Fang Liu
CFA Senior portfolio manager, Thematic Equities

Governments all over the world are making efforts to implement measures aimed at curbing healthcare costs. These include the centralized procurement of drugs and medical devices with the aim of lowering prices significantly; a more structured patient triage system to encourage greater use of generalists rather than specialists; and better chronic disease management to avoid emergency visits at astronomical prices.

Many of these instruments are part of the “value-based care” concept of healthcare delivery model which ties what providers (hospitals and physicians) are paid to patient outcomes. The underlying principle of value-based care is simple: lowering costs while improving outcomes compared to the traditional fee-for-service payment model, whereby physicians charge patients based on the amount of healthcare services they provide.

The Centers for Medicare and Medicaid Services (CMS)1 has tested several value-based care programs over the years, such as the Medicare Shared Savings Program (MSSP), Accountable Care Organizations (ACOs) and Medicare Direct Contracting. Medicare Advantage is the most successful of these programs.

The article explains how Medicare Advantage works, outlines its current status and lists the intended benefits of value-based care for all the healthcare stakeholders. It also examines the program’s real-world cost effectiveness, using its most common format – primary-care focused value-based care – as an example.

This won't be the most comfortable process for many entrenched players. […] But those who are interested in working with us to build a value-based system will have the chance to take advantage of a market where consumers and patients will be in charge of healthcare.

Alex Azar, Former United States Secretary of Health and Human Services, March 5, 20182

Medicare Advantage: how does it work?

The roots of Medicare Advantage (also known as Medicare Part C) go back to the 1970s. In 2003, it was renamed to the Medicare Advantage Program, under Bush administration. Yet it would only flourish later, once the Obama administration had launched the Accountable Care Act (ACA). Unlike the original federal government Medicare Fee-for-Service plan offered to all US citizens over the age of 65, Medicare Advantage is a health plan offered by private insurers, known as Managed Care Organizations (MCOs). These companies enter into a contract with the federal government to provide all the services that traditional Medicare covers to each enrollee for a fixed annual reimbursement, adjusted annually. The reimbursement can vary depending on the health profile of each beneficiary; in other words, it is a bundled alternative to the original Medicare Fee-for-Service. Enrollees often receive extra benefits such as hearing aids, spending caps on co-pays and no monthly premiums to pay. The downside is that often the enrollees must opt for providers that are within certain geographic network of the plan, which is usually where enrollees live.

Medicare then uses feedback collected from member satisfaction surveys, plans and healthcare providers to rate the plans on a scale from one to five stars, helping eligible members to choose the most suitable plans. The star rating also affects eligible plans’ rebate percentage. The higher the star rating, the higher reimbursement (also referred to as Per Member Per Month, or PMPM) the provider would receive from CMS for a Medicare Advantage member with the same health risk profile.3

As a result, the system is designed to create a virtuous circle in which all the stakeholders act in the most responsible way, while patients receive the most appropriate care at a lower cost. Figure 1 summarizes the benefits of such a self-reinforcing system to all the stakeholders.

Figure 1: Value-based care benefits












Lower costs & better outcomes


Higher patient satisfaction rates & better care efficiencies


Stronger cost controls & reduced risks


Alignment of prices with patient outcomes


Reduced healthcare spending & better overall health

Source: NEJM, Massachusetts Medical Society; based on What is value-based healthcare? (; published on January 1, 2017.

A booming market

With enrollment growing at high single-digit percentage points, year-on-year from 2010 to 2022, Medicare Advantage is now used by more than 45% of the 55 million beneficiaries of Medicare. It is expected to add 1 to 2 million members per annum as baby boomers reach retirement age, reaching a projected 43 million by 2030, almost double from 2020.4 (See Figure 2)

Figure 2: Medicare Advantage enrollment has outgrown Medicare Fee-for-Service in the past decade

Bar graph: With enrollment growing at high single digit percentage points year-on-year from 2000 to 2022, Medicare Advantage has now penetrated more than 45% of the 55 million beneficiaries of Medicare.
Source: CMS, enrollment data. Latest data point: December 2022

Bar graph: With enrollment growing at high single digit percentage points year-on-year from 2000 to 2022, Medicare Advantage has now penetrated more than 45% of the 55 million beneficiaries of Medicare.

The market has been dominated by large MCOs such as UnitedHealth or Humana. Figure 3 shows the market share of 2022 enrollment.

