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Jefferies said that while it’s still bullish on Value Based Care providers long-term, it’s favoring companies with diversified payor mixes and strong near-term cash flows and moving to the sidelines on those with outsized full-risk Medicare Advantage exposure.
Due to near-term headwinds in the space, Jefferies advised taking a “selective” approach to the subsector over the next 12 months. The investment bank chose Astrana Health (NASDAQ:ASTH), Privia (NASDAQ:PRVA) and The Oncology Institute (NASDAQ:TOI) as its top picks while downgrading agilon (NYSE:AGL) and CareMax (NASDAQ:CMAX) to hold.
Despite near-term caution, “we remain bullish on the long-term opportunity in the space and will be closely watching for signals that Medicare Advantage-exposed names are turning a corner fundamentally in order to get more constructive,” Jefferies analysts wrote in a recent note.
The analysts added that they believe the “dire state of the US healthcare system” will necessitate the transition to value-based care.
“We continue to view the Value Based Care transition as a logical response to the issue at hand and a long-term trend that will define the evolution of the broader healthcare system over the coming decades,” they said.
Jefferies initiated coverage of ASTH with a buy rating, calling it “an underfollowed company with a long history of execution” in VBC that “has made recent strides to modernize the business.” Astrana Health recently changed its name from Apollo Medical Holdings.
The bank particularly likes ASTH’s diversified payor mix and “strong” cost trend visibility, along with expected EBITDA growth of 20% through fiscal 2025 and “significantly discounted” valuation versus its peer group.
Jefferies added that it sees ASTH’s “unique model” grabbing more attention over the next 12 to 24 months, which should close the “valuation gap to more popular peers.”
Another top pick, PRVA, was praised for its “strong, sustainable” earnings growth with “balanced” exposure to Fee-for-Service, or FFS, and VBC. Jefferies said PRVA’s FFS exposure and “more measured approach to risk transition” gave the company “a leg up versus peers in the current elevated utilization environment.”
As for TOI, Jefferies said that due to the episodic nature of cancer treatment, the oncology care provider didn’t have the same Medical Loss Ratio risks as other VBC names. “Once de novo expansion hits steady state, we expect TOI to become profitable at a relatively accelerated rate and to experience a lift on its bottom line,” the analysts added.
Meanwhile, CMAX was downgraded to hold due to near-term Medicare Advantage utilization headwinds and “stretched capital structure.”
AGL was likewise downgraded due to near-term medical costs headwinds and cost trend visibility that “have put into doubt the true earnings power of the model at maturation.”