End of Year Healthcare IPO Bubble

Every end is the beginning of something new.

As we approach the last quarter (Q4) of 2021, we begin to see more healthcare startups and pending unicorns raise funds at ever higher valuations.

Devoted Health, an insurer that offers personal guidance and healthcare services to patients, is reportedly raising around $1.2 billion at an $11.5 billion valuation. The company has around 40,000 members, which equates to a valuation of $287,000 per member.

To put that into context, last year, Clover Health, another hybrid provider-insurer, became a unicorn at a valuation of $65,000 per member. Brand New Day, another competitor in the space, was acquired last year at $14,600 per member when it had 43,000 members.

Besides the intriguing names of these successful healthcare startups is an equally intriguing rise in valuations. Normally, the success of one startup paves a path for competitor startups and leads to a rise in valuations for all companies within the market. But the rise is not this dramatic.

And whenever we see dramatic rises in valuations, we often think of market bubbles, the inevitable market downturn that takes company valuations with it. Already we see signs of previously highly-valued healthcare startups struggling in the public market.

Oscar Health, a hybrid provider-insurer, lost 45% of its value since going public. The aforementioned Clover Health lost 25% of its value on the public market. Yet the market continues to support higher valuations of healthcare startups.

Inflated valuations that defy market logic and accelerating valuations for pre-IPO startups all point to an inevitable bursting of the healthcare market bubble.

But in our increasingly startup happy healthcare economy, it seems less likely we will see a systemic market downturn, and more likely we will see individual catastrophic flame outs.

Companies with little to no sustainable business model or competitive advantage that manage to raise astronomical sums at implausible valuations. These are the companies to look out for.

They are distinguished by two things – whimsical branding efforts and regulatory risks.

One such potential flame out, Accolade Health, is now entering the virtual primary care market, branding its new service line as personalized healthcare. But there is little to distinguish its virtual healthcare service offerings from other models of telemedicine. It is simply a branding exercise that fails to hold to scrutiny once you get around the catchphrases.

Contrast this marketing gimmick with Oak Street Health, a leading provider of traditional primary care services. Oak Street Health recently inked a deal to be the exclusive provider of AARP Medicare plans. Such deals create a competitive advantage for Oak Street Health by blocking competitors from entering the primary care space.

Companies that fail to achieve similar competitive advantages and rely on marketing slogans will be exposed in the public market. The same goes for companies that succeed on the edges of regulatory risk, including companies that inflate profits through inflated risk assessments of patients.

Recently the Office of Inspector General (OIG) released a report criticizing healthcare service companies for excessively milking Medicare dollars by overinflating the risk in managing their patients. The OIG was particularly critical of United Healthcare, exposing the company’s outsized profits garnered through chart reviews alone.

The bottom line is the fundamentals hold true. Healthcare has fallen in love with startup culture and valuations are rising as a result of that relationship. But the IPO market remains brutal as ever. They will not hesitate to lower the valuation for any company that does not meet its projected earnings.

That come from sustainable business models and defined competitive advantages. Companies that lack either will rely on rebranding existing clinical services as novel or teetering on the edges of regulatory risk.

These are the flame outs, the ones that will implode in the IPO market. To predict who they are, just look at how they market their services and how the government enforces the regulations.

Those tells are the beginning of the end.

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