When Oak Street Health, a Chicago-based network of seven primary-care clinics, began looking for investors last year for expansion, it talked with about 40 private-equity funds.
About 15 firms came to Chicago to conduct due diligence, and most ended up bidding, said Oak Street CEO Mike Pykosz, whose group focuses on coordinating care for patients in traditional Medicare and Medicare Advantage plans. The group ultimately chose Harbour Point Capital, a New York-based private-equity firm.
“We had a large amount of interest,” Pykosz said. “It was a competitive process to pick someone. There are not a lot of people who are doing what we’re doing.”
The March deal between Oak Street and Harbour Point is one of a small but growing number of investments that private-equity firms are making in primary-care physician practices that are ahead of the curve in offering new care delivery and payment models. Investors see an opportunity in being early participants in value-based care, even as the business case is still unclear given mixed results in Medicare’s payment and delivery reform demonstrations so far.
But the niche is well-suited for private-equity firms, which feed on uncertainty, said Todd Spaanstra, a partner at Crowe Horwath, an accounting and consulting firm. Investors are putting faith in the idea that the market is headed toward shared-savings payment models. They’re placing their bets to get in on the ground floor.
The long-term opportunity for private-equity firms is the ability to sell these managed-care-savvy medical groups to insurers or health systems, which may pay a premium for the care-coordination expertise and data analytics these practices offer. Primary-care groups that can demonstrate better quality and lower costs in managing medically complex patients will be valuable in a healthcare system that will increasingly reward cost-effective care.
“It’s a land-grab right now,” Spaanstra said. “These are very small companies that are really just getting started. They’re going for crazy multiples just because (private-equity firms) see the potential there.”
Private-equity firms traditionally have invested in medical groups that offer high-reimbursement potential, such as dermatology, pain management and dentistry. That’s still the case. But part of the reason private-equity investors are looking at primary-care groups, and the managed-care space in particular, is because specialty practices are becoming comparatively more expensive.
Most M&A experts still see a seller’s market. Provider groups are demanding high prices, and very often they’re getting those prices from companies making a strategic play. Private-equity firms, meanwhile, are searching elsewhere for opportunities.
“The large (corporate buyers) are doing deals at valuations that are above their historical comfort levels,” said Slava Girzhel, managing director at KeyBanc Capital Markets. “There’s a lot of discussion about private-equity investing in risk-based models, and I do think we’ll see more of that.” Part of the reason they’re going after less lucrative specialties like primary care is because their traditional provider targets are now too expensive.