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

All right. We're going to go ahead and get started with our next session here with Clover Health. My name is Steven Valiquette and I'm the health care services analyst here at Barclays. To my right here, we have Scott Leffler, the company's CFO. And yes, we're going to keep our streak going here of fireside chats today. So I think with that -- yes, I think for -- we'll just start with high level. I think for some of the members of the audience that might be less familiar with Clover, because there is a managed care piece, but also a technology piece, but also some -- a little bit of a provider component as well. Maybe just give us just a high-level overview of the company, and then we can just dive into deeper questions from there.

That's great. Thanks, Steve. And let me start out just by thanking you and Barclays for hosting us here today and for all of you who are interested in hearing more about the company. We're very excited to be here with you today. Just a quick overview of Clover. We are a health insurance company that is focused on care for Medicare beneficiaries. We're probably best known for our wide network PPO plans that are rolling up under our insurance line of business. We also operate an ACO on -- that rolls up under our noninsurance line of business, which gives providers an opportunity to leverage their original Medicare panel in a value-based care environment. Underlying our lines of business is the real differentiator for Clover Health, which is Clover Assistant, which is our proprietary cloud-based tool, which acts as an enabler for physicians at the point of care, collating different forms of information, inputs in order to help support their clinical diagnosis at the point of care. Clover Assistant -- or Clover Health has been delivering a track record of impressive growth for a number of years. Beginning in the second half of last year, we began to talk a little bit more of an emphasis on profitability as opposed to growth. And that balance between profitability and growth is something that really is reflected in our recent performance, where we delivered an extraordinary improvement in 2022 performance relative to 2021, but also in our guidance for 2023 relative to last year, where we expect to benefit not just from the balance between profitability and growth, but also in our PPO plan having a tailwind from being paid on 3.5 stars for the first time. So the combination of those and a number of other tailwinds make us really excited about 2023 and the path to profitability.

All right. Great. So I think we'll maybe just have some questions here tied to the Medicare Advantage book of business for you guys, and then we'll towards the latter end cover more of the technology and kind of the Clover Assistant part of the business. But maybe just diving in deeper around the Medicare Advantage AEP results for you guys for the 2023 plan year. I think you had cited some expectations for the membership to sort of maybe come in line before you started in 2022. So far, I mean, obviously, the CMS data through February, I think, triangulates that. So that's all pretty straightforward at this point. Maybe just a tick down slightly versus where you ended '22. Maybe just give us more color around the AEP performance and how you felt about your competitive positioning versus the peers?

Sure. And as I said a second ago, we did come into this year already having talked a fair amount about the fact that we intended to balance our growth against our profitability objectives. And for those who follow the industry closely, and I'm sure you're well aware, Steve, the way the economics of the environment work is that typically your new members are going to be unprofitable for at least the first year that you have them. And so for a company like ours that has a maturing membership mix, really when you have an AEP cycle like this one where we have lower growth, lower new returning -- I mean, new members relative to returning members, it creates a profitability tailwind for you. And so when we did our -- went to our bid cycle last year and then went through AEP, we obviously anticipated the shifting strategy. And so overall, the AEP performance played out in line with what our intent was when we crafted our bids. Certainly, there was a very competitive environment in some of the markets that we operate in. But overall, I would say the results are in line with what we're intending to achieve.

Okay. Okay. I think that helps to kind of frame that a little bit better, especially around the benefit plan design. But also, just thinking about how it shook out geographically, did that largely shake out how you thought it would too? Or were there some deviations there?

Well, certainly, we saw, I think, from industry players a very competitive environment in the Georgia market in particular. But overall, I would say that we came in -- as a total plan across the geographies where we operate, we came in where we intended to.

Okay. Okay. One more question maybe kind of tied into that, just the overall marketing effort. When I was doing maybe some deeper dive work on the company a couple of years ago, I think most of the sales effort was external. I don't know how much that's evolved over the past couple of years or so. Maybe just talk about how much of your marketing effort is internal sales rep versus external right now? And did that play any role? And I guess the cost side of the equation? And also, how do you think about that going forward from here, I guess, to the extent that could also maybe help drive some better membership growth once the margin profile gets into the right place?

Yes. Well, certainly, we have a healthy mix of internal and external resources for our marketing efforts. Historically, Clover has significantly relied on outside broker partners, and that remains the case today. And certainly, there's always some amount of tweaking that could happen in terms of that mix. But overall, we're very pleased with our partnerships with our external broker network.

