Providers must optimize the risk-based primary care model following the end of an era marked by M&A expansions and large capital expenditures. 

As the pandemic began to wane, large primary care operators specializing in deploying value-based care within the Medicare Advantage (MA) ecosystem experienced a flurry of market excitement with large M&A deals splashing across headlines. Deals like One Medical (acquired by Amazon in 2022) and Oak Street Health (acquired by CVS in 2023) showed investor interest in providers who participate in MA partial- or full-risk-based contracts. These acquisitions reverberated across the industry as similar organizations saw a tremendous inflow of capital.  

The euphoria, however, began to dissipate as the reality of operating in a highly inflationary environment (both labor and supply expense) set in for many providers. The industry also faced increasing utilization of health services and related rising expenditures throughout Medicare populations. These macro headwinds spelled trouble for providers with capitated and risk-bearing arrangements (often referred to as value-based care, or VBC). 

Under these types of agreements, primary-care providers are generally paid a set fee to provide their services to patients on a per-member, per-month (PMPM) basis. They are also, depending on the amount of contractual risk, able to receive surplus payments if all patient health expenditures within a risk pool are lower than the net premium that the insurer collects. Thus, they are incentivized to maximize the quality of services while minimizing total claims expense from the overutilization of healthcare services (the pinnacle achievement of VBC). Conversely providers may also be liable for deficit balances to insurers when the total claims exceed the net premium amount.  

This topline reality quickly came into view in early 2023 as margins compressed, surplus balances turned to the generation of deficits, and corporate SG&A costs ballooned. These forces, working together to create an unstainable operating environment, were compounded by dwindling liquidity, large interest payments coming due, and more expensive capital as rates climbed. 

For clinics seeking to deliver on the promise of better, cost-effective, integrated care, net revenue depends on a host of factors: the patient’s medical-loss ratio (MLR), the risk-adjustment factor (RAF) score within the Medicare Risk Adjustment (MRA) model, the overarching payor contracting strategy, and the corporate and clinical operating model. All of these factors touch on some portion of the patient’s healthcare journey, and the operator’s ability to provide quality care by helping to proactively manage their conditions. Avoiding further health declines and the associated expenses is a better outcome for both the patient and their primary-care practice. 

Here, we look at critical areas that Medicare Advantage operators must focus on in order to provide excellent patient care in a financially sustainable manner.  

Assess the clinic footprint 

Rapid expansion of clinic networks during a period of strong cash inflows might mean the clinical capacity has outpaced member growth. If that’s the case, underutilization is contributing to expense structures that outpace revenue. 

Rightsizing the clinic footprint can improve EBITDA even if there is some revenue loss. This is about finding the sweet spot: Fewer clinics that are the right size, with the correct staffing model in place, and in the right locations that align to organization growth targets, will lead to better EBITDA margins than a large portfolio with unoptimized cost structures and low member count per center. 

Having, or developing, clinical level P&Ls complete down to EBITDA with site level MLR and complete cost structures (both direct and allocated expenses) is crucial to crafting the correct go-forward portfolio. 

Optimize the back-office SG&A organizational structure 

Ideally, acquisitions allow networks to make use of shared corporate functions, but we often see poor integration undermining profitability and growth. This means reviewing standard selling, general and administrative (SG&A) expenses such as finance & accounting, IT, legal and human resources functions, but also clinical and operational shared services. For example, to design a patient transportation program for specialist visits, providers need to understand the competitive landscape to design an optimized operational structure that minimizes excess expenses and trips. 

Assess the operational impact of payor risk negotiations 

Providers need to evaluate their partial or full-risk models to understand how the revenue is attributed between the two, and how deficits are calculated. Only once they understand the economics can they build a sustainable base of revenue that is sustainable. 

For example, understanding the nuances of the provider share of surplus or deficit from risk-corridor arrangements will allow providers to more fully understand how their actions and decisions impact the bottom line. 

Minimize the impact of v28 and Medicare RAF score calculations 

The healthcare industry is no stranger to regulatory changes from The Centers for Medicare & Medicaid Services (CMS). The CMS hierarchical condition code (HCC) model V28, which takes effect in 2024 with a three-year implementation schedule, will change the mapping of certain ICD codes to HCCs, along with general HCC coefficient changes.  

These changes will affect RAF scores and subsequent PMPM reimbursement. It will be important to gauge the impact this will have on your organization and adjust operations accordingly. 

Ensuring the accurate capture of all HCC and corresponding clinical documentation, and dissemination of the changes to providers will mitigate some, but not all, of the financial impact of coming changes. Companies should also prepare for future guideline changes from CMS that could further impact topline reimbursement. Building flexibility into staffing models or a contingent workforce could help with managing the impacts from an organizational and labor cost perspective. 

Align providers and the VBC model 

Value-based care should work for patients and healthcare networks alike. Medicare Advantage organizations must focus on streamlining clinical services to assist providers in giving panoramic care to patients. 

Aligning with providers on revenue cycle management (RCM) functions means being proactive in outreach to clinicians to assist them with coding current and future practices. A system in balance sees care-management functions aligned with the goal of keeping the patient out of high cost-of-care environments. That means a more proactive approach to high-risk patient groups, with more outreach and touchpoints. Physician bonuses and incentive structures also reinforce the goal of VBC and the mission of risk-based MA organizations. For example, measuring a physician’s generic dispense rate (GDR) or referral compliance to preferred & in-network specialists will help incentivize behavior that is aligned to the VBC model and drive overall lower cost of care. 

Lastly, the quality functions that ensure satisfactory healthcare effectiveness data and information set (HEDIS) measures, among other quality metrics, can also help organizations fully capture financial incentives and bonuses from effectively delivering value-based care. Done well, everyone will be healthier for it.