An Overview of Carbon Health

Our latest private company analysis looks at Carbon Health, a disruptor in the primary care / urgent care market that was recently valued at $3.3 billion and had indicated its intentions to go public. We started this analysis of Carbon back in May, interested in understanding its path to achieving its vision of becoming “the greatest modern healthcare company in the world.”

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This analysis took an unexpected twist this week as Carbon announced a massive corporate layoff (250 individuals were laid off, which reports indicate represent 25%+ of corporate staff and 8% of total staff). In CEO Eren Bali’s note announcing the layoff, he cited two market conditions that have changed for the organization:

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1. Decrease in revenue from COVID related services
2. Shifting strategy from growth to profitability

These two business shifts over the past several months create a challenging question for Carbon - how do you continue executing on the broader vision articulated while also moving toward profitability? We’ll take a look at that in the following sections:

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1. Summary
2. Carbon’s Strategic Evolution
3. Carbon’s Current State
4. Carbon’s Growth Options

Summary: 

• Vision: Carbon has a big vision for changing healthcare delivery in this country. Its CEO, Eren Bali, articulated Carbon’s vision as becoming the “best and largest modern healthcare provider.” Yet Carbon still has a lot of work to do to get there. The current state of the business looks a lot like an urgent care roll-up coupled with heavy investment in an operating / tech platform and brand. 
• Practice Acquisitions: Carbon has been acquiring small urgent care practices at a rapid clip (it has acquired roughly 15 groups / 49 clinics) and integrating them into the Carbon brand, alongside de novo center creation. Carbon appears to have been participating in sale processes for these practices and winning the bids, which obviously is a strategy that drives growth when you have the cash to be the top bidder. 
• Urgent care vs primary care: As Carbon acquires those urgent care practices, it has been bolting on primary care capabilities into those practices, both in-person and virtual, by hiring primary care docs to work in the urgent care practices. Carbon lists 33 clinics on its website as providing primary care services, most of which have same day visit availability (which highlights the convenience play here). It will be interesting to watch how well Carbon continues to recruit PCPs / NPs / PAs over time to work in urgent care settings. 
• Clinical Capacity: Carbon currently has a number of clinical job openings on its website, including 25 PCP, 4 virtual PCP, and 81 urgent care physician roles. It’s not clear that Carbon has figured out how to recruit providers at scale in this market environment, particularly PCPs (not that this is unique to Carbon, check out Oak Street’s and One Medical’s hiring pages). Given the focus on profitability, we wouldn’t be surprised to see them slow down on primary care hiring  
• Analogs: A number of players have shown there are paths to building solid businesses in the urgent care market - CityMD, MedExpress, and GoHealth, among others - have demonstrated that it is a viable model with solid exit opportunities. Yet Carbon has seemed to have broader ambitions, blurring the lines between these urgent care plays with next gen primary care approaches of One Medical, Forward, and Crossover. Despite this, it seems like the most realistic comp for Carbon at the moment is CityMD - a next gen urgent care play with convenient access to services. 
• Partnerships: Carbon has demonstrated a willingness to partner with a number of players across the ecosystem for referral relationships, from D2C telehealth player Hims to Milwaukee health system Froedtert. As Carbon attempts to grow in a capital efficient manner we’d expect new market entries to be tied to partnerships like Froedtert (or acquisitions). If Carbon continues to enter the FFS primary care space, it’d make sense to see them pursue a One Medical style partnership model
• Going Forward: We’re already seeing signs of Carbon adjusting course with its recent layoff and acknowledgement that it’s focusing on profitability versus growth. We’d guess that we’ll see a few strategic adjustments from Carbon over the coming 12 - 18 months to account for market changes while still giving it a path to achieve the broader aspirational vision:

1. Slowed clinic growth (both de novo builds and acquisitions) in order to manage cash burn. 
2. An push to move into VBC contracts in California where Carbon is rolling out its primary care offering in order to capture revenue expansion from such contracts
3. A move towards increasing revenue from employers paying for services on behalf of employees
4. A revival of its original provider enablement play, supporting practices via its platform in order to drive growth in a more capital efficient manner
   

In all, Carbon is setting up to be an Oscar-esqe narrative pitting “optimists” versus “realists”. You’ll have the optimists who believe the story of disruptive innovation changing healthcare for the better, seeing Carbon’s big picture vision as a real potential outcome. Even if they don’t achieve it, it’s still worth a shot. In this scenario, success looks like Carbon as the next version of an Optum-style behemoth. 

On the other hand, you’ll have the realists seeing the vision as a nice story that helps drive growth and attract talent for what ultimately looks a lot like a PE-style urgent care roll-up attempting to leverage VBC contracting dynamics to juice financials. In this scenario, success looks like Carbon as the next CityMD, getting rolled up into a broader PE platform. Neither are necessarily wrong, just depends on your view of the healthcare system. 

Our personal take is that achieving the grand vision will be a bit of a quixotic task - even without the challenges presented by the current financial market environment. While it is nice to articulate a vision to change the industry, the practical realities of financial models in healthcare are what dictates outcomes here, and Carbon’s approach of being the low cost provider charging Medicare rates is going to slam into the reality of what it costs to operate a care delivery provider. 

As much as we want to buy into the broader vision for disruption, we think that as Carbon focuses more on profitability, it will start to look a lot like a CityMD play that has a nice brand but ultimately isn’t all that different from other urgent care models. We’d expect Carbon has a nice exit (although that is relative, particularly for Carbon employees who might have received equity at its recent $3.3 billion valuation) and that it’ll eventually get rolled up by a payor / PE group looking to add convenient urgent care access as a capability for more VBC contracts in California.

