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

Thank you, everyone for joining us today. It's my pleasure to be introducing Clover Health. Clover is a technology company that operates one of the fastest-growing Medicare Advantage health plans as well as a largest direct medical -- largest direct contracting organizations in the country. Presenting today, we have Vivek Garipalli, who's the CEO. We also have [ Derrick Nueman ] from Investor Relations in the office -- in the audience. I think we're going to jump right into Q&A.

Sure.

All right. So basically, we've seen that a lot of the companies that have gone public recently who've been focused on growth have kind of made a shift from growth into focus on profitability. Can you just tell us kind of where you are on that trajectory? And how you think about that pathway to profitability?

Yes. I mean it's interesting just from a general market backdrop. Now you see a lot of -- I mean, it's very similar to kind of 2000, where a lot of technology companies, putting aside healthcare, that have been growing pretty quickly are almost sort of like knee-jerk having to make that shift. I think from our perspective, especially coming into an industry where it's dominated by huge incumbents. There wasn't really a concept in the public markets of a technology company operating in a risk-based model. Obviously, a lot of pattern recognition around technology company servicing big incumbents. But the concept of a technology company potentially becoming an incumbent is very foreign to I think public market healthcare investors. So we knew when we went public that we would have to prove out growth, not only prior to going public, but at least have that cycle. I think right now, I think a generally knowledgeable healthcare investor can conclude that we've got a pretty compelling growth model, just in terms of how we've designed our plan designs, open access in terms of going in or out of network as a primary -- in terms of primary care, super low cost in terms of CAC, and extending into direct contracting. So I think from a shift to profitability is something that I think happens to coincidentally fit with the time, so to speak. But I think we would have had to make this shift irrespective even if, let's say, we remained in a kind of a market bubble still, I think we would still be making that shift, just because it's important for us to do. I think taking it a step further, when we think about our economic model, the goal is really to generate enough gross profit on our insurance line of business to cover the consolidated operating expense of the entire organization. And the way we look at our noninsurance line of business is to take that gross profit, and that's what really will drop to our bottom line and generate a lot of free cash flow over time. Whereas a lot of the incumbents or even some of the other earlier-stage MA plans have to have a very defined gross margin to generate the business value. It's not to say that we won't generate more gross profit beyond even our consolidated OpEx over time, but we have a big economic advantage on operating leverage. And I think a lot of insurance plans or with noninsurance lines of business, they're typically focused on one area or the other. And it's very much of not servicing physicians or providers. So typically, if you're an incumbent, you're very much having these individual lines of businesses that have its own OpEx structure, creating chaos within physician practices. For us, it's really land with Clover Assistant and then extend it across the physicians panel, starting with fee-for-service, extending it with third-party, MA really being that intelligence layer.

It's interesting the way that you frame that, because definitely noticed during your earnings call, it seemed like there was a shift. Obviously, you renamed your segments to be insurance and noninsurance. And then you start talking a little bit more about licensing technology and doing things. So like when we think about the way you just framed gross profit covering the business and then the technology kind of flowing through, is that technology a combination of direct contract, ACO REACH, and licensing the technology, that's the way to think about that other side of the component as you laid out the profitability?

Yes. And I think the way to think about -- and we use the word licensing loosely where it's going to be different in each kind of segment. So as an example, in -- or a direct contract now ACO REACH for next year, the model we've deployed is Clover takes on the financial risk. We deploy Clover Assistant in the clinical programs. And we then share in the upside that we're able to generate over time. But even in that model, we work not just with practices, but MSO organizations, maybe smaller versions of like the Agilon type companies, our real value add there is that intelligence layer. So our monetization engine is really around, there's really a function of what allows us to garner the most value. So just said another way, if we look at something outside of healthcare, no one would ever mistake Google for not being a technology company. They made a decision from a monetization perspective early days to generate ad revenue. The reason they did that, not only because they had a big TAM, but being able to offer that for free allowed them to create the most engagement and iteration to continue to optimize research results. And so when we think about this from an extension perspective into, let's say, we're servicing -- helping practice service third-party MA plans, we're not interested in being direct negotiators with those MA plans. It's really going to be up to the practices or those models, what are they comfortable with? Most doctors that have become physicians to run a hedge fund. So while there is this big fascination with capitation, it's not something that the vast majority of practices are personally or emotionally comfortable with. So we're never trying to shove them into a financial model, it's really what makes sense for that physician or practice or that hospital-based practice. And then from our perspective, how do we ensure that we get the most trust with our platform when we deploy it and how do we create an economic model with how they benefit from that third-party MA plan and we're just behind the scenes on that end. And that's really how we look at it.

