Observations From 2022 Fourth Quarter Earnings Calls: Legacy Payers and VBC Market Entrants

As part of Sg2’s value-based care (VBC) analysis and market research, we review the quarterly earnings calls from a subset of publicly traded legacy payers and VBC-focused entrants. The summary is designed to highlight emerging trends and dynamics in these closely related industries, especially as these tie to VBC. The following post draws from recently released earnings call transcripts from 2022 Q4 with a focus on legacy payers (Centene, Cigna, CVS/Aetna, Elevance, Humana, Molina, UnitedHealth Group) and market entrants focused on value-based care (VBC) and/or the premium dollar (Agilon, Bright HealthCare, Cano Health, Clover Health, Oscar, Walgreens/VillageMD).

Observations on the Macro Environment

Payers and VBC organizations are shifting focus more toward profitability than growth.

This may be, in part, a response to broader concerns around the potential for an economic downturn. It is also reflective of business model maturation, notably in more effectively managing the premium dollar through VBC. Two prominent examples include Humana exiting commercial business with employer health plans and Bright HealthCare exiting the health insurance exchange business.

Aligning clinical and economic models to drive successful results in VBC requires a multiyear horizon.

On the clinical side, Optum (part of UnitedHealth Group) noted it takes 3–5 years to transition a practice from fee-for-service to VBC as it requires clinical training, technology and network coordination.

On the economic side, Agilon provided some useful data that we have used to create the example VBC model below:

• $500 member acquisition cost (midpoint of ~$400–600)
• Year 1: $45 (midpoint of $30–60) per member per month (PMPM) earnings target (gross)
• Year 3: $175 (midpoint of $150–200) PMPM (gross)
• Currently reinvesting ~50% of surplus back into care delivery improvements

While the above analysis can be considered quite rudimentary, it highlights a few key components of the VBC economic model:

• Two things that can increase gains in the economic model are scale and performance.
  • Scale: The graph models reinvestment as entirely variable, whereas in reality, it is a blend of fixed and variable costs. The fixed costs will decrease (on a PMPM basis) as lives increase; the incremental variable costs are tied to members and, thus, are also likely to come down as more lives come onto the care delivery platform.
  • Performance: In line with the above scale comments, incremental PMPM gains translate almost entirely to profit, assuming steady investment. Additionally, the economic upside continues to grow over time with continued improvement, as evidenced by Agilon’s data (and reinforced peer model focused on VBC).
• Investments in VBC usually need to be funded out of the surplus, thus reducing actual gains and extending the horizon to profitability. For organizations evaluating VBC opportunities, this should be modeled out to provide greater clarity.

VBC opportunity is increasing the focus on longitudinal relationships with members and patients.

With greater accountability and opportunity around medical spend, health plans are pointing to the importance of more stability in the membership base. This enables more effective longitudinal care, a more predictable risk profile and a more stable business model overall.

“We can build moats around longer retention, longer 10-year members who will want to be with those providers.” – Mario Schlosser, CEO, Oscar Health

“Focusing on relationships and how long we keep a member used to be more of a 7–8 year member retention, and we need to begin to build that kind of stability going forward.” – James Murray, COO, Centene

 

Observations on Legacy Payer Strategy

The large health plans with considerable Medicare Advantage (MA) and/or commercial insurance footprints are establishing two distinct business units, namely the legacy insurance business and the integrated care delivery model. For multiple reasons, the care delivery businesses are operating under a different customer-facing name. This branding aligns with both the separate operating unit structure and payer-agnostic delivery strategy. It also positions the payers to build a stronger relationship with the members as patients where the industry has historically struggled significantly. 

• Health Insurance: Legacy business largely serving most/all payers (commercial, exchange, MA, managed Medicaid) including both fully insured and self-insured
• Care Delivery: These units include both care delivery and technology capabilities. Payers have been aggressively investing in these businesses, highlighted most recently by CVS’s planned acquisition of Oak Street Health for $10.6 billion. The provider resources generally focus on primary care, home health, virtual access and pharmaceutical. This includes a retail footprint in most cases. The technology facilitates clinical enablement and patient engagement, and this includes provider-level resources as well as patient decision support tools. The delivery and technology are often bridged by the care coordination infrastructure.

