By JEFF GOLDSMITH

Years ago, the largest living thing in the world was thought to be the blue whale. Then someone discovered that the largest living thing in the world was actually the 106 acre, 47 thousand tree Pando aspen grove in central Utah, which genetic testing revealed to be a single organism. With its enormous network of underground roots and symbiotic relationship with a vast ecosystem of fungi, that aspen grove is a great metaphor for UnitedHealth Group. United, whose revenues amount to more than 8% of the US health system, is the largest healthcare enterprise in the world. The root system of UHG is a vast and poorly understood subsidiary called Optum.

At $226 billion annual revenues, Optum is the largest healthcare business in the US that no-one knows anything about. Optum by itself has revenues that are a little less than 5% of total US healthcare spending. An ill-starred Optum subsidiary, Change Healthcare, which suffered a catastrophic $100 billion cyberattack on February 21, 2024 that put most of the US health system on life support, put its parent company Optum in the headlines.

But Change Healthcare is a tiny (less than 2%) piece of this vast new (less than twenty years old) healthcare enterprise. If it were freestanding, Optum would be the 12^th largest company in the US: identical in size to Costco and slightly larger than Microsoft. Optum’s topline revenues are almost four times larger than HCA, the nation’s largest hospital company, one third larger than the entirety of Elevance, United’s most significant health plan competitor, and more than double the size of Kaiser Permanente.

If there really were economies of scale in healthcare, they would mean that care was of demonstrably better value provided by vast enterprises like Optum/United than in more fragmented, smaller, or less integrated alternatives. It is not clear that it is. If value does not reach patients and physicians in ways that matter to them—in better, less expensive, and more responsive care, in improved health or in a less hassled and more fulfilling practice—ultimately the care system as well as United will suffer.

What is Optum?

Optum is a diversified health services, financing and business intelligence subsidiary of aptly named UnitedHealth Group. It provides health services, purchases drugs on behalf of United’s health plan, and provides consulting, logistical support (e.g. claims management and IT enablement) and business intelligence services to United’s health plan business, as well as to United’s competitors.

Of Optum’s $226 billion topline, $136.4 billion (or 60% of its total revenues) represent clinical and business services provided to United’s Health Insurance business. Corporate UnitedHealth Group, Optum included, generated $29 billion in cashflow in 23, and $118.3 billion since 2019. United channeled almost $52 billion of that cash into buying health-related businesses, nearly all of which end up housed inside Optum.

For most of the past decade, Optum has been driving force of incremental profit growth for United. Optum’s operating profits grew from $6.7 billion in 2017 (34% of UHG total) to $15.9 billion in 2023 (55% of total). However, the two most profitable pieces of Optum by operating margin—Optum Health and Optum Insight—have seen their operating margins fall by one third in just four years. The slowing of Optum’s profitability is a huge challenge for United.

Gaul Had Three Parts, So Does Optum

The largest and least profitable (by percent margin) piece of Optum is its giant Pharmacy Benefit Manager, Optum Rx, the third largest PBM in the US.

Optum Rx is more than half of Optum by revenue ($116.1 billion) but less than a third of its profits. The core of its profit comes from rebates from drug companies for featuring their drugs on OptumRx’s formulary- which governs which drugs United Healthcare subscribers get access to and how much they pay for them. Optum Rx derives almost 62% of its revenues from managing pharmaceutical spending for United’s health plan, but the remainder for servicing both health plan competitors of United and self-funded employers. It is the most “vertical” piece of Optum—in that it has the highest share of its revenues coming from United out of all of Optum’s major segments.

The accounting for these rebates is, to put it gently, less than transparent. Some of these rebates are returned to UHG customers (such as self-funded employers). Some are returned to insurers other than United for which Optum Rx processes pharmaceutical claims. And some are kept as profit inside either Optum Rx or United’s health insurance business. Optum Rx does not disclose the ultimate destination of many billions in rebates.

This lack of transparency is, understandably, a subject of political controversy. Congress is considering tightening PBM disclosures and possibly redirecting the flow of rebates back to health-plan customers and, gasp, potentially to patients themselves. Given the widening political controversy about whether PBMs actually save consumers money, Optum Rx’s business model is a major strategic vulnerability for UHG.

