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

Okay. All right. Thanks for joining us here today. With us today, we have Clover Health. On stage is CFO, Peter Kuipers. I believe he's going to start off with the presentation.

Thank you, Jonathan. Great to be here. Thanks for having us. At Clover Health, our vision is to empower every position with advanced technology to earlier identify, manage and treat chronic diseases and drive better health outcomes and also lower total cost of care. And how are we doing that? We are led by technology, and we're proving the technology out in Medicare Advantage. We are a Medicare Advantage insurance plan led by technology. We have developed over 7, 8 years, large machine learning models and now also powered by AI over the last couple of years., ,technology that can be used by physicians and is increasingly used by physicians to earlier identify, treat and manage chronic diseases. Medicare Advantage is a large market. It's growing 35 million seniors in the U.S. are in that market. We operate our main insurance plan in an open network or a PPO network, mostly focused in our priority markets in New Jersey and Georgia. We are expecting to grow at a similar rate as the last AEP this year. Then also, in addition, we are now bringing this technology also to market for third-party payers and risk-bearing providers. On the payer side, this includes national payers that are in the pipeline and also regional payers. For this year, our current outlook is that we're growing over 30%, 33% growth from membership while maintaining profitability from an EBITDA perspective. Let's spend a minute and talk about our differentiated business model. We are different than the large players in Medicare Advantage. First of all, we are patient-facing from a clinical perspective. Our Clover Assistant technology is AI-enabled and is used at the point of care at the time of care by physicians. In contrast, the large players operate mostly insurance tech, so back office and delayed administration. We'll show a real screen-shot of the technology in a bit here, but we believe our technology is elegant. It integrates insights and proposes care management proactively instead of a delayed reactive manner at the large players. We're able to do this also in a large network where our insurance members have a free choice of their physician as opposed to a narrow HMO approach. We're not focused on risk delegation in the traditional sense. It means that the P&L you see our results are pure from an economic perspective. It also means that over time, the upside from a P&L perspective is also reflected in the P&L. The Clover Assistant technology integrates essentially all available medical records from EHRs to pharma to claims to labs. What it actually means that we can also use this for our highest acuity members where Clover -- our Clover physicians become the main physician, and we can manage that care. From a financial performance, our BER is roughly 89% expected this year, while growing 35% in membership, which we think is exceptional. If you compare it to the industry, they're running roughly at high 80s, low 90s percentage on the BER ratio, but that is with essentially a flat membership. Some of the players are decreasing membership. So if you normalize that, you likely end up much higher on the BER for the large players. Now this is a screenshot of the actual technology called Clover Assistant. On the top right, you see that we the technology integrates real-time essentially all medical data from EHR systems, virtually all labs, all pharmacy data and almost all claims as well. It's not just data aggregation because that's just a bunch of data. The machine learning and AI power algorithms synthesize and capture this data to the most important pieces of information for the PCP to use in a visit with his or her patient. And then during the visit can add additional data points, and the AI-powered solution suggests care management solutions and helps identify chronic diseases earlier so that they can be treated earlier as well, resulting in, we believe, better health outcomes at total -- at lower total cost of care. So very elegant and fast real-time solution. The UI is elegant. So we see our users, the PCPs who wanted to use this. We got very good feedback from a user perspective. The user base is growing at a really healthy rate as well. Now I want to point out that the physician him or herself is in the end responsible for the care management and clinical choices. But this tool, this software stack helps the physician operate at the top of their license. And we've grown this over time at scale. So many insights are incorporated in here. It's -- the physician can essentially get a second opinion, third opinion, 1,000 opinion or many, many different opinions, right, all filtered in here. So -- and we believe that leads to better health outcomes. We've also published a number of clinical white papers. So now that we are at scale and are growing 33% in membership this year, and we estimate a similar growth rate next year, we can compare results. So we are clinically at scale as well where the white papers that we published provided some really good evidence on the effectiveness of our software platform. So you see here 6 different white papers that we published over the last 2 years or so. Main themes, I would point out really 2 main themes. So earlier diagnosis of chronic diseases, you see diabetes when the technology is used is generally diagnosed 3 years early on average. So what that means is that diabetes can be treated earlier, of course, is better health outcomes as well. And also if a disease is treated at an earlier stage, the cost of that treatment generally is also lower. So financially, that model works also from that perspective. I would also point out significantly lower hospital admissions and lower hospital readmissions, very, very significant, not only for quality of care for care management, but also, of course, from a financial perspective. And then lastly, I want to point out that from an HEDIS perspective, which is the quality measure within Stars, for the second -- for the consecutive year here, we are ranked #1 in the