Primary Questions
One Medical files an S-1. Will coordinated care find its place in the value chain?
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As I published the last Caseload article a couple of weeks ago, One Medical had just filed their S-1. One Medical is a fast-growing primary care provider, and their S-1 form (which discloses financial and operational details to prospective investors) gives us a close look at an emerging primary care business model.
One Medical isn’t alone in trying to disrupt the primary care space: other growing firms with similar approaches include Iora Health and ChenMed. We’ll consider those businesses more deeply in future articles.
The importance of primary care
From an industry standpoint, it’s worth noting that primary care makes up a small portion of US healthcare spending, according to the American Academy of Family Physicians:
Across payers, including both public and private insurance, primary care spending in the United States amounts to approximately five to eight percent of all health spending, with an even lower percentage in Medicare, compared to approximately fourteen percent of all health spending in most high-income nations.
But primary care’s impact on the system is disproportionately large for driving health and economic outcomes, as the AAFP article continues:
Nations with greater investment in primary care reported better patient
outcomes and lower health care costs. Significant variation in primary care investment exists within the states, according to a Robert Graham Center analysis, yet states with higher levels of primary care investment also report better patient outcomes.
This is intuitive: health problems can often be controlled by primary care doctors before they spiral into costly hospitalizations, keeping patients healthier in the process. Several studies show that devoting extra resources to “coordinated” care is especially effective:
Here’s one claiming that an extra $1 spent on coordinated primary care saves the health care system $13.
Another, run by ChenMed: “Giving Medicare Advantage patients more frequent contact with their primary care doctors kept them healthier and cost 28 percent less than usual care.”
And for Iora, another coordinated model, the result “was an average 48 percent drop in emergency room visits and a net spending reduction of 12.6 percent in Atlantic City and 20 percent in Seattle.”
For an emerging primary care business, this begs the question: how maximize these savings, and capture some of that value?
One Medical’s Approach
In their S-1, One Medical emphasizes how their business satisfies the unmet needs of a host of stakeholders. The filing discusses each in depth, too lengthy to excerpt, so here’s a quick summary:
For patients, One Medical promises same-day appointments that start on time and can be scheduled online. An app makes it possible to engage 24/7, including via text or video chats with providers. Visits allow more time with doctors, and offices are well-located and nicely furnished. Finally, health care is coordinated, meaning that each doctor is supported by a small team of nurses and administrative staff, who can follow up on treatments, ensure medication is being taken, and a whole host of other supporting functions.
All this means that costs will be high and indeed, One Medical charges a $200 annual fee to each member in addition to what they bill insurers. (The fee is sometimes paid by the employer as a perk, but is not covered by insurance).
For doctors, seeing fewer patients each day keeps workloads manageable, and proprietary IT systems reduce administrative tasks. In more typical arrangements, doctors might see four patients each hour, and that limited time affects the care of the patient. Crucially, One Medical’s doctors are paid on a salary model, so there are no financial considerations going into treatment decisions.
For employers, the major benefit is the savings that come from reducing ER visits (the filing cites a 41% decrease in ER visits and 8% total employer cost savings). This results from all of the patient conveniences and benefits, which improve engagement with their primary care treatments. And to the extent that employees value access to One Medical, it’s a way to attract and retain them.
Health networks may be the most interesting stakeholders. One Medical tries to integrate with a single health network in each of their markets (echoing Bright Health), which allows them to provide coordinated care for customers even in specialty situations. Health networks that are looking to integrate further into primary care face risks in building or acquiring primary care functions of their own, so can use One Medical to gain access to more patients.
In a fee for service world, One Medical’s members are valuable, because they’re mostly commercially insured (meaning higher reimbursements for hospitals). And in a value-based world, One Medical’s expertise in coordinating patient care is crucial.
Incentives for Care
There are some big questions in my mind related to One Medical’s incentives. One Medical collects fees in two ways:
PMPM, i.e. a fixed amount “Per Member Per Month,” either from the annual membership fee, or from fixed payments received for the population from a health network.
FFS, a “Fee For Service” arrangement that they call Patient Service Revenue. They collect a payment from the patient’s insurance company after each visit, so more visits directly result in more revenue.
In the case of FFS revenue agreements, the incentive is fairly straightforward: maximize revenue by engaging patients as much as possible, driving as many visits as possible. FFS arrangements are often viewed as cost-drivers to the health care system because they result in more treatment, so insurers and regulators have been trying to shift away from this model. In primary care, however, we established above that increased utilization can actually save money by decreasing hospitalizations. So a FFS model for One Medical does not necessarily represent an incentive problem.
