Clover Health Investments, Corp. (CLOV) Earnings Call Transcript & Summary

Okay. We're going to get started on our next session here. I'm Steven Valiquette, the Health Care Services Analyst here at Barclays. Next company up is Clover Health. With us from the company, we have Vivek Garipalli, from -- he's a CEO. And I guess it's going to be a fireside chat, right? I'm going to turn it to you for any remarks. We're just going to dive right in on the questions. Is that okay, right? That makes it easy then. Okay. Great.

All right. So yes, I think just kicking things off, I think at a high level, I think investors understand that you're focused on the Medicare Advantage market, and you have some payer answer provider assets. Maybe it wouldn't hurt just maybe just give a quick overview of what makes the company a little bit different from some of the other offerings that are out there when people think about the Medicare Advantage marketplace and what kind of things kind of morph from there?

Absolutely. Thanks for having here, Steve. So I think at our crux, our value proposition is really deploying what we call Clover Assistant to clinicians. So our thesis is really how do we help clinicians make great decisions at scale. And that's underpinned by ensuring consumers have that paired with a really wide network. So when we go back to kind of the original founding of Clover, we've always started off with an open primary care network, so where consumers can go in or out of network at the same zero cost sharing. So what that's allowed us to do is pay a really attractive plan design, which has driven a lot of our growth. At the same time, it's given us now well over 1,000 physicians in the MA side where we've been able to deploy Clover Assistant to as their [ covered ] lives have grown. And when we think about the differences is we've really underpin Clover Assistant on a few first principles approaches on how we think about software. So one, we intentionally built Clover Assistant physically outside of the EHR platform. That allowed us to own and control our feature duration rate, not be subject to legacy EHR systems, not have to integrate what software that physicians already don't like to -- we created a very clean payment model. So when clinicians are on Clover Assistant, we pull them off claims and pay them a flat fixed payment tied to using Clover Assistant. So there's no way for clinicians to kind of game it one way or the other. And the decision-making is really pure because payment isn't really tied to the decisions themselves, but really just clinicians using the software. And then now many years later, with the software deployed, we're able to complete back-end integrations with a lot of the EHR systems. So really on our terms, the way that makes sense from a scale perspective and technology perspective.

Okay. Great. Maybe just sticking with just talking about the Medicare Advantage marketplace a little bit. Obviously, there's been a decent amount of churn in this last AEP. You guys still have some pretty good growth numbers. So it didn't seem to really impact you guys. Maybe just talk a bit more about kind of the internal versus external distribution capabilities from the company perspective and how you see yourselves, how that might change over time I guess?

Yes. So it was definitely interesting to see some of the growth challenges some of the plans had. We think this is more what I would call a lagging indicator of what's been happening in the marketplace for the last many years. So when we think about consumers traditionally, they've had the choice of either a narrow network, HMO plan, restrictive primary care choice or an open access network, but higher cost and less supplemental benefits. Even despite that though, the PPO side of MA plans has grown kind of high single digits, in some markets, low double digits. When you look at the last 5 years, the HMO side has been low single digits, when you look at the last 5 years. And this is just kind of nationwide data and you could look at it market by market. And the way HMO plans have kind of made up for it is investing a lot of dollars in marketing dollars with FMOs, a lot of marketing dollars with e-broker channels, and that's been able to kind of make up for some of that growth drop. But I think now that's kind of coming to roost a bit. And I think what we're really seeing is just consumers want choice and low cost, which is something we made has been a core part of our thesis for the last 7, 8 years. So when we think about independent channels or external channels, the churn is just a lot higher on the e-broker channels, mainly because there's not that relationship that's built in. And so that retention is a lot harder. So we have not invested a lot on those e-channels. So a majority of our enrollment is true independent agents with FMOs. We don't give them marketing payments. So this is just where agents are just helping consumers make the best decision for them.

Okay. Do you have any color on how much of your membership gains come from just new first-time eligible seniors versus maybe getting people to switch from other plans over to Clover?

Yes. So if we look at the last many years, it's a bit over half of our growth has been MA market share take. So switching from an incumbent plan, MA plan to Clover. And then over -- under 50%, but I think in the 40%s has been from fee-for-service or an agent with the majority being from fee-for-service of that 40%-plus.