nation for PPO plans on clinical quality. Now earlier, I talked a little bit about that we're offering the same software solution that now has proven at scale for a number of years, also to third-party payers and at-risk risk-bearing providers. Again, these payers and providers enjoy the same benefits for their plants themselves and also, of course, for their members. Again, earlier identification, earlier and better management of chronic diseases and better health outcomes. We're offering this outside of our core markets that I discussed earlier is relatively lower start-up cost. We see the momentum. We see a very strong product market fit. That has proven now. We are scaling. The momentum is growing. We've hired some really deep experience and talented leadership as well that you can see in some of the announcement that we did. From a commercial perspective, the HEDIS quality score that I talked about earlier, that is what draws these third parties in to really engage and start deploying this technology. And we have high confection that from a financial perspective, over time, we can help improve, if you look at the payer side, the financial performance by over 1,000 basis points. If you look at the performance year-to-date for Clover, we have grown membership 35% year-over-year. Revenue is up close to 40%, while absorbing new members that come at higher costs and generally are loss-making on a gross profit perspective. We have achieved $45 million of year-to-date EBITDA, which we think is exceptional. We've also lowered the SG&A as a percentage of revenue. So we have leverage there as we scale. That said, we have higher utilization than we expected originally, driven mostly by new members. So we have new members at higher utilization than the returning members versus expectation. I would also say that we have more new members just in the absolute number than expected, specifically here in the second year. All that said, all in, while growing 40% of revenue, 35% of membership with more new members than expected, the underlying medical cost trends, excluding pharmacy on an incurred basis is around 4%. So that is significantly lower than industry average. Now that said, we had expected to be somewhat better than that, if you will. So we're definitely working on that. That said, the new members, the more new members that we have this year will be beneficial for next year's financial performance. If we look at the increase in members, so 33% membership growth. We have a large new membership cohort this year, so around 26% year-to-date, our new members joining Clover. They're generally loss-making in year 1 from a financial perspective, but they will improve profitability over time as they return and come under Clover Assistant Technology Management. Year-to-date, these new members, more than half of these new members are already seeing a PCP using the technology. From a financial perspective, if we look at -- so we -- our business model is based on cohort management. If we look at the MCR differential from essentially year 1, which is the baseline, which is essentially a new member, the MCR and then the BER improves by 700 basis points going from year 1 to year 2 and another 700 basis points from year 2 to year 3. Now in the last earnings call, we gave a couple of additional data points from an economic perspective. We have disclosed now contribution profits per member per month for new members versus the returning member cohorts. And that is -- we define that as revenue PMPM, so per member per month minus medics or medical cost per member per month, also minus customer acquisition cost, which includes sales and marketing and also broker commissions. So the full cost -- the full loaded cost of the channel. And what we have disclosed is that for new members this year, year-to-date, the contribution profit is $110 a negative or a loss, if you will. In year 1, and you see that the returning cohorts are around $217 of a contribution profit. So you can see the ratio there. As, of course, new members mature into a returning member, it is somewhere in between that, just on everything being equal perspective. However, '26 will be different. '26 will be different from a perspective that we expect specific tailwinds for Clover. And there's also, of course, tailwinds in the industry itself. So talking about these specific tailwinds going into 2026. We have a very strong voluntary retention rate. We believe it's industry-leading. The voluntary retention rate we disclosed is above 90% this year. So very, very strong. And then we also expect, of course, a larger returning member cohort in absolute member numbers next year. We are going from a 3.5 star payment year this to a 4-star payment year next year that adds roughly 5% to the top line. Of course, we are continuing to see further increased usage of the technology by PCPs, more PCPs, also more patients that these PCPs are seeing. We continue to invest strongly in the technology, adding capabilities to have further impact as well on better health care, better health outcomes. We believe we can manage the new members also better. We have plans in place for that as well. From an industry perspective, the Part C, CMS final rate notice came out a couple of months ago. I think it's around 5.5% to 6% on the top line. Then the Part D direct subsidy is increasing about 40% next year. And then, of course, we see further growth opportunity also as other plants retreat. We continue to optimize SG&A. We're renegotiating and have renegotiated already a number of main contracts with all of our vendors. Given that we are now for the foreseeable multiple years ahead, are a strong grower and a winner, if you will, in the Medicare Advantage market. So now we have more leverage as well and make sure we get appropriate rates. We're doing the same on some of the variable costs as well in MedEx. So more to come there. Some impact already is included in the third quarter and fourth quarter, but not annualized yet. So that will annualize next year. So we believe we're well positioned to both achieve GAAP net income positivity next year in fiscal '26 and also an increased adjusted EBITDA number. So with that, over to you, Jonathan.

