It's a Marathon Not a Sprint
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The pandemic exposed many shortcomings in healthcare systems across the world, but one you might not have considered is the fee-for-service payment model. Under such a model, which is used throughout the United States, physicians get paid per patient they see and per treatment or test they prescribe, leading some providers to be more liberal with their care than others. Unnecessary tests and treatment are a huge burden on hospitals, practices, and insurance companies — estimated to cost the American healthcare system upward of $200 billion a year. On top of this, it compounds hospital inefficiency, a growing problem due to staff shortages. However, the pandemic highlighted how unsustainable this model truly is when it deprived many clinics of regular patients.
Discouraged to attend routine appointments or go to the hospital, many patients forewent care in 2020, and this caused a considerable monetary pinch. The American Medical Association found that medical practice revenues fell by more than 30% and nearly 60,000 primary care practices were projected to close by the end of 2021. This came in addition to the thousands of clinics forced to furlough or lay off staff. By contrast, value-based systems saw little to no impact.
Value-based healthcare ties fees and reimbursements to patients' health outcomes rather than individual visits and tests. In doing so, physicians are encouraged to practice patient-centered care, helping them make lifestyle changes and access routine outpatient services. Care like this is especially important for patients with lifelong conditions like diabetes or circulatory disorders. In one study, it was found that 72% of patients admitted to hospitals for congestive heart failure, chronic obstructive lung disease, and asthma did so through the emergency department, yet all of these chronic conditions can be effectively managed through routine primary care visits. With value-based care, patients are less likely to wait until their condition deteriorates to the point of hospitalization to seek medical attention as they do not pay on a per-visit basis. Overall, this keeps costs lower by reducing the risk of complications and ensures small clinics and offices can continue to bring in revenue despite challenging conditions, such as a pandemic.
Most importantly, for investors and patients alike, value-based healthcare is also the answer to ballooning Medicare and Medicaid costs. These state and federal programs, which provide services to low-income families, the elderly, and people with disabilities, have been pivoting towards value-based care since the advent of Obamacare in an effort to save money and improve patient outcomes. After more than a decade of experimentation, the Centers for Medicare & Medicaid Services have made their official recommendations known; it has repeatedly encouraged state Medicaid agencies to seek value-based bids when awarding their contracts. This has created a tremendous opportunity for those in the value-based space such as MyWallSt shortlist member Evolent Health.
Evolent helps payers and providers engage in value-based care through its platform while limiting risk. Evolent handles administrative concerns and data analysis to allow clinics to focus on patients and it would appear to be working. Through Evolent's Complex Care program, which helps physicians monitor and check-in with high-risk Medicare beneficiaries, inpatient admissions and medical spend were reduced by more than 40%. Physicians clearly love it, the company boasts a renewal rate above 98% and net revenue retention of 109%.
It's clear that value-based care would benefit everyone in the healthcare space, from patients to the federal government, but how long will we have to wait to see it embraced? The answer is a while. Despite the pandemic demonstrating the real economic risks of the traditional fee-for-service model, it's not so easy to drop everything and switch. Blue Cross Blue Shield of North Carolina began transitioning to a value-based system last year but first had to promise to subsidize primary care physicians to help them make the change. Many providers are also worried it will deem millions of dollars of staff and equipment unnecessary and for small, independent clinics, the possibility that patient outcomes don't improve is a risk they cannot afford to cover.
Despite this, the signs are clear this is the way the market is moving and large players will follow in the footsteps of Medicare and Medicaid. Evolent is a great way to invest in the trend but don't expect its success to be overnight, this is a transformation that will take decades. However, as we continue to emerge from the pandemic and money flows back into routine healthcare, I would expect to see more providers take the first step.
In light of its recent performance, we have updated our comments on Evolent Health. To read them, click the stock button below.