Value-based Care: What is direct contracting and what are the opportunities for startups?

Why are we talking about this?

Earlier this month, the US Center for Medicare and Medicaid Innovation (CMMI) announced the new Global and Professional Direct Contracting (GPDC) Model in a giant leap towards value-based care. In this article, I explain what the GPDC Model is, why it’s not half as dry as it sounds, and how it plays into the US health insurance ecosystem. I then compare this model to the UK National Health Service (NHS) model of Commissioning. Lastly, I explore how the value-based care landscape could evolve in the future and highlight some of the attractive opportunities that direct contracting presents for startups.

What is the GPDC Model?

From April 1, 2021, 53 healthcare companies began providing care to Medicare patients, as part of a new initiative involving direct contracts awarded by the CMMI. Under the GPDC Model, these companies receive monthly payments to deliver services, rather than a fee-for-service (FFS).

The contracts are based on risk-sharing to reduce healthcare costs and maintain or improve quality of care for patients. Two risk-sharing options are available:

• Professional - lower risk-sharing option - 50% shared savings/losses and a primary care capitation, a risk-adjusted monthly payment to contractors for providing Primary Care.

• Global - higher risk-sharing option - 100% shared savings/losses and a primary care capitation or a risk-adjusted capitation for Total Care.

Four types of contracts have been awarded depending on the contractor’s prior experience with Original Medicare, aka FFS beneficiaries:

• Standard - for companies that already have experience serving Medicare FFS beneficiaries.

• New Entrants – for companies that have not traditionally provided services to Medicare FFS beneficiaries.

• High Needs Population – for companies that serve Medicare FFS beneficiaries with complex needs.

• Medicaid Managed Care Organizations for companies that serve both Medicare and Medicaid FFS beneficiaries.

Successful Direct Contracting Entities (DCEs) for Year 1 of the model include primary care growth stage and public companies such as VillageMD (Series B, Walgreens-backed), Iora Health (Series F), Oak Street Health (IPO 2020), Vively Health (DaVita’s primary care subsidiary) as well as insurers such as Clover Health (SPAC 2021) and Humana (IPO 2020). The new program will complete its first year by December 31, 2021.

The CMMI will monitor each DCE’s performance against agreed quality measures, holding back a 5% “at-risk,” contingent based on the company’s reporting of performance. Those that demonstrate year-on-year improvements or are highest performing have the potential to earn more via a High Performers Pool. 

The program had been expected to run for six years. However, on April 12, 2021, the CMMI announced a pause on further applications for Year 2. America’s Physician Groups (APG) and APG’s Direct Contracting Coalition which includes leaders from Village MD and Iora Health have condoned this decision. The CMMI have said that companies that had already applied for the work-up Implementation Period in 2021 or had deferred their start date to January 1, 2022, would still be able to start next year, however the GPDC requirements at that time would need to be met.

Health Insurance in the US

US Health Insurance is complex with many stakeholders.

There are two main government led health insurance programs, Medicare and Medicaid. Medicare is the federally led insurance program for seniors, aged 65 years and over, younger people with disabilities and people with certain chronic diseases. It covers around 18% of the US population or 59M beneficiaries. Beneficiaries pay premiums, deductibles and co-insurance to access services.

Medicaid is the federally led and state delivered program that provides health insurance to qualifying individuals based on income. It is available to low-income families, qualified pregnant women and children, and those who receive Supplemental Security Income. The out-of-pocket costs are lower and vary according to income. The Affordable Care Act (2010) expanded eligibility for Medicaid which now covers 17% of the population, around 56M beneficiaries.

Employer Sponsored Insurance covers 49% of the US population, which equates to around 161M people. The uninsured population is around 8% which is equivalent to around 26M people.

The UK National Health Service (NHS)

The NHS delivers government led hospital and medical care for all residents in the UK, approximately 68M people with a budget of $295B. Services are tax payer funded and delivered free at the point of care. Medication received in hospital and certain prescribed medications such as contraceptives, and medication for seniors over 65 years are available without charge. Working-age adults are required to pay prescription charges. The NHS prescription charge is currently $13 per item regardless of the medication dispensed. Certain groups are entitled to free NHS prescriptions. Vaccines administered through the national immunization programs and cancer screening through national screening programs are also non-chargeable. Adult social care including home care is available to those who are eligible based on an income assessment.

In England, direct contracts are awarded to entities nationally by NHS England and regionally by Clinical Commissioning Groups (CCGs), based on national priorities laid out in the 10 year NHS Long-Term Plan and the Shared Planning Guidance. NHS England contracts include national cancer screening and primary care services.

CCGs are led by a board of healthcare executives and clinicians who invest a total budget of around $110B. There are 106 CCGs in England serving regions of 250K people on average. For each contract, a procurement process is initiated whereby companies are invited to tender. Contracting entities include emergency care, elective hospital care, maternity services, community and mental health services.

