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- Weekly Health Tech Reads | 10/20/24
Weekly Health Tech Reads | 10/20/24
Redeterminations cause profitability challenges for Medicaid payors, Elevance acquires CareBridge, Walgreens highlights specialty pharmacy opportunity, and more
Kevin O'Leary
October 20, 2024
Welcome to this week’s free weekly newsletter, where we share our take on select recent news and reports plus highlight other noteworthy news and content. For access to exclusive paid content and a highly-engaged network of 5,500+ other folks in healthcare, join the HTN Community.
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MEDICAID M&A
Elevance quietly announces the acquisition of Medicaid care delivery startup CareBridge
CareBridge has had a remarkable growth trajectory in the Medicaid market from its founding in 2019 to its current annual revenue of $4 billion. CareBridge currently provides LTSS services for tens of thousands of patients across seventeen states and the District of Columbia (per its website).
The acquisition was announced live during the Elevance earnings call (more on that below), although terms were not disclosed. CareBridge will be a key pillar in providing home- and community-based care in Carelon’s services strategy.
✍️ Going Deeper
This Inc article on CareBridge does a nice job digging into the model and how it has driven such substantial growth. CareBridge got started by acquiring two small businesses, Healthstar and Sinq Technologies, which notably already had LTSS contracts with leading payors and allowed CareBridge to “upsell” its home- and community-based care model into those payors. As the Inc article notes, this patient population costs MCOs $40,000 - $50,000 annually, and CareBridge grew quickly by taking risk on that population.
It’s also worth going back and reading the 2020 press release announcing the launch of CareBridge, which highlighted the two acquisitions above. It also included quotes from Elevance and UnitedHealthcare leaders about the strategic importance of CareBridge’s offering in the LTSS market, which seems unique for a startup that was launching publicly at the time.
It seems to me that you can infer a good deal about the CareBridge playbook for growth between those two articles. As I read them, it seems the success here was driven by a differentiated understanding of the market, deep relationships with key customers, and access to capital to build a platform, all of which combined provide a meaningful advantage for a business like CareBridge. If you’re looking to build high-growth startups in health care, CareBridge provides a good case study of how that is done.
Despite financial terms not being announced, this appears to be a great exit for the CareBridge team and Brad Smith, who is seemingly amassing one of the best entrepreneurial track records in healthcare right now (Aspire, CareBridge, Main Street Health). It’ll be fascinating to watch CareBridge’s growth trajectory from here now that it is owned by one of its key customers, which happens to compete with its other key customers.
Q3 PAYOR EARNINGS
CVS, Elevance, and United shares drop on earnings reports of medical cost pressures
This was a tough week for the public payors, as UHG, Elevance, and CVS all shared challenging updates. I’ll run through each quickly below:
CVS (stock down 10% on the week)
CVS does not report earnings until November 6th, but it pre-released results on Friday, given the magnitude of challenges in front of it. The press release highlighted a few key points:
Current CEO Karen Lynch is being replaced by CVS Caremark leader David Joyner
Chairman of the Board Roger Farah will be Executive Chairman (if you’re curious about the distinction, this is a good HBR article on the role of an Executive Chairman). It seems like Farah will be playing a more active role in strategic decisions moving forward.
CVS pulled previous guidance because it now expects an MBR of 95.2% in the third quarter, higher than expected.
CVS shared with CNBC that it is no longer considering a breakup of the business
Given all the recent speculation about the go-forward path for CVS, this move makes sense, particularly in the context of Q3 results coming in worse than expected. It’ll make for a critical earnings call on November 6th in terms of understanding the path forward for CVS and how it intends to navigate the challenges the insurance business is facing.
Elevance (stock down 14% on the week)
Elevance missed on earnings in the third quarter, driven by increased costs in the Medicaid book of business. Elevance noted on the call that it is experiencing medical trend in the quarter that is 3.5x - 5x the historical medical trend it is used to seeing across states. It’s worth checking out the transcript as analysts attempted to understand how performance in the market could have deteriorated this quickly. As one analyst on the call noted: “I don't think anyone on this call has ever heard of trend being discussed in terms of multiples of typical”
The ripple effects from Elevance’s earnings were felt across other Medicaid payors, as both Centene and Molina shares fell 10+% on Thursday. Molina’s former CEO took to LinkedIn with a succinct explanation of the driving factor here - plans have been left with a sicker-than-expected population after redeterminations, and states will take a few years to catch up. In a market where health plan margins are 2% in normal times, it seems like a challenging period is ahead for Medicaid plans as states catch up to this sicker population.
