I had the pleasure of speaking at the BioFuture in New York City earlier this November. During our panel, while discussing ways to innovate commercialization routes in healthcare, we highlighted that there’s a renewed sense of excitement for value-based care.
Our moderator, Beth Rogozinski, CEO of Oncoustics, a portfolio company of ours developing full liver diagnosis and screening AI solutions, shared that the latest quarterly report from One Medical had some surprisingly positive numbers on their value-based business.
Fee-for-service vs. value-based care
To give a quick background on the matter, U.S. healthcare has historically been based on a fee-for-service model, where healthcare providers get paid based on the quantity and type of service performed. The amount paid to them is more or less fixed by the payors, like private insurers, Medicare, or Medicaid.
The obvious problem here is that the fundamental system “rewards” the quantity of care rather than the quality of care realized by patients. Because of this setup, costs of care have skyrocketed.
And despite the higher spending per capita than any other country in the world, quality of life is generally tracking very poorly.
Source: Peter G. Peterson Foundation (2022)
It’s no secret that the U.S. healthcare system is broken. Thus, the drive toward a value-based care model had been in the spotlight for quite some time. Logically, it makes sense: payors would be paying providers based on the quality of care provided to patients. Though practically, it has been a major uphill battle. As of 2022, value-based care only makes up 5 – 15% of medical revenue.
One Medical, its latest capitated revenue report, and what it means for value-based care
So, what’s exciting about One Medical’s latest financial report? Their capitated revenue, derived from Medicare Advantage managed care payments, grew from 8% to 50% of the total net revenue. This revenue stream rate is predetermined by Medicare; it is a flat fee per patient, therefore encouraging providers like One Medical to optimize for costs while meeting the standard for patient care. Under such a program, providers are less likely to go on a spur to order unnecessary procedures since the expenses will come directly out of their pocket. Vice versa, any “savings” they could achieve will be realized as a profit. On that note, their managed care program has been profitable: expenses were only ~80% of the capitated revenue, leaving ~20% on the table.
The next promising piece of information is that the capitated revenue reported here was derived from only 5% of One Medical’s members, a group called “at-risk” members, who are 65+ and covered by Medicare. The implication here is that the small (but growing aging population; underrepresented in One Medical membership) generates an outsized revenue for One Medical, while the remaining 95% of the membership and others made up the rest.
Stepping back, this may have less to do with value-based care but all the more to do with an aging population and chronic diseases—one of our three core investment theses—but it’s reassuring to see the data all the same.
Source: Rebecca Pifer, HealthcareDrive (2022)
Overall, the trend is certainly encouraging for the value-based care model, though it’s worth keeping in mind that One Medical seems to be an exception to the rule in comparison to the overall healthcare system.
Is the value-based care business model investible?
Now, turning to the obvious next question, would we invest in a company that solely goes after a value-based care model?
It depends, but likely not.
One of our core investment approaches is to invest in a company that addresses the most critical problems that stakeholders are willing to pay for today. While it seems like the market is moving toward value-based care, providers that operate under such a model are still in the minority today and, truthfully, likely still be in the minority in the timeframe we care about.
Turning the table around, I would question why can’t a company start off by going after fee-for-service, where the majority of the market is operating now, and by all means, expand to value-based care when the business is stable enough and has the resources to do so. There may be an exception if the company’s market is disproportionately in the value-based system. In which case, sure, it might make sense, though whether the market opportunity is sufficiently large and therefore, venture-backable needs to be thoroughly convincing.