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Jefferies said that while it is still bullish on Value Based Care providers in the long term, it is favoring companies with diversified payer mixes and strong near-term cash flows and moving to the sidelines of those with outsized exposure to full Medicare Advantage risk.
Because of Despite short-term headwinds in the sector, Jefferies advised taking a “selective” approach to the subsector over the next 12 months. The investment bank has chosen Astrana Health (NASDAQ:ASTH), Privia (NASDAQ:PRVA) and the Institute of Oncology (NASDAQ:TOI) as the best choice when downgrading agilon (NYSE:AGL) and CareMax (NASDAQ:CMAX) hold.
Despite the short-term caution, “we remain optimistic about the long-term opportunities in the sector and will closely watch for signs that stocks exposed to Medicare Advantage are fundamentally turning to become more constructive,” Jefferies analysts wrote in an article. recent note.
The analysts added that they believe the “dire state of the U.S. healthcare system” will require a transition to value-based care.
“We continue to view the Value Based Care transition as a logical response to the problem at hand and a long-term trend that will define the evolution of the broader healthcare system in the coming decades,” they said.
Jefferies initiated coverage of ASTH with a buy rating, calling it “a little-followed company with a long history of execution” in VBC that “has made great strides to modernize the business.” Astrana Health recently changed its name from Apollo Medical Holdings.
The bank particularly likes ASTH’s diverse payer mix and “strong” visibility into cost trends, along with expected EBITDA growth of 20% through fiscal 2025 and “significantly discounted” valuation relative to its peer group of equals.
Jefferies added that ASTH’s “unique model” will attract more attention over the next 12 to 24 months, which should close the “valuation gap to more popular competitors.”
Another top pick, PRVA, was praised for its “strong and sustainable” earnings growth with “balanced” exposure to Fee-for-Service, or FFS, and VBC. Jefferies said PRVA’s FFS exposure and “a more measured approach to risk transition” gave the company “an edge over peers in the current high usage environment.”
Per TOI, Jefferies said that due to the episodic nature of cancer treatment, the oncology care provider did not have the same medical loss ratio risks as other VBC names. “Once the de novo expansion reaches steady state, we expect TOI to become profitable at a relatively accelerated pace and experience an increase in profits,” the analysts added.
Meanwhile, CMAX was downgraded to hold due to near-term Medicare Advantage take-up hurdles and “tight capital structure.”
Similarly, AGL was downgraded due to challenges related to short-term medical costs and visibility of cost trends that “cast doubt on the true earning power of the accrual model.”