Blurring Lines: The Evolving Nature of Healthcare Companies
As organizations race to capture more of the healthcare dollar in order to chase scale, there has been a natural tendency to blur the lines between the distinct roles of payors, providers, and services organizations in healthcare. Over the past two weeks, we’ve covered the journey of two companies along the journey of blurring roles - Humana and Oscar. Some organizations like Oscar have had bumps in the road as they’ve attempted this role shift, while others like Humana seem to be executing on the transition more successfully. In this article, we walk through how a number of organizations have attempted to grow by expanding their capabilities across payors, providers, and services organizations.
We share this as a framework that we hope is helpful for people in evaluating what companies are up to by understanding where they fit into the broader ecosystem and the capabilities they’re building.
Table of Contents:
- The Core Roles of Healthcare Companies
- Blurring the Lines Across Roles
- Examples of Companies Blurring Lines
- The UHG Case Study
- Questions To Ask Yourself
The Core Roles of Healthcare Companies
In a very simplistic sense, we think you generally can bucket the role of a healthcare company into one of three broad categories: Delivery, Financing, or Services:
I’m sure we could spend all day debating whether these three categories are exhaustive of every company in the space, but we think these distinctions are helpful because they outline how each area has very different core competencies. If you’re delivering care, your organization needs to be good at a very different set of things than if you’re paying for care or if you’re a services organization providing infrastructure. That seems obvious, right?
While each of these roles has a distinct purpose within healthcare, they each also have an achilles heel that ultimately slows growth. For payors, it is hard to manage provider relationships well at scale without driving friction (i.e. ask a payor about implementing prior auth requirements). For providers, it is hard to continue staffing more and more high quality providers at scale (i.e. ask a health system trying to integrate multiple groups of cardiologists). For services organizations, it is hard to drive the results you expect from your platform (i.e. ask a service provider how easy it is to get providers to use anything the way you’d like them to).
At some point or another, every organization gets bogged down in these challenges, and growth starts to slow down. For many healthcare organizations, this isn’t an issue and very profitable businesses can be built within each of these three roles. However, this dynamic has been rapidly changing as venture capital has poured into the space seeking venture scale exits. It isn’t enough for a VC-backed approach to build a profitable small business, the goal is to take over a space entirely.
This desire to scale necessitates that organizations blur the lines in order to keep driving outsized financial returns. It’s a natural occurrence for any organization - outgrow your initial market and it requires you to enter a new adjacent market. It’s been happening for decades in healthcare, too. Go back to the origin story of AthenaHealth for a good example of this. As this article highlights well, originally the idea was to start a women’s health clinic. While that clinic went under because of reimbursement challenges, they found new life as a software platform helping other clinics manage the same reimbursement issues they faced. It’s a story that highlights well how logical these pivots are, and how successful they can be if executed well.
Blurring the Lines
What we notice repeatedly happening with organizations that are looking to scale in healthcare is that they start taking on multiple roles, and in doing so blur the lines across these organizations. We don’t have to look further than the last two weeks of HTN Deep Dives to see two organizations on this journey:
- Humana: Clearly Humana’s core role is as a Medicare Advantage payor, in the “financing” category. But over the past few years, it has decided to enter the Delivery space in a major way via the CenterWell brand, enabling it to better capture economics in the Medicare Advantage space. This is a path virtually every large insurer has followed as it has sought to capture increased margin.
- Oscar: Oscar has attempted to expand beyond its core role as an ACA insurer to leverage its tech platform as a Services play for other organizations looking to launch insurance products. While Oscar has struggled in its transition, the underlying narrative is one that is sound.
Yet it isn’t just these two organizations who are attempting to blur the lines of the roles that they’ve been playing. In fact, virtually every organization seeking to grow and capture more of the healthcare dollar has this same incentive to grow by blurring the lines, and many are following similar strategies of adding capabilities across the various roles in order to drive growth. In the next section, we’ll highlight a few organizations that have been growing by blurring the lines between financing, delivery, and services.
