The Tech-En­abled Mod­el Re­shap­ing Health­care

Trans­form­ing the US health­care sys­tem will be com­plex, but an emerg­ing class of tech-en­abled providers are poised to sup­port a break­through. Learn why the move to val­ue-based care of­fers a po­ten­tial­ly huge mar­ket op­por­tu­ni­ty, de­spite be­ing in its ear­ly stages.

Per­verse in­cen­tives dri­ve soar­ing cost

The un­sus­tain­able na­ture of US health­care spend­ing has long been a wide­ly ac­cept­ed fact, and ex­pen­di­tures touched 19.7% of GDP in 2020. The coun­try now spends an es­ti­mat­ed $12,318 per per­son on health­care an­nu­al­ly – far above Ger­many, the next biggest spender at $7,382 per head.

This might be more ac­cept­able if out­comes for pa­tients were im­prov­ing at the same pace. But, the US lags be­hind many oth­er de­vel­oped na­tions in terms of both ac­cess to health­care and qual­i­ty.

The soar­ing costs are a bur­den on fed­er­al and state gov­ern­ments, on the em­ploy­ers who sub­si­dize in­sur­ance and in­creas­ing­ly on in­di­vid­u­als, who are now be­ing re­quired to pay a big­ger pro­por­tion to­ward their care.

While many fac­tors are in play, a key dri­ver of spend­ing growth is the way the pay­ment sys­tem cre­ates per­verse in­cen­tives. Providers are re­ward­ed for high­er prices and vol­ume, rather than the qual­i­ty of out­comes or val­ue. The re­sult is a health­care sys­tem with in­ef­fi­cient en­coun­ters and pro­ce­dures, many of them re­dun­dant.

Bar­ri­ers to change re­moved

Gov­ern­ment-led ef­forts are un­der­way to ad­dress cost and qual­i­ty. Ini­tia­tives fo­cus on re­duc­ing waste, en­gag­ing high­er-risk pa­tients and shift­ing care to low­er-cost set­tings.

The Cen­ters for Medicare and Med­ic­aid Ser­vices (CMS) are us­ing two main mech­a­nisms to try to ef­fect these changes. One is greater em­pow­er­ment of pa­tients. The oth­er is a mod­ern­iza­tion of the pay­ment sys­tem, link­ing health­care re­im­burse­ments to val­ue, not vol­ume.

So far, the adop­tion of this lat­ter idea has been slow. While it makes sense to pay for health­care based on qual­i­ty and pa­tient out­comes, the fee-for-ser­vice mod­el is deeply en­trenched. Trans­for­ma­tion would over­turn the way providers have al­ways worked – for them, it is dis­rup­tive, com­plex, cost­ly and risky.

How­ev­er, progress is ac­cel­er­at­ing. Pre­vi­ous bar­ri­ers, no­tably around poor da­ta and IT sys­tems, have been re­moved. And al­ter­na­tive pay­ment mod­els are learn­ing from ex­pe­ri­ence and gain­ing trac­tion, with reg­u­la­to­ry sup­port from CMS.

Now a grow­ing group of tech-en­abled providers – com­bin­ing providers, pay­ers and health­care IT play­ers – are help­ing to push for­ward the trans­for­ma­tion of care de­liv­ery and clin­i­cian pay­ment.

Val­ue mod­el ben­e­fits all

Through the cre­ation of ac­count­able care or­ga­ni­za­tions (ACOs), CMS sets a bench­mark for the to­tal cost of care per mem­ber. If a provider is able to care for that mem­ber and keep costs be­low that bench­mark, they get to keep a por­tion of the sav­ings; if not, they pay part of what’s over­spent.

The CMS ap­proach has been to mi­grate providers grad­u­al­ly to­wards the po­si­tion of bear­ing over­spend risk. How­ev­er, some emerg­ing com­pa­nies are now of­fer­ing medics turnkey so­lu­tions to take part in full-risk pro­grams.

Of­fer­ings vary, but pro­grams can in­volve pro­vid­ing the clin­i­cians with tech and ser­vice sup­port, han­dling the com­plex­i­ties of pay­er con­tract­ing and reg­u­la­to­ry com­pli­ance and ab­sorb­ing some or all of the risks linked to the new pay­er arrange­ments.

These mod­els rep­re­sent a win for all those in­volved. Pa­tients get bet­ter care, doc­tors can be paid more and pay­ers lock in bet­ter mar­gins.

A com­pet­i­tive and promis­ing mar­ket

The rush of new and in­no­v­a­tive play­ers in the mar­ket is cre­at­ing a com­pet­i­tive land­scape and spawn­ing a va­ri­ety of ap­proach­es. Some play­ers are in­volved in care de­liv­ery, while oth­ers of­fer sup­port­ing ser­vices; some build brick-and-mor­tar fa­cil­i­ties or di­rect­ly em­ploy medics, while oth­ers work in part­ner­ship; and there is a range of ap­proach­es to im­prov­ing out­comes and low­er­ing costs.

The tran­si­tion to new mod­els is still in its ear­ly stages. Pay­ments based on a fee-for-ser­vice mod­el still rep­re­sent the vast bulk of re­im­burse­ments be­ing made in the US – for now, few­er than 10% of pay­ments are mean­ing­ful­ly tied to val­ue.

How­ev­er, progress is like­ly to be boost­ed by re­cent CMS ini­tia­tives. The com­mit­ment of the Biden ad­min­is­tra­tion to the con­cept – and the ne­ces­si­ty of change to the na­tion­al econ­o­my – make val­ue-based care an in­evitabil­i­ty.

The mar­ket po­ten­tial is huge. The US spends $4 tril­lion per year on health­care. With adop­tion still in a nascent stage, this is a space in­vestors should mon­i­tor close­ly.

Get the lat­est in­sights on the fu­ture of health­care with per­spec­tives from RBC’s ex­pert an­a­lysts.


Sean Dodge

Healthcare Equity Analyst, RBC Capital Markets