Direct Primary Care Industry Insights

Market Trends and M&A Activity
September 2021
The Direct Primary Care (“DPC”) industry remains one of the most sought-after industries for investment by both private equity sponsors and strategic acquirers looking to consolidate or diversify their operations. There are several factors to consider that are currently driving consolidation within the direct primary care industry at substantial transaction multiples, all of which are likely to continue in 2022 and beyond.
First and foremost, the DPC model, in contrast to the traditional primary care model, aims to improve the physician experience that is currently contributing to a shortage of primary care physicians in the US, which in turn supports better care for patients. Growing physician frustration surrounding the traditional primary care model creates an opportunity for DPC companies to retain physicians in the primary care space, as the DPC model provides less personal financial and administrative burden for a primary care physician and more convenience and flexibility in total hours worked. Other notable trends driving the growth in this industry include the increasing national healthcare spend in the US, which poses an opportunity for DPC companies to receive increased demand for services and finally, increased regulatory and employer support for access to direct primary companies and their services.
Presently, there are five private equity-backed platforms. Westcove believes this figure may grow to eight to ten over the next one to three years before existing platforms pursue secondary recapitalizations (“second bites of the apple”). In addition to new private equity sponsors seeking platform investments, Westcove expects existing platforms will continue to expand via add-on acquisitions of smaller practices in local and regional markets to broaden and solidify their market presence across the United States.
In the following white paper, Westcove will highlight each of these trends and detail why the near future may offer a compelling opportunity for direct primary care shareholders and executives to consider a capital raise, acquisition, or private equity investment to help fuel growth in their Companies.
Direct Primary Care vs. Traditional Primary Care
Prior to discussing the trends driving consolidation at record-breaking valuation multiples, it’s important to note the differences between the traditional primary care system and the direct primary care model.
Traditional primary care providers rely on a fee-for-service payment model, where physicians are paid based on the volume of patients treated rather than the value of the care provided. With this traditional model, a patient often leaves the doctor’s office without knowledge of what their insurance will be billed. After deductibles or co-pays are applied and discounts are negotiated between the provider and insurance company, the patient then receives an explanation of what they’re expected to pay for the visit. This fee-by-service billing makes it difficult for patients, and even providers, to understand the cost of care and appropriately prioritize care over income. Thus, this care model often leads to issues such as higher costs for patients, lower levels of patient satisfaction, and worsening health outcomes.
Conversely, the DPC model employs a continuous and relationship-based system between the physician and the patient. Direct primary care is a financial agreement between the healthcare providers and the patient, which aims to remove insurance providers in the transaction. In contrast to fee-for-service models, DPC models look to utilize the most effective parts of value-based care, such as the use of technology and increased physician satisfaction, for the patients or self-funded employers they serve, ultimately driving successful outcomes of their respective patient populations. Patients usually get 24/7 access to doctors as direct primary care patients are usually able to access same-day or next-day visits, given the higher level of emphasis on patient satisfaction. Tele-health options are also frequently implemented such as the option to call, email, video call, or text their healthcare provider. Self-funded employers have increasingly adopted direct primary care models for use by their employees due to the propensity of DPC models to increase workplace efficiency and productivity by decreasing sick leave and lower quality work due to illness. Rather than fee-for-service billing or other volume-based incentives, patients or the employers that offer DPC services are charged a flat monthly fee.
Direct Primary Care vs. Traditional Primary Care
Co-pays, out of pocket costs, and third-party billing are not typically part of DPC models, thus patients and the employers that encourage their employees to utilize DPC services are able to better estimate overall healthcare spend. The DPC model simultaneously focuses on continuous wellness and preventive care for patients, rather than care after the fact. DPC models ensure that patients are able to access routine primary care and mitigate the risks of down-the-line health complications. DPC models, also effectively address the inefficient use of physicians’ time on administrative tasks, which is better utilized concentrating on patients’ needs without the burden of payor-driven demands. Lastly, DPC models are able to lower overall healthcare spend for patients and for self-funded employer plans by utilizing advanced data aggregation and analytics. Many DPC companies utilize proprietary or customized electronic medical record software in conjunction with patient-centric software that better tracks patient utilization of services, patient adherence to treatment, overall progress and ultimately outcomes of treatments. Analyzing these data and focusing on the most effective treatments allows DPC-models to more effectively manage a population’s health, reducing overall healthcare spend for the patient or self-funded employers.

