Article
Against the backdrop of increasingly burdensome costs for healthcare users, governments across the globe have tried to tackle the problem using a variety of policy instruments.
July 10, 2023
These include the centralized procurement of drugs and medical devices with the aim of lowering prices significantly; a more structured patient triage system to encourage greater use of generalists rather than specialists; and better chronic disease management to avoid emergency visits at astronomical prices.
Many of these instruments are part of the “value-based care” concept delivery model which ties what providers (hospitals and physicians) are paid to patient outcomes. The underling principle of value-based care is simple: lowering costs while improving outcomes compared to the traditional fee-for-service payment model, whereby physicians charge patients based on the amount of healthcare services they provide.
The Centers for Medicare and Medicaid Services (CMS)1 has tested several value-based care programs over the years, such as the Medicare Shared Savings Program (MSSP), Accountable Care Organizations (ACOs) and Medicare Direct Contracting. Medicare Advantage is the most successful of these programs.
In this Thematic Insight, we will begin by explaining how Medicare Advantage works, its current status and the intended benefits of value-based care for all the healthcare stakeholders. Next, we will closely examine the program’s real-world cost effectiveness, using its most common format – primary-care focused value-based care – as an example.
"This won't be the most comfortable process for many entrenched players. […] But those who are interested in working with us to build a value-based system will have the chance to take advantage of a market where consumers and patients will be in charge of healthcare."
Alex Azar, Former United States Secretary of Health and Human Services, March 5, 20182
The roots of Medicare Advantage (also known as Medicare Part C) go back to the 1970s. It was then renamed to the Medicare Advantage Program in 2003, under Bush administration. Yet it would only flourish later, once the Obama administration had launched the Accountable Care Act (ACA). Different from the original federal government Medicare Fee-for-Service plan offered to all US citizens over the age of 65, Medicare Advantage is a health plan offered by private insurers – known as Managed Care Organizations (MCOs). These companies take out a contract with the federal government for the healthcare service that they provide to each enrollee for a fixed annual reimbursement, adjusted each year, with such companies having to provide all services that traditional Medicare covers. The reimbursement can vary depending on the health profile of each beneficiary: in other words, it is a bundled alternative to the original Medicare Fee-for-Service. Enrollees often receive extra benefits such as hearing aids, spending caps on co-pays and no monthly premiums to pay. The downside is that often the enrollees must opt for providers that are within certain geographic network of the plan, which is usually where enrollees live.
Medicare then uses feedback collected from member satisfaction surveys, plans and healthcare providers to rate the plans on a scale from one to five stars, helping eligible members to choose the most suitable plans. The star rating also affects eligible plans’ rebate percentage. The higher the star rating, the higher reimbursement (also referred to as Per Member Per Month, or PMPM) the provider would receive from CMS for a Medicare Advantage member with the same health risk profile.3
As a result, the system is designed to create a virtuous circle in which all the stakeholders act in the most responsible way, while patients receive the most appropriate care at lower cost. Figure 1 summarizes the benefits of such a self-reinforcing system to all the stakeholders.
Figure 1: Value-based care benefits
Sources: Credit Suisse; NEJM, Massachusetts Medical Society; based on What is value-based healthcare? (nejm.org); published on January 1, 2017.
With enrollment growing at high single digit percentage points, year-on-year from 2010 to 2022, Medicare Advantage has now penetrated more than 45% of the 55 million beneficiaries of Medicare. It is still expected to add 1 to 2 million members per annum as baby boomers reach retirement age, reching a projected 43 million by 2030, almost double from 2020.4 (See Figure 2)
Figure 2: Medicare Advantage enrollment has outgrown Medicare Fee-for-Service in the past decade
Sources: Credit Suisse; CMS, Enrollment Data; Latest data point: December 2022
The market has been dominated by large MCOs such as UnitedHealth or Humana. Figure 3 shows the market share of 2022 enrollment.
Figure 3: Medicare Advantage enrollment by firm or affiliate, 2022
Note: ‘All other insurers’ includes firms with less than 2% of total enrollment. BCBS are BlueCross and BlueShield affiliates and includes Anthem BCBS plans. Anthem non-BCBS plans are approximately 2% of total enrollment.
