National healthcare budgets are steadily growing worldwide. Increasing budget pressure, ageing populations and the rise of chronic diseases[i] are pushing both developed and developing markets to look for more effective healthcare delivery methods. In the United States, where national health expenditures peaked at USD 3.5 trillion in 2017, the Centers for Medicaid and Medicare Services (CMS) projected the healthcare budget will increase at an average annual rate of 5.5% in the next decade.[ii] [iii] In the United Kingdom, around 70% of healthcare spending goes to the treatment of chronic conditions.[iv] As governments and healthcare providers examine ways to contain healthcare costs without sacrificing quality of the service, value-based healthcare (VBHC) has emerged as a potential solution to create a more affordable, efficient and inclusive healthcare system.
What is value-based healthcare?
VBHC is a healthcare delivery framework where healthcare providers are rewarded for the quality of clinical outcomes they achieve, rather than the volume of services provided.[v] For example, the US CMS tracks and discloses quality performance targets for clinics and hospitals that are linked to patient outcomes, such as readmission rates, patient experience or complication rates. [vi]
VBHC can also be used to reduce inequalities in healthcare delivery across different regions. In the UK, the National Health System (NHS) launched the “Right Care” program to reduce regional differences in health outcomes across the country through a precise measurement of the value delivered.
A VBHC framework can also create efficiencies in patient treatment leading to lower overall costs. Teams of doctors and healthcare professionals communicate with one another with the help of a healthcare coordinator, payments for tests and services are bundled rather charged separately, and the use of electronic medical records helps to eliminate repetitive and unnecessary tests and procedures.[vii]
Healthcare and Pharmaceutical Companies’ Perspective
VBHC is clearly an opportunity for policy makers to achieve better health outcomes at a lower cost.[viii] For healthcare and pharmaceuticals companies, the adoption of new delivery models may be an opportunity in emerging markets, however, it will likely present several challenges in key markets like the US and UK.
- Business model change: In a system primarily based on traditional fee-per-service payments, shifting towards VBHC could destabilize prevailing business models. [ix]
- Monitoring progress: VBHC requires tracking a wide range of performance measures (e.g., cost savings, readmission rates, patient satisfaction, etc.) to determine the performance metrics to which monetary rewards will be tied and to demonstrate the benefits of the new framework to public administrators and patients. This requires the development of data management capabilities not necessary for healthcare companies’ traditional operations. [x]
- Call for care coordination: Better communication among healthcare system players is essential to improve patients’ final outcomes. For instance, CMS is now implementing a bundled payments initiative where multiple providers are paid together for a single episode of care.[xi]
- Shared financial risk: VBHC arrangements imply shared financial risk among providers, as health outcomes depend on the joint actions of different parties.[xii]
Sustainalytics’ research finds most healthcare and pharmaceuticals companies in our coverage have not yet engaged in VBHC activities. Of 291 companies monitored, only 10.7% have publicly disclosed information on VBHC programs.
Companies engaging in value-based care initiatives
Of the healthcare players engaging in VBHC activities, managed healthcare companies have adopted the most comprehensive approach. Their role is crucial in providing innovative contract arrangements that reimburse healthcare providers for outcomes rather than volumes. One example of best practice is Aetna, which has pledged to have value-based arrangements in place for 75% of all claims by 2020. In 2017, the company reported that 7.2 million of its plan members already received care through VBHC initiatives, representing roughly 53% of the company’s claims.[xiii]
Pharmaceutical and healthcare companies are striving to implement pilots and prove the effectiveness of their value-based solutions in order to benefit from new payment frameworks. A good example is Medtronic’s pilot project in Latin America. The Irish medical devices company has been able to reduce the mortality rate related to segment elevation myocardial infraction by 30% thanks to better care coordination enabled by its products and monitoring system.[xiv]
Another company engaging in initiatives to drive the transition towards VBHC is GlaxoSmithKline. Since 2011, the company has linked the remuneration of its US sales representatives to performance metrics such as overall quality of service.[xv]
Is there momentum for value-based healthcare?
Although there is no consensus on how fast the transition will be,[xvi] we expect VBHC to become a leading approach in the healthcare industry, because of the cost savings and improved patient outcomes. To take advantage of this trend, companies should consider embracing VBHC initiatives, such as the programs sponsored by the US CMS where providers are paid based on the outcomes of various healthcare services such as dialysis treatments, services provided in skilled-nursing facilities or primary care.[xvii] Investors can play a key role in this transition and should monitor whether portfolio companies have recognized the potential impact of rising healthcare costs in their business models. Investors should also consider whether companies are prepared to take advantage of new payment structures that rely on value rather than volume and to mitigate risks arising from the increasing complexity of VBHC models.
[ii] Center for Medicare and Medicaid
[v] Center for Medicare and Medicaid
[vi] Center for Medicare and Medicaid 2
[xi] Center for Medicare and Medicaid
[xvii] Center for Medicare and Medicaid3
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