Got it. Okay. All right. Just taking a step back for a moment, I think investors are certainly intrigued by what we'll call some of the next-generation managed care companies or I guess you can categorize or describe yourselves with a bunch of different ways around that. But one of the challenges though is to get to a point where the book is mature enough that you're operating on a consistent level of profitability.

Yes.

So maybe you can just spend a couple of minutes really 2 interrelated questions I guess. First, just visibility on operating expenses and how much that may continue to increase or maybe decelerate as far as the growth of that as you think about the investment spend, but also just provide some color on what the bridge may look like to get to profitability over the next couple of years?

Yes. So I think just on the OpEx side, this year is a pretty big deceleration in OpEx growth relative to Q4 run rate last year. I think we'll see that trend going into next year as well. There's also a lot of investments we're making that we think are going to really extract the synergies that we have across our MA side and our ECO reach side, which is now 2/3 of our revenue projected for this year. And then from a gross margin standpoint on MA, and we've given guidance in the 90s for this year. So we expect to see a stepwise improvement this year versus last year. And I think next year, we have another improvement coming versus this year as we think about increased Clover Assistant coverage now that we're able to be back in the field. Our home-based programs are now able to be back in the field this year and then layering on care coordination around more curated specialist networks, which is something we haven't done in prior years as well. So when you kind of pair all that together, we think we're on kind of another improvement next year versus this year as we expect for this year versus last year. And then kind of the -- on what kind of swings us to profitability or not will depend on where we land on gross margin next year on ACO reach as well.

Okay. Can you remind us again, when you focus on profitability, whether it's at the EBITDA line or even cash flow, how you're looking at that from either some expenses that might be included or excluded as far as stock cap, et cetera. Does that sort of change the view, when you turn profitable under different definitions, I guess, how people look at it?

Yes. So I think this year, I mean, what we'll be reporting is just kind of GAAP, GAAP MCR on MA, GAAP gross margin on ACO leach. And then just OpEx this year just excluding like true noncash expenses that are with consolidated subsidiaries, where we're not funding those. Next year is when we'll probably get a little bit more granular on the OpEx side, really trying to delineate for investors as to what's truly noncash, what's cash, what's truly nonrecurring and recurring, mainly with the goal of folks to get a better understanding of what our go-forward OpEx structure is and how to think about some of the investments we're making. But practically speaking, long-term is just to be reporting kind of GAAP margins and let folks kind of make their adjustments as they want to make them.

Okay. All right. Great. Maybe just shifting gears here a little bit and thinking about the star ratings which obviously is critical within Medicare Advantage. One, from a marketing standpoint, but two, from a potential incremental revenue standpoint as well. So -- but basically, as far as where you guys are sitting on that spectrum right now, I think you're trying to get to a 4-star rating across the organization. Maybe just talk about some of the steps you're taking to try to reach that milestone and what the time line looks like? And then I may have a follow-up on star ratings after that as well.

Yes. So our goal for this year, for this year's measurement here is 4 Stars. That would flow through in payment year 2025. The real investment around that is increased coverage of Clover Assistant and incremental new features rolling into Clover Assistant will have an impact for this year. I think the other tailwind that probably doesn't impact this year, but could impact next year's stars, definitely 2024, are some of the changes in the rate notice. So there's a proposal in the rate notice for a health equity index that'd be a measure added to the star rating. There was another proposal around med adherence to make adjustments based upon area deprivation index, which is tied to census data. And there was a third component necessarily tied to Stars, but tied to risk adjustment in the rate notice where there is a proposal around an inflator that would go on to risk adjustment for membership in a higher area deprivation index area and a deduct to make it budget-neutral, hasn't really been discussed any of those 3 because it was buried in 548 pages or something, but we were very excited to see those proposals. Now those will definitely have a negative impact on the incumbent operating margins. But I think the whole point of that is to drive behavior change on how plans operate to make sure they're much more inclusive on their membership mix. So for us, it's a big tailwind.

Okay. So tying some of that together then as we think about some of the investments you may have to make or not make to get from 3.5 Stars to 4 Stars. Is there a lot of incremental expenditure required to achieve that? It's kind of tying everything together you just mentioned or when does the leverage really start to kick in around that?