Carbon’s Growth versus Profitability Dilemma

As much as any other healthcare organization, Carbon has a massive challenge in front of it as the market has turned from growth to profitability in that it arguably has some of the biggest ambitions of any healthcare delivery, with its CEO, Eren Bali, having set out the target of 1,500 clinics by 2025 on the path to becoming “the greatest modern healthcare company in the world”. That target was shared back in 2021, which seems like an eternity ago given how quickly the market has turned. Back then, Bali expressed this view on Carbon’s business model and the need for growth:

"Our business model demands that we grow as fast as possible," Bali says -- meaning that the company's only hope of reaching profitability and maintaining low, transparent prices is by getting big enough to pressure the rest of the industry. "If we put this much investment in R&D and opening clinics, we are going to be a horribly unprofitable company forever -- unless we get to scale. The more size you have, the more you can leverage innovation. I want to pressure the competitor. I want to pressure the U.S. health care market, so that other providers have to become more efficient."
Source: Inc Article

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It comes across as a pretty honest statement from a different era in the capital markets, but acknowledges the issue that Carbon is now facing - the investments Carbon is making in opening clinics and building a better healthcare experience have made it quite unprofitable as it seeks to scale this new disruptive, low-cost healthcare experience. 

This is the very nature of the care delivery business - a low margin game that benefits players who already have scale - and is exactly why it is so hard to build a disruptive platform in the industry. Building scale is either a very long term endeavor and/or necessitates large losses, which is where venture funding has come to play a major role in building new care delivery models over the last several years. 

Contrast that statement with the end of Bali’s announcement of the layoff this week:

These changes, alongside a number of non-personnel related reductions in operating expenses, will allow Carbon Health to be profitable much earlier than we had originally planned, which is the prudent thing to do in today's market. Our mission – making great healthcare accessible – remains unchanged. The difficult actions we took were necessary to strengthen our position both financially and strategically for the future, and they set us up to deliver on that mission for our patients, providers, partners and employees. 

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It doesn’t seem as though Carbon has gotten to the scale it needed to in order to change the industry yet, so the fact that it is attempting to move towards profitability now hints at the challenges it is going to face in achieving Bali’s vision articulated last year. 

As we’ll get into below, there are clearly ways to move this business to profitability, it just starts to look a lot like any other urgent care business, not the disruptive company described. The question is can Carbon still find a way to thread the needle and do both? 

With that as general context, let’s take a look at the current state of the business and see how it might choose to address the dilemma it faces.

The Carbon Model: Key Strategic Inflection Points

Let’s take a walk down memory lane to take a look at some of the key inflection points for Carbon in its growth as a care delivery business, since it was founded back in 2015. It gives some context for how Carbon has been malleable with the vision of the organization.

2015 - 2017: A tech platform for practices

Carbon announced its Seed round in March 2017, and at the time it sounded a lot more like a data infrastructure play than it did a next gen care delivery company. Check out the screenshot below, describing how Carbon’s business model was as a physician enablement play, intending to charge physician practices 7% of revenue, similar to a billing company that charges practices 5% - 10% of revenue. 

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But Carbon wasn’t just intending to provide outsourced billing for practices, rather it was rebuilding an EHR from scratch, and it intended to sell its patient-centric EHR to practices. The broader goal at the time was to create a “two-sided marketplace” to connect patients with providers. You can see some of the beginnings of what Carbon is going after today in this quote from Bali:

The idea is to build a Carbon Health network. Rather than a group of providers united by a hospital, this group will be united by the platform itself. Interoperability will be built in. “It's like a very large hospital that does not own any buildings,” Bali said. “It works and feels very different from an EHR, but it does what an EHR does.” https://www.modernhealthcare.com/article/20170731/TRANSFORMATION01/170729886/carbon-health-s-epic-plan-for-patient-data 

Carbon had its own private practice at the time in order to test out its platform on patients, and had 750 patients using the service. While that served its purpose in standing the company up, it appears Carbon realized there were some challenges in scaling this concept, as this particular vision for Carbon wasn’t particularly long lived.

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2018 - 2020: Carbon’s Entry into Urgent Care

In March 2018, Carbon announced it was merging with Direct Urgent Care, a chain of seven urgent care clinics in the SF Bay Area. Along with this, Carbon’s website branding changed significantly, with it changing its language from being a network of providers to having its own modern clinics. This shift moved Carbon out of the provider enablement category and into the care delivery category. 

It’s interesting to note that this approach to growth via acquisition has been in Carbon’s DNA since the beginning, as it now shows up a lot in its strategy. Whereas many other disruptive companies in the space (i.e. Oscar, Devoted, Oak Street) are strictly growing organically, and building all competencies in-house from the ground up, Carbon has demonstrated a willingness to grow by combining assets. It’s a logical choice to make when seeking to scale in healthcare, although it does raise a number of questions in terms of how “disruptive” the idea is, versus piecemealing together existing assets. 

2021: A broader vision for reinventing care delivery

In 2021, the public facing tone for Carbon became much more grandiose - Eren Bali’s letter to investors included this aspirational vision for Carbon:

I communicated to you a year ago that I believed that, in 2021, the long-term vision I set out when founding Carbon Health – to become the best and largest modern health care provider delivering great care accessible to all Americans – would start to take shape.  Undeniably, we have made many significant strides in this direction over the past twelve months.
Source: https://carbonhealth.com/blog-post/a-look-back-at-2021

In October 2021, Carbon raised a $350 million round and shared a public goal “to become the largest primary care provider in the U.S.” Around this time is when Carbon started articulating the vision of opening 1,500 clinics by 2025.

As we’ll get into more in the next section, this period has included a number of acquisitions of urgent care clinics, and then using those urgent care clinics as a chassis for bolting on additional care delivery elements, most notably primary care. 

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2022: Shifting to profitable growth

We don’t know exactly yet what this change will entail for Carbon, but it’s clear from the layoff announcement that Carbon is shifting its strategic focus to profitability. 

