Healthcare is Irrational

One Medical acquired Iora Health.

A company defined by direct pay memberships acquired a company defined by risk-based insurance plans. At first blush it makes no sense, until you understand the environment in which the acquisition was made.

A few months ago the Centers for Medicare and Medicaid Services (CMS) established Medicare Direct Contracting and issued specific risk contracts to a select number of entities. Iora Health was one of them. One Medical was not.

Additionally, CMS determined that only those companies initially selected would be re-eligible for the program the following year – which means no new entrants.

The market closed just as quickly as it opened – with one quick whisk of CMS’s regulatory wand.

The details of the program are much like other risk-based payment models, continuing the government’s push to tie financial remuneration of clinical services with the outcome of those services. Vague on details and heavy on platitudes, stating on the website:

“The risk-sharing options are anticipated to appeal to a broad range of physician practices and other organizations because they are expected to reduce burden, support a focus on beneficiaries with complex, chronic conditions, and encourage participation from organizations that have not typically participated in Medicare FFS or CMS Innovation Center models.”

But more than any tangible goal or metric of measurement, the exclusivity of the program is the value driver. And explains why a company notorious for direct payments would suddenly shift into the risk contracting market.

Scarcity always breeds demand, and the exclusivity of the entities selected into the Medicare Direct Contracting suddenly made every entity selected much more valuable.

Whether One Medical would have purchased Iora Health absent any exclusivity provision in the contracting will never be known. One Medical has not admitted this outright.

But the explanation for the acquisition will come in how One Medical integrates – or does not integrate – Iora Health into their existing business line.

One Medical provides premium, exclusive care for upper class populations. Iora Health focuses on high-risk patient populations, which tend to be the diametric opposite of One Medical’s population.

The two companies have different populations and different models of patient care.

One Medical has clinics in premium, urbane locations across elite metropolitans, charging a premium to its customers, netting a significant profit in the process.

Iora Health targets elderly patients with multiple chronic conditions and co-morbidities affecting their quality of life, investing time into indigent patients, sacrificing profit in the name of care coordination.

They cannot be more different.

But the shifting regulatory world, and the exclusivity offered, changed the value of Iora Health to the point that, despite not being profitable, it was acquired under a multi-billion dollar valuation.

Implying that value in healthcare comes not from the services provided, not from the unit economics, but from the regulatory policies coming from high above.

Which can change in unpredictable ways, leading two healthcare service providers, with two different populations, to merge into one entity.

Which seems quiet irrational.

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