One Medical is going public: 5 things to know about the primary-care startup

One Medical is going public: 5 things to know about the primary-care startup

17 Jan    Finance News

One Medical, a direct primary-care provider, has filed for its initial public offering, trading under the name 1Life Healthcare Inc.

The company ONEM, +0.00%  operates a care model in which patients pay an annual fee of $199 to gain access to One Medical’s primary-care physicians and services, including the ability to text their doctors, schedule same-day appointments and log into the company’s digital platform housing all of their health information.

The pitch is convenience, aimed primarily at working-age adults who get their health insurance through their jobs and live in urban centers like New York City and San Francisco. At the same time, primary care is increasingly viewed as an untapped opportunity within healthcare circles with potential to lower costs and improve health.

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Direct primary care, in particular, is growing in popularity because it seeks to address two of the biggest complaints about traditional primary-care offices in the U.S., a lacking customer experience and a frustrating working environment for physicians, who are facing higher rates of burnout in traditional medical settings.

According to its S-1, which was filed Friday, One Medical’s revenue and membership numbers are steadily growing. It brought in $198.9 million in net revenue for the first nine months of 2019, up from $154.6 million in the same period a year ago. It had a net loss of $34.2 million in the first three quarters of 2019, compared with a net loss of $6.9 million in the same time frame in 2018. It had 397,000 members as of Sept. 30, up from 323,000 in September 2018.

The cost of care for the first nine months of 2019 was $118 million, taking up 59% of revenue. For the same period in 2018, cost of care was $100 million, about 65% of revenue.

Here are five things to know about 1Life Healthcare before it begins to trade publicly.

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Large employers are on board

Google, a unit of Alphabet Inc. GOOG, +0.95% , owns at least 5% of the company and is also one of One Medical’s largest customers, accounting for one-tenth of net revenue in 2018 and the first three quarters of 2019. One Medical also said it operates on-site clinics at some Google offices.

Long vocal about rising employee healthcare costs, many large employers are now actively taking steps to stem the flow of money they spend on employee medical costs. In 2018, Inc. AMZ, +0.13%, Berkshire Hathaway Inc. BRK.A, +0.68% and JPMorgan Chase & Co. JPM, +0.54%  announced plans to tackle employee healthcare costs in 2018, eventually creating a joint venture called Haven. Apple Inc. AAPL, +0.25%  is building out its own clinics for employees, called AC Wellness.

One Medical said that more than 95% of its members were commercially insured.

“A large part of the demand for our solutions and services among enterprise clients depends on the need of these employers to manage the costs of healthcare services that they pay on behalf of their employees,” One Medical wrote in the securities filing.

One Medical is taking marketing cues from consumer (not healthcare) companies

The opening statement in the company’s S-1 states that One Medical’s goal is to “delight millions of members with better health and better care while reducing the total cost of care.”

Using the word “delight” in marketing materials is much more common among consumer companies. According to a FactSet analysis of third-quarter earning transcripts in 2019, this includes pet e-tailer Chewy Inc. CHWY, +0.61%  (“our proposition to delight customers with high quality products), athletic retailer Lululemon Athletica Inc. LULU, -0.77%  (“make sure that we delight the guests”), and fitness platform Peloton Interactive Inc. PTON, +3.02%  (“delight our members over time”), which went public in September.

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Only one Fortune 200 healthcare company — Molina Healthcare MOH, -1.97%  — used “delight” in an earnings call or analyst, investor or shareholder meeting in 2019.

However, what many of the new entrants to healthcare are trying to do is upend a U.S. system that is expensive, inefficient, sometimes hard to access and more often than not difficult to navigate by creating a better customer experience. One Medical offers 24-7 access to its members through a mobile app and website, which includes video and chat options. “We aspire to be the most loved brand in healthcare,” the company wrote in the S-1.

More people are paying attention to primary care

One Medical predicts that it could more than double its market footprint, from $34 billion in primary-care spend now to $81 billion, by expanding from the nine markets where it already operates to the 51 largest metropolitan statistical areas.

It’s a timely bet considering that other startups and traditional healthcare organizations are also trying to boost utilization of primary-care services.

Traditionally, the U.S. hasn’t prioritized primary care, which accounts for about 6% of $3 trillion in total health spending, according to the Milbank Memorial Fund. In comparison, Australia and Poland both spend about 18% on primary care, according to a 2018 report from the Organization for Economic Co-operation and Development.

That thinking is changing, and the most recent school of thought is that primary care can be an effective cost-cutting tool, by helping patients better manage chronic diseases before they get too sick and keeping them out of more expensive care settings like emergency rooms or urgent-care centers. States like Oregon and Rhode Island have passed laws setting benchmarks for primary-care spending in recent years, and major health insurers and pharmacy chains, including CVS Health Corp. CVS, -0.08% , Humana HUM, -0.72% and Walgreens Boots Alliance Inc. WBA, +0.42%  are opening clinics that offer primary-care services.

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One Medical said it counts among its competitors other primary-care providers and on-site clinics set up by employers.

Even in a new model, revenue is driven by patient volume (for now)

One Medical has three revenue sources: individuals or employers buying memberships, “partnership revenue” from health networks or clients that have One Medical on-site services, and net-patient revenue. It said that “while we intend to increase revenue contribution from health network partners, our revenue mix will continue to be driven by patient visits over the near term.”

Many of the newest initiatives and business models in U.S. healthcare aim to capitalize on the move away from a volume-based service model to one that emphasizes value, a shift that has taken place since the Affordable Care Act was passed into law in 2010.

It’s still hard for a startup like One Medical to hire and retain medical talent

Part of One Medical’s pitch to future employees is the chance to work a new type of environment. “Our culture, technology, team-based approach and salaried provider model help address the fundamental issues driving physician burnout,” it wrote.

However, most organizations that employ physicians, nurses, physician assistants and other health care workers struggle to keep the staff they need. There are a number of reasons behind clinician shortages, including baby-boomer workers hitting retirement age, burnout and growing demand for medical services.

One Medical, which had 1,600 full-time employees as of Sept. 30, said “the pool of qualified personnel with experience working in the healthcare market is limited overall,” and it competes with other healthcare organizations for talent.

One Medical is looking to go public at a time that the Renaissance IPO exchange-traded fund IPO, -0.30%  has rallied 12% over the past three months, while the S&P 500 index SPX, +0.21%  has gained 10%.

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