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Analysis

One Medical Lays Out Potential Risks Ahead of IPO

By Jack O'Brien  
   January 07, 2020

The primary care startup filed for an initial public offering shortly after the New Year.

One Medical, a primary care clinic startup based in San Francisco, kicked off 2020 by filing for an initial public offering (IPO) and detailing its forward-looking opportunities and risks.

The company is a direct primary care provider that currently services around 400,000 members across nine markets, with plans to expand to three additional markets this year, according to its filing.

The company also reported $212.6 million in net revenue at the end of 2019, though losses from operations totaled $45 million. In October, CNBC reported that One Medical was valued at $1.5 billion during its latest financing round last year.  

One Medical is backed by major investors, including the Carlyle Group and Alphabet. Google, which is a subsidiary to Alphabet, is an enterprise client that accounted for 10% of One Medical's total revenue in 2018.

The company is the latest Silicon Valley–based company planning to go public with a specific aim to make a play in the healthcare industry. Last year, Uber, Lyft, and Slack all debuted on Wall Street with plans to disrupt healthcare.

Related: One Medical, a Unicorn Health-Clinic Startup Backed by Alphabet, Files for IPO

Related: One Medical's IPO Reveals Growing Reliance on Hospitals

In S-1 filings, companies must provide a comprehensive overview of business operations, including any potential risk factors to the enterprise as it prepares to be publicly traded.

One of the most immediate risks facing One Medical is the need to recruit and retain quality primary care providers.

While One Medical expects to have expanded opportunities as a public entity with a growth strategy, the company predicts increased competition for a key component of its business model.

The company stated that it expects insurers and private equity firms to acquire providers or employ physicians in markets where One Medical operates.

The emphasis by One Medical on acquiring quality care providers is likely to draw the attention of hospital and health system executives as both directly compete for the same talent pool.

The company acknowledged the need to effectively recruit and retain physicians but also noted that maintaining these relationships might be negatively impacted by outside factors. These include changes to federal reimbursement rates among other "pressures on healthcare providers."

Related: How Tech-Infused Primary Care Centers Turned One Medical into a $2 Billion Business

Below are some additional risks laid out in One Medical's S-1 as the company moves forward with its plan to go public.

Revenue at risk if volume of members with private health coverage, specifically employer-sponsored plans, declines

As fewer employers opt to self-insure and proposed healthcare reforms aim to drastically change or outright eliminate employer-sponsored health coverage, One Medical faces financial challenges.

"The resulting loss in members may also decrease the fees we receive under our contracts with health network partners as fewer members engage in their healthcare networks," the company said. "Were this to occur, there is no guarantee that we would be able to compensate for the loss in revenue derived from enterprise clients and health network partners by increasing retail member acquisition."

Growth opportunities "substantially dependent" on strategic partnerships with third-party partners

The company noted that it is crucial to meet third-party partner expectations since One Medical continues to "substantially depend" on its external clients.

The business model relies on satisfying partner expectations, the company said, and avoiding situations that might result in contracts being amended or terminated.

During the first nine months of 2019, almost 30% of One Medical's net revenue came from partnership revenue. Most of those proceeds were the result of contracts with health network partners, the company said, including HMOs.

Related: 3 Takeaways from the HealthLeaders Innovation Exchange

"If we are unable to successfully continue our strategic relationships with our health network partners, on terms favorable to us or at all, or if we do not successfully contract with health network partners in new jurisdictions, our business and results of operations could be harmed," the company said.

Beyond the material impact partners have on the bottom line, One Medical stated in its S-1 filing that third-party vendors host and maintain the company's technology platform.

Must abide by HIPAA regulations and use patient health information (PHI) carefully

Much like other Silicon Valley companies going public with healthcare ambitions, abiding by regulations to protect PHI is key for One Medical's success.

The company noted that compliance with state and federal health privacy laws, most notably HIPAA, could cause One Medical to incur "substantial costs."

Failing to abide by HIPAA regulations or suffering from a data breach would negatively impact the organization's bottom line, the S-1 read. However, One Medical also anticipates additional PHI laws enacted at the state and municipal level going forward, specifically referencing the California Consumer Privacy Act of 2018.

"The potential effects of this legislation are far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply."

Editor's note: This story was updated on January 9.

Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.


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