Takeaways from AHLA’s Health Care Transactions Conference

Value-based care has arrived and it is here to stay. That was the consensus shared by panelists at the Health Care Transactions conference hosted by the American Health Law Association in April 2023 in Nashville.

“Throughout my entire career, I’ve been hearing that value-based care is ‘maybe only five years away,’” Jim Cotelingam, the chief strategy officer for the Cleveland Clinic, said during the opening panel. “I’ve been hearing that for 25 years. But I think this time is actually different.”

Levin Associates was in attendance at the conference and the insights shared below are from panel discussions that our writer observed in person. This article also cites third-party data sources gathered following the conference.

DEFINING IT: Value-based care versus fee-for-service

Luis Argueso, a partner at InHealth Advisors, and Kyle Gotchy, a partner at King & Spalding, summarized the difference between existing systems and value-based care arrangements:

  • Over the past few decades, the majority of payments for physician services have been fee-for-service arrangements. Payment is based on the volume of services delivered.
  • In a value-based care model, providers are financially accountable for the quality of the care delivered and the cost of those services. Reimbursement is based on factors such as outcome measures, patient-reported experience, and avoidance of wasteful services. As Argueso explains, value-based reimbursements are usually based on one of three models:
  1. A hybrid of fee-for-service payments with an at-risk component
  2. Episode-based payments
  3. Capitated payments for all prospective care over a time period

For more details on value-based arrangements, as well as key financial terms of private equity transactions, see our Glossary here.

Does the system really need to change?

Argueso and Gotchy noted that the United States leads the world in healthcare spending per capita (nearly $13,000 per person as of 2021). They also stressed that the Medicare Part A trust will run out of funds and become insolvent by 2028, according to the Medicare Board of Trustees. Despite all this spending, Argieso and Gotchy said, the United States is ranked #51 in life expectancy globally and more than half of physicians (53%) report feeling burned out.

“What we can see here today is that fee-for-service medicine isn’t really leading us to the outcomes that we want in our healthcare industry,” Argueso stated. “Payers see value-based care as a potential solution to the problem.”

There is also significant growth potential in this space. McKinsey & Company has predicted that “continued traction in the value-based care market could lead to a valuation of $1 trillion in enterprise value for payers, providers, and investors,” potentially as soon as 2027.

Commercial payers are following Medicare’s lead

The Centers for Medicare & Medicaid Services (CMS) has set an ambitious goal: By 2030, CMS wants 100% of Medicare beneficiaries to be in a relationship with a provider that utilizes some sort of value-based care model.

This is a big deal because the federal agency provides coverage for approximately 163 million people – which is nearly half the U.S. population. More than 65 million of those patients are currently enrolled in Medicare and that number is expected to grow as more Baby Boomers retire.

The 2030 goal is “going to continue to pull the industry forward,” said Darren Skyles, a partner at Frost Brown Todd. While he says he doubts we’ll see a total shift to value-based care by 2030, he expects CMS will “be a heavy influence in getting us closer and closer toward paying for value rather than paying fee-for-service.”

“In many markets, Medicare is the major payer and for many hospitals or health systems, half of the patient population is from Medicare and maybe half of their inpatients are in Medicare Advantage-type plans,” Cotelingam pointed out. “We’re now in a situation that we didn’t have 10 or 20 years ago, where one payer really can move the market.”

Cotelingam continued, “I think Medicare doesn’t have a choice. They’re projected to go bankrupt in several years. They have to move their patients to more value-based environments and that’s what they’re really going to do.”

Jana Sizemore, vice president of Coker Group, echoed that sentiment when she stressed that commercial payers tend to follow CMS’ lead. She cited several non-traditional healthcare providers entering the value-based space:

“For example, Agilon Health. That’s a company that enables physicians to create their own Medicare-centric globally-capitated line of business. Oak Street Health is a technology-enabled platform that’s out there to deliver value-based care. Another is Privia Health, which collaborates with more medical groups and health plans to optimize physician practices, improve patient experiences and reward doctors for delivering high-value care in in-person and virtual care settings. So we know that this is something that’s here to stay,” Sizemore said.

Recent deals have created new opportunities for providers like Oak Street Health to expand their value-based care structure. Levin Associates’ proprietary data platform, which tracks healthcare mergers and acquisitions in real time, shows CVS Health acquired Oak Street Health “in an all-cash transaction at $39 per share, representing an enterprise value of approximately $10.6 billion.” The deal closed on May 2, 2023.

Fee-for-service still dominates the market

For all of the talk about value-based care, it’s still the minority system. Only 15% of physicians currently participate in value-based payment models. Matthew Weiss, a Managing Director at EY Parthenon, predicted that we’ll see wide disparities in how value-based care expands across the country.

“One size doesn’t fit all and I think that applies geographically, where the penetration of value-based care versus fee-for-services is going to be widely disparate in certain markets.” Weiss named Cleveland Clinic, Mayo Clinic, and Kaiser Permanente as examples of healthcare organizations that are capable of implementing value-based care arrangements.

Weiss added that he’s curious to see how value-based and fee-for-service arrangements play together in the short term and whether there will be “internal friction within health systems.”

“You may have certain physicians who are practicing along a value-based schema and others who continue” with fee-for-service, Weiss said. “It’s interesting to contemplate what it really means to be a value-based orthopedic surgeon, who goes from performing total hip surgeries all day to someone who may not be doing as much volume but is more accountable for outcomes.”

Specific specialties are ripe for value-based care arrangements.

Eric Major, a Managing Director at Provident Healthcare Partners, noted that orthopedics has begun to embrace value-based arrangements. He cited HOPCo, a value-based orthopedic group backed by Audax Private Equity, as an example. “They started investing heavily into outcomes data early on,” Major said.

Major also mentioned that oncology is one specialty that is seeing more value-based care players. But he said cardiology is the specialty to watch, especially since this sector has attracted significant investment in recent years. [See Levin’s article on investment in cardiology].

“I think investors view cardiology, over the next 5-10 years, as an area that is prime for value-based care,” Major predicted. “It’s probably going to start with more shared savings, and then move into bundled payments, and maybe even sub-capitated-type models depending on the condition of the patient. So we think that’s going to be a big area of investment.”

Erin Laviola is a writer for Levin Associates.

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