investment paper

Signed into law in 2010, the ACA has made a big difference in how Americans get health care. One of the areas of focus has been implementing a value-based approach to healthcare delivery that moves away from a volume-based pay-per-service model. Since then, CMS (Centers for Medicare & Medicaid Services) has tried different models with different insurers, providers, and state government agencies. Daniel Cattel, Assistant Professor at Erasmus University, Studied We researched 18 of these initiatives and found one thing they had in common. This idea was inspired by Amazon’s (AMZN) Acquisition of One Medical (ONEM), CVS (CVS) Acquisition of Signify (SGFYMore), Walgreens (WBAs(Crof), and Alignment Healthcare (ALHC), both utilize preventive care as a strategy to reduce costs. The rationale behind this policy framework is simple. By investing in primary care, health systems can reduce more expensive hospital stays.

This trading activity reflects the scale of the opportunity offered by the move to CMS payment models. But the real question is Agilon’s health (New York Stock Exchange: AGL) offer such an opportunity? I do not think so. The hottest assets in today’s healthcare market are primary care facilities. AGL has partnerships with 17 physician groups and produces 2,200 primary care physicians, but its lack of underlying assets makes it less attractive as an M&A target, with companies such as (AMED) and LifeStance Health (LFST) owns the underlying assets and derives most of its revenue from Medicare and Medicaid programs.

If you judge AGL’s business model by its merits, you can’t find meaningful value. Operating a hybrid reinsurer and outsourcing business, it is uncompetitive and takes a lot of risk for most returns. The company incurs endless losses on patient medical expenses, shares a portion of the profits from Humana (HUM) and UnitedHealth (UNH) under a risk-sharing agreement, and PCP captures most of the profits. I’m here. AGL also offers outsourcing activities and maintains billing tasks on behalf of providers.

revenue trends

Investors should be aware of several trends shaping the healthcare industry. In particular, be wary of companies like AGL that focus their operations on the Medicare market. These trends are changing the entire healthcare system, including how providers deliver care and how they pay for that care. However, despite the burden of health care costs on the public budget, cutting these services does not appear to be a politically viable option for elected officials and candidates running for public office. In fact, the Healthy People 2030 initiative, like the 2020 and 2010 initiatives before it, expanded the country’s health goals.

AGL earns per capita income for each eligible Medicare member. As we build new partnerships, their income will increase and so will the lives we cover. Given its scope’s focus on seniors in the United States, its revenue sources are two: 1) insurers offering Medicare Advantage and 2) CMS under its direct contract program. As such, the company stands to benefit from demographic trends in the United States as baby boomers age and qualify for Medicare.

The most important growth driver is intrastate and interstate expansion through partnerships with new providers. The company now operates in seven of his states, down from his five last year. Recently announcing new partnerships in new states, including Maine, Minnesota, South Carolina and Tennessee, from January 2023 he will add nearly 250,000 lives to the platform.

Two factors contribute to the company’s ability to sign partnerships. First, her leadership talent is demonstrated in her ability to build and maintain partnerships with existing and new PCPs and payers (insurers). Steve Sell is the former CEO of Health Net, the largest subsidiary of Centene (CNC). The Board includes industry leaders with deep connections and expertise, including Dr. Bill Wulf, President of America’s Physician Groups, a medical association with 300 institutional members. As AGL continues to grow and expand beyond its current market into other states, I believe the talent of AGL’s management team is critical to its success.

Second, it offers attractive deals to PCPs and insurers, taking most of the risks for a small percentage of profits. Set a cap on your monthly payment amount. In contrast, if a participant requires additional care, their risk exposure to medical costs is unlimited. Suppose her PCP partner succeeds in reducing medical costs. In that case, they share only a fraction of the profits while maintaining administrative tasks such as collections, claims, liquidity support, margin compression and hold rating support.

margin trend

For the above reasons, there is no doubt that AGL will generate growth. However, I still have my doubts about the rating. The company’s business model is unique, leveraging CMS’ value-based care initiatives to reduce healthcare costs. However, it lacks competitiveness. Many insurers operate similar risk-sharing programs directly to their network of providers. Additionally, the lack of economies of scale limits the benefits of revenue growth. High variable cost per student.

Finally, one cannot help but think that the insurance industry is digging its own grave, including hybrid models such as AGL. The Department of Housing and Human Services, “HSS,” sets Medicare reimbursement rates based on average medical costs (currently averaging about $10,000 per enrollee per year). size). However, in order to promote the adoption of value-based care practices, CMS, under some programs, allows insurers to keep the savings they have achieved beyond this gross margin. Suppose an industry changes standard procedures and succeeds in lowering the national average medical cost. In that case, HSS may respond by lowering the base redemption rate. That’s the whole point of these initiatives. So, in some ways, I believe AGL’s quest for margin expansion is like chasing a mirage, at least in the long term.

Overview

AGL’s prospects hinge on its ability to reduce member healthcare costs and keep members healthy (as indicated by trends in healthcare utilization indicators). So far, so good. Margins have improved, confirming a positive relationship between ACA-aligned care and cost savings. One challenge, however, is maintaining positive margin momentum as we expand our PCP partnerships. If successful, the company could reach a major milestone in its growth story. Yet, as a reinsurer for Medicare Advantage policyholders, execution risk is exacerbated by high variable costs, structurally low margins, and unlimited downside exposure to patient healthcare costs. In the long term, the margin may be limited by the dynamic base rate set by HSS. For now, the price level is too high given its challenges.