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

Great. I want to thank everyone for joining us today. It's my pleasure to be introducing Clover Health. Clover is a tech-enabled insurance company focused on Medicare Advantage as well as ACO REACH. Presenting today, we have Scott Leffler, who's the CFO. Ryan Schmidt from Investor Relations is also in the office -- is in the audience. But I don't know. Scott, do you want to start off with anything before we jump into Q&A?

Yes, that would be great, Kevin. And let me just start out by thanking you and Bank of America for having us here today. And for those of you who are listening who are either already following the company or have an interest in beginning to follow us now, I just want to thank you for your interest and your time, and look forward to getting you more and more acclimated to the Clover story. As Kevin mentioned, we are a health care company with a particular emphasis on the Medicare-eligible population looking to support the early identification and management of chronic conditions. We are probably best known for our wide network PPO plans. But really our true differentiator is Clover Assistant. Clover Assistant is a physician enablement tool. It's a proprietary cloud-based tool that we developed in order to support physicians in that effort around the early identification and management of chronic diseases. Clover, for those who have tracked some of our history, had delivered a track record of extraordinary growth during its history. But one of the strategic areas of emphasis that we've been discussing now for a few quarters is the balancing of our prioritization of growth versus profitability. And we have increasingly emphasized recently our intent to accelerate on the path towards profitability. We delivered an extraordinary improvement in overall performance for the company on the MA side during 2022 compared to 2021, but we really looked at Q1 of 2023 as a very important proof point also to document the incremental benefit from the shift in strategy as we leveraged a maturing membership base in terms of our mix of new versus returning members, benefiting from being paid on 3.5 stars for our PPO plan for the first time, operational enhancements as well as payoff from the continuing investments that we're making in Clover Assistant. And hopefully, some of you are aware that we did report Q1 earnings earlier this week, and we could not, as a management team, be more excited about the momentum that we have shown here in 2023 so far, reflective in the step change in performance in Q1 compared to the prior year period but also enough positive momentum that, already at this early point in the year, we improved on the guidance for full year 2023 that we had just communicated a few months ago. And so again, very excited about the positive direction of the company. For the first time, we did indicate that we see a path to profitability in 2024, and look forward to continuing to deliver more proof points for the investment community. So with that intro, Kevin, I'll hand it back to you.

Sure. So I guess one of the things that we've been trying to get an answer to this week has been the strong utilization data points that we've been seeing across hospitals, med tech companies. I mean, by and large, managed care companies are saying everything is fine. Your quarter, strong improvement in MLR year-over-year. So like is there some way that you can think about how to kind of reconcile what seems to be a reacceleration utilization with strong MLRs and good commentary from managed care?

So obviously, I can speak most -- with the highest level of conviction around specifically what we saw out there in the market and then perhaps hypothesize around what's going on more broadly. I do think there's still a little bit of noise in the prior year comp. Last year, Q1 of 2022, you had elevated levels of direct COVID-related expenses but, on the other hand, slightly depressed utilization levels. And so I think it's natural to expect that you would see some amount of elevated utilization relative to that somewhat distorted baseline from last year. But in general, what I can tell you what we saw was utilization levels that was more or less in line with what we expected. And when we look at our Q1 utilization and what that informs for the rest of the year, we didn't see anything that really changed our view. And when you look at our outperformance in Q1, it was really coming from the fact that we delivered 14% year-over-year revenue growth as opposed to anything abnormal on the MedEx or utilization side. And that is one of the things that really gives us so much optimism around the rest of 2023 because that outsized revenue performance is something that we believe to be largely sustainable based on some of the internal metrics that we follow.

Yes. So I guess maybe to dig into that for a second because I guess, I think the easy comp makes a lot of sense, particularly when you think about non-COVID utilization being up so much. But yes, from a managed care perspective, it's not just what is utilization. It's kind of what did you price for. So when you thought about pricing, and you mentioned pushing through pricing benefiting from Stars, how did you think about utilization? Did you assume a normalization in utilization, pent-up demand still below the trend line? How would you think about it?

