Value-Based Services in Behavioral Health: an Investors Roadmap

It doesn’t take a healthcare expert to notice that the US healthcare system is riddled with obvious shortcomings. For starters, according to the CMS the US spent 17.9 percent of GDP on healthcare in 2017– roughly 3.3 trillion dollars or $10,348 per person. Among the primary economic issues driving the many inefficiencies in the system is the misalignment of incentives. With countless actors in the healthcare space from physicians, to hospitals, pharmaceutical and medical device companies and payors such as health insurance plans to mention payors such as medical insurance firms and government funders, it can be easy to lose track of the ultimate driver of the industry, the patient. From an investor’s perspective, it is quite obvious how these misaligned incentives can destabilize the efficient delivery of care to patients– as each actor in the system is primarily responsible to its own shareholders and financial outcomes.

Recent and sustained efforts to redesign the reimbursement model have taken hold of late in the provider delivery space. Traditionally, healthcare operates on a fee for service mode where each procedure and client seen are individually billable; this model inevitably creates an incentive where providers bottom line are effective most by two factors: volume of clients seen and reimbursement rate. Per the National Institute of Health, “ Providers get paid in a FFS system for seeing patients regardless of clinical outcome, providing little differentiation between effective and ineffective encounters.” While this is not to say that physicians and clinicians do not take their patients care and wellbeing seriously, it does speak to a system that, in the aggregate, does not offer financial incentive for providers to do so. In fact, one new model that seeks to realign economic incentives around patient care known as value-based service is gaining substantive traction among healthcare payors.

In short, a value for service delivery model is one in which clinical outcome, cost and efficiency take precedent in driving compensation. In such a model, providers and hospital compensation are a factor of quality over quantity. Ideally, a value-based system will allow for providers to offer fewer services, see fewer clients and, if not properly, retain Fee for Service levels of revenue. Several Value-based models are currently be explored by payors and include shared savings, bundled payments, global capitation and shared risk. In each of these models, providers are financially incentivized (either in a bonus structure or ability to retain savings) to efficiently deliver care against a baseline spending benchmark. Per a recent report authored by Deloitte Researchers,

“Blue Cross Blue Shield health plans spend more than $65 million annually, about 20 percent of spending on medical claims, on VBC….  Aetna dedicated 15 percent of its 2013 spending to VBC efforts and intends to grow that amount to 45 percent by 2017.” With the strongest incentive to control costs and make delivery of care more efficient, health insurance firms have been one of the driving forces behind value driven care.


For this blog, then, the most relevant and obvious question is how could this shift affect the Behavioral Health Industry, especially from an investors perspective.  The next several paragraphs will aim to capture some possible ways in which a value-oriented delivery system may ask behavioral health providers to restructure their services and then ask a series of questions pertinent to investors in the behavioral health space.


It is critical to first understand the financial model that behavioral health providers utilize to create profitable and growing organizations. Operating along a Fee for Service basis, drug rehab, eating disorder and mental health facilities all rely on three key metrics for success: reimbursement rate, daily census size and length of stay. These performative metrics all follow a similar pattern relevant to the conversation. They maximize client exposure to ongoing care, but fail to record distinctly qualitative factors in delivery and post-discharge environment. Moreover, from the perspective of healthcare payors, especially insurance companies, behavioral health facilities represent a costly hybrid in the healthcare system with lengthy and protracted treatment episodes similar to hospitals with specialized needs akin to specialist care providers. In fact, in 2013 depressive disorders represented the 6th most costly diagnosis in the United States, incurring $71 billion in treatment.


With that being said, how is a behavioral healthcare facility to redesign its programming to maximize outcome? While research is slowly changing the face of behavioral health, especially in the substance abuse sector, there are obvious means of investing in outcomes. For starters, incorporating more evidence-based care into treatment models is an obvious means of ensuring that programming has maximum efficacy. Inasmuch as this step might prove costly in the short-term, the competitive forces of the behavioral marketplace are already setting in motion a shift towards higher quality of clinical care. Additional measures can include investing more time and resources into aftercare planning. Behavioral health facilities, unlike other healthcare organizations, have less control over patient outcome– given the outcome is entirely at the discretion of the patient and his or her behavior. This essential point makes it all the more obvious that facilities, which often see their patients for no more than several months, need to ensure that the necessary post-care provisions are set in place. This can mean prioritizing family involvement in care, increasing psychoeducation for patients and their families and, most importantly, connecting patients with additional therapeutic outpatient support prior to discharge.


Other, perhaps more data-driven, approaches can also help boost value care in behavioral health. Creating benchmarks for various disorders at each level of care can help provide a baseline by which facilities are able to operate and compete to maximize outcomes. Outcome studies and continued support and contact with clients following discharge can serve as an effective tools for helping facilities track their successes and outcomes. Presently, substantially more resources are dedicated in behavioral health to marketing to new and prospective patients than ensuring their outcomes following discharge are successful. This ultimately may mean that behavioral health may need to take data collection, integration and analysis to the next level and identify means of capturing clinically pertinent information from scratch.


From an investor perspective, too, this paradigm shift is not inconsequential. In an industry experiencing substantial consolidation and private equity investment, financial models and cash flow analysis should be based on the assumptions of an inevitable and gradual shift towards a value-based model. It also should enable large consolidated behavioral health facilities some leverage with their payors in determining which outcomes and qualitative metrics to gauge. Without facility participation and buy-in, there is an underlying risk that payors will shift towards metrics that may not favor their practices. It is critical that behavioral health facilities be at the table in negotiating qualitative and value-based models. Also, for large consolidated firms being in a position to invest in data capture and analysis represents a smaller share of costs where a company has scaled efficiently. Lastly and critically, it means that potential investors need to be sensitive to quality of care in addition to financials. Finding investments that will yield healthy returns both in the current fee for service model and have the infrastructure and potential to continue to succeed in a value-oriented economy will certainly pay dividends. Placing a value of quality when seeking an investment will nicely supplement due diligence.


Every good actor in the healthcare system should gladly support an effort to boost patient outcome, especially when financially incentivized to do so. A value-based model clearly seeks to find a solution to misalignments in an industry plagued by disparate actors each with specialized functions. However, in the case of behavioral health, there are additional questions that have not yet fully been articulated. First and foremost, does a value-based model also create an incentive for providers to reject treating particularly complicated clinical cases and diagnoses? Will a predominantly payor led shift in care model overlook important provider-oriented nuances in care? Does a value-based system uniquely hurt behavioral health facilities who do not have a ‘standard’ client and are often more vulnerable to externalities, such as client behavior?

Ultimately, these questions will need answers. For now, however, the shift towards value-based care seems inevitable, especially as health insurance payors seemed determined to reign in spending. Like any change of considerable size, this movement could serve to present opportunities to providers and investors alike– they just need to recognize an opportunity when it presents itself.


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