After years of struggling with rising costs among health care providers, investors are looking to primary care providers as a way to reduce expenses, improve outcomes and enhance patient experiences, the so-called triple aim. This model isn’t new to health care, but the amount of cash being invested in primary care is.
In this model, providers coordinate a patient’s medical care with specialists and promote general health and wellness. In return, they are paid a flat rate per member per month under what is known as the capitated revenue model.
The idea is that providers have an incentive to promote preventative care and reduce unnecessary and costly testing if they receive a fixed amount of revenue. The model is evolving, but it is gaining more attention particularly as the adoption of digital technology allows for greater savings, and startups want in on the opportunity.
For example, Vera Whole Health, which is using technology to scale primary care to achieve the triple aim, received a $400 million investment from the private equity firm CD&R.
Then there is Cano Health, which went public via a special purpose acquisition company, or SPAC, at a $1.49 billion valuation. The company has approximately 117,000 members and $829 million in revenue, 95% of which is from capitation. Investors are betting that the technology will scale the cost-saving and health-promoting solutions in a way that wasn’t possible even a few years ago.
According to Pitchbook data, there have been nine similar buyouts of technology-driven primary care providers this year after a record 23 last year. Of the 14 deals in 2019, one included the $1.4 billion acquisition of InnovaCare, a record at the time in technology-driven primary care.
But uncertainty in the future of capitation and primary care remains. Shortly after the Cano deal was announced, the stock price of the acquiring SPAC increased to $11.97 from $10.13 and peaked at $16 twice in January and February. By the time the listing completed in June, the price had fallen back toward $12.
Certainly, this movement also may reflect the lackluster returns many SPACs have delivered for investors. But the trillion-dollar question of the primary care physician’s or midlevel provider’s role in the future of health care remains unanswered.
As this topic evolves, four key questions remain:
1. How well does anyone truly understand the cost of delivering care?
In the typical capitated model, the provider receives a certain amount of money per member per month. For providers to generate a financial margin that sustains future operations and generates a reasonable return for investors, they must know exactly how much it costs to deliver care across the continuum of care covered by that capitated arrangement.
In most industries, understanding cost is a given. Not so in health care. The complex web of arrangements and agreements between providers and payers in the traditional fee-for-service model has long obfuscated the economics of health care such that few providers truly understand the cost of delivering care. Without such an understanding, any capitated arrangement is doomed to fail.
2. Will technology-driven, capitated arrangements actually reduce physician administrative burdens?
Physicians generally loath the administrative work required of our traditional fee-for-service model: entering notes into electronic medical records or calling around for prior authorizations and pre-approvals. One benefit of the capitated model is that many of these duties evaporate. Proponents of the model argue that this will reduce physician burnout and curb labor shortages while also improving the patient experience since providers will be able to spend more time with their patients.
But in a capitated model, the physician, or midlevel provider, is now responsible for coordinating care for many patients across multiple specialists. Some observers argue this is a key area where technology will assist providers. Yet I remain skeptical because other observers have long promised time-saving technology for the traditional fee-for-service providers. Technology has not yet meaningfully reduced the fee-for-service physician burden. Instead, it seems to create more.
3. Will blame for denied coverage shift from the payers to the primary care physicians?
It is no secret that patients and providers are often frustrated when an insurance company denies coverage for a medical procedure. To the provider, denials can feel as if the insurance company is playing backseat physician. To the patient, such denials are confusing and aggravating. In a fully capitated world, the insurance companies would not deny a procedure.
But because the providers are now at risk for the cost of caring for the population, it is conceivable that expensive procedures may be denied for individuals. As capitated primary care models become more pervasive, it will be important to watch if the blame for denied procedures simply shifts from the insurance companies to the providers themselves, and what that means for the patient-provider dynamic.
4. Can preventive incentives ever be fully aligned if patients are free to move to a new plan or group?
Promoting preventative care like mammograms and colonoscopies is one of the most attractive cost-saving features of any capitated primary care model. The idea is that patients will more actively seek out annual check-ups and cancer screenings if there is no out-of-pocket expense. By catching cancer, or other conditions, early, the providers can not only improve survival rates, but can also drive down cost; it is generally less expensive to treat Stage 1 melanoma than Stage 4.
However, these savings can take time to actualize. The free-screening mammogram doesn’t cost the patient anything, but it does cost the provider. And it can take several years of preventative care and screenings before the health of the population improves to a point where the provider is generating a sufficient financial margin on the capitated revenue.
The more frequently that patient members leave to go to a competing plan, the more difficult it can be to capture the cost savings promised by preventative care. If provider X spends two years giving “free” screenings and check-ups to a patient only for her to leave to provider Y the next year, provider Y has now received the benefit of that preventative care provider X paid for. This can be problematic for provider X.
The takeaway
These questions are not meant to suggest that technology-driven, capitated primary care like Vera or Cano, are not worthwhile endeavors. Rather, as health care continues to change rapidly, we have to temper our excitement with critical questions. In the end, the organization that cracks this solution will usher significant change.