Okay. Great. That was a nice overview of everything. I guess starting with the results, to your point, the third quarter results did see elevated utilization trends broadly across the book, but obviously geared a little bit more towards the newer cohorts. Can you talk about the utilization that you saw? And was it accelerating throughout the quarter?

Yes. So generally, from a utilization perspective, we saw most elevated utilization in inpatient and outpatient. From an inpatient perspective, that was mostly on the surgery and the vascular side, outpatients was mostly oncology. If you kind of -- if we click down and look at the metrics and then how we drive those and monitor those, the new members had a bigger proportion of the drive in the increase in utilization. Now of course, we are learning the behaviors and the trends with this new member population as well. So we believe we can better manage that go forward as we go forward into next year, but again, a fairly large new membership group joining our plan.

Okay. I guess one of the items I was curious about is that Clover Assistant typically improves the BER. Where would you say kind of miss in terms of bending the trend and kind of where is the opportunity for improvement on CA kind of looking ahead moving forward?

Yes. I would say from a -- first of all, from a commercial perspective, we think we can improve our unit cost, which is the equation, of course, as well from -- from a financial perspective, we are expanding, of course, capabilities on the road map for Clover Assistant as well. I would say from a utilization perspective, again, it's mostly the new members. I would also say that we've seen some trends of abnormalities in DME and, where we think from a payment integrity perspective and recovery perspective, we can improve the governance and potentially some recoveries there also. Then last year, I think for us and probably for others as well, given the IRA and Part D being new this year as far as the risk corridors on top, there's optimization to be had as well with our PBM. So we're working with our PBM not only from a Medicare's perspective, from a Stars perspective, but also from a financial perspective, right? So think about increased network management on kind of Part C and rates, if you will, more insights in utilization management for Part C. Part D, I would say, more dollarized and unit cost efficiencies there also. And then optimizing, of course, dental and DME. So I think it's across the board that we're doing that.

Okay. I guess when we think about your bid and approach for 2026, you likely made an assumption on trend and how much you could bend the trend. To the extent that you can talk about, did you price under the premise that trend would be similar to this year and you could bend it downwards? Just what's your view there?

Yes. I think it's a great question. I mean I think in general, we just -- we used industry-wide cost assumptions and cost trend assumptions for the bid.

Okay. And then to the slides that you just had, they're very helpful about the '25 cohort, how the older cohorts look in profitability and where they could be in '26. But with that, the newest cohort, at least based on the slide, still seems to imply that it is unprofitable, at least based on the slide. Is that accurate? And what's inhibiting the improvement year-over-year from, say, being unprofitable this year to at least breakeven next?