The second major piece of Optum, OptumInsight, has been in the glare of public controversy since its Change Healthcare subsidiary was hacked by the mysterious Russian hacker collective BlackCat in February. Its main business lines are: business intelligence, consulting, IT enablement, and business process outsourcing to non-UHG health enterprises. OptumInsight is the smallest of Optum’s three pieces at $18.9 billion, but the most profitable—22.5% profit margin—$4.3 billion in operating earnings. I have written extensively about OptumInsight, almost 42% of whose revenues derive from servicing United’s other businesses, but will not repeat that analysis here.

Optum Health

The piece we want to focus on here is the largest generator of profits for Optum, Optum Health, a diversified healthcare services enterprise. Optum Health is a $95.3 billion business, which makes it the second largest care enterprise in the US after Kaiser Permanente. It generates nearly $6.6 billion in operating profit for United. However, Optum Health’s profit margin declined from more than 10% in 2018 to about 6.6% in the third quarter of 2023. If not turned around, Optum Health’s declining profitability is a threat to United’s enterprise valuation and reputation. This is why when Optum reported disappointing 3Q23 earnings, United’s Chairman Steven Hemsley cleaned house at Optum Health, installing new leadership.

Since United is not required to disclose acquisitions that are not “material”, there is no way of knowing what United has actually bought and what it presently owns. But Optum Health is home to an enormous collection of physician groups, surgicenters, a large urgent care network, and two of the largest home health agencies in the US. It is a sprawling nationwide roll-up of healthcare assets.

Optum claims 90 thousand physicians in its networks but is cagey on how many are actually employed by Optum and how many are independent physicians in Independent Practice Associations that wrap around the employed groups and are common in the West and Southwest. An educated guess would be that Optum employs from 45 to 60 thousand physicians. If true, this would still be between double and triple the size of Permanente Medical Groups. Optum’s profitability dwarfs that of Kaiser (see below), perhaps a function of Kaiser operating 39 hospitals and Optum not operating a single one.

Optum Health receives $57.7 billion (or 60% of its total revenues) from United’s health plan—the vertical part. But it also claims $21.8 billion in premium income, e.g. capitation, from “non-affiliated” customers, namely health plan competitors of United’s health plans. That capitation represents almost 23% of Optum Health’s total revenues. In addition, Optum Health reports $14.1 billion in services income, almost certainly “fee-for-service” based income from other health plans. What share of Optum Health’s $6.6 billion in profits come from these contracts with United’s competitors is a compelling mystery, since this is not reported in United’s financial disclosures.

Whatever the profit split, Optum Health is very much dependent not merely on the kindness of strangers, but of competitors of United’s core business. An important and unknowable question is whether Optum’s contract renewals with those competitors have enabled it to recover the soaring costs of nursing coverage, temporary physician coverage, turnover and retirements, and other labor factors that have exploded in the wake of the COVID pandemic. Every care delivery enterprise in the US has faced rising people costs, as the largest care delivery enterprise in the US, these forces have not spared Optum.

Optum’s medical group acquisition strategy to date has targeted independent (e.g. non-hospital) medical groups with significant at-risk (e.g. “capitated”) populations, mainly in Medicare Advantage plans. These included the original asset, the Nevada based Sierra Medical Group which United acquired when it purchased the Sierra Health Plan in 2007, but also Healthcare Partners, Monarch and North American Medical Management (based in Los Angeles), WellMed in central Texas, Atrius and Reliant in Massachusetts, Everett and PolyClinic in Seattle and Kelsey Seybold Clinic in Houston Texas. It is a growing presence in Oregon, New York and Connecticut through mainly smaller acquisitions. The map below showed where Optum Health’s assets were as of 2022.

The Vertical Integration Conundrum

Healthcare strategists have touted the idea of vertical integration –pioneered by Kaiser Permanente—which offers a comprehensive healthcare service experience—pretty much soup to nuts—through its health plan. The only way to access Kaiser physicians and hospitals is by enrolling in their health plan. Vertical integration has been viewed as a way of reducing health cost (by eliminating middlemen’s profits) and procuring products and services more efficiently, though actual evidence that it does so is scarce upon the ground.