Okay. Okay. I think for a lot of the "next-generation" managed care companies that have come public over the past few years, I think at the time of the IPOs, there was I think a lot of investor patience for timelines to profitability. But now with some changing capital markets outlook and cost of capital has gone up, maybe some of that patience has worn thin a little bit. So maybe in light of that, maybe just talk about the current bridge or a path and timeline to profitability now versus maybe where that was a couple of years ago? And you kind of touched on that a little bit as far as some of the strategy for the '23 AEP. But just talk about how that helps you also on -- when you get to breakeven in profitability, et cetera?

Yes. Well, certainly, the changing market environment is something that we considered when we crafted the bid strategy and overall the near-term game plan for our go-to-market. And I think when you look at our 2022 results, at least on the insurance side of the business, we delivered an extraordinary improvement in MCR performance. I think it was over 400 basis points of improvement relative to 2021. Then if you look at our guide for 2020 -- I mean -- yes, for 2022 relative to 2021, and if you look at our guidance in '23 relative to '22, you see a significant improvement in performance. So we feel like we are delivering in terms of our stakeholders' expectations as far as showing consistently improving performance. We have not yet actually talked about circling a date in terms of our external comments towards profitability, because what we want to do at the beginning of 2023 here, first, is to deliver proof points on our 2023 performance, and then from there, we'll be able to talk more about the multiyear cycle.

Okay. Okay. Yes. And on that '23 guidance, correct me if I'm wrong, but I think you guided for MLR improvement. I think you're saying, what, 89% to 91% for this year versus 91.8% last year, I think.

Right. 91.8% on a GAAP basis. But we did mention that we had some favorability from PPE that impacted our 2022 results. One of the comments we made towards the end of last year was that when we consider that PPD and looked at kind of the underlying run rate performance of the business coming out of 2022, we view it as kind of coming out of the year at a 93% to 94% run rate. So the 89% to 91% now that we're guiding to for 2023 is a meaningful improvement over that underlying run rate performance coming out of last year.

Yes. Okay. Yes, it helps a little better. Yes. But it's a pretty big jump, obviously. And I think -- you said kind of going beyond '23, it's tough to talk too much right now. But do you see that target range of 89% to 91% something that might be in place for a couple of years? Or do you think every year the goal is just to improve that further based on what you see right now and knowing that right now, unfortunately, 2024 may not be a great year as far as the rate update as far as what's proposed right now anyway?

Sure. Well, at least we know we have the benefit this year of being paid for the first time on 3.5 stars for our flagship PPO product. And then beginning next year, we'll have a continuation of that for the PPO in 2024. That's already been confirmed. And our HMO is going to be paid on 3.5 stars next year. So we feel comfortable in that area going into next year. Certainly, when we look at the advanced notice -- I think everyone was interested to see what came out recently. It's not final yet. Obviously, once we have more information on it, then that will be incorporated into the bid cycle for next year. And we think that broadly it will be incorporated into the bid cycle by other participants as well.

Okay. All right. And based on the timing of this conference, now we're several months into calendar '23. So asking every payer and provider company if they're willing to just -- what are you seeing on utilization trends so far year-to-date in '23? And how is that stacking up versus expectations? I don't know if you're in a position to opine on that today or not, but thought I'd throw it out there and see if you're willing to have any discussion around that?

Yes. Sorry to disappoint you, but we're not providing any kind of interim update. For whatever it's worth, what I can say is that we are only 2 weeks removed from our earnings call when we provided our 89% to 91% MCR guidance. And so, obviously, the utilization levels that we would have seen so far in the year would have been reflected already in that guidance.

Okay. That's helpful to frame it that way, unless you did your budget like 4 months earlier, but I don't think that's the case. Okay. All right. Okay. Yes, I think you just touched on this, too, as far as the MA Star ratings, 3.5. But maybe if you can just -- a little more color on what's the pathway to improving those stars to 4 stars going forward from here?

Sure. One thing I'll say right out of the gate though is when we talk about our own internal planning towards eventually reaching profitability, we planned and seek to achieve profitability on our 3.5 star performance level. And so for us, profitability is not contingent upon hitting 4 stars. But having said that, obviously, it's something that we do want to achieve over time. You probably know better than I do how complex the formula are and the number of variables that drive stars performance. But the areas, of course, that we look into are medication adherence and closing care gaps and things like that, that over time will help to improve our star performance towards 4 stars.

