Will One Medical justify $40m in venture funding?

One Medical is a San Francisco-based “concierge lite” primary care service. I happen to know it pretty well because I’m a patient there and have known CEO Tom Lee and given free (probably unwanted) consulting to COO Sharon Knight since before the NY Times made them famous.  So yesterday’s news that they’ve raised another $20m (making their total $46m) gave me pause. Not because I don’t think my doctor (Andrew Diamond) isn’t fantastic. He is. Plus when you go to an appointment–which really can be booked same or next day online–you get a full half an hour, it really runs on time and the office environment is fabulous. Ian Morrison used to tell us that quality in health care was being in a waiting room with people richer than you. At One Medical everyone is better looking than you (well, than me anyway!).

The added cost for this? Only about $150 a year. Oh and that added cost is actually voluntary, as Tom Lee pointed out in an email last year after local IPA Brown & Toland complained. Yes that fee gets you rapidly answered emails, online prescriptions, same day appointments and way more. So what’s the catch? There doesn’t seem to be one. This concerns me for several reasons:

  1. Can they make money? Unlike some new primary care models like Qliance or MDVIP, Tom has not taken One Medical out of the current insurance system. This is a great thing, for those like me with good HMO coverage. But how One Medical can afford to provide the level of care it does when every other primary care doc needs to see 8-10 patients an hour, and yet does it with apparently fewer office staff, I don’t know. But it makes me nervous because they may be losing money on every patient to grow market share.
  2. The referral problem. Every primary care office in America has a massive problem getting patients to the right specialist. My wife had a not great experience being routed to the wrong kind of specialist and basically I took over the process. I have a colleague who was also using One Medical who had a similar experience. So it appears once you get outside the walls, care coordination is tough. The only logical way I see to change this is to add specialty in house (and they’ve made a start with OBGYN although not, despite my appeals, with pediatrics–even though I clearly told them Colette’s upcoming birth date). But it’s hard to see how any one practice can solve the mess that goes on out there for their patients–especially if they’re not paid for it.
  3. The EMR. It’s home grown and you can’t see into it. There’s a patient edited personal health summary on the site, but that’s more or less useless self-entered data, and I’m sure the physician never reads it. Even those quickly answered emails are standard emails sent over the public Internet, not secure email a la Kaiser or Relay Health. Given that lots of new SaaS vendors are providing fully integrated EMR/patient portal/registry et al with an excellent communication system over multi-media between doctors and patients, I cannot see One Medical scaling on its current system, or keeping its patients happy. I happen to know they are talking to other vendors, but as a patient I want to see them get on a modern platform soon.
  4. The pressure of the VC money. At 16 patients a day and an average of 2 visits a year, a One Medical doc has a panel of about 1,500 patients. Even if they all pay the $150 a year, there’s only about $200K per doctor in the kitty to defray the extra costs and lack of revenue from not seeing double to triple the number of patients. It may be enough, but I worry that it cannot be that profitable on a per physician basis. Don’t forget that they take all comers including HMO insured patients like my family. Now add in raising $46m at a valuation that must be over $200m.  One Medical will have to grow locations and grown same store profitability in what is a labor-intensive business. I’ve written about this before, calling my thesis Why Wall Street Hates Health Care Services and doesn’t know it. Simply put, it’s very hard to turn a low-margin labor-intensive business like providing health services into a high growth, high margin business like software.

Having raised these concerns, I must reiterate that I’m a huge fan. I really hope that Tom & colleagues continue to succeed in giving Ritz Carlton service at Day’s Inn prices. I’m particularly impressed that they’ve stayed within the current insurance system and haven’t gone cash only–as apparently have most pediatricians in San Francisco. And if they can answer my four questions and scale with their current philosophy, they deserve to make millions and will make lots of patients very happy.

11 replies »

  1. You have to look at this model in the proper context. in the bay area Kaiser and Sutter Health dominate and they have the control over facilities (hospitals). Many practitioners who are not inside those systems need to figure a sustainable ( like One Medical) business model to survive. What most people forget is PCP are in short supply, and they are getting older. This business model allows youger doctors to not only survive but to provide people with a choice. What is wrong with choice? California has always been on the cutting edge and this could be the next big thing.

  2. Oh yes they can, anything is possible if you get the patient to sign a contract. They can only bill insurance for what the insurance contract states. They can bill a patient anything they like. The trick is getting the patient to pay it.

  3. Completely agree with the above. As a practicing private doc, there’s a lot more than $150 a head, and a lot more than 2 visits a year involved here. Are these guys kidding themselves?! With all the neurotic worried-well suburbanites out there with money to burn, let me tell you… 🙂

  4. John: I believe the $40M is to scale the model to multiple locations in multiple metros. I don’t recall how many locations they have now (3?), but I don’t think they can build a large enough IRR for investors without a significantly larger footprint. It’s not uncommon in “bricks-and-mortar” to have thin margins/profits (if any) at very small scale. The IRR that VC’s are looking for – only comes at large scale. $40M to add the kind of physical footprint isn’t that much. Lease commitments alone could easily take a big chunk – because I don’t think they’ll be vying for rural sites at all. Only major metros – and (possibly) multiple locations in each.

  5. Dan Munro: I appreciate that $40 million for a brick and mortar consumer plan (any vertical is not that big. But I come at it from the other direction: Why do they need $40 million of capital for a primary-care practice? Surely a couple of million bucks should cover it, no?

    Dr. Mawdaugh, your question leads me to ask: How can they accept insurance, or (as Matthew Holts puts it) remain inside the current system? What does Matthew actually mean by that anyway? They cannot contract with payers, can they? They are out of network, no?

  6. “…and assume the doctor takes home at least half…”

    Big assumption in primary care.

  7. Not sure I understand even the $150 cost/value if they’re using a non-standard EMR (“that you can’t see in to”), non secured communications and they still have continuity of care (referral) issues. Spa like offices I guess? This isn’t that far off from the UrgentCare / NextCare model – which has no “membership” cost – typically very modern facilities – and accept most insurance.

    I do think we need to have this debate – but not with models (like One Medical) that do accept insurance. The DPC model where insurance isn’t an option is very different. Do we really want to fork both the payment and delivery model into those who can afford it – and those that can’t? It *may* work for those who elect “catastrophic” only coverage – but it also strains an already stretched resource – Primary Care Physicians. I know Dave Chase and Alex Fair are both strong proponents of the DPC model – maybe they’ll join in?

  8. They’re not losing money, Matthew. From their fee schedule, at 16 patients per day, and counting a good percentage of integrative medicine and rather healthy panels, each provider should bring in about $400K – $500K in collections. Medicare pays well in SF and private payers pay more than their fee schedule, if coded right. If you add the $200K in annual fees and discount for the significant number of PAs and NPs, and assume the doctor takes home at least half (mostly young docs), you still have a sufficient amount to cover overhead nicely, and then some.
    When Maverick invests in something, it’s a pretty good bet (trust me on this one 🙂 )

  9. They charge the patient an additional $150 over an above any cost for service (billed to the insurer) as a membership. If you’re hospitalized in most hospitals around here PCPs leave you to the hopsitalists

  10. Matthew,

    I do not get it. Are they billing insurance and collecting the $150 fee?
    If you were to be hospitalized, will your doctor manage your care in the hospital?