Examples of Companies Blurring Lines
In many ways it is easier to watch startups evolve compared to large organizations given the various stages of the businesses. Press releases and funding rounds provide great ways to observe how organizations pivot between slightly different models. Below, we look at several examples of startups that provide good case studies in how organizations are transitioning between the core financing, delivery, and services roles.
Companies that started in financing:
Bright Health. Insurance → Services & Delivery
Bright Health got its start as an ACA insurance business that entered the Colorado market via a partnership with Centura Health. Bright quickly learned how challenging it is to enter new markets via health system relationships, and in order to continue driving growth, it began expanding the model beyond health system partnerships. As part of that strategy, Bright launched a new division that is a services / care delivery arm, NeueHealth. Bright is now launching primary care clinics in multiple states and offers a “VSO” (their version of an MSO) for providers looking to manage risk.
Clover Health. Insurance → Services
Clover got its start as a pure-play Medicare Advantage insurance business. As it scaled and went public, it started introducing the concept of a technology platform for primary care providers. While in Clover’s early years its growth as a MA insurance plan was a key part of its story, as it has gone public, its performance as a MA plan has lagged, and the tech platform has become a key growth driver for the organization. As of 2022, Clover’s press releases call it “a physician enablement company”.
In addition to the startups, almost every big insurer is employing a strategy of blurring lines, with Optum leading the way. CVS / Aetna, Elevance, Humana, and others are all extending their reach via various initiatives in care delivery and/or services, ultimately with the aim of capturing additional value by better managing cost and quality of care. SCAN Health Plan, a Medicare Advantage insurer in Southern California, is another good example of a regional health plan with growth ambitions seeking to scale by capturing value via new initiatives going into care delivery and outside of core insurance.
It’s worth noting here the success large insurers are having in adding these organizational capabilities versus the challenges the newer insurers are having in doing so. Why are the larger insurers having this success? Certainly it seems to do with the fact they have larger existing membership bases and have figured out how to operate successfully as an insurer, allowing them to add these new competencies from a position of relative strength. Compare that to the startups referenced above, which have generally been moving into these new competencies out of necessity as their core business is struggling.
Companies that started in delivery:
Firefly Health. Delivery → Insurance
Firefly got its start as a virtual primary care startup before launching a health plan for employers in 2021. It’s a logical strategy to capture additional value for a company that should be able to manage cost and quality of care via its virtual primary care offering, so long as patients engage with the primary care offering and use it instead of (not in addition to) existing PCPs. That said, launching an insurance business on top of a primary care business is no easy feat, and includes a lot of organizational complexity.
98point6: Delivery → Services.
98point6 garnered a lot of early attention as a new text-based primary care model selling its services to employers. In 2020, it raised $118 million in funding citing how it had 240 employer relationships and 3 million members. However, that growth appears to have stalled out as in September 98point6 announced it is changing strategic directions. Its new strategic direction is providing a member engagement platform for other provider organizations, starting with MultiCare’s ambulatory platform. This transition likely belies challenges that 98point6 had in continuing to scale its care delivery platform and need to find other avenues for growth.
In addition to the startups, many large healthcare delivery organizations have undertaken this strategy as well. The entire concept of provider-sponsored health plans is a blurring of roles that naturally comes from this scale question. Once a provider group reaches local market density, it becomes hard to increase market share and launching a provider-sponsored health plan presents a nice opportunity to grow by capturing more of the healthcare dollar for existing patients. Serving these existing customers with an adjacent service can feel like an “easier” growth channel, and is a natural step in theory. Although in practice, it doesn’t seem to be quite that easy, given the struggles providers have had launching health plans.
A number of large health systems have had success developing services competencies that they have eventually spun out into separate organizations. For instance, UPMC was involved as a “co-founder” in the creation of Evolent Health, leveraging UPMC’s approach to managing cost and quality. It’s worth noting that many of these successes have ultimately involved spinning out these organizations into standalone entities that can grow under their own leadership, with their own investors. It’s a reminder of the different competencies required to execute on these different businesses well.
