Medicare Advantage (MA) focused companies, like Oak Street
Health (14x revenues), Cano Health (11x revenues), and Iora
Health (announced sale to One Medical at 7x revenues), reflect
valuation multiples that appear irrational to many market observers. Multiples may be
exuberant, but they are not necessarily irrational.
One reason for high valuations across the healthcare sector is the large pools of capital
from institutional public investors, retail investors and private equity that are seeking
returns higher than the low single digit bond yields currently available. Private equity
alone has hundreds of billions in investable funds seeking opportunities in healthcare.
As a result of this abundance of capital chasing deals, there is a premium attached to the
scarcity of available companies with proven business models and strong growth
Valuations of companies that rely on Medicare and Medicaid reimbursement have
traditionally been discounted for the risk associated with a change in government
reimbursement policy. This “bop the mole” risk reflects the market’s assessment that
when a particular healthcare sector becomes “too profitable,” the risk increases that CMS
will adjust policy and reimbursement rates in that sector to drive down profitability.
However, there appears to be consensus among both political parties that MA is the right
policy to help manage the rise in overall Medicare costs and, thus, incentives for MA
growth can be expected to continue. This factor combined with strong demographic
growth in the overall senior population means investors apply premiums to companies in
the MA space compared to traditional providers.
Large pools of available capital, scarcity value, lower perceived sector risk and overall
growth in the senior population are all factors that drive higher valuations for the MA
disrupters. However, these factors pale in comparison the underlying economic driver
for these companies. Taking full risk for MA enrollees and dramatically reducing hospital
utilization, while improving health status, is core to their business model. These
companies target and often achieve reduced hospital utilization by 30% or more for their
assigned MA enrollees.
In 2019, the average Medicare days per 1,000 in the U.S. was 1,190. With about
$14,700 per Medicare discharge and a 4.5 ALOS, the average cost per Medicare day is
approximately $3,200. At the U.S. average 1,190 Medicare hospital days per thousand,
if MA hospital utilization is decreased by 25%, the net hospital revenue per 1,000 MA
enrollees is reduced by about $960,000. If one of the MA disrupters has, for example, 50,000 MA lives in a market, the
decrease in hospital revenues for that MA population would be about $48 million. This does not include the associated
physician fees and other costs in the care continuum. That same $48 million + in the coffers of the risk-taking MA
disrupters allows them deliver comprehensive array of supportive services including addressing social determinants of health. These services then further reduce utilization and improves overall health status, creating a virtuous circle. This is very profitable.
MA is only the beginning. When successful MA businesses expand beyond MA, and they will, disruption across the
healthcare economy will be profound and painful for the incumbents. The market is rationally exuberant about that
A new report out later today concludes that basic scientific research plays an essential role in creating companies that later produce thousands of jobs and billions in economic value.
Why it matters: The report uses the pandemic — and especially the rapid development of new mRNA vaccines — to show how basic research funding from the government lays the necessary groundwork for economically valuable companies down the road.
By the numbers: The Science Coalition — a nonprofit group that represents 50 of the nation’s top private and public research universities — identified 53 companies that have spun off from federally funded university research.
- Those companies — which range from pharmaceutical startups to agriculture firms — have contributed more than $1.3 billion to U.S. GDP between 2015 and 2019, while supporting the creation of more than 100,000 jobs.
What they’re saying: “The COVID-19 pandemic has shown that the need for the federal government to continue investing in fundamental research is far from theoretical,” says John Latini, president of the Science Coalition. “Consistent, sustained, robust federal funding is how science evolves.”
Details: Latini praised the Biden administration’s first budget proposal to Congress, released last week, which includes what would be a $9 billion funding boost for the National Institutes of Health (NIH) — the country’s single biggest science research funding agency.
- The National Oceanic and Atmospheric Administration would see its budget rise to a record high of $6.9 billion, including $800 million reserved for climate research.
The catch: The Biden budget proposal is just that, and it will ultimately be up to Congress to decide how much to allocate to research agencies.
Context: Government research funding is vital because private money tends to go to applied research. But without basic research — the lifeblood of science — the U.S. risks missing out on potentially world-changing innovations in the future.
- The long-term value of that funding can be seen in the story of Katalin Kariko, an obscure biomedical researcher who labored for years on mRNA with little reward — until the pandemic, when her work helped provide the foundation for mRNA COVID-19 vaccines.
The bottom line: Because its ultimate payoff might lay years in the future, it’s easy to see basic research funding as a waste — until the day comes when we need it.
It’s long been accepted as a truism that “moms” make most of a family’s healthcare choices. This has led many health systems to invest in high-end women’s services, especially labor and delivery facilities, with the hope of winning the entire family’s long-term healthcare loyalty.
This conventional wisdom has existed since the middle of the last century, when the postwar Baby Boom coincided with the rise of commercial insurance. But it’s hard to find real evidence that these investments deliver on their intent—and we think the argument deserves to be reexamined.
An expectant mother is likely years away from her family’s major healthcare spending events. Giving her a fantastic virtual care experience, or taking great care of her teenager who blows out a knee playing soccer, is likely to engender greater loyalty to the health system when she’s looking for her first mammogram, than her labor and delivery experience from a decade earlier. That’s not to say that top-notch obstetrics isn’t important—but market-leading labor and delivery facilities are likely more critical for wholesale purchasers, such as an employer considering a narrow network, or for physicians choosing where to build an OB practice.
Direct-to-consumer strategies should be built on more sophisticated consumer research that takes into account the preferences of a new generation of consumers, for whom not all healthcare choices are equal—that same consumer will be in different “segments” and make different choices for different problems over time, not all pre-determined by one memorable birthing experience.