With United, the health plan preceded the health services. In the first thirty years of its existence, United was a “network” plan, which contracted with independent hospitals and doctors for care. With the Sierra acquisition in 2007, United embarked on an adventure in strategic ambiguity—owning physician clinics which provided care to United customers as well as those of competing health plans. After Sierra and WellMed, a large capitated medical group in central Texas that Optum acquired in 2011, Optum’s medical group acquisitions have been, at best, loosely tied to United’s health plan enrollment. A 2018 analysis showed at best modest overlap between United’s Medicare Advantage market presence and the Optum Health network.

Making United “more vertical” in Optum markets would be complicated. Offering financial incentives to the Optum Health patients presently enrolled in competing plans to switch to United would pose two challenges. One is that this would damage Optum Health’s contracts with competing health plans. And sharing savings (e.g. some of United’s profits) with patients to redirect their care or lowering their rates would reduce health plan profit margins.

Conversely, telling Optum patients that they could only get care if they enrolled in United’s health plan would trigger a firestorm of negative publicity not to mention retaliation and cancelled contracts by United’s health plan competitors. Telling United subscribers they could only get care from Optum physicians and facilities would overwhelm them in volume and trigger longer waiting times and provider burnout. In sum, it does not appear to make business sense for United to make Optum more “vertically aligned” with its health plans. So straddling competitors in local markets seems to be an ambiguity with which United will have to cope going forward.

How much unregulated and invisible profit United’s health plans can generate  “inside” United’s visible and highly regulated medical loss ratio (MLR) by selectively and generously compensating Optum’s physicians, surgical facilities, etc. is the most compelling mystery of this business model. Matthew Holt, a veteran industry observer, has termed this strategy of maximizing enterprise profit through contracting favorably with yourself “provider fracking.” Companies that control both insurance and care delivery have a great deal of flexibility in what the accountants term “transfer pricing”.  This flexibility is valuable and would be lost were Optum to be spun off in a future United restructuring.

Two Big Risks for the Partially Integrated Optum Health

There are two other major clouds on the horizon for Optum Health. One is the Federal Trade Commission’s proposal to ban of non-compete clauses for corporate employees, including physicians. Non-compete clauses effectively make the patient populations of acquired physician groups the property of Optum. If physicians leave Optum, they are required to move out of the community to practice, surrendering their patients to the company.

Many of the senior physicians who were equity holders in the large practices acquired by Optum departed millionaires with United’s cash, leaving behind junior colleagues to suffer through both Optum system conversions and leadership changes that affected their daily lives as practitioners. Outlawing non-competes would enable disgruntled Optum physicians to remain in their home communities and take their patients with them.

If FTC precedents hold, the non-compete clause prohibition might not apply to non-profit hospitals (80% of all hospitals are non-profit), putting Optum and other corporate employers of physicians at a competitive disadvantage. In my opinion, entities that rely on coercive measures like non-competes to assure physician loyalty need to take a long hard look at their corporate culture.

The FTC’s proposed ban on non-competes is a major enterprise risk for Optum Health’s vast agglomeration of medical groups. If enacted, it would force Optum management directly to address physician working conditions, values, and priorities. United does have the potential for markedly reducing the documentation burden for Optum physicians that take care of United patients by selectively altering its claims review strategies. It will be interesting to see if they do so.

E Pluribus Unum

The other major cloud on the horizon is the unionization of physicians. According to AMA, some 67 thousand practicing physicians (e.g. not interns, residents or fellowship trainees) are members of labor unions. There are been several recent high profile instances where disillusioned hospital-employed physicians elected union representation (Allina in Minneapolis/St Paul, Providence St. Vincent and Legacy Health in Portland OR, are recent examples).

Unionization is often not motivated directly by compensation issues but rather by a sense of powerlessness and a feeling that core issues that affect the employee are not being addressed. Unionization would both increase Optum’s operating costs and reduce its management’s flexibility. Optum Health’s groups are by far the largest and most lucrative target of physician unionization in the United States.

