Julia Gutierrez spent her final weeks in pain. Last year, the 78-year-old Arvada, Colo., assisted-living resident suffered a serious skin breakdown. When she got to the hospital, she was found to have severe dehydration and sepsis, and a portion of her bowel had failed, says Gutierrez’s daughter Sylvia Torralba. Gutierrez was put on hospice care and died at her daughter’s home less than two weeks later.

Torralba says Gutierrez’s care fell far short of what was promised by her healthcare provider, InnovAge Holding
INNV,
+11.76%
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The Denver-based company is the largest player in the Program of All-Inclusive Care for the Elderly (PACE), a Medicare- and Medicaid-funded service designed to cover all the healthcare needs of some of the most frail, high-cost and medically complex seniors—and keep them out of nursing homes.  

“InnovAge should have been aware and monitoring mom and known about her overall condition,” says Torralba. “I was constantly keeping up on them just to get them to do their job,” she says. “The hardest part was getting someone to talk to me.”

Torralba also holds accountable the assisted-living facility to which InnovAge referred her mother. The InnovAge promise of all-inclusive care, Torralba says, turned out to be “all-inclusive neglect.”

Backed by private equity, InnovAge has more than doubled its enrollment over the past five years while snaring Washington-connected directors, including scions of the Bush and Kennedy families and two former top Medicare officials. On Wall Street, the company raised roughly $374 million in a March initial public offering.  

But vulnerable seniors have been brushed aside as InnovAge prioritized financial growth in recent years, people who have worked for the company say. Despite the cash and well-heeled connections, many InnovAge participants have had long waits for medical appointments, little access to specialists, and poor coordination of transportation, medication delivery and other services that the company is supposed to provide, according to former employees, patient advocates, and regulators. InnovAge pursued a plan to expand nationally while “denying [patients] access to thousands of medically necessary services,” according to a 2019 whistleblower complaint filed against the company by a former InnovAge employee. The federal government didn’t intervene in the case, and the former employee dropped the suit last year. The company’s growth also sits uneasily with some PACE experts and even the organization’s founders, who started InnovAge as a non-profit.  

Now, the company is attracting attention from federal and state regulators. The Centers for Medicare and Medicaid Services in September suspended enrollment of Medicare beneficiaries at InnovAge’s Sacramento location, citing failure to provide participants with medically necessary services. In Colorado, the company has recently been audited by two state agencies as well as CMS, and the state attorney general in July sent the company a civil investigative demand for information regarding patient services, referrals and Medicaid billing. 

The scrutiny of InnovAge comes at a critical time for America’s seniors and the roughly $430 billion long-term care industry that serves them. Now that the pandemic has killed more than 186,000 people in U.S. long-term care facilities, patient advocates, lawmakers and some industry groups are pushing to dramatically expand home and community-based services such as PACE, which accounts for virtually all of InnovAge’s revenue. This year, Medicare and Medicaid PACE spending will total roughly $5.2 billion, the National PACE Association estimates. That’s more than $94,000 per participant. 

InnovAge’s evolution from humble nonprofit to Wall Street growth story also underscores how the revolving door between Washington D.C. and the private sector can generate wealth for the well-connected and have profound implications for health policy and the public interest. Among InnovAge’s many friends inside the beltway is Tom Scully, a former CMS administrator, InnovAge board member, and general partner at Welsh, Carson, Anderson & Stowe, a New York City-based private equity firm and major InnovAge shareholder. Scully has shepherded InnovAge through its conversion to a for-profit corporation and its expansion across the country, largely through acquisitions of existing non-profit PACE programs, as Welsh Carson extracted dividends.

Scully says that InnovAge has tapped Wall Street to fuel a business that is helping people who are better off maintaining a degree of independence. “The whole concept is keeping people out of a nursing home” by providing great care, he says. InnovAge participants have fewer hospital admissions and low-to-medium severity emergency-room visits than a comparable group of traditional Medicare beneficiaries, according to company securities filings. Scully says that laws prevent InnovAge from commenting on individual participants like Gutierrez, but adds that InnovAge has care management plans for all participants.

Despite some service problems, the number of people dropping out of the program is “incredibly low,” he says. “PACE is a wonderful thing” that should be available to many more seniors, he says. “I’m all about trying to make it bigger.” 

***

Tom Scully was roaming the halls of San Francisco’s Westin St. Francis Hotel in 2013 when he bumped into a friend who was having coffee with Maureen Hewitt, the CEO of InnovAge. At that chance meeting amid the hubbub of a healthcare conference, Scully recalls, Hewitt told him that she needed capital to expand her business offering comprehensive medical care to frail seniors through taxpayer-funded programs. Scully, who specialized in making healthcare investments at private equity firm Welsh Carson, told Hewitt he would love to work with her.  