Yes. So we -- from an illustrative perspective on the slide, we're depicting there that we expect a significant step-up for new members. A part of that are the drivers that are Clover specific that we talked about and then industry-wide as well. And then, of course, part of the Clover specifics are that we're looking, of course, at member experience, looking at onboarding, make sure we have complete data of new members so they can come on the Clover Care, et cetera. So we have a number of initiatives there too, just a more practical onboarding perspective.

Okay. And then in the quarter, you recognized a $10 million mark-to-market equity investment in the quarter. I guess what's that investment that saw a substantial pickup? Was an ownership stake in the company or something else?

Yes, there was an equity stake we have in bio-character science. They specialize in precision medicine. So they had another financing round and we updated the market valuation for that.

Okay. And then there was new news out of the administration that Medicare could theoretically cover GLP-1s for weight loss at a reduced price. Obviously, there are a lot of details that are currently unknown right now. But can you talk about how you're thinking about this if you would have to cover GLP-1s for weight loss? And then do you have visibility into your membership that would indicate that a member would be eligible?

Yes. So I would say we have this insight, of course, because we have the full medical records if a member is covered by Clover Assistant. And again, as we have disclosed previously, around 70% or slightly higher percentage of our membership base is covered by Clover Assistant. So therefore, we have the medical records, if you will. So we have those insights. That said, there's a lot of unclarity quite yet on non-GLP-1 guidelines. It looks like it mostly will be -- most likely, it will be applicable for 2027. So we'll make sure we include that appropriately in the bid.

Okay. Great. And then can you talk about how AEP is trending for you thus far? You kind of mentioned similar growth trends to what you experienced this year? And how is the mix between switchers and new to MA?

Yes. So we haven't given a lot of detail, if you will, because AEP, we're right in the middle of AEP. What we said on the earnings call is that we see significant growth, roughly on par, same ZIP code as we experienced last year during AEP. I would also say very similar to last year, the split between switchers and kind of new is roughly the same. And last year was roughly 80% switchers.

Okay. And then going to the Stars, obviously, you took a step back in Stars for payment year '27. Can you talk about the specifics of what went wrong and what specific steps you're taking to remediate this to ideally get back to 4 Stars?

Yes. Our aspiration, of course, is to -- the strategy is to be scored at 4 Stars. So we have initiatives in place just in general on Stars, but very specifically on pharmacy. That is where we saw the decline. Now part of that is, of course, not fully in our hands because we have a PBM. So we're working with the PBM as well, of course, to drive Stars performance there. That said, I want to point back to the prepared remarks and earnings. And then I think also in August, we did a press release on Stars as well. We believe the current Stars framework has inconsistencies that we're engaging on with CMS, specifically in some of the measures that really don't drive in our view, clinical outcomes and a number of those are in the pharmacy area.

Okay. So to point about pharmacy since that seems to be the culprit, maybe worth a minute talk about how the specific scoring works for that metric and what exactly you're trying to do to remediate it?

Yes. There could be some -- if you look at kind of prescribing, if you will, and the kind of the med adherence, it's really the -- is a medication picked up. I think it's in a 90-day window, if you will. But some of those measures don't get corrected if a medication cats de-prescribed -- if your PCP determines if your Medicare Advantage members, you don't need to use that medication anymore. The plan actually get dinged for that. So there's some inconsistencies there as well.

Got you. And then conceptually, given you would be influencing the PBM dynamic, how do you think about this theoretically impacting drug trend? Are you putting additional checks or measures in place to get ahead of any issues?

Yes. So a couple of things there. Like first, of course, there is formulary optimization. So we're working on that. We're working on pricing and unit costs as well on net cost with the PBM. And then also, of course, we can further integrate, of course, med management and medical costs from a Part D perspective, also in our Clover Assistant technology stack.

