The Growth of Alternative Payments in Healthcare: 3 Considerations for Investors

By Patrick Pilch

The shift to value-based reimbursements from volume-based fees stands to significantly impact business models and competition in the healthcare industry. And with that shift well underway—the Centers for Medicare and Medicaid Services (CMS) launched a bundled payments program in April 2016—investors in the healthcare space need to understand the effects, trends and opportunities that new alternative payment methods provide.

In the BDO PE Activity in Healthcare Report: How Bundled Payments Will Impact Healthcare Investment, we explore takeaways and implications for investors looking to succeed in healthcare amidst the changing regulatory landscape.

  • Bundled payments are on the rise. CMS’ first mandatory bundled payment program focuses on the outcomes of Medicare-covered hip and knee replacements from surgery through 90 days after initial hospitalization. This payment model changes how care is managed—specifically, with regards to post-acute care providers—and reimbursed. While this first program is centered on joint replacements, CMS’ goal is to tie 90 percent of all Medicare payments to quality or value-based outcomes by 2018, indicating that bundles will likely grow into other areas. Additionally, commercial payors tend to follow CMS’ lead when it comes to payment methods; thus, interest in bundles will rise in 2017. Post-acute care investors should take the time now to assess the future impact of bundled programs on referrals and revenue.
  • Investor interest in post-acute care will increase. As the business of healthcare adapts to regulatory changes, investor interest in the post-acute care space—including long-term care facilities, rehabilitation facilities and home health agencies—is growing. In 2015, a total of 79 deals were reported in this space, up from 71 in 2014. Additionally, deals were valued at $5.92 billion, compared to $1.67 billion in 2014. And while the quantity of private equity deals in the sector decreased in 2015, average deal size was up radically, totaling $2.37 billion, compared to $208.4 million in 2014. With strategic investors and private equity partnering on deals more often, we expect to see rising valuations for post-acute care businesses that can prove they are performing well.
  • Now is the time to scale up. Larger organizations have the upper hand in the changing healthcare environment, as they have the resources to grow and improve clinical care and outcomes, leading to better financial results. Whereas smaller organizations, such as family offices, are burdened by the transformations required to stay in business. Investors should pay close attention to the development of healthcare networks—in other words, the alignment of the hospital, ambulatory care and post-acute care providers.

As the healthcare industry continues to make the change toward value-base reimbursements through bundled payments and alternative payments programs, investors must assess their portfolios for both opportunities and weak links. Success will mean better understanding where they are in the healthcare provider chain and getting savvier about addressing and adjusting to new mandates.

Want to learn more about how CMS’ new bundled payments program and other alternative payments methods impact healthcare stakeholders? Check out BDO’s on-demand webinar, The Impact of Bundled Payments on PE Deal Activity in Healthcare, and keep up with the BDO Center for Healthcare Excellence and Innovation by following us on Twitter at @BDOHealth.

Patrick Pilch is managing director & national Healthcare Advisory leader with the BDO Center for Healthcare Excellence & Innovation. He can be reached at ppilch@bdo.com.

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