Down in the Valley

The emerging market risks for Optum can be seen in two medium sized cities in Oregon’s Willamette Valley. During the early pandemic, Eugene-based Oregon Clinic encountered terminal operating difficulties and sold to Optum in late 2020. In March of this year, Optum sent letters to patients of departing Oregon Clinic physicians that they would have to find care elsewhere because they were unable to recruit replacements for their physicians. These 32 physicians resigned, apparently, because they were unhappy with working conditions at Oregon Clinic after the Optum takeover. Reading between the lines, due to non-competes, the departing physicians were unable to remain the Eugene area and thus unable to continue seeing long-standing patients.

Meanwhile, up the road forty miles in Corvallis, Optum requested that the State of Oregon expedite review of its proposed acquisition of the Corvallis Clinic due to accelerating cash flow difficulties that made it impossible for the Clinic to meet its payroll. The State ultimately acceded to Optum’s request.   The apparent cause of the cash flow problem: the Change Healthcare cyberattack, which made it impossible for Change, an Optum subsidiary to accept or pay claims from its provider networks, including, most likely Corvallis Clinic. In other words, the catastrophic system failure of one piece of Optum likely accelerated another piece of Optum’s acquisition of the largest physician group in town.

Taken together, these simultaneous problems have not served to enhance Optum’s image as a care provider in the southern Willamette Valley. They make the company appear as a cold and exploitative outsider capitalizing on problems it helped create. These events will not enhance the likelihood of United growing its core insurance business in the area or endear the company to Oregon’s health system regulators, or its state managed Medicaid program, the Oregon Health Plan.

Outgrowing Its Nervous System?

Optum Health has almost quadrupled in size in the past six years, but its profit margin has fallen by a third. Given the explosive pace of acquisitions and the cost pressures on physician practices during and after the COVID pandemic, this margin deterioration is not surprising. However, if Optum Health’s new management does not stabilize its operating performance, margins could deteriorate further, putting pressure on United’s earnings.

There are no evident economies of scale or co-ordination in physician services. How Optum can recruit and retain high quality motivated physicians and advanced practice nurses to its vast care system is a major challenge to the enterprise. They will need a compelling answer to the question: “Why work for Optum?” The answer cannot be: we are huge and you don’t have a choice. How the company creates value for its tens of thousands of physicians and nurses will be the central management facing United, or indeed any large-scale employer of these complex professionals.

There is growing evidence that there are diseconomies both of scale and co-ordination in health services generally. Those diseconomies manifest themselves in the vast empty space between the giant enterprise and the physicians and patients who rely on them. Every denial of care by United’s AI-driven claims management system makes a tiny dent in the company’s consumer image. Patient anger over arbitrary and self-interested health plan meddling in care decisions resulted in first managed care backlash in the late 1990’s. United’s recent Net Promoter Score of -5 suggests that it has a long way to travel to regain customer confidence and loyalty.

The physician-patient relationship remains the bedrock of the health system. If the nerve endings of an enterprise do not reach out and sense the effect it is having on that relationship, it isn’t going to be very long before it either ceases to grow or ceases to be profitable or, likely, both. United and Optum have reached that tipping point right now. Follow Optum’s physicians and their patients and see the future.

Acknowledgements: Trevor Goldsmith provided research and technical support for this piece. The author appreciates Ian Morrison, Andrew Mueller  and Jamie Robinson for reading and commenting on this piece.

Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This comes from his personal substack

By MATTHEW HOLT

In recent days and weeks, there have been three stories that have really brought home to me the inanity of how we run our health care system. Spoiler alert, they have the commonality that they all are made problematic by payment per individual transaction—better known as fee-for-service.

First, several health insurers who sold their reputation to Wall Street as being wizards at understanding how doctors and patients behave had the curtain pulled back to reveal the man pulling the levers was missing a dashboard or dial or three. It happened to United, Humana and more, but I’ll focus on Agilon because of this lovely quote:

“During 2023, agilon health experienced an increase in medical expenses attributable to higher-than-expected specialist visits, Part B drugs, outpatient surgeries, and supplemental benefits, partially offset by lower hospital medical admissions. While a number of programs have been launched to improve visibility, balance risk-sharing and enhance predictability of results, management has assumed higher costs will continue into 2024,” the company said in a statement

Translation: we pay our providers after the fact on a per transaction basis and we have no real idea what the patients we cover are going to get. You may have thought that these sharp as tacks Medicare Advantage plans had pushed all the risk of increased utilization down to their provider groups, but as I’ve be saying for a long time, even the most advanced only have about 30% of their lives in capitation or full risk groups, and the rest of the time they are whistling it in. They don’t really know much about what is happening out in fee-for-service land. Yet it is what they have decided to deal with.

