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Why Value-Based Business Models Are Core to 2022 Investment Activity

November 9, 2022

Ben Grabski

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The introduction of the phrase “value-based care” into the industry lexicon can be tracked back to 2010 driven by the reforms of the Affordable Care Act (ACA). The HMOs of the 1990s weren’t balanced with quality, access, consumerism, nor were they tech enabled. They indeed failed spectacularly but moving back to FFS indefinitely wasn’t the answer either.  Lessons learned were applied to the Medicare Advantage modernization aspects of the ACA to align quality, cost and consumerism. The ACA also came with the commitment from the government for continued payment model innovation through the Center for Medicare and Medicaid Innovation (CMMI) which started a new value-based care arms race in the private sector. There was a lot of experimentation and innovation from 2010-2020 and we are now starting to see the promise of value-based care prove itself out with sustainable, value-creating healthcare companies. In fact, CMS has doubled down on the trajectory and commitment of value-based care over FFS with the creation of its most advanced payment model yet, ACO REACH, and with the goal of all Medicare and Medicaid beneficiaries to be in a value-based model by 2030.  Value-based care is no longer an experiment, and the equity markets have noticed. To be clear, I am not talking about the exuberance we saw in the Special Purpose Acquisition Company (SPAC) markets in 2020 and 2021. Most of the SPAC companies were NewCos built on the promise of value, often through a PowerPoint presentation, with little to no operating history, capitalizing on the market’s desire to get in on these companies early, in a desirable sector, when the market was flush with capital.  But it takes more than a PowerPoint to deliver on the promise of value-based care. Value-based care is simple in concept but incredibly difficult to execute. This was demonstrated by many of these SPAC companies missing their FIRST quarter commitments and trading down 90% of their initial stock price.  Experience matters in value-based care. Where the equity markets have maintained, and increased valuations are with companies that are already (or are close to) cash flow positive and have a track record adding value to the healthcare supply chain. Deals that involve value-based payment, continuum of care coordination, and ease of access consumerism have been the focus recently. Sherlock Company, a research organization that tracks the state of investment in public value-based care companies, states seven value-based care public companies it follows had revenue growth of nearly 100% year-over-year, and outperformed the greater S&P 500, even in the broader bear market. And while IPO volume has been down [2] from previous years in healthcare technology and services (see SPAC commentary above), merger and acquisition activity is picking up [3] as my colleague Rick Goddard referred to in the recent blog Healthcare Vertical Integration: Back to the Future, vertical integration is picking up among the large corporations looking to diversify across the healthcare continuum. The latest deals are focused on business models that are built on a value-based chassis:
  • VillageMD has entered into a definitive agreement to acquire Summit Health-CityMD this week (11/7/22). This expands VillageMD’s value-based net of access points across geographies and the healthcare continuum with the addition of Summit-City’s primary, specialty, and urgent care assets. Walgreens Boots Alliance is the largest shareholder of VillageMD at 53% ownership and this continues to accelerate Walgreens vertical integration intentions. 

  • Amazon announced its pending acquisition of One Medical, a subscription based primary care model, in August 2022. In late 2021, One Medical acquired Iora, a consumer-driven primary care physician company. Iora was very deeply committed to driving high value, consumer driven care built on a capitated primary care model.

  • CVS Health recently announced its pending acquisition of Signify Health at an $8B purchase price. CVS prominently featured Signify’s purchase of Caravan Health in early 2022 as being a major interest point even though it is only 4% of the revenue in YTD 2022 [4].
  Why value-based care models are an attractive investment right now Value-based, capitated, or total cost of care models that allow providers to actively take a role in managing the risk of their network to drive high quality outcomes has multiple benefits to Wall Street, including:
  1. It is easy to understand. Per member per month (PMPM) models are easy to financially project and fall in line with many growth company’s subscription models that Wall Street loves.
  2. It aligns with the consumer’s best interests. The financial incentives are to keep people healthy instead of managing care on a fragmented and transactional basis; engaging only when they are sick is not helpful for the consumer’s experience, their health, or their pocketbook.
  3. Macro payment trends are moving in this direction. The federal government sponsors Medicare, typically a provider’s largest insurance payer, and this payer is rapidly moving toward value-based payment. Once substantially penetrated, the rest of the commercial market will begin adopting more provider-delegated insurance risk models. Companies that capitalize on this trend will have more member share and leverage.
  4. It is predictably cost effective. Incentives drive behavior and the fee-for-service model drives inefficient, over utilized, and sometimes, unpredictable behavior. Predictable medical utilization allows for better risk containment for the investor community that doesn’t like to be surprised by unexpected risks.
  5. The pandemic has not been favorable to fee-for-service (FFS) models. When demand dropped significantly during the COVID-19 pandemic high prevalence years of 2020 and 2021, many providers dedicated to FFS either closed or were acquired due to their volume-based demand collapsing. Those that diversified to capitated-based models had cash flow to weather the storm or thrive while managing to their patient’s best interests.
From a business standpoint, the benefits above are indeed attractive, however the most important component is that value-based models produce higher quality outcomes for consumers and providers. By focusing on preventative and whole-person care, the healthcare services consumer is being concentrated on before they develop a more progressive disease or chronic illness. Meanwhile, providers are off the fee-for-service metaphorical “hamster wheel” of productivity incentives and are moved to population-focused incentives that allow them to focus longer on patient health and reduce their own burnout. It’s more sustainable from BOTH a workforce, consumer, and financial perspective. Value-based care is no longer an experiment; it’s now the expectation, and investors are paying attention as care in our country migrates from FFS to higher value and outcomes-based financing. [1] Sherlock Company [2] https://insight.factset.com/u.s.-ipo-activity-drops-dramatically-in-the-first-half-of-2022 [3] https://www.pwc.com/us/en/industries/health-industries/library/health-services-deals-outlook.html [4] Signify Health, Inc. FORM 10-Q For the quarterly period ended June 30, 2022
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