Source: KFF analysis of CMS Medicare Advantage Enrollment Files, 2022.
Sources: KFF, CMS, Credit Suisse; based on Medicare Advantage in 2022: Enrollment Update and Key Trends | KFF
Research comparing traditional Medicare spending with Medicare Advantage on a per-beneficiary basis has not found obvious cost savings by subcontracting care to MCOs.5 Often used as a benchmark, the average Medicare Fee-for-Service cost per beneficiary grew from $10,179 in 2006 to $15,309 in 2021.6 A research piece in 2009 showed that on average Medicare Advantage cost 17% more than Medicare Fee-for-Service, but the discrepancy has narrowed to 4% in 2022.7 We believe this trend will continue. MCOs already invest heavily in technologies and data analytics such as telemedicine and chronic disease management and are poised to deliver cost advantages.
However, any pure cost comparison might not reflect the whole picture since this would fail to consider members’ risk profiles and care satisfaction. After all, the Net Promotion Score (NPS)8 for many value-based care initiatives are particularly high. For example, Oak Street Health, one of the largest primary-care based value-based care providers, reported a NPS of 90 from patients based on survey data gathered after their physician visits from June 2018 until March 2020 – far higher than the NPS of 3 received by the average provider.9
At the center of the blueprint is to increase Americans’ access to primary care doctors or generalists. About a quarter of adults and nearly half of adults under 30 do not have a primary care doctor in the US, despite its outsized spending on medical care.10 In most single-payer healthcare systems in OECD member states, access to general practitioners is almost a given, eventhough OECD countries spend an average of 9.7%11 of GDP on healthcare compared to 18.3% in the US.12
The logic seems simple. If other countries have been able to bring down per-capita healthcare spending by offering broad access to primary care as a triage system, the US should be able to do the same. Therefore, as the Medicare Advantage market has grown rapidly in the US, so has primary-care focused care that is tech-enabled and value-based.
Most of these companies, such as Oak Street Health and Cano Health, were founded in the last 10 to 15 years and experienced an up-turn in business during the COVID-19 pandemic. Their business model is to contract Medicare Advantage members from MCOs at a flat fee and offer comprehensive healthcare services to these members. In other words, MCOs transfer members’ healthcare cost risks – either high or low – to these care providers which would then leverage technology and preventive care solutions with the aim of achieving better health outcomes at a lower cost. In doing so, they would hire in-house primary care doctors, build bricks-and-mortar medical centers where telehealth would be put in place, and closely monitor members’ chronic diseases in order to prevent any unnecessary hospitalization and acute events stemming from these.
As an example, Oak Street Health disclosed that, by doing this, it was able to bend the cost curve of its early member cohorts, while increasing the profit margin of its early centers from significantly negative to above 20% for the period 2016 to 2020.13
According to a study by the Peterson Center on Healthcare, US healthcare spending per capita in 2019 was $11,582 and it is expected to climb to $18,000 by 2028.14 We believe that value-based care growth will continue to accelerate as a key pillar when it comes to bending the cost curve as it changes the way physicians and providers deliver care.
Although the transition has proven more difficult than aniticipated, we expect to see larger-scale successes across the different parts of the healthcare ecosystem beyond primary care.
MCOs will probably assume a bigger role in consolidating the market and driving fundamental change in the industry landscape. Optum of UnitedHealth has already been a pioneer of substantial healthcare innovations, while CVS Health Corp acquiring Oak Street Health shows similar ambition. Ultimately, as in many other industries, we believe that scale and technology will determine the winning recipe.
Credit Suisse Asset Management has designed a number of highly focused strategies to provide clients with “pure-play”15 exposure to a number of compelling long-term secular growth themes, such as Robotics & Automation, Security & Safety, Infrastructure, Digital Health, Edutainment, Environmental Impact and Energy Evolution.
Contact us to learn about exciting investment opportunities. We are here to help you achieve your investment goals.
The individuals mentioned above only conduct regulated activities in the jurisdiction(s) where they are properly licensed, where relevant.
The companies mentioned above are meant for illustration purposes only and are not intended as a solicitation or an offer to buy or sell any interest or any investment.
All investments involve some level of risk. Simply defined, risk is the possibility that you will lose money or not make money.
