For Profit PACE Financing Growth

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For Profit PACE Financing and Growth

This presentation is for general informational purposes only and does not constitute business or legal advice by NPA or any of its participating members.

Andrey OstrovskyManaging PartnerSocial Innovation Ventures@andreyostrovsky

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For Profit PACE Financing and Growth

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Disclosures

• I have a financial interest in the following companies: https://www.socialinnovationventures.co/

Objectives

• Share interview findings from Welbe, Innovage, PE conversations

• Identify the tailwinds for serving the bottom of the pyramid

• Examine promising practices when building a business serving vulnerable populations

• Review portfolio progress to date

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Objectives





Welbe – Venture‐backed PACE company

• Email correspondence and conversations with Chief of Staff, CEO

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PACE Growth

• Most PACE programs shrinking during COVID because classic enrollment model is to send out an enrollment person

• Welbe has 6‐8 new members/month

• Growth needs to be prudent and not too fast

• Growth impediments• Can't market directly to seniors

• More limiting to PACE and MA

How to safe balance profit with mission

• Welbe studied cases of for‐profits in hospice and saw that entrepreneurial organizations can expand availability of services, but can also bring risk

• Welbe believes• There is a serious responsibility of entrepreneurial organizations to adhere to the highest standards

• Entrepreneurial organizations can bring PACE to unserved communities (vs. simply converting successful non‐profits)

• PACE should be governed by mission‐driven physicians, not investor‐controlled

• Non‐profit PACE programs are bringing vital services to communities

• Welbe partnered with Sutter Health System in Stockton• Sutter provided their specialist network, hospitals and brand to Welbe/Sutter in the community

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Level of evidence

• No studies available

Innovage – Publicly‐traded PACE company

• Interview with CEO Maureen Hewitt

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Vision

• Make sure this great program (PACE) is available to all seniors that need it

• Ensure that PACE is part of a national platform

Footprint

• Initially• Started in 3 states

• $15M/yr revenue

• Now serving • 5 states (with 2 under development)

• $150M/yr revenue

• 6800 ppl

• 1800 employees

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3 prong approach to growth

1. De novo/Organic growth

2. Acquisition

3. Joint Venture

Why conversion non‐profit to for‐profit

• Needed access to cheap capital and wanted to expand the program

• She started with 10 PE firms, then narrowed to 5, then to 1• She vetted Welsh Carson Anderson Stowe deeply and knew and trusted Tom Scully from prior work

• Appreciated his alignment with a long term view on the investment

• Noted they were a few years ahead of our growth expectations from Welsh

• Now majority owned by Welsh Carson (Tom Scully) and Apex (Andy Cavanna)

• Challenge: Lots of PE interested but NOT a lot of experts in the space to help the non‐profits scale

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Process of converting non‐profit to for‐profit

• Maureen and Tom worked to change the federal law to allow PACE to be for‐profit

• No prohibition for for‐profit PACE at state level except CO, which has now changed• Converting the NP to FP was very political & required a lot of work with attorney general’s office in CO

• Acquiring non‐profits is highly political with many opinions from stakeholders• Went to orphans court, had many public hearings

How to safe balance profit with mission

• Federal and state rules around PACE serves as counterbalance on pressures to drive up profit

• Whether for profit or non profit, you follow the same rules

• In many states like CA, you can only apply a couple of times per year to set up a new program• Can't grow at same speed as Starbucks

• Keeps focus on more quality growth than quantity

• 18 month window for opening de novo

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What happened at the Sacramento location?

• Sacramento location opened up during the pandemic and was approved during the pandemic

• Huge demand to get seniors from nursing homes into the community and enroll in PACE, which led to rapid enrollment

• Regulators felt like enrollment was too fast and wanted to slow it down

• Her job is to work with regulators to do the right thing

Level of evidence

• No studies available

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General perceptions from PE investors

• Need is likely 2.2 million members but PACE currently only serving about 2.5% of total number of people we could be serving

• Fundamental question: Can PACE programs scale enough to warrant PE investment?

