One Medical, a primary care provider for commercially insured patients, hopes to break into the booming Medicare Advantage market with the purchase of Iora Health.
San Francisco-based One Medical has been on an aggressive growth trajectory since well before its early 2020 initial public offering, and its potential $2.1 billion all-stock purchase of Iora announced Monday represents yet another expansion, this one not only into new markets, but into the fast-growing, potentially lucrative senior population.
On an investor call Monday, leaders with both companies worked to emphasize their similarities.
“Both organizations started over a decade over firm in the knowledge that technology powered primary care with salaried providers is key to achieving both better member outcomes and lower costs,” One Medical CEO Amir Dan Rubin said on the call.
The companies have several things in common. They’re both innovative, membership-based providers seeking to capitalize on the country’s flawed primary care system by connecting with patients frequently and in multiple ways and using advanced technology to manage care. They both also want to improve the provider experience through a salaried model.
But there are important differences, too. The most obvious is that One Medical’s roughly 600,000 members are mostly commercially insured. They skew young and healthy. And the company’s revenue model is heavily dependent on fee-for-service revenue.
Iora, by contrast, accepts full risk for the cost of its 38,000 members’ care. Its patients are covered under Medicare Advantage and Medicare’s new Direct Contracting program.
“There’s big opportunity to earn income at risk in Medicare Advantage,” said Jeff Goldsmith, president and founder of the consultancy Health Futures. “I think maybe what the One Medical people are discovering is there isn’t a comparable earnings opportunity in the fee-for-service business.”
While both companies have intriguing models for delivering care, neither has proven they can make the numbers work in the long run. One Medical’s losses have widened over the years, from $31 million in 2017 to $88.7 million in 2020. Boston-based Iora is a private company and declined to share detailed information on its financial performance. The companies disclosed in a slide presentation that Iora’s more than $200 million in revenue in 2020 was up 40% year-over-year. Iora is projected to generate $299 million in revenue in 2021, compared to One Medical’s $475 million.
In recent years, One Medical has been getting a growing share of its revenue from health systems like Mass General Brigham in Boston and less from fee-for-service patient revenue and membership dues. That category was 42% of total revenue in 2020, up from just 12% in 2018. One Medical wrote in its IPO filing that it continues to “substantially depend” on relationships with health network partners to grow its business, and that future growth depends in part on developing new affiliations.
Patient service revenue has dropped from 68% of revenue in 2018 to 39% in 2020. Membership revenue dropped from 20% to 18% in that time.
Goldsmith said it’s not a good sign that fee-for-service and subscription revenue is down. He said the plan for growth might be through more money from hospitals.
That question in Goldsmith’s mind is whether this deal will bring new business for Iora.
“Is there growth potential in Iora for doing this or is this an opportunity to get paid and get out?” he said. “$2.1 billion is a heck of a lot of money.”
Company leaders said on Monday’s call they envision membership expanding within families, projecting $350 million in revenue synergies from the deal.
“If those parents and grandparents talk to their children and say, ‘Look, this is a really great model, this is now available for you as well,'” Thaler said. “We feel very, very bullish about the opportunity to derive those $350 million in revenue synergies.”
The combined company would operate in 28 markets covering 120 million people, or nearly 40% of the U.S. population, which the companies said creates membership growth opportunity.
The companies expect the sale to close in the third or fourth quarter, pending regulatory approval and closing conditions, including approval from One Medical’s shareholders. For their part, shareholders didn’t seem thrilled about the deal on Monday. Shares were down roughly 2% at market close.
Stephanie Wissink, an analyst with SVB Leerink who covers One Medical, wrote in an email that’s because funding the deal with equity means existing stock will be diluted to pay for the acquisition.
“Effectively, there’s more value to the business, but there are more people to share in it too, so the argument would be a bit less per person,” she said.
Christopher Koller, president of the Milbank Memorial Fund, said he’s encouraged by One Medical’s focus on expanding primary care to younger, healthier populations. Any deal that increases access to primary care is a good thing, he said. The National Academies of Sciences, Engineering and Medicine warned in a major report in May that federal government must aggressively bolster primary care, recommending that all Americans select a primary care provider or be assigned one.
“If you accept the fact that primary care is weak and fragile in the U.S., these are both models that build on primary care,” Koller said.
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