From Cano Health (CANO) to One Medical (ONEM), the companies exposed to value-based care (VBC) are on a roll amid rising buyout interest as the industry heavyweights look to benefit from a lucrative alternative to a traditional reimbursement model.
VBC ties reimbursements to the quality of care delivered, rewarding healthcare providers for both efficiency and effectiveness as opposed to the fee-for-service (FFS) model, which relies on historical bill charges or annual fee schedules.
After COVID-19 underscored the drawbacks of the FFS model, companies are pivoting to VBC, which offers better economics amid favorable government policies.
The early stage of the pandemic exposed the volume driven FFS system as declining patient volumes led to a substantial decrease in payments, Corinne Lewis, the Program Officer for Delivery System Reform at the healthcare think tank, The Commonwealth Fund, pointed out. "So, providers are recognizing the need to move toward more value-based approaches for more flexibility and protection against future volume shocks," she told Medical Economics.
In addition, VBC models focusing on members' long-term health outcomes deliver higher profitability to providers.
Highlighting its benefits, George Renaudin, Medicare President of health insurer Humana (NYSE:HUM), said that value-based care models deliver a 20% higher contribution margin to the company, reducing total medical costs by an estimated 13.4% compared to original Medicare. Humana (HUM) expects its value-based primary care and home health services to sustain EPS growth beyond 2025.
Some government policies are in place to support the shift: In June, the Centers for Medicare & Medicaid Services (CMS) proposed a 4.2% cut in home health services for 2023. Estimating its impact at $30M, Susan Diamond, HUM's Chief Financial Officer, said at the recent earnings call that the decision has put "more emphasis on value-based payment models."
Meanwhile, HUM's rival UnitedHealth Group (UNH) plans to accelerate its VBC shift, leveraging analytics and decision support tools of the company's Optum unit in a 10-year collaboration with Walmart Inc. (WMT).
Weeks later, AMZN and UNH were cited as potential bidders to buy Signify Health (SGFY), a company focused on the value-based payment industry, which eventually agreed to be acquired by CVS for nearly $8B early this month.
According to experts, the FFS model is unlikely to completely go away partly due to its delivery of certain medical practices, such as vaccinations, effectively. "I don't think fee-for-service will ever be eliminated entirely, because in some cases it can be an appropriate mechanism for incentivizing care that we want to see more of," Commonwealth Fund's Lewis added.
However, the stock performance of VBC-leveraged healthcare players indicates otherwise. Oak Street Health (OSH), Privia Health Group (PRVA), agilon health (AGL), CareMax (CMAX), and Cano Health (CANO) have all outperformed the broader market over the past three months, as shown in this graph.