Specialty: The Next Frontier of Value Based Care
Executive Summary
The transition to value based care will likely have the largest impact on U.S. Healthcare of any trend over the next 10 years. McKinsey estimates 130-160 million lives could be in some type of value based arrangement by 2027, doubling the size of the market to $1 trillion. Primary drivers of this trend include (1) continued adoption of Medicare Advantage and Managed Medicaid, (2) new government programs like ACO reach, and (3) technological advancements that have made measuring patient outcomes and cost of care significantly faster and cheaper.
Specialty presents the biggest opportunity in VBC over the next 5-10 years. Healthcare incumbents like CVS, UnitedHealth, and Amazon have spent billions building and acquiring national networks of primary care businesses. Over the next 10 years, they will need scaled specialty partners to drive cost savings. We believe compelling economic alignment between payers and specialty providers will be a key driver of adoption, particularly in shared savings arrangements. To illustrate, moving a knee replacement surgery to the outpatient setting from the hospital drives ~$11,000 of savings. Under a shared savings agreement, we estimate the surgeon can increase compensation by 133% while saving the payer 26%.
Company Ventures likes tech enabled MSOs because of capital efficiency and ability to build scale quickly. Tech enabled MSOs are businesses that handle admin services like contracting, billing, and scheduling for healthcare practices. We like their ability to create scaled provider networks quickly with lower capital investment than PE rollups or ACOs. Nowhere has this been more evident in healthcare today than within behavioral health. Tech enabled MSOs like Octave (Company Ventures portfolio company), Headway, Alma, and Uplift have aggregated more than 40,000 providers in 3 years while raising less than $300M combined. By comparison, PE roll up Lifestance spent $2.1 billion over the last 7 years to create a network with ~5,200 behavioral health providers.
MSK, cardio, and inflammatory conditions are compelling therapeutic categories to build in for value-based, shared savings contracts. These therapeutic categories account for $640B in annual US spend, compared to $180B for behavioral health. We also like the high spend per provider, market fragmentation, well documented savings opportunities that can be used for contracting, and high frequency of referrals from primary care (for cardio and MSK specifically). We do not believe these markets are winner-takes-all because of the enormous market sizes and multiple scaled winners that have emerged in behavioral (Headway, Sondermind, Octave, Alma, Uplift, Grow Therapy, etc).
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1. Framing The $1T VBC Opportunity
The transition to Value Based Care (from fee for service) will likely have the largest impact on the U.S. healthcare system of any trend over the next 10 years. Today, 80-100 million lives are in some type of value based arrangement. McKinsey estimates this number could grow to 130-160 million by 2027, roughly doubling the size of the market to $1 trillion (source). We believe several factors are driving this trend:
Adoption of Medicare Advantage and Managed Medicaid - These capitated government programs are administered by commercial health insurance companies like UnitedHealth, Aetna, and Centene. Medicare Advantage alone has grown to include ~31M medicare patients, or 51% of all Medicare beneficiaries. Because the programs are capitated, payers are increasingly seeking solutions to better manage high-cost, chronic patients and offload portions of risk to providers.
Government programs - CMMI has continued to push value based programs, the most recent example being ACO reach.
Technological advancements - Measuring patient outcomes and cost was historically time intensive and costly. The adoption of Electronic Medical Records, connected / mobile patient devices, remote patient monitoring apparatuses, and electronic healthcare claims has changed this.
Defining value based contracting. There are a wide spectrum of contracts considered to be value based. Below we define 3 of the most common:
Incentive based - A provider is paid an incentive fee or bonus for taking a specific action. An example would be screening a patient for diabetes during the annual primary care visit. This type of arrangement is common in primary care.
Shared savings - A provider and health insurance company split the savings generated from a specific action. Examples would include moving site of care for a surgery from the hospital to outpatient setting or changing a patient’s medication from a biologic to a biosimilar.
Capitation - A payer pays a provider group a set monthly fee to manage all or some health care services for a specific patient. The provider is “at risk”, meaning their profit will depend on the actual cost to care for the patient.
We believe a company must achieve 3 things in order to successfully contract on a value basis:
Scale - An organization must have enough capacity to care for a large population of patients.
Measurement - An organization must have the ability to measure outcomes and cost across the population of patients it is treating.
Ability to influence outcomes - Once scale and measurement are in place, the company must have a unique clinical model that improves outcomes and does so at a lower cost.
2. Why VBC Needs Specialty, and Why Specialty Needs VBC
Solutions aimed at building scale in speciality are the biggest opportunity over the next 5-10 years. According to JAMA, the top 3 categories of healthcare spend in the US are musculoskeletal, diabetes / endocrine, and cardiovascular, with behavioral, neuro, gastro, and respiratory also in the top 10 (source). Despite this, very few scaled tech-enabled specialty companies exist today. Over the last 10 years, large healthcare incumbents have invested billions of dollars to build scaled primary care business. Most notably, UnitedHealth’s acquisition of thousands of primary care practices, Amazon’s acquisition of OneMedical, and CVS’s acquisition of Oak Street Health. Over the next 10 years, we believe these platforms will need scaled specialty referral partners to truly unlock meaningful patient cost savings.
