Private Equity Investment for Value Transformation: Magnificent or Mephistopheles?, with Don McDaniel

The impact of investment activity on our industry cannot be overstated, with the velocity of capital pouring into the health sector reaching stratospheric proportions. The valuation of private equity deals in the US health care sector is nearly $100 billion dollars—a twentyfold increase from 2000 (when it was less than $5 billion). Before COVID-19, we were already seeing mass provider consolidation, expansive funding in digital health, and significant M&A activity…and the appetite for capital investment in healthcare has only increased in recent years. The amount of capital being poured into the health sector, and the velocity at which it has been deployed, is reshaping the landscape and a driving force in the future of value-based care.

Joining us this week is Don McDaniel, the CEO of Canton & Company. Don engages with pioneering healthcare firms across the industry, all striving to win in the new health economy. A true market-maker, he focuses on advancing innovation, elevating market positions, and connecting complementary players to disrupt and reshape the industry.  Don McDaniel is a healthcare visionary, master economist, serial entrepreneur, and lover of a good debate.  In this episode, he will provide insight into the continued increase in the appetite of private equity and other institutional investors.  He will discuss whether this interest is good or bad for consumers, patients, providers, payers and other stakeholders.  He will also overview the interest level and forecast of investment activity, explore pros and cons from various stakeholders’ perspectives, and consider the implications of such investment on the value movement.  If you are a business leader trying to understand current investment trends and whether or not institutional equity actually improves the overall industry health of healthcare, this episode is for you!

Private equity (PE) has been ramping up investments in healthcare over the last several years. Read this brief to learn more about the intersection of PE and value-based care, including potential negative and positive impacts, and recommendations for industry stakeholders.


Episode Bookmarks:

01:30 The valuation of private equity deals in the US health care sector is nearly $100 billion dollars—a twentyfold increase from 2000 (when it was less than $5 billion).

02:45 Introduction to Don McDaniel, the CEO of Canton & Company

04:45 The number of healthcare services deals among institutional investors has more than doubled in the last six years, with 356 deals in 2015 and a whopping 733 deals in 2021.

06:30 The system is broken.” – Investment fervor is based on the “train wreck” that is American healthcare.

07:20 The arbitrage opportunity for capital investment based on historical spending and inefficiencies

08:10 Referencing Jim Collins: Confront the Brutal Facts (from Good to Great)

08:30 How negative labor productivity in healthcare contributes to dysfunction

09:30 If the airline industry had the safety record of healthcare, no one would get on a plane.” (iatrogenic errors creating bad outcomes)

10:00 “Healthcare lacks true consumer sovereignty.”

10:30 Adam Smith’s “invisible hand” has been missing from healthcare since 1965.

11:30 Consumer dissonance drives system inefficiencies and how that is attractive to investors.

12:10 “Healthcare is a credibly inefficient business backed by massive tailwind demand.”

12:30 The impact of an aging population on our nation’s healthcare system

13:45 Opportunities with massive consumerization and privatization of Risk

14:30 Private Equity investment activity at an all-time high

15:20 The international opportunity for healthcare disruption across the globe as the American system undergoes transformation

15:40 Early indications of inflationary pressures and other macroeconomic factors on private equity investment activity

16:15 Referencing “It’s the Prices, Stupid: Why the United States is so Different from Other Countries” with regard to lack of cost transparency

16:50 Dry powder and competition for deals in private equity

17:30 Health care spending is projected to grow at an average annual rate of 5.4 percent until 2028 where it will then reach $6.2 trillion

19:00 Referencing recent Credit Suisse report illustrating single-digit VBP penetration

20:00 Value-based payment transformation from CMMI in the Medicare and Medicaid payer segments

20:30 How employers transitioning from unfunded pension liabilities compares to the value shift in American healthcare

21:50 Medicare Advantage risk transference and how other payers are replicating that model to transfer risk to providers

22:40 How capital investment drives innovation in provider risk sharing

23:00 The lack of financial incentives and capital access for primary care providers

23:45 The misappropriation of “value-based care” and how the multidimensional aspects of industry transformation often get overlooked

25:00 Fee-for-service Medicare as a regulator (more than it is an actual payment modality)

26:15 Investments to “build a better mousetrap” in fee-for-service (without actually transforming payment models, population health, safety, etc.)

27:30 How the third party payer system creates an obscuring of economic benefits without actual consumer-centric orientation

29:30 Global payment and risk transference is ultimately where we are going in American healthcare.”

30:00 Referencing Livongo’s value-based care innovation for diabetes and how that propels the concept of Regina Herzlinger’s “focused factories

32:15 How value-based care is bringing about a more holistic view of healthcare investments (e.g. loneliness prevention, food insecurity, housing)

33:20 Upstart health plans that have already raised hundreds of millions in funding with $1 billion+ valuations (e.g. Oscar Health, Clover, Bright Health, Collective Health, and Devoted Health)

33:45 1 in 5 physician transactions involved in primary care practices where they are getting acquired for $5k – $10k per MA life!

35:00 The misnomer of excessive profit margins with publicly-traded payers

35:30 The need for physicians to be leading value-based care transformation and the opportunity for advancing primary care

37:30 Reimagining the mental model for a consumer-centered and omnichannel approach to primary care

38:45 How to leverage capital investments to support a value-focused business model for specialists

40:00 The future of specialty-based mixed payment models (e.g. FFS, sub-capitation)

41:00 The antiquated nature of legacy payers and how that has stymied value-based care innovation

42:00 How “digital MA payers” are leveraging data to impact social determinants of health

43:00 Referencing commentary from ACP and a recent JAMA study suggesting undue influence and corporatized influence of profit-focused investors

44:20 How concerns about PE-backed Direct Contracting Entities led to the launch of the ACO REACH model

45:20 The importance of having a lens to balance scrutiny of private equity with the perceived benefits of innovation

46:30 Where would we be if we didn’t have the private infusion of capital in the healthcare sector?

47:00 Do nonprofit hospitals provide more community benefit (i.e. uncompensated and charity care) than for-profit hospitals?

48:00 Federally Qualified Health Centers (FQHCs) and how they approach Board Governance representation from community members

49:30 Are concerns about physician equity ownership warranted?

50:00 “Value-based care is raising the stakes for how we view overall value.” (e.g. hospital-acquired infections, cost transparency, variance reduction)

51:30 A free market perspective on why excessive regulation on capital investment may not be in our best interest

52:00 Referencing the moratorium on physician-owned hospitals while they were, in fact, better performers

52:40 There is massive information asymmetry in healthcare and private equity forces transparency to facts.”

53:00 Much of the horizontal consolidation among hospitals and other providers and business arrangements in the supply chain have resulted in higher costs.

54:30 “COVID was the conducer, but not the creator for value-based care adoption.” (e.g. workforce development, virtual care)

55:30 Inflation will accelerate the pathway to global budgets and value-based payments.”

56:40 How fast will the movement to value happen?

58:00 Is alignment of value-based care incentives to process measures the right way to go?

58:40 Investment capital is the lifeblood.  It is the forcing innovation driver…and we need it!

59:30 Large retailers like Walmart, CVS, Amazon, Walgreens, and Target are all bringing consumerism to the forefront in healthcare

61:30 The definition of health is broadening in a way that includes enhanced economics and social determinants.”

63:00 How non-traditional healthcare participants are creating disruption through workflow innovations

64:00 Referencing Best Buy, Walgreens/VillageMD, and Dollar General as examples of innovations in the distribution channel for care delivery

66:00 Fiat disruption through regulation may hurt investment potential in healthcare.