On 21 July 2022, Amazon announced the acquisition of primary care organisation, One Medical (’ONEM’), for US$3.9bn. Is this surprising? In a sense, every acquisition is a “surprise” — that’s why the share price moves — but looking at it in post, there’s a clear narrative and strategic rationale.

This article is an (opinionated) business model breakdown of One Medical. I’ll extract the key learnings from ONEM that are applicable to healthcare and businesses in general.

I’ll then investigate Amazon’s acquisition of ONEM. Was it smart? Or is it doomed to join Amazon’s expanding graveyard of failed healthcare initiatives?

Let’s find out.

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Part 1: One Medical

Overview

One Medical is a membership-based primary care provider which integrates digital health with in-person care. Put more simply, it’s series of GP clinics that are part online, part in-person.

I see One Medical as an experience design and process optimisation business. It’s a ‘lipstick on a pig’ company. It’s like a magical iPhone unboxing experience, but in ONEM’s case, there’s no iPhone inside. In clearer terms, ONEM is a ‘cool’ product. But ONEM doesn’t do much to improve the quality of healthcare. It was innovative in 2007. But today, ONEM’s offerings are table stakes.

So how does ONEM’s hybrid GP model work? Well to start, customers pay twice. $199 for membership to the platform. And then on a fee-for-service (’FFS’) basis every time they see a doctor. Despite these costs, ONEM allegedly has an NPS of… wait for it… 90. This is unheard in most industries, let alone healthcare.

One reason for the 90 NPS, is how ONEM selects its sample population for this number. The other reason, is that ONEM has brilliantly structured it’s business model such that patients don’t actually pay the fees themselves:

• Membership fee: More than half of patients have the $199 covered by their employers — somehow ONEM convinced employers that if their employees sign up, the employers’ costs go down
• FFS Fee: The FFS fee is usually billed to the patients’ insurance (which actually means that ONEM is still playing the FFS war of ‘gaming billing codes’)

As of June 2022, ONEM had 790,000 members, which was up 78% from February 2020, the time of the IPO. This is commendable but not amazing considering how ONEM was a quintessential COVID digitisation play.

During COVID, ONEM traded on a $3bn market cap at 11x revenue. That’s a whopping 32x gross profit. This is worryingly high for an unprofitable business growing revenue at a measly 28% annually since 2017.

It looks even worse at the gross margin level. Gross margins have worsened from 35% (bad) at IPO, to 19% (horrible) in the last 12 months to July 2022.

So already, we have some burning questions:

• What made ONEM so good as to achieve a 90 NPS?
• How did ONEM convince employers to pay for the service en-masse?
• Why did the market assign ONEM a seemingly ludicrous price given it’s financials?

Product and customers

We can think of ONEM as having four key stakeholders:

• Patients: people who use the service, like you and me
• Payers: employers, insurers, government
• Providers: doctors, nurses, physician assistants, therapists and other folks who help provide care
• Health systems: networks of specialists to whom ONEM can refer patients

Patient product

We know one thing for sure — patients want better healthcare. Healthcare is the ultimate low NPS industry with 81% of patients dissatisfied with their healthcare. ONEM is doing lots to improve this, per the image below.

They have a beautiful app and website, make it easy to book appointments, and for the most part, follow through on what they promise.

But is this enough to have an NPS of 90?

For context, here are the NPS scores of top companies — Apple (66), Netflix (54), Nike (30).

So, I did some digging. Yelp users score ONEM clinics between 2-3 stars. As a slightly different proxy, ONEM scores only 3.3 on Glassdoor. Only 54% of employees would recommend working at ONEM to a friend. On the Apple app store, ONEM has a 4.9-star rating (at least that’s a tick). But it’s 3.5 stars on Google Play.

From first-hand experience testing the service, it’s good. Good as in far above the typical GP experience, good. But not good as in ‘scream to the world to start using this right now’, good.

One part of what makes it good is just doing all the basic things right. Another part is the membership model, which incentivises ONEM to retain clients for life and therefore focus on long-term health outcomes.

How does this work in practice?

One component is that the app proactively reaches out to members to encourage adherence or to check in on care needs. Members receive customised preventative care reminders, app-based mental health screenings, follow-up recommendations and other care reminders.

For example, if a member is diagnosed with a chronic condition, the technology platform will automatically check in on that member’s condition. ONEM sends follow-ups for over 100 different conditions. Providers can configure additional automated follow-up communications. The ongoing relationship is step above the traditional model of transactional GP visits.

As a result of ONEM’s proactive outreach, almost 50% of members check the app once a month. Members complete over 65% of health action items assigned to them by the technology platform. ONEM interacts digitally with patients 4x more often digitally than in-office.

