Weekly Health Tech Reads | 2/4/24

CMS Advance Notice, BASS partners with ApolloMed, Q4 earnings, and more!


Sharing our perspective on the news, opinions, and data that made us think the most this week

Summary: CMS released its proposed rates for 2025, opening up a public comment period for the next month before it will finalize 2025 rates on April 1st. The government expects payments to insurers to increase by 3.7% in 2025, by roughly $16 billion.

My Reaction:

  • If you're in Medicare Advantage payor circles, this was by far the biggest news of the week. Inevitably we will hear a lot more about this over the coming weeks as the Medicare Advantage industry digests the changes for 2025, responds to CMS during the comment period, and then prepares 2025 bids. At first blush, the rate notice seems to continue the broader overall trend we've been seeing emerge recently - profitability will be challenged in the MA market as the government seeks to rein in expenditures.

  • It is also interesting to juxtapose the notice with the Moody's report this week that found that aggregate payor earnings actually declined by 2% in the MA market between 2019 and 2022, as earnings per member declined by 28%. Per the report, the three big players (United, Humana, CVS) generated virtual all all of the profit in the market, while smaller players struggled to consistently generate profits. All of this is shaping up to make the 2025 bid cycle a particularly important one as payors re-evaluate their benefits strategy in order to balance profitability with membership growth.

Summary: BASS Medical Group, a San Francisco based medical group with 400+ providers, announced a partnership with ApolloMed (soon to be Astrana) as its exclusive MSO partner for new value-based care contracts. As part of the partnership, ApolloMed will invest $20 million in BASS to support BASS's growth in California.

It appears that ApolloMed will become BASS Medical Group's second MSO partner, as BASS and Privia announced a similar deal in late 2021. In that deal, Privia acquired a majority interest in BASS's existing MSO with an exclusive contract to be the managed services provider to BASS. BASS is still featured on Privia's website as their anchor medical group partner in California.

My Reaction:

  • It seems like a sign of the times in the provider enablement market that a provider group has now contracted with not just one, but two, public MSO companies. It is interesting to think about the series of events that led BASS to this outcome. Presumably this started with a conversation between BASS and Privia that involved divergent views on the level of interest in VBC contract growth, and ultimately resulted in Privia not supporting BASS's growth ambitions in VBC. The fascinating part of this is that almost definitionally, either Privia or ApolloMed have the wrong strategy here. The question is which one?

  • Even before the answer to that question unfolds, if you're an investor in MSO / provider enablement market, I'd imagine you're at least slightly concerned about the strategic implications of a move like this. If the switching cost for a provider organization like BASS is so low that they can change / add MSO partners like this, it seems like it should call into question what competitive advantage these MSOs businesses actually have. If the reason why an MSO wins a relationship with a provider is because they offer the most financial upside to the provider, it seems like a tenuous strategic position to be in, particularly for the ones taking on financial risk alongside those providers.

Q4 Earnings Updates

A rundown of key earnings takeaways from the week

Cigna reports Q4 earnings; sells Medicare business to HCSC for $3.3 billion

The big news for Cigna this week was the sale of its Medicare Advantage, Medicare Supplemental Benefits, Medicare Part D, and Care Allies businesses to HCSC for $3.3 billion, which the parties expect to close in early 2025 after regulatory approval. Cigna has roughly 600,000 Medicare Advantage members, almost triple HCSC's current MA book of business, which is just over 200,000 lives according to the WSJ. As part of the transaction, Evernorth will provide services to HCSC members moving forward. Cigna noted it made this move in part because the MA business required an outsized capital investment relative to the size of the business in its portfolio, and also because of the regulatory headwinds in the market. Despite the sale, Cigna noted on the analyst call that it remains excited about the MA market, with a focus on Evernorth providing services to MA and Medicaid plans moving forward.