The second story is a particularly unpleasant tale of provider greed and bad behavior, which I was alerted to by the wonderful sleuthing of former New Jersey state assistant director of heath benefits Chris Deacon, who is one of the best follows there is on Linkedin.

The bad actor is quasi-state owned UCHealth, a big Colorado “non-profit” health system. They have managed to hide their 990s very well so it’s a little hard to decipher how much money they have or how many of their employees make millions a year, but it made an operating profit last year of $350m, it has $5 BILLION in its hedge fund, and its CEO (I think) made $8m. It hasn’t filed a 990 for years as far as I can tell. Which is probably illegal. The only one on Propublica is from a teeny subsidiary with $5m in revenue.

So what have they been doing? Some excellent reporting from John Ingold and Chris Vanderveen at the Colorado Sun revealed that UC has been getting collection agencies to sue patients who owe them trivial amounts of money, and hiding the fact that UC is the actor behind the suit. So they are transparent on how much very poor people allegedly owe them, and come after them very aggressively, but not too transparent on how their “charity care” works. The tales here are awful. Little old ladies being forced to sell their engagement rings, and uninsured immigrants being taken to the ER against their will and given a total runaround on costs until they end up in court. Plenty more stories like it in a Reddit group reacting to the article.

What’s the end story here? UC Health gets a measly $5m (or a share of it) a year from all these lawsuits which is less than the CEO makes (according to a Reddit group—with no 990 it’s a little hard to tell).

Yes, all these patients are being billed or misbilled for individual procedures and visits. It makes people terrified of going to the doctor or hospital, and no rational health services researcher thinks that charging people a fee to use health care encourages appropriate use of care. Last month Jeff Goldsmith had an excellent article on THCB explaining why not.

Of course it goes without saying that if these patients were covered by some kind of a capitation, subscription or annual payment none of this cruelty or waste motion would be happening.

The final example is still going on.

Just over a year ago United HealthGroup, the $500bn market cap gorilla in America’s health care system, paid $13 Billion for Change Healthcare. Change was (and is) a giant in the business of revenue cycle management and claims processing. As Stat News’ Brittany Trang reports

Change ferries claims and payments between providers and insurers, and helps providers check on patients’ insurance information. Before Optum acquired Change in 2022, it served 1 million physicians, 39,000 pharmacies, 6,000 hospitals, and connected with 2,400 insurers.

United went to war with the DOJ and won in order to buy Change because it got them into the detailed flow of bills sent from providers (including pharmacies) to payers—presumably so they could get smarter about what’s going on out there. Well I suspect United is regretting it now. Last week Change got seriously hacked.

In response to the cyberattack last week, UnitedHealth unplugged Change’s connection to every hospital, medical office, and pharmacist that used it to execute one of those functions, whether those organizations interfaced with Change directly or through the complicated insurance claims bucket-brigade.

The complexity of the financial and clinical data flowing through Change is staggering even to those of us who had some idea what it did. But hospitals, doctors and pharmacies can no longer identify patients’ eligibility and more importantly can’t submit claims or get paid.

Why do we need “revenue cycle management” and “claims submission”?  Because of fee-for-service.

This is similar to the time in 2020 when Covid stopped hospitals and doctors seeing patients and submitting bills. Who was ok back then? Kaiser Permanente and other integrated “payviders” who get paid a flat amount per patient they take care of.

Plenty of other industries figure out a way around this. Netflix doesn’t charge per movie watched, my cable company charges me an outrageous amount for internet and TV and divvies it up among its suppliers, giving way too much to Fox News. Even phone companies have gone from pay per minute of each call to a bundled amount per month. Of course there are plenty of companies trying to unbundle this to charge more—as a soccer fan I am very conscious of this with different companies charging me to watch different competitions but none of them are charging per game watched!

