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

Thanks, everyone, for coming today, the last at Credit Suisse Healthcare Conference. With us today is Clover Health. And we have Vivek Garipalli, the current CEO, also outgoing CEO, as Andrew Toy takes over. So let's kick it off.

So I guess, you reported 3Q results if you just want to give a quick summary of how you did in the quarter and kind of your viewpoint into -- for the rest of the year?

Yes. I think really pleased with our quarter and continued progress. A big step-wise improvement on MCR. I think we're about 86.3% MCR for Q3 and year-to-date, 91.7%. And we lowered our full year guidance to 93%, 94%. So huge stepwise improvement on just gross margin in general for our MA business. And then on the noninsurance side, MCR definitely higher than we want it to be, but we talked through some strategies longer term on how to reduce that.

Yes. So just kind of go -- starting with the MA side of the world for a second here. You're pulling back in terms of county expansion relative to kind of what you did prior years. Obviously, tied to market dynamics and just cash, focusing on profitability. Should we expect a much more moderate growth rate in county expansion on a go-forward basis until a certain time frame? Or how are you thinking about that?

Yes. I think we're in a really interesting an attractive situation set up for ourselves as an organization. So we're -- we have a lot of cash on our balance sheet. We have no debt or any sort of debt-like instruments on our balance sheet, fully funded on regulatory capital without any quota share. Not that we are against that or any of those structures. But from a setup perspective, it's important for us to be having a clean capital structure right now. And so when we think about our path to profitability, it's really matching our longer-term growth aspirations with free cash flow generation. So one of the underlying drivers of our improved margins is Clover Assistant, probably a key driver. And -- so there's been a lot of features that are rolled out this year. We think that's going to help accrue to another stepwise improvement in MCR next year. One of the other components we've rolled out -- it's present now during open enrollment is what we call LiveHealthy Rewards. So it's a first actual reward for a member getting a visit that's powered by Clover Assistant. And that's going to be a really powerful lever going into next year, that's actually going to increase Clover Assistant coverage. So if we think through today where Clover Assistant itself, the members seeing a position on Clover Assistant versus member seeing not in Clover Assistant, the MCR differentials excess of 1,000 basis points. So as we continue to roll out more and more features, the value for members on Clover Assistant goes up. But then as our coverage increases materially hopefully next year, that also accrues MCR. Hence kind of our optimism on not just a stepwise improvement in '23 but also stepwise improvement '24 to '23. So when we think about growth, our view is, let's -- let that timing take place where we get coverage improved or increased continued value accrual per visit and we get to next year's bid planning. That'd be the right time to think about what an incremental amount do we want to put into plan design. And so that was a pretty -- I think, a pretty thoughtful decision we made this year is to not kind of jump the gun on that and let our growth and cash flow generation start matching itself.

Okay. Got you. Okay. So I mean a kind of alongside that topic, you're not necessarily putting your changing benefits just yet, but as you did go into this particular bid cycle, my understanding is you did make some tweaks on some of the benefit design that was perhaps a little too generous. So I guess one, how do you see that influencing AEP and membership gains, if at all? And what does this mean for your MLR next year?

