Oak Street, one of the Medicare Advantage primary care startups, filed its S-1 late on Friday afternoon to start the process of going public. Thanks to the intrepid reader base here it certainly didn’t sneak it through unnoticed before the weekend! Link.
Here are some of the more interesting pieces of the S-1 to me (now would be a good time to grab a cup of coffee and buckle in, or just skip down to the next main bullet):
Oak Street did $540 million of revenue in 2019, up from $310 million in 2018 (pg 77) which represents 74% growth. Worth noting that $308 of the $540 million of 2019 revenue came from Humana (pg 159), which is one of Oak Street’s major shareholders. Humana, WellCare, and Cigna HealthSpring account for 74% of Oak Street’s capitated revenue in 2019 (pg 24). It’s really impressive how quickly they’ve grown the capitated revenue base over the past few years. They’re also losing a significant amount of money - they lost over $100 million in 2019 - as their medical expenses essentially cancel out revenue (more below) and they have sizable SG&A costs as well.
It’s unclear to me from this document that Oak Street reduces medical costs, which you’d hope would be the case at this point. While they repeatedly cite data that the model reduces hospital admissions, ED visits, readmission rates, etc, there doesn’t appear to be any data cited on overall cost reductions (pg 6). In 2018, Oak Street’s medical spend (medical expense + cost of care) was 101.3% of capitated revenue, and in 2019 it was 97.6% of capitated revenue (pg 18). I would hope to see a bit more data here that the model actually reduces costs, but it doesn’t seem to be anywhere in the S-1 as far as I can tell.
They currently have 260 primary care providers in 54 centers treating 85,000 patients, of which 65% are capitated and 35% are fee for service. Based on capitated revenue and total patient numbers, they seem to be earning over $800 per patient per month on average (pg 109) [the math: $540m revenue / (85,000 patients * 65% at risk) / 12 months ]
Oak Street sees center level contribution margin across the business at 12% today, but runs a loss for the first three years they open a center (pg 86). They also think they’re less than 5% penetrated in existing markets (pg 125), which Oak Street views as a growth opportunity.
They currently have only four centers - out of the 54 - that have over 2,000 at-risk patients. This seems like a surprisingly low number, which also hints at the growth opportunity. Those four centers provide an indication of how well this model can do at scale - as those four are generating a contribution margin of 28% (pg 86).
I knew Oak Street and Humana had a close relationship, but I didn’t realize just how close. Oak Street is leasing a number of its clinic spaces from Humana (pg 40), Humana is 50%+ of Oak Street’s revenue (see above), and Humana invested $50 million into Oak Street in 2018 (pg 159). Interesting to ponder Humana’s relationship here and recent Partners in Primary Care moves with Welsh Carson - what is Humana’s end game in the space?
The S-1 is very focused on their in person offerings, with relatively little discussion of telehealth, which strikes me as a bit odd given the broader context. See Iora, for instance, talking about how their entire care model is shifting to digital. The S-1 talks about how Oak Street sees 7.9 visits per year in person for Medicare Advantage patients (pg 81), but has no relevant metric for digital interactions. There’s a few brief mentions about the impact of COVID-19 on the business going a bit more digital (pg. 89) and that 90% of their visits in April were virtual (pg. 118).
I’d be really interested to hear what their patient retention rates are, although I didn’t see this in the S-1. Their NPS scores are high at 90 (pg. 6), and MA typically has very little churn, so I’d expect Oak Street’s high touch model to have even less churn than average, which would bode well for the model financially. For members in capitated contracts, Oak Street earns $234 per month on the whole, but it earns $436 for members that have been with them over three years. (pg 80).
Remember when back in 2019 Oak Street seemed to be going down the path of partnering with health systems as evidenced by their partnership with Advocate Aurora? Apparently that strategy has fallen to the wayside as it doesn’t appear to be mentioned anywhere in the S-1. Interesting to see the divergent paths here between Oak Street and One Medical in their growth stories.
Oak Street’s financials provide a glimpse into why fee for service primary care is a tough business to be in, particularly when you do not take capitated payments. 35% of Oak Street’s patients are fee for service, but less than 1% of their overall revenue comes from those patients. Oak Street loses $184 per month per fee for service Medicare patient (pg 80).
Oak Street acquired Ampersand Health in Philadelphia for $13.7 million in 2018. Ampersand had four clinics focused on Medicaid patients at the time. (pg 103).
Each new center costs approximately $1 million and takes 9 - 12 months to open. (pg 84).