1 The Centers for Medicare and Medicaid Services (CMS) provide health coverage to more than 100 million people through Medicare, Medicaid, the Children's Health Insurance Program and the Health Insurance Marketplace. Source: Centers for Medicare and Medicaid Services | USAGov; accessed 12.04.2023.
2 Transcript available here. Source: YouTube link HHS Secretary Alex Azar II - YouTube
3 5-star special enrollment period | Medicare, accessed 03.04.2023.
4 Medicare Advantage: A Policy Primer | Commonwealth Fund (urlisolation.com), accessed 03.04.2023.
5 Richard Kronick and F. Michael Chua, “Industry-Wide and Sponsor-Specific Estimates of Medicare Advantage Coding Intensity,” SSRN, November 11, 2021.
6 CMS. Average Medicare cost per beneficiary - USAFacts
7 MedPAC. Medicare Advantage: A Policy Primer | Commonwealth Fund
8 Net Promoter Score, or NPS, measures customer experience and predicts business growth. It is measured on a scale of 0 to 100. Source: What Is Net Promoter?; accessed 12.04.2023.
9 S-1 (sec.gov), page 2 & 3, accessed 05.04.2023.
10 KFF. One-Fourth Of Adults And Nearly Half of Adults Under 30 Don’t Have A Primary Care Doctor | KFF, accessed 03.04.2023.
11 OECD Health Statistics 2022 - OECD, accessed 04.04.2023.
12 NHE Fact Sheet | CMS, CMS, accessed 04.04.2023.
13 Oak Street Health, company filing S-1, S-1 (sec.gov), accessed 05.04.2023.
14 Peter G. Peterson Foundation. “Why Are Americans Paying More for Healthcare? Why Are Americans Paying More for Healthcare? (pgpf.org), accessed 28.02.2023.
15 With the “pure-play” concept we mean companies which have at least 50% in revenues directly attributable to the corresponding theme.
Source: Credit Suisse, unless otherwise specified.
Unless noted otherwise, all illustrations in this document were produced by Credit Suisse AG and/or its affiliates with the greatest of care and to the best of its knowledge and belief.
This material constitutes marketing material of Credit Suisse AG and/or its affiliates (hereafter "CS"). This material does not constitute or form part of an offer or invitation to issue or sell, or of a solicitation of an offer to subscribe or buy, any securities or other financial instruments, or enter into any other financial transaction, nor does it constitute an inducement or incitement to participate in any product, offering or investment. This marketing material is not a contractually binding document or an information document required by any legislative provision. Nothing in this material constitutes investment research or investment advice and may not be relied upon. It is not tailored to your individual circumstances, or otherwise constitutes a personal recommendation, and is not sufficient to take an investment decision. The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable. CS provides no guarantee with regard to the content and completeness of the information and where legally possible does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient. The information provided in this material may change after the date of this material without notice and CS has no obligation to update the information. This material may contain information that is licensed and/or protected under intellectual property rights of the licensors and property right holders. Nothing in this material shall be construed to impose any liability on the licensors or property right holders. Unauthorised copying of the information of the licensors or property right holders is strictly prohibited. This material may not be forwarded or distributed to any other person and may not be reproduced. Any forwarding, distribution or reproduction is unauthorized and may result in a violation of the U.S. Securities Act of 1933, as amended (the “Securities Act”). In addition, there may be conflicts of interest with regards to the investment. In connection with the provision of services, Credit Suisse AG and/or its affiliates may pay third parties or receive from third parties, as part of their fee or otherwise, a one-time or recurring fee (e.g., issuing commissions, placement commissions or trailer fees). Prospective investors should independently and carefully assess (with their tax, legal and financial advisers) the specific risks described in available materials, and applicable legal, regulatory, credit, tax and accounting consequences prior to making any investment decision.
Copyright © 2023 CREDIT SUISSE. All rights reserved.
Distributor: Credit Suisse (Switzerland) Ltd., Paradeplatz 8, CH-8001 Zurich I Distributor: Credit Suisse AG, Paradeplatz 8, CH-8001 Zurich I Distributor: Credit Suisse Asset Management (Switzerland) Ltd., Kalandergasse 4, CH-8045 Zurich I Supervisor (Entity of Registration): Swiss Financial Market Supervisory Authority (FINMA)