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Summary

It should be clear by now that Carbon has demonstrated a willingness to shape-shift over the last eight years, adjusting to the markets as needed. Carbon’s publicly stated vision has migrated quite a bit from its earliest days of creating a two-sided marketplace to its recent aspiration of becoming the biggest and best care provider in existence, while now recognizing it needs to do so profitably given market conditions. This presents an interesting question for Carbon moving forward - does it continue to attempt to provide the care itself, or does it move back to more of a networked approach, where it is building the platform delivering care? 

A few weeks ago, we’d have told you that we expected that as Carbon seeks to balance growth with profitability that we see it move back in the direction of a platform play, enabling other providers to deliver better care. As agilon and others have demonstrated, it requires significantly less investment to build that business, although it would represent a departure from the currently stated vision. But given the layoffs focus on corporate staff, it would seem that Carbon is de-emphasizing the platform build and instead focusing on getting clinics to profitability. 

This would seem to indicate that Carbon is doubling-down on its position as a care delivery provider. If it were going to go the platform route, we’d expect a more even distribution of layoffs across corporate and clinics (as well as reduced clinical hiring, which doesn’t seem to be the case as we’ll get more into in the next section).

Carbon Current State Business Details

Carbon’s Current Footprint 

Carbon’s clinic footprint has been changing on almost a weekly basis since we started doing this analysis a few weeks ago. As of June 2nd, it appears Carbon has a physical footprint in 16 states currently and offers virtual care in 35 states. Across those 16 states, Carbon currently operates 126 clinics, which we’ve broken down across their various service offerings below:

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Here are the clinics broken down by type:

The majority of Carbon’s clinics are urgent care clinics (that also offer COVID testing services), at 58% of Carbon’s total clinics. 33 of Carbon’s clinics offer primary care services, the vast majority of which are in California. Only one primary care clinic is outside of California, located in Reno Nevada. 14 clinics are COVID testing sites, many of which are travel clearance sites. 

California is by far Carbon’s biggest market, and it appears to be building density in both San Francisco and Los Angeles. San Francisco currently has 26 clinics open, while Los Angeles is up to 33. Los Angeles demonstrates Carbon’s willingness to acquire practices, as it has acquired at least 18 of the 33 clinics it operates there, 14 of which were MedPost urgent care clinics.

In the past month, Carbon appears to have opened more clinics in two areas (based off looking at the clinic locations posted on Carbon's website):

• Former MedPost clinics in Los Angeles. It appears Carbon has added seven new clinics that were former MedPost locations to its website in the past few weeks, some of which are still in the process of reopening. 
• De novo workplace health clinics in New Jersey. Carbon has opened four new clinics in New Jersey over the past few weeks, all of which are offering workplace health services. It sure seems like Carbon is experimenting with employer offerings in New Jersey. 

 Carbon’s clinic footprint gives a good sense as to its current business 

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The COVID Bump

Carbon’s business appears to have grown significantly due to COVID-19 related services over the last few years, but it looks like Carbon is expecting that growth to subside, as Bali notes in the layoffs announcement:

While our core business grew 4x in 2021 and will double again in 2022, we – like most healthcare providers – had significant revenue from COVID-specific lines of business. As COVID is entering a new phase, we are winding down some of those COVID-specific lines of business and that, unfortunately, means parting ways with some colleagues.

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The comparison to most healthcare providers here seems a bit misleading - yes, while presumably many FFS providers stood up COVID testing clinics and gained revenue from that, FFS care delivery in general was negatively impacted by COVID, whereas Carbon was able to grow its footprint tremendously during that period as a result of COVID. As the Inc article notes, some of Carbon’s clinics were entirely full of 120 COVID patients per day at the height of the pandemic.

The Telegraph clinic, which opened in 2013 as a Direct Urgent Care and was rebranded in 2019, has six rooms that serve both primary and urgent care patients. At the height of the pandemic, the clinic saw as many as 120 patients in a day, almost all of them for Covid testing and treatment.
Source: Inc article

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As Carbon sees a reduction in this COVID related business, it will be interesting to watch how this impacts their margins over time, as presumably this volume was quite profitable for Carbon.

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Urgent Care Acquisitions

Carbon has acquired ~16 urgent care practices and at least 51 of the 106 urgent care / primary care clinics that Carbon operates have come into the organization via acquisition of an existing practice - the list of practices it appears they’ve acquired (or partnered with) are below. 

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Giving the shifting focus towards profitability, it will be interesting to see how/if Carbon’s approach changes here. It appears Carbon’s approach to acquiring clinics at least in part involves aggressively acquiring small urgent care clinic changes as they’re coming up for sale. For instance, check out this press release from Benchmark International, the bank that sold Hillcrest Urgent Care to Carbon. Hillcrest was put up for auction and Carbon won the bid process with an offer that Hillcrest “could not pass up”. It will be curious to watch whether Carbon continues to win auction processes as a means of driving growth given the new market landscape. 

It’s also interesting to see this private-equity style play being run by a venture capital funded business (although presumably these acquisitions are being funded at least in part by debt). But it also raises a number of questions as to the integration of these practices and the change Carbon is trying to drive within them. It’s worth noting the difference that Carbon is taking here from organizations like Oak Street, which have been focused on building de novo clinics from the ground up. Of course, each approach has its pros and cons. 

This model allows Carbon to scale much more quickly than a de novo build approach, and in a world focused on profitability, that certainly has advantages. But as Carbon presumably seeks to deliver a consistent care delivery experience across all of its primary care and urgent care clinics under the Carbon brand, it will face challenges in integrating practices. This is one of the challenges of integrating provider groups via acquisition and then attempting to bring them together under one brand that delivers care in a standardized manner - it is the same issue health systems have always faced when acquiring provider groups. Each individual provider generally thinks they know how to practice medicine and is resistant to being told to change how they practice, creating a mess in aggregate. 