UHG (stock down ~5% on the week)
UHG kicked off Q3 earnings season by noting the headwinds the organization is navigating across many parts of its business, including Medicare rate cuts, Medicaid redeterminations, and the lingering effect of Change. UHG confirmed 2024 guidance but set expectations lower for 2025, an unusual move for UHG that seems to underscore the headwinds facing insurers today. Instead of hitting the 13 - 16% long-term growth target that UHG expects, it shared with analysts that it anticipates that 8% is the high end of potential growth in 2025.
WALGREENS FY2024 EARNINGS
Walgreens stock jumps on Q4 performance, notes specialty pharmacy opportunity
Walgreens reported earnings this week for its 2024 Fiscal Year. Unlike the payors, the market responded positively to Walgreens financials — its stock was up ~16% for the week. The overall narrative from the earnings call is summarized well in the slide below — Walgreens has been rebuilding a new foundation in 2024 and will focus on stabilizing the core retail pharmacy business in 2025:
As part of its organizational shift, Walgreens shared its plans to close 1,200 unprofitable stores over the next three years and improve the profitability of the other 800 current unprofitable stores in its portfolio.
✍️ Going Deeper
As Walgreens continues its pivot towards focusing on its strength as a retail pharmacy partner for healthcare, it was interesting to see CEO Tim Wentworth say this about the under-appreciated opportunity in specialty pharmacy:
That's why we've recentered on the pharmacy as a core to our strategy. I would then say, inside of that, what's probably not as well appreciated is -- will be over time is our specialty pharmacy, which is really when you look at where the growth of patient need is, payer need is, being the largest independent specialty pharmacy and having the assets that we have and the team that we have is a tremendous starting point to envisioning doing more, whether that's for the pharma companies that actually originate the products, the biosimilar companies that make biosimilars or indeed the payers who want to have their patients have access to a highly reliable, clinically focused, trusted company.
Just after this, Wentworth noted that he views Shields and CareCentrix as complementary assets that will play a role in executing this strategy moving forward. While it seems those two acquisitions play a role in Walgreens’ future strategy, it is also quite clear from the earnings call that VillageMD is the “non-strategic asset” that Walgreens is referring to in the slide above that it is focused on monetizing.
It is equally as clear from the call that the VillageMD divestiture has not gone as planned. Recall that during the Q3 earnings call in June Walgreens shared in no uncertain terms that it planned to reduce its position in VillageMD to a minority stake. The update on this call was much less clear, noting that it’s been a longer process than expected while they try to find a transaction that preserves the value of the business:
Well, the key asset in the U.S. Healthcare business that we are looking to monetize, as you know, is VillageMD. And our goal is to monetize it, but to do it without destroying value unnecessarily. And so from that standpoint, it has been a longer process. I wish I could have wiggled my nose and just made it happen, believe me, because we've declared it's not a crucial part of our future.
We also believe it's a great business, and will do well on its own. But the process of getting there has been longer than we would have hoped, but we're going to be very methodical and very appropriate in trying to preserve value. There are physicians that are part of that, that are outstanding and ensuring that we have thought through their situation and that we become even more of an employer of choice, for example, means that we're going to be really thoughtful about how we do it.
… And so rushing that particular decision would have not achieved anything and would have potentially destroyed even more value. So we'll keep you posted as to what happens there. We're very engaged there. Mary Langowski and our team working with both the Village team and the other investors have been relentless, but it is very complicated and therefore, we're going to get it right.
I’m not entirely sure what to make of that quote — it reads to me as though a transaction is still in the works involving the VillageMD leadership team. But if that hasn’t happened yet, what is the hold up at this point, and when is it going to happen? I have to imagine that the decisions Walgreens is making at the moment to harvest cash flow from the business would hurt VillageMD’s long-term growth prospects, which certainly would seem like a value-destroying activity, which would only seem to make a transaction harder here. It all underscores the fraught position VillageMD appears to be in given it is owned by a parent company with no strategic interest in its future growth.
