Reviewing the CareMax & Steward VBC Deal

Diving into CareMax's acquisition of Steward's VBC business

Link (Slides) / Link (Transcript)

CareMax, a Medicare Advantage primary care company that SPAC’d in 2020, announced a fascinating acquisition of Steward’s value-based care business this week. Steward is a Dallas based provider organization that was previously owned by PE group Cerberus, but a group of physicians purchased it back from Cerberus in 2020. Steward currently has ~6,600 providers across nine states.

If CareMax and Steward are successful in converting Steward’s MA FFS lives to MA global cap, this has the potential to be a massive home run for both sides, and it’s understandable while CareMax was willing to give Steward up to 41% of the business in such a scenario. We’ll dig more into the deal below, with a few key takeaways for us.

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An Overview of the Deal

  • CareMax, announced it is acquiring the value-based care business of Steward Health Care System for a total of $212 million ($25 million of cash, $110 million of stock, and a prepaid $72 million receivable for Steward’s MSSP performance), and it will serve as the MSO managing Steward’s VBC lives moving forward.
  • The earnout portion of the deal highlights just how big the opportunity is for both parties here - if 100,000 Steward FFS Medicare patients are converted to risk, and it hits an MLR of 85%, then Steward’s equity ownership of the joint entity will be 41%, up from the 21% current consideration. Both parties clearly see massive potential here. 
  • Steward is selling its value-based care contracts with 171,000 patients to CareMax, which has historically been focused on the MSSP program (112,000 patients), but increasingly is moving into MA capitation deals (50,000 patients) and ACO Reach (9,000 patients).
  • The slide below provides a helpful breakdown of Steward’s geographic reach within VBC contracts - almost half of its VBC lives are in Massachusetts, and MSSP makes up 112k patients out of the 171k VBC patients. As an aside, it’s curious to note how many providers Steward has in Texas (542) compared to VBC lives (22k) versus other states (Florida, for instance, has 123 providers but 30k VBC lives).
  • The deal highlights the upside of global cap contracts, and how meaningfully different they are than other VBC programs like MSSP. Steward’s VBC business will generate ~$40 million of revenue in 2022, primarily off MSSP, and CareMax expects this number to grow to $1.6 billion in 2025, driven by flipping MA fee-for-service patients to global cap.
  • This deal seems to make a ton of sense for both parties here. For Steward, a health system that appears to have hit the limit of its ability to implement and scale VBC initiatives, it gets equity upside in a VBC platform play as well as a cash infusion. For CareMax, it’s a way to drive substantial growth in membership with relatively little cash outlay required compared to other methods of growth. If these organizations succeed in moving Steward’s patient population to MA global cap deals, this relationship seems like a home run for both parties. Will be interesting to see if we see other organizations pursuing similar deals moving forward. 

A couple takeaways that make this a particularly interesting deal:

Shifting Primary Care Innovation Strategies

  • CareMax shows how quickly care delivery startups can pivot between various growth strategies, as it has pivoted from a clinic acquisition play to a de novo clinic play to now an MSO in the past 18 months since it SPACed. Check out how its CEO plays this up as a strength of the organization in the analyst call:
I think one of the things that really separates us, Judd from a lot of other -- from a lot of other competitors is that we've been very successful at executing on the MSO strategy over the last 11 years. And we've also been very successful on the de novo strategy over the last 11 years. So that allows us to really work within those 2 lines as we think about the future. So really, we made that pivot as valuations were becoming increasingly more expensive on the acquisition side. The de novo side is far more accretive in the long run, but it also does create -- we recognize that what it does do, if you're starting a de novo at zero, it does create a significant amount of cash burn for a period of time. And what we've solved for here is the ability to do both the MSO and then the de novo structure without having to have the cash burn or that time to maturity because we've effectively solved for the membership component of this.
  • It makes all the sense in the world why CareMax has followed this route to growth given the market conditions over the past 18 months. As noted in the quote, it appears the market for acquiring clinics got quite frothy (CareMax acquired six clinics in the Orlando area, with 4k Medicare Advantage members, for $110 million in 2021), and so it made more sense to build practices. But now as the market turns again from growth to profitability, it makes less sense to build de novo practices, so enter the MSO strategy.
  • Of course, while from a growth perspective these organizations can bounce between strategies quickly, it should invite questions as to whether operationally they are able to do so as successfully. CareMax notes it has had years of experience operating both as an MSO and a clinic business, but each requires different organizational designs - how you structure teams, where decisions are made, how you incentivize people, and what your strategy is. 
  • As CareMax (and others) move towards an MSO play, it will be worth watching how well it executes on doing so. CareMax does share some interesting data about how its MSO has improved medical spend from 107% to 85% over four years with a population in the slide below. It’s hard to know how replicable this is, but it does lend some credence to the fact that CareMax can successfully operate the MSO model:

  • It’s interesting to note the difference in MSO performance versus de novo clinic performance for CareMax - on slide 23 it highlights how CareMax owned clinics are at a 65% medical expense ratio by year 4, while MSO clinics are only at 85% medical expense ratio. To this end, it isn’t surprising that CareMax doesn’t appear to be departing from the de novo clinic model entirely as the slide below highlighted:

The Upside of Global Cap versus MSSP Savings

  • One of the subthreads in this acquisition is that it appears Steward feels like it did as well as it could in the MSSP program but that it still wasn’t driving meaningful business for Steward. This despite the fact that it had over 171,000 members. As noted in the transcript, the Steward value-based care business in 2022 is only expected to generate $35 million - $40 million of revenue and $10 million - $13 million of EBITDA, this despite the fact that its MSSP ACO was ranked #1 in membership and #2 in shared savings generated in 2020. Meanwhile, CareMax highlighted the massive potential earnings of Steward’s VBC patients in 5 - 10 years as follows:
  • So it doesn’t appear as though Steward was failing in the value-based space, but rather that its MSSP footprint wasn’t a meaningful business on its own, and Steward saw a much larger opportunity to flip the business to full-risk Medicare Advantage contracts. The analyst call notes that by 2025, they expect Steward’s value-based care business to be generating $1.6 billion to $1.7 billion of revenue. They also note that the estimate only reflects moving less than 25% of Steward’s 500,000 FFS Medicare Advantage patients into Medicare Advantage global cap contracts. In many ways, whether this materializes appears to be the key question in this deal.
  • This slide below highlights well how CareMax views the improved economic performance of full risk contracts versus both limited risk and FFS deals. You can see pretty quickly why both organizations see it as a massive opportunity to move FFS lives over to VBC deals.
  • It would certainly have been interesting to hear Steward’s Board room conversations on this deal. Given its performance in MSSP, Steward seems like it would be well positioned to succeed in taking on more risk as a provider. Yet it appears to have decided that in order to succeed in managing global capitation contracts in MA and in ACO Reach, it’d be better to do so with a partner that can both work with payors to set up global capitation contracts and also manage those deals. Certainly it also seems that the cash timing issues of VBC contracts played a deal in this (given CareMax is funding $72 million of Steward’s accounts receivable relating to MSSP savings). Regardless, Steward found a willing partner in CareMax, which laid out a rather logical approach to move toward global capitation as follows:
  • This all seems very doable, and given the number of lives that Steward has sitting in Medicare FFS, this seems like a really nice move for both parties.

What’s Next for CareMax?

  • CareMax is certainly an interesting company in that it now has three relatively large partnerships CareMax continues to sign up big partners. In the past twelve months, it has signed up deals with Anthem and The Related Companies in order to launch 50 and 75 new clinics, respectively. The Related Companies deal is particularly interesting in this context with Steward, as TRC acquired a 9% stake in CareMax back in 2021 with a plan to jointly develop 75 new centers for seniors in underserved urban communities. Analysts during the call picked up on this, asking CareMax what this new deal with Steward means for the growth of those other partnerships. 
it allows us to think about our future centers as seeded de novos. So with respect to how we're going to be opening up centers, we're going to make sure that we're doing it in areas now that are either complemented by Steward or Anthem, so that we never have to open up a center again that doesn't have a certain amount of membership, and that's going to be just instrumental and really just shortening that duration, potentially starting up our seeded de novos at breakeven rather than waiting the full amount of time.
  • It seems from this that CareMax is being quite thoughtful about how to grow patient numbers while doing so in a capital efficient manner. Being able to leverage the Anthem and Steward relationships to open de novo centers in markets where there is built in patient volume makes a ton of sense.
  • Given all this, it rather understandably seems that Steward is the key driver of CareMax’s growth now over the next several years. It also then makes sense that Steward will own 41% of the joint entity if this deal is ultimately successful.