Yes. So I guess, does that have any ramifications or -- because it feels like a little bit different way this is how you're framing the economic models. How many different ramifications for kind of how we think about margins or the EBITDA potential of the company, does that change the margin, expand the TAM? Does it -- how should we think about it?

Yes. So the -- the TAM -- the way we kind of view TAM, there's current TAM and future TAM. Future TAM, everyone says all the Medicare, all that sort of stuff. So I think the reality is you have to look at -- in MA, you have to look at how many markets are you going to be in over time. So the reality is we're not going to be in every market in the country in the next 3 to 5 years, but we'll be in more markets in 3 to 5 years than we are today. And then you have to look at the product that you're offering consumers. So the main cash flow engine of incumbents today in MA, are HMO products. Any incumbent that says they generate a positive operating profit on PPO, they're lying. They're just not. And so they don't know how to make money on the most popular product that exists today. That's a business problem for them. They're valued as if they're growing pretty quickly, but in reality, their growth has stopped and is actually declining. And on the PPO side, where the growth is actually make a negative operating margin there. And so we built our whole business model to have Clover Assistant drive financial value in an open-access PPO model, not just a standard PPO model where you can go in or out of network to any primary care doctor at the same cost sharing. And that gives us once a physician -- even if they're out of network, gets to a certain level of Clover members that allows us to go and get engagement on them using Clover Assistant. And so from a TAM perspective, whether it's in a county or in a state, we're able to make a more, what I think a more intellectually honest argument that any consumer in that market that's interested in saving money relative to fee-for-service and maintain that choice, we're a more attractive product. And there's a financial sustainability around it. And then that starts extending when we actually start opening up alignment incentives with consumers to want to go to physicians on Clover Assistant. That's something we haven't introduced into the market yet, but it is on our road map over time. That's something we may do. So when we look at our TAM, it's a function of what's actually financially sustainable. I'd argue the future TAM for current incumbents isn't actually bigger than it is today, because they're going to bleed lives on the HMO side and they don't know how to generate margin on the PPO end. So -- and then if we take it into the fee-for-service end, that's a marketplace where if the government said tomorrow, we're not -- there's no more at-risk models, ACOs are gone. Our whole approach is, well, okay, we're just trying to deploy an intelligence layer there for physicians. So what's the new RFP or what's the new technology model there. We just saw this as an opportunity to deploy software. It's really interesting monetization strategy for us and a way for us to get more operating leverage with practices. At the same time, there's a lot of markets that we're in, where we have an ECR partner, we don't have an MA plan. And that's -- that gives us a lot of signal as to is that a market we want to enter with an MA plan now or later. And then when we think about extending to third-party MA, it's really fascinating, right? So if you're -- let's say it's like -- it's a state that we're in, let's say, it's New Jersey or Georgia now. And there's a -- let's say there's a lot of practices that are on Clover Assistant. There's well over 1,000 now in New Jersey on Clover Assistant that see Clover MA lives in Jersey. And they want to leverage Clover Assistant with their third-party MA plans. If whatever reason those third-party MA plans don't engage in an honest way with those practices, what do you think those practices are going to do? What do you think that health system is going to do? We do have the more attractive product there. So all of a sudden the disruption gets created because of friction on the third-party MA side. Because they're not giving them a technology product that's helping them make better decisions. So there's these structural things that are happening that I think will be clear over the next 3 to 5 years, that will demonstrate we've got all these very unique tailwinds, given how we've built our model and how we monetize. And I think you're seeing some of these signals with what Humana is saying around their growth challenges or this obsession United has with acquiring Change Health, right? Like they've got to print these EPS kind of growth numbers. The reality is the model is broken. If you really started unpacking and they started revealing what they are making in different segments, you'd see there's a real issue there.

So you mentioned kind of like an Agilon type model where you're helping physicians manage all of their Medicare book of business. Is it -- was it truly an Agilon type model where you're sharing upside downside 50-50 or is it still kind of leveraging the doctors? You can see in the fee-for-service world we'll pay you more, if you work with Anthem but we'll take the risk on that. What kind of structure are we talking?

