Valuation Implications of Value-Based Care

Aetna’s goal is for value-based payments to be 75% of their provider payments by 2020.  As of 2014, just over 50% of hospitals and 30% of physicians received value-based care payments.  It is safe to say that value-based payments are here to stay, and implementation will accelerate at a faster rate over the next five years.  Hospitals and physicians, who typically hold these contracts, are slowly realizing that they cannot build or own it all themselves and are turning to technology vendors and ancillary healthcare service providers to fill the gaps.

Historically, hospitals have never engaged the patient beyond the walls of the hospital.  Sure, they have had educational events and distributed pamphlets promoting good health, but these all came from the marketing department.  With more hospitals and physicians participating in value-based care programs, they have entered a new frontier of truly engaging patients where they live and work. As many have failed, they have turned to technology vendors and other healthcare service providers for help.  Technology vendors and healthcare providers with true patient engagement solutions have been rewarded with expanding valuations.

The Technology Vendor:

The acceleration of value-based care means opportunities abound.  Data management and clinical and predictive analytics have been all the buzz for the last few years, but patient engagement is starting to become the key focus.  Whether it is remote monitoring, identifying gaps in care or engagement apps and rewards, technology is becoming a primary diver in patient engagement. There have been number of technology companies that have been in the patient engagement business long before healthcare reform.  Mostly they have worked with disease management companies, commercial health plan or directly with employer-sponsored health plans.  However, many more have come onto the scene since the implementation of the ACA as more providers finally catch up with the technology revolution.

While it is becoming a crowded marketplace and the sale cycle of selling to hospitals and physicians is painfully slow, these are generally “sticky”, long-term contracts.  As value-based care providers mature, they will begin a process of limiting the technology vendors that providers engage.  This is already driving consolidation among technology companies as those that seek to become a comprehensive population health solution acquire for the purpose of filling strategic gaps in their offerings.  The size of the opportunity, lengthy contracts and an acquisitive market has resulted in higher valuations.  Valuations have come down slightly from mid-2015, but are still strong.  There have been exceptions on either side of the range, but in general over the past 12 months, valuations have ranged between 1.5x and 3.5x revenue for companies under $25 million in revenue.

For a complete list of transactions, please email me at and I will send you an Excel spreadsheet of healthcare M&A and capital raise transactions.

Healthcare Service Providers:

Another sector that is benefiting from value-based care is healthcare service providers that serve patients where they live and work.  This includes a number of segments, but to name a few, they include wellness, home care, physical therapy, occupational/workplace medicine, skilled nursing facilities and other emerging segments.  These providers are patient engagement specialists and will see a patient many more times than a hospital or even physician during an episode of care. Hospitals are realizing they cannot own it all and need to closely align with those community providers that will engage the patient on an intimate and regular basis.  However, there are some challenges.  To control quality and standards of care, value-based care providers are limiting the number of service providers they partner with.  This can leave out a large number of companies, which can significantly diminish their referrals.

Initially, hospitals and physicians treated patient engagement providers as vendors, awarding contracts to the lowest cost provider.  However, this is changing.  In value-based care, quality of service finally matters, and the smart value-based providers are truly partnering with those that can help improve patient engagement.

Providers that have been successful in partnering with value-based care providers have been able to demonstrate three key points: 1) They truly understood value-based care and their role in continuum, 2) They had the systems in place to execute, 3) They could minimize the risk for the hospital or physician.

Because this is a broad segment, valuations for healthcare services providers vary widely.  In general, they have ranged between 3-8x EBTIDA.  We’ve prepared valuation reports for each segment of healthcare services providers.  You can receive a copy by emailing me at and letting me know which segment you are interested in.

—Chip Measells