Primary Care: Healthcare Costs & Consumerization Driving M&A

Key Learnings

• Primary care is a large, growing, highly fragmented sector primed for M&A.

• Rising costs and consumerism across healthcare are driving opportunities for platforms to differentiate and create value.

• Eight primary care subsectors show promise with attractive trends generating investment opportunities.

Primary care is a large, expanding sector undergoing significant evolution and spurring increasing investor interest. In the U.S., primary care is quickly approaching $300 billion in revenue with strong and steady growth. [1]

The sector remains highly fragmented, characterized by many small providers who have yet to employ technology to manage their practices at scale. Recently, capital has started flowing into the sector, both to invest in consolidation plays and to support the development of more sophisticated care management capabilities and digitally focused offerings for specific populations.

There are several ways for investors to play this sector, within which M&A will continue to accelerate. Here, our senior professionals share their perspectives on the primary care market landscape and sector trends creating investor interest and M&A opportunities.

Featured Professionals:

James Clark, Managing Director 
Dan Linsalata, Managing Director
Nick Owens, Director
Michael Mahoney, Vice President

Essential to Managing Healthcare Costs

Defined as the provision of frontline healthcare services by physicians and their care teams, primary care encompasses most personal healthcare needs, typically involves sustained partnerships with patients, and is practiced in the context of community. Given the ubiquity and importance of primary care, it plays a critical role in managing rising healthcare costs.

U.S. healthcare spending rose to a record-high $4.3 trillion in 2021, accounting for 18.3% of total U.S. gross domestic product. [2] With this rapid growth in spending, managing costs and improving quality within the healthcare system are strategic imperatives for all constituents, and primary care providers are in a critical front-line role.

For example, value-based care (VBC) is a healthcare delivery model in which providers are paid based on patient health outcomes as opposed to volume. “Primary care is the gatekeeper of healthcare services and costs, responsible for identifying and managing chronic conditions and disease states,” says Clark. “Recently, sophisticated primary care providers have entered arrangements with payors and employers to take on risk and deliver on VBC initiatives by providing services that lead to a lower overall cost of care and improved patient outcomes.”

There are a variety of VBC models, including upside only, upside/downside, and full risk structures. “Providing high-quality care at lower cost requires proactive management of a patient’s care to reduce high-cost downstream care,” he explains. “If downstream care can’t be avoided, then managing that care based on data-driven clinical pathways and into fully aligned specialist networks is critical to success.”

Consumerism Creating Growth

Patients have more choice than ever for their healthcare, and increasingly desire affordability and convenience, including access to clinics in attractive locations, virtual scheduling, telehealth, and app-based connectivity. “To address the rising importance of consumerism, providers are now employing more sophisticated technology and unique care models,” says Linsalata.

A major trend is an increased emphasis on retail-like health clinics that address areas like primary care, which consumers value for their convenience and speed. “Providers that engage with existing and prospective patients in an easy-to-access, convenient way are positioned to gain market share,” he adds.

Consumerism has also led to the growth in Medicare Advantage (MA) health plans, with the share of eligible Medicare beneficiaries enrolled in Medicare Advantage more than doubling since 2007 to 48% in 2022. [3] Owens notes that these plans compete for members by offering incremental services not covered under the traditional Medicare benefit. “The penetration of Medicare Advantage has created greater opportunities for primary care organizations who serve these populations to participate in value-based arrangements with MA payors,” he says.

M&A Themes Across Eight Key Sub-Verticals

The primary care landscape is broad and diverse, with attractive trends creating high-value opportunities for investors. Below, we’ve defined eight core subsectors to watch and the M&A dynamics within them.

Please contact our senior bankers to discuss opportunities across eight key primary care subsectors.

TRADITIONAL AND VALUE-BASED PRIMARY CARE

Given the trajectory of value-based care, more high-quality primary care providers are entering risk-based arrangements to capitalize on the model’s upside. “This shift toward taking on risk offers an actionable growth opportunity for many mid-sized players that manage patients appropriately, and it drives stronger alignment with key stakeholders,” says Clark.

Within value-based primary care, organizations are also increasingly taking control of the management of specific populations, such as the elderly. For these Medicare-eligible populations, this is generally achieved by contracting with Medicare Advantage plans, or by starting or joining an Accountable Care Organization (ACO).

ACOs follow a similar coordinated care approach, but providers function as the plan and the provider, taking risk directly. “These groups of doctors, hospitals, and other healthcare providers come together voluntarily to provide coordinated, high-quality care to Medicare patients,” explains Owens. “As these providers reduce the overall cost of care for a patient population by better coordinating and managing care, they share in the savings generated for Medicare,” he adds.

“Underscoring the strategic importance of risk-based primary care models are the M&A priorities of some of the largest healthcare players in the U.S.,” notes Clark. “United Healthcare (NYSE: UNH), Humana (NYSE: HUM), and CVS Health (NYSE: CVS) have all been actively pursuing scaled risk-based primary care providers over the last year,” he says. CVS, for example, recently acquired Oak Street Health and its collection of value-based primary care offices in a $10.5 billion deal. [4]

HOUSE CALLS / SENIOR FACILITY-FOCUSED

Another key area of primary care is distinguished by the site of care or how providers aggregate patients. “Both MA and ACO-focused providers have employed care models focused on reaching underserved communities where access is difficult,” says Mahoney. “This can mean providers seeing patients in their homes, assisted living facilities, or skilled nursing homes.”

Recently, there have been several investments from private equity and venture capital in this model of care, which sits between two fundamental healthcare themes of value-based care and care shifting into home-based settings. Clark believes this model will continue to gain traction, as many of these home- or facility-bound patients can also be the costliest. “Primary care models that integrate nursing, behavioral health, and a strong care management capability for these populations are set to gain popularity,” he says.