Payer product

Payers include insurers, the US Government and employers:

1. Insurers pay for the cost of the doctor's visit, much as they would without ONEM
2. The US Government generally covers healthcare costs for those over 65 in America via Medicare. ONEM primarily engages Medicare through its Iora business
3. Employers often cover the $199 ONEM membership fee

Insurer and government funding have always happened in the US. Employer funding is bit more innovative. Employers cover the membership fee for employees. 65% of employers also cover their employees’ dependents. By selling to employers, ONEM gains a B2B2C channel on top of its B2C channel. So how does ONEM persuade employers? Two ways:

1. Reducing costs for employers
2. Keeping employees happy

Let’s examine each of these.

Reducing costs:

ONEM claims to reduce costs for employers by 8% … again, ‘claim’ is the operative word. This statistic is based on a single case study with a single employer. Medical costs were only reduced by 3.5%. ‘Saving time’ was a 4% reduction in opportunity cost. Summing these you get 8%. Sound sketchy?

In general, you need tech architecture that is more sophisticated and complete than ONEM’s to move the needle on cost by changing the delivery of primary care.

Employee satisfaction:

Despite the questionable cost data, ONEM does improve the employee experience. 76% say ONEM improved their opinion of their employer. 72% rated ONEM as one of their most valuable benefits. External research supports this. I suspect that employee satisfaction would be the key sales lever.

Provider product

“Providers” is a catch-all term for doctors, nurses, physician assistants, therapists, and other medical professionals.

One Medical has innovated in this space by asking “what are the main problems that providers face?” Two problems include (1) the fee-for-service model, and (2) the extensive paperwork and admin burden that GPs face.

Fee-for-service:

The traditional way that GPs are paid is on a fee-for-service basis. In other words, the GP is paid each time they see a patient. This incentivises GPs to rush through patients, which is one reason for GP burnout (50% of GPs say they are burnt out).

ONEM, by contrast, pays providers a fixed salary upfront. The doctor has to work for a set number of hours but can see patients for as long as they’d like.

Paperwork and admin:

Another problem is that GPs spend roughly 30% of their time on paperwork. Talk to a GP and they’ll loathe this. ONEM claims to reduce the paperwork burden by 40%.

How? Take it from the horse’s mouth:

We have designed our technology to surface important clinical context in a single view and to reduce the time and clicks necessary to complete clinical and administrative tasks. We leverage machine learning to route inbound requests to the most effective team member for resolution. All of our providers access the same longitudinal medical record, which facilitates smooth handoffs of clinical tasks, and results in care that is truly team-based. Further, when our technology integrates information from other stakeholders in the healthcare ecosystem, we present that data alongside information gathered in the course of care at One Medical, enabling the development of an integrated care plan.

Health networks product

ONEM has a network of partner specialists and facilities, that can be seamlessly accessed when needed. ONEM digitally integrates with these partners to help reduce duplicative testing, to share digital information, and to coordinate care. It’s a neat part of the ONEM solution and provides yet another way for ONEM to monetise.

Iora — the fifth ‘stakeholder’

I’ll give it to ONEM, Iora was a smart acquisition.

Basically, ONEM’s core business targets the healthy, working-age population. Iora, by contrast, targets over 65-year-olds. The US government covers most of the high healthcare costs of the over 65s under the Medicare program. ONEM members also now ‘age into’ Iora members. Beyond diversifying demographics, Iora also diversifies ONEM’s geographic footprint, helping ONEM to expand into 8 new markets.

What’s more, the acquisition opens up a neat cross-sell opportunity. ONEM has over 700k members with a purported 90 NPS. All those members have parents and grandparents they might point towards Iora.

The challenge?

Iora’s gross margin is even worse than ONEM’s… we’re talking a shocking 10%. The acquisition requires you to believe that the medical claims expense ratio comes down dramatically over time…. which leads us to financials.

Financials

Revenue

One Medical has four main revenue streams:

Membership revenue from annual employer and consumer subscription fees

• Enterprise clients typically pay a discounted fee on the $199 per person per year

Partnership revenue predominantly from:

• Health networks (on a per member per month (’PMPM’) basis)
• Enterprise clients (fixed payments for on-site medical services)
• COVID-19 on-site testing
• Fixed payments from enterprise clients for on-site medical services

Fee-for-service revenue from providing in-office care to patients, which is billed to patients’ insurers

Capitated revenue, which is value-based Medicare revenue associated with Iora

• Capitated means that ONEM receives a fixed sum from Medicare to cover a fixed number of people.
• The capitated payment is the sum of each member’s risk-adjusted health care premium per month. This covers a range of services for those members.

Cost of Care (COGS) = medical claims expense + care margin

We can think of ONEM’s COGS as the sum of what it calls “cost of care” and “medical claims expense”.

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Cost of care

Cost of care can be thought of as the COGS item for the commercial revenue streams (partnership revenue, fee-for-service revenue, membership revenue).

