What are the 4 critical risks of investing in the Health and Human Services (HHS) space?

One of the worst mistakes investors new to the space can make is to assume that strategies rooted in the commercial payer or Medicare Advantage space can be simply pivoted into the Medicaid space. The mistake is understandable, because few portfolio companies understand this risk and they do not know to communicate it to their investment partners.

Understanding that commercial and Medicare strategies need to be dramatically altered to work in Medicaid is the first step. The next risk is underestimating the learning curve for Medicaid. Each state operates its own Medicaid program, and most benefit, operational and procurement decisions are done independent from federal operations. We have a saying in our space: “If you have seen one Medicaid program, you’ve seen one Medicaid program.” Besides the policy differences across states, each state has its own agency and stakeholder environment, and navigating these is extremely complex for HHS veterans. Finally, the regulatory environment for this space evolves constantly, and in ways that greatly impact revenue projections. For those new to the space, critical mistakes and loss of time are guaranteed.

Many investors rely on the relational nature of other verticals for confidence in sales revenues. While relationships play an important role in the HHS space, most contracting is done using a defined competitive procurement process. This applies to both state agency and health plan contracts (though less so in health plans). Because of the regulatory and bureaucratic components, the sales cycle for this space is much longer and much more unpredictable than in other verticals.

The Medicaid space has two key components that drive unique pricing models: A focus on the rate-cell capitation payments to managed care plans, and long-standing efforts to implement value-based payment models.

Medicaid health plans are paid a per member per month (pmpm) fee by states to manage different populations (such as diabatics or pregnant mothers). All the costs for care and management of each member must be funded by those rates or the plan loses money. Each plan thus thinks of all vendor solution costs in terms of pmpm. This type of pricing is not the norm for most portfolio companies operating in the commercial space, and it may take a large effort to structure pricing models in a way that will succeed in the Medicaid space. Most portfolio companies price solutions at an aggregate level and do not have a way to assign costs at the plan member level.

The second challenging part of HHS pricing models is the focus on value-based payments. Most Medicaid state agencies and health plans are required to place an ever-increasing amount of their payments to providers in what is called a “value-based” arrangement. While precise definitions of these models remain elusive, the critical risk is not being able to clearly tie a portfolio company solution to specific member outcomes. Vendors should also be prepared with standard risk sharing arrangements to offer to prospects in the Medicaid space.