Industry Overview

As stated previously, DPC companies, primarily utilize a subscription and relationship-based sales model that allows consumers to receive continuous care. With the industry being nascent, the pricing structure varies from physician to physician and company to company but can be put into a relative range. The average adult fee for membership is approximately $82.86 a month or $994.32 a year. In higher cost of living areas like San Francisco and New York, companies can charge up to $175 per month. Over 82% of family memberships cost around $50 to $225 per month. These Companies often tailor their clinics and prices to their specific geographic and target market demographics.
Across the country, there are approximately 1,000 DPC practices in 48 states who serve over 300,000 patients. The DPC industry is still in its infancy as only 4.5% of all physicians, or roughly 20,000, have adopted the DPC model or are employed by DPC companies.

Industry Growth Trends

Trends Fueling Growth in DPC

Increasing Physician Frustration & Burnout
Traditional primary care physicians are experiencing greater frustration and burnout due to the regulatory compliance requirements, personal financial issues and greater work hours associated with fee-for-service care. Administrative work, accounts for the majority of this regulatory compliance time spend and contributes a large portion of time drain away from direct patient care. In turn, physicians are leaving medicine to relieve themselves of the disheartening administrative demands imposed by public and private insurance. Because of this, the primary care physician shortage is rapidly growing in the U.S, with an estimated 65,800 physician shortage by 2025. The DPC model relieves administrative tasks to save time and prevent them physicians from burnout. Primary care physicians are also able to reduce their overhead costs due to the DPC company dealing with the administrative burden. There is no need to process paperwork or wait for reimbursements, reducing overall physician frustration.
Growing Trends Towards Preventative Care
Chronic diseases are the leading cause of death in the US and the primary drivers of the country’s $3.5 trillion in annual health care costs. Preventative care offers a long-term solution for this health concern. The traditional primary care model focuses on solely addressing urgent medical issues and “sick care.” However, the DPC model prioritizes routine care which involves regular check-ups to detect health issues before they turn into major medical issues.
Trends Towards Value Based Payments Over Fee-For-Service
The shift away from fee-for-service payments is further driven by governmental trends to build on the regulations like the Affordable Care Act by doubling down on alternative payment models and mandatory payment changes. Specifically, it the Department of Health and Human Services will make fee-for-service less attractive and push mandatory alternative payment models, providing an opportunity for value-based DPC models to grow.

Employer and Regulatory Support

In December 2020, Senators Bill Cassidy, Doug Jones, Jerry Moran and Jeanne Shaheen introduced legislation to lower the cost of healthcare and expand patients’ access to their primary care providers. From this legislation, DPC providers are able to expand their reach to patients. As of 2020, Direct Primary Care laws have been passed in 32 states with pending legislation in 12 states. These laws generally define DPC as a medical service outside of state insurance regulation and offer varying levels of consumer protection. For example, in 2016, DPC provider R-Health, a transaction recently completed by Westcove, was awarded a contract to provide services to members of the New Jersey State Health Benefits Program (“SHBP”). There has also been an increasing number of employers offering employees DPC services. This is fuelled by greater awareness on overall healthspend both in time and money. In addition to managing potential catastrophic claims in the future, employers can achieve up to a 20% reduction in total healthcare costs by offering DPC services.

M&A Activity in Direct Primary Care Space

The above discussion shows the inherent growth and interest both by sponsors and strategics in the DPC industry. Below are select examples of Direct Primary Care transactions completed:

(*) Westcove Partners served as the sole sell-side advisor to R-Health in its sale to Everside Health.

Private Equity Interest
Private-equity firms traditionally have invested in healthcare groups that offer high-reimbursement potential (dermatology, pain management and dentistry). However, with these specialty practices increasingly becoming more expensive, private equity firms have begun to look at primary care practices. These firms prioritize primary care groups that can demonstrate better quality and lower costs in managing medically complex patients which will be valuable in a modern healthcare system that emphasizes cost-effective, efficient and preventative care. Below are examples of private equity transactions in the Direct Primary Care space:
Increasing IPOs
Below are examples of Direct Primary Care companies that have gone public at attractive valuations:

Sources: CMS Data Center, Hint Health, PYA

Print Friendly, PDF & Email