Scully and Hewitt, however, had a problem. PACE providers generally had to be nonprofit entities, and there was no way for Welsh Carson to invest in InnovAge. CMS had considered the potential for for-profit PACE programs and commissioned a 2013 study of a handful of pilot for-profit programs, which found some evidence they delivered lower-quality care than nonprofit providers, although the differences were often small. 

But as the top Medicare and Medicaid official under President George W. Bush, Scully was known for his work on Medicare’s Part D prescription-drug benefit and Medicare Advantage, two programs that gave the private sector a major role in providing coverage for seniors. Scully, together with other former top officials at CMS, became instrumental in unleashing the private sector in PACE—and Scully’s firm would be among the first in line to profit from it. 

““InnovAge should have been aware and monitoring mom and known about her overall condition. I was constantly keeping up on them just to get them to do their job.””

Shortly after he met Hewitt, Scully says he contacted CMS and asked the agency to look at the question of permitting for-profit providers in PACE–an issue that wasn’t getting much government attention, he says. Marilyn Tavenner, whom Scully describes as “a good friend,” was then the CMS administrator and would later join the InnovAge board. By May 2015, a few months after Tavenner stepped down from her government position, CMS lifted the restriction on for-profit PACE providers. Andy Slavitt, who was acting CMS administrator at the time, also became involved with for-profit PACE after he left the government. Slavitt’s venture-capital firm, Town Hall Ventures, became an investor in the PACE provider WelbeHealth. 

Slavitt says the PACE program was not spreading quickly under nonprofit operators. Activating different pools of capital that could help keep seniors out of nursing homes “felt like a smart thing to do,” says Slavitt, who also went on to serve as senior COVID advisor to President Joe Biden. “The reality is that nursing home operations are pretty worrying from a quality standpoint, and we have to keep trying new things and have to police it well,” Slavitt says.

Tavenner didn’t respond to requests for comment.

Scully went on to personally negotiate InnovAge’s 2016 conversion from nonprofit to for-profit status with the Colorado attorney general’s office, he says. As part of the deal, a Welsh Carson fund acquired InnovAge, and the proceeds went to a new, independent nonprofit foundation focused on the aging population. To address concerns raised by public commenters that patient care would suffer under for-profit ownership, the Colorado attorney general imposed some monitoring requirements. But some of those safeguards fell by the wayside. An independent organization, for example, was supposed to assess for-profit PACE, using InnovAge as a case study, three years after the conversion. Asked for the results of the study, Scully said it never happened. It was the Colorado Department of Health Care Policy and Financing’s responsibility to get the study done, he says. Department spokesman Marc Williams said the agency is not responsible for the study.  

Among those with misgivings about the for-profit conversion were the geriatricians involved in the late 1980s formation of the non-profit organization that became InnovAge. In the organization’s early days, “I remember saying, ‘if we don’t accomplish our mission, I don’t give a damn if we’re profitable or not,’” says Dr. Alan Lazaroff, founder of the nonprofit PACE provider Total Longterm Care, which later became InnovAge.

Lazaroff thought the not-for-profit structure was best suited for InnovAge and the PACE program broadly because they serve uniquely vulnerable participants. PACE participants must be 55 or older and need a nursing-home level of care. They have about six chronic conditions, on average, nearly half have dementia, and the vast majority are eligible for both Medicare and Medicaid. Many participants can’t effectively advocate for themselves, and they depend entirely on the program provider for all healthcare services. If participants leave the program, there’s a good chance they’ll be placed in a nursing home. 

Medicare and Medicaid pay PACE providers fixed monthly per-participant rates in exchange for covering all of their participants’ healthcare needs—and “you can make a lot of money, if you don’t spend any” on patient care, says Lazaroff. “That’s why it was set up to be nonprofit in the first place.”

Lazaroff’s approach clashed with the vision being pushed by Hewitt, who became InnovAge’s CEO in 2006 and wanted to build a highly successful business, according to Lazaroff and Dr. Willie Orr, another geriatrician involved with the organization’s beginnings. “She’d make comments such as, ‘why do we only take care of poor people?’” says Orr, who noted that PACE largely serves lower-income seniors. Lazaroff and Orr say that Hewitt pushed them out of the organization shortly after she became CEO. “She worked to get rid of people who had a long-term history with the organization and were going to compete with her, in her mind, for authority and prestige,” Orr says.

