July 27, 2022

By Jan E. Messerschmidt

Last month, a group of three Cohen Milstein clients—the El Paso Firemen & Policemen’s Pension Fund, the San Antonio Fire & Police Pension Fund, and the Indiana Public Retirement System—filed an amended complaint as co-lead plaintiffs in a securities lawsuit against InnovAge and its officers and directors. InnovAge was among the five worst-performing initial public offerings in 2021.

The filing describes how InnovAge, a national healthcare company providing medical care to ailing seniors, focused on aggressive enrollment of patients for profit at the expense of the healthcare the company was obligated to provide. On average, during the period at issue, InnovAge received a fixed amount of $95,000 per year per enrolled patient, meaning that the fastest and simplest way to grow revenue was to increase enrollment. But unbeknownst to investors, InnovAge’s rapid enrollment growth resulted in severe staff shortages, high caseloads, significant delays, and lack of contracts from specialists, leading to systemic deficiencies and substandard care. Nevertheless, InnovAge focused its resources on hiring sales and marketing staff and ignored substandard home and clinical care for its participants.

In May of 2016, InnovAge became the first Program of All-Inclusive Care for the Elderly (PACE) organization to achieve for-profit status. PACE, a joint Medicare and Medicaid program, provides comprehensive, community-based medical and social services to frail and elderly people. For decades, PACE programs were operated almost exclusively by nonprofits. But InnovAge’s previous CEO, Maureen Hewitt, who served until January of this year, led the company’s aggressive lobbying campaign to transform InnovAge from a regional nonprofit to the first national for-profit PACE provider. To do so, Hewitt secured the partnership of Thomas Scully, the Administrator of the Centers for Medicare and Medicaid Services (CMS) under President George W. Bush and a general partner at the private equity firm Welsh, Carson, Anderson & Stowe (WCAS).

As Hewitt and InnovAge’s private equity leadership prioritized growth in enrollment, the goal was to advance InnovAge’s vision of rapid growth by providing healthcare to the burgeoning senior population in the United States, a massive market on which InnovAge was poised to capitalize. Shortly after WCAS invested in InnovAge’s for-profit conversion in 2016, Scully set a target of taking InnovAge public in as few as four years, citing the growth of the senior population and the market for PACE around the country. As Scully later put it: “I’m saying this lovingly: PACE is like community co-op grocery stores, I’m hoping someday it becomes Whole Foods.”

Over the next four years, the company’s prioritization of enrollment led to explosive growth in revenue, and by early 2020, WCAS and Scully began to implement their exit strategy by soliciting bids for a full or partial sale of InnovAge through either a strategic acquisition or an initial public offering. In July 2020, Apax Partners agreed to buy a stake in InnovAge from WCAS in a deal that valued the Company at $950 million. Under the deal, Apax and WCAS jointly controlled InnovAge, with each owning 49% stakes. The deal’s $950 million valuation of InnovAge represented a 480% increase from WCAS’s investment in the company just four years earlier.

On March 4, 2021, InnovAge launched its IPO, with the company boasting to investors that its meteoric growth was due to its provision of comprehensive care for vulnerable seniors, even though InnovAge was consistently failing to provide timely specialist care and adequate home health services. As a result, InnovAge’s market value rose to $3.2 billion on March 4 and to a high of $3.5 billion the following week, which was approximately 3.6 times its valuation by WCAS and Apax just months earlier.

In the months that followed, however, InnovAge’s systemic problems were slowly revealed. Last September, CMS notified the company that the government agency was suspending enrollment at InnovAge’s Sacramento, California center after an audit of the facility found that InnovAge “substantially failed” to “provide to its participants medically necessary items and services that are covered PACE services.” InnovAge also revealed last year that CMS and the state of Colorado had decided to suspend enrollment at InnovAge’s Colorado facilities, and the company is currently under investigation by the Colorado Attorney General. In just the first six months of 2022, CMS has suspended enrollment in existing centers or canceled agreements for new centers in Florida, Indiana, New Mexico and San Bernadino, California.

As a result of these revelations, InnovAge’s stock price plummeted to $4.71 by December 27, 2021, an 80% drop from its all-time high in March—just nine months earlier. The case is El Paso Firemen & Policemen’s Pension Fund, San Antonio Fire & Police Pension Fund, and Indiana Public Retirement System v. InnovAge Holding Corp., et al., No. 21-cv-02270 (D. Colo.).