Sure. And so we did assume effectively this normalization in utilization that, from our view at least, we largely saw. Although one thing to just bear in mind with respect to us specifically is that given this shift with an increasing emphasis on profitability than what we priced in our plans as far as last year's bid cycle, also would have been influenced by some of these other strategic factors outside of our anticipated utilization levels.

Okay. Now that's helpful. So I guess when we think about -- you mentioned your confidence in kind of the profitability in 2024. What still has to happen? Where -- what are the drivers to get to that level?

Sure. Well, so if I start with 2023, and I'll just reference the guidance that we updated earlier this week, we are already projecting a step change improvement in gross profit contribution from each of our 2 business units. And so for starters is they're obviously going to be the biggest levers, and what we look to see in 2024 and going forward is continued accretion, along with top line growth, for our 2 business units. And then separate from that, we did recently announce a transformation initiative that includes transferring some of our noncore insurance and back-office type operations to a UST HealthProof, which is a new partner for us and a leader in the industry. Obviously, we keep everything that is core to us, particularly in terms of the development and maintenance of Clover Assistant, but it allows us to leverage some of the economies of scale that a plan with less than 100,000 members just doesn't have as a -- doesn't have access to. And so the savings, which we had indicated, we anticipate reaching $30 million on a run rate basis by early 2024, is an important part of the overall levers that we intend to pull towards profitability next year.

So I guess, I'm trying to think -- I mean that $30 million would be, I don't know, 20% of the entire -- like of the way there. So like are there other kind of like areas of main building blocks you kind of size for us? Like how much of it is just kind of repricing? How much of it is costs? Any other way to think about it?

Yes. Well, that gets down to a level of granularity that's beyond what we've disclosed so far. We do see that path to profitability in 2024. And particularly with this Q1 proof point now, we obviously have an extraordinary level of optimism around our 2023 performance, which then helps to inform the jump-off point in terms of profitability contribution -- gross profit contribution from each of our 2 business segments.

Okay. And so then, I guess, you mentioned this UST HealthProof relationship. And again, I don't -- when I read the description of kind of what you're off-sourcing, it kind of feels like some of these are -- feel like to be like core payer functions, where it's like -- so can you think about -- how do you think about where your role starts and where you're adding value versus kind of where you see some of the more commoditized back-office things?

Sure. So some of the areas that we are transferring over to the UST Health group are things like member contact, mailing, enrollment processes, some claims activity. And so these are areas where really -- we're very proud of our capabilities in every area, but really, these are processes where there's a tremendous advantage to achieving economies of scale. And we're talking about a partner across their different lines of businesses. Services are around -- I believe around 3 million members as opposed to servicing less than 100,000. So it's easy to see how they have access to economies of scale that we just aren't close to. And so it is a great opportunity for us to take advantage of the economies of scale that they bring at the same time that we keep what makes us special. And of course, the #1 thing that makes us special is always going to be Clover Assistant, significant capabilities and investment that we've made in that, but also as far as just the overall kind of core activities around managing the plan, managing the strategy of the plan, bid process, things like that, that we maintain internally with our management team.

So I guess maybe you can talk a little bit about Clover Assistant then and then how you engage patients and where the value add from that is.

Sure. And at the risk of being redundant, Clover Assistant truly is our differentiator. It's a physician enablement tool, which we often say kind of bring superpowers to a physician in the clinical environment where, in today's day and age, you've got so much data that is out there from disparate sources and consolidated data from many sources. It's a machine learning tool, always getting better and adding functionality. And anytime in the care environment the physician is using Clover Assistant to supplement during care, it is giving information -- feeding information to the physician in order to help enhance their clinical judgment. One of the things that's important distinction with Clover Assistant, it is that really what we're doing is we're investing in the clinical judgment of the physician as opposed to trying to supplant it in either way. We're providing what we deem to be useful information to help them, particularly in the early identification and management of chronic conditions.

Okay. Actually, just go back to UST for a second. The savings that you're generating, is that -- are there savings on ACO reach from that as well? Or is this really more just supplementing the MA side of things?

It's really the MA side/some amount of impact on the corporate infrastructure.