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Bolting Primary Care onto Urgent Care

A central part of Carbon’s strategy appears to be acquiring urgent care clinics and then adding primary care services onto them. Take Med7 for instance, which was a chain of four urgent care clinics in Sacramento, CA. Carbon announced the acquisition of Med7 a little over a year ago. If you go to Med7’s website, which is still active, Med7’s site looks and feels exactly like what you’d expect for a local chain of urgent care clinics. 

But when you go to Carbon Health’s website, it now lists that primary care services are also provided, and that you can book either an in-person or virtual primary care visit. 

This provides a glimpse into how Carbon is expanding on an urgent care clinic location over time - acquiring the existing clinic (and patient volume it has) and then bolting on additional services to it.

This is going to be an interesting cultural transition to keep an eye on within Carbon’s clinics, and in many ways it feels like the broader vision for the business relies on making this transition effectively. It will be particularly interesting to watch if Carbon can attract primary care docs to practice in an urgent care setting in a way that scales. Urgent care and primary care are two very different types of practice for providers, and being the one primary care provider who is coming to work within an urgent care setting (even if you’re not doing urgent care per se) seems like a rather challenging recruiting hurdle. How Carbon navigates these organizational design questions will be a big task for the organization. 

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What is Carbon’s Clinical Model?

What isn’t really clear from anything Carbon has released publicly is whether it has figured out what its specific care model is. Of course, this isn’t all that important in the FFS urgent care world - your model is getting patients in the door, fixing an issue, and getting them out as quickly as possible. It's a pretty straightforward playbook which has been run time and again.

This confusion hits home when you actually see some of Carbon’s clinics in the wild - for instance check out this clinic in Los Angeles:

Notice how the clinic itself has “Primary Care” on the outside of what appears to be something like a nicely branded shipping container, yet the clinic doesn’t actually provide any primary care services. You can schedule urgent care services or COVID tests, not primary care. And even if you could schedule primary care there, is this really the future of care delivery? If health systems were saying that they were planning to increase access to primary care services by putting shipping containers in parking lots, we'd all look at it really skeptically. Why is Carbon different? It highlights how Carbon combines all of these care delivery concepts somewhat liberally.

If Carbon is seeking to manage VBC contracts, as they’ve indicated previously, it will become much more important to understand how exactly Carbon is building out a clinical model that effectively manages risk - both within the four walls of their clinics and also with downstream care delivery partners. Given Carbon’s approach of acquiring practices, executing on a uniform clinical model across these practices seems doubly challenging. Just look at how Oak Street is able to describe its clinical performance versus how OptumHealth describes its model as an indicator of how well each can manage clinics and optimize performance. 

The one thing that appears clear is their intent to leverage “practicing at top of license” for primary care roles, using PAs and NPs heavily to deliver primary care. However, as this recent Forbes post reminded us all, that concept is essentially just a labor arbitrage play to benefit from the financials, and it’s not clear how that play will work out. 

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The Challenges of Hiring Clinicians

In the 2021 Investor Letter, Carbon indicated that it wasn’t having any issues hiring clinicians:

We have never delayed a new clinic opening due to staff recruitment shortfalls, and we have experienced virtually zero clinic closures due to staff turnover.  

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It’s an interesting data point to share in that both of those things can be true and the organization still can be struggling due to staffing. According to Carbon’s Lever page, as of 5/17/22 (note: right before the announced layoffs), Carbon was hiring for 361 open positions. 355 of those roles were for roles that are clinical and/or in-clinic operations. Of those 355 roles, 86 are for PAs / NPs, 81 are for urgent care physicians, 25 are for PCPs, 5 are for medical directors, and 4 are virtual PCPs. That’s 115 roles currently posted that are needed to deliver care to patients. It seems like that most definitely represents a staffing challenge for an organization like Carbon. 

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Note: since we did this analysis on 5/17, Carbon appears to have removed all Back-Office job postings, although clinical jobs are still posted. Presumably with the 6/1 layoff there is also a hiring freeze on back-office positions. As of 6/3, the 355 clinical roles is now at 338, but unclear if the decrease is due to removal of roles or hires.

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The convenience conundrum

One of the core challenges that Carbon will need to resolve as it attempts to scale is the fundamental conflict presented when a fee-for-service care delivery organization is trying to: 

1. Provide low cost care

2. Provide more time with providers

3. Provide convenient access to appointments. 

The core underlying reason why that is tough is that primary care provider salaries are expensive and yet they are also underpaid in the current system, forcing them to pack visits into short time slots. So baked into the current cost of care is an already packed schedule that churns through patients quickly. Thus, the fee-for-service care delivery system forces you to pick two of the three things to optimize at best. For example, check out the below schedule for one of Carbon’s PCPs, Murtaza Rajabali, MD for a same day appointment on May 18th:

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It’s wonderful as a consumer that I have so many options with Dr. Rajabali, and this very much seems to live up to Carbon’s idea of providing accessible care. But the challenge of course is that PCPs are high paid employees, and given that, Carbon is likely burning money by employing Dr. Rajabali while he has this many openings on his schedule. On a fully-burdened basis, Dr. Rajabali is likely making somewhere on the order of $300,000 per year. 