PACE PROGRAMS

Programs of All-Inclusive Care for the Elderly (PACE) provide comprehensive medical and social services to elderly individuals, most of whom are dually eligible for Medicare and Medicaid benefits. An interdisciplinary team of health professionals provides coordinated care to PACE participants, with the intent of keeping them aging at home rather than in a care facility.

“While many of these programs are not-for-profits, the past several years have given rise to a number of private equity investments within PACE programs, which are typically converted to for-profit status upon the investment,” says Owens. “There have been several large PE investments in this space, as well as several more growth-equity investors starting platforms under PACE,” he adds.

DIRECT-TO-EMPLOYER PRIMARY CARE

A subsector with growing interest is the multibillion-dollar market served by companies that supply healthcare directly to self-insured employers. Most large employers offer health coverage to their employees and their families and have been facing steep hikes in the cost of care for years.

To better manage these costs, employers are often partnering with primary care providers to offer employees high-quality, cost-effective healthcare through on-site and near-site wellness centers and virtual care models. In addition to primary care, they frequently provide other services such as pharmacy, optometry, dentistry, physical therapy, and even infusion to make healthcare more accessible.

“By dedicating primary care resources in this way, physicians can spend more time with patients and manage their care more proactively, often avoiding higher-cost specialist care,” points out Clark. “When specialist care is required, these providers use clinical outcomes data to direct patients to the highest quality specialists, often in a narrow network model.”

BOUTIQUE / CONCIERGE / VIRTUAL CARE

The increasing consumerization of healthcare is driving several new boutique and virtual primary care models. An exemplar in this space is OneMedical, which began as a boutique membership model in which patients could pay a modest annual membership fee to access semi-concierge primary care clinics, physicians, virtual care, and mental health professionals. OneMedical has agreed to be acquired by Amazon (NASDAQ: AMZN) for $3.9 billion and is awaiting regulatory approval. [5]

“OneMedical also markets its solutions to employers to serve their employees with higher-end service, and versions of this model have been deployed by a number of other companies as well,” notes Clark.

URGENT CARE

Urgent care, a $45.9 billion market, emerged as an investment theme over a decade ago and has since spawned dozens of private equity-backed platforms across the country. [6] Over time, these retail clinics offer a less expensive and more convenient alternative to emergency room (ER) visits.

Urgent care has also replaced traditional primary care services for nearly half of individuals without a dedicated primary care physician. That number is even higher among younger patients who commonly visit urgent care for physicals, cold and flu symptoms, and other basic health needs that are traditionally treated in a primary care setting.

“As urgent care has grown, businesses have started sub-specializing within areas like pediatrics and orthopedics,” says Mahoney. “The model has shifted from competing with the hospital ER to partnering with the health system to serve their communities in more effective and convenient ways.”

VALUE-BASED CARE ENABLEMENT PLATFORMS

Aside from provider-based opportunities, investors are also interested in an emerging group of businesses that partner with primary care providers to deliver the most effective and efficient healthcare while meeting contractual commitments with payors. 

“These companies represent opportunities to invest in value-based care outside of providers or health plans, and consist of platforms offering technology and data analytics solutions,” explains Linsalata. This includes: 

• Utilization Management, which controls the type and volume of care being delivered.  

• Care Management, which consists of a wide range of tech-driven capabilities that can identify high-risk patients and prioritize and coordinate their care across different types of providers around the clock. 

• Quality Management, which are often workflow and analytical tools that enable providers to find and address gaps in care and other specified quality metrics in real time, at the point of care. 

• Coding, which involves providing services or technology to provider groups that help them code more accurately to ensure all patient diagnoses are captured correctly, and physicians are paid for services provided. 

• Risk Scoring, which entails services or technology that accurately assesses the overall health of a population of patients for which providers are at risk. A population's risk score is directly correlated to the amount a provider is paid by the payor.

Attributes of Winning Primary Care Companies

There are a wide variety of ways to invest across primary care, and several stand-out differentiators can help buyers identify best-in-class assets.

For example, a strong management team is a top success factor, but that can mean different things depending on the type of primary care company. “Some primary care models favor teams with strong multi-site experience, while others need more clinical expertise. Value-based care models, on the other hand, require experience in risk-based models,” says Clark.

Linsalata adds that all these companies need sophisticated technology solutions to manage clinical care and operations: “Value-based care businesses also require data analytics and insights engines that work at scale and across broad populations.”

For provider-based models, Clark explains that scale and density are required to attract top clinical talent and have a meaningful place in the ecosystem with payors and health systems. “We continue to see top businesses have exceptional revenue cycle management tools and teams. It's complex to bill and collect for services in healthcare, and companies with size and sophistication will be best positioned to do so and continue to grow,” he says.

Within primary care, healthcare costs will continue to rise, and the consumerization of healthcare will be an important trend for years to come. Due to these forces, M&A will accelerate throughout the market’s eight core subsectors, creating high-value opportunities for companies with digitally driven solutions and unique care models.

To learn more about these primary care opportunities, please contact our senior professionals.

1. https://www.grandviewresearch.com/industry-analysis/us-primary-care-physicians-market 

2. https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet 

3. https://www.kff.org/medicare/issue-brief/medicare-advantage-in-2022-enrollment-update-and-key-trends/ 

4. https://www.sec.gov/Archives/edgar/data/64803/000094787123000133/ss1747225_ex9902.htm 

5. https://www.healthcarefinancenews.com/news/amazons-39-billion-acquisition-one-medical-moves-step-forward 

6. https://my.ibisworld.com/us/en/industry-specialized/od5458/industry-at-a-glance