Yes. I think for us, it's really features within Clover Assistant and then increased coverage of Clover Assistant. So not any material amount that we would view on the SG&A line. When we think about what we're trying to build is really trying to build scalability with the platform versus, I would say more traditional approaches and where you really are throwing a lot of kind of bodies or vendors at a problem per se.

Okay. And then you touched on this a little bit at the beginning, but I think it's worth going to be diving into a little bit more. As we think about Medicare Advantage, I mean, there are some differences in the margin profile on more of an HMO book versus PPO. Maybe you can talk about some of the things, you just touched on this a little bit, but just what you're doing is really to drive success in the PPO margins and how that separates where other companies have kind of struggled with that a little bit to get more of an open network approach, maybe more volatility in medical cost potentially.

Yes. So I think if you think about all the MA margin on large incumbents or a lot of MA organizations, they're all on the HMO side. The PPO side really is a construct for them to get them into the plan and then move them into the HMO side. And there is no actual clinical model with those PPO plans. It's all embedded in kind of a narrow network on the HMO side. And that's really where we view Clover Assistant as that great equalizer where it can be deployed to any primary care physician as long as we're a willing user of it and really be able to democratize decision-making, really improve that consistency of decision-making irrespective of kind of the primary care network design. And that's really that powerful unlock that has allowed us to drive margin enhancement. When we look at lives that are with the doctor not on Clover Assistant versus lives that are with a doctor on Clover Assistant, we've shared that it's in excess of 1,000 basis points. And we just expect that to grow as more features go throughout. So I think we -- our operating model and our platform is really built around benefiting from an open network, whereas a lot of other players in the space, that's not their core business line and their clinical strategy really depends on attribution to HMO networks or primary care doctors in an HMO network or slash kind of narrow network design around primary care physicians who have strong coding ability let's say or already performing well on gaps in care.

Okay. So shifting gears here a little bit. And I know you also touched on this a little bit, but one thing that investors maybe have a little bit less familiarity with the need to get their arms around when looking at the company as some of the Medicare Direct Contracting that you have. I mean you could spend a minute or 2 just sort of talking about that part of the business, but also I think CMS introduced a move with this new reach model for Medicare Direct Contracting. Maybe talk about how that might impact the company as well.

Yes. So now Direct Contract has renamed ACO REACH. We were very pleased to see the proposed changes. I think one of the more interesting ones, it was the first actual rule promulgated under Medicare ever around actually creating financial impact tied to health equity, really tying it back to area deprivation index, where there's an adjuster up and down depending upon which decile one is in. So I think that's a good potential preview as to what could happen on the MA side. I think the other -- the second thing was by changing the governance components, I think they made it really clear that it's got to be physician-led and physician governed. A huge thesis of Clover Assistant is really empowering clinicians to make great decisions. We're really just a construct to allow them to benefit from that with Clover Assistant and the ability to take upside and downside risk. So I think long-term, and I made a couple of other adjustments that we think make it harder for larger organizations that are on the MA plan side to take advantage of maybe some lack of clarity in some of the rules and regs. So I think clarifying that, there's some of those are really helpful. So at least as we think about it, the rules are adjusted in the spirit of the original intent of the program, which is empowering physicians to benefit from better decisions and the savings that are generated from that. I think there's going to be continued pushback from hospital ACOs though. So if we think about the last 10 years, there's been probably 10 years ago maybe only 10% of primary care practices were controlled by a health system, either in a lease model or an employment model that number has ticked up to 50%. And so what's happened is the Medicare cost per capita in those practices went up dramatically relative to overall Medicare costs, mainly because you had more spend under [ HOPD ], you also have a little bit more intense referral patterns of utilization. So I think the ACO REACH model might expose that, that kind of differential in cost structure. So there's a bigger risk, I think, to the hospital ACO model as you kind of compare the PMPM costs that kind of play out over the next few years. So that's where I think some of the pushback might come from. If I was in charge of a hospital [ ACIV ], worried about ACO REACH being successful because it might put a spotlight on things that are happening.

