Startups

Why VCs are investing in value-based care

The US may never move to a fully value-based system, but venture capitalists still think it’s worth investing in.
article cover

Science Photo Library/Getty Images

· 3 min read

Navigate the healthcare industry

Healthcare Brew covers pharmaceutical developments, health startups, the latest tech, and how it impacts hospitals and providers to keep administrators and providers informed.

It’s no secret that the healthcare industry has been pretty slow when it comes to transitioning away from a fee-for-service model—just 41% of healthcare dollars went through a value-based care model in 2020.

Pitchbook recently predicted the US would never fully convert to a value-based care model, in which providers are reimbursed based on patient outcomes rather than the quantity of services provided, like in the traditional fee-for-service model. But some venture capitalists (VCs) still think it’s worth it to invest in companies working to make the transition possible.

Adam Fine, founder and managing partner at healthcare-focused venture capital firm Windham Venture Partners, told Healthcare Brew he agrees with Pitchbook’s prediction because it wouldn’t make sense for certain procedures, like cosmetic surgery, to operate under a value-based care model.

“I don’t foresee a time in the future that cosmetic surgeons are going to start taking financial risk on aesthetic outcomes,” Fine said.

But just because it’s unlikely that 100% of the US healthcare system will one day be value-based doesn’t mean the concept should be scrapped entirely, Fine said.

“Just because it’s hard is not a reason not to do it.”

According to Pitchbook, “the [value-based care] transition will continue because the fee-for-service reimbursement model is unsustainable at a macroeconomic level and fundamentally at odds with the values that draw most healthcare professionals to the industry.”

How two VCs decide which value-based companies are worthy of investment.

Krish Ramadurai, a partner at early stage venture capital fund Harmonix, said one of the first things he looks at when deciding whether a value-based care company is worth investing in is if the company has produced a “tangible outcome.”

“Actually being able to use statistics to measure in an evidence-based way how you’re accelerating or proving that outcome—I think that’s the winners in the space,” Ramadurai said.

The companies Harmonix invests in are most often trying to make sense of the healthcare industry’s massive collection of data.

“You’ve got this massive trove of data that every institution, provider, payer, patient is sitting on, but nobody’s actually been able to clean it up, tag it, label it, and derive a functional insight quickly and effectively,” Ramadurai said. “How do we consistently take actionable insights out of that data and move the needle on patient outcomes to provide value-based care? That’s been the key bottleneck that we’ve been trying to figure out.”

Companies with founders that have “extensive healthcare experience” are most likely to win over Ramadurai because “they understand how to derive that better, faster, cheaper outcome,” he said.

Fine said that for him to invest in a value-based care company, “there’s got to be a clear, demonstrable value proposition or return on investment (ROI) within a 12- to 18-month period.”

“Customers [are] being bombarded with new solutions and new platforms, and they definitely want to see concrete, real ROI,” Fine said. “We like to see real traction with real, paying customers who are valuing the platform or the service offering.”

Navigate the healthcare industry

Healthcare Brew covers pharmaceutical developments, health startups, the latest tech, and how it impacts hospitals and providers to keep administrators and providers informed.