The Healthcare Breakdown No. 044 - Breaking down the Primary Care woes of Cano, Walmart, VillageMD, and Amwell

Brought to you by the HMO class of 1973

What we’re breaking down:  The recent huge failures in primary care and virtual care

Why it matters: Primary care and virtual care are seen as a gold rush, but the gold isn’t there, at least not the kind large corporate entities are interested in, namely, real gold

Read time: 2 mimosas (7 minutes for real though)

---

The Healthcare Breakdown is for real brought to you by:

Launch or grow your private practice or healthcare startup.

Forward Slash / Health works with clinicians to launch and accelerate their businesses. We specialize in compliance, financial optimization, strategic planning, and operations management.

We are currently taking limited applications for new clients. Follow the link below to lean more.

---

Primary care. You know it, you love it. Sometimes they make you look left and cough. Other times they swing by, type with their back turned and tell you to eat a Mediterranean diet.

No, I am not speaking from experience. Ok, a little...

Primary care has also been in the news quite a bit lately with some major stumbles and wild business developments.

In case you missed it, here’s what’s been going down.

Cano Health went bankrupt. And with financials like these, who could blame them…

Year after year losses, billion dollar acquisition, billion dollar debt, and burning cash. Ya, that’s bankruptcy for sure.

Next we have VillageMD. I did a whole breakdown on that breakdown last month. You can check it out here. You can also take another look at the unfortunately consolidated financial statements of Walgreens that give you a small peek into the performance of that unit, mostly in the form of the Goodwill write-down.

Oh, and one more thing about VillageMD. Cigna also just wrote down $1.8B of its $2.5B investment in the company. True story:

Not going swimmingly…

And obvies we need to talk about Walmart Health. The largest employer and the largest company in America. You’d think if anyone could pull it off, maybe they could?

Just look at these numbers:

Take that, UnitedHealthcare, with your measly $370B in revenue.

The main point here is that Walmart is massive and saw an opportunity. Who doesn’t want a piece of the $4.3T pie? But, Walmart? For a tank top, some beer, and a last minute grill on the way to the lake, sure. For an enduring relationship with a primary care team? Hard pass.

To round this non-exhaustive list of setting piles of money on fire, you have Amwell. Crowning glory of companies about to be delisted from the stock exchange for operating in a wildly competitive environment with basically a paid version of FaceTime? Ya, I don’t know.

Here are the numbers:

Just losing all the money.

Here is some fun info from Amwell on who it considers competition:

We view competitors as those companies whose primary business is developing and marketing virtual care and digital care platforms and services. Competition focuses on, among other factors, technology, breadth and depth of functionality, range of associated services, operational experience, client support, extent of client base, and reputation. Our competitors include:

• Platform telehealth players such as Teladoc and Caregility;

• Consumer-focused telehealth competitors such as Included Health and MDLive;

• Technology players leveraging horizontal platforms into the healthcare vertical, such as Microsoft, Amazon, and Zoom;

• Virtual nursing offerings, such as Care.AI and Avasure;

• EHR providers, including Epic, Oracle Health, Allscripts and athenahealth;

• Digital patient engagement companies like Twistle, GetWell Loop, and Memora Health;

• Digital behavioral health companies, like Ableto, Headspace, Array, and Neuroflow.

So like, everyone. No wonder it’s tanking.

All right. I’ve shown you a bunch of numbers, but what does this have to do with anything at all.

The point is all these companies are doing the same thing PhyCor and MedPartners tried to do in the 90’s.

Oh, sorry, you haven’t heard of them?

Well buckle up, because their story will seem very familiar.

The long version you can read here.

The short version is that these companies were the early day VBC MSO (value based care management service organization). Instead of those acronyms, they called it PPM or Physician Practice Management. The premise being that primary care managed the most lives and was under pressure and simeltaneously controlled the purse strings for the rise of the HMO model.

