Create Your Own Luck: How Private Equity Funds Can Succeed in Value-Based Care
With the potential for high returns and reduced cost of care, private equity (PE) funds have shown a persistent interest in the value-based care (VBC) sector.
However, the realities of operating a VBC business in normal market cycles have led sponsors to move beyond the broad thesis and focus on execution. PEs must assess data infrastructure, operational capabilities, and product fit to determine whether a business can actively realize consistent returns through risk.
Due diligence has shifted focus and must assess whether a company has the systems, actuarial rigor, and visibility required to consistently deliver against its contracts |
The commingling of the administrative costs to drive the VBC levers with the fees needed to run a standard management services organization (MSO) has created additional diligence requirements. In response, due diligence has shifted focus and is no longer limited to financial modeling. It must assess whether a company has the systems, actuarial rigor, and visibility required to consistently deliver against its contracts. Disciplined payer contracting, proper patient diagnosis and coding—increasingly shaped by the Centers for Medicare & Medicaid Services (CMS) Version 28 (V28) risk-adjustment overhaul—and member engagement and incentive programs for providers and the entire care team are crucial components of driving overall success.
There are many pitfalls VBC organizations can fall into and many risks outside of their control. It is important to differentiate VBC organizations that have been successful due to fortunate timing from those that have driven utilization through systems and processes. However, this isn’t always easy to do. Over-investment in technology without a demonstrable impact on revenue or medical expense has created technology expense overhang for some organizations that is difficult to unwind.
While some VBC organizations fell into success due to opportune market conditions, PE funds can make their own luck by backing operators that demonstrate consistent performance, actively directing care delivery, monitoring and managing risk, and establishing comprehensive systems and data architecture.
The Gap Between VBC Promise and Performance
VBC models can utilize access to patients to help decrease overall healthcare costs, but many businesses are doing little VBC after transactions.
There has been a lot of deal flow in the US healthcare and VBC markets. A&M expects the global VBC services and enablement market to see robust growth, with some groups, such as Coherent Market Insights, predicting it to reach $43.39 billion by 2031.[1] Some deals are sophisticated while others are simpler, and deal types vary across geographies. While Florida and California have robust, defined markets, other regions are still emerging and maturing. Primary and sub-specialty clinical providers delivering services within skilled nursing facilities are particularly popular investment targets. VBC models are attractive because they can utilize access to patients to help decrease overall healthcare costs. However, many of these businesses do little VBC in practice.
VBC adoption has been slower in many European countries, such as France and Germany, than in the US. In France, uptake of capitation models has been limited by the difficulty of adjusting information systems and uneven quality monitoring, while in Germany activity remains concentrated in a small number of quality contracts and local pilots.[2], [3] However, the sector is more advanced in the Nordics and patches across other Western European countries due to robust nationwide registers.[4] Unlike in the US, A&M has found that European PE groups are not as interested in the market. Instead, various impact funds with sustainability-focused investment theses are the main driver of VBC investments.
Additionally, investments in the European nursing- and care-home space have their own hurdles to overcome. Workforce challenges stem from inflationary cost increases, changes in access, and the shift in the source of the primary workforce from Eastern and Central Europe to Asia and Africa. Elderly care businesses still generate some interest, but many investors have pulled, refinanced, or considered continuation vehicles for specialist care in the UK and Europe.
Despite investment, many businesses that have already been doing VBC haven’t seen as much success. In A&M’s experience, maturity shows a meaningful lag, with membership cohorts taking approximately four years to reach a level of maturity that results in meaningful earnings. Additionally, despite more than a decade of adoption, many VBC-exposed businesses still lack a stable, underwritable earnings profile. Recent utilization trends exposed the fragility of underwriting assumptions, with higher-than-expected costs and limited real-time visibility into performance. Regulatory changes and geographic variability in payer sophistication and contract structures have further reduced transparency into contract-level profitability.
A common deal pattern persists: businesses still acquire assets based on future VBC upside with limited current contribution from risk-based models.