Okay. And so going back to the Clover Assistant, you talked about engagement. So like can you talk a little -- give an update on kind of percentage of physicians who were using the Clover Assistant and some of the proof points as far as MLR for those who are using it versus those who are not using it?

Sure. So that is a statistic that we used to routinely published. But what we found is that there were some distortions in the number where, particularly during periods where we were in a very aggressive growth mentality and expanding into new geographies, you would have kind of a natural phenomenon where the new geographies, you have less scale there, ends up being to your KPI in terms of Clover Assistant penetration. And so we've stopped relying on that. But what I can tell you directionally is in an environment where we are moderating growth, in lives at least, and instead focusing on a more optimal mix of returning versus new members, it's natural that your concentration of -- or your penetration of Clover Assistant use across your membership base is going to benefit. Outside of the penetration statistic, we're also very excited about just the overall functionality of the tool, which we're always investing in, as well as the financial impact of the tool. We have always referenced the fact that there is over 1,000 basis point differential in MCR performance for our members who see a physician who's live on Clover Assistant. And on our earnings call a couple of days ago, we made some qualitative comments to the effect that what we're seeing now is an incremental contribution that is significantly higher than that 1,000 basis point differential. And I think that's a testament to the great work that the team has done in continuing to invest in the tool. We've made comments in the past that because Clover Assistant was always built to be a cloud-based tool, it makes it very easy for us to roll out enhancements routinely. You don't have an installed -- locally installed base that has to be updated over time. And so really, we have a fairly routine -- or have a -- or a routine process around rolling out enhancements. Sometimes it's as often as every couple of weeks that we're rolling out enhancements, and that really allows us to be nimble and responsive to the feedback loop from physicians out in the field as well as other areas that are helping to inform some of the enhancements that we're making.

Yes, because I guess that's an important point because I think from the outside, everyone says they've got IT. Everyone says that they engage the physician or give them the information. So it's always hard to tell like where one is better than the other. So I mean, is it that ability to flex and consistently iterate? Like what do you think differentiates Clover Assistant versus what Humana or United or any other company has?

Well, look, I think it starts with the people. And when you look at our CEO, Andrew Toy, who joined the company as the Chief Technology Officer, you're talking about somebody that didn't come from a health care environment. He came from a tech environment, and this is somebody that lived through some of the most monumental, disruptive technological advancements of our age, kind of creating the smartphone as we know it today and things like that, that really have had such a material impact on the world that we're in today. And then he brought on Conrad, who's our new CTO, and they have built around a team of software engineers and product development folks that are not coming from the health care background necessarily. They are coming from a disruptive technology environment that helps us to build a tool that really isn't hampered by, I think, the biases of somebody who's kind of used to doing things that were done before. So that's the foundation of it, but I do agree with what I think you were getting at, which is the ability to constantly iterate and have an active feedback loop. Our engagement with physicians who are live on the tool, we get very, very positive grades and positive feedback on the tool but also have great constructive input. That ability to continue to evolve it and move it forward helps to improve the efficacy of the tool in terms of clinical outcomes as well as the financial benefit from it at the same time that we're building the confidence and buy-in from the user base.

All right. Great. And then, I guess, there's been a lot of concern around MA rates. I guess the final rule came in better than the proposal with a 3-year phase-in. It sounds like you guys believe your model maybe means that the company will be not as -- a little more insulated from some of these pressures. I'd love to hear a little bit more about your view on the rates and your competitive positioning into next year.

Sure. Well, so again, I just want to emphasize that, for the near term at least, we are continuing with the strategic emphasis around profitability over membership growth. So it's not as though we're out there or intending to have very, very aggressively priced plans in any kind of a share shift effort. We are intending to deliver revenue growth on the MA side, but most importantly, we're intending to achieve profitability as a company as quickly as possible. But in terms of some of the advanced notice information, there are specific nuances to it that I think have been widely discussed, particularly with respect to different areas of coding that are going to be impacted over a multiyear cycle. And we have said that we believe that we're less exposed to that just based on the types of codes specifically that are impacted and the types of relationships with capitated agreements out there in the field that we don't necessarily have that are often more conducive to that type of coding. And so our business model in general is one that we think is less exposed to some of those risks.