The PMPM revenue is a different story: if I’m reading the filing properly, I see two potential conflicts:
When a health network is compensated based on FFS, but partners with One Medical to pay on a PMPM basis, then the network essentially gains when there are more One Medical visits, but One Medical loses, because they bear the cost of each visit. The reverse is also true: One Medical is best off when they have fewer patient visits. This can be mitigated somewhat by partnering with networks that are compensated on a value-based arrangement (e.g. ACOs).
Larger yet, One Medical sells to employers in large part on the basis of the cost savings that they’ll generate through higher primary care engagement. However, in the PMPM arrangement, they again drive higher margins by reducing engagement, because they bear the cost of each visit.
One Medical’s model certainly demonstrates a commitment to increasing engagement—the whole model is built toward that end. And in the long term, it’s still in their best interest to do so, since their sales to employers and networks is based on showing effective coordination and cost savings.
But those savings will only become clear in the long run. In the short run, there may be a temptation to show strong financial performance, especially in the spotlight of the public markets following an IPO. Should they need to raise capital to fund growth into new markets, they’ll find it much easier to do so by showing strong margins. In this way, navigating the competing pressures for short- and long-term performance could become a burden.
In light of that point, it’s interesting to note that since 2017 the PMPM portion of total revenue has climbed rapidly from 22% to 48% in 2019, while the FFS portion has fallen a corresponding amount.
It might also be helpful to understand the recent trends in visits per member. While not stated explicitly, I’ve used the charts on pg. 78 of the filing to estimate them, and the trend is decidedly downward.
It’s impossible to say what’s driving this; it could be signing up healthier members, or a reduced capacity to engage members, or something else. But it suggests reduced engagement for a business that should want to maximize engagement.
Unit Economics
To be clear, I don’t want to suggest from the incentives discussion that One Medical will fail. Their overall viability is much better taken from their unit economics, of which a simple analysis in the graphic below:
Note the rapidly increasing customer acquisition cost (CAC), which here is just the sales and marketing expense line divided by the estimated quarterly customer additions. They’re still earning nearly 6x back from each customer compared to what they’re spending in sales and marketing; possibly higher if you factor in the mix of less targeted brand awareness advertising that’s required from a growth company. However, there are probably sharply diminishing returns in their ability to buy customer growth via sales and marketing spend.
In addition to those figures, it’s also worth noting that the ‘Care Margin’—which is net revenue minus the cost of care, essentially Gross Margin—has increased from 35% of net revenue in Q3’18 to 41% of net revenue. Management notes that margins tend to be low in newer markets than mature ones, so it’s possible that stabilized margins will be higher still. So while the headline analysis of their financials is a history of worsening losses in absolute dollar terms, they profit on each customer. It’s the investments in future growth that pull them into the red, but those, we hope, will diminish over time.
Lastly, it’s plausible that as One Medical grows its share in a given market, care margin will improve, because higher volumes with give it pricing leverage with health networks who want to access those patients.
Whose line is it?
Recall from our last article that the DTC insurance companies were also becoming involved in coordinating patient care for large health systems. Clearly there is a job to be done here, but the question is, who is best-positioned to do the coordination?
Primary care companies like One Medical, Iora, or ChenMed have a lot of leverage, because they directly employ the primary care physicians, and can form support teams around those doctors. But aligning the incentives is tricky, since reducing primary care costs can actually harm patient health. And they need to integrate with health systems—that’s where all the costs are—to be maximally effective.
Insurance companies stand to benefit a great deal from coordination because they profit when costs are reduced. However, they’ll need to do the work of integrating with provider partners, both on the primary care and the specialty side. This may be possible to do in a small number of markets with narrow networks, but will require
The health systems themselves can likely do the best job: they wouldn’t need to spend time and resources integrating with other companies, and their care coordinators could focus on a single set of IT systems, workflows, and personal connections to make this work. The problem for now is that in a given health system, much revenue remains FFS-driven, which means that the health system is incentivized to coordinate care for some, but not all, of its patients. I would expect that if value-based payment schemes achieve a critical mass of patients, and if health systems continue to integrate with primary care practices, then they will be the ones best-positioned to perform care coordination.
It’s also possible that a modular solution eventually emerges. That is, health systems perform the work required to make themselves simple to integrate with, creating opportunity for many care coordination firms to provide that service. In this case, One Medical will need to compete with all of those market entrants, likely seeing margin erosion over time.
One Medical’s arrival in the public markets might be taken as a signal that care coordination has arrived as a key part of the health care value chain. But for an indication of One Medical’s long-run prospects, watch how the other players in that evolving value chain use and source care coordination for their patients.
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