But health care remains dead set on fee for service and there are plenty of companies like Change and those Colorado collection agencies that live precisely off this system. In the thirty plus years I’ve been looking at American health care none of the promise of value-based care has made fee-for-service less prevalent. In fact it’s usually just added to the complexity of it while using FFS as a base.

Why? Because in general, as Agilon and the other Medicare Advantage plans are discovering, if a provider gets paid for doing something to a patient, it’s pretty hard to stop them doing more of it.

Legendary Canadian health economist Bob Evans told me once that nothing that is regular is stupid. In other words if something keeps happening, there’s a reason behind it. In the case of fee-for-service in health care the reason is clear, and everyone—other than the dumbos paying for it–is in on the game. It’s just that the reason is stupid.

By JEFF GOLDSMITH

Envision, a $10 billion physician and ambulatory surgery firm owned by private equity giant Kohlberg Kravis Roberts, filed Chapter 11 bankruptcy on May 15.  It was the largest healthcare bankruptcy in US history.   Envision claimed to employ 25 thousand clinicians- emergency physicians, anesthesiologists, hospitalists, intensivists, and advanced practice nurses and contracted with 780 hospitals.  Envision’s ER physicians delivered 12 million visits in 2021, not quite 10% of the US total hospital ED visits.

The Envision bankruptcy eclipsed by nearly four-fold in current dollars the Allegheny Health Education and Research Foundation (AHERF) bankruptcy in the late 1990’s.   KKR has written off $3.5 billion in equity in Envision.   Envision’s most valuable asset, AmSurg and its 257 ambulatory surgical facilities, was separated from the company with a sustainable debt structure.  And at least $5.6 billion of the remaining Envision debt will be converted to equity at the barrel of a gun, at dimes on the dollar of face value. 

KKR took Envision private in 2018 when Envision generated $1 billion in profit, in luminous retrospect the peak of the company’s good fortune.   Envision’s core business was physician staffing of hospital emergency departments and operating suites.    In 2016, then publicly traded, Envision merged with then publicly traded ambulatory surgical operator AmSurg.  This merger seemed at the time to be a sensible diversification of Envision’s “hospital contractor” business risk.   

Indeed, Envision’s bonus acquisition of anesthesia staffing provider Sheridan, acquired by AMSURG in 2014,  helped broaden its portfolio away from the Medicaid intensive core emergency room staffing business (EmCare), which required extensive cost-shifting (and out of network billing) to cover losses from treating Medicaid and uninsured patients.   It is clear from hindsight that where you start, e.g. your core business, limits your capacity to spread or effectively manage your business risk, an issue to which we will return.

The COVID hospital cataclysm can certainly be seen as a proximate cause of Envision’s demise.

The interruptions of elective care and the flooding of emergency departments with elderly COVID patients, which kept non-COVID emergencies away, damaged Envision’s core business as well as nuking ambulatory surgery. By the spring of 2020, Envision was exploring a bankruptcy filing.  An estimated $275 million in CARES Act relief and draining a $300 million emergency credit line from troubled European banker Credit Suisse temporarily staunched the bleeding.  But the pan-healthcare post-COVID labor cost surge also raised nursing expenses and led to selective further shutdowns in elective care and further cash flow challenges.  

While one cannot fault KKR’s due diligence team for missing a global infectious disease pandemic, with hindsight’s radiant clarity, there were other issues simmering on the back burner by the time of the 2018 deal that should have raised concerns.  Two large struggling investor owned hospital chains,  Tenet and Community Health Systems, began divesting marginal properties in earnest in 2018, placing a lot of Envision’s contracts in the pivotal states of Florida and Texas at risk.

More importantly,  there were escalating contract issues with  UnitedHealth, one of Envision’s biggest payers,  as well as increasing political agitation about out-of-network billing, which provided Envision vital incremental cash flow.  These problems culminated in a United decision in January 2021 to terminate insurance coverage with Envision, making its entire vast physician group “out of network”. 

