Weekly Health Tech Reads | 9/22/24

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EMPLOYER SALES

Progyny’s stock plummets 30% after losing Amazon as client to Maven

Progyny issued an 8-K announcing that a 670,000 life employer terminated its contract with Progyny for 2025, driving its stock price down 30%+ on the news. Bob Herman at STAT reported that Amazon is the client in question and that Amazon is switching to Maven for fertility benefits in 2025. Amazon and Maven announced an initial partnership just over a year ago, offering fertility and family-building support.

Read the 8-K
Read the STAT report

✍️ Going Deeper

Progyny noted in the filing that Amazon did not have any issues with Progyny’s service. A year ago, Amazon was publicly celebrating over 30,000 employees who had used Progyny’s service. Assuming that is indeed the case, it seems likely that this was a move to consolidate vendors and drive some financial savings in the process on Amazon’s part.

It appears that Amazon paid Progyny roughly $142 million for fertility benefits in 2023 — Progyny reported that this customer represented 13% of Progyny’s ~$1.1 billion of revenue in 2023. Amazon also appears to know how to leverage its size to negotiate favorable terms, as Progyny noted in the filing that despite being 13% of revenue, it represented a lower portion of EBITDA for the business.

Even if Amazon’s business was slightly lower margin than the rest of Progyny’s customers, it’s eye-opening to see the growth in spending from 2019 to 2023 by Amazon. Based on Progyny’s SEC filings, Amazon went from spending ~$34 million with Progyny in 2019 to ~$142 million in 2023:

Amazon’s spending increased by over $100 million in this five-year period. For comparison, Progyny’s next largest client, Microsoft, spent ~$15 million in 2018, growing to ~$75 million in 2021 and ~$79 million in 2022. Progyny no longer reported Microsoft’s revenue in 2023 because Microsoft no longer represented 10% of revenue for Progyny.

I’d imagine that Maven is ecstatic about winning this business, even if you assume that Amazon got even better financial terms as it changed vendors. It’s a huge top-line revenue win for Maven. That said, Amazon has shown itself to be a fickle customer, and it appears that it will now be Maven’s business risk to manage moving forward so that it doesn’t experience the same outcome Progyny has here.

If anything, this news underscores how hard it is for companies to rely so heavily on these employer contracts. On the one hand, a contract like Amazon’s helps with the growth narrative for a business in the public market. On the other hand, it doesn’t seem sustainable to have such a big portion of your business tied up in a contract that can be termed on 90-day notice, particularly as a public company. It reminds me a bit of when Accolade lost Comcast as a customer at the end of 2022 because Comcast wanted to negotiate better rates. Accolade’s stock price fell 50% at the time, highlighting how negatively the market reacts to these key customer losses.

MEDICARE ADVANTAGE

Oak Street Health pays $60 million to settle kickback allegations

The settlement is related to Oak Street’s Client Awareness Program, a referral program that Oak Street introduced that paid brokers $200 for warm leads. The program, which ran from September 2020 to January 2022, was apparently pretty effective, with Oak Street making 20,000+ payments to agents through the program for a total of $4 million in payments to brokers. The DOJ found that these payments violated the Anti-Kickback Statute because they were inducements for brokers to refer people to Oak Street.

This is not the first issue that Oak Street has had with the DOJ about potential violations of the False Claims Act. Back in November 2021, it received a civil investigative demand from the DOJ looking into whether providing free transportation to potential members violated the False Claims Act.

This program appears to have been a key part of Oak Street’s growth efforts back around 2021. Between December 2019 and 2022, Oak Street grew by ~111,000 at-risk patients (from 48,000 on 12/31/19 to 159,-00 on 12/31/22). Given Oak Street made 20,000 payments via this program between September 2020 and January 2022, that math would seem to imply that ~20% of Oak Street’s new at-risk members were referred to Oak Street via this program (20,000 / 111,000 = 18%). It goes to show how effective financial incentives can be for brokers.

Read the settlement agreement

URGENT CARE

Carbon Health sells urgent care clinics it acquired in 2021 to Community Health Systems

Community Health Systems announced that it is acquiring ten urgent care clinics from Carbon Health in Tuscon, Arizona for an undisclosed amount. Based on Carbon’s website, it appears it will operate 105 locations after this transaction. This Healthcare Dive article does a nice job articulating the CHS strategy here as it has been divesting hospital assets and acquiring outpatient assets, noting it is interested in making acquisitions on favorable terms. Over the last five years, CHS has invested over $200 million in building outpatient capabilities in the Tucson area.

Carbon entered the Tucson market just over three years ago, acquiring nine urgent care clinics from Southern Arizona Urgent Care in a deal announced in August 2021.

Read the press release

✍️ Going Deeper

In June 2022, I wrote a deep dive on Carbon’s model as it was charting an ambitious course not just as an urgent care chain, but as “the greatest modern health care company in the world.”

At the time, Carbon was on a PE-esqe roll-up of urgent care clinics across the country. The plan appeared to be to bolt a primary care model on top of the urgent care chassis in those clinics. Here are the acquisitions it had completed at the time based on my research, including Sothern Arizona Urgent Care in Tucson:

In 2021, Carbon raised $350 million with a vision of operating 1,500 clinics across the country by 2025. It seems clear that these tuck-in acquisitions were a key part of that strategy. With the benefit of hindsight, it’s pretty clear the strategy didn’t work as expected here. Looking at the Tucson market as an example, it seems that Carbon purchased a chain of nine urgent care clinics, opened a new one, and is now selling those urgent care clinics to a health system a few years later. The narrative around disrupting healthcare clearly didn’t materialize there. I think it's interesting to ponder how real the opportunity was here in the first place or whether this was a ZIRP-fueled opportunity to deploy capital destined to end up at this outcome.

With this transaction, it appears that Carbon has decided to jettison a non-core asset, presumably to bring in cash and apply more focus to the core business. There’s an interesting question within that about what the core business is moving forward for Carbon — is it Carby, the EHR that Carbon appears to be selling to other providers? Or the primary care model it’s building in Massachusetts and the Bay Area? I’d imagine it’s some combination of both of those models, with the urgent care clinics in other markets no longer core to the narrative moving forward.

MEDICAID DATA

KFF data highlights changing Medicaid enrollment from pre-pandemic

While 25 million people were disenrolled from Medicaid unwinding, KFF’s analysis shows that Medicaid coverage is up by more than 10 million nationally since the beginning of the pandemic. Seven states have seen enrollment increases of over 30% during that period.

Enrollment for children has returned closer to pre-pandemic levels, with twelve states seeing declines in enrollment for children since 2020, as highlighted by the chart below.

Read the KFF data

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