Weekly Health Tech Reads | 11/13/22

The Summit / VillageMD deal, reflections on Oak, Oscar, Bright, Clover earnings, & more

This week’s newsletter is sponsored by Health2047Health2047, a Silicon Valley innovation firm powered by the American Medical Association, hosts a podcast called So You Want to Transform Healthcare. Each month, Health2047’s Dr. M. Christine Stock explores bold ideas and emerging solutions in healthcare innovation, with a focus on how they impact the physician-patient relationship. Featuring guests from payers, providers, public health agencies and early-stage startups, each episode frames the big-picture and real-life impacts of areas like augmented intelligence, DEI, community-based care, and more. Check it out here.

VillageMD / Summit & Earnings Rundown:

  • The big news early in the week was of course that Walgreens / VillageMD is purchasing Summit Health from Warburg Pincus at an $8.9 billion valuation, as rumored last week. Walgreens is contributing $3.5 billion to the deal, and Cigna's Evernorth division is contributing $2.5 billion, which will give it an ownership stake in the "low teens" of the combined VillageMD / Summit Health entity. Walgreens position is 53% in the combined entity, dropping from 63% previously in VillageMD. If you do the math on Cigna's stake, that implies a valuation for the combined entity of ~$19 billion ($2.5 / 13%), which implies VillageMD's valuation is ~$10.1 billion. Moving beyond the valuations for a second, this is a big strategic move for Walgreens that surely has had strategy teams at UHG and CVS (and maybe Amazon?) working in overdrive this week to map out the implications, as Summit Health surely had to be at the top of the list of provider organizations to potentially acquire in the race to vertically integrate and manage risk. As the transaction presentation highlights well, this seems like a no-brainer strategic move for Walgreens in this environment. You get a new cornerstone asset with $2.9 billion in revenue in NJ / NY while adding 2,700+ providers across primary care, urgent care and specialty care. Even with Walgreens paying enough of a premium to pre-empt a sale process next year, Walgreens still expects the deal to be immediately EPS accretive and add $400+ million to its US Healthcare EBITDA in FY 2024. And having Cigna involved in the deal to help drive the adoption of commercial VBC deals for VillageMD seems like a shrewd move here for all parties. Seems like a really astute move for Walgreens, both in advancing its own healthcare strategy and also blocking UHG or CVS from acquiring Summit. It seems like another blow for CVS in particular, which is coming off of a rough earnings session that featured questions cropping up about progress on the healthcare strategy. When your competitors are making massive moves like this, it seems like it creates some urgency for CVS to act.Link (transaction presentation) / Link (Cigna portion) / Slack

  • Oak Street's revenue in Q3 exceeded the high end of projections, and also drove increasing EBITDA losses year-over-year. Oak Street continues to execute on its core MA primary care strategy in a way that is refreshing, particularly when we get into the next group of companies covered in this update. Oak Street's revenue is higher because it seems to be doing a good job enrolling new members organically into its model. It also still is burning through a lot of cash as it tries to fill its centers. Neither of these should be a surprise. But the earnings call was still worth checking out, as it had a number of interesting details about Oak Street's model. Among those points - Oak Street shared some interesting insight into how ACO Reach is designed, how patients get attributed to providers, and why even though it is getting patients to voluntarily align to Oak Street it still might take time to get those patients attributed. Oak Street also disclosed in the 10-Q that it acquired a single MA clinic called CHW Cares in NYC for $6.2 million with a potential earn out of $5.5 million, which it seems willing to do when it identifies a clinic model with cultural compatibility and an existing patient population. The RubiconMD deal also has hit its earnout, so it seems that integration is going well. It's worth noting that Oak Street is getting into PACE, and indicated that they'll need to open a center specific to PACE in Illinois.  It's worth noting as Oak Street has always lauded the benefit of focus - it has one model it operates and that allows it to scale easier than others. But between PACE and its work in Walmart, we're starting to see Oak expand scope a bit. It's a natural move for them, so shouldn't be surprising, but it will be interesting to watch how they adapt the story as the model becomes more complicated. Lastly, Oak Street shared some good insight into both Star ratings changes and the open enrollment period, highlighting how MA primary care models are relatively protected from everything going on for MA insurers at the moment.Link (10-Q) / Link (announcement) / Slack (h/t Rik Renard)