Yes. So I think when we -- on our plan design itself and I think an actuarial can answer it with exact precision. But not too much has changed in terms of when we think about the aggregate value. So when you look at our core markets, what we actually did was put together a very meaningful rewards and incentive program with a lot of it tied to Clover Assistant visits, i.e., earning a reward if you got a Clover Assistant visit. And we moderated back in certain other areas to fund that. So it would look like if everything was fully paid out, that would be a higher spend per member. But we're able to calculate fairly precisely the value, if our coverage numbers go up. So there's a total consolidated math equation that's pretty attractive to us on that. That's kind of -- that's one part of the equation. I think the adjustment as we think about selling that type of product to consumers, the same way -- we basically led the way on creating parity on primary care. So $0 in network, $0 out of network of primary care to essentially propel a 2-sided marketplace where if consumers went to out of network position that created another physician that we could deploy Clover Assistant to. So competitors are sort of forced now to copy that to be able to compete. But their internal operational model isn't structured to actually have attractive margins under that model. And so the next kind of wave of our competitive approach is actually not funding a reward if you get a Clover Assistant visit. That takes an educating on how to -- educate a consumer about that, educate brokers about that. But that will happen because it's a pretty attractive structure. And so that's probably the shift that's happening now. But then we have -- we think over a time of high ceiling, on how much we can increase the rewards by as we generate more and more margin. So -- when we look out over multi year period, we think there's going to be a lot of dollars available per member to deploy in some benefits and rewards as we think through our improving MCR. And we know our competition doesn't really have that ability to do that. For them, it's more changing our SG&A dollars. So what we see the big competitors doing now is funding agents multiple years upfront and/or giving them marketing dollars upfront because they've had to pivot from the e-broker strategy, which we've been pretty vocal about for many years, [ wasn't ] a sustainable one. The current strategy that they're deploying we also don't view as sustainable. So for us, it's just stick to our approach in terms of Clover Assistant. Parity now funding value into Clover Assistant visits for consumers and then keep increasing that value over time.

Okay. I mean kind of on that topic of what other plans are doing. When you look at the competitive landscape, we've obviously seen and heard that some of the MA plans are bolstering their benefit designs by a pretty fair margin. I guess, what are you seeing in the market in terms of what they're actually doing? And how is this impacting the growth in your markets? And are they -- are those plans also taking share? Or are they taking share from you? Or are they just slowed down your growth rate? What are you seeing out there?

Yes. So I mean I can comment on if we -- Georgia is a great example where that's our second focus market. We took a lot of share in '21 going into '22. So the big competitors there are Humana as an example. So what we've seen a couple of big competitors do is, in our opinion, when you look at it on a consolidated plan basis, not a lot has changed for them. They've -- so one of the big competitors copied our parity but then added a $750 medical deductible. So it is technically more expensive to the consumer if they were a discerning shopper, but it definitely could create some confusion in the marketplace. And then another plan design where there's a higher OTC benefit, but a very high out-of-network cost sharing for primary care on the PPO side. But the -- no rewards. But it's paired with a tremendous amount of marketing dollars to brokers upfront, plus upfront multiyear payments to brokers upon enrollment. So when we look at that, it's not a pure sales and marketing strategy that's sustainable over time. So I don't think it's as much as you would -- like if you look at Plan Finder, for example, it doesn't actually go through rewards and incentive structures. That's not described because it's a separate sort of program within that. So we are actually not seeing tremendous change in the plan design. What we're seeing is all the money that was going to e-brokers is now flowing back to agents and then some because I know there's definitely been a lot of obviously pressure on some of the big MA players to get growth back to where it was.

Yes. I mean, going to the e-broker comment, you're not that exposed so you don't really use that channel. But as we kind of think about the retrenchment of -- from the e-broker channel, does this create an opportunity for you? And then alongside that, we've heard that complaints are somewhat elevated with CMS actually putting out a release that there's a lot more complaints going on and that they're telling plans, hey get this in check. Does this create an opportunity for you? And what do you think is going on in the marketplace that there is elevated complaints given what happened last year?

Yes. I think it's a huge tailwind for us for a few reasons. So agencies are pretty open about if you don't give them significant upfront marketing dollars, they won't sell your plan. And they feel bad about it, but they're getting -- and that is -- it's permitted, but it goes against the, I think, the policy intent of agents being focused on the interest of the consumer. So I think a driver of the complaints are not knowing necessarily what you signed up for. And if agents obviously don't sell enough of a plan from the plan that gave a lot of marketing dollars, they may not get marketing dollars the following year. So we stayed far away from that because, one, we can't compete on the marketing dollar side. Similar to the big players, all of our investment goes to R&D and Clover Assistant and valuing Clover Assistant and developing open network because that allows us to win on the gross margin side, which we can then pour into rewards and incentives and attractive plan design over time. So what I think this does portend to is we're in a long-term trend line where consumers within MA -- it's a slow trend line, but it's a growing one, where are going to make their decisions more and more driven by their own opinion as to what's the best plan for them. That doesn't mean they won't use agents, but there'll be more free will and a free thought. And you're definitely seeing that in terms of the folks aging into Medicare and those who recently age into Medicare. Those that are, call it, in their 70s or older, they still heavily rely more on agents to actually also make the final decision or recommendation for them. And so when we think about our business model, it's really playing towards the former and focusing our investment on that growth because it's hard to do both. But when your core model, i.e., the big players are focused on the latter, it drives a lot of behaviors in the organization that over time are going to create more and more problems for those organizations. So I think a lot of the complaints and so forth is just a result of many, many years of those behaviors and sort of a bit of a desperation to maintain growth levels.

