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Weekly Health Tech Reads 4/2/23
Agilon’s investor day, Walgreen’s earnings, Cano Health loses a board member, and more
Kevin O'Leary & Amanda DiTrolio
April 02, 2023
This newsletter is sponsored by Medallion
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News:
agilon’s investor day highlights the growth potential in existing markets
Picking up on a key theme we’ve seen from other VBC companies, it was interesting to see agilon hit much more heavily during this investor day on the opportunity to expand within the markets it is already operating. During the session, agilon announced two new health system partners, Premier Health in Dayton, OH and Holland PHO in Western Michigan, which both happen to be markets which agilon previously entered with a PCP partner. agilon discusses how in Dayton in particular, it now covers 39,000 out of the 191,000 Medicare lives in the Dayton market. agilon spent a number of slides describing its “in-market” growth opportunity in the session, suggesting it has an opportunity to grow from 2,700 providers today and attract the remaining 33,000 physicians in the markets where it already operates. It’s a change in tone from last year’s session (which we covered here), where agilon focused the story of local market scale on identifying the right PCP partner in a local market. It’ll be interesting to watch how this tone shift materializes in agilon’s 2025 partner class and beyond. It’s not hard to envision a scenario playing out where this market is getting more and more crowded, and agilon is having a tougher time finding the right partner to enter new markets with, particularly one who is willing to agree to its 20 year partnership term. So instead of seeking to expand into new markets, agilon would naturally then seek to find growth by further scaling and penetrating existing markets. This feels like the narrative that agilon teed up at this session.
It’s not as though growth in lives is slowing for agilon though - agilon increased its 2026 target for MA lives under management from 750,000 to 850,000. It also highlighted how its LTV:CAC ratio is around 12:1(!), with its CAC remaining consistently around $350 - $400. agilon again did a nice job during the session of highlighting its partner providers, and again they reminded us that agilon’s real core competency here is as a change management partner for PCPs. Multiple slides highlighted how agilon helps move poorly performing providers to high performing providers on metrics like diabetic eye examples and HbA1C gap closure (slide 20). agilon is helping these providers with the resources for providers to implement standardized workflows that help the providers perform in VBC contracts.
This was also highlighted as agilon discussed three key clinical programs - palliative care, kidney care, and cardiology - where it has the opportunity to improve care by implementing standard workflows to remove variability, and in doing so generate over $100 million in financial savings. The crux of doing this? Implementing standard workflows and moving providers from low performing to high performing. Again, it’s an exercise primarily in change management with these practices and individual providers. The session included an interesting anecdote from Buffalo Medical Group, where they discussed driving better oncology performance. As a multi-specialty group, Buffalo employs oncologists, but found that 60% of patients were still seeking oncology care elsewhere. So instead of trying to bring those patients back in house, they’ve retrained their oncologists as oncology navigators. They aren’t the oncologist who provides care to the patient, instead they help the patient know what the right questions are to ask of the care provider. It’s a really interesting anecdote as it highlights how healthcare delivery seems like it should work - supporting patients to make decisions on their terms. These are the ways in which agilon has been generating performance on VBC contracts, and in turn sharing those profits with providers to implement more programs like that oncology navigator model.
It was a bit surprising to see the stock price slide by ~15% after the session, as the day felt like business as usual for agilon. The one dark clout on the horizon is that it does start to feel like the market is at a tipping point where it will be harder and harder to sign up new clinician groups for this model as the market gets saturated. That challenge will also eventually make its way to clinical and financial performance on these VBC contracts. Once agilon and others address the low hanging fruit in terms of VBC contract performance, it’ll naturally become more challenging to generate savings. In the analyst Q&A, agilon mentioned that a typical PCP is able to increase their total compensation by 50% - 100% within a few years of being on the agilon platform. At those numbers, you can see why there has been a massive land grab in this market. What PCP wouldn’t want to increase their salary by a few hundred thousand dollars a year? But that won’t be the case forever. As the land grab phase plays out, it’ll be interesting to watch performance in this next phase of going deeper in local regions.
Walgreens earnings call featured a heavy dose of care delivery growth
Walgreens is very bullish on its new care delivery assets, noting the Summit Health deal . While the growth in the healthcare business is good, losses are also increased as the US Healthcare business lost $109 million in Adjusted EBITDA for the quarter, compared to $62 million a year ago. This loss was driven by the growth in VillageMD clinics and Walgreens organic investments. VillageMD had 806,000 VBC lives at the end of the quarter, which includes 177,000 full-risk Medicare lives. The legacy VillageMD business appears to be growing almost entirely via co-located clinics in Walgreens at this point, and the co-located clinics have now surpassed standalone clinics in number. VillageMD grew by 106 co-located clinics in the last year (from 94 to 210). It grew standalone clinics by 27 (from 176 to 197). Walgreens also showed its retail roots in the earnings call. It highlighted that retail scripts are higher by 40 per day in co-located sites that have been open for 2+ years, which increased 35% over last year. It’s interesting to see them mention that only 50% of VillageMD patients at co-located sites are opting to get their prescriptions filled at Walgreens - which seems to mean that half of VillageMD patients are walking into a Walgreens for a visit, being asked if they want to fill their prescription there, and actively saying “no, send it somewhere else.” It’d be interesting to know how much of that is a brand issue versus a convenience issue, and what the natural limit is for that number.
