HTN | Weekly Health Tech Reads | 10/22
October 22, 2023
NEWS OF THE WEEK
Sharing our perspective on the news, opinions, and data that made us think the most this week.
Summary: Waystar publicly filed its initial registration document with the SEC this week, starting the IPO process. Back in August, reports came out suggesting they confidentially filed at an $8 billion valuation. Waystar was created in 2018 as a result of a merger between two companies, Navicure and ZirMed. It has grown significantly over the past six years, following a PE-style roll-up strategy. Since the 2018 merger, Waystar has acquired eight companies to build out its RCM platform, primarily using debt to fund those acquisitions. Over the next five years, Waystar has $2.3 billion in debt obligations to pay, and it has had substantial interest expense payments to make. In 2022, it paid $149 million in interest expense, while doing $704 million of revenue for the year. Yes, that means they were paying ~21% of revenue in 2022 to interest expense payments. Still, they’ve managed to grow the business to 30,000 customers over the last few years, including significant growth in clients they’re making over $100,000 a year with. They’ve grown those >$100k clients from 733 in March 2021 to 1,023 in June 2023, although this growth has been slowing substantially since 2021.
- As I read the S-1, I get the strong sense that Waystar probably would have ideally gone public a few quarters ago, before the >$100k client growth started tapering down from ~10% quarter-over-quarter down to under 2%. The slowing growth and massive interest payments invite some questions as to how well Waystar can continue driving organic growth moving forward. It wouldn’t be surprising to see organic growth continue to slow down for the business. Can Waystar continue to afford driving growth by financing additional acquisitions via debt? It’s not exactly clear, although the rating agencies seem to think that is a thing of the past now that it’s on the public markets.
All of that said, Waystar appears to have built a market leader in the RCM business by bolting together a number of different platforms over the last 5 years, giving it a breadth of solutions that have allowed it to drive meaningful client growth over the last several years. In order to execute on this approach, Waystar is paying a king’s ransom in interest payments, which will naturally invite questions about the use of leverage to finance this growth. Regardless, the approach got Waystar to this point, and it’ll be interesting to follow along with what happens in the public markets over the coming quarters.
If you’re an HTN member, stay tuned for a more in-depth analysis of the S-1 this coming week.
Q3 earnings season is picking up; sharing some reactions to earnings calls here
Summary: The big headline from the earnings call is that Elevance shared it is expecting a $500 million revenue hit in 2025 as a result of its poor Stars performance. There is a lot of energy going towards mitigating that problem as discussed on the earnings call. Elegance noted it embarked on an internal strategic review in Q3, deciding to cut $750 million of internal operating expenses, largely related to software development. Medicaid administrative terminations sound like they've been a headache as states roll them out, causing members to lapse in coverage. Elevance noted it has been seeing significant growth in the individual exchanges as a result, though. All in all, while there's a bunch of moving pieces at play, it appears that the organization feels pretty confident in its ability to manage the change ahead as they raised earnings target for 2023 and confirmed the target for 2024 as well as long term growth expectations. Lots more detail covered in the Slack thread this week for HTN members - including some nuggets on markets where Elevance is looking at acquiring VBC providers.
CHART(S) OF THE WEEK
Sharing a visual or two from the week that made us think
This was an interesting report from the team at Health Enterprise Partners exploring the state of health system strategic investing that they originally shared at HLTH. The deck does a nice job outlining some of the rationale for health systems getting into this, an overview of four common approaches health systems take (direct investing, fund investments, accelerators, and innovation centers), including some interesting survey results from fund leaders and CEOs. The slide above is particularly interesting finding that startups that receive strategic capital have consistently better exits and are less likely to go out of business.
Health Affairs published an article looking at performance data of Medicare Accountable Care Organizations in 2022. As seen in the chart above, it's particularly interesting to note that the majority of ACOs took on downside risk (59%) for the first time since MSSP's inception. Other key findings included:
- Greater net savings: The program resulted in $1.8 billion in net savings, a 9% increase from 2021.
- Improved health equity: ACOs serving more diverse populations (e.g. dual eligible, or underserved race/ethnicity groups) achieved comparable savings and similar quality scores.
Milliman published an interesting report looking at upcoming changes to Medicare Stars Ratings, the impact they'll have, and what MA orgs should do to prepare.
Hayley Roger's Reaction:
Hayley Rogers is a Consulting Actuary with Milliman, based in Seattle. She specializes in creating data-driven, strategic initiatives to elevate client Star Ratings.
