Five Observations From 2023 Fourth Quarter Earnings Calls: Legacy Payers and VBC Market Entrants

  by Joe Maher, CPA, MBA

As part of Vizient/Sg2’s value-based care (VBC) and payer-provider alignment 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 they tie to VBC. The following post draws from recently released earnings call transcripts from 2023 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, Alignment Health, Clover Health, Oscar, Privia, Walgreens/VillageMD).

Observation #1: The current economic environment continues to place a premium on margin over growth.

2024 promises to be a challenging year for many health plans, especially as utilization upticks in 2023 are expected to persist. Many plans did not fully account for this in pricing and bids, particularly in Medicare Advantage (MA) business. Consequently, they are shifting medical loss ratio (MLR) guidance and projections upward. The MA plans were already bracing for financial headwinds from the risk adjustment (Version 28) updates coming online this year. The upshot is that health plans are already managing investor expectations for 2024 performance, which will undoubtedly impact many payer-provider relationships and negotiations.

“I also share the conviction of the rest of the management team regarding the need to prioritize margin recovery in 2025 and the significant multiyear opportunity that is in front of us.” – James Rechtin, President & COO, Humana

Observation #2: The “glass half-full” view is that the focus on margin management will increase payer-provider partnership opportunities, especially in VBC.

Payers and providers alike are facing economic uncertainties. Succeeding in value-focused approaches will require increasingly innovative approaches, especially where improved collaboration can elevate shared impact. Providers can bring a wealth of capabilities and insights to these partnerships that should build on traditional approaches (eg, MA STARS performance) and evolve further into patient-centered cocreation (eg, plan design, channel strategy, member impact). Health systems and provider organizations with a strong value proposition (eg, differentiated network performance, commitment to transition to value, demonstrated clinical integration) are well positioned to differentiate and grow.

“We also are underpenetrated when it comes to our full-risk VBC relationships. And those types of relationships also result in, I would say, bigger impact on [risk adjustment] V28 relative to a non-VBC type relationship. This is something, again, we want to expand over time, and it’s a critical strategic priority for us.” – Brian Kane, EVP, CVS Health, and President, Aetna

Observation #3: Health systems and providers must continue to elevate their sophistication when it comes to risk.

Many health systems still think of risk contracting as a binary either-or. Rather, risk should be a tool that allows providers to increase the upside capture and must be used strategically. Moreover, VBC providers with the skills to contract in risk-based arrangements are taking a more agile approach, especially with risk adjustment impacts and macro-utilization trends. Where risk is a reliable strategic lever, these same organizations are holding the course by balancing an awareness of their readiness with external environmental trends. Risk contracting remains an important vehicle for payers and health systems to align with contracts’ terms that reflect their market, patients and positioning in VBC. Health systems and payers need to work through any disconnects to ensure these arrangements are built on a strong shared understanding.

“We are still taking pretty substantial risk in these contracts, 50% or higher. It’s just that we’re dialing it down with a certain higher MLR threshold, and it’s a 1–3 year arrangement that changes over time of the ability for us to take risk changes over time, and then we’ve just got to deal with the realities that we are seeing in the marketplace. So, I think it speaks to our strength of the business model and how we can work with the payers and the long-term nature of the contract.” – Parth Mehrotra, President & CEO, Privia Health Group

Observation #4: Risk readiness takes time and care model maturity.

Organizations that have been measurably successful in VBC continually reinforce the multiyear journey this requires. Often, these organizations continue to see gains (eg, decreases in MLRs) in VBC performance year-over-year for multiple years as their models mature and evolve. Health systems and provider organizations that expect to advance in two-sided VBC arrangements in the coming years need to be actively advancing their care delivery model today to position their organization for success. For most provider organizations, the care delivery model is the unique and differentiating capability in the larger ecosystem.

“We manage the risk really by managing the care, which I think is fundamentally at the highest level what you need to be successful in Medicare Advantage. It’s not an underwriting or a financial engineering exercise, it’s actually managing the care.” – John Kao, Founder and CEO, Alignment Health

Observation #5: For health systems in markets advancing toward value, understanding positioning of specialty care and pathways is critical.

Regardless of your health system’s approach to VBC, it is imperative to understand the surrounding ecosystem. Even though VBC is often anchored on primary care, VBC-led entities are advancing in their specialty care capabilities. These include technology-enabled pathways, referral partners and even targeted care delivery investments in certain higher-need patient populations (eg, diabetes, hypertension, oncology). As organizations and markets progress in value, especially with the other aforementioned headwinds, specialty care presents an increasingly important opportunity in resource management. Consequently, health systems need to refine their pathways, value proposition and site-of-care optimization approaches if the goal is to be the entity of choice for many of these referral partners.

“They’ve [Optum clinicians] got referral management practices that they can engage with high-quality specialists when they need to for outpatient procedures.” – Heather Cianfrocco, President, Optum

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.

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