Okay. Just within the kind of overall MA market and just managed care organizations in general, we've seen a lot more M&A going on. PCP seems to be the big theme. Home health was also a big thing. What are your thoughts on kind of what's going on in the marketplace? Do you see yourself as needing this type of asset sometime in the future? Any high-level thoughts there?

Yes. I think when we think about the -- just the clinician landscape, professional clinician landscape, everywhere from physicians, nurse practitioners, RNs, as an example. It's very similar to the landscape in the 70s in the United States, where there was a huge clinician shortage and physician shortage. And there were millions of visas that were distributed to bring physicians into the U.S. because of impending shortage. There was a great study that was released, I think it was maybe 3, 4 weeks ago. I mean when you project out, there's almost every state in the country has about -- the calculation is fairly straightforward, but basically a 50% shortage of clinicians. That's assuming everyone is in your network. You're seeing that on the hospital side as well where a lot of nurses have left the market or joined staffing agencies. Labor costs are up dramatically. So when we look at where is the -- where do we want to invest our dollars, for us, it's technology to help with clinical decision making, technology to help with clinical intelligence. The real -- when we think about capital deployment, it really is how do we, as a country, make it more attractive, easier to bring clinicians into the United States to decrease this impending shortage. I don't think buying practices other than if it's super strategic in certain situations is a great long-term model, in the sense of like given kind of the stats I described. it would be the equivalent of Amazon in the early 2000s, like buying a bunch of brick-and-mortar locations versus just focusing on building a great technology infrastructure. There's always going to be a need for clinicians and talented clinicians. And we don't have enough of them in the country given the aging population and baby boomers coming in and continue to come in through the end of this decade. And so when we think about where is the biggest value, it's technology for clinicians. And so all these practices and models being built up, we hope they could be future customers of ours one day.

Okay. Coming to that point. There's always the idea that you could take Clover Assistant and monetize it directly rather than going through DCE program or some other vehicle. How do you guys kind of see that evolving over time? Is this something that you're actively contemplating? Is this part of the future strategy? Just thoughts there.

Yes. So our be-all and end-all isn't to have every senior in a Clover MA plan. A lot of the times, a Clover MA plan may not be the right plan for a customer given their circumstances and how they utilize health care. So when we think about this over a 10-year time line, we want Clover Assistant driving clinical intelligence across as many clinicians as possible across all patients, Medicare, Medicaid beyond. Medicare is obviously our focus now and will be for some time to come. And when we think -- so we're definitely -- long term, we're definitely payer agnostic, whether that's fee-for-service, third-party MA. We're going to be super thoughtful around how we extend Clover Assistant out beyond Clover MA. So we think about fee-for-service programs, MSSP, et cetera, beyond the current program we're in. That's our first really experiment on executing Clover Assistant into an environment where Clover MA isn't the payer. And so we've learned a ton through that, and that's going to help guide us. One, it brings us into new markets at a pretty low cost. And -- but the thing that is very important to us is to always be a fiduciary to the practice. The risk of partnering directly with third-party payers, not that we're necessarily philosophically opposed to it. But the risk and something it's always top of mind is traditionally speaking, third-party large payers on the MA side, they're not necessarily clinically oriented. It's very much year-to-year. They don't view themselves in the business of helping clinicians make better clinical decisions. And so there's always going to be a kind of a conflict there on what they want to use software for versus what we would. Whereas partner with clinicians, we know that their goal each day when they wake up is to help their patients.