  • Oscar's Q3 earnings performance unfortunately provided yet another example of how it has underwhelmed (to put it charitably) streak as a public company, sharing that it will "modestly" miss its Adjusted EBITDA target range for 2022. It seems like a silly strategic error to make for a company that is now so laser-focused on getting to profitability - mind you Oscar is projecting a decline in members in 2023 from 1.075 million to 1.0 million, which is wild for an organization that has been all about massive growth for a decade now. It's a mistake that also highlights the degree of difficulty in the strategic shift Oscar is making here. Oscar attributed the 2022 EBITDA miss to an issue with broker commissions - Oscar thought it could turn off all broker commissions at the beginning of Q2 in a cost cutting move, a move that CMS subsequently prohibited. Missing your EBITDA target because of that seems like an unforced error for a public company with no room for unforced errors. As I mentioned in the Slack thread linked below, while Oscar shared it is intending to reach overall company profitability in 2024, I can't quite square how they intend to get there. Hitting the target of InsuranceCo profitability in 2023 is clearer - flat-to-down membership increased prices, slightly better medical management, and $120 million in admin cost savings seems feasible. But that still leaves a massive G&A line item - somewhere around $310 million for 2022 - on tech spend that needs to be solved for. I'm not sure how you resolve that without slashing tech spending massively. And given that, it seems the fundamental experiment that Oscar was conducting - that it could invest heavily in tech to build a new kind of insurer, is all but over. While it seems clear that Oscar has succeeded in building tech that is lightyears better than existing insurance platforms, all that Oscar really has shown thus far is that spending the time and money to build that tech just makes an insurance business tremendously unprofitable. It's hard for me to see how Oscar makes it out of this without becoming the same sort of insurance business it sought to disrupt.Link (announcement) / Link (transcript) / Slack 

  • Clover Health's Q3 results were full of intrigue as usual. This quarter they surprised with an announcement that they plan to drastically reduce their ACO Reach footprint after posting a 104.3% non-insurance MLR in the quarter, which they attributed to the unpredictability of it being a new program CMMI is rolling out. Meanwhile, the earnings call also appeared to be Clover's first without a section for questions from the Reddit retail investing community, which seems like a sign they've finally moved on from the meme stock gimmick. So here we are only two years removed from Chamath's absurd GROWTH * GROWTH * GROWTH SPAC presentation in which Clover became a public company with a narrative centered around growth in Direct Contracting, projecting 450,000 direct contracting lives in 2023, and now they're acknowledging that a new CMMI program is unpredictable and are projecting a decline in ACO lives by 2/3rds. As of Q3, they had 166,432 non-insurance lives, which means in 2023 they're expecting roughly 55,000 lives. Meanwhile, I find it incredibly hard to believe that Clover leadership did not fully grasp in 2020 that DCE was a new, risky program while pitching the public markets. Thank god we've moved on from SPACs. Moving forward, Clover is apparently going to be focusing on MSSP as a more stable program where it can work with providers. Clover all of a sudden sounds a lot like Aledade, although I can't imagine Aledade is particularly concerned about the competition here. It's hard to argue with the logic behind the move for Clover at this point - intellectually it makes sense as a natural next step for Clover to move to MSSP. The challenge is more whether you believe at this point that Clover is actually capable of doing this. Keep in mind, you don't see any of the other public companies in ACO Reach talking about how they're having to jettison two thirds of the providers they've contracted with. It's hard not to question what is going on here, particularly when you see articles about Clover paying its MA patients $150 to see a doctor that uses their tech platform, on top of the $200 Clover is paying to the provider, which will be the case in 2023 for Clover per this Modern Healthcare article (paywalled). Every step along the way, Clover has articulated a theoretically possible growth strategy that could get them out of a messy current state, and they continue doing so here. Link (results) / Link (transcript) / Slack (h/t Alex Wess)

  • Bright Health's quarterly earnings came with significantly less intrigue as they already shared their major strategic pivot exiting the exchanges. They reiterated that this strategic retreat will put them in a better financial position moving forward, targeting Adjusted EBITDA profitability in 2023. It's interesting to watch Bright leadership attempt to spin this move as focusing on the underserved senior populations. This of course is only true until analysts start asking about how many lives that means Neue will have under management next year and Bright quickly starts talking about how it intends to retain a fair amount of ACA lives that it had contracted via the Bright insurance product. Reading between the lines you can see this is simply about doing whatever it takes to get to profitability, while trying to craft a plausible strategic narrative around that. The biggest thing Bright has going for it at the moment is that it has acquired some real businesses over the past few years, including Brand New Day, which give it something to build off of, and it sounds like despite all the Bright distractions, that Brand New Day's MA membership is still growing nicely in California. Almost in spite of itself, it seems safe to argue that Bright has the most optimistic financial future here simply because it has acquired some real businesses along the way.Link (news) / Link (transcript)

