Risk-based Contracting for Value-based Care, a Founder's Playbook

Macro Context and Shift to Value-Based Care (VBC)

• VBC is a dual clinical and payment model prioritizing preventative services and long-term outcomes, positioning itself as an alternative to the traditional fee-for-service (FFS) system.
• FFS models have historically driven healthcare costs to nearly 20% of GDP without commensurate improvements in clinical outcomes or patient experience.
• In 2021, fewer than 40% of US healthcare dollars flowed through payment models with substantial value-based components; only 6% were in sub-capitation or global capitation arrangements.
• The Center for Medicare & Medicaid Services (CMS) aims to have all Medicare beneficiaries cared for by providers in value-based models by 2030.
• The pandemic exposed the lack of resiliency in FFS models regarding unpredictability, while highlighting that entities with value-based exposure were better positioned financially.
• Rising medical costs are driving payers to accelerate the adoption of risk-based and value-based models.

The Risk Spectrum: Contractual Models

• Pay for Performance: Layered on traditional FFS rails with clinical or operational performance guarantees.
• Per Member Per Month (PMPM): Companies charge a fixed set amount (e.g., $5–$150) per member monthly, coupled with limited economic risk-sharing against total cost of care.
• Bundled Payments: Entities take full risk for all care within a specific episode (e.g., maternity or knee replacement) defined by time or service type.
• Sub-Capitation: Companies take payment and risk for a specific subset of services (e.g., primary care or outpatient) while excluding others like hospital or pharmacy spend.
• Capitation: A flat rate is paid for a patient while the provider assumes full risk for a wide range of services beyond bundled episodes.
• Global Capitation: The entity takes full actuarial risk for the total cost of all clinical services for a patient, effectively functioning as the payer.

Strategic Decision-Making and "Glide Paths"

• Founders like Jack Stoddard (Patina) accelerated toward risk to bypass the market's 4–6% payment cap on primary care, aiming to prove that investing more in primary care reduces waste in the remaining 94%.
• Rajay Bhatniji (Waymark) and Corbin Petro (Eleanor Health) noted that risk should be pursued to fund clinical models unsupported by existing CPT codes (e.g., "creating meaning and purpose") rather than for valuation arbitrage.
• Faye Rottenberg (Firefly Health) adopted a "glide path" strategy, launching with basic FFS contracts while operating as if on value-based models to generate proof points for later renegotiation.
• Satish Jain (Carom Health) opted to remain risk-neutral initially, citing that insurance risk introduces regulatory complexity and significant capital requirements unsuitable for early-stage surgical marketplaces.
• Global capitation is often most appropriate for continuous, longitudinal care (e.g., primary care), while episodic care (e.g., surgery) may be better optimized via bundled payments.
• The decision to take on risk depends on the leverage required to control utilization management, claims payment, and network design.

Partnership and Stakeholder Alignment

• Successful risk-based contracts require early alignment with partners who share a commitment to value-based care and vision for long-term impact.
• Mike Copco (Pearl Health) argues that partner selection should shift from geography to effectiveness in managing specific risk conditions.
• Sunny Goyal (Blue Cross Blue Shield of NC) emphasizes that partners must have deep, local population understanding to design solutions that match specific community needs.
• Executives with P&L ownership are critical "anchor customers" who can act as internal champions to navigate complex organizational barriers.
• Early-stage expansion requires building broad coalitions across verticals (executives) and horizontal functions (legal, medical leadership, credentialing, finance).
• Payers like Blue Cross Blue Shield utilize dedicated strategy, new ventures, and markets teams to guide innovators through due diligence and network integration.

Defining Success and Measuring Outcomes

• Success metrics must be defined contractually at the outset rather than retrospectively, often detailed in spreadsheets covering cost, operational, and clinical outcomes.
• Partners prioritize total cost of care and affordability; successful innovators must demonstrate how their solution drives these specific payer goals.
• Eleanor Health utilized psychometrically validated scales to benchmark substance use disorder outcomes and tracked reductions in ED and inpatient utilization via third-party data.
• Firefly Health used "experience metrics" (e.g., 41 clinical touchpoints annually) and ER admission rates to validate their model during initial FFS contracts.
• Due to inherent data delays in healthcare (up to 18 months for financial reconciliation), companies must rely on upstream process and operating metrics to gauge scalability before final financial results appear.
• Upstream metrics should include utilization changes, quality impacts, and early indicators of satisfaction or savings to build confidence in the model's trajectory.

Scaling, Risk Management, and Capabilities

• Scaling requires balancing operational unit economics with actuarial credibility while avoiding excessive exposure that could threaten the business if early results underperform.
• Pearl Health mitigates risk in large-scale models through reinsurance and stop-loss policies to defray systemic risks and protect against market swings.
• Founders emphasize building robust data infrastructure from day one, including claims enrichment, risk stratification, and the ability to iterate care models based on evidence.
• "Build vs. Buy" decisions should prioritize building proprietary engagement and automation tools while buying core instrumentation to ensure compatibility with payer/provider systems.
• Risk-based models necessitate multimodal, interdisciplinary care approaches, often combining brick-and-mortar clinics, field teams, and digital infrastructure.
• Companies moving toward risk must integrate expertise (e.g., risk management, actuarial science) and capital reserves typically found in larger, later-stage organizations.

Investment Criteria for Risk-Based Models

• Investors evaluate whether a company has the internal talent or hiring plan for experts who have successfully implemented value-based care and negotiated risk contracts.
• The capital utilization plan must demonstrate sufficient runway to cover statutory reserves and reach milestones for follow-on funding rounds.
• Market readiness is critical; investors validate that the selected patient population has the right timing and regulatory tailwinds (e.g., oncology, kidney care, primary care).
• A clear roadmap to full risk or specific risk levels is required, including assumptions for pricing, margins, Total Addressable Market (TAM), and evidence generation.
• Investors look for lined-up or hypothesized payer partners capable of collaborating on the specific patient population the company targets.