One Medical and Iora serve radically different populations. Here’s why the $2.1B tie-up might make sense.

Digital health market watchers were surprised when concierge medical network One Medical announced plans to acquire value-based chain Iora Health for $2.1 billion on Monday, with some airing concerns the deal represents a marriage of two diametrically opposed operational models.

One Medical is a fee-for-service machine, with the majority of its business coming from charging commercially insured members per-visit fees. The San Francisco-based primary care group’s clientele is mostly comprised of the so-called wealthy well, which it captures through direct-to-consumer arrangements along with contracts with employers like Google.

In contrast, Iora’s business goes after Medicare patients, steering them into full-risk arrangements and capturing revenue by eking out savings with contracting arrangements like Medicare Advantage and the Medicare direct contracting program.

That apparent clash in business models, along with projected revenue synergies some analysts called overly optimistic, contributed to some investor pushback on the acquisition, analysts say. Shares in One Medical, which was founded in 2007 and went public early last year, have fallen more than 3% since the deal’s announcement, while the S&P 500 stayed flat.

But snapping up a value-based network may be a logical step, according to some analysts. One Medical isn’t trying to bring its model to seniors — in fact, it plans to keep the Iora brand entirely separate in the near-term. Instead, with the Iora acquisition, the provider chain is expanding its focus beyond capitated fee-for-service and into Medicare’s risk-based programs, which can be extremely lucrative.

And One Medical and Iora have complementary member-based models, combining digital population health and virtual care services with salaried providers, though each have evolved to serve different populations.

“It’s the same sort of concept, just a very different user base,” SVB Leerink analyst Stephanie Davis said. “One Medical had to go risk-on at some point.”​

It’s unlikely the Iora addition will make a meaningful difference to, or attract more of, One Medical’s core commercial demographic in the near-term, experts said, though the two will likely try to cross-sell One Medical to Iora members’ families, and vice versa. Instead, One Medical is banking on capturing their members’ care as they age, from pediatrics to privately insured adults to Medicare seniors.

“There’s tremendous opportunity for us to grow,” One Medical CEO Amir Dan Rubin told investors on Monday — especially in Medicare.

The Medicare population, which consumes the lion’s share of healthcare services, is forecast to grow from roughly 62 million Americans last year to more than 70 million by 2025, per CMS data. One Medical and Iora’s footprints combined can access more of that tempting demographic: Together, the companies have a combined footprint in 28 markets covering 120 million people, or roughly 40% of the entire U.S. population.

“As the Medicare-aged generation continues to grow, this is a hot market segment for so many healthcare organizations, “Arielle Trzcinski, a principal analyst at Forrester, said. “This makes the Iora acquisition a great fit for One Medical’s market expansion.”

And Medicare direct contracting, a program which lets providers take on risk in original, fee-for-service Medicare that kicked off in April, could prove especially profitable for One Medical and Iora once the acquisition closes, expected this year. Boston-based Iora is one of roughly 50 providers selected for the program, and is one of about 10 with a nationwide reach.

In a slide deck on the deal, the companies highlighted that together, they have an $870 billion total addressable market in the U.S.

More than half of that, or $450 billion, is from Iora’s total addressable market in the direct contracting program alone.​

That’s because Iora can capture significantly higher premium revenues from risk-based patients. Iora’s co-founder and CEO Rushika Fernandopulle, who will stay on as chief innovation officer of the combined company if the deal goes through, said Iora receives about $40 per Medicare fee-for-service member per month.

In full-risk, Iora receives $1,000 per member per month.

“That’s transformative,” Fernandopulle told investors on the call. “We are rapidly putting our patients in direct contracting and signing them up.”

And One Medical, which has recorded mounting losses, was able to nab Iora at a “reasonable” price of seven times estimated 2021 revenue, given the red-hot Medicare market, Davis said. That’s compared to One Medical’s current trading multiple of almost nine times, while the most direct comparison to Iora, Medicare-focused network Oak Street Health, has a forward revenue multiple of almost 10 times.

Some have questioned why Iora didn’t try to go public, potentially through a merger with a special purpose acquisition company, as so many of its digital health peers have done in recent months.​ The startup likely could have made more money, given the ongoing Wall Street fervor over health tech.

“Selling for $2bn in very volatile stock doesn’t count as the greatest exit of all time,” Matthew Holt, a health tech expert who advises startups, commented on Twitter.

However, the acquisition allows Iora to lock in its gains at a time when market valuations are very healthy, while gaining the benefits of scale and operational experience by joining with One Medical, Davis said. The analyst did note she’d be surprised if Iora hadn’t seriously considered a SPAC deal.

Iora did not respond to a request for comment by time of publication.

As for One Medical, it’s unlikely it will pursue more M&A in the short-term, as it’s not a health tech player that prefers to grow inorganically — its last acquisition was in 2016. Still, analysts say there’s an eventual opportunity in the broader market for primary care chains to expand into the relatively untapped Medicaid population.

But the company already faces stiff competition in existing markets as healthcare organizations race to expand their tech-leveraged medical offerings. Along with virtual care competition from telehealth giants like Teladoc and Amwell, retail behemoths like CVS Health, Walgreens and Walmart are all in the process of expanding their networks of brick-and-mortar clinics.

And One Medical is also facing off against more direct membership-based networks like Oak Street Health, VillageMD and UnitedHealth Group’s Optum — many of which are similarly betting on value-based arrangements.

But its executives argue Iora provides unique growth opportunities, both geographically and within the senior population. One Medical estimates that integrating Iora, and all the benefits of risk along with it, will lead it to break even on adjusted earnings by the end of 2024 — and provide a pathway to eventual profitability, if the primary care network can convince members to stay from childhood to adulthood and through the golden years.