According to a Centers for Medicare and Medicaid Services (“CMS”) study reported in Health Affairs on March 24, 2020, national health care spending reached $3.81 trillion in 2019 and is projected to increase to $4.01 trillion by the end of 2020.  CMS also projects that by 2028, health care spending will reach $6.19 trillion, and will account for 19.7% of GDP, up from 17.7% in 2018.

Although the CMS study was only released four months ago, in COVID-19 time, the projections and estimates included in the study may already be considered stale.  After all, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, a $2 trillion coronavirus economic stimulus bill.  More recently, Senate Republicans introduced their proposal for a second coronavirus economic stimulus bill, the $1 trillion Health, Economic Assistance Liability Protection and Schools, or HEALS Act, as an answer to the $3 trillion stimulus bill – the Health and Economic Recovery Omnibus Emergency Solutions Act, or HEROES Act – that was passed by the House on May 15, 2020.

As a result of the above federal financial infusions which post-date the conclusions reached in CMS’s March 24, 2020 study, the amount of national healthcare spending projected for 2020 and through 2028 will certainly exceed the CMS spending projections.  How will this additional healthcare spending impact the venture capital (“VC”) and private equity (“PE”) markets as it relates to healthcare investment?  Well, if money attracts money, we can safely say that skyrocketing spending in healthcare has the potential to have a significant impact on private healthcare investment.

In this article, we will focus our attention on private investment in the primary care sector of the healthcare market.  As described below, primary care has received a significant amount of new attention during the COVID-19 public health emergency.  First, the pandemic has highlighted the need to improve public access to basic healthcare services.  Second, given the financial strain being placed on the U.S. healthcare system as a result of the pandemic (See, “Hospitals, Home Health Agencies, and Skilled Nursing Facilities: The Costs of COVID-19 and Federal Relief for Healthcare Providers,” Sheppard Mullin Healthcare Law Blog (July 30, 2020)), finding a cost-effective way to provide high quality healthcare services has become more of an imperative than ever.  Since it is well known that the timely provision of primary care services can significantly reduce the likelihood that a patient will need more intensive – and more expensive – healthcare services in the future, attention has turned to primary care as a path forward to both address the healthcare access issue and the economic issue.

As a result of this increased attention on primary care, will PE and VC firms be attracted to primary care as a target for investment?  Even if investors are swayed by the financial opportunities presented by primary care, will their interest in primary care be enough to overcome what some have reported as a tightening in the capital markets?  Finally, if there is a tightening in the capital markets, does this apply to healthcare investment?


Behavioral Health and the Parity Act.  In the fiercely competitive arena of healthcare investment, investors are under constant pressure to find the next “behavioral health” – a healthcare subsector that experienced a significant increase in consumer demand and, in turn, significant investment starting about 10 years ago.

In significant part, the increased demand for, and investment in, behavioral health was brought about by the success of industry groups that advocated for parity in payor coverage for medical services and behavioral health services.  Beginning in 2008, the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act (the “Parity Act”) established federal law that generally prevents group health plans and health insurance issuers (The Parity Act was extended to individual health insurance policies in 2010 under the Patient Protection and Affordable Care Act (the “ACA”)) from imposing less favorable benefit limitations on behavioral health benefits than apply to medical/surgical benefits.

As a result of the Parity Act and later the ACA, more people had access to affordable behavioral health services because their behavioral health coverage suddenly matched their medical coverage.  Increased access to affordable behavioral health services created increased demand for such services.  Increased demand for behavioral health services caught the eyes of investors.

In a January 2020 report, “Understanding the Opportunities and Challenges of Investing in Behavioral Health Services,” Vin Phan, Partner and National Practice Leader, Healthcare Transaction Advisory Services, BDO USA, LLP, describes the Parity Act as a catalyst for the formation of, and investment in, behavioral health clinics to care for patients requiring mental health and/or substance abuse-related services.  A decade later, the behavioral health investment opportunities continue as, “many of these firms have matured but are still growing rapidly, and they are now looking for capital or strategic partners to expand their catchment area.”

Primary Care and COVID-19.  Whereas the Parity Act was a catalyst for growth in the behavioral health world, the COVID-19 pandemic may be a catalyst for growth in the primary care world.  Although VC and PE investment in physician practices including primary care and specialty practices predates the COVID-19 pandemic, the pandemic is drawing increased attention to early medical interventions including the need for greater access to primary care services.

In part, the Parity Act was the result of intense lobbying and public education efforts by behavioral health providers and public interest groups that used clinical data showing the prevalence of mental health challenges in the population to make the case that there was a pressing and unmet need for such services that, at the time, was being exacerbated by a lack of insurance coverage for behavioral health services.

As applied to the primary care market, COVID-19 has put a spotlight on the need for improved patient access to basic healthcare services.  In addition, a growing body of research and clinical studies are showing that primary care services can improve the health status of a community while lowering the community’s healthcare costs.  In combination, these two elements plus the overall sense of urgency to respond to the COVID-19 pandemic have set up a situation that seems familiar to those who followed the discovery of behavioral health by PE and VC investors.