Whichever of the underwriting banks was responsible for formatting the columns in the tables should be fired as the tables in this thing are damn near impossible to read.
Walgreens and VillageMD, a primary care startup that looks partly like Aledade and partly like Oak Street / Iora, enter into a massive deal to open 500 - 700 primary care clinics in their retail locations over the next three years after their initial pilot in Houston for the past few months seemingly went swimmingly well. Walgreens is investing $1 billion in VillageMD over the next three years, and will own 30% of the company after that investment. Walgreens COO says in the article they’re seeing benefits from increased prescriptions and healthcare goods sold in the retail stores. It’s an interesting move for a number of reasons, but perhaps most interesting to me is that Walgreens has chosen to expand this approach so aggressively, versus their more local partnerships with health systems. Keep in mind, Walgreens has partnerships with a number of health systems to operate primary care clinics in local markets (i.e. Advocate, McLaren, Piedmont), so presumably it would have been pretty straightforward to partner with leading health systems in other local markets as the foil to CVS. Link.
Livongo’s stock went through the roof this week as they released an update that they expect Q2 2020 revenue to come in at $86-$87 million versus its prior guidance of $73-$75 million. That’s… a good quarter! It’s interesting to see some of the takes on Motley Fool / Seeking Alpha articles by investors on Livongo - there’s a lot of excitement around long term growth prospects, as the linked article indicates. Livongo sure seems to have a ton of momentum at the moment, particularly given their stock price has already increased 4x this year. Link.
Truepill, the DTC pharmacy enablement startup, raised $25 million. They also announced that they’re building out a physician network, which I find curious. It seems like it’s a signal that the physician market isn’t interested in working with these DTC pharmacy companies (at least yet). So, Truepill is building the physician network to support those DTC pharmacy companies and drive more demand for the offering (if there are no docs to prescribe, there are no prescriptions). Link.
Truepill also led a $9 million investment into Ahead, a DTC mental health startup. Ahead is differentiating off of the importance of having employed providers, which seems to philosophically conflict with Truepill’s approach of hiring the docs because their partners can’t hire fast enough. An interesting stat - the article says Ahead did 1,100 visits last month with 15 full-time providers on the team. Link.
Walmart is opening up a Medicare insurance brokerage, which seems like a really smart move for them, assuming they are playing a very long game in the healthcare space. Rather than jump right in to buying an insurer, which brings with it a whole host of brand risks, why not start understanding consumer behavior when it comes to purchasing insurance while making money off of it? Sounds great. Link.
Telehealth startup Doctor on Demand raised $75 million. Link.
Kindbody raised $32 million for its fertility benefits platform. Link.
Manatee, a pediatric behavioral health startup, raised $1.5 million. Link.
Novartis and Propeller have teamed up for a co-prescribed asthma medication. Link.
Could COVID-19 serve as a forcing function for value-based care? This piece from Chilmark research looks at the question. It uses BCBS North Carolina’s recent move to pay primary care providers differently as a roadmap for for how payers can drive toward more value based arrangements in this new world we’re in. Would be fun to see similar models sprout up elsewhere as well. Link.
Here’s a skeptical point of view on whether the recent price transparency ruling will have any impact on prices, arguing that consumers don’t use price transparency tools, and that instead policymakers should fix the structural issues behind the system. The whole argument seems a bit circular to me. Link.
One of the folks from the MyFitnessPal team, Nick Crocker, shared a memo he wrote a few years back about how MyFitnessPal helped its 75 million+ users collectively lose over 200 million pounds. Link.
Here’s an overview on Walmart’s ambitions in healthcare. Link.
The Bipartisan Policy Center released a report on primary care in Medicaid, providing some recommendations for how to improve primary care - supporting comprehensive care, increasing access to insurance, supporting the primary care workforce, and addressing disparities. Link.
Check out this new ranking method of hospitals to gauge their community impact in addition to patient care. It’s a really interesting read to see its differences from the US News rankings. For instance, Mayo Clinic, which generally scores well on standard rankings, does not fare so well here. Check out this blistering critique: “The Mayo Clinic is a great place, in other words, to get a major surgery—as long as you aren’t poor, have excellent insurance, and actually need the surgery.” Whew!! Link.
Rock Health released its report on digital health funding in the first half of 2020. Lots of dollars getting invested in relatively big rounds. Link.
Check out this analysis by Fair Healthcare on telehealth claims growth as a percent of total claims. It went from <0.2% of claims in March 2019 to 7.5% in March 2020, and was 13% of total claims in April 2020. Woah. Link.