A look at Oak Street's Analyst Day on 3/16/22
Oak Street, per usual, is a model of consistency in its Investor Day slides. It does a really nice job of simplifying the complexity of value-based primary care into an easy-to-understand ramp-up to profitability, making the lives of Wall Street analysts much easier. It also helps that Oak Street has years of consistent performance that support the case, allowing it to tell a very simple story along the lines of:
The biggest question for Oak Street in this, as we’ll get into below, is whether as an investor you want to bear the losses associated with investing millions of dollars in a clinic and then bearing losses until you get to maturity. Oak Street's Net Loss of $414 million in 2021 is a staggering amount of money for a chain of primary care clinics. While the clinics demonstrate profitability at maturity, Oak Street incurs significant losses in getting there, and still has a long ways to go to get a majority of its centers to maturity. There’s a lot to like if you believe they can continue marching down the same path they have already demonstrated moving towards profitability.
Our key takeaways from the day:
Oak Street leadership repeatedly hit on the idea that its model works so well because it is solely focused on the senior population and how this influences every decision for the org. In part, I’d guess they hit on this so heavily because it differentiates them from One Medical. But it also calls into question what they were thinking entering into the Walmart partnership, which calls into question that entire premise. In it’s three Walmart clinics, Oak Street treats all patient types, as part of the deal it signed with Walmart. So it’s curious, that when asked about the performance of those clinics in the analyst Q&A, the Oak Street response was that they’re performing in line with its experience. It seems like those two positions - that Oak’s model works because it’s focused on seniors only, but that it’s Walmart clinics are performing just as well - are a contradiction in terms. Strategically the Walmart partnership has always seemed like a very odd thing for them to do, and it continues to feel that way here. Why undermine your entire narrative for three clinics you don’t even bring up at investor day?
It becomes clear in a session like this that the key unlock for these next gen care delivery models (Oak Street and others) is primarily payment model change, not technology. I have a feeling that there will be two reactions from folks reading that sentence:
Both in Oak Street’s presentation, and also agilon’s presentation last week, if you listen for the PCPs talking about what these models unlock for them, it’s in large part the time to behave differently. You hear repeatedly that physicians already know what to do, but are trapped in a FFS rat race where they just don’t have the time or resources to do so.
A new payment model allows providers to spend more time with their patients and do the things that they already know how to do, along with the funding to hire support staff to help them do more of that. The technology platforms are a helpful extender of this, to be sure, but function more as a bespoke project management tool that helps standardize care team behavior. In other words, better tech without payment model change doesn’t work. Payment model change should be able to work (although perhaps not scale to VC returns).
On a related note, the Canopy discussion was a bit underwhelming in terms of positioning the tech platform as a key part of the growth story. Watching sessions like this one, it is indecipherable what is better / different about any of these tech platforms versus the others. This comes up in the analyst Q&A (~2:50) when an analyst asks the question about how Oak Street’s platform is different from others. And Oak Street’s answer is telling - they were unable to describe how it was different from others, only sharing that Canopy is purpose built for Oak Street’s care model and it enables consistent workflow.
It does seem that is the primary benefit of these platforms - that they can be purpose built to support the specific needs of the care delivery model (which enables the standardization point below). And certainly, there is value in that. But it also should mean that a platform will eventually emerge that allows for the customization of workflows in ways that works for Oak Street and other companies, such that they won’t have to spend the resources to build it internally. Long term, I’d expect we see more and more companies in the space partnering rather than building these tools.
One of the things that is clear from Oak Street’s investor day is the focus on standardization of the clinical experience. Everything they talk about is having a standard playbook for their care teams to know exactly what to do. Clearly this approach has resulted in consistent results for the business and is working well. It’s also relatively different from the narrative you’ll sometimes hear from other primary care organizations, which are much more about empowering providers to operate in the way they see fit. This shows up in sometimes odd places - for instance, Oak Street proudly highlighted in the talent development section that it has hired 40 top-tier MBAs, retained almost all of them, and promoted a good number of them. Many primary care organizations would never dream of highlighting such a number, only talking about physician talent. But Oak Street clearly places a strong emphasis on the business side of the house.
The RubiconMD acquisition remains a bit confusing from a strategy perspective. Oak Street highlighted the reasoning for the acquisition as more closely integrating specialty care in order to drive additional cost savings (more specifically, it articulated three goals: 1. seamless integration, 2. triple the number of eConsults, 3, reduce specialty costs by 10%). It’s hard to argue with that reasoning from Oak Street. But its not clear how acquiring RubiconMD actually will generate any additional cost savings for Oak Street beyond what Oak Street was already seeing by partnering with RubiconMD. It’s not as though RubiconMD owns the specialties, so Oak Street won’t have any better control there. Keep in mind that RubiconMD has external revenue from other organizations leveraging its eConsult platform, but Oak Street makes no reference to that in the analyst day, suggesting it is not an organizational focus to spend time growing that business. So for the current state of the business, it seems like it’d make a lot more sense to keep RubiconMD as a partner rather than acquiring it with no intention to grow outside revenue.