Assuming he practices 32 hours a week, and has a month of vacation, that means he has approximately 1,484 hours a year he spends in clinical practice. Lets say Carbon’s average revenue per visit is $100 (if it wants to decrease costs, it shouldn’t be getting much higher than that), which means to cover off on costs for Dr. Rajabali, he needs to do 3,000 visits per year (3,000 * $100 = $300,000). If he’s spending 30 minutes per patient, that means he needs 1,500 hours to see those patients, which is more hours than he works in a given year. In that sort of environment, if Carbon is trying to employ this provider in a somewhat profitable manner, that scheduling page above can’t look like that - all of those visits need to be booked, and more when you factor in things like cancellations. This is the underlying reason why you can’t pick all three…

Low cost care + Long provider visits = No access (and probably no viable business)

Long provider visits + Convenient access = High cost care (i.e. a concierge practice)

Convenient access + Low cost care = Short transactional visits (i.e. urgent care)

All of this underscores the challenging business dynamics Carbon faces in trying to create the disruptive business model it envisions. There are some very real constraints that limit Carbon’s ability to do so, within a FFS business model. Of course, there are two unlocks here that Carbon appears to be trying to pursue:

1. Leveraging lower level staff - if you can use PAs / NPs extensively and drop salaries from $300k fully burdened to half or two thirds of that, it generates more flexibility within the model
2. Leveraging value-based contracts - if you can change the way primary care is paid, going from 5% - 10% of the healthcare dollar to the entire healthcare dollar, obviously that creates more freedom to change how a provider practices. 

More on this in the strategy session.

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Summary of Current State

Carbon’s path to getting to this current state has involved cobbling together a number of small urgent care practices and leveraging a new brand to change the experience and add more services to the offering. And it does appear to have created a nice branded experience that offers convenient access for individuals. Other urgent care models like CityMD have demonstrated this approach can lead to a successful exit by continuing down this path.

Yet at the same time it doesn’t appear Carbon is interested in stopping at building a slightly better urgent care brand - it has much bigger aspirations that include primary care and beyond. And this is where the story gets much more challenging for Carbon as it seeks to balance growth and profitability while attempting to achieve those ambitions.

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Carbon's Strategy

Let’s spend a bit now looking at what Carbon appears to be doing strategically moving forward as it still attempts to become “the greatest modern healthcare company in the world” while also needing to find a path to profitability.

Carbon’s Key Pillars

Carbon’s Investor Letter from 2021 laid out ten key pillars in terms of what is required to achieve its vision disrupting care delivery. It’s a helpful architecture for how Carbon thinks about its investments and where it is differentiating itself moving forward, and it’s also interesting to read these while thinking about how the markets have changed Carbon’s priorities since then.

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Reading through all of these pillars, you can quickly see how Carbon seeks to differentiate from other healthcare delivery organizations. There are a few interesting callouts in this for us given the passage of time: 

1. COVID response as a key pillar. Obviously in hindsight this was a short-lived pillar. This shows how quickly the business is evolving for Carbon, moving from being one of its key pillars only a few months ago to the company winding down COVID-specific portions of the business.

2. No mention of the clinical team specifically. One of the key differentiators for most care delivery organizations is clinical talent. It is interesting to note that Carbon calls out “clinical innovation” and “world-class team” but it doesn’t specifically mention the clinical team. Given Carbon’s focus on product and brand, it’s easy to imagine a world where it views the product / tech / data teams as the key differentiator, and clinicians more as a necessary, but not differentiated, cog in the machine. And clearly, if that’s true, the layoffs indicate the need to flip this thinking.

3. Brand. This is one area where Carbon (and other next gen care delivery models) seem to have a real opportunity to shine versus incumbent care delivery organizations. If Carbon can create a wedge, particularly leveraging COVID-19 testing, with a population of individuals seeking convenient access to care, and use that to build a broader relationship with those individuals over time, it seems like a meaningful way to drive change.   

It’s interesting to note that Carbon doesn’t call out as a key pillar the need to effectively manage the integration of the various clinical practices it is acquiring and partnering with. Time and time again, the most innovative platforms are thwarted by the realities of working with various physician groups and trying to get them to operate in a streamlined manner. If Carbon is driving all of this technological and clinical innovation, but the clinicians in the 51 clinics it has acquired aren’t interested in partaking in that change, how will Carbon effectively navigate that? 

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Go to Market Strategy

Carbon’s Clinic Rollout

Given the recent strategic focus on profitability, it seems doubtful that Carbon will continue to target 1,500 clinics by 2025, as it articulated last year. Assuming all of those 1,500 clinics include urgent care capabilities, that would put Carbon at roughly 17% of the urgent care clinics in the country (there are roughly 9,000 urgent care clinics in the US today). To put this into perspective, lets show where this would put Carbon compared to where all the other biggest urgent and retail clinic players in the country sit today:

Yes, Carbon would be roughly triple the size of the next largest purely urgent care company, Concentra Urgent Care. The data above shows just how fragmented the urgent care landscape is that Carbon is attempting to roll up, with the 20th largest urgent care / primary care player having only 69 clinics today. Needless to say, it seems very unlikely that Carbon hits 1,500 clinics, although not impossible - CVS has almost gotten there with its retail clinics.

One of the questions that Carbon will face as it attempts to grow out its clinics is where it intends to place said clinics. This article highlights how MedExpress and CityMD have both found success taking two very different approaches - MedExpress has grown by targeting under-penetrated rural areas where there is little competition, while CityMD has gone deep in the New York City market. Both approaches have shown to be viable options, but Carbon doesn’t appear to have a clearly defined strategy in growing its footprint - right now it appears to be growing by acquiring a few clinics in major metro markets everywhere aside from California, where it appears to be building more density. It wouldn’t be a terrible idea for Carbon to go after a CityMD-like approach becoming the leading urgent care player in Southern California.

It is worth noting that Carbon appears to have opened only ~55 de novo primary care / urgent care clinics (it has acquired and rebranded the remaining) since it raised its seed round in 2017, with the remainder being acquired / partnered practices. This isn’t an issue per se, but it does highlight how Carbon’s growth ambitions might present more challenges with integration as it continues to scale. As the number of acquired practices increases from 55, that complication compounds.

Coupled with the recent layoff and strategic shift, we’d expect that the number of clinics Carbon is targeting to come down significantly over the next few years. It seems much more realistic to expect them to grow on an Oak Street style path - 40 clinics a year for the next several years as it moves them toward profitability. This would still make Carbon one of the largest urgent care chains in the country, which would be no small feat. 