Even though the business units are separate, the corporate strategy is to engage with members through both businesses. With the focus on VBC, the priority is serving the fully insured segments on both platforms, most notably MA. It may also be noteworthy that the two health plans (Centene and Molina) that focus on the Medicaid business have not placed as much emphasis on the care delivery, likely because of the different economic models often tied to this payer class.

Regarding Medicaid redeterminations, the payers avoided making specific public predictions on the impact on membership for 2023. In general, they do expect a drop in enrollment with some opportunity for an uptick in the commercial and Exchange businesses. The payers also expect redeterminations to unfold on a state-by-state basis that will start this summer and span well into 2024.

 

Strategic Insights on VBC Entity Focus

The VBC-focused entities that earn margin through alternative payment models are learning, maturing and focusing more on profitability, especially as access to capital is tightening up. Most of these companies are still sharpening their model and establishing which segments and markets to focus on. A few examples of tactical levers these companies are pulling to improve performance include:

• Leveraging improved technology to more proactively identify and reach higher-risk patients sooner (Clover Health)
• Removing underperforming providers from the network (Cano Health)
• Eliminating downside risk in year one of contracts and taking a graduating approach (Bright HealthCare)
• Improving attribution logic, specifically for MA preferred provider organization (PPO) plans (Agilon)

 

Observations on Medicare Advantage: Current Intersection of Payer Strategy and Value-Based Care

Payers are continuing to focus on growth in MA while placing greater emphasis on profitability. This appears to be a hedge as CMS is taking assertive moves against aggressive risk-coding practices, which will reduce payments from CMS to the plans. The legacy payers are taking a unified public position on requesting CMS to include a fee-for-service adjuster.

Excessive competition for MA lives is tempering expectations for membership growth. CVS/Aetna noted Annual Enrollment Period (AEP) growth for 2023 missed targets. Humana was able to capture new growth in members switching plans. Humana’s CFO, Susan Diamond, noted that when members switch plans (including within Humana), it is usually to a richer plan, which translates to lower contribution for those members. There was one consistent pocket of growth favorable to expectations, namely the Dual-eligible Special Needs Plans (D-SNP).

Continuing with the theme of profitability, the payers are notably moving upstream in the sales and enrollment channels to target both retention and Stars ratings. Humana is focusing on aligning plan design to be attractive to both members and brokers to promote better engagement, satisfaction and onboarding up front. This sets up higher long-term retention as well. Centene is moving one step further to bring most marketing and sales channels in house. Centene had the added impetus of improving member experience, specifically through reducing member complains to CMS, which was a large driver of their poor star ratings.

The formula for MA success for these plans is continuing to focus on targeted growth and risk-adjustment strategies, while placing an even greater strategic emphasis on advancing VBC performance and member retention.

“[The initial 2024 rate letter] will create some revenue dislocation [in 2024]. So the sophistication of benefit management, that's going to be necessary market by market. The leverage of value-based care relationships, which, as I noted earlier, about 75% of our MA lives are in a value-based care relationship, will all come into play.” – David Cordani, CEO, Cigna

 

Closing Thoughts

For the last few years, many health system leaders have been asking themselves whether VBC will take hold. Backed by billions in payer investments, VBC will be a growing factor for the foreseeable future. Perhaps instead, health systems and providers should be asking: how will we choose to participate in value-based care?

Amongst the legacy payers, VBC was referenced 70+ times in total by executives during the earnings calls. On the other hand, VBC received only three mentions amongst legacy (publicly traded) health systems (Community, HCA, Tenet, Universal) during their Q4 earnings calls.

No matter where your organization stands today on its journey to value-based care, our value-based care experts are equipped to provide your organization with unique insights and impactful recommendations in prioritizing opportunities and positioning your organization for select value-based care undertakings. Please reach out to us for more information or to speak with an Sg2 value-based care expert.

Source: Sg2 Analysis, 2023.