Okay. Okay. I'm just kind of bouncing around here a little bit. I mean given the positioning of the company right now, how focused are you guys on just the overall growth that the Medicare Advantage pie or is that not really that relevant for you given kind of where you are more at the kind of hyper-growth stage at the beginning of the corporate journey?

Yes.

And also tied into that, by the way, you can maybe comment on the rate updates that were also very favorable for next year, which obviously should be a positive, but that should help the industry grow too, but just curious to kind of tie that into your discussion around that.

Yes. Yes. I think on the rate updates, I mean, I think we take it with a grain of salt in the sense of we assume there's that COVID -- there's some construct of COVID costs that are going to just be around, whether it's vaccine cost, testing costs, et cetera. So we'll assume some of that rate increase was to meant maybe compensate for some of that as we think about next year. When we think about kind of just growth in general, one of the very intentional approaches we've had is really around taking significant local market share. So we're #2 in individual MA for the entire state of New Jersey. There's really not a lot of organizations that have been successful taking significant share in the entire state over the last many years. We're now on a similar track in Georgia as well. So we're building I think pretty deep value by trying to take a lot of share in existing markets. When we think about the long-term path for us is really thinking about what's going to be valued by consumers. And we keep going back to the first principles, which is consumers want choice, paired with low cost. And for us, that means an open PPO model on the primary care side, but paired with great software for clinicians to make great decisions at scale. And then the tailwinds behind that when we think about over a multiyear period, thinking about 2025, '26, '27. This is -- we're in a setup where a lot of the -- now we finally see it in the rate proposals, that doesn't mean they're actually going to promulgate in regs. But if they did, a huge tailwind for us, a huge headwind for the incumbents, but it will create the right behavior changes as part of that. So our strategy we think is pretty unique, probably pretty contrarian as well. But it's one where -- it's not necessarily a land grab. There's already a product market fit with consumers and wanting low cost and a lot of choice. There's already product market fit with physicians wanting very helpful software that doesn't kind of screw them over at the same time or doesn't try to manipulate them in making certain decisions. And you kind of pair that together with the cost structure where we're able to manage the cost structure around a practice construct versus a different cost structure for each line of business, we should end up with much better economics long term as well. So I look at headwinds and tailwinds and then myself and Andrew, our President, we're the largest investors in the company or shareholders. I started the company with my own capital for the first few years. So we're looking at this over a 10 to 20 year time line, which I think is just very different than kind of the other players in the industry.

Okay. All right. Well, we're in our final minute here. Some of the companies at our conference here have given some updates around what they're seeing on utilization trends so far in the first quarter, breaking it down maybe between COVID and non-COVID. Are you in a position where you can provide any updated thoughts on how things are tracking?

Yes.

Clearly, in January, there was one trend that's kind of reversed itself. And also, is there a tight correlation between when COVID goes up, non-COVID goes down and vice versa? Just curious to get kind of your updated thoughts around all that.

Yes. I mean, I'll give you kind of general thoughts. So I mean, I think there's -- I'm sure, we all kind of keep up on this. There's definitely another wave that is making it from now Europe potentially into the U.S. Our hope, I think there's general hope for how this will play out is a much lower severity of conditions in response to that. I think we saw that with Omicron where the severity was just much lower this time around when we think about hospital admissions at least in the Medicare population. I think that was paired with mostly the higher vaccination rates than what was in place prior maybe 6 months before that. But now I think we hope the severity is in lower because it's higher vax rates in the senior population than even before. And a bigger percentage have already had COVID prior. And so the severity should be lower. I think we're seeing that when we look at the very recent Hong Kong data and New Zealand data where Hong Kong the severity is super high because you have 2/3 of seniors there that are not vaccinated and it's flip flop in New Zealand with a much higher vax rate with the senior population, similar outbreak in terms of those infected, but the severity level is much lower, much lower hospital admission rates. But if we see a wave coming back again, I think what will happen is we'll see as much more kind of the incidental COVID with admissions that would have happened anyway and then net -- there's that extra 20% payment that would come in through a hospital mission. I don't know if that's ever going to change. It's hard to take that back from a schedule perspective.

Yes. Okay. Great. Those are some great insights around that. So I appreciate it. So with that, I think we're out of time. I want to thank Vivek for his time today, and thanks, everyone, for joining this session. Thank you.

Thanks, Steve.