Companies that started in services:
Carbon Health. Services → Delivery
When Carbon Health first raised funding back in 2017, the company set out to be a tech platform for urgent care practices (more on Carbon’s strategy in our recent overview here). However, Carbon quickly evolved its strategy, and in 2018 announced it was merging with an urgent care practice. Presumably, it quickly realized how challenging it can be to sell a software offering to existing providers, and instead found a more straight-forward approach in using venture capital funding to acquire existing clinics and bolt on the software on top of those clinics.
Aledade. Services -> Delivery
In the past year, Aledade has expanded scope from a value-based technology infrastructure pure play and started dabbling in care delivery via Aledade Care Solutions (ACS). Aledade’s core business has been in helping primary care practices succeed in generating savings via the Medicare Shared Savings Program. As it continues to seek growth, it’s a natural extension of the platform to think about what kind of care delivery services it can provide to wrap around primary care clinics. The press release highlights well how Aledade thinks about leveraging its ACS division as an extension of the services a primary care office provides. Given their customer has been (and presumably will continue to be) the PCP, the key question in this effort is how to prioritize initiatives within ACS that will be perceived as additive by PCPs, rather than competitive to the things they already do. Over time, as Aledade is successful in this approach and driving additional savings, it will naturally have to ask itself whether it should look at acquiring the entire primary care practice in order to drive even more financial value for stakeholders.
The result of mapping each of these strategic shifts across the various roles can be seen in the chart below.
As you see companies in the news talking about various strategic initiatives, we’d suggest it’s an interesting exercise to think about where they’d fall into a map like this, and how their strategy might be evolving over time. For instance, take Ro’s decision last year to acquire remote monitoring company Workpath and home health diagnostics company Kit. Before these acquisitions, Ro seemed solidly in the care delivery role. It has been taking a newer approach to care delivery, yes, but it ultimately was providing care for individuals. Yet Kit and Workpath both represent acquisitions of services businesses for Ro, as both offer B2B service to other care delivery companies Fast forward to today and Ro has seemingly shut down that business as the market has turned, but it raises an interesting question for Ro’s strategy moving forward as to whether it intends to grow as a care delivery organization or a services organization.
Ultimately, the trail for organizations blurring lines across these various roles has been blazed by the success of the company seemingly taking over the industry bit by bit, UnitedHealth Group.
The UHG Case Study
For-profit investors everywhere are understandably enamored with the growth UnitedHealth Group has experienced over the last decade-plus since launching Optum. Just look at UHG’s stock performance chart since it IPO’d back in the 1980s:
We all think of UHG as a massive financial success today, but keep in mind how much of its growth has predominantly come in the last decade, when it started implementing this approach of blurring lines. It’s worth remembering that the Optum brand was formally launched in 2011, kicking off an incredible decade of growth for UHG, which saw it successfully blur the lines between various roles in an incredibly successful manner. Over the past decade UHG has grown via a number of acquisitions in the delivery and services categories:
Clearly, the approach has been working well for UHG. It has built a flywheel for itself in doing so that seems unstoppable at the moment - each acquisition it makes generates more cash flow for UHG (it’s worth noting that UHG generally does not have an interest in acquiring unprofitable assets) and enables the organization to kick off more cash flow. Its diversified businesses can pay a premium for assets like LHC, because it derives financial benefits via multiple parts of the organization (i.e. a home health provider like LHC that doesn’t have a payor arm doesn’t capture the benefits of better managing cost in the same way UHG can when it brings LHC in house).
Yet when UHG first embarked on this approach, it wasn’t clear to the outside world that this was a viable strategy. UHG spent years communicating to Wall Street that it wasn’t just an insurance company, what it was building was more than an insurance company - and by doing so, it has since unlocked significant value. It just took a while for everyone else to catch on to UHG’s approach here. In the decade plus since those early days of the Optum strategy, UHG continues to methodically execute on this approach with ruthless efficiency. This approach of building these capabilities over a decade-long period while generating additional positive cash flow from each successive acquisition certainly has worked well.