The other theme to note in the earnings call that we’re starting to see as a repeat theme this year - the VBC primary care groups recognizing the importance of local market power in terms of managing costs. Check out this response to an analyst question about learnings from VillageMD / Summit integration: “what we're seeing is the opportunity to, I think, drive more cost and growth synergies off of kind of a multi-threat set of assets that we think could be very impactful, particularly as we concentrate market power with more service offerings in specific markets.” It’s an entirely logical play as its really the one health systems have been running forever. Dominate a local market and use that leverage to negotiate better contracts. Similar to the agilon investor day above, I imagine we’ll be seeing a number of VBC companies shifting to this narrative this year - rather than geographic scale, focus on local market density and expansion beyond primary care services.
Link (transcript)
Oscar has a new CEO: Aetna’s former CEO Mark Bertolini
Wooooow. Certainly seems to be a sign of the seasons changing over at Oscar. After a challenging few years on the public markets, Oscar brings in a seasoned industry vet in Bertolini to run the business, with co-founder / CEO Mario Schlosser taking over tech. Bertolini had been working with Oscar as a strategic advisor, and frankly I’m not sure there’s any better move they could have made here in terms of the viability of the business. If you’re an investor in Oscar, I’d imagine you have to be thrilled at this news, and the stock price jump would seem to indicate as much. Best case scenario, Bertolini thinks Oscar is the disruptive competitor to the BUCAs and has a huge opportunity here. Worst case, he’s coming in to button this up for a sale. There was some good debate on this in the HTN slack.
I’d personally be betting on the former scenario here - that Bertolini got to see under the hood over the last eighteen months and became enough of a believer in the Oscar platform that he agreed to run the business full time. Despite Oscar’s rocky tenure as a public company, one thing has always been clear - Schlosser is a much more tech forward leader than other insurance company execs, and Oscar’s tech platform has been light years ahead of the industry. It’s not hard to imagine Bertolini getting excited by the potential of that platform as the way to disrupt the space. The comp package setup discussed in the 8K seems to align with that theory as well, with Schlosser and Oscar’s other remaining co-founder Joshua Kushner relinquishing founders shares, a move that appears to be done to give Bertolini a similar equity upside opportunity without diluting everyone else (i.e. employees).
If you’re an employee of Oscar, I’d imagine the emotions are mixed here. Yes, bringing in an old school industry vet should make the business more viable, which is great news. But in many ways, Oscar has always been unique exactly because it hasn’t been run by industry vets. Making money as an insurance company isn’t rocket science, but it sure is hard to disrupt. The one thing you need to be an effective insurer is the one thing you by definition don’t have as a disruptor: scale. Insurers negotiate good provider contracts and ensure appropriate utilization while pricing their product correctly and adjusting their operating spend to ensure an appropriate margin. Yet it seems a big part of what has made Oscar unique, for both better and worse, is that it has had a workforce that hasn’t made decisions like a traditional insurer would, starting with the CEO. This has led it to both create a tech platform no other insurer could and also burn money in a way no other insurer would. So when you put an industry vet at the helm who is tasked with driving profitability, it seems like all of a sudden what once looked disruptive now might look like an added cost with no ROI. What keeps Oscar from leveraging its tech like any other insurer at this point? After all, it is in its financial best interest to do exactly that. The Propublica expose on Cigna covered below provides case-in-point here. Is it really that hard to imagine that in five years we could be reading a similar narrative on how Oscar’s technology, which once was being designed to change the industry, could be used to deny care in order to save costs for an insurer?
On the whole, I think this was an astute move given where Oscar is at the moment, and probably a necessary one as Oscar marches toward profitability. It leaves me more optimistic that Oscar is going to pull through this period of time, but more pessimistic as to Oscar’s future as a disruptive force.
Cano Health’s performance publicly called out in Director resignation letter
Barry Sternlicht publicly announced his resignation from the Cano Health Board of Directors, issuing a scathing rebuke of Cano’s leadership, including calling for a new CEO. Sternlicht was a key figure in Cano, as he was the Founder and Chairman of the SPAC entity that took Cano public a few years ago, and Sternlicht’s letter makes it clear the relationship has soured quite a bit since then. In the letter, Sternlicht takes issue with the companies financial management, corporate governance, and overall stock price performance, which is down 90%+ since the SPAC closed. It’s a stunning public statement by a key Board member, and it unsettled other investors enough that it sent the stock price down another 25%+ this week. That means that Sternlicht, who still personally owns almost 10% of Cano, lost about $10 million himself just by writing the letter. That puts into perspective the level of frustration here for Sternlicht, and hints he might be trying to go the activist investor route in order to shake up the leadership team. It’ll be curious to watch where this goes from here.