Primary Care as a Cost-Effective Solution.  According to the 2019 Patient-Centered Primary Care Collaborative (PCPCC) Evidence Report, the United States spends only 5-7% of its healthcare dollars on primary care services while Organization for Economic Cooperation and Development (OECD) member countries average 14% of their health care spending on primary care.  Given that many of these same OECD member countries have been shown to have better healthcare outcomes than the United States, it is not surprising that studies have also shown that primary care investment improves healthcare outcomes and lowers total healthcare costs.

According to the PCPCC Evidence Report, “an association was found between increased primary care spend and fewer emergency department visits, total hospitalizations and hospitalizations for ambulatory care-sensitive conditions.”  As reported in an August 6, 2018 Medical Economics blog post, “Delivering Value in Healthcare Starts with Increased Primary Care Investment,” the American Academy of Family Physicians maintains that, “if the U.S. spent closer to 12% of its healthcare dollars on primary care, it would cut per-patient costs and lead to a decrease in overall healthcare expenditures.”  Finally, in “Implementation of Oregon’s PCPCH Program: Exemplary Practice and Program Findings,” a September 2016 study conducted by Portland State University and released by the Oregon Health Authority, it was found that for every $1 invested in primary care, there were $13 in savings in other services, such as specialty care, emergency care, and inpatient care.

Primary Care: A Legislative Focus.  Seemingly in response to the primary care studies referenced above – as well as many others that have reached the same or similar conclusions – eight states have passed legislation or issued executive orders geared towards prioritizing primary care or increasing primary care funding since 2017. (See, PCPCC Evidence Report).  Although such legislation varies from state-to-state, the legislation appears to fit within two  general categories: (1) legislation that mandates increases in primary care investment/spending (e.g., in 2017, Oregon passed Senate Bill 934 requiring commercial and public payors to spend at least 12% of total medical expenditures on primary care) or (2) legislation that establishes payor and/or provider reporting and disclosure requirements to give states information to make informed decisions regarding primary care spending in the future (e.g., in 2019, Maine enacted into law SP 421, “An Act to Establish Transparency in Primary Health Care Spending,” requiring insurers to report primary care expenditures to the State in order to allow the State to determine the percentage of total expenditures used for primary care).

As evidenced by these legislative initiatives and the increasing need for states to find cost-effective healthcare solutions in a time of decreasing state revenue, it is likely that we will see more activity at the state level – as well as the federal level – to increase governmental outlays as a way to expand access to primary care services.


With growing public sector attention on the provision of primary care as a way to improve healthcare outcomes and drive down overall healthcare costs, private investment may find a lucrative opportunity in the primary care space.  Certainly, given the void created by a history of under-funding in the primary care space, the hunger for new investment sources within the primary care community is palpable.

One way that investors have already entered the primary care sector is through start-ups.  While many primary care practices have been hit hard by declining visits during the COVID-19 pandemic, many primary care practices – including venture-backed primary care start-ups – that participate in managed care-type payment models (models in which payments are made on a capitated basis that rest on patient enrollment rather than the actual provision of patient care services) have fared better during the public health emergency than practices and healthcare entities that are reimbursed on a fee-for-service basis.

Early in the pandemic, certain primary care platforms were able to transform their traditional in-person primary care practices into hybrid in-person and virtual/telehealth practices within weeks.  Some of these same platforms now have plans to expand current and post-pandemic operations with more “bricks and mortar”  practice locations and increased virtual/telehealth capacity to meet increased demand for primary care services and to take advantage of Medicare and Medicaid reimbursement parity between virtual and in-person physician office visits – a change in reimbursement rules implemented by CMS during the early days of the public health emergency.[1]  Other PE and VC backed startups have entered into new agreements with Fortune 500 companies, either in the form of customer agreements that will provide large patient bases for comprehensive care models, or in the form of joint venture arrangements with large retail pharmacies to build new large-scale on-site retail health clinics for the provision of primary care and other selected healthcare services.

In order to reduce costs and improve quality, many primary care start-ups – including start-ups of the types referenced above – have been early adopters of next-generation technologies such as patient portals, mobile applications, telehealth and remote monitoring, which have allowed its primary care practitioners to stay connected with patients when in-person visits are not possible. (See, our series of telehealth articles posted on this blog over the last six months, including “The Post COVID-19 World: Continued Focus on Relaxing Telehealth Barriers” (July 2, 2020)).  Put simply, venture funding and investment have been significant factors in the development of telehealth and other primary care innovations which have been integral in maintaining and increasing access to healthcare during the pandemic.

As discussed in a May 16, 2020 Health Affairs article, “The Innovative Potential Of Venture-Backed Primary Care,” venture funding in primary care has the ability to stimulate innovation in four key ways: (1) enabling the development of new delivery models that provide comprehensive, tailored care, (2) designing new, innovative reimbursement models to support the delivery of comprehensive care, (3) allowing primary care to reach larger populations of patients, as opposed to focusing on local or regional groups and (4) fostering fast growth and scaling.  Telehealth is a prime example of the key role that VC and private investment can and has played in the development of a new technology that has made it possible to maintain access to primary care services while observing public health initiatives such as social distancing.