Other News:

  • Friday Health Plan was told to stop operating its ACA health plan in the state of Texas by the local regulator due to operational challenges the plan was having due to large volumes of enrollment. Per the article, between Friday and Bright Health (which also recently left the Texas exchanges), those two plans had ~500,000 members in 2022, almost 30% of the ACA market in Texas. It should be a really good reminder for folks the perils of growing insurance membership too quickly, and I'd imagine this won't be the last state regulator looking hard at the operations of startup insurance plans. It's a bit frustrating to think about the 500,000 people in Texas impacted by Bright and Friday. These are real people with real healthcare needs who are put out because startups have grown membership too quickly, struggling with understanding pricing and how to operate a health plan. It's a reminder that maybe this sort of growth isn't the end-all-be-all in healthcare.  Link / Slack (h/t Zach Kosky)

  • The trend of VCs and health systems aligning more closely together continued this week with Andreessen Horowitz and Bassett Healthcare Network announcing a partnership where Bassett will use A16Z portfolio companies to improve care for its rural patients in upstate New York. Between General Catalyst and now Andreessen, clearly you're seeing some big VCs move in this direction. And it seems like a pretty natural evolution for VCs where you've got big investments at high valuations that are likely struggling to grow organically. So if you're the VC backing these companies what do you do? You sign deals that have built in distribution with customers for your startups. It's a smart move for the VCs to attempt this. But on the flip side, it seems like health systems are being taken for a bit of a ride here. I really don't understand the strategy for a health system aligning itself to a specific VCs portfolio companies, unless that health system is an LP in said VC's portfolio and is benefitting financially from the adoption of their portfolio. Eventually it seems like these health system swill realize that VC diligence on portfolio companies doesn't really equate to diligence for a health system, nor does it help move the needle on health system adoption of digital health, and these partnerships will fall to the wayside.  Link / Slack (h/t Neil Sanghavi)

  • In more health system + VC news, Northwell and Aegis Ventures announced they're launching Upliv, a virtual menopause care company, with a "projected" $8.9 million in seed funding through the end of 2023. It sounds like a cool idea, although having seed funding described as a projected amount with an expiration date sure makes it sound more like a corporate pilot than a seed round. This appears to be the first startup coming out of the recently launched Aegis & Northwell partnership to invest $100 million into AI companies. Link / Slack 

  • Amazon briefly shared a video on a new Amazon Clinic idea on YouTube that was quickly taken down, but not before The Verge captured some screenshots. At first blush it sounds a lot like the Katara effort that was highlighted recently by Business Insider (paywalled), where Amazon is piloting a new Ro-like service with its employees. It certainly seems like something Amazon could do well in healthcare, although it seems like Amazon remains a confusing strategic mess.  Link / Slack (h/t Kevin Wang)

  • Eleven orthopedic surgeons in Wisconsin left their health system to launch a new independent practice seeking to take VBC contracts with payors. The practice will be managed by HOPCo, a PE-backed MSO model for orthopedic practices that appears to be building a really nice business with partner practices in 32 states and a capitated contract with UHC, according to the article. The orthopedic surgeon who will run the new practice suggests this will be about improving quality and reducing costs, while suggesting the move is not about making money for the providers. The first two of those things certainly seem like they're true, but it seems like a political move to suggest to the local paper this isn't also about financial opportunity for these providers. I find it hard to believe they'd be making this move if HOPCo wasn't showing them a very clear path to significantly more profitability. I think it's silly to suggest otherwise. Regardless, it's a really interesting strategic movement by providers.  Link (paywalled) / Slack (h/t Frederik Mueller)

  • Crossover and Aetna are piloting a new Commercial VBC model. This seems like a really meaningful move for Crossover to untether itself from a single employer partner and begin opening up its clinic footprint to growth in geographies. Obviously they still need to do the heavy lift of turning a contract into more patients walking in the door, but it seems like a smart step.  Link / Slack (h/t Ben Hughes)