HHS Finalized the 2024 MA and Part D Rate Announcement
After the last few months of intense debate from various stakeholders sparked by the 2024 Advance Notice announcement, HHS finalized the 2024 rates and technical adjustments. It appears the model will be phased in over three years and the rate increase of 3.32% (~$13.8B in MA payment increases) is actually higher than the 1.03% from the Advance Notice proposal. As the final rule is unpacked, we’re still expecting the debate to rage on as the announcement itself makes a point on how the Administration will be increasing oversight on a variety of issues including recovering improper payments, marketing tactics, and prior auth. But in what seems at the outset as a little less harsh, or at least less immediate, than expected, it’ll be interesting to watch if there is any change in tone from the public MA insurers and care delivery orgs.
Friday Health Plan’s Texas subsidiary shut down by Texas insurance department
The Texas Department of Insurance declared Friday insolvent and placed it into receivership, although Friday’s operations in other states remain un-impacted. This follows the news late last year that Friday wouldn’t be able to offer insurance plans in the state in 2023. Will be interesting to watch the path forward here for Friday in the six other markets it currently operates.
VBC enablement platform Wellvana raised $84 million
Wellvana has some big name investors involved between Heritage Group, Valtruis, and Adam Boehler. Wellvana, which is targeting independent PCPs, specialists, and health systems, currently has over 100,000 lives under management between Medicare Advantage and ACO REACH. Based on Wellvana’s website, it looks like Wellvana really started gaining traction in early 2022 after it merged with Prime Holdings, which itself was a VBC enablement platform. The story line fits a logical investment thesis - buy a platform capability that is perhaps underutilized and recruit in a leadership team to scale it.
Florence, a clinical workflow platform, comes out of stealth with a $20 million round
Clinical trial matching company Inato raised $20 million
Opinions
Cigna’s prior auth policies under scrutiny for mass denials of claims
Propublica dives into Cigna’s prior auth program called PXDX, which looks really bad when you read the article. If you’re looking to vilify insurers, this article provides some solid ammo to do so. Cigna’s PXDX program appears to have been systematically denying payment on thousands of claims without medical review. This is not changing the care delivered, but it is saving Cigna money and passing more costs along to patients.
The more we reflect on this article, the less we think Cigna is a bad actor that has intentionally designed a program to increase profits by not paying for care that is medically necessary. It’s worth perusing the slide deck referenced by the article from a Cigna employee that was evaluating putting a specific test in the PXDX program back in 2015 (as an aside, I can’t believe Cigna hasn’t gotten that taken down yet). As I read through those slides about them evaluating the pros and cons of a decision about moving a test onto PXDX, it feels an awful lot like they were acting rationally in a system we’ve all collectively created that unfortunately has predictably bad outcomes for patients.
Data
Leading health systems lose massive amounts of money on investments in 2022
This Health Affairs article provides a good look at how large health systems have taken a beating on their investment portfolios in 2022. The article suggests that investment portfolio losses have been the key driver of poor financial performance for these ten large hospitals, versus operating items such as increased labor costs.
An interesting perspective on the sorry state of price transparency data
This is a fascinating blog post by Alec Stein digging way into the details of price transparency data. Stein goes through the effort of cross checking negotiated fee for service rates between hospitals and payors, which theoretically should match exactly as it’s just a payor and provider reporting a price they’ve agreed upon. But of course, not only do they not match, in many cases they are wildly different. Stein suggests CMS actually needs to audit this data and enforce it to make price transparency data actually usable.
Andreessen suggests health tech companies are viable public market investments
The data included in the post about public market valuations are interesting to check out. Beyond the data, I struggle to follow the narrative in the post, which seems to suggest that Oak Street (pre-acquisition) and agilon are valued much higher than peers because of “business model magic.” The post concludes by suggesting that the notion of “business model magic” is really just a proxy for being able to generate sustained free cash flow. Which, yes, I think we can all agree that generating sustained free cash flow is a very key part of having a viable business. But still, it seems like an odd narrative here given 1. the irony of suggesting Oak Street and agilon are highly valued because of their ability to generate free cash flow despite never actually having done so and 2. the big public healthcare co’s that have shown they can generate sustained cash flow are trading very close to the regression line.
If anything, I think the more reasonable point is that mature healthcare companies trade pretty close to the regression line. Doesn’t that alone prove the point that healthcare companies are investable as public companies, just like any other industry? In many ways, it highlights how the question isn’t really whether healthcare can support viable public companies, clearly it can. The question is whether healthcare can support venture capital outcomes as an asset class. Unfortunately, I think this data suggests the opposite of the case Andreessen is making here.
JAMA study demonstrates positive impact of virtual care to treat opioid use disorder
This cohort study looked at the impact of telehealth services on treating Medicare beneficiaries suffering from OUD before and during the pandemic. Beneficiaries who received OUD-related telehealth services during the pandemic were found to have a reduced risk for fatal overdose. Despite these improved outcomes, the study also details that only 1 in 5 Medicare beneficiaries in its pandemic cohort received OUD-related telehealth services, and only 1 in 8 received MOUD - highlighting the need for continued expansion of these virtual interventions to provide access to a broader population.
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