Part 2 — Transition from Fee-for Service based model (FFS) to Value-Based healthcare

The race to remake healthcare — Giant firms are entering the healthtech space to mark the shift from a “fee for service” (FSS)-based model to a “value-based model”

Value-based healthcare is increasing in scope and popularity. The transition to this model would see a downturn in terms of finances in the short term before longer-term cost savings are realised. This model is transforming the way healthcare specialists and hospitals provide care.

Healthtech startups revving up the market

As the healthcare crisis deepened during the pandemic, healthtech companies gained prominence, with their niche offerings providing a robust digital platform to support patient engagement. As investor confidence increased, the number of initial public offerings of healthtech firms skyrocketed in 2021. Total funding for US-based digital health startups amounted to USD29.1bn across 729 deals, with an average deal size of USD39.9m, almost doubled that of USD14.9m in 2020.

Funding scenario for healthtech firms

However, these companies’ funds have dried up on fears of recession, and funding for healthtech companies has tanked sharply, to USD6.0bn (-79.4%) from USD29.1bn in 2021. Venture capitalists who were bullish in 2021 are now withdrawing their investment funds, looking to reduce their exposure to the market, and shifting to safe-haven assets, reflecting high market volatility and low investor confidence. This has forced startups to try alternative routes such as crowdfunding and debt-financing, which are not appealing and are not sustainable in the long term. The increase in borrowing costs limits the profitability of startups, with fewer entities reaching maturity.

  • High inflation and low unemployment — The Phillips curve theory states that when inflation is high, unemployment is low and vice versa. The trend of low unemployment seems positive for the economy, but if unemployment is too low, it would drive inflation higher. Low unemployment is extremely sensitive to government interventions to curb inflation, which could trigger a recession if not balanced.
  • 21 July 2022: Amazon agrees to pay USD3.9bn for One Medical, a primary-care concierge service, which ensures Amazon a market share in the healthcare sector. Amazon intends to enter the direct-primary-care business and sell more healthcare products with the help of its pharmacy business that started with the acquisition of Pill Pack for c.USD1bn in 2018.
  • 31 August 2022: Walgreens Boots Alliance completes majority-share acquisition of CareCentrix. The partnership with CareCentrix intends to extend care capabilities to homes to create a connected and congenial ecosystem for patients. The company has finalised the investment as rival firms including CVS Health, Amazon and Optum Care express interest in buying Signify Health. Walgreens’s rivals such as CVS Health, Amazon and Walmart are retailers ramping up to add more primary-care and in-home services.
  • 5 September 2022: CVS Health announces acquisition of Signify Health for USD8bn. The acquisition will help CVS enhance its on-door medical assistance.
  • 7 September 2022: United Health Group and Walmart announce their collaboration to deliver high-quality, affordable healthcare powered by the “Optum” clinical capability. United Health Care, through its medical provider arm Optum Care, has been buying multi-specialty physician practices focused on providing tech-enabled medical assistance. Other flagship acquisitions by United Health Care’s Optum include the acquisition of home healthcare business LHC Group (USD5.4bn) to introduce mobile health clinics, Refresh Mental Health (for an undisclosed amount), Kelsey-Seybold Clinic and Atrius Health.
  • Companies such as UHG-Optum and CVS-Aetna are examples of companies adopting “capitation”, the most-promising concept currently. They assume the financial risk of the cost of care on behalf of fully insured clients and manage expenses for self-insured clients. The concept of capitation reduces costs, enhances quality by maximising incentives on preventive healthcare and effectively monitors chronic conditions to avoid unnecessary hospitalisation. The model minimises the need for expensive specialty care, when a patient could be treated with other inexpensive substitutes or primary care. This cost reduction enables insurers to offer attractive premiums while increasing their retained earnings. This increase in income increases compensation of healthcare providers, unlike under the FFS structure.

About the Author

Sanchit Tuli joined Acuity Knowledge Partners’ (Acuity’s) Investment Banking team with over two years of experience. He specialises in the healthcare and consumer sectors. He currently supports the US division of a leading European bank, having demonstrated proficiency in financial statement analysis and preparing credit reports and pitch decks. He is well versed in preparing customised research reports involving market and competitive intelligence, market assessment, benchmarking, market entry and growth strategy for deal identification. He is knowledgeable about proprietary databases such as FactSet, Bloomberg and Capital IQ.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.