Deborah Gersh, Ropes & Gray health care partner, discusses considerations for private equity companies investing in the value-based health care space.
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Private equity companies typically look at an investment horizon of about five to seven years, meaning that a private equity company will invest in a target company and look to liquidate its owning’s or have a liquidity event in five to seven years – that is a very different structure than a long-term look at a company. So there are two things I think we need to look at – one is the infrastructure with value-based health care, meaning that you don’t necessarily get paid for performance, but you get paid for the quality of the service you provide and to reduce cost. But in order to do that, you also have to have the right infrastructure, which requires investing in a new way in a company, which isn’t always evident. From an infrastructure standpoint, it’s important to look at what you have and what you may need in the era of value-based health care because data is going to be critically important. If you want to see how you are doing, you want to collect that data and be able to use it – in order to aggregate and use that data, you need folks who can assist in doing that. In a provider-oriented business, let’s just pick physical therapy, you certainly want to make sure that the folks understand the business and the clinical pathways. So what I mean by that is providers may have a certain way of treating someone – we would want to collect data to make sure that the way that they’re treating them makes sense, that in fact what they think is successful, is actually successful. So in investing in that infrastructure and insuring that you have that appropriate data is really essential.
When we talk about operational readiness – is how is the company positioned to be able to accept risk and payment, understand and control costs, and improve the overall experience of patients – and in doing that we have to look at a number of different factors. One is, do you have the right people in place? But also, when we look at the metrics that you’re considering, you want to make sure you can operationalize those metrics. So for example, if you enter into an arrangement or agreement and you will be rewarded, again taking the physical therapy example, you will be rewarded if folks progress much more quickly than normal. Let’s say it usually takes ten days to do something, but you can do it in five – you will then be able to be paid for that. Well, how do you make sure you’re operationally ready? It’s looking at the data, understanding what has worked in the past, and also being able to ensure that you understand what works. What a lot of folks are now doing in physical theory, because they understand that they’re rewarded for improving peoples quality, reducing their length of stay, making sure they don’t have to go back to the hospital, making sure they can go home more quickly – all of those are cost saving measures, but they also make the patient feel better, the patient rehabs earlier, and is happy as a result. So we want to make sure that that ability to operationalize what you’re thinking, to transfer the knowledge into thought, and to buy into that program is important – again not just by you, but by the providers and the clinicians as well.
I think key in any investment strategy for private equity folks looking to get into health care is to look at the company from slightly different perspectives, from investment in infrastructure – which will likely need to be more immediate because of the investment horizon, to operationally – does this company embrace or does it have the ability to embrace value-based health care? Is it a company that can withstand a paradigm shift in the way it’s reimbursed, and then how do you prepare that company for those changes and how do you consider what those changes mean for the bottom line – how to manage cash and how to understand the risks and rewards attendant to a value-based health care system. And most importantly in diligence, to really understand the relationship with the payers, meaning the people who are paying you, and what risks you may have in respect to that payment model, and also the nature of the risk you choose to take. If you’re with a company that is going to find it fairly difficult to embrace this new model, it may be something to consider whether this is the right investment for you within your time horizon.