Cost of care primarily includes provider and support employee-related costs for both virtual and in-office care, medical supplies, and insurance. D&A is excluded. Providers include doctors of medicine, doctors of osteopathy, nurse practitioners, physician assistants, and behavioral health specialists. Support employees include registered nurses, phlebotomists, health coaches, and administrative assistants assisting our members with all non-medical related services. I list all these different providers to give you a sense of how ONEM runs its business.

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Medical claims expense

Medical claims expense can be thought of as an additional COGS item for the capitated Medicare revenue stream (so the Iora revenue stream).

The way this works is that Medicare pays ONEM a fixed amount to provide basically unlimited services (often through third parties) to Medicare patients. The medical claims expense is the cost of those services. It includes costs for inpatient and outpatient services, certain pharmacy benefits, and physician services. At 92% in 2021, this is egregiously high. ONEM’s argument is that this comes down on a cohort basis over time as they get better at managing care for these high-risk cohorts.

Care margin

The care margin can be thought of as a gross margin. Care margin optimisation is crucial for ONEM to succeed. There is little evidence that ONEM is improving here. The care margin was 36% in 2018, 39% in 2019 (a small improvement), but now is below 20%. This is worryingly bad, and raises real questions as to the long-term sustainability of ONEM’s business. To assess this, it would help to see ONEM’s cohorts cut by geographic market, by employer and by clinic, to see if mature markets are more attractive.

In any case, ONEM is now under the reigns of the COGS-optimising machine, Amazon. Time will tell whether Amazon can turn this around. The challenge will be doing so without sacrificing the quality of care.

OPEX

Not only have ONEM’s gross margins worsened, but S&M and G&A have shown no operating leverage and by contrast, have outpaced the growth in revenue.

S&M grew from 9% of revenue in 2018 to 10% of revenue in 2021. To be fair, these percentages are both commendable, and demonstrate ONEM’s efficient sales motions through its multiple channels.

G&A grew from 41% of revenue in 2018 to a whopping 52% of revenue in 2021.

So what?

With the backdrop of just how horrendous ONEM’s financials are, let’s see what it promised investors at IPO at the start of 2021…

I’ll just pause to let the irony of this since in.

Whilst, revenue growth has been on target, the care margin has shrunk to below 2017 levels, and G&A is over 3x worse than the target, at 52% of revenue instead of 15%… This has driven the EBITDA margin even further into the negative at -15% of revenue… a far cry from the 20% goal.

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Part 2: Amazon

If we look at ONEM to date, it has improved the experience of healthcare delivery by maybe 100%. Really, I’ll give them that. Their doctors’ offices are inviting and tech-enablement reduces friction. But they haven’t improved the quality of care. Fundamentally, ONEM is not a healthcare quality company but rather an experience design company… much like Amazon. As the SVP of Amazon health services said:

“We see lots of opportunity to both improve the quality of the experience and give people back valuable time in their days”. (emphasise mine)

I don’t doubt that Amazon will continue to improve on healthcare experience. But I expect lacklustre performance in terms of moving the needle on quality.

Amazon’s failures to date

Amazon has been trying to crack the healthcare nut for over 20 years, but its performance is somewhere between a C and C+. Amazon Care was recently closed down. And Pillpack has had lucklustre performance to date. There was also the disaster in 2018, when they launched the much-awaited Haven, alongside JPMorgan and Berkshire Hathaway. Haven folded in 2021.

What this tells us, more than anything, is that Amazon’s core strength isn’t building businesses zero to one. Instead, I think Amazon is a great 10-100 company. It’s great at optimising margins, reducing prices, and improving convenience. Buying ONEM means that Amazon has just skipped the 0-10 phase. Now, Amazon can focus on what it’s good at: margins and customer experience.

Can Amazon turn ONEM around?

ONEM has been haemorrhaging money on low margins. So here comes Amazon as the margin-improvement machine. Can Amazon turn things around? Maybe. It’s a hard sell, but Amazon has a few advantages going for it:

• ONEM can be bundled with Prime Memberships and other Amazon offerings
• ONEM clinics can be co-located with Amazon’s Wholefoods stores
• Amazon can uniquely support running operating losses on ONEM in the short to medium term, since it has the capital to play a long-term game

I think they can do it

Despite criticism, I think Amazon will turn ONEM around. The acquisition was tactful play by Amazon to get a fat foot into the door of the healthcare system.

Despite my negativity around ONEM’s financials, I think the business is well-run and has made an important impact in the healthcare system.

Yes, Amazon’s not a healthcare company. But I don’t think it matters. I expect that Amazon will bring efficiency and innovation to ONEM, which is exactly what it needs. I expect that the Amazon-ONEM duo will prove a formidable force into the future.

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