Okay. All right. We touched for a moment earlier just how the 2024 proposed rate coming in softer than anticipated. I'm not sure what else to really say about that. I mean I think based on history, there hasn't really been a ton of deviation from final rule versus proposed rule. Maybe it hasn't deviated more than 100 bps maybe historically in either direction. But I think given that, I think do you already sort of assume maybe that it's not going to be that great for next year? Or do you still hold out hope from either what you see from the lobby groups' discussions or other things that maybe gives you better hope? Just curious to get your thoughts on that.

Well, it is going to be interesting to see how it plays out when you double click on it and see kind of beneath the surface some of the other changes that are going into the initial view at least. And obviously, CMS has taken a different approach. It seems as though they're looking to change how they handle coding for some conditions that they don't necessarily believe are predictive of increased cost in the care cycle. And there are certainly going to be a number of industry participants that could potentially be significantly impacted by that and might have to reconsider their operating model. But thankfully, from the perspective of Clover, we've always gone to market with this philosophy and with the Clover Assistant tool, which at the end of the day, is providing the information that our partner providers need to supplement their own diagnosis without any influence on our part. And so we think that puts us in a good position.

Okay. All right. And then just bouncing around here a little bit. I mean given the shorter duration of the corporate history for Clover, you guys had a lot less riding on the final [indiscernible] ruling maybe versus some other companies. But maybe just remind us again kind of on what you -- your thoughts were around the final ruling? And was there any material impact one way or the other on the business the way you see it now or not really?

It was in line with our expectations. At the end of the day, we think that it's going to be the implementation that's going to determine a lot in terms of the impact to any industry participants. And so we're just watching carefully for more details to see how it plays out.

Okay. Okay. This is an area of the company I think I haven't really spent too much time on hardly at all, but just as far as like some of the home-based care practice, what are your plans maybe for some of the geographic expansion around that?

Yes. So our home care business is one that we're really excited about. And for those who aren't very familiar with it, we've included a little bit of supplemental information in some of our investor materials recently. So I encourage you to go out there and use that information in order to become a little bit more acclimated on the business. But I think for any plan, you've got a relatively small subset of your population that is particularly vulnerable and at risk of disproportionate consumption of institutional services that really would benefit from the resources that we can bring to bear with our home care business. It is primarily focused on New Jersey, which makes sense given the history of Clover and where we have a concentration of our membership base. We certainly consider other geographies for it. But historically at least that's where we've had the most presence. We have talked about looking to expand the coverage for that business within our network. We are targeting to expand the coverage of the business to the point where -- our home care operation is actually managing $150 million of our MedEx for the insurance side of the business. And obviously, having that much of our MedEx under their management should help to deliver incremental benefits to the population they're serving as well as incremental improvement in MedEx for that population.

Okay. Yes, just around home health overall, I mean it's been an industry that had a ton of organic growth, then things kind of slowed down a little bit over the past year or 2. And there's been some labor challenges on top of that. But have you guys been sort of caught up in some of those same challenges? Or...

Certainly, it was impacted by COVID, and I think coming out of COVID, compounded by the labor market challenges that we've been seeing since then. I would say overall while we're always looking to maintain a stable staffing environment, that business has done pretty good well under -- a pretty good job under strong leadership, maintaining the resourcing and the things you need in order to get the job done.

Okay. Got it. Okay. Maybe we'll shift gears here a little bit and talk more about the ACO side of the business and also Clover Assistant. So I guess, first, on the ACO business. You guys have emphasized improving the MLR trend in that business in 2023 as well to also improve some of the profitability. Maybe just walk us through some of the different strategies, the mechanics you're employing to -- and if you have any sort of just status update on how that's flowing so far? Again, your call wasn't that long ago, but maybe just kind of reiterate whatever you were saying around that as well?

Well, it's another element of that general theme around shareholder value and accelerating on the path towards eventual profitability. And we started talking about this part of the business as well I think around the third quarter of last year. What we did -- so that business is relatively young and it grew very, very quickly very, very large. And when we reassess the universe of providers that we are partnering with last year, we were able to select those partners who we thought based on our experience were really most closely aligned to the program of value-based care and the use of Clover Assistant that we're looking to emphasize throughout the program. And so with the results of that based on the guidance that we provided, the expectation of a business -- it's about more or less 1/3 of the size than it was last year. But really we believe with legitimate line of sight to delivering gross profit for the first time, our guidance is 98% to 100% MCR for 2023, and we feel pretty good about the improvements we've made overall in the universe of providers that are participating in the program with us.

