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Hi friends 👋 ,

Healthcare has always scared me, both as a patient and as an analyst. I don’t go to the doctor nearly enough (read: ever) and I’ve only covered one healthcare company in Not Boring, Kenya’s Antara Health. But when Cityblock Health co-founder Bay Gross reached out to me to talk about a piece, I was very curious.

First, because healthcare was a blind spot of mine, and it’s too important not to understand. Many of the next decade’s biggest innovations, and returns, will come from healthcare.

Second, because unlike many healthcare companies, I’d actually heard about Cityblock, and heard good things. It was born in 2017 in DUMBO, a short walk from my Brooklyn apartment, spun out of Alphabet’s Sidewalk Labs. I have smart friends who work there. I knew it was building something ambitious, and something in healthcare, but I just didn’t know what, exactly. 

Third, because of the money. Cityblock has raised $462 million from very smart investors, including Alphabet, Thrive, Redpoint, General Catalyst, and Tiger.

When I talked to Bay and co-founder Toyin Ajayi, I knew I had to write about the company. It’s a healthcare company that’s doing a lot of things we talk about in Not Boring and helping a segment of the population that’s often overlooked by startups. 

Today’s post is a Sponsored Deep Dive -- you can read more about how I select which companies to work with here -- but it’s different than a normal Sponsored Deep Dive. Cityblock doesn’t want you to buy anything; it gets its members from payers. They just want to make people in tech aware of the hard problems and huge opportunities involved with what they’re doing. They want smart, talented people to come join them in helping make healthcare equitable and accessible, and luckily, Not Boring readers are all smart, talented people. Check out Cityblock jobs here.

Let’s get to it.

Cityblock Health

In June 2017, Keith Rabois tweeted the formula for startup success: 

Keith Rabois @rabois

Formula for startup success: Find large highly fragmented industry w low NPS; vertically integrate a solution to simplify value product.

June 2nd 2017

1,217 Retweets6,571 Likes

Three months later, in September, inside Alphabet’s Sidewalk Labs, co-founders Iyah Romm, Dr. Toyin Ajayi, and Bay Gross, launched Cityblock Health.

Coincidence? Yes, almost certainly. But what they’re doing fits Rabois’ formula pretty darn cleanly:

• Large Market: Cityblock is operating in a $613.5 billion market. Its market represents 3% of US GDP. 

• Highly Fragmented: Not only was the industry itself fragmented, but the pieces needed to deliver an impactful experience to customers were fragmented. 

• Low NPS: The industry hadn’t even tracked NPS, and customers hated the experience so much that they often avoided it unless they absolutely had to use it. 

Have you guessed the market? 

It’s Medicaid and people who are dual-eligible for Medicare and Medicaid. Cityblock Health works with some of the most at-risk, medically complex, lowest-income people in the country to deliver comprehensive care that addresses the tangled web of root causes that leave them coming back to the ER time and again, and leave taxpayers footing the ballooning bill. 

To fix the market, improve peoples’ outcomes, and save payers (insurance companies and governments) money, Cityblock is taking an approach that’s as vertically integrated as it gets. 

The three biggest drivers of healthcare costs are unmet medical, mental health, and social needs, which express themselves as high medical bills when it’s too late. Existing providers treat medical and mental health separately, and don’t deliver social care at all. They wait for the sequelae of unmet social needs to wash up on the shores of the emergency room and then treat symptoms with expensive and avoidable medical interventions. 

What does that look like in practice? Maybe the person who is food insecure develops dangerously low blood sugar, which causes a fall, which lands them in the emergency room. Instead of feeding people and educating them on how to manage their needs within the community, traditional healthcare waits until the fall, calls 911, and delivers thousands or tens of thousands of dollars worth of medical care. It’s a tragic game of whack-a-mole. 

Cityblock is taking a holistic, vertically integrated approach, addressing the medical, mental, and social needs of its members, treating them like whole people. 

It has physical clinics, teams full of primary care providers, pharmacists, psychiatrists, therapists, geriatricians, social workers, and other care providers on staff (with equity and Slack access), and a growing tech team building custom tools to scale Cityblock’s approach to millions of members.  