  • Springboard Health, a new network of virtual specialty care companies, launched this week. It's targeting PCP groups taking capitated contracts, which certainly is a logical starting point given the needs those groups presumably have in terms of providing patients with accessible high quality / low cost specialty care. Feels like Springboard will serve as a a good barometer for how far along the capitated PCP market is and whether it can drive enough patient volume through Springboard for it to be a meaningful network. Link / Slack

  • Wheel is acquiring GoodRx's EMR platform for $20 million. GoodRx itself acquired the platform when it purchased HeyDoctor back in 2019. Lots of good context on Slack highlighting how HeyDoctor by all accounts seems to have built a high quality EMR system that Wheel now gets to leverage for its client base moving forward. Seems to make a lot of sense for both Wheel and GoodRx. Link (Axios Paywalled) / Slack (h/t Ben Lee)

  • Truepill announced a new funding round, amount / investors / valuation undisclosed. Link / Slack

  • Fathom, a medical coding automation platform, raised $46 million. Link

  • WellTheory raised $7.2 million for a virtual care platform for autoimmune conditions. Link / Slack (h/t Wallace Torres)

Opinions:

  • In an article that has surely caught the attention of early-stage consumer-focused healthcare entrepreneurs everywhere, the Andreessen Horowitz crew penned a new post suggesting that the biggest company in the world will be... a consumer healthcare company! The article posits that this company will either be a payvidor (UHG meets Apple) or a marketplace / infrastructure layer enabling care delivery companies (Visa or Amazon for healthcare), which perhaps not coincidentally seems to match Andreessen's investment thesis nicely. The article invites more questions than it has answers, starting with the question of whether this is the right goal to aim for in the first place. It's also a little odd to see how UHG is framed as being "trapped as the 8th biggest company in the world", which is a weird way to describe a company thats market cap has done this over the past decade. UHGs growth in many ways highlights the challenges, and opportunities, within the argument. Consumer experience hasn't really mattered all that much in terms of financial success for healthcare organizations like UHG (look no further than what Oscar has and hasn't accomplished for a good example of this). Will it be what unlocks a new goliath in the space? Perhaps. Link

  • CMMI shared a blog post this week highlighting their new comprehensive strategy for specialty care. Lots of good perspectives from folks in the community shared on Slack on the impacts of the change. The diagram below from CMS provides a nice high level visual representation of the approach.Link / Slack (h/t Ben Hughes)

  • Also on the topic of value-based care for specialty care, with a Duke Margolis releasing a paper suggesting four policy reforms that could help support specialty condition-based payment models. Link / Slack (h/t Francois De Brantes)

  • This tradeoffs interview is fascinating, highlighting the research of Karen Bullock exploring why black families are less likely to receive hospice - 35% of Black Medicare beneficiaries who are eligible for hospice care receive it, versus 50% of white beneficiaries. Perhaps not surprisingly, the challenges stem from a lack of trust and a lack of access to culturally competent care. Link 

  • Duncan Reece continues his series on Medicare Advantage, this week highlighting the dynamics of the MA market in Las Vegas and how an insurer might think about the strategic tradeoffs in product decisions for the coming year. It provides some nice insight to how insurers think about these decisions, and have to make them months before they have any real insight into what their competitors are doing. Link / Slack (h/t Duncan Reece)

  • This is a really sad article in Bloomberg about Cerebral and how patients using Cerebral have committed suicide, highlighting how Cerebral struggles to treat patients who don't disclose substance-use disorders to them. While recognizing that it is likely not unique to Cerebral among mental health providers to have patient stories like this, it's still really hard to read. Cerebral unfortunately also continues be an organization in turmoil, and with its former CEO apparently preparing a lawsuit (paywalled) against the organization, it's hard to imagine that changes anytime soon. Leaving Cerebral aside, it's hard for me to read this and stomach that this is the current state of care for patients in this country. The only thing that's clear to me coming out of this is how much work we all have to do. Link

  • Sachin Jain got a jump on 2023 prediction season, sharing his list of trends he think will be at the forefront in 2023. It provides a nice overview of what will surely be key topics of discussion in the industry over the coming months, particularly given many of them are already well underway. Link / Slack 

  • Here's a good read from Milliman on the benefits and drawbacks of using voluntary alignment as an ACO participating in ACO Reach.  Link

Data:

  • This is an interesting paper that attempts to quantify spend on SDoH by the top 20 payors. Seems notable that housing appears to be more than all the other categories combined most years. Link

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