Capital Allocation Is Shifting Toward Data-Backed Enablement Models
Integrated data environments capable of real-time monitoring and decision making are critical for effective VBC participation.
Investors continue to pursue risk-bearing platforms, but outcomes vary significantly based on infrastructure maturity. Capital is increasingly flowing toward enablement models—analytics, payer services, and revenue cycle management—offering exposure to VBC without full risk assumption.
Independent practice association and MSO structures highlight the divide between organizations that actively manage contracts and those that lack performance visibility. In physician practice management, the focus has shifted from scale to building the data capability required to take on risk.
Effective VBC participation requires integrated data environments capable of real-time monitoring and decision-making. Leading platforms demonstrate visibility into member-level performance, provider variation, and contract outcomes. Less mature organizations rely on delayed or incomplete data, limiting their ability to manage risk proactively.
Variability in payer data quality further elevates the importance of strong internal systems and actuarial frameworks.
V28 Is Shifting Risk Strategies
Many VBC programs are funded by CMS, which uses hierarchical condition category (HCC) risk adjustment models to determine the appropriate level of funding. Through the introduction of V28 of its rules, CMS has updated how risk adjustment scores are governed, resulting in potentially material impacts to funding levels.
Accurate patient coding and diagnosis are increasingly important under V28’s updated rules.
These rules help payers determine how sick populations of patients are to determine how many dollars should be allocated to the entities caring for them. For example, if the population is older or at risk, more money is allocated to providers. This cash is allotted to healthcare organizations for covering patients rather than seeing them, incentivizing organizations to accept patients onto their panels regardless of the patients’ initial health statuses.
V28 is a more sophisticated mechanism than Version 24, the previous model, for judging how to risk rate patient populations. Under the updated rules, HCC categories increased from 86 to 115, which should increase the precision of assigning a diagnosis.[5] However, it is expected that risk scores will decrease relative to the prior model across many condition categories. These trends increase the importance of complete and accurate clinical documentation so that coded diagnoses reflect each patient's true health status. When documentation is accurate, funding follows patient acuity as CMS intends; when it is not, organizations carry both revenue risk and audit exposure.
Sophistication in tracking and monitoring and understanding population and risk taking is where VBC organizations see success and take risk off the table.
However, most of the time, it is the payers that own and house the data, making it difficult for providers to get reliable data. Providers often lack visibility into risk adjustments and must wait to find out whether they’ll receive a bonus payment. Because of this opaqueness, it’s critical to have the right data leverage in contract terms. Data is also critical in transactions, as many deals fall through when historical profitability is threatened by future data issues, leading to additional diligence considerations.
Diligence When Revenue Is an Estimate
VBC due diligence must focus on the reliability of estimation methodologies, data inputs, and actuarial assumptions, not just reported results.
VBC revenue is inherently driven by estimation, with cash validation often lagging performance by one to three years. Cohort maturation adds complexity, with earnings profiles taking several years to stabilize.
As such, diligence must focus on the reliability of estimation methodologies, data inputs, and actuarial assumptions, not just reported results. This often leads to an escalation to specialized expertise to fully assess revenue quality and sustainability.
The quality of data affects how well organizations can conduct due diligence, and PE funds and corporates often must combine a variety of data to get a sense of the company’s infrastructure. While some organizations have well-built structures, others don’t have any structure at all.
AI enhances core VBC due diligence functions, such as utilization modeling, risk adjustment, and revenue cycle efficiency, but only where strong data foundations exist. The question organizations need to ask is whether AI is improving outcomes or simply automating existing processes. Without high-quality, timely data, AI provides limited incremental value.
A robust accounting structure gives insights and value to the due diligence process. A focus on operational expenditure and budgeting, along with disciplined underwriting in risk-based markets, can identify cyclical rates and the drivers of costs that VBC players may be accountable for. Failing to account for these can lead VBC organizations exposed to significant losses.
Common Pitfalls of VBC Investments
A&M Perspective
Performing financial analysis alongside robust process and control reviews allows VBC organizations to better manage risk, identify opportunities, and implement V28.