So we -- yes, we don't view ourselves in any way competitive to Agilon. And I think they operate in a different -- we're not in the business of helping manage practices, helping them run admin services, negotiating with MA plans for them. That -- I think there's a lot of organizations that do that well. I think they're one of them. That's not our edge. What we do like about companies like that is they're focused on empowering practices and helping them become more successful. I think there's a big tailwind behind that. We're really the intelligence layer behind that. So there's a lot of smaller versions of Agilon that we do work with, that are much smaller, that realize, wait a second, we're not going to build what you've built. We see how there's synergies here, and we're happy to partner. So I would say it's not bespoke in the sense of that every economic model is completely different. But for us, it's really around how do we get into the right type of partnership with that practice versus obsessing to getting to a very specific type of economic model day 1. Because it's the same when we enter an MA market, it's hopefully for a very long time, the same way as we think about it getting into a physician practice. Because for us, the land and expand can entail a lot of things. It could allow us to build a preferred network. If it's on ACO REACH, it allows us to extend our software into more practices there. That allows us to roll out an MA plan, if we so choose. So there's a lot of different ways we're able to optimize kind of gross profit over time. And I think the powerful thing about it is when we are in a market, however we're in a market, we're able to add gross profit without much OpEx. And that's really the journey we're on right now over the next kind of 1.5 years, 2 years, is that when we talk about those efficiencies, that's what's really exciting about it.

And so when you think about the technology, I think the problem that a lot of time investors have from the outside looking in is like everyone says they've got a great technology. So how do I look at Clover and say, I can clearly see from the outside that this is different than what other companies are talking about?

Yes. I mean I think it starts from the top. So this is the second healthcare technology company, I built. The first one was Flatiron Health. That was probably the first successful healthtech exit. My partner at Clover, Andrew Toy, built one of the most successful security companies for Android and sold it to Google about 5 years ago, and he is a security layer for every Android phone in the world. It's what -- to build great technology, you need to have the best people and to pair and I saw this first in Flatiron, you need to pair great technologists with really strong domain experts. And if you think about what is it -- why has Musk been so successful with SpaceX and Tesla, he's been able to do that successfully and it's not an easy thing to do. A lot of the great technology companies typically are more consumer-oriented, not in complex industries like health care or space or defense or education. So it starts there. Typically, when a company run by, what I would call, someone more of like a suit type person, let's call it, who's never really built technology or built a technology company, it's very hard to hire a great technologist and treat that person as a partner and attract the right people. You typically hire someone and then you kind of dictate how things should be done. And that's not how great products are built. There's very little pattern recognition within whether it's upstarts or industry players that have actually built great technology. So it starts there. I think kind of the second part is, we're the only company out of all of those companies that has actually deployed software at scale with thousands of physicians with an 80-plus percent engagement rate, and that's a fact. And those are the stats. So I don't -- I think they'd have to demonstrate, well, where are those statistics that demonstrate that they feel they've got -- typically, it's technology where they've -- there's this deal signed and the practice has an already downside risk or they're fully capitated or they own the practice. It's all these kind of contortions that where it's not free will, I would call it. But when you're doing that with physicians that don't work for you, where they could also be out of network and have the same zero cost sharing. Well, then what is really the reason they're engaging with you. And then from a physician perspective, they really need to trust that software. And so even if you're building something that's really valuable, typically the business person at that healthcare organization will say, well, wait a second, we have to create the payment model that ensures that they're engaging with it the way we want them to. But then you change the behavior on the physician side, because then they're going to engage with the software in a way that either they feel we'll penalize them on the payment end or in a way that will help them get more payment. So by doing that, you're just ruin the integrity of the data interaction on that software. And so that's a core part of it where there's no way to game Clover Assistant by engaging in a certain way. You can't get paid more or less. So you can't help, but just to use it to hopefully, make better decisions. And then as a stand-alone software company, we're not subject to all the kind of IT upgrade cycles that you're stuck with all these legacy HR systems. But we've seen a lot of progress within the technology component of CMS that has put a lot of oversight on EHR companies to do integrations on our terms. And we're no different around that. So we're able to maintain the integrity of our technology platform from an innovation perspective. And so what kills software is if you do integrations too deep, you can't roll out new features quickly and consistently and at scale. And everything I'm describing is very foreign to most healthcare companies. Their eyes would kind of spin. But these are fundamental tenets if you're going to build great software for clinicians or in general for anyone.