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Carbon’s Low Cost Approach

This was an interesting quote from one of Carbon’s investors in the Forbes article on Carbon:

“Carbon starts from a principle of lowest cost wins and lowest cost is good for the consumer,” says Eric Jones, a partner at Dragoneer. While there are other public primary care companies like One Medical, which is membership-based, and Oak Street Health, which focuses on Medicare patients, Carbon Health doesn’t restrict the patients it serves or require a subscription. “Carbon is a beautiful mass market opportunity that can really exist—whether it's a pop-up or full-scale clinic or virtual—in every kind of nook and cranny of the U.S.,” says Jones. “And that's what I think makes it really special.”

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One of the unique things about Carbon’s vision is that it allows so many folks to be attracted to the general concept of it, while also simultaneously saying conflicting things about the vision. For instance, it is interesting to note how Jones differentiates Carbon versus Oak or One Medical. But the reasons for what Oak and One Medical are doing differently are the result of financial realities of delivering care - as we described above, it is seemingly impossible to be the low cost provider of care in FFS care delivery while also providing access to care and meaningful visit lengths with providers. Oak and One Medical have found revenue models that work, tied to specific segments of the population for whom they deliver care. Trying to be the low cost solution that is everything to everyone seems like a challenging value proposition to succeed with. 

Carbon has been able to avoid membership models because it has been delivering urgent care and benefiting from COVID related revenue, but that does not demonstrate it can more broadly be a low cost care delivery provider moving forward. As Carbon expands to offer more services and gets into primary care, we’d bet it is either going to need to figure out a One Medical-esqe model (Carbon has already been charging employers PEPMs for its COVID Ready services) and you can also bet it is going to restrict the patients it serves (again, it is offering COVID Ready to employers, and as it gets into VBC contracts and builds a model around that, it is naturally going to have to start restricting services to certain patients). The strategy dictates that. So while it’s a really nice vision that Eric Jones is articulating here, the reality is that as Carbon continues to grow, it’s likely going to start looking a lot like these companies. 

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Carbon’s Bricks & Mortar Approach for Patient Acquisition

One of the most interesting insights Carbon appears to have learned over the last several years is the difference in acquisition costs across in person and telemedicine. This is a fascinating quote from Bali in the Forbes article:

“The downside of telemedicine is that your customer acquisition costs are actually a lot more than what we spend on clinics,” he says. In the Bay Area, 95% of Carbon patients are from word-of-mouth and walk-bys, while only 5% of new customers are from paid channels, says Bali. More than 1,000 of Carbon’s 1,600 employees work in the clinics providing care.

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This physical footprint appears to be one of Carbon’s biggest strengths moving forward - at a footprint of 100+ clinics currently, Carbon has a convenient footprint that will be hard for many organizations to build out. It is not hard to imagine scenarios where any number of players might decide they want to acquire Carbon’s clinical footprint as a way to continue driving growth.

Carbon’s recent partnership with Hims also hints at its willingness to cede telemedicine channels to other companies and focus on convenient in-person care delivery. It’s a deal that makes sense for both parties in that it now has a national D2C telehealth partner to funnel volume to Carbon in geographies where Carbon has a presence. These sorts of partner relationships that really are a means to generate referrals for both parties are not new to fee-for-service care delivery, and it appears that Carbon is leaning into them as a way to drive patient growth. Of course, as these organizations grow, these relationships invite inevitable questions as to who ultimately owns the patient relationship and it seems this will either fizzle out eventually or lead to a closer relationship between the two parties (i.e. you could envision a future state where there is a new health system that combines Carbon’s physical footprint with a D2C telehealth brand like Hims.

Carbon Health Connect Partnerships

Carbon Health Connect has been a major new initiative for Carbon over the past several months, as they’ve announced key partnerships with health systems after launching Carbon Health Connect in November 2021:

• John Muir Health (Nov 2021)
• Stanford Health Care (Feb 2022)
• Froedtert (April 2022)

This activity seems to provide further evidence of Carbon’s willingness to partner with other care providers similar to Hims in a referral relationship type of manner - yes, these relationships should lead to better, more integrated care, but it also should lead to referrals for both Carbon and the local health system partners. 

There is a lot to unpack within each of these three press releases in terms of what the specific relationship is between Carbon and the various health systems. In general, these do not seem to be much more than agreements to share data between the parties. But that could certainly change over time. One could envision a future state where Carbon is entering into much deeper agreements with health system partners, similar to how One Medical has grown by leveraging health system relationships to bill higher FFS rates to payors. But again, that seems counter to Carbon’s model of providing access to low cost care, so we wouldn’t expect to see them go that route. 

Froedtert provides for the most interesting of these three deals as it is the one where Carbon does not have an existing clinic footprint, meaning that Carbon will be entering the market and building a brand from the ground up. Froedtert presumably provides Carbon with an existing patient population to build brand with, although it also ties Carbon’s brand to Froedtert in the local market. That may be a good thing in terms of initial patient volume for Carbon, although it also may limit Carbon’s ability to drive its disruptive model over time.

On the other hand, you could envision a private equity group looking at Carbon the way Warburg Pincus looked at combining CityMD with Summit Medical Group, and see these sorts of partnerships as a clear way for Carbon to start taking on risk with populations and manage medical spend. For an organization looking to take more value-based contracts, having access to a substantial urgent care footprint as part of the model represents an appealing addition. If you can combine that urgent care footprint with a multispecialty group, it provides a solid footing to start taking risk on populations. 

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Market Expansion

We’d expect that as part of the shift towards profitability that Carbon slows down its entry into new markets, and instead chooses to build density in existing markets, only expanding into new markets where it has a way to do so with clear line of sight to patient volume and profitability. This would seem to either come via an acquisition of an urgent care clinic chain, like Carbon’s entry into New Jersey, or a partnership with a health system, like Froedtert.