But Oak Street’s leadership team generally is pretty thoughtful about strategy, and so it doesn’t make sense that they’d acquire RubiconMD to achieve roughly the same outcomes and kill its external revenue. What does start to make more sense is if this is the first step for Oak Street into a broader specialty care strategy. As they mention in the analyst Q&A, it sounds like we might see them step further into delivering care themselves. In that event, having the platform to facilitate that care in a virtual hub-and-spoke model makes much more sense. Will be interesting to watch how this evolves over the next few years, and we’d expect to see Oak Street start picking more specialties to play an active role in.
Oak Street’s community outreach teams seem like a well oiled sales machine. It’s worth listening to the section on how they think about building out these teams and who they look to hire, which starts around 1:12. Oak Street focuses on hiring people who are local, living within 5 miles of centers. They look for people who: 1. care (for their community) and 2. want (buy a home, pay for college, etc). Oak suggests they need both of those attributes in order to be successful driving growth. It also highlights how this is really a sales role for Oak Street, and they are very deliberate in that. They talk about the specific metrics - how many contacts need to be made, how many quality conversations, etc. It might not be immediately obvious to everyone that this is Oak Street’s sales organization, but after watching this presentation it definitely should be. Oak Street sees a huge opportunity from the world opening back up, and it's understandable why.
As Oak Street continues to articulate a story more focused on achieving profitability, it continues to hone in on Patient Contribution and Platform Contribution as key metrics. It's a smart play on their part, because it shifts focus from the magnitude of their EBITDA loss currently and focuses attention on the profitability of the model at maturity. Visually, I’m a bit sad to see that Oak Street has moved away from its waterfall chart in explaining the financials, opting for a chart (see Slide 52 below) that better highlights how Patient Contribution and Platform Contribution are calculated. While it’s a helpful explainer of those two metrics, it loses the broader context that the waterfall chart provided, which was one of the best explainers of capitation mechanics out there.
Oak Street is using Patient and Platform Contribution to demonstrate how, as clinics get to maturity, Oak Street’s model gets very profitable. Yet it also glosses over the fact that the vast majority of Oak Street’s clinics are not at maturity yet, and will not be for the next several years. See the 2021 chart below from their 10-K as a good example of the difference between Patient Contribution, Platform Contribution and Adjusted EBITDA. Platform contribution was $31.5 million, while Net Income was a $414 million loss, and Adjusted EBITDA was a $228.9 million loss in 2021. With the magnitude of those losses, you can understand why Oak Street is focusing on getting to profitability and slowing growth of clinics.
Given that dynamic, you can see why Oak Street is slowing down clinic growth to hit profitability sooner given the current state of the markets. The ramp up of clinics costs a lot of money, and Oak Street is not going to get closer to profitability until it can get more clinics in to the “mature” category. As slide 55 highlights below, in 2024 Oak Street is only at 16% of its centers at maturity, with an average center age of only 3.0 years. This is up from 1.8 years in 2021, so it’s trending in the right direction, but still a long way to go.
All of that said, Oak Street does a really nice job simplifying the story of how their clinics get to maturity over time, and that once they do, they have a profitable business on their hands. See Slide 43 below highlighting how its at-risk patients grows consistently across practices versus months open (Slide 33 also highlights how consistent this ramp has been over various years).
Oak Street’s Acorn ACO performance seems like a meaningful rebuttal to the Medicare Advantage risk adjustment debate, showing that Oak Street generates roughly the same margin in the Medicare Shared Savings Program as it does in Medicare Advantage. It’s meaningful because Oak Street does not benefit from risk adjustment mechanics in the MSSP program like it does in Medicare Advantage, and yet its revenue was higher in the MSSP ACO than Oak Street’s broader Medicare Advantage population. It’s interesting to see an MA player provide this kind of data, would love to see it more broadly from other players as well. Couple data like this with the outcomes we’re seeing in Medicare Advantage programs and it makes for a compelling story across cost and quality.
Direct Contracting / ACO REACH didn’t come up during the entire three hour session, either proactively by Oak Street or in analyst questions. Not sure how to interpret that, but it’s a very different position from not that long ago when Oak Street spent an entire analyst call talking about the Direct Contracting opportunity. Given the shifting focus from growth to profitability, and unknown profitability impact of ACO REACH, it does make sense that they'd avoid that discussion and focus on the core businesses movement toward profitability.