In Cigna's ongoing insurance businesses, it expects a decline in exchange membership in 2024 as it repriced its product offering, while commercial insurance membership should increase slightly. Cigna beat expectations for 2023 MLR, noting that its medical margin in MA was in line with expectations in Q4, a notable divergence from what Humana reported.

It's worth noting that Cigna selling that CareAllies business is a nod toward it moving away from an owned provider strategy and toward an enablement / partnered strategy. Cigna seems pretty confident that it doesn't need to own care delivery as a core part of its strategy moving forward.

Other Relevant Links:

HCA earnings call highlighted how it expects to "invest significantly" in long term growth across three areas - facility expansion to increase capacity, digital advancements to unlock embedded value within core operations, and leveraging its strong balance sheet / cash flow to increase capital spending and also repurchase shares.

The recent Humana earnings call seemed to be on the minds of analysts as there were a number of questions related to utilization, but HCA seemed to indicate it was business as usual for them in the quarter. They reported normal seasonality and no indication that demand was driven by a COVID-backlog or new policies. The two-midnight rule came up multiple time in analyst questions, but HCA indicated its too early to see any impact there. Revenue per admit was consistent through the year in Medicare Advantage.

Other Relevant Links:

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Sharing a visual or two from the week that made us think

Commonwealth Fund's updated Medicare Advantage primer

The Commonwealth Fund published an updated version of its Medicare Advantage policy primer. It's a great introduction into the topic of MA for those looking to learn more about the space. The report breaks down what is MA, how it differs from traditional Medicare, how it's paid for prevalence of chronic conditions for enrollees, a comparison of plan margins by type, plan data by county, and more.

Kaufman Hall data suggests health system margins are rebounding to close out 2023

Per this Kaufman Hall data, operating margins for health systems were rebounded with the Calendar Year to Date (CYTD) margin in December coming in at 2.3%. December's monthly operating margin was 4.6%, the second highest month of the year (June was 5.5%). The report also notes that margins are up 15% since 2022, and outpatient revenue has increased 40% since 2020.


A round-up of other newsworthy items we noticed during the week

Hindenburg Research published a short report on public behavioral health provider LifeStance. It is well worth a read if you're following the behavioral health market. The report raises a lot of challenging questions for LifeStance, both related to its general financial model / ability to turn a profit and also how it treats providers. It's a good reminder that if you're evaluating companies like this you often need to get under the hood into the actual patient and clinician experience, beyond just the metrics reported to Wall Street.
Link / Slack (h/t Manas Kaushik)

Deloitte is at the center of an FTC complaint alleging that the software it built to help Texas manage Medicaid eligibility is faulty. Turns out that Deloitte's software is used by over twenty states, and it is one of the largest Medicaid eligibility software providers in the country. The complaint goes through a laundry list of issues that Deloitte has had in various states and suggests that hundreds of thousands of individuals have had Medicaid coverage inaccurately terminated. This apparently isn't a new issue, with the complaint highlighting issues going back to 2018 in some cases, including a footnote about how Deloitte issued a public apology to the state of Delaware in 2019 over implementation issues.
Link / Slack (h/t Dan Hoff)

Optum and Allina Health announced that they have agreed to a ten year strategic partnership, which will include Optum hiring 2,000 employees from Allina Health in the revenue cycle and IT departments. In a state where for-profit health systems have had a hard time entering the market because of questions related to patient care in the state, it will be quite interesting to watch how the Attorney General responds to this move. Either way, this seems like a meaningful win for Optum, particularly coming on the heels of Optum and SSM ending their relationship earlier this month after agreeing to a similar deal a few years ago.
Link / Slack (h/t Michael Ceballos)

While the Summa / HATCo news made waves in the industry the other week, the real work is now beginning for the leadership teams there as they attempt to win over local constituents. STAT had nice coverage this week highlighting the complexities at play, with local politicians in Akron wanting to make sure the local public interest is being protected in the deal, and natural questions being asked about for-profit versus not-for-profit status.

