On Monday, Fresenius (more specifically, Fresenius Health Partners, the value-based care division of Fresenius Medical Care North America), InterWell, and Cricket shook up the kidney care space by announcing a merger. The combined entity has a $2.4 billion valuation, will operate independently under the InterWell brand and be fully consolidated under Fresenius. The combined InterWell will seek to manage total cost of care, with 100,000+ covered lives and $6 billion in medical cost under management today. It expects that to grow to 270,000+ covered lives and $11 billion under management by 2025, in part driven by moving to managing earlier-stage CKD.
InterWell was created in 2019 as a Joint Venture between Fresenius and 650+ nephrologists who banded together to leverage Fresenius Medical Care’s value-based care infrastructure to drive more value-based contracting. These two have been operating with a program centered around a renal care coordinator program that works with nephrology practices to drive better outcomes.
The InterWell JV apparently was going well enough that it raised a $46 million round in 2021 from over 1,000 nephrologists (from 55 nephrology practices in 31 states) that are part of the InterWell Health Network. Feels like there’s a lot to learn for the VC community in physician stakeholder management in a round like this.
Cricket has been on its own path in the value-based kidney care space. It has raised $110+ million in total, with a $83 million round most recently in August 2021, from a handful of leading investors including Oak HC/FT and Valtruis (Welsh Carson’s value-based care arm).
Cricket is generally lumped in with other highflying kidney care disruptors including Strive Health, Somatus, and Monogram Health. Yet beyond a deep relationships with Blue Shield of California and Cigna in California (both payors were investors in Cricket), it is unclear how Cricket was scaling with both payors and providers.
Cricket’s core strength lies in its technology, and specifically its predictive analytics platform that risk stratifies CKD patients. This, along with its patient engagement platform, was called out in the press release as a key factor in the acquisition.
It’s a big bet on value-based care in kidney care. Dialysis has been one of the poster children for the ill-effects of FFS care, which is opening the door for payors to move it to risk. You have CMMI rolling out the Kidney Care Choices (KCC) model, and it appears Fresenius is positioning itself to be the leader in this space. The combined entity here will help InterWell meet requirements to take on full cost of care within KCC (specifically the CKCC Global Option). Given the JV relationship between InterWell and Fresenius Medical Care, it is not hard to envision why Fresenius wanted to fully consolidate InterWell’s 1,400 nephrologists if it is bullish on the growth of global risk capitation. This seems like a bet VBC is here to stay in kidney care, and Fresenius is looking to get in front of it.
It shows healthcare continues to be a scale game. The deal also highlights the benefits of scale in healthcare. The crux of this deal is the 1,400 nephrologists and the payor contracts those nephrologists are able to sign up (i.e. see this deal with Humana in Medicare Advantage and Commercial). Cricket’s technology is a great enabler to support those providers performing against those contracts, but the name of the game is still how you get those 1,400 providers and negotiate those payor deals. This should be a massive watch out for early stage care delivery organizations raising huge rounds at astronomical valuations.
An incumbent recognizes value in a good technology platform. The decision to fold Cricket into this acquisition - and calling out Cricket’s technology as a key reason for doing so - seems to be an implicit acknowledgement that Fresenius needs to partner and not build this specific capability in terms of its value-based care platform. While we’ve called into question the investment that next gen primary care delivery orgs are making in technology, Cricket’s value feels more discrete when looking at the kidney care space - i.e. the press release calls out the value of its machine learning in risk stratifying patients. A few years back I’m not sure an incumbent like Fresenius would have seen value in acquiring a platform like Cricket, as evidenced by its choosing to build a VBC enablement player on its own, which seems like a sign of maturation in digital health.
We should expect more of these new school / old school mergers. This appears to be the logical conclusion of the points above, and we should expect to see more of this type of activity as the digital health space matures. As incumbents realize they need help entering a new era and VC-backed startups realize they need partners to scale, it seems like we’ll see more new school - old school combos over the coming years. Between Honor / Home Instead and this deal, we have two good examples in the last year. M&A bankers are in for a good couple of years.
Things to keep an eye on:
Fall out in the kidney care market. One of two logical buyers is now presumably off the market as an exit for Strive, Somatus, and Monogram. DaVita has been dabbling in similar VBC arrangements with payors and nephrologists (see Nephrology Care Alliance, for example), so it’s not hard to imagine DaVita looking to secure a similar capability. Do we see DaVita make a big acquisition in reaction to this?
Implications for VC-backed next gen care delivery. We’ve seen the public markets turn and compress valuations. Care delivery startups with significant growth expectations baked into high valuations may be looking at flat or down valuations as that compression comes down to private markets, and an exit like this may be viewed as a safe return for investors. Do we see more high-flying startups seeking a decent exit now versus continuing to raise large rounds?
Cultural integration between new school and old school. All M&A integrations are hard, but bringing together a VC-backed, tech oriented startup with an older-school provider mindset seems particularly challenging. Will InterWell be able to bring both competencies together effectively and continue to scale?
Fresenius’s FFS vs VBC interests. Fresenius further integrating a VBC business alongside its FFS dialysis business presents the same organizational design challenges healthcare delivery has dealt with forever in implementing value-based care. The KCC model encourages in-home dialysis and early transplants, both of which eat into Fresenius’s core FFS dialysis business. Will they successfully navigate their organizational design internally?