A Primer on Medicare Advantage, Risk Sharing, Capitation, and Value Based Care

4 min read

Medicare advantage…risk sharing…capitation… value based care…what does it all mean?!? Such jargon can be unintuitive and intimidating, and is (unfortunately) increasingly ubiquitous within the healthcare industry. This article aspires to be a high-quality 5 minute primer that’ll (1) give you a high-level overview, and (2) provide you with links to helpful resources where you can learn more.

A Brief Primer on Terminology:

  • Value Based Care (VBC): although somewhat arbitrarily defined (some define “value = (quality + outcomes) / cost”, others define “value = outcomes / cost”), the principle is simple: an emphasis on paying for tangible, long-term health outcomes that are cost-effective. This is the antithesis to fee for service (FFS), the antiquated–yet still predominant–method of American healthcare payments which entails providers getting compensated for delivering healthcare services (ie. surgeries, doctor’s appointments, procedures, lab tests, etc.) as opposed to actual results. In contrast to FFS, high value care emphasizes prevention and primary care: for instance, appointments with your primary care physician (PCP) to remind you to take your Lipitor so that you may stave off heart attack; vaccination to prevent your child from being hospitalized with COVID; foregoing the costs, anxiety, and bureaucracy associated with unnecessary medical imaging unless absolutely indicated.

  • Risk Sharing / Risk-Bearing: If VBC is the blessed water needed to cure American healthcare, risk-sharing is the holy grail from which we must drink. Simply put, risk sharing involves shifting the risk of healthcare expenditures from payors (private insurers, CMS) unto the providers themselves. If covering the medical expenses for a 72 year old diabetic woman, Mrs. Sanchez, costs the insurer $10,000 per year, risk sharing involves paying Mrs. Sanchez’s doctor–say the PCP–the full $10,000 up front and having him apportion medical care/ services as he deems fit. If he invests in prevention and manages Mrs. Sanchez’s illness well enough that she only costs $7,000 over the year, he pockets the remaining $3,000. If he mismanages Mrs. Sanchez’s care and she ends up accruing healthcare bills totaling $12,000, he is responsible for paying the additional $2,000. All of a sudden, the provider’s incentives are aligned with the insurer’s: to keep Mrs. Sanchez as healthy as possible and to avoid expensive interventions unless absolutely necessary. 
  • Capitation: this refers to the concept of paying physicians a fixed amount (risk adjusted according to the patient’s illness severity) per patient per time period; in the above example, the $10,000/year for Mrs. Sanchez was a capitated payment to the PCP. There are multiple strategies for risk sharing and capitation: primary care capitation, secondary care capitation, global capitation, capitation for costs only related to a specific medical condition (ie. chronic kidney disease). Such arrangements are called “alternative payment models”.
  • Medicare Advantage (MA): as we touched on in our last article, MA is synonymous to Medicare Part C, this is an alternative to traditional Medicare that involves the government (Centers for Medicare & Medicaid Services, CMS) paying private insurers annual capitated payments to manage beneficiaries. Eligibility is the same as traditional Medicare: aged ≥65y, afflicted by disability, or diagnosed with end stage renal disease. What’s different and “hot” about MA? Because of federal requirements upon MA plans–namely, that they must (1) include all coverage for all hospital-related (part A), physician and service-related (part B), and drug-related (part D) expenses, and (2) limit enrollees’ out-of-pocket spending for Medicare covered services–private insurers resort to closed physician networks and managed care in order to make the economics work. If these smell suspiciously like HMOs, hint hint: that’s because they are. But that’s actually a good thing. And the results speak for themselves. MA plans lead to cost reduction despite boasting record high patient satisfaction rates; enrollment in MA has grown steadily each year since 2008, and by 2032, it’s forecasted that 61% of all Medicare beneficiaries will be enrolled in MA

Why All the Hype with Medicare? 

So why is Medicare, the insurance for our elderly, front and center amidst the movement towards value based care? Partly because the government’s healthcare innovation arm, the Centers for Medicare & Medicaid Innovation (CMMI), has structured a lot of its innovative alternative payments models to be most conducive to the MA population. Partly because the economics make risk-sharing most economically attractive for patients that are highly complex and more expensive, and because these patients tend to be older (ie. on Medicare). 

However, this has not been without controversy. As Richard Gilfillan and Donald M. Berwick, two renowned healthcare experts, have explained, much of the growth in MA startups has been fueled by exploitation of a faulty reimbursement system. It’s why seemingly every other unicorn in healthcare over the last several years–Devoted Health, Agilon, Oak Street, ChenMed, VillageMD, Bright Health, Clover–has been focused on the MA population, and why others (ie. Oscar) have shifted towards it. Rightly so, there has been much criticism of the broken funding mechanisms that allow this (Direct Contracting, ACO Reach), and the controversy continues.

All that said, directionally, we still believe this represents improvement. While the exact economics of MA plans should be adjusted to prevent the private sector from essentially robbing public coffers, the MA trend has ushered in tolerance and appetite for testing various capitation and risk-sharing strategies. The sweet, financially lucrative exterior of MA plans has succeeded at getting payers, providers, and patients to swallow the bitter pill that is capitation and managed care. (Read about why managed care and HMOs have suffered from propaganda in the past). Looking at the bigger picture, the movement towards risk-sharing and value based care is exactly what we need.

So What’s the TL;DR?

  • Everyone is thankfully (albeit slowly) moving towards risk-sharing and capitation, and value based care is slowly extinguishing the scourge of fee-for-service medicine. 
  • Medicare Advantage has been the beachhead population upon which a lot of these innovative alternative payment models have been piloted, although the surge in venture funding (and absurd, nonsensical valuations in that sector) have been somewhat tied to exploitation of a broken funding paradigm. 
  • If you’re starting/ running a healthcare company, if possible, it’s best to align with risk-sharing and VBC reimbursement mechanisms in order to (I) do good, and (II) capitalize on the profits to be had by successfully managing risk. (*caveat: think critically about whether or not this applies to your business!)

Primary author of this article is Kush Gupta, co-authoring with Amit Garg. Originally published on “Data Driven Investor”. Kush is an Associate with Tau Ventures. Amit is Managing Partner and Cofounder of Tau with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). See here for other such articles. If this article had useful insights for you, comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are from the author(s).

Kush Gupta I am a physician and biomedical engineer who is deeply frustrated with the current state of healthcare delivery. Clinically, I am particularly compelled by the medical complexity and humanistic challenges of caring for critically ill patients. In my free-time (depending on the season), I can be found skiing the slopes of Tahoe or kitesurfing out in the Bay.
Amit Garg I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

Leave a Reply

Your email address will not be published.