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While the COVID-19 pandemic rages, the past two years have seen another epidemic of a far different type—in financing and acquisitions of firms focused on serving Medicare beneficiaries. These firms include physician practices, notably primary care practices (PCPs); management services organizations (MSOs) that aggregate practices; and Medicare Advantage (MA) insurers. In this arena, the combined activity of private equity and venture capital firms, initial public offerings, special purpose acquisition companies (SPACs), and insurance company purchases of MA-focused firms has soared: more than $50 billion in valuation has been created in the past 18 months, dwarfing the speculative bubble for physician practice management companies in the 1990s.
One indicator of the exuberance underlying this “Medicare Gold Rush” is the amount per covered life implicit in a firm’s overall valuation. Historically, per-life valuations in MA have ranged from $4,000 to $10,500. Exhibit 1 shows per-life valuations for a sample of recent transactions. The average is $87,000 per beneficiary. Most of the firms acquired or financed are PCPs or MSOs that typically produce no margins—just an average take-home income of $240,000 per physician. The first six are participants in the Centers for Medicare and Medicaid Services’ (CMS) new Direct Contracting Model, which we shall discuss further in Part Two of this post.