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Carbon’s Product Extensions

One of the neater things Carbon has been doing is rethinking how it offers services in ways that we might not traditionally expect from primary care / urgent care operations. A good example of this is the Metabolic Health Assessment program they launched. For patients in California at high risk of developing diabetes, Carbon can enroll them in a two week assessment program where members get a CGM, two visits with an endocrinologist, and a personalized diabetes plan, all for about $80 (according to the website). Programs like this seem like they have the opportunity to:

1. Create a differentiated experience in the eyes of consumers
2. Generate near term additional revenue opportunities for Carbon
3. Help Carbon perform better in risk-based contracts down the road

Of course, the challenge with this is how much time and investment it takes to stand up a program like this and get it to profitability. And given the recent strategic shift, it’s hard to imagine that Carbon is able to continue supporting staff who are developing these sorts of programs that don’t provide line of sight to near term profitability. This is the challenge with achieving Carbon’s vision - many of the things it appears to want to accomplish aren’t tied to near term profitability, which means we’d expect to see this type of innovation slow down significantly. Of course, this is the exact same thing that happens all the time in fee-for-service care delivery environments - really talented people come up with great ideas, implement them at a small scale, and eventually funding dries up because it isn’t aligned with FFS financial incentives. Not surprisingly, Carbon doesn’t appear to be immune to this issue.

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Financials

Carbon’s Revenue & Gross Profit

Based on data that has been publicly reported, we can get some high level sense of what Carbon’s revenue and gross profit has looked like over the last few years:

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While this doesn’t give us a ton of detail on the profitability of the business, it does show how revenue has been growing over time. One of the biggest questions in this is how much of Carbon’s revenue growth has been related to COVID versus its core business.

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COVID Revenue vs Core Business

Carbon did 300,000 COVID tests as part of its air travel partnership, presumably most or all of those happened in 2021. It appears Carbon offers both PCR tests ($150 - $250) and antigen tests ($60). Let’s assume Carbon had an average unit price of $150 for COVID tests, this would account for $45 million of revenue in 2021 for Carbon. It’s a really nice boost for what amounts to essentially no time for a provider.

In the layoffs letter, Carbon also shared that “our core business grew 4x in 2021 and will double again in 2022.” It’s hard to know exactly what the core business contributed to revenue in 2020 given the ramp up of COVID over the period, but if you are generous and assume that Carbon’s 2020 revenue was almost entirely the “core business”, that would mean that $185 million of revenue in 2021 was from core business, while $35 million of revenue was from COVID-19 related services. That seems like the very high end of the range, which would put Carbon at $360 million of revenue in 2022. It seems likely that it will come in a bit lower than this given presumably some of 2020 revenue was COVID related. 

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Urgent Care Financials

Carbon’s model of acquiring urgent care practices is a pretty well-worn private equity-esqe approach to building positive cash flow businesses, and should give some reassurance to Carbon that it too can get its urgent care footprint to profitability, assuming it chooses to pull the same profitability levers every other urgent care clinic player pulls. Of course, this is the conundrum for Carbon - either you attempt to be the industry changing disruptor, don’t pull those levers, and lose money, or you acquiesce to the industry norms and get to profitability. 

Check out this slide deck that references 16 urgent care clinics for to get a sense of what revenue and EBITDA look like for urgent care clinics:

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As you can see from these various clinic financials, there is a clear path to profitability for well run urgent care clinics. Carbon has noted historically that its goal is to get its clinics to EBITDA margins between 25% - 35%, and suggested in its investor update that in mature clinics, it generated EBITDA margins of 30% - 40% in 2021. See Bali’s comments in the Forbes article about how they’ve gotten clinics to that EBITDA margin:

One of the major milestones to test readiness will be hitting a 25 to 35% EBITDA margin throughout all Carbon’s clinics, Bali says. It has happened for some of the older clinics, but he says that needs to be replicated across the new ones that are opening at a steady clip.

As the same slide deck referenced above shows, while industry medians / averages hover between 16% - 18% EBITDA, it should be pretty doable to operate a clinic efficiently that gets to that 25% to 35% EBITDA margin. Check out this income statement projection that pegs EBITDA in the 27% - 31% range below.

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So while it is clear that Carbon should be able to operate its urgent care footprint profitably, its broader ambitions have likely been putting a drag on the company as it has operated unprofitably today. It will be interesting to watch how much this layoff moves them in the direction of profitability by cutting operating expenses for the org, but either way Carbon will need to figure out how to navigate this and find a path to grow profitably moving forward. 

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Growing Profitably 

Given the need to shift to focusing on profitability, it is going to be interesting to watch how Carbon seeks to continue to try to drive growth in the business. Let’s take a look at key levers they might be considering in doing so, beyond the obvious strategy of continuing to grow clinics as they have been:

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Value-based Care

Understandably, it seems as though Carbon has an eye on VBC contracts, saying as much in the 2021 Investor Letter:

And looking to a future where value-based care will be part of our arsenal, we have begun developing our competencies in this arena.

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This would single-handedly be the biggest lever Carbon could pull to successfully achieve its vision. It would make sense for them to seek the same kind of percent-of-premium contract we’ve seen value-based primary care providers seek out in the Medicare Advantage market, in order to capture the entire premium dollar in the same way that those MA entities are doing. The challenge in embarking on this strategy is a couple of things:

1. Payors aren’t going to sign percent of premium deals with an urgent care clinic that isn’t acting as a patients PCP. In order to sign these deals payors need to be able to attribute members to a PCP, and so Carbon will need to expand to offering PCP services before it can reasonably expect to sign these deals up. It makes sense that they’re attempting to build this density in California first, and in particular Southern California, where Carbon should be able to use that density to sign up payors to contracts. The vast majority of Carbon’s clinics are in California, so it should be able to address this issue pretty quickly there.