Yes. So you have a 3.5 star rating for next year. You've maintained your 3.5 star payment near '24. So that's a pretty positive thing considering most plans actually went down in star ratings with the recent release. So I guess when you think about kind of on the go forward, I believe by going to 3.5 stars, you get a 300 to 500 basis points improvement in your MLR. As you think about that potential profit pool that kind of comes in, do you see yourself reaccelerating into more counties? Or is it more, we're just going to take our time and really just focus on the profitability aspect, then you get to '24 and you continue the same thing? What's the calculus in terms of -- do you need to get to a 4-star range before you decide to say, hey, okay, now we could go back and expand?

Yes. So we run our long-term math, we believe we can get to consolidated profitability with a healthy growth rate at 3 stars. 3.5 and 4 is upside for us and for prospective consumers is how we look at it. So when we think about stars, it's more around how we think about consolidated MCR. We think when we kind of compare that -- it's not that we have to choose between one or the other, but there's a lot more upside in Clover Assistant value on MCR versus 3.5 to 4 Stars, but we don't have to pick between either. So for us, it's really a consolidated MCR equation. So as we get to bid next year, the math we're going to be running is, are we seeing that step-wise improvement in MCR next year that we're hoping for, that we're expecting? We'll have a lot more visibility by mid next year into are we getting that incremental next or will we be getting that incremental next stepwise improvement in MCR in '24 versus '23 as we think about the initiatives and features that are in flight. And we'll be able to take them and determine, okay, how much of that do we want to put into bid, irrespective of where we'll land in terms of 3.5 or 4 Stars or whatever it may be. And even if we got to 4 Stars, when you think about the -- how it works like -- like next year stars doesn't affect like 2025. I mean it's really 2026, but -- it's how big of a weighting is the Health Equity summary score going to be. That's going to be really interesting on how that promulgates. I'm sure there'll be a lot of industry pushback to not want that to have a big weighting. We want it to have a big weighting. That will be a signal as well because that's also going to affect competitors' views on it. I also think another -- there's probably a couple of shoes to drop on the regulatory side that I think it tailwinds for us. One, when you look at kind of all the benchmarks, so some counties are paid at 95% of the benchmark, some counties paid at 115%. When you do a blended average, it's about 104% to 105%. So Medicare advantage plans are overpaid irrespective what other MA plans say they are. There is an opportunity for the government to ratchet that 104% blended average down to 100%, easy way to save $0.25 trillion over the next decade from a budget perspective. Now we're talking our book a little bit because we're -- our counties are averaged around 98% or so. So we'd be a beneficiary of that. On the Stars side, when the Stars program rolled out, I think you had less than 30% of plans under -- at 4 Stars or more. Now you have something like 80% plans. So are they really high-quality plans? Or have they built their plans in a construct and service the population to get the high Stars. It feels like that 80% should be closer maybe to like 30%. That's another $0.25 trillion in budget savings. So you do those 2 things, you've got $0.5 trillion in savings for the Medicare program over a decade. It's good for consumers, also for Clover because you're -- because any changes will probably adjust to how do we gear this to where plans behaviors are geared to help all Medicare consumers, not just those who are well to do.

Yes. Shifting over to the DCE program, the DCE direct contracting program. It's been a little volatile for you. It's been a little volatile for the entire industry overall. And so for 2023, you're pulling back a little bit dead on that. Could you just provide some high-level thoughts on why the pullback? And particularly given it's a relatively light model compared to MA, why the pullback? And what this means for some of the other programs that you're participating in the future?

Yes. I think in general, our view is to make sure we're setting up to participate in a lot of different types of shared savings programs, fee-for-service programs, those that are not just upside and downside, but also upside only, gearing the model to practices that maybe aren't yet ready for downside risk. A lot of the practices that we have worked with and then are on our kind of top of funnel list are not in and have not been in shared savings programs before. And so when we think about not being heavily concentrated in one program, I think that's one; two, tending to be very conservative in our projections on projected math of that program and then diversifying beyond that. So I do think a lot of the practices that we're not going to be working with next year. I think a lot of them, we may be working with in '24 under a potentially different shared savings program. And so for us, it's more of a glide path on how do we ensure we're deploying Clover Assistant in a way with practices that also aren't going to be in a financially challenged position because they're at risk and not ready to take risk yet as an example.

