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Private equity and venture capital eye new opportunities for profit

April 2, 2023

Private equity and venture capital see opportunity in federal programs for underserved communities

PESP’s recent report “Private Equity Descends on Rural Healthcare” reveals the extent to which private equity firms are investing in the rural healthcare space, from creating dedicated investment funds targeting rural health to buying up and merging smaller rural health providers into industry giants.

However, private equity firms are not alone in seeing a potential for profit—venture capital firms have also begun increasingly investing in rural-health-oriented startups, particularly in new platforms targeting Medicare Advantage and value-based care. Several of these new companies are targeting the Biden administration’s redesigned Direct Contracting Model, known as Accountable Care Organization Realizing Equity, Access and Community Health (ACO REACH).

ACO REACH arises out of the now-scrapped Geographic Direct Contracting Model (Geo), a Trump-era Medicare pilot program that established Direct Contracting Entities (DCEs). DCEs are privately owned and controlled coverage networks in which for-profit companies are paid monthly to cover beneficiaries’ healthcare. Providers may pocket any funds left over after they cover the cost of care.[1] The model was met with scrutiny from progressive lawmakers, who sounded the alarm that it would lead to the privatization of Medicare. In a January 2022 letter to the U.S. Department of Health & Human Services (HHS) and CMS, a group of 54 lawmakers led by Rep. Pramila Jayapal (D-WA) wrote that the model creates ““…a perverse motive to decrease the quality and volume of seniors’ care.” They noted:

“These models ultimately aim to privatize traditional Medicare by funneling beneficiaries, without their knowledge, into a DCE. Unfortunately for patients in these entities, DCEs are incentivized to funnel patients to providers within their networks to maximize profits which can limit patients’ care options.”[2]

The ACO REACH model, the Biden administration’s relaunch of the Trump Administration’s Geo model, attempts to put a greater focus on increasing health equity among underserved populations in Medicare and beef up governance of DCEs. The stronger governance is in part targeted at up-coding, whereby providers overstate the severity of a patient’s condition to reap higher reimbursements.[3]

However, some progressive lawmakers are concerned that ACO REACH has the same problems as its Trump-era predecessor, including incentivizing DCEs to squeeze money out of Medicare by allowing them to pocket any money they do not spend on patient care. In a February 2022 hearing of the Senate Finance Committee, Sen. Elizabeth Warren said of the program:

“Private equity and insurance companies want the eye-popping profits that are possible when the federal government lets them pocket whatever it is they can avoid spending on seniors and people with disabilities who need healthcare.”[4]

Venture capital and private equity firms have indeed begun launching DCEs focused explicitly on rural health. For example, rural-focused ACO Main Street Health was created in 2021 by venture firms Frist-Cressey Ventures, Oak HC/FT, and Russell Street Ventures. Russell Street Ventures is a new VC firm started by former CMS Innovation Center Director Brad Smith, under whose leadership the Trump administration created the Geo DCE model.[5]

VC-backed Homeward launched in 2022 and focuses on rural home health and telemedicine. The company will operate a DCE and partner with Medicare Advantage plans in rural areas.[6] Homeward is backed by venture capital firm General Catalyst, which launched its second $600-million-plus fund focusing on healthcare. General Catalyst has backed a variety of tech companies including Airbnb and Instacart.[7]

Aledade, a whose venture capital backers include OMERS Growth Equity and Fidelity Management & Research Company[8] has rural ACOs in Kansas, Mississippi, and West Virginia.[9]

In addition to venture capital, a handful of private equity-owned companies have also launched DCEs including Upward Health, owned by Heritage Group and other firms,[10] and AbsoluteCARE, owned by Kinderhook Industries.[11]

In January 2023, CMS announced that over 700,000 providers and organizations are participating in one of CMS’ three accountable-care programs in 2023. A total of 132 organizations will participate in ACO REACH, caring for around 2.1 million Medicare enrollees. CMS also said 824 federally qualified health centers, rural health centers, and critical access hospitals will participate in 2023, more than double 2022’s numbers.[12]

As more venture capital and private equity firms carve out opportunities to reap profits from federal programs, it will remain critical that regulators scrutinize firms’ participation to ensure that they do not exploit these initiatives at the expense of underserved communities.



[1] “Geographic Direct Contracting Model (‘Geo’) | CMS,” Centers for Medicare & Medicaid Services, December 3, 2020,

[2] “Letter from Rep. Pramila Jayapal et al. to The Honorable Xavier Becerra (HHS) and The Honorable Chiquita Brooks-LaSure (CMS) Regarding Medicare DCE Model,” Congressional letter, January 5, 2022,

[3] Robert King, “CMS Overhauls Direct Contracting Model to Include New Requirements on Governance, Health Equity in 2023,” Fierce Healthcare, February 24, 2022,

[4] Robert King, “Warren Calls for End to Direct Contracting, Reforms to Medicare Advantage Risk Adjustment,” Fierce Healthcare, February 3, 2022,

[5] Paige Minemyer, “Former CMMI Chief Smith Launching Value-Based Care Company Targeting Rural Providers,” Fierce Healthcare, June 29, 2021,

[6] Heather Landi, “ViVE 2022: Former Livongo Execs Launch Rural Healthcare Startup Homeward with $20M Investment,” Fierce Healthcare, March 8, 2022, sec. Digital Health, Fierce Healthcare Homepage, Providers, Finance,

[7] Giles Bruce, “General Catalyst: Why the VC Firm with an Unassuming Name Should Have Healthcare’s Attention,” Becker’s Hospital Review, August 12, 2022,

[8] OMERS Growth Equity, “Aledade Raises $123 Million Series E To Accelerate Growth In Medicare Advantage And Support Primary Care Physicians With Expanded Services,” Jun 6, 2022.

[9] Centers for Medicare and Medicaid Services, “ACO Investment Model,” Accessed March 2023.

[10] Upward Health, “Upward Health Announces Growth Equity Financing Led by Heritage Group,” Upward Health (blog), September 13, 2022,

[11] “Kinderhook Invests $105 Million in AbsoluteCare, a Leading Value-Based Primary Care Provider,” Kinderhook Industries, accessed September 29, 2022,

[12] Centers for Medicare and Medicaid Services, “CMS Announces Increase in 2023 in Organizations and Beneficiaries Benefiting from Coordinated Care in Accountable Care Relationship,” January 17, 2023.

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