused on health equity have built in risk-based care as part of their thesis. There are several examples (and their venture backers) including CayabaCare and Health in Her Hue (Seae Ventures) and Waymark (AZ16 and NEA). The movement to value-based care was a key part of the national vision to move health care from a volume-driven practice to a more integrated, quality-driven practice. Value-based payments prioritize preventive, engaged, patient-centered care. Companies focused on improving birth and maternal outcomes through coordination, higher engagement through tech-enabled care, or through a mix of community-based providers are attempting to build much of what researchers and policymakers have contemplated for decades.
These companies represent an asset class that is more nascent, with varying degrees of risk. For example, payment policies may not have caught up with care delivery new companies offer to support access for their target patients. For some companies, the ability to meet the needs of the patients they serve goes beyond the care traditional clinicians can offer. Seamlessly integrating community services, social supports, and technology is operationally complex. The combination of successful implementation and adequate reimbursement is critical—and should be supported.
While there is no guarantee that all new companies will succeed, there is a belief that what they are building is essential to better align care for women, Medicaid beneficiaries, dually eligible beneficiaries, and people who have been left behind by traditional models of care. And VC investors have a higher tolerance for risk in exchange for greater potential for investment profits after success of the company. The companies that successfully make it through the VC funding stages will be candidates for larger private equity (PE) investments.
How Private Equity Capital Can Help Scale Health Care Businesses
PE investors focus on companies with more mature products/services that are differentiated in their markets. Ideally, the addressable market is large and growing, and the revenue model is clear. As an asset class, PE is slightly more risk averse compared to VC. This makes sense: the sizes of investments are typically larger in PE, and the company must show a plausible pathway to growth even in challenging environments.
The most misunderstood thesis around PE investments is that investors seek to tear down a company and extract all the resources and value, and then sell the company for a large profit to another buyer. For established PE investors with institutional limited partners (often pension funds) to succeed in any sector, including health care, they must have a demonstrable track record of building up companies with leadership, talent, customers, quality services, and products to make that company attractive to the next buyer. No buyer—not another PE firm nor a strategic company nor public investors in an IPO—will invest in a company that the incumbent owner has stripped of all its assets, with no path to delivering quality services or products, or attracting high-quality leadership. Due diligence, conducted on every aspect of a business prior to a transaction will identify these weaknesses and likely lead to a conclusion to not move forward.
The body of literature on PE’s role in health care is nearly universally negative. While researchers should evaluate whether PE sponsors have a meaningful impact on health care and health equity, they are also limited by few data sources that allow thorough empirical assessments of PE’s role. A few good studies have found that PE-sponsorship of hospitals is associated with better clinical outcomes for patients’ acute myocardial infarction, and that PE may not have different incentives from other sources of capital. This nuance is important. There are very few (if any) studies in health care or business literature that fully interrogate a truism in health care investing: higher quality, better leadership, stronger technological infrastructure, engaged physicians and providers, and better patient experiences translate to better financial returns. Objective, empirical assessments of whether PE-sponsored health care companies deliver on these expectations are warranted.
Several academic studies and news articles use the term “private equity” very broadly, even in cases where no institutional private equity firms were involved. A recent example from the New Yorker characterizes two individuals with no known outside investors and no other known investments as “private equity.” The Securities and Exchange Commission, investors, bankers, and other stakeholders that are part of this ecosystem do not consider these PE investors. The definitional problems don’t stop there. The practices, management principles, levels of investments in the communities they serve, and relationship to the health care system overall of the New Yorker article subjects are different from what one might find in a traditional, health care-focused investment firm.
This conflation has posed some challenges for traditional, institutional investors. In response to the information vacuum about the role of PE in health care, portfolio companies and PE firms have begun to publish reports about the quality, access, and patient outcomes their portfolio companies deliver. My firm, WCAS, is working towards making more data from the companies in which it invests available in peer-reviewed outlets and in report format (see examples for Liberty Dental Plan and Springstone); we hosted an inaugural quality conference focused on clinical outcomes and patient experience this spring to center quality, patient engagement and outcomes in the work at portfolio companies. Each company is different, with different investors, and hold periods can vary, which does not allow for easy datasets preferred by researchers. But until there is an industry-wide effort to build datasets focused on quality and patient outcomes, there will be relatively few studies that empirically show a direct link between PE capital and improvements in access, quality, outcomes and patient experience.