The challenge with this playbook of course is that you can’t just copy it overnight by acquiring assets like United has, particularly when you aren’t kicking off free cash flow like UHG is. Look no further than Bright Health for an example of how hard this UHG approach can be to execute on. Similar to UHC / Optum, Bright started by launching an insurance business and has since grown via services acquisitions (Zipnosis) and delivery acquisitions (Centrum Medical). The challenge that Bright appears to have run into is that it hasn’t figured out how to do any of this in a cash flow positive manner - and now as markets have turned, they need to be bailed out in order to maintain operations.
Why do some organizations succeed in this approach and others fail? It’s a complex question for a number of reasons that we’ll continue to unpack in future deep dives. In many ways, it all comes down to a question of organizational design and readiness. These are complex challenges fraught with obstacles. It certainly isn’t an easy undertaking for an insurance company to build a services offering, or a provider to build an insurance offering. It’s worth noting that a lot of success in the space currently comes from big acquisitions, but we have limited insight into how well those acquisitions are actually being integrated from an operational perspective. We think over time this will likely be the achilles heel of this strategy, even for organizations that are doing it well today. At some point, growth will slow and the integration debt will catch up and bog any organization down.
In the interim, it sure seems like a good way to drive successful financial returns for any healthcare organization, hence why we’re seeing so much of that behavior today.
Questions To Ask Yourself:
- Where does my organization fit in this framework and are we building a capability aligned to our role?
One of the most common missteps we see in the industry is organizations spending significant time and energy building for the wrong core competencies given their role. For instance, if you’re building a care delivery organization, it seems like a challenging proposition to be building all of your own technology from scratch. Certainly it’s not impossible, but if your organization is spending significant resources building this technology, success at the end of the day will likely be as a services organization licensing that technology to other care providers. We also see many care delivery organizations choosing to outsource virtually all of their clinicians. It’s an understandable need particularly when trying to meet VC scale expectations, but of questionable long term viability.
It should go without saying, but knowing what role your organization is playing, and understanding what you need to (and not to) build in order to succeed in that role, is quite important.
- When will growth stall out in our current role, and what will it be caused by? How do we leverage what we’ve built in order to find our next growth avenue?
The core reason for blurring the lines across these various roles is the financial opportunity that lies in doing so. Growth eventually stalls in every role over time, and ultimately this will drive lagging financial returns. It is important to understand when and why this will happen. Having a clear line of sight into that can help your organization be thoughtful about building its extension from a position of strength, rather than weakness.
That is a better position to be in than being forced to pivot at a moment of weakness by a Board that is frustrated because scale isn’t materializing and your organization is burning through cash. Or even worse yet, you are a public company finally realizing that your core business is likely untenable and you are launching a new division as a lifeboat. This is seemingly all-too-common of a story for many startups that oversold their ability to scale in the healthcare environment, burning through substantial amounts of capital at significant valuations that are coming crashing down.
- What is the right level of scale in healthcare and how long will this blurred line trend last for?
In many ways, this is the hot question of the day as VCs ask themselves how scalable their healthcare delivery investments are. This trend of blurring lines seems very en vogue at the moment as companies compete for maximum potential financial returns on behalf of their investors. We’d imagine that as a number of companies inevitably flame-out in attempting to expand their competencies, that the tide will shift back in the other direction. We have a handful of public, yet relatively young, insurers that are very much struggling with their expansion aspirations - Oscar, Bright, and Clover all discussed above, which already appear to be driving more investor caution in the space. As part of that caution, we imagine that investors will want to see more focus from companies, and that it will be increasingly common for companies to plant a flag as a “pure-play” - focus on doing one thing and doing that well. We think there’s a certain logic to that.
Of course, all eyes will be on UHG, as always. So long as they continue generating outsized financial returns growing in this manner, there will be a natural appeal for others to follow in their footsteps.