• General answer currently: Insufficient rate of growth to meaningfully invest

General perceptions from PE investors

• Time period for achieving financial goals for PACE is beyond the typical timeline of PE liquidity objectives• Breakeven is about 150 members

• Timeframe from initial effort to start of operations: 2‐3 years

• Time from start of operations to 150 people: 18‐24 months

• Average time to profitability 3.5‐5 years at the fastest

• PE likes to buy businesses that already generate profit and then optimize them

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PE Investment Criteria for PACE

• Sufficient existing volume of patients

• Demographic trends• Opportunities for growth perceived by PE industry: IL, GA, CT

• Religious < non‐religious affiliation

• Parent company attributes (strengths/weaknesses)

Objectives





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COVID19 deaths have surpassed 600,000

Source: https://www.cdc.gov/coronavirus/2019‐ncov/covid‐data/forecasting‐us.html

Profound widening of disparities in life‐expectancy

Source: https://www.cdc.gov/nchs/data/vsrr/VSRR10‐508.pdf

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Bottom of the pyramid

Source: Prahalad CK. The Fortune at the Bottom of the Pyramid. 2004.

Record breaking H1 2021 for digital health funding

Source: https://rockhealth.com/reports/h1‐2021‐digital‐health‐funding‐another‐blockbuster‐year‐in‐six‐months/

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Growth in D2C carries large risk of perpetuating disparities

Source: https://rockhealth.com/reports/h1‐2021‐digital‐health‐funding‐another‐blockbuster‐year‐in‐six‐months/

Ethical principles for investing in BOP

Source: https://www.cdc.gov/coronavirus/2019‐ncov/covid‐data/forecasting‐us.html

• Justice (treat patients fairly and equitably)• High risk for inequitable access with D2C

• Investors should invest in BOP because it’s the fair thing to do

• Investors have mostly been performative in their DEI efforts

• Beneficence (duty to produce benefit)• When there is strong evidence for positive outcomes for certain tech, we must ensure that tech gets to patients

• Non‐maleficence (do no harm)• Investors shouldn’t back snake‐oil solutions because it can be not helpful and maybe harmful

• Theranos

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SIV investment thesis ‐ Assumptions

• Investors’ real motivation overwhelmingly profit and not social mission

• Investing in BOP has lower unit economics but larger overall TAM

• I can help my companies turn high regulatory and market complexity from a risk into an advantageous moat

• If my fund can perform better than consensus internal‐rate‐of‐return (IRR), institutional investors will increase their investment in the innovation space for vulnerable populations

SIV investment thesis ‐ Hypothesis

Social Innovation Ventures will have IRR greater than consensus healthcare investor IRR (> 30%) by investing in BOP over 10 year period

Source: https://carta.com/blog/internal‐rate‐return‐irr‐calculator/

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Objectives





Promising practice: Diversify who you invest in

Source: socialinnovationventures.co

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Promising practice: Diversify who you invest in

Source: onboardhealth.co

Promising practice: Generate evidence

@andreyostrovsky

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Sustained effect size for virtual reality treating pain (AppliedVRFDA breakthrough designated)

Improvements in asthma and COPD outcomes (Propeller FDA cleared)

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Initiation and engagement in treatment for virtual AUD treatment provider appear better than national average for in‐person providers (Monument)

Source: Ostrovsky A, Krushel J, & Klein A. Initiation and Engagement with a Virtual Alcohol Use Disorder Treatment Provider. Being submitted for peer‐review.

Source: Courtney R Lyles, Urmimala Sarkar, Urvashi Patel, Sarah Lisker, Allison Stark, Vanessa Guzman, Ashwin Patel, Real‐world insights from launching remote peer‐to‐peer mentoring in a safety net healthcare delivery setting, Journal of the American Medical Informatics Association, Volume 28, Issue 2, February 2021, Pages 365–370,.

Increased coordination & engagement through concordant care with peers reduced HgA1c 1.71% (P < .01) (Inquisit Health)

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Promising practice: Immerse board & senior leadership in client journey

Source: https://medium.com/@andreyostrovsky/what‐i‐learned‐about‐digital‐health‐investment‐from‐spending‐a‐night‐in‐a‐homeless‐shelter‐7f419a518497. @johnprendergass

Software alone usually not the solution

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Objectives


• Describe market failures and opportunities for innovation serving Medicare and Medicaid dual‐eligible individuals



Performance overview

• 26 investments to date (Started 2018)

• 15 (58%) founding teams diverse (not‐white, non‐heteronormative, and/or non‐male)

• 12 (46%) companies raised first institutional round since SIV investment

• 3 (11.5%) exits

• IRR net of fees: 41.42% (exceeding goal 30%)

• Return on equity: 301%

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Broadening impact investing ‐ Artists

Broadening impact investing ‐ Housing

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THANK YOU

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Documents

For Profit PACE Financing Growth