CMS regulations are intricate and constantly evolving, making it easy to miss important information that has significant impacts on health plan finances, marketing, and enrollment. This was especially true when CMS released the 2024 Star Rating Second Plan Preview in September. Most stakeholders were surprised to see that CMS had re-calculated the 2023 cut-points with the Tukey outliers removed before applying the 5% guardrails, which was not expected based on the coded regulations that specifically says non-CAHPS cut points can only move by +/- 5% “from year-to-year”.
After reviewing the proposed and final rules from recent years it became evident that CMS’ communications regarding the impact of future Star Rating system changes have been less than transparent. CMS would quantify their anticipated savings from Star Rating procedural changes in terms of a percentage of the total revenue for all Medicare private health plans. This approach is misleading because the revenue includes plan types that are not subject to the Medicare Advantage Star Rating system, plans with revenue not tied to their assigned Star Ratings, and contracts unaffected by the specific rule changes. For example, increasing the hold harmless improvement measure threshold from 4.0-Stars to 5.0-Stars would only affect 4.0-Star and 4.5-Star contracts, which would be significant if those contracts shouldered the burden of the CMS estimated $2.1 billion in CMS cost savings (revenue reduction).
When I began to quantify the CMS projected impacts of the Tukey outlier removal, HEI Reward system, weight changes, and the tentative “hold harmless” provision on the contracts affected by those changes, it became clear that there was a series of cascading changes coming to the Medicare Advantage Star Rating system and many stakeholders could be unprepared. This white paper is the first in a series of four that will be released over the next few months, which aim to bridge the information gap between future rule changes and their broader implications. Please look out for our white paper coming next week, titled “The Future is Now: 2024 Star Ratings Release”, which will provide a detailed analysis into the 2024 Star Ratings.
A round-up of other newsworthy items we noticed during the week
Henry Ford announced it will merge with Ascension Michigan and Genesys to create a joint system worth $10.5 billion, consisting of 13 acute care hospitals, ~50,000 employees, and 550+ regional health care sites in the Detroit area.
Link / Slack (h/t Michael Ceballos)
CMS announced it has started allowing public and private insurers to pay providers for medical services delivered to homeless people any place they are located, meaning outside of traditional medical facilities, like hospitals and clinics. Prior to the deal, Medicaid would not pay medical providers for services delivered outside of these traditional settings.
Link / Slack (h/t Nikita Singareddy)
Calibrate, a digital weight loss startup, is selling itself to private equity firm, Madryn Asset Management. As part of the deal, Calibrate will undergo a restructuring. Calibrate had been in the news for patient complaints related to the company not being able to fill prescriptions of weight loss drugs.
Link / Slack (h/t Katie Chlada)
A collection of notable startup financing rounds across the industry
*Correction from 10/15 newsletter:
Last week's newsletter included the news of Main Street's $315 million financing in order to support rural health care delivery. That section mistakenly linked out to an article about CareBridge, not Main Street. Main Street is not four years old, it is two years old, and we're not sure revenue.
Waymark, a community-based care model for Medicaid, raised $42 million. To date, the company supports 50,000 Medicaid enrollees via its tech-enabled community based care platform.
Link / Slack (h/t Michael Ceballos)
Sky Labs, a digital wearable company, raised $15.3 million in Series C funding. The startup offers a ring wearable device that tracks various physiological signals, such as blood pressure, PPG signals, oxygen saturation, and more.
Allara Health, a virtual care platform treating PCOS, raised $10 million in Series A funding. The startup helps connect women suffering from PCOS with a comprehensive care model including access to medical practitioners and dieticians.
Link / Slack (h/t Thiv Paramsothy)
Pair Team secured $9 million in Series A financing to continue its work supporting community-based organizations in the Medicaid space. The company plans to use the fresh capital to expand across California.
Link / Slack (h/t Michael Ceballos)
Ilant Health emerged from stealth with $3 million to build its value-based obesity care model. The startup works with employer and government payers across all 50 states to help identify and match individuals with obesity care plans, inclusive of behavioral therapy, pharmacotherapy, and bariatric surgery.
Link / Slack
A round-up of posts from the broader healthcare community this week that made us think
Price transparency opportunities for payers by Chris Smith, Spencer Marshall, and David C. Lewis (Milliman)
Another solid whitepaper from the Milliman crew digging into price transparency opportunities for payers. The article digs into various questions, addressing competitor contract structure, case studies, how to contract in new markets, and more.
Resetting expectations for VC investing in health tech by Christina Farr
This Second Opinion article makes the case for why the generalist VC model may not be appropriate in healthcare. Farr frames it up discussing how the industry has had its eyes set on the well known billion dollar unicorn exits for too long, and suggests instead we should be focused on and celebrating the smaller to medium-sized exits ($100 - $500 million range).