Based on A&M’s experience, a mismatch between the sophistication of the investment thesis and underlying data capabilities is the most common risk factor of VBC investments. Additionally, an overreliance on projected VBC upside without supporting infrastructure remains prevalent. Recurring issues also include weak revenue estimation processes, limited performance visibility, and a lack of operational controls.
Access to patients or contracts alone does not equate to value creation if businesses lack the ability to manage outcomes. Understanding the risks of underwriting and the intermix of product, network, utilization, and seasonality is critical but often overlooked. Sophistication around pricing and the ability to link financial results with risk management and utilization supports the overall scalability of MSO infrastructure. Often, though, VBC businesses have many costs without the scalable infrastructure needed to support them.
A portion of VBC successes came down to timing rather than execution. Businesses that got into VBC before COVID-19 and got out quickly realized success. Meanwhile, those that invested after utilization increased failed to see expected returns.
Investors don’t have to rely on luck. Instead, they can rely on good management, analysis, systems, and practices to make their own success.
Crafting Durable VBC Investments
Operators must have a strong backbone of data and performance monitoring to successfully deliver VBC care and craft durable investments.
PEs have several different strategies for VBC investments. Some take on real risks and own the risk-bearing entities alone while others do so with partners.
Part of the investment thesis for PE sponsors is often whether the current model can be taken beyond existing markets. Investors need to combine strong data infrastructure, operational discipline, and the ability to manage performance in real time to create scalable platforms that can grow into different geographies.
VBC involves a complex data and operating environment, and it requires a backbone of robust data and performance monitoring. Implementing payer contract optimization alongside payer data feeds creates a more data-rich environment that supports performance and growth.
To succeed, operators must:
Demonstrate consistent performance and contract renewal leverage
Direct care delivery based on cost and quality performance
Drive durability by integrating depth and resilience within client workflows
Monitor and manage risk properly
Partner with sophisticated allies
Remain disciplined on the cohort of providers, patients, and payer contracts that comprise the risk portfolio
When all these things are done, VBC organizations no longer need to rely on luck to win in the market.
The Bar Is Higher Than Most Businesses Can Clear
VBC organizations have the potential to create healthcare systems with higher efficiency and lower costs. To realize these opportunities, PE funds need to put in the work.
The level of sophistication required from management, models, and underwriting to operate a successful, long-term VBC strategy is extremely high due to the complexity of several factors. In facing any of these complexities, including future unknowns, failing to achieve adequate sophistication leaves VBC organizations unable to manage change or remain profitable.
Despite the risk, many businesses don’t have that level of sophistication and have either gotten lucky in their success or have not realized success at all. With proper due diligence, risk management, and data management, VBC models can develop the necessary structure and support long-term growth, health, and profit.
How Can A&M Help?
The Healthcare and Life Sciences team within A&M’s Global Transaction Advisory Group creates solutions for clients by providing sophisticated diligence that delivers richer insights and better decision-making. The combined expertise and specialized experience of our professionals in VBC, growth expansion, process improvement, strategic advisory, operational intelligence, M&A, and PE are focused on successful transactions and value creation after the deal.
[1] "Global Value-Based Healthcare Market to Reach $43.39 Billion by 2031," Coherent Market Insights, February 9, 2024.
[2] Noèmie Morize, Isabelle Bourgeois, and Cécile Fournier, "Renewing Public Policy on Healthcare: Experimenting with Healthcare Organisations under Article 51 Scheme," Issues in Health Economics (Questions d'économie de la santé), no. 261 (September 2021).
[3] "World Economic Forum: Value-Based Payment Scheme PROvalue," Heartbeat Medical, January 10, 2023.
[4] EIT Health, Implementing Value-Based Health Care in Europe: Handbook for Pioneers (EIT Health, 2020).
[5] "Announcement of Calendar Year (CY) 2024 Medicare Advantage Capitation Rates and Part C and Part D Payment Policies," Centers for Medicare & Medicaid Services, March 31, 2023.