Hewitt didn’t respond to requests for comment. But Scully says InnovAge’s board determined that Lazaroff and Orr had a conflict because their physician practice had a contract with the organization to provide participant care.

After the for-profit conversion, Scully went to the National PACE Association’s office in Alexandria, Va., assuming that InnovAge would be getting a seat on the organization’s board. The meeting didn’t go well. The group, an advocacy organization for PACE programs, balked on the board seat, and Scully responded, “If we don’t have a seat on the board, we’re not paying” dues, he recalls. Hewitt had been on the group’s board years earlier and resigned after a few meetings, according to a person familiar with the situation. “I don’t think she was getting the care and attention she thought she deserved,” the person says. The association turned down Scully’s request because it has a democratic process for electing board members, according to this person. 

In the years that followed, InnovAge sometimes worked in opposition to PACE trade groups. It pushed for a change in Michigan law that would give it a quick foothold in the state, leapfrogging ahead of existing Michigan providers that had been waiting for state approval to expand their programs. “It’s not fair to jump to the front of the line and rewrite a process that we’ve all had to follow in Michigan,” says Stephanie Winslow, executive director of the PACE Association of Michigan. 

In recent months, InnovAge has rejoined the national trade group under an uneasy truce. The group is watching closely to ensure that InnovAge doesn’t work against it on state and federal policy issues, according to the person with knowledge of the situation. 

In the five years ending June 2021, InnovAge’s participant count climbed about 120%, and revenues grew more than 170%, reaching $638 million in the fiscal year ended June 30—virtually all of it from Medicare and Medicaid. InnovAge’s acquisitions of four PACE organizations in 2017 and 2018 gave the company eight new centers in Pennsylvania and Virginia. Welsh Carson, which initially paid $196 million for InnovAge in 2016, started to cash in. In May 2019, InnovAge upsized a term loan facility and used some of the proceeds and existing cash to pay $66.1 million in dividends to shareholders. That was the second or third “small dividend” under Welsh’s ownership, Scully says, noting that the dividends also benefit the public pension funds that invest with Welsh.

The company attracted more private-equity investors. Welsh Carson last year sold roughly half its stake in InnovAge to Apax Partners for an undisclosed sum. Finback Pace LP, a vehicle of former Florida Governor Jeb Bush’s Finback Investment Partners, invested $20 million last fall, according to regulatory filings. Apax didn’t respond to a request for comment, and Finback declined to comment. 

Bush is now on the InnovAge board, along with healthcare regulatory attorney Ted Kennedy Jr., Scully, and Tavenner, among others.

***

Beneath the high-profile boardroom, troubling patterns were taking shape, according to former employees, others familiar with the company, and court filings. The 2019 whistleblower complaint filed by a former employee includes results of a 2016 internal audit that found appointment scheduling in San Bernardino, Calif., was “an extremely large concern,” with a backlog of hundreds of outside-specialist appointments that needed scheduling. One participant needed to be evaluated for heavy bleeding in November 2015, the audit found, but there was no documentation of the appointment in the medical records, and the participant went to the emergency room in December of that year. A 2017 review included with the court filing found that 87% of outstanding orders for outside consults in San Bernardino were at least 30 days old.

According to the lawsuit, the former employee relayed the issues to Hewitt, who was her direct superior. But instead of acting on the concerns, Hewitt “rebuked her and had her investigated,” the complaint says, and the former employee resigned in late 2017. 

Whistleblower suits “happen all the time,” Scully says. “I’m certain that InnovAge was never intentionally denying services to anybody.” As for the CEO’s alleged treatment of the whistleblower, Scully says he has never observed Hewitt behaving that way, adding, “I don’t know any of the circumstances.”

Four years later, the Colorado PACE ombudsman program is still hearing complaints similar to those cited in the lawsuit from InnovAge participants and their family members, says state PACE ombudsman Shelbie Engelking. One former InnovAge employee, who only agreed to speak anonymously, said InnovAge too often did not provide sufficient care to seniors. “Every single center had significant issues” with delays and failures to provide care, the former employee says. “I started telling participants, ‘go to the hospital. Just go to the hospital,’” rather than waiting for InnovAge to schedule doctor appointments, the former employee says. 

““PACE is a wonderful thing” that should be available to many more seniors. “I’m all about trying to make it bigger.” ”

— Tom Scully

At InnovAge’s Sacramento location, CMS said the company failed to manage participants’ medical situations, provide necessary services from specialists, coordinate care delivery and follow up on specialists’ recommendations, among other issues. “Auditors found instances of ordered services being cancelled, not provided, or unreasonably delayed without any clear rationale,” CMS wrote in a September letter to InnovAge.