2. VBC primary care deals are still heavily oriented towards Medicare Advantage, and urgent care volumes are heavily oriented towards commercial and cash pay. This data suggests that of urgent care visits, 55% are commercial, 22% are Medicare / Medicaid, 10% are cash pay, 7% are occupational health / workers comp, and 6% are other. Assuming that Carbon’s clinic payor mix looks like the general distribution (if anything it seems like given its branding it would skew more heavily commercial), it is going to be challenging to sign up VBC deals with commercial payors. Perhaps they can get some limited amount of upside for hitting quality metrics, 

3. Clinical strategy. As more primary care providers seek to partner with payors on VBC contracts, payors are naturally going to be more selective in working with providers who have a clear clinical strategy as to how they intend to improve clinical outcomes. It is not clear what Carbon’s clinical strategy is today, beyond bolting primary care services onto an urgent care chassis. While this does provide for urgent care style accessibility, it still begs the question as to whether Carbon actually has a care delivery model, or will need to combine itself with a broader organization (ala CityMD with Summit Medical)

These issues present large impediments to Carbon standing up a meaningful book of VBC business. Just look at One Medical for a comp here, which has made little inroads in moving its commercial business to VBC, and acquired Iora to get into the Medicare Advantage VBC business and capture the improved financials there. But we’d surmise that Carbon is attempting to sign up VBC contracts in the California market. If they’re able to successfully do that, and successfully manage risk on those contracts, it presents a nice potential path forward for Carbon.

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Ramping employer sales

From the investor update, it appears that the employer business is becoming a key part of Carbon’s growth story:

During Year 2 of our enterprise business in 2021, we continued to expand our presence and scale, and the enterprise business has become a vital part of our revenue growth at an attractive margin profile.

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We can see from this PDF it appears that Carbon is working with employers to pitch COVID testing, charging employees $20 per employee per month for its COVID-Ready program, which includes testing, education, monitoring, etc. More broadly, in going after enterprises, Carbon would be following in the footsteps of fellow care delivery disruptor, One Medical, which has followed four growth phases in its business:

• D2C patient acquisition
• Employer partnerships
• Health system partnerships
• Medicare Advantage VBC

It would make sense that Carbon, similar to One Medical, seeks to leverage the D2C brand it has built with consumers and go to their employers to offer services. It has already started doing so related to COVID, and it wouldn’t be a surprise to see them expand that more broadly to primary care services generally. The issue with this employer approach is that it isn’t exactly consistent with Carbon’s vision of providing low cost care, so while a revenue model is clearly there for Carbon, it doesn’t seem entirely consistent with its vision. 

Interestingly, Carbon appears to be building a workplace program in New Jersey, where it has opened 4 clinics recently that offer workplace services. It’s a curious move in that Carbon doesn’t yet have brand recognition with individuals in New Jersey. While it certainly is doable to enter a market with employer relationships, we’d expect it would be easier for them to do so in a market where they already have a solid brand built with individuals, making it easier for employers to sign up. 

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Carbon as a Platform

Before the round of layoffs, Carbon had a job posted for an Account Executive for RPM. Check out the Job Description below:

Carbon Health is looking for an experienced Account Executive responsible for selling Remote Patient Monitoring (RPM) solutions to independent physician’s offices focusing on cardiology, nephrology, and internal medicine. In this role, you will own closing new business in your sales territory as well as managing, leading, and optimizing existing accounts.
https://jobs.lever.co/carbonhealth/02b88b25-19bb-4b5a-946f-144ab1273696 (inactive)

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This would appear to be a pretty strong indicator that Carbon was moving down a path toward going back to its roots as a provider enablement platform and selling its technology services to other practices.

It would make a ton of sense for Carbon to revisit this strategy, particularly as it looks to public market comps like agilon that have been able to balance the growth / profitability tradeoff relatively well. The benefits are obvious here - between not needing to finance the clinic footprint and not carrying the financial burden of provider salaries on your P&L while the business matures, it creates a capital efficient way to grow. 

Given this, it is a bit surprising to see Carbon layoff such a substantial portion of its corporate workforce if this is the route it is going to head moving forward - laying off corporate staff with no reduction in the clinic footprint seems to provide an indication that Carbon is going to continue focusing on its clinics. The strategy here will certainly be worth watching.

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Summary

Carbon is in quite a pickle strategically as it attempts to achieve its vision while doing so profitably. Carbon has a clear path to profitability in other urgent care financial models, yet its broader aspirations are weighing it down from a profitability perspective. If it wants to continue moving towards those ambitions, the clearest path to getting there seems to be that Carbon needs to take on VBC contracts in order for it to cover off on the costs of the model. The employer route and platform route also offer other paths, but both seem more complicated than the VBC pathway.

We expect to see them attempt to grow this VBC business in California while attempting to profitability grow density in its urgent care footprint in other parts of the country. It will be interesting to see whether it continues to do so via acquisition or de novo growth of clinics. We also expect they’ll explore offering their platform to other providers in more of an MSO-like approach similar to the original vision of Carbon, although this might be over a longer time horizon as Carbon continues to balance its clinic footprint with the platform approach. If it can get the urgent care clinics it operates to profitability, that creates a lot of opportunity for Carbon to explore routes like these.

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Conclusion

This wraps our deep dive on Carbon. Hopefully this provides for some constructive thinking on where it has been, the challenges it is currently facing, and paths it has potentially in front of it. While the days of $3 billion valuations for companies generating $200 million of care delivery revenue seem to be a thing of the past, Carbon still has a nice potential growth trajectory in front of it as a urgent care model with the aspirations to drive broader disruption in the primary care market if it is able to successfully execute on that shift. The capital markets make that reality quite challenging, and we eventually expect to see them rolled up as a convenient, low cost asset that gets rolled up into a broader value-based care play. 

As always, we invite any and all feedback - feel free to agree / disagree with anything you see here, either on Slack or directly via email (admin@healthtechnerds.com).

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