VIRTUAL CARE
A Deloitte survey on virtual care looks at the gap between availability and demand
Deliotte released a survey this week of 2,000 consumers’ experience with virtual care. It’s fascinating to me to see that the only type of visit that consumers preferred to do virtually versus in person is refilling a prescription. For the other ten visit types, consumers preferred in-person care, with only weight management and mental health being even close. Data from Deloitte’s survey also shows that 20% of health systems have deprioritized virtual offerings — either offering fewer or stopping virtual care altogether.
Other Top Headlines
Bloomberg reports that Humana and Cigna are again having informal merger discussions, after the last round of conversations stalled in December 2023 over valuation.
Clinical Care Medical Centers, a PE-backed primary care chain in Florida, has filed for bankruptcy and will sell the clinics to Humana’s Conviva business unit for $45 million. Clinical Care Medical Centers operates 26 primary care clinics that serve 35,000 patients. It also has $480 million in long-term debt after being acquired by PE firm Sun Capital Partners in 2020 - a striking reminder of how much times, and valuations, have changed over the past several years.
A new proposed DEA rule will likely extend telemedicine prescribing flexibility for at least one additional year.
A Senate staff report this week dove into how Medicare Advantage payors are using prior auths to deny patient access to post-acute care. STAT News provided a nice summary of the report here.
The Blue Cross Blue Shield Association agreed to pay $2.8 billion to settle antitrust claims from providers.
This is a great read in The Guardian on how Parkview Health, a health system in Northeast Indiana, has built a dominant market presence in the area. The result is predictable — a health system that is one of the most expensive in the country, and patients facing absurd medical bills.
An article in Oregon Live highlighted the changes in Medicare Advantage plan offerings in Oregon in 2025, with a number of plans dropping coverage across the state. It’s a good example of the change afoot in the market for consumers as insurers adjust to the changing financial realities of MA.
Modern Healthcare shared an interesting interview with Intermountain’s CEO, Rob Allen. It was notable to me to see the bearish perspective on VBC, the views on Intermountain’s relationship with Kaiser, and Kaiser’s efforts to expand its model with Risant.
STAT News highlighted how dozens of small telehealth brands prescribe compounded GLP-1s via a handful of medical networks operating behind the scenes.
Funding Announcements
Oshi, a virtual gastrointestinal provider, raised $60 million. Oshi is now available as an in-network provider in all fifty states to over 4 million patients. Oshi will use the capital to build out a network of in-person provider partnerships, grow payer and employer relationships, and expand into Medicare in 2025.
Alchemy, which provides the infrastructure for HIV clinics to operate in-house pharmacies, raised $31 million. a16z shared its investment thesis here. It’s an interesting thesis centered around how safety net providers have lacked the infrastructure to operate specialty pharmacies, and how Alchemy intends to help support those providers. Alchemy has launched at least one pharmacy to date, with a helpful case study on the results seen to-date.
Healthie, a practice management platform and EHR, raised $23 million.
Ash Wellness, an at-home testing platform, raised $10 million.
Legion Health, an AI-enabled psychiatry practice, raised $6.3 million. It’s currently in-network for 99% of individuals in Texas with commercial or ACA insurance and plans to expand to other government programs (Medicare, Medicaid).
Pip Care, a surgical care optimization platform, raised $5 million.
Parakeet Health, a call center automation platform for providers, raised $3 million.
MDisrupt, an expert-matching platform, raised $1 million from AHA Ventures.
Reads from the Community
Why is primary care more important in Q4? by Alexandre Colavin and Paulius Mui
A nice article exploring gap closure dynamics in Q4 and how that creates some odd incentives / complexity for primary care practices. The real world examples of payer behavior are helpful anecdotes if you’re looking to get a flavor for the shenanigans that can occur here. Read more.
State of CareOps 2024 by CareOps
The CareOps crew published their annual state of CareOps survey, highlighting how healthcare operators are building care delivery workflows. Read more.
HTN Member Reflection: Women's Health PAC in San Francisco by Deepa Sheth
Deepa reflects on her experience attending the event and details the role and goals of the Women’s Health PAC. Read more.
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