Value-Based Care: The World Turned Upside Down

The Cowen Insight

Value-based care (VBC) aims to restructure healthcare payment incentives & delivery based on quality, outcomes, and total cost instead of payment for each individual service provided. VBC payment models are accelerating a move away from fee-for service (FFS), elevating the role of primary care, incentivizing coordination, & changing care delivery, particularly in the $800B+ Medicare market.

Our report summarizes and is informed by a roundtable discussion regarding the future of VBC with 16 KOLs in the sector, including consultants and government, physician, hospital, and insurance executives. In addition, we provide a comprehensive history of 1990s VBC and “Lessons Learned” from that decade’s attempt to reorganize healthcare delivery. Finally, a look at possible consolidation in the sector following a dramatic valuation correction.

What Is Value-Based Care?

Value-based care, at its simplest level, is the structuring of healthcare payment incentives and delivery based on quality outcomes and total cost instead of payment for each individual unit of service (as in fee-for-service, or FFS). Historically, in the U.S., healthcare is paid FFS where physicians are reimbursed each time they see a patient, regardless of the quality of care delivered. The focus of VBC on quality and total cost of care generally requires higher investment in primary care, risk stratification and disease management as well as longitudinal (vs episodic) health maintenance.

Providers who are able to deliver high quality care while reducing costs are able to share in financial savings (upside risk). Providers who deliver lower outcomes and or higher costs generally must “pay” or bear the difference (downside risk) between the excess cost that is above the prospective benchmark or capitated payment amount.

How Value-Based Care Can Impact Healthcare Payments

VBC payment models are accelerating a move away from fee-for service (FFS), elevating the role of primary care physicians, and driving new incentives for integrated care delivery across healthcare disciplines. We know that much of U.S. healthcare spending is uncoordinated, wasteful and influenced by financial incentives. For over a century, financial incentives have rewarded payers, providers, & intermediaries for higher healthcare spending. VBC promises to change this.

In the long run, VBC could ease fiscal pressure from health entitlement programs, redeploy resources to more productive sectors of the economy, and boost labor productivity and quality of life. The transformation of the U.S. healthcare delivery system over the next decade favors entities positioned to reduce per capita healthcare spending.

In this new epoch, the most significant investment opportunities will be found in companies that provide higher value to entitlement programs, employers, and payers. Over the long term, the hospital industry stands to become the largest loser, as most VBC strategies aim to reduce hospital admissions, emergency room visits and inpatient procedures in favor of outpatient procedures.

The Investment Impact of Value-Based Care

VBC companies and strategies will drive far higher revenue growth rates (20-40%+) than organic U.S. healthcare spending growth (recently ~5%), both from de novo and acquisition strategies, but also from the financial shift from FFS to capitation (or population health) payment streams. Over time, we believe successful, scaled VBC models should yield EBITDA margins in the 10-15% range.

This view is informed by private-company history and current observations despite a lack of demonstrated mature VBC disclosures – this terminal margin question remains the largest investment controversy for the sector. Payers with proprietary VBC assets create sources of unregulated earnings and can drive competitive cost advantage to drive market share gains.

Value-Based Care Catalysts

We expect public and private acquisition activity to accelerate given the recent valuation correction in VBC stocks. We believe large payers will accelerate investments in VBC; other payers will follow, as will less-traditional entrants.

The federal government, through its Center for Medicare & Medicaid Innovation (CMMI) has led the market shift towards VBC. They will narrow and refine existing models to accelerate financial risk-based models as part of its “strategy refresh”. In recent weeks, a group of House Democrats has called for CMS to eliminate or change the recently launched Medicare Direct Contracting program; CMMI has promised an update “soon”.  Many VBC companies will host their first investor days during 2022 – expect important updates on care management initiatives, risk scoring and vintage/cohort progression.