I have been concerned about the difficulty of projecting revenue and determining valuations for new and existing healthcare companies based on risk based reimbursement models. My fears have not been allayed. Rather, they have been confirmed.
On Monday, Secretary Burwell issued a press release that essentially committed CMS to moving the entire Medicare payment model from a fee for service to a value based model ( see this link: http://www.hhs.gov/news/press/2015pres/01/20150126a.html)
The current Medicare demonstration projects—bundled payments, shared savings models using Accountable Care Organizations and patient centered medical homes will be expanded to include the vast majority of health care providers. This shift over the next several years will certainly change the financial outlook ( and perhaps valuations) for many health care portfolio companies. Currently, health care service rollups are a favorite of some investors where the management fee that is earned is paid to the investor owned management company as a percentage of collections. Under many of these models especially the shared savings program, provider bonuses earned barely get them back to the revenue level they had in the prior year. What do providers do about increasing costs when their revenue is fixed or declining?
The impact of this new policy will also drive the commercial insurers and managed care companies to shift their patterns of payment as well. As it is well known, that Medicare changes are quickly followed by the commercial insurers and managed care companies. I expect that many of the new companies which service health care providers will be looking at new financial models that have aligned incentives with their customers.
However, any investor investing in companies that take health care reimbursement risk should be asking their current and future portfolio company two questions—-how will the new Medicare reimbursement policy impact their business and what is the company going to do about it?