Notwithstanding the private investment opportunities that are being created by the need for innovation in the healthcare space to address the healthcare challenges that have been the focus of attention during the COVID-19 pandemic, whether there will be sufficient access to capital to fund new start-ups in the healthcare space remains to be seen.

It has been reported by some observers of, and participants in, the VC/PE markets that there has been a general tightening up of available sources of funding for startups during the pandemic.  In an April 27, 2020 report, “Startup Ecosystem Faces Capital Crunch over Coming Months,” the National Venture Capital Association (“NVCA”) concludes that VC investment in startups is expected to “drop significantly” in the coming quarters due, in some part, to the risk and uncertainty presented by the COVID-19 pandemic.  According to the NVCA report, “existing capital reserves by venture capital (VC) investment funds will not be nearly enough to sustain operations in the startup ecosystem. Many startups are having challenges accessing federal business support programs due to various rules for which the unique startup business model are not suited” – meaning funds being made available by the federal government in response to the pandemic.  The NVCA report goes on to say that, “the startup ecosystem has traditionally ebbed and flowed with previous cycles and has weathered economic storms in the past. In fact, some of the most innovative and notable companies were born during downturns. However, the sheer force and speed of the COVID-19 crisis and its uncertain impact and duration is not comparable to past downturns.”

Additionally, many PE funds are circling the wagons and focusing on the financial health of their existing portfolio companies and their respective balance sheets which inevitably takes attention away from potential new deployments of capital.

In evaluating the conclusions reached and observations made in the NVCA report, it is worth noting that the report focuses on the VC/PE markets generally and startups specifically.  The report does not focus on healthcare investment activity or the healthcare startup environment.  In fact, there are no healthcare-specific references in the report nor is there any healthcare specific data in the report.  Therefore, it is worth asking the question whether the report’s conclusions apply to healthcare startups and whether the conclusions reached regarding startup activity apply to VC/PE investment generally.

In evaluating the capital markets and their performance in the healthcare space during the pandemic, we note the following observations made by market pundits and participants:

  1. As reported in the PwC/CB Insights MoneyTree Report (Q2) (“MoneyTree Report”) released on July 16, 2020, the second quarter of 2020 saw a 3% quarterly increase in VC deal activity from the first quarter of 2020. However, as compared to the second quarter of 2019, second quarter deal activity in 2020 was down 18% year-over-year.
  2. Of the Top 5 business sectors evaluated by the MoneyTree Report, the healthcare sector was Number 2 in second quarter deal activity with 221 deals worth $6.4 billion in total. Healthcare fell behind Internet (573 deals/$11.3 billion) but ahead of Software (151 deals/$2.9 billion), Mobile and Telecommunications (148 deals/$2.9 billion), and Food and Beverage (48 deals/$0.5 billion).
  3. Investment activity in the healthcare sector during the second quarter of 2020 varied by geographical area, with healthcare dominating the investment market in certain cities. For example, each of the top five economic investments in San Diego and three of the top five in Washington D.C. were in the healthcare space (with investments ranging from $61 million to $200 million).  According to the MoneyTree Report, California remains the center of healthcare equity investments, with 66 out of 221 deals taking place in Q2, 2020.
  4. According to the MoneyTree Report, digital health is one of the three emerging areas that dominated deal activity in Q2, 2020 and saw an increase in deals during the COVID-19 pandemic. In Q2, 2020, investments in digital health totaled $3.1 billion and expansion-stage startups raised over $630 million.
  5. Investment in retail health has steadily and rapidly increased over the last decade. Each of the top retail pharmacy chains have all invested in their own version of retail health clinics.

As noted above, one of the key components of innovation in primary care that may lead (and in some cases, has led) to profitability in the sector is technology, and in particular, digital health including telehealth.  For an investor in primary care, the hope is that this influx of investment in digital health will lead to important solutions helpful in the provision of primary care services, and, perhaps, is a signal of a corresponding wave of investment in the primary care sector.  As also noted, while retail health clinics have the potential to act as healthcare market disruptors (undercutting the costs of typical primary care providers), there is also the potential for primary care platforms to partner with these conglomerates, learn from the innovations that such retail health platforms develop or distinguish themselves in order to coexist.[2]  At the very least, investment by these retailers seems to reiterate that there is a void in the market for primary care.


[1] During the COVID-19 public health emergency, CMS imposed Medicare and Medicaid reimbursement parity on in-person and virtual physician office visits. There is a current debate in Congress as to whether reimbursement parity is appropriate on a long-term (post-pandemic) basis.

[2] See, The Shape of Healthcare: Blockbuster Mergers, Retail Healthcare, and Marcus Welby, M.D. and How Health Systems are Confronting the Retail Revolution in Healthcare.