Figure 3: Medicare Advantage enrollment by firm or affiliate in 2022

Pie-chart: Medicare Advantage enrollment by firm or affiliate as of 2022: UnitedHealthcare (7.9 million, 28%), Humana (5 million, 18%), BCBS (4.1 million, 14%), CVS Health (3.1 million, 11%), Kaiser Permanente (1.8 million, 6%), Centene (1.4 million, 5%), Cigna (0.6 million, 2%), all other insurers (4.6 million, 16%).
Source: KFF, CMS, based on Medicare Advantage in 2022: Enrollment Update and Key Trends | KFF

Pie-chart: Medicare Advantage enrollment by firm or affiliate as of 2022: UnitedHealthcare (7.9 million, 28%), Humana (5 million, 18%), BCBS (4.1 million, 14%), CVS Health (3.1 million, 11%), Kaiser Permanente (1.8 million, 6%), Centene (1.4 million, 5%), Cigna (0.6 million, 2%), all other insurers (4.6 million, 16%).

How effective is Medicare Advantage in cutting healthcare costs?

Research comparing traditional Medicare spending with Medicare Advantage on a per-beneficiary basis has not found obvious cost savings by subcontracting care to MCOs.5 Often used as a benchmark, the average Medicare Fee-for-Service cost per beneficiary grew from USD 10,179 in 2006 to USD 15,309 in 2021.6 A research piece in 2009 showed that Medicare Advantage cost on average 17% more than Medicare Fee-for-Service, but the discrepancy has narrowed to 4% in 2022.7 We believe this trend will continue. MCOs already invest heavily in technologies and data analytics such as telemedicine and chronic disease management and are poised to deliver cost advantages.

However, any pure cost comparison might not reflect the whole picture since this would fail to consider members’ risk profiles and care satisfaction. After all, the Net Promotion Scores (NPS)8 for many value-based care initiatives are particularly high. For example, Oak Street Health, one of the largest primary-care value-based care providers, reported an NPS of 90 from patients based on survey data gathered after their physician visits from June 2018 until March 2020 – far higher than the NPS of 3 received by the average provider.9

Primary-care focused value-based care

At the center of the blueprint is to increase Americans’ access to primary care doctors or generalists. About a quarter of adults and nearly half of adults under 30 do not have a primary care doctor in the US, despite its outsized spending on medical care.10 In most single-payer healthcare systems in OECD member states, access to general practitioners is almost a given, even though OECD countries spend an average of 9.7%11 of GDP on healthcare compared to 18.3% in the US.12

The logic seems simple. If other countries have been able to bring down per-capita healthcare spending by offering broad access to primary care as a triage system, the US should be able to do the same. Therefore, as the Medicare Advantage market has grown rapidly in the US, so has primary care that is tech-enabled and value-based.

Most of the companies, such as Oak Street Health and Cano Health, were founded in the last 10 to 15 years and experienced an up-turn in business during the COVID-19 pandemic. Their business model is to contract Medicare Advantage members from MCOs at a flat fee and offer comprehensive healthcare services to these members. In other words, MCOs transfer members’ healthcare cost risks – either high or low – to these care providers which would then leverage technology and preventive care solutions with the aim of achieving better health outcomes at a lower cost. To do so, they hire in-house primary care doctors, build bricks-and-mortar medical centers where telehealth is put in place, and closely monitor members’ chronic diseases in order to prevent any unnecessary hospitalization and acute events stemming from them.

As an example, Oak Street Health disclosed that it was able to bend the cost curve of its early member cohorts, while increasing the profit margin of its early centers from significantly negative to above 20% for the period 2016 to 2020.13

Looking ahead

According to a study by the Peterson Center on Healthcare, US healthcare spending per capita in 2019 was USD 11,582 and it is expected to climb to USD 18,000 by 2028.14 We believe that value-based care growth will continue to accelerate as a key pillar when it comes to bending the cost curve as it changes the way physicians and providers deliver care.

Although the transition has proven more difficult than anticipated, we expect to see larger-scale successes across the different parts of the healthcare ecosystem beyond primary care.

MCOs will probably assume a bigger role in consolidating the market and driving fundamental change in the industry landscape. Optum of UnitedHealth has already pioneered substantial healthcare innovations, while CVS Health Corp acquiring Oak Street Health shows similar ambition. Ultimately, as in many other industries, we believe that scale and technology will determine the winning recipe.

About the author
  • Fang Liu

    CFA, Portfolio manager, Thematic Equities

    Fang Liu (MA, CFA), Director, is a Senior Portfolio Manager of the Digital Health Equity strategy. Fang joined the Thematic Equity team in 2020. Prior to this, she worked at Calibrium AG for three years and covered global equities across all sectors, and from 2015 to 2017, she was an equity analyst for thematic funds at Lombard Odier. She started her career in 2011 as an academic researcher at IMD, focusing on corporate strategy and innovation in the consumer, technology, media, and telecom sectors in China and Europe. Fang holds a master’s degree in Management from the University of Lausanne (HEC), has coauthored a book on globalization, and is a CFA charterholder.

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