Okay. That's very interesting. So have you communicated so with the providers that you are not going to be working with next year, have you actively talked to them that, obviously, the upside downside risk or programs was not your forte. So how about we just try the upside program? Have you actively talked to them? And what's their reception been on that?

Yes. I mean I think -- we'll know for sure, obviously, as it comes to kind of end of Q3, early Q4 next year. And I think no practice loves being in a situation where they are told maybe the math isn't going to work or they're not ready to kind of continue in a program. At the same time, I think the vast majority of practices know that they have to have a longer-term strategy outside of just straight fee-for-service. And so I can't say all those practices are going to be there come 2024, but we feel pretty good about a lot of those relationships and being well positioned. And we're going to invest the time and analytical resources to determine what the right kind of partnership structure is.

Okay. And then as you guys think about the paths profitability, again, got the 3.5 Stars, you're kind of ratcheting back on DCE program, ACO reach, is there a time line in your mind of when that eventuality will come? And do you need to be -- and alongside that, do you need to be in the ACO reach program for this? Was that part of the original plan? Kind of any thoughts there?

No. I think if anything -- I'll say this way. When we think about next year in kind of future years, we do expect -- and our goal -- more importantly, our goal is for any noninsurance programs to drive operating profit. That we think is kind of a healthy internal approach in terms of what we're trying to achieve as an organization. And because they're asset-light and creating that diversification of the programs that we're in, it gives us a much higher probability of us being able to hold true to that and grow operating profit versus just targeting a number of practices. So instead of focus initially on just top line growth, really making sure kind of core metric on noninsurance is operating profit. On the core MA side, we could have taken the approach of pulling forward some of our expectations next year in MCR and then 2024 and said let's grow really fast again going into next year. But that kind of goes back to that like cash inflow and outflow timing part. So from our perspective, we use this as an opportunity where we actually -- we didn't pullback, our plan is on but reconstructed it a bit to really allow for the creation of this very attractive rewards program paired with Clover Assistant. That's going to -- that visibility that we'll have by Q2 next year -- Q1, Q2 next year will then allow us to set forth kind of the future kind of growth strategy in terms of the pricing side that we know we're going to have an advantage in. And we obviously guided to not needing any capital next year, potentially not in '24 and beyond. Our goal -- my goal and our goal as an organization is to have a setup where we actually don't need any cash ever again. And there is a possibility if we -- if what our goals are for next year and year after are achieved, we're not guiding to that. But I think visibility for that will come in the next kind of 12 months or so. And then -- and if we think about in terms of whether it's consolidated free cash flow or core business free cash flow. So we think about our aggregate business, existing members, excluding cost of growth. So that's an equation, right? So we think about low cost of capital, what's an expensive cost of capital is equity, very expensive, especially today where our share price is. If you're a lender, as an example, there is no way to monetize as a lender, Medicare Advantage if -- because the big payers have plenty of cash. They don't need any external dollars. But there's a math equation where as we get our core existing MA business to where it's very attractive from a free cash flow generation perspective, and we're able to clearly delineate core free cash flow and then growth costs and growth for year 1 and year 1 member costs. If I'm a lender, I'm looking at that, that's really interesting. And MA is pretty big. And you've got a pretty competitive growth engine. There's a really attractive mutual cost of capital construct for us as a company and lenders out there. Again, super early in thinking through that, really talking through the math equation side. But we'd love to create a growth engine as we get the math, super logical internally, the unit economics where we don't have to necessarily use equity capital to do that. But to get there, it really means making sure we get ideally the consolidated business to profitability with our existing cash, but definitely the core business to profitability when excluding for cost of growth.

Right. Okay. Well, with that, I think we're over time. So I'd like to thank Vivek here for participating. Up next in the next session will be [GoodRx]. Thank you, everyone.

Thank you.