Link to S-1: Click Here
Business Model Overview:
agilon health is a Medicare Advantage startup operating in the primary care space. Founded in 2016, agilon partners with primary care physician groups and assists PCPs in taking full-risk via globally capitated contracts. More specifically, agilon will form a risk-bearing entity (RBE) within each local geography, and subsequently enter into PMPM global capitation arrangements with payors to manage all healthcare expenses related to their physician partners’ patients. The physician partners are paid fee-for-service, but share in any savings (agilon also provides 100% downside protection, allowing PCPs to feel less uneasy about a potential transition to a full-risk model). agilon’s platform supports this transition in a few key ways:
Technology: data integration and management across payor systems, EMR sytems, labs, pharmacies, etc.
Payor Engagement: connecting payors, patients, and physicians around a single platform allows for quicker and more efficient patient experience, clinical program management, and financial management
Performance Management Analytics
Clinical Programs & Product Development
Finance, Legal & Administrative Functions
Market Entry Strategy:
Whenever agilon enters a new market, they partner with an “anchor physician group” and enter a long-term (~20 years) contract that includes joint governance, operations, and leadership (see picture below for further detail). These anchor physician groups have considerable market share in their respective regions, have been serving their community for over at least two decades, and receive exceptional net promoter scores from patients (~83), ultimately allowing agilon to benefit from…
Scale: agilon’s regional hubs allows them to easily expand into incremental geographies. Also implies that agilon’s partner physician groups compose a material portion of payors’ membership base, allowing the Company to form collaborative relationships with payors. Lastly, large physician partners allows agilon to have less concern over YoY revenue growth (i.e. sheer amount of lives allows for more predictability and less variance on expected FFS-to-MA conversion, patients aging into Medicare, etc.)
Not suprisingly, intial investments to enter a new market are quite costly, averaging around $4.2mm (implementation year costs plus initial losses, if applicable). Fortunately, the business model’s high operating leverage allows subsequent growth to be relatively inexpensive.
Is agilon a good business?
The most important (and obvious) question to start off with is, “Can agilon’s partner physicians actually run full-risk models efficiently?”. Though there is variance based off geography (which the S-1 unfortunately does not provide much color on), the answer by in large seems to be yes. In 2019, medical margin was ~16%, ER utilization rate was 42% lower than the local FFS benchmark, and hospital re-admission rate was 26% lower than the local FFS benchmark. For reference, Oak Street’s rates for the latter two statistics is 51% and 42%, respectively.
The next cause of concern is profitability - agilon has yet to turn positive income from operations since its inception in 2016. To be fair, this shouldn’t be surprising given agilon’s business model, which requires considerable upfront costs and operating leverage. A more helpful metric is a by-geography market analysis, which the S-1 partially provides (see below). At first glance, it seems that agilon is able to steadily grow both membership and PMPM medical margin.
However, there are a few things to caveat. First is sample size; the graphic only shows three geographies, and it’s likely that agilon handpicked their three most successful geographies to display. It by no means is illustrative of all geographies. Further, PMPM margins are considerably different by geography, illustrating the fact that each incremental region agilon expands into is vastly different and hence brings its own set of logistical, legal and operational difficulties. This brings us to a related point, and that is, there is significant risk in entering new markets. Just one failed market entry has the potential to be a cash flow drain that equals years of cash flow generation in agilon’s most successful markets. As a matter of fact, agilon’s California business alone (which they exited in 2020) lost them over $168mm. As an investor, I would feel a bit uneasy about agilon’s perhaps overly hasty rate of expansion (three new geographies in 2021 and six in 2022) given these previous losses.
Unfortunately, agilon’s business model inherently makes market expansion far riskier than for companies actually providing the primary care (such as Oak Street or Iora). More specifically, for companies such as Oak Street, their clinic-model allows them to test out a new market with far less capital (i.e. you can build just one clinic and depending on performance, can decide whether to continue or halt expansion into a new geography). On the other hand, because agilon relies on an “anchor physician partner” model, expansion often requires entering into an entirely new region. This not only requires greater upfront capital and risk, but remember, agilon is also signing 20-year contracts with their anchor physician group, making it much more difficult to backtrack. Put simply, market expansion logistically is far stickier and riskier than for actual primary care providers.
This is the double-edged sword that comes with being a services company in the primary care space; membership growth and geographic expansion can occur rapidly, and to give credit to agilon, their growth has been impressive (130k lives and 11 geographies in ~5 years). However, it does make you wonder, what exactly is their value-add over the long-run? Primary care physician groups, particularly larger established groups, will likely be able to learn how to navigate the operational aspects of running a full-risk model on their own. agilon likely understands this as well, leaving the Company no choice but to enter long-term contracts with their anchor physician groups (hence larger upfront costs and risk to enter new geographies) and rapidly scale in order to reach profitability.
agilon’s ability to continously expand into new geographies is also likely to become more difficult over time; remember, agilon only partners with already exceptional and established primary physician groups. Will agilon continue to be able to discover such groups? Will the quality of agilon’s anchor groups slowly decline? If so, can agilon’s business model yield sufficient savings with not-as-stellar partners? However, on the flip side, one could argue that as agilon continues to grow its platform, their scale will allow them to more easily and effectively enter into new physician partnerships.
Conclusion:
Despite the aforementioned concerns, we are currently still in the very early stages of primary care providers engaging in full-risk models. The rising tide presents agilon a large untapped market opportunity, one that will likely continue to grow over the next few years. Further, though I did question the long-term value that agilon provides, it would be foolish to ignore the fact that the Company’s services, as of now, are very much needed by PCPs, who are still very unfamiliar with capitation models. Also, the 20+ year contract lengths make this a question that doesn’t need to be seriously considered for another decade or so.
More importantly, the business itself is making rapid improvements. Medical margins increased by nearly 8% YoY and existing markets are finally at break-even profitability. As the agilon platform continues to mature and scale into new markets, it is likely that agilon will reap greater rewards from their high operating leverage; for instance, despite the Company’s 54% YoY increase in revenue, SG&A expenses only increased by ~$15mm this past year.
Finally, it seems that management has finally discovered, and is comfortable with, the identity of the company (i.e. MA only), after completely exiting their Medicaid line of business this past year. This will likely prevent any major mishaps like the California business failure, and as long as management is able to cautiously enter new markets, agilon seems to be on a strong growth and profitability trajectory.