By Peter Cohan,
The world’s healthcare system is straining to meet the surge in demand. Because the health risks of patients and doctors being in the same room is so high, non-urgent medical care is on the back burner.
Telemedicine — in which patients and doctors connect via videoconferencing — can help those patients. A case in point is San Francisco=based 1Life Healthcare — the parent of One Medical — which offers a mixture of digital and in-office health care.
While social distancing is reducing One Medical’s in-office visits for now, the company expects a surge in revenue once social distancing is narrowed. And that revenue resurgence could benefit 1Life Healthcare shareholders. (I have no financial interest in the securities mentioned in this post).
I have requested comment from One Medical and will update this post if the company responds.
One Medical uses a bricks and clicks model to deliver healthcare to consumers and employers. Through video and voice encounters, chat, and messaging enabled by mobile apps and websites, One Medical consumers can access healthcare services at any time. In addition, as of the end of December, One Medical provided in-office care at 83 offices, according to its March 2020 10K.
One Medical Business Model
One Medical gets paid by consumers, employers, health networks and insurers. Consumers and companies pay an annual membership fee. While new consumer members pay $199 a year, employers pay a discounted amount in advance based on a monthly rate per employee.
In exchange for a fixed fee, One Medical provides billing and collection services for health networks that treat enterprise member employees. For enterprise clients that provide on-site medical services, One Medical gets paid on a fixed price or fixed price per employee basis.
In addition, One Medical receives capitation payments — in which a doctor or hospital is paid a fixed amount per patient for a prescribed period of time — from Independent Practice Associations (IPAs) that contract with health maintenance organizations (HMOs) for medical services provided to covered participants, according to its 10K.
Finally, One Medical receives revenue on a per-patient visit basis from health insurers and patients.
In 2019, 53% of revenue came from per-patient visits, 28% from partnerships with health networks, and the remaining 19% came from membership fees.
One Medical is growing revenue, losing money, and burning through cash flow from operations. Revenue was up 30% in 2019 to $276 million; its net loss increased 18% to about ($54 million) — which equaled cash flow consumed by operations, according to its 10K.
One Medical was able to go public on the last day of January 2020 at about $22 a share and by April 4 had declined 15% to a market capitalization of $2.3 billion.
One Medical Founding, Growth, IPO
in 2007, Tom Lee, an MD who was previously chief medical officer for Epocrates, founded One Medical. Lee’s vision was to match treatment and care to each patient’s health philosophy, motivations and preferences, according to an April 2012 Rock Health interview. Lee recognized that giving consumers an approachable, seamless experience would demand a careful blending “of brick and mortar, people and process, and technology.”
Over the decade that followed Lee led One Medical to 60 clinics — raising $180 million in venture capital at an estimated $1 billion valuation — before getting kicked upstairs to executive chairman. In July 2017, Amir Dan Rubin — an executive from UnitedHealth Group UNH’s Optum division — took over One Medical as CEO, according to CNBC. At the time, Rubin did not anticipate selling the company to a major health system and, as its 2020 IPO demonstrates, he kept his word.
One Medical’s Market Opportunity and Strategy
One Medical is going after a large opportunity. The U.S. primary care market generated roughly $260 billion in 2019 revenues — $159 billion of which came from commercially insured patients. Having captured about 3% of the commercial market opportunity — in the nine markets ($34 billion in revenue) where it operates — One Medical said it had room to grow, according to its January 2020 prospectus.
The company aspires to gain market share by offering its key stakeholders — consumers, employers, and health care providers — more benefits than competing services do. Its 10K, provides some evidence that One Medical is succeeding:
- High primary care service quality. One Medical scored in the 90th percentile rankings on key primary care related Healthcare Effectiveness Data and Information Set (HEDIS) quality metrics.
- High member satisfaction. 76% of new employer-sponsored members saw One Medical as a benefit that improved their opinion of their employer and 72% of respondents cited One Medical as one of their employer’s most valuable benefits, according to its 2019 customer satisfaction survey.
- High customer retention. One Medical retained 97% of its enterprise clients and 89% of its consumers for the year ending September 2019.
Whether these encouraging figures can improve in 2020 depends heavily on One Medical’s culture. As I wrote in April 2018, culture made a big difference for Microsoft MSFT when Satya Nadella become CEO in 2014. For its part, One Medical’s culture rewards “behavioral tenants of being human-centered, team-based, unbounded in thinking, driven to excel and intellectually curious,” according to its 10K.
How COVID-19 Affects One Medical
COVID-19 has had a mixed impact on One Medical. As CEO Rubin said, during the first half of March about 31% of its members sought “virtual care” and got COVID-19 testing — where deemed appropriate by its providers — at One Medical locations, according to its March 18, 2020 earnings call transcript.
Public officials have adopted social distancing and sheltering-in place practices and are guiding One Medical to “defer elective in-office visits when possible,” according to the earnings call transcript. Therefore, patient services revenue from office visits are anticipated to decline while membership fee and partnership revenues continue.
Should social distancing policies be relaxed, Rubin anticipates that office visits and related patient services revenue could come back even stronger. That’s because once social distancing restrictions are lifted patients will make their now deferred visits for “chronic disease management of diabetes and heart disease, cancer screenings, reproductive health, sexually transmitted infections, behavioral health, wellness visits… lab testing services and..future vaccinations.”
One Medical’s Growth Strategy
In 2020 One Medical expects to expand in the U.S. At the end of the year, its expects to be competing in 12 markets representing $38 billion in primary care for commercially insured patients. This wider geographic footprint would expand its market opportunity to $81 billion, according to its 10K.
On February 25 Piper Sandler analyst, Sean Wieland, set a $29 a share price target for One Medical. Wieland wrote that the company can grow revenue at 25% by providing value to health care providers (cutting emergency room visits 41%) and employers (saving them 8% on health care costs), according to Investor’s Business Daily.
I think Rubin will be right about the resurgence of revenue once social distancing policies are lifted. However, I do not see that happening soon. And in the meantime, the company is likely to suffer from a further decline in patient service revenue.
Investing now in One Medical is not an emergency.