That engagement dynamic is key, because you've demonstrated and disclose information 100 basis -- 1,000 basis points better in MLR when doctors are using it. I guess what are the numbers in the most recent quarter, but the engagement as a percentage of MA members seem to decline. How should we think about that number overall? What drove the percentage decline?

Yes. The main driver of that was Georgia. So Georgia, we tripled our membership. And so the biggest indicator of whether a physician is willing to adopt Clover Assistant or not, is if the Clover membership -- and I'm talking about the MA side, the Clover membership for that position goes above 10 Clover members. Once you're below that number, it's just -- there's not a -- there's just -- you're not in the conversation. And psychologically, when you think about why is that 10 important. So if you take -- physicians are creatures of habit. They go about their weeks and they're dealing with all this stuff. But if you take 10 patients, let's say, on average, they're seeing 4 -- there's 4 visits a year per Medicare patient. So in general, they're seeing a Clover member once a week. And so just psychologically, when you think about just behaviorally, that's what's happening and why, okay, yes, I see Clover members. They're not doing a count on their, oh, you are at 10. This is just human psychology. And when you're building software, you have to understand the psychology of who you're asking to use your software. And so when we go into a new market, we don't go and try to convince physicians, who have very few or no Clover members to utilize Clover system, because that will not go anywhere. And so for us, it's really expand the membership and then certain practices that we're seeing that now, obviously, going from a few thousand to 11-plus thousand in Georgia, in 1 open enrollment, we now have a lot more practices and physicians that have that 10 or more Clover members, and we'll see that kind of coverage level tick up. If we were just in Jersey, as an example, let's say, all the new growth occurred only in Jersey, then you would have seen that immediate coverage numbers continue to go up into the right. But because of the major growth in Georgia and that dynamic, that's why it picked out.

Yes. So I guess when I -- when you think about that 10 number dynamic, I would have thought that having a direct contract population would have factored into that side. Does that include direct contracting? Or does it only include the...

So I'm only talking about MA there. Our direct contracting lives, I don't have the exact sort of hold me to these numbers. I want to say it's about 2/3 to 3/4. I'm giving you a little bit of a wide range of our direct contracting lives or in markets where we do not have an MA plan. So there's a smaller segment of those practices that are -- but to your point, in those practices that happen to be in our MA markets, definitely a very different type of conversation.

Yes. So I guess why is that? I guess you're just targeting them differently, like if you're saying direct contracting, I'm talking to you because you have a large Medicare population, not because you necessarily are going to be in MA.

Yes. We're looking at it under a 20-year time line. So we're a founder-like company, founder controlled company, not really going anywhere, neither is Andrew. And so we're looking at how do we win in 20 years. So when we look at our market, it's really how do we think about this over the next 20 years. And for us, if we can work with an anchor practice that has enough of a base of lives, and that gives us our ability to deploy software there and learn in that market. We know we're going to win in 20 years. And it's being patient around that versus saying we have to have an MA plan in every new market. Because if I think about even on the personal investing side, the vast majority of my personal investments have been in early-stage technology companies over the last 10, 12 years. Same with Andrew. We have a ton of pattern recognition outside of healthcare on a personal basis on how companies win in industries and you've got to take a long view. This is not an industry where we're going to be able to take $1 billion and just throw it at growth and no one's going to pay attention to the unit economics. That's just not the current space we live in for -- within health care. So we have to create that mathematical edge. And that mathematical edge is, find the right way to deploy our software in the market at a super low cost, and that allows us to extend there over time. But then you again -- you go back to the incumbents, they're not looking at it that way. It's very -- there's a centricity in terms of how they -- it has to -- they have to win in their model. And that is going to prove out to be a disadvantage for them over time.

Yes. And so I guess one of the things that we think about your kind of pivot to proving the economic model, the MA rate was pretty strong. I mean, does that give you -- does that make you change at all your view about how fast you want to grow versus how quickly you want to pivot to that profitability dynamic?