For both sides of the market -- patients and payers -- neither of whom is happy or thriving right now, Cityblock Health is simplifying the value prop. 

To payers, it’s saying: give us your most challenging patients at a fixed price, we got this. 

To patients, it’s saying: anything you need to improve your life and health, we got you. 

Cityblock is exploiting two arbitrages for good: an experience arbitrage that allowed them to see opportunity where others didn’t and a care delivery arbitrage through which they deliver lower-cost care upstream to save on expensive costs downstream. 

Healthcare seems scary because it’s regulated and slow and there’s no one-size-fits-all solution. Medicaid and low-income Medicare patients seem like a particularly difficult group to target. But really, Cityblock Health’s approach isn’t different from other companies, like Opendoor, that realized that the only way to win large, fragmented, atoms-based markets was to go vertically integrated, powered by a combination of experienced humans, strong operational systems, and technology. 

If it succeeds, Cityblock Health will have solved one of the biggest challenges out there: how to provide quality care to low-income people who need it most and halt America’s ballooning healthcare costs. 

This is a big enough opportunity, and fascinating enough business, to get investors excited. In the past seven months, Cityblock raised $352 million in two rounds, $160 million at a valuation north of $1 billion led by General Catalyst in December 2020, followed quickly by $192 million at a healthy step up valuation led by the one-and-only Tiger Global in March. 

It’s also a big and important enough opportunity to cure my healthcare-phobia, and digging in, while the product is different than the startups I’m used to covering -- Cityblock is literally keeping people out of the hospital and saving lives -- the things that make the company tick are the same: big market, business model with positive unit economics, and an innovative product, powered by technology. We’ll use that framework to understand Cityblock:

• The Market: Demystifying Medicaid. 

• The Business Model: Value-Based Care. 

• The Product: Treating the Whole Person.

• Strong Early Results

• Challenges

• The Future of Cityblock, and Healthcare

It all starts with tackling a challenge very few startups have ever dared to face. 

Demystifying Medicaid

There may be no category with a higher TAM:Funding ratio than Medicaid. 

Medicaid is the joint state-federal health insurance program that provides coverage to millions of Americans including low-income people, children, pregnant women, and people with disabilities. Today, there are 72.2 million Americans on Medicaid, including 50% of all babies born in the US and one out of every three New Yorkers. 

In 2019, state and federal governments spent $613.5 billion on Medicaid, and according to a Pew report, many states spend 20-25%+ of their revenue on Medicaid, representing billions of taxpayers’ money. The averages even obscure the extremes; in Massachusetts, that number is over 50%.  

From the outside, Medicaid is hairy and scary. It’s a lot of things that startups like to avoid: regulation, government, healthcare, and low-income populations. Plus, dealing with Medicaid has a built-in CAC:LTV challenge. On the CAC side, Medicaid patients are harder to find and sign up than Medicare or commercially insured patients -- statistically, they move addresses more often, and are significantly more likely to be homeless. Medicaid populations often face significant structural barriers when it comes to receiving regular preventative doctor visits:

• They may live in primary care deserts 

• Face transportation barriers and childcare barriers

• Lack of employment hours flexibility

On the LTV side, if things go really well, and patients’ lives improve, they may cross the poverty line and churn out of Medicaid. That’s the dating app problem: success leads to churn. 

Still, the lack of funding in Medicaid relative to Medicare is stark. Before Cityblock launched, the team identified about $3-4 billion in recent VC funding that had gone into startups tackling Medicare, which covers older Americans, but only $20-30 million in VC funding for Medicaid startups. Medicare is a slightly larger market -- $799 billion versus $613.5 billion in 2019 -- but that doesn’t explain the two-orders-of-magnitude funding gap. 

With all other variables accounted for, it seems that the low-income piece accounts for the gap. Which, as a healthcare outsider, seems a little crazy. It’s all the same payer. The government pays for Medicare and it pays for Medicaid. It shouldn’t matter who the ultimate recipient of the care is if Uncle Sam and his Stately progeny are footing the bill. 

This is Cityblock’s first arbitrage: deeply understanding an opportunity that others missed. 