The story of PE investments moving the needle on health equity is yet to be written, in large part because the companies focused on systemic disruption are still relatively new. But there are some examples that illustrate the opportunity to scale health care companies focused on marginalized or underserved populations. Vistria, a private equity firm based in Chicago, is backing Help at Home, a company focused on delivering home care to seniors and individuals with developmental disabilities. AbsoluteCare, which in its early days focused on HIV-AIDS patients but has pivoted to address health for members of the LGBTQ community is backed by Kinderhook.
The PE firm Deerfield has invested in Humanity Health, an executive search firm focused on growing and positioning a diverse health care leadership. The focus is to achieve health equity through diverse talent that includes racial minorities, women, and other underrepresented groups in leadership. Private equity has shown an interest and a capacity to invest in models of care that prove beneficial to patients by way of coordinated care, improved access to mental health, and home-based care.
Other Important Sources Of Investment Capital
There are other sources of capital that can be deployed to address health equity. Health systems are arguably closer to the patients and communities they serve and many are affiliated with large research centers. Many not-for-profit health systems have investment or venture arms that could invest in companies that are focused on health equity. Similarly, large strategic companies such as insurance companies are often positioned to invest significant sums in companies that support them in their efforts to serve their customers and better run their businesses. Also, large employers such as JPMorgan and Walmart invest in building health care companies that are focused on expanding access points, cheaper medicines, and primary care to reach a broad swath of the population. Several combinations of plans and large employers increasingly partner to address health equity; an example is the recent CareSource + Walmart joint effort to address cardiometabolic health, and birth and maternal outcomes in Ohio and Georgia.
Aligning Incentives
Inequities in health are only partly due to the failures of the health care system. Inequities in education, income, wealth, safety, access to healthy food, and housing—in short, social and economic disposition—explain much of our inequities in health. For too many people in the United States the legacy of racism, discrimination and lack of opportunity affects nearly every aspect of life. But in the health care system, misalignment of incentives can magnify disparities that are built over lifetimes. For example, in the hospital readmissions program, underperforming hospitals were punished rather than resourced to improve their performance. Many underperforming hospitals served vulnerable populations. Also, Medicaid rates for some services can be breathtakingly below what is needed to provide services reasonably at cost. Most providers who care for Medicaid beneficiaries will need to serve other commercial or Medicare beneficiaries to make their business models work. Without a profit margin, the business will simply not be sustainable. And a business model that includes neither a margin nor a path to one, regardless of what the company wants to do to address health equity, will not attract investor capital.
To meaningfully advance health equity, incentives must be aligned so that the patient who needs help wherever they live can be seen by a culturally competent professional, at the right site or level of care, with the right social supports that are available in their community. Their secured health information should be readily available to avoid duplicative, inefficient and expensive care. This is the start. The current system is far from this ideal and investors know this because they deploy capital in a risky, slightly unpredictable environment.
Public Policy And Health Equity
The public policy that would most advance health equity would be to have a single entity manage resources associated with education, nutrition, housing, transportation, and population health. This is a textbook, person-centered, place-based approach with multiple layers of stakeholder collaboration that would keep comprehensive needs of a community at the core. There are no examples (that I am aware of) where we have modeled this successfully in the United States. At this time, each of these areas is discrete with their own structures, funding sources, and regulatory bodies. To raise the prospect of a single responsible, accountable entity for a given community is to ask who will give up control over resources. Federal departments, Congressional committees, and most stakeholders that currently manage any portion of the sprawling set of resources at the federal level are unlikely to willingly give up control, even for a short-term pilot.
Policymaking around private capital in health care is rapidly evolving at federal and state levels. Policymakers with a responsibility to safeguard public dollars should require sensible reporting requirements that identify responsible, high-quality entities—regardless of ownership structure—to ensure communities’ needs are being met. Incentives should be based on the value created for communities and populations, and the efficient use of resources towards health, health outcomes and patients’ experiences. Smart policies should focus on moving us away from fee-for-service, a movement that has been far slower than anticipated a decade ago.
One potential unfortunate consequence of imprecise regulations would be to discourage private capital investments in health equity before there is an opportunity to address sprawling needs that cannot be funded entirely with public or nonprofit resources. For example, health equity would be drastically improved with a stronger, nationwide pipeline approach for empathic community health workers, nurses, physicians and allied health professionals, and a sophisticated technological infrastructure critical to meeting tomorrow’s health care needs. There is no panacea to advance health equity and there is no singular institutional savior. We should plan to leverage all forms of capital--public, private, and nonprofit alike—and work towards aligning incentives to support the goals of improving health for all.
Author’s Note
Adaeze Enekwechi is an Operating Partner at WCAS, an investment firm with a focus on health care and technology sectors. She is on the board of several health care companies and non-profit organizations.