VBC economics in specialty are more compelling than fee for service. Value based contracts in specialty have enormous potential to drive increased revenue to providers and save payers money, all while maintaining the highest standard of patient care and (ideally) improving outcomes. This trifecta alignment of patients, providers, and payers is critical to the widespread adoption and, ultimately, the success of value based care within our $4.3T healthcare system. To illustrate, let’s compare billings for a knee replacement surgery in a fee for service vs. a shared savings arrangement. Based on actual data from BCBS, total cost for a knee replacement in the hospital setting is $30,249 vs $19,001 in the outpatient setting (source), of which ~$1,450 is paid to the surgeon (source). Despite this, 90% of knee surgeries happen in a hospital. If the orthopedic surgeon shifts to a 30% shared savings arrangement and performs the surgery outpatient, they can increase their payment by 133%, and reduce the total cost to the health insurer by 26%. This financial alignment is the key driver of adoption.
Knee Replacement Cost Comparison: Fee for Service vs. Shared Savings
| Fee for Service | Shared Savings (30%) | % Delta | |
|---|---|---|---|
| Health Insurer Cost | $30,249 | $22,376 | -26% |
| Payment to Surgeon | $1,450 | $3,374 | 133% |
3. Tech Enabled MSOs: Gaining Ground in Specialty
Tech enabled MSOs create scaled specialty networks quickly. MSOs provide administrative services like billing, scheduling, contract negotiation and administration, vendor management, quality reporting tools, and basic data collection to measure outcomes. After establishing density within a given specialty, the MSO model enables providers to collectively negotiate VBC contracts. We believe this cap light business model is the most efficient path to moving to a shared cost savings arrangement. Once a shared savings arrangement is in place, it then allows other specialty providers to “opt in” to the contract going forward.
The capital efficiency of scale matters. ACOs and private equity roll-ups also create scale, but require large amounts of capital to do so. Because of this, we favor capital light, tech-enabled models. For example, formerly PE-backed behavioral health roll-up company LifeStance (NASDAQ: LFST) employs ~5,200 providers across 32 states. The company has raised over $2 billion since 2017 to achieve this level of scale. In contrast, Headway, a tech enabled behavioral health MSO has over 22,000 providers on platform across 16 states. The company has raised only ~$100m since 2019, showing the advantage of tech-enabled, asset light models.
Capital Efficiency Comparison: Headway vs. LifeStance
This market is still in its early innings. While significant investment has been made in behavioral health over the last 3 years, other categories of specialty care remain as large opportunities. We do not believe these business models are winner-takes-all because of the enormous market sizes and multiple scaled winners that have emerged in behavioral to date (Headway, Sondermind, Octave, Alma, Uplift, Grow Therapy, etc).
Orthopedics, inflammatory conditions, and cardio are all high potential therapeutic categories that we have zeroed in on. Collectively, these 3 therapeutic categories account for an estimated $640 billion in annual spend, or an average annual spend of $4.2mm per provider. We also like these categories because of their market fragmentation, well documented savings opportunities that can be used for contracting, and high frequency of referrals from primary care. Within MSK, established value based care markers for site of care (for orthopedic surgeries) and medication management (for inflammatory conditions) provide opportunity for shared savings arrangements. Similarly in cardio, reduction in hospitalizations is a well-documented value based care marker that can be monitored for shared savings within a value based arrangement. We believe that the realigned economics of a shared savings arrangement would give ample incentive to drive adoption of MSOs.
Below is a summary table of 7 top categories of specialty spend that we analyzed:
| Specialty | Number of Providers (U.S.) | Total Annual Spend (US) (Source) | Potential KPIs for VBC Contracting |
|---|---|---|---|
| Musculoskeletal and Inflammatory Conditions |
|
$381 Billion |
|
| Diabetes / Endocrine |
|
$309 Billion estimated annual cost of diabetes, urogenital, blood, and endocrine diseases | |
| Cardiology |
|
$255 Billion not including the cost of treating hypertension | Reduction in hospitalization |
| Behavioral |
|
$181 Billion | |
| Neurological |
|
$174 Billion | |
| Gastrointestinal |
|
$136 Billion |
| Specialty | Number of Providers (U.S.) | Total Annual Spend (US) | Potential KPIs for VBC Contracting |
|---|---|---|---|
| Respiratory |
|
$117 Billion |
Adjacent care services offer incremental savings opportunities. Given the complexity of care within specialty medicine and high overall spend on chronic conditions, payers are incentivized to cover adjacent care services that have been proven to lower costs and improve patient outcomes. Over time, MSOs could expand value capture by offering dietary coaching, behavioral health, and care coordination. As contracting increasingly moves away from fee for service, tech designed for measuring outcomes (remote patient monitoring, patient data capture infrastructure, and data interoperability) across specialists creates stickiness in the model.