The Funnel Wars are here — how can you prepare?
Sometimes the truth is hard to hear.
For years, we have been talking about new competitors entering the healthcare space, focusing particularly on the top of the funnel. In Chris Bevolo’s recent book, Joe Public 2030, one of our five predictions is The Funnel Wars. That’s how important we think this trend is and the impact it will have on the future of American healthcare.
Recently, the Funnel Wars finally got some national attention with Amazon’s acquisition of One Medical. One of my favorite gurus, Scott Galloway, jumped the gun on his fancy profile in the New York Times with a No Mercy/No Malice newsletter called “Prime Health.” There are some interesting observations and predictions from his newsletter that must be shared and examined here.
Before we do that, it’s worth taking a moment to appreciate how far the Funnel Wars have progressed before Amazon made this $3.9 billion deal for One Medical. United Healthcare’s Optum unit has quietly assembled the largest contingent of employed physicians in the nation – more than 60,000. Their OptumCare unit has become a strong competitor to health systems and physician groups in key markets – the top 75 MSAs – and Optum will contribute a significant amount of United’s earnings by year-end. Granted, this is inflated by the quasi-extortion of drug rebates captured by Optum Rx, but still.
Here are a few examples (courtesy of Josh Raskin’s Nephron Associates):
- On June 1st, 2022, it was reported that UnitedHealth had reached an agreement to acquire Healthcare Associates of Texas (HCAT) from Webster Equity Partners. According to news articles, the acquisition was completed at an enterprise value of $300 million, implying a high- teens EBITDA multiple. For background, HCAT operates 15 primary care clinics across the Dallas-Fort Worth region. These clinics are complemented by a suite of ancillary services including pharmacy, diagnostics/imaging (collocated with 2 PCP clinics), physical medicine (collocated with 3 PCP clinics), and a wellness center.
- In 2Q22, it was announced that UnitedHealth acquired Kelsey-Seybold Clinic. For background, Kelsey-Seybold is a large risk-bearing medical group with more than 500 physicians across 30+ locations in the Houston, TX area. The organization offers coordinated, value-based patient care through partnerships with payers, and also operates its own MA plan (KelseyCare Advantage) with enrollment of approximately 42.0K as of June 2022. That said, it is not exactly clear what assets were included in the transaction. According to media reports, TPG Capital invested a minority stake in Kelsey-Seybold in January 2020 at a valuation of roughly $1.3 billion.
- During 2Q22, UnitedHealth received regulatory approval for its $236 million acquisition of Atrius Health. The transaction, which was initially announced in March 2021, was closed on May 31st, 2022. For some perspective, Atrius is the largest independent physician network in Massachusetts, with more than 30 medical practices and 645 physicians/primary care providers.
Literally these are just deals announced in the last couple weeks. And here’s a fun fact that puts the media hysteria about consolidation into perspective.
“UnitedHealth spent $5.9 billion on M&A this quarter, representing a significant increase over the prior sequential quarter. According to the statement of cash flows, UnitedHealth used $5.9 billion of cash in the second quarter for acquisitions, which is above the $3.45 billion spent in 2Q21, and significantly higher than the $1.23 billion spent in 1Q22. With that, UnitedHealth has spent at least $200mm in cash on acquisitions in all but six of the last 25 quarters. Obviously, those are GAAP reported totals so there are likely some true-ups/downs that impact quarters, but it is clear that UnitedHealth is typically fairly acquisitive every quarter. Over the past five years, UnitedHealth has spent a total of ~$34.9 billion on M&A.” (source: Nephron Associates).
$35 billion in five years on acquisitions by one Funnel War competitor alone. Holy cow.
Now let’s return our attention to Scott Galloway’s newsletter and some of his insights and recommendations. First, Scott (rightly) points out the terrible retail experience the healthcare system delivers in many traditional settings.
“Healthcare offers the second-worst retail experience in the country (gas stations retain the number one spot). Imagine walking into a Best Buy to purchase a TV and a Blue Shirt associate requests you fill out the same 14 pages of paperwork you filled out yesterday, then you wait in a crowded room until they call you, 20 minutes after the scheduled appointment you were asked to arrive early for, to be seen by the one person in the store who can talk to you about TVs, who only has 10 minutes for you. New York is the wealthiest city in America, yet the average waiting time in an emergency room is 6 hours and 10 minutes.”
We all talk about patient experience, and digital experience, yet this must become an increasingly urgent priority for hospitals and their owned clinics and physician practices. We must get better as the Funnel Wars highlight bigger and better capitalized competitors who have mastered the consumer experience.
