“Show me the incentives, and I will show you the outcome.”
— Charlie Munger
The notion of “value-based healthcare” has been a strategic priority in the U.S. for over a decade now. Value-based care promised a future in which our healthcare system (and its consumers) would systematically pay for value, rather than volume. In principle, aligning incentives to value would curb healthcare spending while simultaneously improving patient outcomes. To their great credit, the Centers for Medicare and Medicaid Services (CMS) explored numerous value-based care models and alternative payment structures over the last 10+ years, ranging from performance-based bonus payments to shared savings programs administered through accountable care organizations (ACOs). Why, then, do we still face rising healthcare costs, continued threat of Medicare Trust Fund insolvency, a widening health equity gap, and growing primary care provider burnout? In our view, the short answer: we lack technology and infrastructure that enables individual providers to be incentivized by value, and take on risk.
Provider enablement: aligning incentives with technology
Acknowledging my own bias as a physician, I believe providers — in particular primary care physicians (PCPs) — are the central decision nodes whose incentives have been repeatedly overlooked in prior iterations of value-based payment models. There are nearly 300,000 primary care providers across the country, who function every day as powerful patient advocates, clinical experts, and decision makers; although their services account for <5% of total medical spend, they directly influence >80% of downstream healthcare costs. But we’re currently neither incentivizing them nor empowering them to provide holistic, value-based care.
By and large, PCPs today remain tethered to fee-for-service payment rails: only 17% of Medicare Advantage (MA), 4.4% of traditional Medicare, and 2.5% of commercial reimbursement currently flows through capitated population-based alternative payment models. This means that most PCPs are still paid per episodic patient visit, and are hamstrung by short-term payment hurdles, rather than sharing in access to the value generated by keeping their patients healthy long-term.
In an alternate future universe, the work of a PCP could be radically different. Instead of running through 22 separately billable patient encounters each day, providers could be paid on a per-patient-per-month fee structure, with access to upside (and downside) financial risk based on each patient’s overall health (and total cost of care). In this regime, providers might shift towards managing panels of patients, grouped by condition. They could be empowered to focus on prevention, and always-on triage. They could make their own informed decisions about when to spend an hour with a patient in their home vs when to simply check in with a patient over text message. And PCPs deeply embedded in their local communities could remain financially independent, retain their unique practice styles, engage their patients to address health inequities day in and day out — and be recognized for the long-term value they provide their patients.
But until we radically change the financial incentives for individual providers, the outcomes will not change. Moreover, until we empower providers with the technology and tools they would need to actually succeed against these new incentives, they will not be able to participate effectively.
Enter Pearl Health
We first met the Pearl Health founders Mike Kopko, Ankit Patel, and Jeff DeFlavio in May of 2021, when they shared their vision for the future of value-based care. In their voices, we heard experienced healthcare innovators who had seen up-close the historical failure modes of the field, and wanted to bet boldly on exactly the theme we believed in: provider enablement through technology. We knew almost immediately that we had to team up.
Pearl Health is building the future of value-based healthcare with three key pillars, all oriented around provider enablement:
- Individual physician exposure to financial risk (rather than insulation from it)
- Technology infrastructure to support fundamentally new provider workflows that drive high-value care
- An efficient marketplace to create healthcare risk liquidity, anchored on individual physician decision-making
The Pearl team sees a wave of both federal and commercial value-based care models coming, many of which will create opportunities to further align the incentives of individual physicians and payors. A particularly exciting example is the CMS Direct Contracting model, which is now enabling a capitated fee structure for tens of millions of Medicare beneficiaries. But while these payment models provide the starting point for radical change, they are just that: a starting point. To fully enable providers to actually join these programs, and run towards financial risk rather than away from it, a new layer of technology is necessary. Pearl will lay the infrastructure needed to support providers in this brave new world on everything from contracting and reporting requirements, to data-enabled workflow changes that enable delivery of more proactive care. Ultimately, we believe this will finally align the incentives of payors, providers, and patients — with the tools needed to make it all work.
Building a marketplace
At a16z, we love marketplace businesses. Marketplaces create delightful win-win opportunities for multiple parties, have the potential to scale rapidly, and benefit from network effects that make them stronger over time as new participants join.
We see the potential for a dynamic marketplace emerging between independent PCPs (each of whom influence an estimated ~$10M in annual healthcare spend), healthcare payors, and specialized digital health innovators. Pearl Health is building the technology and infrastructure needed to make this marketplace hum — with complex, customized, and efficient contracts that enable participants to share risk, and ultimately collaborate in service of patient care.
We are thrilled to partner with the amazing Pearl Health team and join their board. Please reach out if you’d like to build the future of value-based healthcare together!
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