The United dispute coincided with a skillfully managed public policy initiative laying out the scope and indefensibility of Envision’s cost shifting strategy.  The assault began with a 2016 study covertly assisted and guided by United  by a prominent Yale health policy analyst.  This study ignited a firestorm of press criticism and was followed by an aggressive lobbying and PR campaign funded by United and other large commercial payers  aimed at restricting balance billing by firms like Envision. 

This campaign culminated in the Dec 2020 Congressional passage of the No Surprises Act, which effectively ended balance billing and subjected thousands of Envision’s out-of-network bills to an arbitration process. NSA went into effect in January 2022.   Ironically, days prior to its Chapter 11 filing, Envision won a $91 million judgment from an arbitration panel against United for out-of-network billing disputes from 2017-2018.  If this judgment survives the inevitable challenges, the proceeds will end up repaying Envision’s creditors.  

A significant longer term threat to Envision’s bargaining power was the proposed Federal Trade Commission prohibition on non-competes for its physicians. Non-compete clauses in employment contracts forbid employed physicians from working for others (e.g. local hospitals, in-market physician groups or competing multi-market staffing firms)  in the same community for a period of years.  Outlawing non-competes would remove a major leverage point for physician staffing companies- the threat of terminating an unfavorable hospital contract and forcing the hospital to cover its ERs and ORs from out-of-the market docs.

If historical FTC precedents hold, non-profit hospitals and systems, a major client group for Envision, would be exempt from the FTC mandate, tipping the bargaining balance decisively their favor.  Hospital systems already vastly outstrip staffing firms in physician employment.  Asymmetrical restrictions on physician non-compete clauses in employment contracts would pose an existential threat to the many private-equity based physician enterprises, as well as Optum Health’s huge and rapidly growing physician group.   

Strategically, the Envision bankruptcy raises anew the question of whether there are economies of scale, and investment returns to scaling, in healthcare. Certainly the conventional wisdom argued that large firms like Envision had the ability to recruit and retain clinicians across vast geographies, and negotiating power with the large insurers that increasingly dominate key insurance sectors like Medicare Advantage and Managed Medicaid.  

Envision’s demise strongly suggests that the power balance-both political and economic- has tipped decisively in the direction of payers like United.  Rising interest rates, the increasing scarcity of clinicians as workaholic baby boom vintage docs and deepening financial challenges for the ultimate customers of many of these companies, namely hospitals, suggest that we may have reached an inflection point in the viability of many private equity physician care models, with their 4-7 year holding periods and a succession of owners.   Current owners might find it increasingly difficult to exit their positions.

Looking beyond private equity, the evident diseconomies of co-ordination and concentration of business risk in the large healthcare rollups may argue against the type of consolidation that created Envision in the first place. This problem is likely to haunt many of the putative healthcare “disrupters” such as CVS and Amazon that are busily and extravagantly overpaying for clinical assets in search of the holy grail of “integration” and market dominance.

They are late to the party and will be compelled to “pay up” to get the national market presence they seek.  CVS recently paid $18 million per physician to purchase boutique Medicare Advantage provider Oak Street Health.   

In 2012, financial strategist Nassim Nicholas Taleb, who predicted the 2008 financial crisis, argued in his Anti-Fragile: Things that Gain from Disorder,  that prospering in this modern economy requires nimbleness and the ability to rapidly adjust business strategy in the face of uncertainty and rapid market shifts.  He argued that many mergers seeking scale and leverage actually made organizations more fragile and, thus, prone to tipping over, as Envision did. 

What a wise colleague once suggested large healthcare organizations need is “optionality”- the ability quickly to adjust one’s holdings and business models to take advantage of economic cycles, regulatory and political changes and growth potential.  To have optionality is to be “anti-fragile”. 

UnitedHealth Group, a vast healthcare conglomerate spanning health insurance, care delivery, pharmaceutical benefits management and business intelligence and services has optionality, along with more than $2 billion a month in cash flow to fund it, and is anti-fragile.   Envision- with its heavy reliance on a single financial leverage strategy and a dominant customer type- was not. United’s optionality and long-game patience rather than its scale per se may be its biggest strategic asset.   Envision is United’s first major scalp.  There will be many others. 

Jeff Goldsmith is the President of Health Futures, Inc, one of Americas leading health futurists, and regular on THCB Gang.