These efforts are resulting in and being supported by an explosion of capital flowing into the healthcare ecosystem. Investments from initial public offerings, special purpose acquisition companies (SPACs), and venture funding hit $33 billion in 2020, up 33% from 2019, according to a recent Oliver Wyman analysis. IPO and venture funding stood at $12.5 billion in 2016, the analysis showed.

While there’s no singular path to the future of care delivery, there is a common thread: The historic models of transactional fee-for-service care, nearly exclusively delivered via bricks and mortar access points within product structures and engagement approaches that lack personalization, are rapidly becoming unsustainable. Innovations that accelerate the transition to personalized, digital, and value-based care delivery are becoming more prevalent, but healthcare still lags most other industries when adopting business models and technology solutions that can drive an improved and more convenient consumer experience.

“It’s dangerous to play the fee-for-service game and hope that value-based care doesn’t catch me before I leave,” Robbert Vorhoff, Managing Director of Global Healthcare for General Atlantic, said during an Oliver Wyman Health Innovation Summit Digging Deeper session in October, adding that private equity and other sources of capital are looking for solutions that will create value that is sustainable over the long term.

This shift raises some critical areas for investors to consider — whether they are private equity or an incumbent with an innovation fund — as they think about backing different models of care and payment, or a new technology.

Operational readiness

Providers, payers, and other stakeholders need to ensure that they are able to collect, analyze, and act on data that not only shows performance improvement but can pinpoint areas where more efficiencies can be gained. That includes looking at clinical pathways and setting up metrics that track whether a patient is getting better and utilizing fewer resources over time. It will require integrating electronic health records, billing and claims processing software, patient-generated data, pricing and cost data, and more. That means breaking down long standing walls between parts of the ecosystem to connect clinical, financial, and consumer preference data sets within a highly regulated environment where data privacy and protections are paramount.

There will be significant up-front costs to building out this type of infrastructure, both in terms of financial and human capital. For many physician practices, it will be a heavy lift. It shouldn’t be a huge surprise that 2020 marked the first time that the majority of physicians — 50.2% — were employed as opposed to owning their own practice. That’s up from 47.4% in 2018, according to the American Medical Association. The survey also found that 4% of physicians said their practice was owned by private equity, a category that the AMA added in 2020. The increased employment numbers are driven by several factors, the AMA noted, including increased M&A. Physicians continue to face stiff financial headwinds as the pandemic drags on, which could result in more difficulties to make the changes necessary for a transition away from fee for service and the adoption of new patient care delivery and engagement tools like mobile platforms with bi-directional communication capabilities and telemedicine.

“Physician practices were hit hard by the economic impact of the early pandemic as patient volume and revenues shrank while medical supply expenses spiked,” then-AMA President Susan R. Bailey, MD, said in a press release. “The impact of these economic forces on physician practice arrangements is ongoing and may not be fully realized for some time.”

The rise of SPACs during 2021 is likely to provide some of the capital necessary for providers and startups to address a variety of needs. There were 40 healthcare and life sciences IPOs through Q1 of this year, raising a total of $10.93 billion, according to a S&P Global Market Intelligence report. What remains to be seen is whether these large investments can generate equivalent returns through solutions that fundamentally change the way care is delivered at scale. 

Achieving scale and returns commensurate with investments

To maintain revenue and margin goals, healthcare organizations will need to expand their pool of patient populations, but that will be a challenge as the competitive landscape continues to tighten with new offerings from retail chains, digital health platforms, and continued consolidation among incumbents into regional and national players with scale.

Many of the investments to date have been focused on Medicare populations where the underlying economic structures of risk adjustment accuracy aligned to revenue increases and acute or comorbid members with opportunities to improve medical costs make for a ripe value-based care model business design. The “sweet spot” cohort within the Medicare population is the 23-35% of the population driving 60-70% of the costs. While government services lines of business are certainly one of the fastest growing segments of the industry, there are only so many “sweet spot” cohorts that can be divided amongst new entrants and incumbents. Value-based care models are about 50% penetrated in Medicare markets, but are only 15% penetrated in Medicaid, and commercial markets. To achieve scale over time sufficient to warrant returns commensurate with investments, these new models will need to find ways to make the economics work across broader healthier populations, where the underlying economic structures are very different.

Common vision

Tensions exist around how to define and deliver value to the market. There’s concern that new entrants focused on improving the consumer experience may not be as attuned to reducing total cost of care, at least as they try to build scale. In contrast, some incumbents have more traditional focus on reducing total cost of care but may lose market share as more consumer-centric models proliferate. And investors will have an entirely different view of what it means to drive waste out of the system since their underlying goal is to achieve a significant return.

As the stakeholders embark on these conversations, they’ll need to weigh other metrics beyond total cost of care. It is important to view value from the lens of different constituencies — patients/consumers, payers, employers, and providers. Metrics important to these groups include access to care and programs, workforce productivity, patient engagement, reduction in administrative burden, and employee satisfaction scores, all of which link back to ROI indicators and can help support different revenue models.

Timeframe for returns

Private equity companies typically have 5-to-7-year investment timeline before looking to liquidate their holdings. SPACs have a two-year life span in which they need to spend the money raised through an IPO by buying another company or returning the funds to investors. Publicly held organizations are under constant scrutiny from the market to grow and show ever improving economic performance in-year. While those timeframes may be realistic for investments in a fee-for-service world, they don’t line up with a value-based model where the focus is improving clinical and financial performance over a sustained period. Value models aim to drive down unnecessary utilization and direct patients to lower cost care settings. Although shared savings arrangements offer an upside if providers effectively manage their patient populations, they must hit as many quality metrics as possible. 

We view the drive to value — both as a market trend and an investment strategy — as a positive development for the industry and consumers. And there’s no denying that momentum is building.  Physicians are eyeing a move to different reimbursement models — 75% in a March 2021 JAMA survey said they do not believe fee for service should account for the majority of primary care payments. And 66% of employers reported that they already have or are considering value-based benefit designs, according to a 2021 survey from the National Alliance of Healthcare Purchaser Coalitions.

But the failure of an effort like Haven, a joint venture between Amazon, Berkshire Hathaway, and JPMorgan Chase that got considerable attention for its goal of disrupting the employer-sponsored coverage market, illustrates just how difficult it is to create lasting change. And who will be driving that change continues to be a moving target, even the definition of an “incumbent” is evolving. As Sara Vaezy, Chief Digital and Growth Strategy Officer at Providence, noted during an Oliver Wyman Health Innovation Summit Digging Deeper session, organizations like One Medical could now be considered incumbents — it has been around for a number of years, operates in several states, and has scale.

During one of our Digging Deeper sessions, we polled 40 industry CEOs and senior leaders representing both long-standing healthcare organizations and new entrants. Roughly 40% said that innovations will end up in the hands of incumbents while 60% believe they will displace traditional care delivery and insurance businesses. What it could come down to, according to Vaezy, is having more focused strategic and operational goals versus trying to be all things to all people.

“The ones that are focused have a discrete strategic advantage because they are able to really dive deep and extract value around a specific value proposition as opposed to getting spread thin over what is a relatively abstract concept of cradle-to-grave,” she said. “What is important for us is to not be the locus of control over time, but to position ourselves through our technology platforms, taking an API-oriented frame of mind and connecting to the ecosystem that is out there, whether it is upstream or downstream.”