Value-Based Care Finds a Home with Primary Care Physicians
Alignment of incentives between Medicare, insurers and primary care creates a foundation for value-based care acceleration
By: Samarth Chandra, General Partner, Enhanced Healthcare Partners
More than 65 years in the making, the peak of the Baby Boom has arrived at the doorstep of senior citizenship. Between now and 2026, the number of Americans covered by Medicare will grow by 30% —from 62 million to 80 million—as Boomers born in the latter half of the 1950s and the first part of the 1960s (the proverbial “boom within the boom”) turn 65.
There’s no surprise in this, of course. How to pay the public and private costs of caring for Boomers as they age has been a critical point in the U.S. healthcare debate through multiple political cycles going back to the Clinton Administration. Since the enactment of the Affordable Care Act in 2010, much of the discussion has focused on using “value-based care” to reduce costs.
Instead of paying providers fees for services rendered—which economically incentivizes testing, procedures and services that don’t always correlate to improved outcomes—value-based care proposes creating a payment model that rewards providers for driving down costs and generating better patient results. In theory, providers make money by saving the system money while driving superior patient outcomes.
Putting that theory into practice has been challenging. While a powerful idea for over a dozen years, payment methodologies and incentive structures made a value-based approach a non-starter for many healthcare providers. Participants could cannibalize established revenue streams with lower revenues and greater uncertainty. Moreover, value-based care favored more sophisticated organizations that had patient scale, analytics and practice management infrastructure, non-realities for the average physician group. Finally, early value-based care programs, on average, were not successful in driving better patient outcomes.
More recently, forces have fallen into alignment and placed Primary Care Physicians (PCPs) in the driver’s seat of value-based care for Medicare patients. The trend has been highlighted over the last year by a surge in primary care-driven M&A activity. We believe the PCP space is ripe for value-based investment and innovation now and in the years ahead.
A New Alignment
For decades, Medicare has been split between two populations, traditional Medicare and Medicare Advantage. Approximately 60%, or 37 million Medicare seniors, are enrolled in the traditional Medicare system, which is run on a fee-for-service (FFS) basis and offers participants unfettered access to any physician accepting Medicare but few protections against spiraling out of pocket costs in the event of catastrophic illness.
The remaining 40%, or 25 million seniors, are enrolled in “private” Medicare Advantage, where private health insurance companies sell Medicare Advantage plans and are regulated by the government. In this system, insurers design benefit packages that offer traditional Medicare services plus additional perks, including limits on out-of-pocket costs and dental & vision coverage. A Medicare Advantage beneficiary, however, does not have the same ‘open access’ to Medicare-participating physicians; they are often limited to a narrower physician network with the PCP acting as a ‘gatekeeper.’
Medicare Advantage is a capitated program which means that insurers take on a patient in exchange for a flat monthly payment from the federal government to manage their care. In recent years, Medicare Advantage insurers have begun implementing the same model with networks of PCPs, essentially agreeing to pay the PCP a flat monthly fee to take holistic responsibility for the patient’s health.
While capitation under Medicare Advantage is not new, it has taken many decades for the current system to script a clear playbook for success. The PCP field is highly fragmented; it took time for PCP groups to build scale, develop needed analytics and manage cost-effective networks of associated specialists who could drive lower costs for capitated patients.
Now, under capitated PCPs, the economic incentives of the government, insurers and PCPs are aligned; well-run PCP organizations can achieve superior patient outcomes in a cost-efficient manner while generating higher profitability than a traditional fee-for-service model.
On the traditional side of Medicare, the ACA put in place a system of Accountable Care Organizations (ACOs) which was a key step in introducing the fee-for-service Medicare population to value-based care arrangements. ACO participants continue to earn revenue on a fee-for-service basis but are eligible for bonus payments (and losses) tied to their performance against benchmarked standards. Results of the program have been mixed; only 11 million Medicare beneficiaries are enrolled in ACOs. While there are many positive attributes, ACO bonus payments can take up to a year to receive and did not provide a compelling enough economic incentive to drive PCP participation.