Most founders, and certainly most investors, are unfamiliar with Medicaid. VCs aren’t typically on Medicaid. They don’t know many people on Medicaid. In a 2017 article titled “Silicon Valley is too focused on taking the easy path in healthcare,” Christina Farr wrote: 

Health care startups face regulatory hurdles, long sales cycles and a high burden of proof — and that means it can take more than a decade to make a return. As a result, many venture-backed entrepreneurs are looking instead at opportunities on the fringes of the health care system, such as cash-only health services that don’t require insurance or tests and apps that aren’t regulated by the U.S. Food and Drug Administration.

It’s easier to focus on consumers who are able to pay out of pocket and deliver unregulated point solutions. That approach is similar to most of the other categories in which startups thrive. Medicaid seems incredibly foreign and hairy and unprofitable in comparison. But Cityblock’s founders are intimately familiar with it. Toyin Ajayi, Cityblock’s President, spent more than a decade working with vulnerable Medicaid patients. Co-founder Bay Gross told me that Toyin “is a top ten expert in the country for behaviorally complex Medicaid groups.” 

Complex is the medical term, and it’s also an understatement. Cityblock works with the highest-risk portion of the population, people whose medical and social complications feed off of each other. In their flagship Brooklyn market, the average member: 

• Has 8-10 diagnoses at any given time

• Is on upwards of 12 medications 

• 80% don’t live with nuclear family members in the same household (low social support structures) 

• 20% are housing insecure

• Almost all  have experienced trauma and/or other behavioral health challenges

Tragically, these New Yorkers are falling through the cracks, and getting left behind. That’s a failure on society’s part, and it’s costing society in equal measure. While investors may not have been paying attention to Medicaid when Cityblock got started, they’re certainly familiar with one important dynamic at play: power laws. 

The most expensive 5-10% of the population drives 60% of the costs. These individuals are in and out of the ER all of the time, and they’re disengaged and mistrustful of the system (for good reason!). “They don’t like going to the doctor,” Toyin told me, “because the doctor makes them feel like shit.” 

In Antara Health, I wrote about the Vicious Cycle of Uninsurance: 

In Kenya, where only 2.8% of the population has health insurance, people avoid going to the doctor to avoid paying out-of-pocket costs, which means that they don’t catch things early, which means they don’t go to the doctor unless things are really bad, at which point out-of-pocket care is so expensive that it’s likely to push those who need to pay for it into poverty. 

There’s a very similar dynamic at play here, only the payer is different. In the US, Medicaid and low-income Medicare recipients face a host of issues that combine to make them avoid the doctor. They may be housing insecure, behind on their bills, confused about how to work with the medical system, and work multiple jobs to stay afloat. There’s no time for the doctor, particularly when that doctor won’t address the root issues anyway, and when, as Toyin told StartUp Health, the “person leaves feeling judged and unable to explain that they eat McDonald’s three times a week because they can’t afford to buy leafy vegetables.” 

Plus, because Medicaid is a hassle for doctors, many just don’t accept it, which makes it even harder for Medicaid recipients to find someone to treat them. A NBER paper released in April found that billing and administration hassles caused doctors to miss out on 16% of Medicaid revenue, versus 7% for Medicare and 4% for commercial payers. That may be another reason that startups don’t focus on Medicaid. A 16% revenue loss rate is awful in any industry. 

This all combines into the Vicious Cycle of Low-Income Healthcare in the US. 

The system is broken, inefficient, and ineffective. Paying a lot of money at the bottom of the vicious cycle is expensive, and it doesn’t fix any of the issues that got the person there in the first place. 

To fix those issues, you need to rebuild the whole system.  

The Business Model: Value-Based Care

One way to try to serve individuals on Medicaid is to work within the system by fixing one thing at a time. Maybe you build clinics, like a One Medical for Medicaid, that treat patients where they are. Maybe you build apps that make it easier for people on Medicaid to communicate with their doctors. Maybe you try to provide healthy meals in the communities in which people on Medicaid live. 

Those solutions all sound good, but they’d all fail. The financial incentives are too far out of whack for any one player to sustainably make an impact, and as highlighted above, even collecting revenue from Medicaid can prove to be a challenge. 

