The article was sponsored by The Vistria Group
The conversation in healthcare among key stakeholders such as providers, investors, and policy experts has centered around the need for higher quality care that is less expensive.
For years, the industry has explored the notion of value-based care – the idea that we can move parts (and potentially large parts) of healthcare spend from a model that compensates those providing healthcare for the services they provide to one that compensates them for the health outcomes of those services. It is this model that has expedited innovation in care delivery and opened the door to an infusion of private capital.
This fundamental change in how we pay for healthcare comes against the backdrop of a decline in the overall health of our nation. In 2021, American life expectancy was 76.1 years – down 2.8 years from the 2014 peak of 78.9. We have a population that is aging and is, by and large, sicker across not only serious medical conditions, but mental and behavioral health dimensions as well. In recognition of these changing demographics and the desire to improve outcomes and lower cost, our system has also been trying to better manage the total care of people more wholistically (population health) – trying to integrate once disparate healthcare services or manage the total healthcare spend of certain populations more effectively.
On top of these structural issues is the reality of a very meaningful shortage of clinicians across all parts of healthcare, an issue that was troublesome before the pandemic, but which has now become severe in certain geographies, care settings and specialties.
The combination of these factors, and others, has led to evolving complexity in healthcare, which we believe creates tremendous opportunity for investment. But historical approaches are not enough: a new set of resources from the private sector is needed, as are innovative strategies to navigate the evolution.
Impact is a core driver in value creation
We believe that to succeed in healthcare investing, you must be focused on impact. Impact can mean many things to different people. The Vistria Group has defined impact along multiple dimensions:
- Looking at how our healthcare system (and the companies within it) is delivering scalable access to high-quality care and producing strong health outcomes for patients across socio-demographics;
- Looking at how companies conduct their business: the governance structure they use, the social impact they have on key constituents including employees, and the environmental impact they have on their communities.
There are a number of out-of-the-box measurement tools worth considering, but for those looking to dig deep, like The Vistria Group, we created our own – Vistria Optimal Impact (VOI). This measurement system allows us to work with a diverse set of companies to help them track progress within consistent impact categories through impact metrics unique to them.
As healthcare moves toward a value-based model, impact in the form of health outcomes will be a critical measure of success. It will not only help companies drive revenue, but also help them command higher multiples from investors who value companies that create better health outcomes.
A thoughtful DE&I strategy will also be a strong competitive advantage for companies. In an era when there are fewer clinicians in the workforce who have more employment options than ever, it’s critical for companies to focus on impact-based strategies to recruit employees who will be crucial to patient care and companies’ ultimate success.
American life expectancy in 2021, down 2.8 years from the 2014 peak of 78.9
To continue to retain both employees and patients, we believe you must be focused on creating boards and governance structures that bring unique perspectives and experiences while also building a workforce that reflects the patients they serve.
To do it right, private equity firms must consider impact throughout the investment process, from due diligence and value creation planning to operations and exit, and be able to partner with portfolio companies to systematically measure impact across all of these dimensions.
Leverage the power of the portfolio
Outsized and consistent healthcare sector performance requires more than insights and good timing.
Firms that are able to leverage their existing portfolio to drive new investments and cross collaboration will be better positioned for healthcare investments of the future.
A thematic approach to investing not only identifies places in healthcare that are well-positioned for growth, but it also helps us build a network of relationships from operating and strategic partners. It is these relationships that have most significantly led to The Vistria Group’s investments in spaces like home and community-based services and mental and behavioral health.
Furthermore, companies within our portfolio have provided valuable insights where we’ve been able to identify new, unmet pain points within those subsectors that have led us to tangential investments.
Take Medalogix, a data science and machine learning company, for example. As longtime home healthcare and hospice investors, we saw that solutions were needed to ensure that patients receive the best and most appropriate care from the right providers in a timely manner. Remember, focusing on outcomes over cost per service.
Our investment in Medalogix allows clinicians to identify important insights about patient risk and progress, resulting in improved utilization of healthcare services and patient outcomes, including reduced rehospitalizations, adverse events and early hospice deaths.
Separately, The Vistria Group’s investment in healthcare staffing company Supplemental Health Care has helped us deeply understand the mechanics of effective recruiting strategies – no small feat in healthcare today – which have been shared across our portfolio companies to help them attract more high-performing talent.
Smart investments require more than capital
While some may be exclusively focused on the healthcare sector, investors with the foresight to collaborate across industry verticals will reap the rewards. For us, the synergies with education investments were especially prominent as the healthcare industry navigates evolving labor dynamics.
Getting to the root cause of the supply/demand imbalance inevitably led us to the education sector where there were opportunities to leverage knowledge and learning insights to support the biggest value creation hurdle facing healthcare providers.
We’ve found cross-sector collaboration not only helped to address a pain point for clinical-based investments, but it also mitigated significant future risks which included creative new education-based retention strategies. An added benefit for the education-focused portfolio companies was an untapped revenue stream making the collaboration mutually beneficial across the verticals.
Another valuable resource beyond investment capital is relationships. A strong and vast network of both operating and strategic partners can kickstart a new theme or help accelerate the growth of a portfolio company.
These relationships may be in the form of connections, expertise or insights that are a key differentiator among the competitive set. At The Vistria Group, we appreciate partners who push us to look deeper, question our assumptions, and think outside the box.
Evolution in the healthcare industry is inevitable and the private market is ripe to be a catalyst for positive change. But its capital is not enough. In order to drive long-term success, investors must root their approach in impact, innovation and insights. And the outcomes for both patients and investors will be there.
David Schuppan and Amy Christensen are co-heads of healthcare at The Vistria Group