Is That Value-Based Care Company Selling Care or Selling Rules?

Here is the question I would put to any board or investment committee looking at a value-based care company: if Medicare changed one number in its formula next year, what would happen to this company’s profit?

If management cannot answer that fast, you do not yet know what you own.

For 2024, the Centers for Medicare & Medicaid Services (CMS) forecast that Medicare spending would grow 4.9%. That forecast went into the benchmarks that decide whether accountable care organizations (ACOs) in the Medicare Shared Savings Program earn a bonus. Actual spending grew 8% or more. The benchmarks came in too low, and ACOs that ran good programs lost savings they would otherwise have earned. Aledade, one of the largest ACO operators, estimated the shortfall at $154 million in lost shared savings across the program.

The ACOs’ care did not get worse. The forecast was wrong.

A recent Health Affairs Forefront piece, “The Category Error: Value-Based Care Is Not a Payment Model,” names what is going on. The authors argue that value-based care works less like a price and more like a court: benchmarks, patient attribution, risk scores and appeals, all settled long after the patient went home. For an investor, that changes what you need to check.

The Money Is Settled After the Care Is Done

In a fee-for-service business, the price is known when the work is done. In a shared-savings contract, the work happens in one year and the payment is settled the next, against a benchmark the company does not control.

Here is how far that goes. On June 30, 2025, six months after the 2024 performance year closed, CMS cut the weight of its spending forecast in the benchmark from one-third to one-sixth. Milliman estimated the change let five more new ACOs earn shared savings for 2024.

Same patients. Same care. Same year. Different payout.

CMS fixed a real problem, and that is good. But the fix also proved that the payer can move a company’s result after the work is finished. The next change may not go in the company’s favor.

Three Questions to Ask Before You Believe the Savings Number

1. What happens to last year’s result under a different benchmark?

Ask management to rerun its most recent reconciliation with the spending forecast at a different weight, or with actual regional growth swapped in. If a change of a few points turns a profit into a loss, the margin is a bet on the formula, not a return on care.

2. How much of the result comes from which patients are attributed?

Critics cited in the Health Affairs piece argue that part of the recorded Shared Savings Program savings comes from “latent selection”: healthier patients ending up in an ACO’s assigned population while costlier patients leave it. Ask for the risk profile of attributed patients against the region, and for the share of high-cost patients who left the panel each year. A company that truly improves care should keep its sickest patients and show lower cost for them.

3. How much comes from coding?

Higher patient risk scores raise the benchmark, which makes diagnosis coding a profit lever. Ask how fast the company’s average risk score has grown and what share of its savings depends on that growth. CMS has closed coding gaps before: in Medicare Advantage, it began phasing in a revised risk model in 2024 that pays less for many diagnosis codes. A margin built on coding can be cut by one rule.

Why the Payer Has a Reason to Keep Rewriting the Rules

The other party to every one of these contracts is the federal government, and it is not getting much. According to the Health Affairs authors, net savings to Medicare from ACOs, after bonus payments, come to about 0.06% to 0.13% of total Medicare spending.

The wider record is similar. Of roughly 50 payment models the CMS Innovation Center has launched, only four have been selected for expansion. The Congressional Budget Office found the center’s work raised Medicare direct spending by $5.4 billion from 2011 to 2020 instead of cutting it.

A counterparty that writes the rules and sees little return will keep rewriting them. That is the risk an investor in this sector is underwriting.

The authors make one more point that matters here: Medicare’s own evaluations cannot reliably tell a weak care model from a badly set benchmark. If Medicare cannot tell the two apart, a savings figure in a pitch deck cannot either. Only the three questions above can.

The Bottom Line

A value-based care company can make money two ways: by changing the care, or by working the rules. Both are legal. Only the first survives a rule change. Before you set a price, find out how much of the margin comes from each, and pay for the part that survives.

If you sit on a board or an investment committee weighing a value-based care company, get in touch. I’m glad to talk through how to test its savings claims before the next rule change tests them for you.

The financial model is only part of the diligence. The leadership team must also be capable of adapting when the rules, assumptions and economics change.

If you are evaluating whether a leadership team has the capabilities required to protect and strengthen its advantage, watch this video.