What if, instead, you said, “Fuck it. Hey states and insurers, just give me all the money you’d spend on Medicaid patients upfront, and I’ll do the whole thing myself.” 

That’s essentially what Cityblock does. It’s called value-based care, and the way Cityblock does it is vertical integration to the extreme. If Cityblock makes patients healthier, it makes money. If it doesn’t, it loses money. It’s fully up to Cityblock to figure out how to spend the money in the way to maximize outcomes and lower costs. 

Here’s how it works: 

• It costs states and insurers a certain amount on average to care for its highest-risk Medicaid patients, say $45k per patient per year.

• Cityblock works with states and insurers to find the highest-risk people that it can help, and insurers pay Cityblock a certain amount, call it $40k per patient per year, to take full responsibility for those people. (This is called a capitation payment.)

• Cityblock spends some amount on services that it provides to improve the patient’s health and life, and pays out some amount to hospitals and other care providers. 

• If Cityblock can spend less than $40k on average to treat its patient population during the year, it keeps the difference.

• If it costs more than $40k on  average to treat its patient population during the year, it’s on the hook for the losses. 

The name of the game, financially, for Cityblock is to use the money it spends to decrease the money it pays out, and to keep the total of those two below the money it receives from insurers. 

(Note: I am clearly leaving out a lot of nuance here. For example, in some cases, Cityblock splits some of the savings with insurers.)

Obviously, this would be a risky trade to make on a single patient. If that person ends up in the ER a couple of times, the economics are shot. Instead, Cityblock focuses on total populations and total outcomes. It works with plan partners like EmblemHealth to identify populations of people within the plan partners’ coverage group that Cityblock can help and negotiates the amount of payment per month per member with the plan partner to take over their coverage and care. Instead of being at risk $40k for each member, they might manage $400 million on a population of 1,000 members. 

Cityblock uses data science to determine which segment of the plan partner’s population it’s most likely to be able to deliver results for (it spun out of Alphabet, after all). Patients with super high pharmaceutical spending, for example, are expensive, but there isn’t much Cityblock can do to help them, whereas patients with behavioral health issues, diabetes, obesity, and hypertension would benefit from a holistic approach. The goal then is to keep the total cost to serve that group below $400 million while improving quality outcomes, reducing ill-health and disability, and delivering a respectful and valuable experience. Cityblock needs to solve for all of those goals; it has quality, access, and experience guardrails in place to ensure that cost savings don’t occur at the expense of health outcomes. 

What Cityblock has at that point is a list of people it can work with. Then, it needs to convince those people to become Cityblock members. The pitch: we’ll help you more, but you don’t owe any more. 

Once members opt-in, Cityblock effectively becomes both insurer and care provider for thousands of people with the most complex situations. Its job is to find solutions that make those people healthier and keep them from needing to go to the ER. 

I love this model. Instead of insuring someone and hoping for the best, or making the member choose from a limited menu of existing healthcare options that are covered by Medicaid, Cityblock puts itself on the hook. It takes the money upfront and full responsibility, then simplifies a ton of complexity, limits the traditional downsides to dealing with Medicaid, and greatly expands the tools at its disposal. If it thought the best way to make patients healthier was to buy them all NFTs, it could do that. (I don’t think that’s the answer, btw, I haven’t gone that far down the rabbit hole. Just saying.) 

Ultimately, value-based care circumvents limitations in the system and gives Cityblock license to treat the whole person in the way they see fit. 

To read about Cityblock’s product, early results, challenges, and future:

Continue Reading Online

If you’re feeling inspired already, here’s the ask:

The system isn’t going to fix itself. Cityblock needs the best and brightest on its side to fix it. If you or someone you know wants to help fix healthcare and knock basis points off of the US government’s largest spending category at a well-funded company led by kind, brilliant leaders, Cityblock is hiring. Join them. It’s a career arbitrage, of sorts: do well by doing good.

Work at Cityblock Health

Thanks to Bay Gross, Toyin Ajayi, Gil Kazimirov, and Bridget Halligan for working with me on this piece and teaching me about Cityblock!

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Thanks for reading and see you on Thursday,

Packy