Last week, shares of %CanoHealth ($CANO) shot ahead 35% with the release of a Wall Street Journal article covering rumors that healthcare juggernauts CVS ($CVS) and %Humana ($HUM) were vying to acquire the tech-driven %PrimaryCare company. Citing sources close to the matter, a deal could be done any day now assuming negotiations don’t collapse. No buyout price was teased, but at $8.50 per share, Cano Health has a market capitalization of $4.25 billion.
The market for primary care companies is heating up. In July, Amazon (NASDAQ: AMZN) agreed to pay $18 per share, or about $3.9 billion including debt, for concierge primary care company One Medical (NASDAQ: ONEM), roughly an 80% premium to the price of the stock the day before the deal was announced.
The main prize in buying Cano is deepening a footprint in senior primary care, as almost half (44%) of Cano Health’s patient base is on %Medicare Advantage, sometimes called Medicare Part C or MA. Medicare Advantage plans are value-based care (VBC) offered by Medicare-approved private companies, in which the government pays the private company to cover patients Medicare benefits.
As far as suitors, the odds are tilted in the favor of Humana if it wants to bring Cano under its umbrella. Pursuant to an agreement between the companies inked in 2019, Humana has a right-of-refusal agreement should Cano ever consider selling itself. Furthermore, Cano is Humana’s biggest independent primary-care provider in Florida, serving 68,000+ of its MA members. It’s not hard to fathom that Humana would like to expand its presence in the MA space, considering it is currently second in the market behind only %UnitedHealthcare (NYSE: UNH).
The Cano news puts a spotlight on similar disruptive companies serving the senior demographic, including %VBC specialist %SkylightHealthGroup ($SLHG) (SLHGF), a provider of software and services to transition patients into a VBC model to drive better outcomes and experiences. Skylight operates a multi-state health network comprised of physical practices that provide services from primary care, sub-specialty, allied health, and laboratory and diagnostic testing.
VBC is differentiated from the traditional fee-for-service (FFS) model long used in healthcare. In FFS, private and public insurers pay healthcare providers per encounter, which is why doctor’s offices are so adept and separating treatments and visits (you’re here for a fever, not your annual check-up) for billing purposes. To generate as much revenue as possible, patient volume is the focus. In VBC, the focus is on minimizing health expenditures, with practices rewarded by keeping patients healthy. The emphasis is on quality of care, not volume.
With healthcare cost spiraling out of control to now comprise a whopping 19.7% of America’s GDP, its understandable that the Centers for Medicare and Medicaid Services is looking at VBC in a bid to improve outcomes and cut spending. This favors Skylight, whose core customers are small and independent practices that need Skylight’s technology, analytics, and infrastructure to switch from FFS to VBC.
This year, Skylight’s growth strategy has included initiatives evolve beyond its FFS model as a primary care management group by increasing its VBC coverage and expanding its Medicare Advantage plans. It also launched a new contact center early in the years for the purpose of improving overall patient visits by addressing the challenge of missed calls at the practice level due to capacity restraints. The pilot has been a success, resulting in Skylight scaling the project nationally across all its practices and markets in July 2022.
This month, the Toronto-based company said it amended its existing contract with AvMed, widening its coverage from South Florida into three primary care practices in Central Florida beginning in January 2023. AvMed is a one of Florida’s oldest and largest not-for-profit health plans, providing Medicare Advantage coverage in Miami-Dade and Broward counties and coverage for employer groups in 52 counties across the state.
All told, Skylight serves 100,000+ primary care lives and 2,400 Medicare lives at full risk, also called full-risk capitated. The plan is to keep scaling to top 5,000 full risk patients in 2023 and 10,000 in 2024. A common metric in the industry for a managed care life is about $14,000. At 2,400 patients, that equates to $33.6 million. Extrapolating to 10,000 patients is $140 million. Skylight currently has a market cap of $21.85 million.
Profitability appears to have a limited role in acquisitions, as it is the patients the larger companies want to acquire and move into at-risk arrangements. This is evidenced by the fact that both One Medical and Cano Health, while have large patient populations, were both unprofitable at the time of the buyout offers (or rumor in the case of Cano right now). Per the Skylight corporate presentation, the company expects to be profitable with its growth in the full-risk capitated sector, targeting about $30 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2026.
Presently, Skylight has four Medicare Advantage VBC contracts in place and more being negotiated, according to the company. Apropos, Cano isn’t the only one working with Humana; Skylight has a contract with them too. If Humana is looking to overtake UnitedHealthcare, investors will surely be looking for any signs of the company taking an aggressive M&A stance, which could provide a boon for all companies entrenched in the markets.
Skylight Health Group Inc. (TSX-Venture: SLHG) (OTCPK: SLHGF) Full Corporate Write-Up: Click Here.
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