Okay. As far as those provider partners then -- again, I don't cover the company, so I'm not as close to this as I might be otherwise. But just remind us again as far as the revenue sources, then how much of that -- I think -- when I think ACO, I think a lot more of it might be sort of government contracts and some of the opportunities there versus just payer -- direct payer revenue. But what's your mix of commercial versus government revenue within the ACO business?

Well, it's an original Medicare panel that is being covered. And effectively, we're taking 100% downside risk from CMS under the program.

So [indiscernible] CMS…

Yes, that's right. And then the individual provider relationships can vary a little bit. But we maintain the vast majority of the risk on our balance sheet.

Okay. Yes. One of the themes from the -- I mentioned earlier, the keynote speaker session from the launch earlier today was really focused on value-based care and we had somebody from CMS Innovation Center speaking around all this. And there's been a lot of BBC opportunities directly with CMS through the ACO, but not all of them have been super profitable opportunities for better or worse. And I think they're getting more conscious of that. But clearly, on your own, you're also trying to make it more profitable as well. But I think under the payment terms that are offered with the programs you're involved in, I mean, do you see a clear path to profitability? Is this going to be one of those situations where, hopefully, it's not going to be one of these never-ending black holes where the companies ultimately have to just say, "Hey, if CMS is not cooperating, we just have to pull a lot of this. So I guess what's your level of dedication to the -- just the ACO business overall?

Well, certainly, I think there was some amount of concern in the industry last year as you saw some variability in the relevant benchmarks from quarter-to-quarter. But for us, we obviously made a commitment to the program here in 2023. We feel really good about the efforts that we've made around down selecting to the universe of providers that we maintain in the program for 2023. And we feel pretty optimistic about a positive profitability contribution from that business here this year.

Okay. Okay. And then on Clover Assistant. -- again, some of the companies that are using technology to really drive medical costs, whether it's through a BBC arrangement or just your -- just a more traditional managed care type business, some have been more successful than others. But maybe just talk about how that Clover Assistant platform, just how critical that is at the end of the day on your overall cost containment average.

Sure. Well, Clover Assistant certainly is core to who we are in terms of trying to improve care to Medicare beneficiaries. Fundamentally, what Clover Assistant is seeking to do is to enable physicians with the early diagnosis and care for chronic diseases. If you look at some of the materials that we've published recently, including in our Investor Relations deck, we've begun to talk more about specific areas where we believe we've documented the efficacy of the tool, whether it's related to diagnosis and treatment of conditions like chronic kidney disease and diabetes. So we feel great about the good work that Clover is doing from a profitability standpoint. We have also talked about the fact that Clover Assistant, when you look at our membership that see a physician who's live on cover assistant relative to those who see a physician, who is not live on Clover Assistant the Clover Assistant cohort is over 1,000 basis points better from an MCR performance standpoint. So the financial proof is there for us. And when you look at some of these other data points around some of these chronic conditions that we feel we're able to document improved care. Really, the package comes together nicely in terms of the messaging, and we really believe in Clover Assistant is a long-term value driver for us and for the market.

Okay. Great. All right. So yes, I think -- also on someone tied into this, I think you've talked about platform enhancements on a regular basis, I think every couple of months or so. So I don't know if that's something that you're closely able to kind of speak on get somewhat technical sometimes, but just any insight on any new features might be on the docket for '23 and how these might improve and impact physicians using the platform and also for your members for that matter?

So we don't talk about specific features that we're getting ready to roll out. But I will make a plug just in general for the efficacy of the technological framework that the team has in place a Clover Assistant was designed as a cloud-based tool and we have talked in the past another fact that we routinely roll out new and improved features and they don't have to be transformative. You know the fact that it is a cloud-based tool where we can very quickly and easily roll out new versions of CA and it's seamless to the user base out there in the field means that we can routinely roll out small, medium or large enhancements and ensure that we're getting the best capabilities out there for our user base.

Okay. Great. All right. Well, with that, I think we're out of time. I think we timed it pretty well here as far as full use of the session. So I want to thank Scott for his time today, and thanks, everyone, for joining us for this session, and enjoy the rest of the conference.

Great. Thanks, Steve.