$300M Investment Signals Faster Growth of Medicare Advantage in Senior Living

In May 2020, we ran a story arguing that Covid-19 was building the case for senior living providers to become involved in Medicare Advantage (MA).

Now, there are signs that this is coming to pass:

• AllyAlign Health has raised a $300 million investment round
• Senior living-focused American Health Plans (AHP) is growing
• Rick Matros, CEO of Sabra Healthcare REIT (Nasdaq: SBRA), believes MA is a “game changer” and participation will pick up steam

These recent developments show that some investors are betting on Medicare Advantage growth in senior living, but also suggest that providers need to reconsider the risk-reward equation of owning MA plans, in light of how the pandemic has shaped consumer expectations and market imperatives.

A stronger case for Medicare Advantage

New Enterprise Associates (NEA) led the big funding round for AllyAlign, which is a company that partners with senior living providers to launch and manage Medicare Advantage plans. The venture capital firm cited AllyAlign’s performance during Covid-19 as one major reason behind the investment.

“AllyAlign was pressure-tested during the Covid pandemic; their model had proven itself prior to 2020, however their exceptional services really went to work over the last year,” said Mohamad Makhzoumi, General Partner and Head of Global Healthcare Investing at NEA. ” … AllyAlign is poised to transform the senior living industry and we’re excited to support this next phase of growth, allowing for better care for the U.S. senior population.”

Clearly, NEA sees a big runway for growth of provider-owned institutional and institutional-equivalent special needs plans, knowns as ISNPs and IE-SNPs, and they are not alone.

American Health Plans also sees a big runway. AHP is a division of operator American Health Partners, and has co-ownership and partnership agreements with long-term care providers in eight states, with expansion to new states in the cards. CCRC provider John Knox Village recently joined four other providers that co-own an AHP special needs plan in Missouri.

“Right now, the market is less than 10% penetrated with these products, and within that, only a third of those are associated with provider-owned and operated plans,” AHP Chief Development Officer Hank Watson told me.

The trend toward expansion is backed up by data. In 2020, 76 Medicare Advantage special needs plans were owned by senior housing and care providers, with that number increasing to 98 plans in 2021, according to ATI Advisory data.

There are a number of reasons why the pandemic might further accelerate this MA growth, including:

Increased focus on health care:

Covid-19 put a glaring-hot spotlight on senior living providers’ clinical capabilities, causing some executives to declare the “health care versus hospitality” debate settled in favor of care. Senior living providers that own and design MA plans create benefits packages that are uniquely tailored to the needs of their residents, and have care management and coordination capabilities to deliver more services on-site.

AllyAlign in 2019 licensed the Connect4Life model created by Juniper Communities, enabling the company to bring this coordinated care approach to other providers engaged in Medicare Advantage plans. With the $300M in venture capital, AllyAlign intends to further bolster its clinical capabilities, including adding more telehealth services.

AHP’s plans are supported by TruHealth, which employs nurse practitioners and other clinicians to collaborate with senior living and care providers in order to meet beneficiaries’ medical, social and mental health needs.

For providers, being able to tout such programs could be crucial to winning over future residents, as consumers became more discerning about senior living provider’s health care offerings during the pandemic.

Greater ability to serve the middle market:

Covid-19 added more urgency to the quest for middle-market senior living, given high unemployment and other pandemic-related financial effects.

Medicare Advantage is one route toward more affordable senior living, because MA plans have been given increased flexibility to cover certain services that are common in senior living. If residents can tap MA to cover some care, that would increase their ability to afford rent.

“I’m actually a big believer in that,” Sabra’s Matros said last week during an appearance on SHN+ TALKS. “I think all of that is going to help provide a higher quality care and in a more affordable way.”

Sabra has talked to “a number” of operators about Medicare Advantage and tried to connect them with organizations that can assist them, he added, noting that Juniper Communities CEO Lynne Katzmann — a leading force in The Perennial Consortium — sits on Sabra’s board.

Sabra has focused on partnering with senior living operators, notably Enlivant and Holiday Retirement, that offer a middle-market price point.

But, Sabra likely will divest of Enlivant in the near future, so the REIT’s influence on that operator might be limited. And because Holiday is focused on independent living, the provider could find MA a difficult proposition. Fewer IL residents qualify for special needs plans, which require that beneficiaries need an “institutional” level of care, Watson pointed out.

Still, Sabra could help drive MA strategies for its other senior living and skilled nursing tenants, and plans to continue investing in the private-pay space going forward.

Risk vs. reward

Starting a Medicare Advantage plan has been a daunting proposition for senior living providers, Matros acknowledged.

“There’s a capital investment there, so there’s a certain level of risk … people are fearful of risks,” he said. “On the senior housing side, doing anything with government reimbursement is a new thing.”

Total capitalization for a new plan is in the $4 million to $5 million range, according to Watson. When launching a plan, AHP typically puts up more than half of that amount, and works with groups of senior living providers that participate as joint venture partners.

“We have anywhere from large multi-state operators to single-site locations that participate alongside us, and we have a lot of flexibility in terms of how they can come in as capital partners,” Watson said.

By owning plans, senior living providers ensure both that reimbursement rates are adequate and that they get a fair proportion of shared savings payments related to efficiently managing cost of care — for example, by reducing hospitalizations through better coordination and on-site services.

“We paid, on top of our normal monthly capitated payments, about a 25% shared savings bonus across our book of business in 2020, despite Covid, so we expect that to expand in 2021,” Watson said.

Still, given the financial risks and learning curve involved, some senior living providers are opting not to start their own plans, either individually or in JVs with other operators.

Instead, some of these providers are partnering with MA plans owned by other entities, including large insurance companies. These insurers have clinical programs that senior living residents can tap into via MA, enabling providers to gain benefits such as increased length-of-stay.

I think it’s understandable that some providers are happy to take increased LOS and give up the chance for insurance gainshare payments in order to avoid the risks and work involved in owning MA plans. But, I also think the industry can be overly cautious and resistant to change — in one obvious example, it should not have taken a global pandemic to prove the need for more robust technology infrastructure and systems. Providers that are staying on the MA sidelines or opting for partnerships should at least note the big bets that investors are placing on Medicare Advantage coming out of Covid-19.

In the last several months, companies that focus on serving the Medicare Advantage population — through their own plans and/or their specialized approaches to managing these beneficiary populations — have raised huge amounts of capital via initial public offerings and SPAC deals. The AllyAlign funding round shows that investors also see big potential in managing these beneficiaries specifically in senior living settings.

It’s a point that is not lost on AHP’s Watson.

“What I try to convey at a very high level is, there are a lot of companies out there today — Oak Street Health, Alignment Healthcare — that have gone public with a message of, we are managing high-cost, high-need Medicare Advantage or Medicare beneficiaries, and we’re creating a lot of value,” he said. “And folks have recognized that, and it’s time for nursing home owners and ALF operators and owners to recognize they’re in a position to do that too, and this is the mechanism to do it.”