And guess what? These fellas took capitated payements to manage patients.

Sound familar?

You know what else sounds familiar? They both don’t exist anymore.

Why?

Three things. Well, more for sure, but I’m going to talk about three.

1. Economies of scale produce diminishing returns

2. Reimbursement can only go so high

3. There is only so much upside in value based primary care (as it exists today)

Ok and before we go on, I know I also mentioned Amwell virtual care, which may seem like a red herring, but it isn’t. Part of the premise and the value proposition of organizations like Amwell is they provide virtual primary care.

The long and short is that virtual care is lovely, great, and wonderful. It’s also a feature not an all encompassing solution. I loves me some virtual care and believe in certain circumstances and segments, it can be a stand alone solution. However, it is a stand alone solution only because it’s the only solution. Otherwise, we will always default to an in-person visit.

And in-person care can and should be augmented by virtual and tech. Like I don’t need to go in to meet with the doctor to discuss results. A phone call will do. Or a FaceTime, I mean Amwell visit.

But again, the failure comes when we assume that many healthcare services are meant to be delivered in a way that maximizes profitability and forgets about the purpose in the first place.

What was that purpose again… oh ya, patient care.

So back to the three things to unpack.

1. Economies of scale produce diminishing returns

Primary care isn’t manufacturing. And it isn’t Walmart. If you want to talk about it in business terms, it’s a services business. You can’t achieve economies of scale in a services business beyond a certain point.

Couple that with more or less fixed revenue rates, you are looking at ever increasing overhead and variable costs with no upside in revenue. And that’s the next point.

2. Reimbursement can only go so high

CMS sets (and when I say sets, I mean cuts) reimbursment rates every year. Then you get your negotiation pants on to beg insurers for higher rates. And they do pay more than Medicare and Medicaid, but only to a point.

Even the largest groups and health systems can only get their reimbursement pushed so far. Again, we’re looking at fixed revenue that only increases if the output of individual contributors increase. Adding more clinicians doesn’t increase profitability magically as labor rates go up and reimbursement rates come down.

So next time you roll into a large health system multi specialty group and wonder why the doctor only spend 17 seconds with you, it’s because they have to hit their 30 pateint quuta for the day. It doesn’t add up.

3. There is only so much upside in value based primary care (as it exists today)

Well that’s why these are all VBC arrangements and companies! Duh, Preston.

Yes, totes agree. But there’s a problem. VBC arrangements put these organizations at the bottom of the feeder. They share in savings based on avoiding higher acuity and higher cost encounters. But as magical as primary care is, it can’t cure all woes. We need specialists in the mix as well to really bend the cost curve in VBC arrangements.

As I mentioned in the Walgreen’s/VillageMD issue, when United and CVS are rocking with VBC primary care, I can see it. They are controlling the entire “value” chain. You can also think Kaiser.

But without a fully integrated model, the upside is going to be limited and incredibly challenging to access. If the value of primary care is as the gatekeeper with the most patients under care, then you still have to have somewhere to let them through the gate to.

This is especially true in Fee For Service land. Margins are low in the primary care model but are made up for with higher margin services. Primary care is looked to as the feeder and controls the referrals to the money makers.

Walgreens has no second level. Nowhere to self-refer (oops, did I say that?). It’s just a pharmacy where you can also get cigarettes and ice cream. The gate goes nowhere. Same with Walmart. Same with Cano. Same with PhyCor.

Sure you can participate in VBC contracts, but there is only so much you can control. Especially when you take primary care and shove it in a Walmart. Or put it into a FaceTime.

How do you build a longitudinal, deep relationship in those settings? I get it, it worked for Tender and Bumble, but guess what? They eventually meet IN PERSON! The other version is called catfishing.

I will leave you with some financial numbers from the progenitors of these types of debacles. Check out that font. Love it.

Now, top off that mimosa and go find yourself a local, independent primary care doctor. And never let go.

See you out there!