Successful entities demonstrate strong health economics with agreed performance measures and health outcomes, that are monitored by the CCG. Payment models for the contracts include capitation models, block contracts, national tariff pricing and payment for performance. In 2017, over half of all CCG contracts reported were for one or two years, and almost a third were for three years (Figure 1). Contract values ranged from $350K to $7.6M per CCG (Figure 2).

Figure 1: Length of contracts of companies with NHS CCGs

(Source, Health.org.uk, 2017)

Figure 2: Average contract value per NHS CCG

(Source, Health.org.uk, 2017)

US Direct Contracting vs NHS Clinical Commissioning

Both US direct contracting and NHS commissioning facilitate the process of understanding the health needs of a population, planning and prioritizing them, sourcing and due-diligence of companies, awarding of risk sharing contracts, and monitoring of performance to deliver improved health outcomes at lower costs.

Contracts awarded by the NHS are made at national and regional level. Similarly, in the US, the Geographic Direct Contracting Model (“Geo”) is a regional approach to direct contracting, involving relationships with providers and community organizations to address specific needs of Medicare beneficiaries in a particular region.

The benefits of a value-based contracting model are multifold. Speaking to this, Kelly Conroy, Director of Pinnacle Healthcare Consulting states, “There are so many great things in this model, such as health equity, voluntary alignment, total cost and clinical accountability, upfront dollars to fund care coordination infrastructure and real-time alignment of incentives and new beneficiary incentive payments.” Risks include the random assignment of patients to direct contracting entities, and the loss of existing provider relationships.

The GPDC Model is not the CMS’ first attempt to deliver value-based care to Medicare beneficiaries. The Value-Based Payment Modifier program showed how inadequate risk-adjustment and poor incentives to providers can lead to disappointing clinical outcomes and performance. It has been replaced by the Quality Payment Program (QPP) involving a Merit-based Incentive Payment System (MIPS) to providers based on quality of care.

Since the applications for the Year 2 GPDC Model are currently paused and under review by the new Administration, it is likely that any changes to the Model will incorporate learnings from the Year 1 Implementation Period.

What does the future look like?

With rising US healthcare costs, high rates of bankruptcy due to medical bills and the added complexity of delivering value-based care through multiple health plans, many believe it is time for a single, value-based health system for all. Physicians for a National Health Program are advocating for Medicare for All. In a recent Kaiser survey, 74% of adults reported that they would support a national government-administered health plan that would be open to anyone.

At present direct contracting is only available to Original Medicare beneficiaries. In the future, we can expect to see expansion of direct contracting and risk-sharing agreements for beneficiaries of Medicare Advantage. Such expansion could potentially replace Medicare Advantage health plans. Furthermore, federal programs could contract directly with companies serving Medicaid beneficiaries and the Employee Sponsored Insurance market. Already, Firefly Health (Series B), Crossover Health (Series D) and Accolade (IPO 2020) are all using value-based care models to deliver full stack navigation, primary care and mental health services to employers at lower cost.

Nevertheless, finding the right balance between capitation models and value is a challenge. Just last week, primary care operator Optum Care reported it was transitioning to a value-based care model, paying a flat-fee to the physician practices in its network for managing patient care. The move has been met with skepticism from already stretched physicians who could be forced to schedule more patients to make up for lost revenue.

What are the opportunities for startups

For healthcare companies, well priced and risk-adjusted US direct contracts and NHS commissioned contracts provide significant monthly recurring revenue from a reliable payor with the potential for longer term contracts according to performance. Analysts at Evercore ISI estimate that Oak Street could achieve $90M in revenue from the GPDC Model in 2021.

Startups have the opportunity to leverage guidelines from the GPDC Model and other regional direct contract models, as further value-based care contracts emerge. Completing the diligence process for direct contracting, and establishing value-based metrics for risk-sharing with government organizations would be attractive to private payors.

VC investors are also attracted by healthcare companies that demonstrate they can achieve certain thresholds for direct contracts including clinical outcomes and performance, targets for recurring revenues, a deep understanding of health economics, as well as compliance with data privacy and security regulation.

MDisrupt is a platform that connects digital health companies to industry leading health experts to help them build, scale and commercialize their products faster and more responsibly. MDisrupt can connect digital health founders with payor experts who can help them prepare for direct contracts to scale their products faster within value-based care settings.

For startups seeking to enter the UK market through direct contracts with the NHS, I would recommend preparing the Digital Technology Assessment (DTAC) criteria. A new national baseline criteria that is used to assess companies during the procurement and due diligence process at NHS England and at CCG level.

Namrata is a Primary Care Physician, former digital health Founder with experience as a GP board member of an NHS Clinical Commissioning Group. She works as a Healthtech Investor & Advisor to startups in the US & UK.