One Medical’s $2.1 billion buy up of Iora came as a bit of a shock this week. It’s not the first acquisition I would have expected from One Medical, although in hindsight I can totally understand the rationale.
To get a perspective on the news, I reached out to Malay Gandhi for an authentic take. If you don’t already know him personally, Malay is an OG digital health strategist and thinker. He’s formerly of Evidation and Rock Health - and is now with Benchling.
So thanks Malay!
I’ll note, given my journalistic background, that this is one person’s perspective. For the companies’ statements on the acquisition, read the news release here. Malay’s thoughts below:
CF: Were you surprised by this acquisition or did you expect it?
MG: On some level every acquisition is a “surprise” but looking at it in post, there’s a clear story and deal rationale, so it’s not terribly surprising. One Medical and Iora as a combined entity address nearly every segment and distribution model in primary care. Oak Street Health is the comp: they are a primary care provider focused on the Medicare population. With a $14 billion valuation and serving 65,000 at-risk patients as of the end of 2020, they are a little more than 1/10th of One Medical’s size in terms of patient scale but trade at nearly 3x the valuation. Oak Street has raised more than $2.8 billion since August 2020, inclusive of its IPO and 4 follow-on offerings, the most recent of which was in late May and priced at a 195% premium to their IPO price. Medicare and the Direct Contracting program are red hot right now and Iora is an obvious target in this environment.
Right now, primary care is seen as a valuable asset. But the range on value is incredibly high—with a low end of valuation associated with companies that are grinding out $80-150 fee-for-service visits versus the high end being tied to Medicare-focused companies that take on full risk. One Medical, with its membership model and health system partnerships falls somewhere in the middle. This range begs an obvious question—if you own primary care infrastructure, what set of problems should you tackle? The race towards risk will presumably continue—but you have to wonder whether the valuations are chasing the results or vice versa.
CF: Why do you think One Medical chose to buy rather than build?
MG: Iora was the available asset and the only way into Medicare Direct Contracting is to buy your way in. It changes One Medical’s story overnight. Also, Iora itself serves as a case example of what building in capitated primary care for Medicare can look like. After 10+ years they serve 38,000 patients—that’s 3,800 patients they’ve added a year, or the equivalent of a couple PCPs’ panels. Growth is clearly not Iora’s strength, but if this is the industry average—why go down the same path unless you have some intrinsic unfair advantage to scale up?
CF: Do you see a world where One Medical gets serious about expanding beyond primary care? If so, what does that look like?
MG: No, not really, especially if you consider low complexity chronic condition management and behavioral health as being part of primary care. One Medical (the commercial primary care business) has opted out of building multi-specialty practices and instead “coordinates care” for those patients with its health system partners that own specialist networks.
CF: Do you see One Medical upping its game in telemedicine/virtual care? That's always been a strong part of the story but could we see the company do more?
MG: I’m a One Medical member and I would argue that One Medical is missing novel care architectures that define virtual care in our current landscape and it operates as more of a telemedicine v1 tech stack: secure messaging (emails), phone calls, and video visits that substitute for a traditional in-office encounter. The new virtual care companies have totally different architectures that are fit-for-purpose to specific use cases around accessing drugs and diagnostics, continuous care for chronic conditions, and 24/7 front door access to a concierge care team. Virtual care product investments are also an area where they identify cost synergies (i.e., they intend to combine their investments in virtual care to save money), so I think at best it’s an open question if the combined company becomes a market leader or laggard in virtual care alone. As brick and mortar clinics, it seems they will have advantages over pure virtual companies in delivering a fully owned hybrid experience.
CF: How will One Medical adapt to a different patient population? Iora's patients are not the population typically served by One Medical.
MG: I don’t think they will. One Medical will be the commercially-focused company and Iora will be the Medicare-focused company. I don’t think this is a ‘bring One Medical to seniors’ type of approach.
CF: Any views on what this means for digital health more broadly?
MG: In an environment where best case 20-40% (and more likely 10-15% or even negative) gross margin service businesses are valued at 10-15x NTM revenue, every health tech founder touching care delivery has to wonder why they’re not “cheating” by acquiring a provider group with capitated contracts. This is the fastest way to “10x” right now—just look at the Babylon SPAC. This tweet I sent 3 days ago was a joke but not really.
CF: Anything I should have asked and didn't?
MG: Iora's performance as a business. After 10 years in business they still lose money on care, i.e., they are a negative gross margin business. They argue it’s growth and their cohorts perform better over time, but it shows how challenging their approach has been to spending less on care than what they’re paid.
That’s it for this edition, folks. Any thoughts of your own on this deal? Reach out to me @chrissyfarr on Twitter.