Notably, Medicare’s recently initiated Direct Contracting Program merges many of the best attributes of the Medicare Advantage and ACO program to create a promising value-based care system targeting the traditional Medicare population. Participating providers earn a monthly capitated payment plus a share of the savings (or losses), similar to the Medicare Advantage program. The potential economic upside must be balanced with the risk that traditional Medicare beneficiaries are not beholden to a specific network; they are free to choose any participating Medicare provider and the Direct Contracting participant bears the risk.
While the program is currently under review by the Biden Administration, there is optimism that Direct Contracting will continue and play a key role in managing Medicare expenditures for its traditional senior population (forecasted to grow from 37 million to 46 million Medicare beneficiaries by 2025).
Why Primary Care as the Value Driver?
Assuming that the Direct Contracting programs remain substantially the same, we believe Primary Care is now the best-positioned segment of the healthcare ecosystem to command the “risk dollar” and realize the long-delayed promise of value-based care as we move into an era of substantial public healthcare cost pressures.
There are several reasons for this:
· As the front-line point of contact, a patient’s PCP is uniquely positioned to “quarterback” care and monitor clinical care for efficiency.
· PCPs are key drivers in the effort to minimize institutional care of seniors in favor of home care (which is preferred both for cost and outcome reasons).
· Technological advances that have spurred the trend toward in-home care tend to put the focus on the PCP; telemedicine, as well as coordinated services from nurses, physical therapists and other lower-cost providers position the PCP as “captain” of a team-based care approach.
In the near future, sophisticated PCP organizations will build their own networks across the care continuum. These networks will leverage technology, nurses and lower cost clinical resources to increase frequency of ‘patient touch’ and drive preemptive care. Downstream, these networks will partner with home healthcare agencies and build their own (capitated) specialty networks. While these networks are beginning in parts of the U.S., we expect them to gain prominence over the next several years.
The Market Heats Up
The market for risk-bearing PCP-focused companies has been scorching for the past 12 months. Most notable was the August 2020 IPO of Oak Street Health, which focuses on services to the at-risk Medicare population under a full-capitation model. At the end of 2020, the company operated 79 centers in 11 states and had about 98,000 Medicare Advantage patients (with about two-thirds “at-risk” patients).
With about $800 million in revenue and negative EBITDA of ~$100 million, the market valued the company at $9.5 billion at the time of its IPO; Oak Street has since surged to a valuation of about $14 billion—14 times the company’s estimated 2020 revenues.
Cano Health, a privately-owned Miami company, manages care to more than 100,000 patients through a network of more than 560 PCPs in Florida, Texas, Nevada and Puerto Rico. The business, which offers primary care and other health and wellness services to the senior population, was built around a group of primary care clinics first purchased in 2017.
In November 2020, JAWS Acquisition Corp. announced a $4.4 billion SPAC merger with Cano —a transaction that implies a ~3x multiple on the business’s estimated 2021 revenues of $1.45 billion.
Private Equity Jumps In
Private equity investors were also active in the space in 2020, acquiring primary care platforms like MBMG Medical Centers (Sun Capital) and Best Value Health Care (Arsenal Capital Partners) in Florida and California’s Rancho Family Medical Group (LightBay Capital)—each of which is ripe for organic and acquisition activity.
Geography has been crucial in the expansion of PCP-driven value-based care, as certain markets embody better payor and demographic dynamics. Florida and Arizona both have large senior populations. In Florida, there’s added support from dominant insurer Humana, which has pushed the PCP capitation model. In California, Kaiser Permanente, an insurer that grew out of a clinical background, has been another enthusiastic adopter.
At Enhanced, we believe that value-based care plays a fundamental role in promoting better patient care while reducing costs. Several of our portfolio companies, such as Eventus Whole Health and NextCare, are evaluating value-based care initiatives led by primary care physicians. We are actively studying the regulatory landscape and evaluating several PCP organizations with whom to partner.
After more than a dozen years of talking about value-based care, we are finally seeing fruits from the approach. While the Biden Administration’s pause on the Direct Contracting program has worried some in the industry, we believe the long-term direction for investments is positive, particularly given the nationwide shortage and intense demand for primary care physicians, which will continue to spur innovation and creativity around treatment approaches and structures.
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Samarth Chandra is a General Partner with Enhanced Healthcare Partners, is a member of the firm’s investment committee and currently sits on the boards of Synergy Health Partners and Priority Ambulance.