Yes. I think it -- we we've had -- we now have probably, I guess, it's 9 years of like on-the-ground intelligence on what consumers really care about. And they really care about choice. And choice in their minds really does come down to primary care. And if -- I'm sure most folks here, their parents or grandparents can afford traditional fee-for-service, why do you want that? Because it's a choice. You can go anywhere you want. That's just fundamentally it. And yes, sub benefits are great and all that stuff is great, but people want choice. And especially if you think about the next stage of individuals entering Medicare, they definitely want choice. My mom's a Clover member. And I'm pretty sure if we didn't have a choice of primary care she would be sticking with fee-for-service. And so it's really kind of that fundamental. And so we've been watching kind of the growth models that are out there, and they just don't work for us. This whole kind of TELUS sales and it's just -- that's -- you're not building a relationship. You're selling based on where your marketing dollars are coming from. And I think we're seeing obviously a lot of cracks in that model now playing through, but we've been talking about those cracks for the last couple of years, because it just doesn't work for the consumer. And I'm not saying everything needs to be broker-led, independent agent model, but it has to start with, are you giving the consumer the most important thing. And so when we see kind of rate book increases, this and that, we're not -- we don't think about it as to how do we dump more of it into some benefits, this and that. We know we've got this very attractive thing that is unique to us, because we know incumbents and others can't win in Open Access PPO. They might be able to win in a PPO where the cost sharing is super high in out of network for a primary care. That does -- that's not choice. That's just sort of like marketing kind of BS. And so that's really how we think about it. And the moment they do try that, their MCRs are going to look well higher than ours and then someone in Minneapolis or wherever is going to be like, no, no, no, we got to bring it back and we know how those organizations work. So we just have to stick with what we know consumers really want.

So actually it's interesting as you've said a few times, it's hard to make money on PPO. So like when you look at industry, enrollment PPO has grown faster than HMO over the last few years, but you're kind of differentiating between PPO a name versus PPO, the way you see it, which is a very broad network access?

Yes. I mean, I wouldn't say we're the only company that has a priority zero caution with primary care, but I would bet we're the only company where that's our model. And I'm sure organizations have a market or two where they've tried it or experimented with it.

And on the call, you talked a bit about the home-based capabilities that you got. You have to talk about a lot about the technology on the front end, but like the care delivery, how important is that? How scalable is that? What kind of investments do you need to make that work?

It's super vital for us. So when we were a few years in building Clover, we had to make a clinical and business termination for our most acute population. Do we partner with Oak Street, do we partner with ChenMed, do we partner with Iora. I spent a year talking to hundreds of physicians, just primary care doctors in various markets, not because we were entering the MA business there, I really wanted to understand what do you think of these companies. And they hate them. And the reason they hate them is not because they don't have a good clinical model. I think they have great clinical models, but there is not one Medicare patient with 8 or more chronic conditions that does not already have a primary care doctor. So the challenging thing is those models create so much friction where physicians don't want their patients enrolling in those organizations' clinical models, because they lose the patient, and that's a big revenue portion. That -- those patients generate 15%, 20% of their Medicare E&M revenue. That's a lot. Even though it's only 4% to 6% of their panel. And so the problem with that is they tap out a 20% to 30% enrollment of those that are eligible, because of these dynamics I described, and people in the market don't know who they are. But that 20% to 30% is still relevant for United or for Humana. But when I look at it, I'm like, what about that other 70%, that's not getting access to that. There's a math opportunity there, and there's a clinical opportunity there. And how do you do that where you don't create competition in the local marketplace where it feels like you're referring more to an oncologist, or a cardiologist, what primary care doctors do all the time. No problem care doctor says, I'll handle kind of everything oncology-related but based on clinical need. And so we bought a small asset out of Signify 5 years ago. It's the only acquisition we ever made, and they had a small home-based primary care program because I needed a team that had that clinical know-how and then we brought some folks from kind of CareMore and Oak Street and elsewhere. And we then build a home-based primary care model. The only physicians we employ are those home-based primary care physicians. So when we're enrolling, we're trying to get engagement around enrollment there. Physicians aren't threatened by it. They understand it's a clinical model, it's home-based. We're not setting up locally to take their patients. We're not saying they have to switch primary care doctors, but that might be the natural kind of evolution. There's obviously a whole kind of support team there. And we're north of 60% enrollment of clinical eligibles, double or more what you see in the marketplace. And on top of that, we're growing pretty fast. So that 6% would be higher if it was at steady state. And we've had COVID for the last 2 years. We've had to run this program virtually the last 2 years up until February of this year. And there's no doubt we cannot drive the same clinical value when it's fully virtual. So we're excited about what we're doing there now and we're on time. And then we just appended onto that, our palliative care and hospice program but you pair that with where you already have 60% plus enrollment of eligibles, we're at 90% plus enrollment into palliative care hospice for those who are eligible of that population. And that's really -- it's those engagement stats that we pay attention to that win long term.

Okay. Great. I think we're out of time.

Thanks for doing us. It's our pleasure, yes. Thanks.