Second, Scott points out what Amazon’s acquisition of One Medical could mean as the company’s healthcare strategy come into better focus.
“Amazon built an in-house service for its employees: Amazon care. Virtual health services plus nurses…delivered to your home. It’s doing much better expanding across the country, and now provides healthcare for other companies. Hilton is Amazon care’s largest disclosed customer. The acquisition of One Medical will couple capital, domain expertise, and installed tech with billing infrastructure, and bring it to the 66 million Prime households. Imagine: ‘Alexa, I feel feverish and my lower back is aching.’ Then ‘Connecting you to an Amazon Prime medical professional now.’”
It’s also important to keep in mind that this forecast will impact physician practices, telehealth providers (including those telehealth offerings sponsored by health systems), and pharmacies. But what about the referrals those physicians make? What about the higher acuity care some patients will need? Amazon Care might not steer away from hospitals, but can we say the same about Optum care with confidence?
The Funnel Wars are just starting. Amazon and One Medical are potentially a border skirmish in a much larger war. Why? Scott predicted Amazon would get into healthcare several years ago.
“For the same reason Apple is getting into auto: not because it wants to, but because it has to. Amazon stock’s price-to-earnings ratio is 56 – more than double Walmart’s. For the company to maintain its share price, it needs to add a quarter of a trillion dollars in topline revenue over the next five years. It won’t find this kind of revenue in white-label fashion or smart home sales, it has to enter a gargantuan market that lacks scale, operational expertise, and facility with data.”
In fact, look at the biggest buckets of healthcare spending and that is a good prediction of where the big players will make acquisitions and investments. – physician care, hospital care, outpatient surgery. The winners in the Funnel Wars may very well determine the winners (and losers) in the hospital sector – from small rural hospitals to the largest for-profit and non-profit hospital groups.
Finally, Scott shares some interesting examples and potential predictions.
“Mark Cuban launched a pharmacy in January that eliminates middlemen – from the insurer to the PBM. The result? A 90-day supply of acid reflux treatment that costs $160 is now $17. It’s estimated Medicare would save $3.6 billion in one year if it had purchased generic drugs through Cuban’s pharmacy. As other apex predators look for new sources of growth, many will turn their gaze on different limbs of the carcass. Nike could enter healthcare through a wellness positioning: orthopedics, acupuncture, and chiropractic. LVMH, L’Oreal, and Estee lauder could build the first global plastic surgery brands. The Four Seasons and Hilton might open hospitals. Lennar and Pulte could build “active living” communities that nana will leave feet first, bypassing the expense and tragedy of dying under bright lights surrounded by strangers.”
Seem like wild ideas? So was the idea of Amazon buying One Medical and its 736,000 just a few years ago.
What do we make of the Funnel Wars? The healthcare industry’s response has been, largely, vertical integration and consolidation. Health plans by physician groups, ASCs, and UCCs. Hospital groups buy ASCs and start their own health plans. This intra-industry competition may be helpful in certain markets, but Scott thinks it’s not enough. He says, “We are overweight, depressed, and increasingly broke at the hands of U.S healthcare. The treatment that offers the best outcomes is the same therapeutic that resulted in massive value and prosperity across most of our economy: competition.”
If you’re not sure how to prepare for the Funnel Wars, here are a few first steps to get you started. This is not a comprehensive list, but a plea for action:
- Rethink every aspect of your customer experience from the ground up. Start with your physician practices and re-engineer the real and digital front doors to match the best experiences in retail, and then move through the experience from there. Marketing brings incredible insight to this process around what people want and how we can improve their experiences. Use this to attract patients, retain them, and build loyalty.
- Use analytics to demonstrate the quantitative need for physician clinics, urgent care centers, and other care sites in underserved and growing areas of your community. Establish marketing’s role in sit selection and the future of access in the area. Then, approach these new sites with the same rigor and care developed in #1 above.
- Refocus your marketing messages on what competitors are using to steal market share, and what consumers increasingly care about. Focus on a great customer experience, ease of access and appointment setting, streamlined billing and payment processes, and the other paint points that are causing consumers to seek care with new competitors and alterative providers.
- Help people navigate their insurance choices and use of their insurance, since we are often blamed for the misdeeds and terrible policies foisted on us by the insurance industry. Take an active role in helping consumers the right insurance. Take an even-more-active role in helping people understand their financial responsibility, how payor policies may effect them, and how to navigate the maze of insurance rules and regulations. This may help us keep some patients who could get scared off and seek care at one of our Funnel War competitors.
The Funnel Wars didn’t just start, but it’s not too late. We care about people and their health, now we just need to protect their right to go where they want and see who they want for their care.