This was a solid overview from POLITICO on the shifting politics surrounding Medicaid expansion in red states in the South. It discusses how there is a growing window opening up for a few more states (like Alabama, Georgia, Mississippi) to pursue expansion more seriously, as well as the broader history of state politics tied back to Obamacare holding that have held progress back for so long. It was great to see expansion go live in North Carolina this past year, so a particularly interesting read to hear about growing momentum in a few of the remaining states.
Link / Slack

Fabric Health (fka FlorenceOS, which launched last year with $20m in funding) announced it acquired AI-chatbot GYANT. This follows its acquisition last year of Zipnosis. Seems like between those two acquisitions, Fabric is stitching together an interesting "digital front door" platform partner for health systems. The press release cites Fabric is now doing eight figures in ARR, with 70 enterprise health customers, including Luminis, OSF Healthcare, MUSC, and Intermountain. GYANT will also bring some big name clients into the fold - Cleveland Clinic, Geisinger, Highmark Health, and more.
Link / Slack

Science 37, a decentralized clinical trials platform, announced it will be acquired by eMed, a telehealth & diagnostics company in an all-cash tender valued at $38 million. Following the closed deal, Science 37 will delist from the Nasdaq and become private once again.
Link / Slack (h/t Cole Roberts)

Humana's Centerwell Senior Primary Care will expand into three new markets in 2024 - Asheville, NC; Baton Rouge, LA; and New Orleans, LA.

CMS shared the updated list of participants in the ACO REACH program in 2024, noting that the number of aligned beneficiaries is increasing from 2.0 to 2.6 million.
Link / Slack


A collection of notable startup financing rounds across the industry

Accompany Health, a primary, behavioral, and social care provider, secured $56 million in funding. The startup provides at-home and virtual care to underserved populations and recently began serving 8,000 patients in Detroit through a partnership with major national health plan.
Link / Slack (h/t Michael Ceballos)

Cohere Health raised $50 million for its prior auth automation platform for payors. Cohere has grown substantially in the last few years, with Business Insider reporting it plans to hit $100 million in revenue this year, and the press release sharing its working with five health plan customers and processing 5.5 million prior auths a year.
Link / Slack

Cognito Therapeutics, a neurodegenerative-focused medical device company, raised $35 million in Series B extension funding. The company is developing a wearable headset that leverages gamma frequency light and sound stimulation to address cognitive decline associated with Alzheimer's disease.
Link / Slack

Foodsmart, a food-as-medicine startup, secured $10 million in fresh capital and announced three new health system partnerships, including Advocate Health, Memorial Hermann, and Intermountain Health. The company will use the additional financing to roll out its food prescription program called Foodscripts.
Link / Slack

Swift Medical, an AI-based wound care platform, raised $8 million in funding.

Being Health, a ketamine clinic treating mental health disorders, secured $5.4 million in seed funding.
Link / Slack

Valendo Health, a Redesign Health backed VBC diabetes platform, launched with $4 million in funding and two partnered provider groups. The press release walks through Valendo's three-phased approach to support independent endocrinology practices in taking on more VBC contracts.

Aster, a women's health practice management platform, secured $2.4 million in pre-seed financing.
Link / Slack


A round-up of posts from the broader healthcare community this week that made us think

Opportunities for CMS to improve healthcare access and equity through advancing technology-enabled startups and digital health innovations by Shobha Dasari, Raihana Mehreen, Kristin Baker Spohn & Andrey Ostrovsky
A study in npj Digital Medicine examining four key areas of opportunity where CMS partnerships with digital health technology businesses could improve healthcare access and equity.

New Business Models for Community Health Work by Dhrooti Vyas
Part one of a multi-part series diving into new HCPCS codes for community health workers and future opportunities for new business models to support those healthcare workers.

Five Questions Raised By The New 2022 Birth Data by Eugene Declercq and Neel Shah
This Health Affairs article does a nice job highlighting some really interesting questions, suggested answers, and supporting data regarding birth trends in this country.

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