“Apparently we got backed up in Sacramento and had some service issues and responded very poorly” to CMS’s questions about it, says Scully. InnovAge is working to improve staffing, provider agreements, referrals and other issues found in Sacramento, Hewitt said on the company’s earnings call this week. The enrollment suspension remains in effect until CMS validates that the problems have been fixed. 

Like many other PACE providers, InnovAge has contracted with outside chart review services to help identify the diagnosis codes that factor into Medicare’s risk-adjusted payments to providers. Patients with higher-cost diagnoses contribute to higher risk scores, which are multipliers used in calculating Medicare reimbursement rates and designed to compensate providers for higher-cost patients. Accuracy of diagnosis codes is crucial. 

For roughly 18 months ending in early 2020, InnovAge had a contract with DxID, a chart-review provider in East Rochester, NY, Scully says. DxID established a limited liability company at InnovAge’s Denver headquarters address in early 2019, according to Colorado business filings.

In a case unrelated to InnovAge, the Department of Justice intervened in September in a whistleblower suit against DxID and its parent company Independent Health. The government alleged that “DxID’s services were designed to capture and cause the submission of diagnosis codes that were not accurate or adequately documented in medical records.”

Asked about the allegations against DxID, Scully said that InnovAge’s risk scores are below the industry average, and he’s confident the company has been coding properly. As for the DxID business filing at InnovAge’s address, “they had no right to do that,” Scully says. “It’s kind of bizarre.” The filing was withdrawn early this year, shortly before InnovAge’s IPO. DxID shut down earlier this year. Independent Health didn’t respond to requests for comment.    

As the pandemic pushed many healthcare providers to the limit, InnovAge remained focused on enrollment growth, former employees say. Last year, InnovAge enrolled a number of people experiencing homelessness who were being housed by the Colorado Coalition for the Homeless in several Denver-area motels, according to one of the former employees and Cathy Alderman, a spokesperson for the Coalition. InnovAge’s services in the area were severely understaffed and failing to provide adequate care for existing participants, the former employee says, and many of the new enrollees had substance-abuse and mental-health issues as well as multiple chronic conditions.

“Why are you going to make growth happen in the middle of a pandemic, if you don’t have the services to take care of the people we have?” the former employee asks. 

The enrollments were not coordinated through the Coalition, which as a federally qualified health center was already providing health services on-site to those individuals, Alderman says. When some of the new enrollees realized that they’d now have to get all their health services through InnovAge—and that they were cut off from their previous substance-abuse treatment and other behavioral-health providers—“that became a problem for them,” Alderman says. “We had to work with those individuals to get them unenrolled.”

Asked about the enrollment efforts at the motels, Scully said that the state social services agency encouraged InnovAge to enroll those individuals. During the pandemic, he says, “most of our states wanted to get as many people into InnovAge as they could.” A spokesperson for the state’s social-services agency, the Colorado Department of Human Services, said the issue falls under the purview of the state’s Department of Health Care Policy and Financing. Williams, that department’s spokesperson, said the agency does not take a role in encouraging enrollment of individuals or groups in PACE.

CMS’s Colorado audit of InnovAge is focused on provisions of service, service delivery requests, and appeals and grievances, among other issues, InnovAge CEO Hewitt said at a June healthcare conference. The agencies auditing the company’s Colorado centers have referred the case to the CMS compliance enforcement division for review and possible further action, InnovAge said in early November. Final reports on those audits are expected in early 2022, and the company says it has no indication of whether the agencies intend to impose any sanctions on the programs. 

But all the regulatory trouble has slammed InnovAge’s stock, which is down more than 30% since the company disclosed the CMS action in Sacramento and roughly 70% from its peak. 

The past couple of months have been “not fun,” Scully says. But “generally we’ve done a good job,” he says. “I’m proud of the company.”

Scully and other PACE backers still have supporters in Washington. The PACE Plus Act introduced earlier this year by Pennsylvania’s Democratic Senator Bob Casey, for example, aims to make it easier for states to adopt the PACE model, provide grants to organizations opening or expanding PACE centers, and broaden PACE eligibility. Democrats’ social-spending framework released in late October includes $150 billion for home- and community-based services, including PACE. 

Whether under for-profit or nonprofit operations, Scully says, he’s still focused on PACE’s potential for turbocharged growth. “I’m saying this lovingly: PACE is like community co-op grocery stores,” Scully says. “I’m hoping someday it becomes Whole Foods.” 

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