With the recent passage of the healthcare reform bill (known as the Patient Protection and Affordable Care Act), two healthcare trends are likely to continue: rising medical costs and declining access to care. Medical costs continue to increase at rates well above inflation with no signs of abating, and patient access to care will continue to decrease as the relative shortage of primary care physicians increases. The healthcare reform bill will exacerbate both issues and does not contain any real levers to reverse these concerning trends.

For instance, the Massachusetts mandate for insurance coverage was successful in increasing the number of people with insurance. However, it is costing the Commonwealth much more than expected, and is resulting in the longest wait times to see a doctor in the country. The Massachusetts experiment provides a meaningful example of what is likely to occur nationally should broader initiatives to insure more people without true cost containment reform be implemented.  

Since we do not have the appropriate incentives in our healthcare system, payment reform will be required to improve quality and lower costs. Most of our healthcare system currently works on a fee-for- service basis, which encourages more utilization of services regardless of the outcomes produced. Even worse, paying providers solely for a service does not encourage them to measure and improve outcomes or to coordinate care with other providers. Most healthcare experts agree that care coordination through integrated systems of care is the most important factor in driving high-quality, cost-effective healthcare. Payment reform is likely to help our system migrate from a fee-for-service system to one that rewards providers based on episodes of care or through capitation. Some models are already based on capitation, which has encouraged successful care coordination to improve quality and decrease downstream costs.

In 2005, Summit Partners invested in HealthCarePartners (HCP), one of the largest integrated healthcare delivery systems in the U.S. Through a coordinated system of a few thousand doctors, HCP manages the care of more than 600,000 people. Unlike fee-for-service providers, HCP has an incentive to invest in technology, centers of excellence for certain chronic illnesses, home visits to the frail and elderly, telehealth, and many other innovative initiatives. HCP hopes to keep the population it cares for in good health and out of the hospital. In addition to winning many quality awards, HCP has been able to lower admissions, readmissions, and hospital bed-day requirements for its members. It represents a model of what can be accomplished through integrated, coordinated healthcare systems.

The healthcare industry can be divided into healthcare services (payers, providers, and vendors to those groups) and life sciences/medical technology(manufacturers and distributors of reagents, tools, devices, and pharmaceuticals). We have had success investing across the vast majority of these healthcare industry subsectors. In the current environment, companies that help healthcare payers control the utilization of unnecessary services are of increasing value. Often called specialized benefit management companies, these businesses help control the cost and utilization of pharmacy, radiology, laboratory, oncology, and other services.

On the provider side, hospitalist groups that provide expert care to hospitalized patients as well as other types of specialized practice management companies (e.g. anesthesia or emergency care) can demonstrate better value than other alternatives. Urgent care companies provide a lower-cost alternative for many common ailments, while freeing overcrowded emergency rooms so that appropriate care can be provided to those in need. Ambulatory surgery centers and dialysis centers are lower-cost alternatives compared with their hospital-based counterparts. Hospice companies are able to help patients and their families through trying times in ways that benefit everyone and to help prevent unnecessary, costly, and often painful testing and procedures. In the future, there are likely to be more companies that provide telehealth and concierge medicine to control costs or improve patient access to care.

Healthcare technology companies that provide services to healthcare payers and providers are increasingly important and poised for growth. The need to better manage medical claims, analyze and report data, connect a fragmented healthcare system, and manage a network of payers has resulted insubstantial opportunities for companies that provide electronic medical records, practice management solutions, interoperability, population health, claims editing, and revenue cycle management.

We invest in companies that already demonstrate profitability and substantial growth. Because of this, the companies we partner with do not need us—they choose to work with us. That means that we do not have a defensible business model unless we provide outstanding service to our companies after the investment, and help the entrepreneurs and management teams we work with build companies they envision—and sometimes above what they envision. Our goal is to help our partner companies grow faster than they would organically and through acquisitions, and to share our insights in best practices from our experience across 300 high-growth companies.