Okay. And then when thinking about Clover Assistant within the construct of pharmacy, is this something you're considering to bring to life within the organization? How quickly can something like this be stood up and any incremental costs, et cetera, related to it?

From a product road map perspective?

Yes.

Yes, of course, some of those initiatives are already on the product road map. I would say we'll continue to invest in pure R&D. Actually, I want to point out that we're probably pretty unique in the MCO space of actually being technology focused. We have a very talented and experienced software engineering team, which is quite exceptional to have that combined with the insurance business. So that's on the road map. I would say it's part of the assessment, and it's baked into our outlook for '26, where we believe that we can be -- that we will be net income -- GAAP net income positive for '26.

Okay. So despite the Stars hiccup, the company is poised for strong growth in '26, given the pullback from nationals and your relative positioning. How are you thinking about the level of growth where you're okay versus you've just taken on too much? How do you think about that breakpoint?

Yes, I would say we haven't given kind of a number there, but -- from a percentage growth perspective. What I would say, though, is that we are focused very specifically on what we call priority markets. So what is the priority market? We define the priority market as it could be a county or close from counties where we have -- already have membership or strong membership where we have PCPs, physicians and health systems using Clover Assistant technology and also where we have in-home care to treat our higher acuity members. So we're focusing our efforts from a go-to-market perspective, broker engagement, member engagement in those geographical areas, right? So to some extent, we can manage the level of the growth, but it's also what type of growth you want as well. And so it's a very, very precise approach.

Okay. As we think about G&A savings that you think you can achieve via recontracting with the scale you have now compared to previously, should we think of the savings as similar magnitude in terms of dollars in terms of what we've seen? Or how should we think about this dynamic?

Yes. There's really 3 categories in SG&A from a cost perspective. So the first category of cost is what we call growth cost, growth SG&A, which includes sales and marketing and also broker commissions. Of course, we are fine-tuning broker commissions as well and increase the long-term value there and the payback -- and decrease the payback period. So we definitely see benefits there. We're also making sure that we have the right quality metrics around how these brokers perform. It doesn't necessarily mean that, that's an efficiency, but we get more return for every dollar spent in that category from a variable SG&A perspective, which is mostly servicing kind of the back office side of the insurance plan mechanics, of course, because we now have more scale and our growth outlook for the next number of years shows really healthy growth, right? So it's a different discussion as far as the leverage we have there. So I expect to see quite a bit of leverage there on the unit cost perspective. And then the third category of SG&A is fixed SG&A. So think about that as fixed infrastructure. It could be a vendor or partner base or it could also be kind of in-house headcount based. We definitely see, from a vendor perspective, more negotiation part from our perspective also. We see vendors in that cost category also using AI. So we see some AI efficiencies there as well. And then internally, also, we are more and more deploying also AI with an AI strategy outside the clinical and outside the software platform to really not only for efficiency, drive costs and drive leverage, we also believe that it also improves really the employee engagement, right? It makes the jobs better by really automating, using AI for the more manual task. And we really believe that's really valuable for our employee and our team as well.

Okay. When you think about the growth plan -- growth that are in your plans, should we think about the recontracting that you're taking as more of a kind of last bolus of G&A reductions and then we move towards a more stable but constrained type of growth moving forward? how would you frame it?

From a top line perspective or cost perspective?

Cost perspective, cost, yes.

Yes. I would say, again, those 3 categories. I think there's more optimization to be had on the growth of SG&A as we continue to refine that. Variable SG&A, I think that will continue as well, and the biggest impact will be on the fixed SG&A. So I think it will be continuous. I think there is -- we had quite a bit of progress, I would say, in the last couple of months, and we'll continue to have that in the next couple of months. So see it as a step function for improvements across those 3. At the same time, I would say we'll continue that. We'll continue to work and optimize SG&A, of course.

Okay. Turning to counterpart. I guess, you made a -- the company has made a few announcements related to counterpart in terms of customers, but can you give an update on how things are progressing with your clients? Are these full expansions now? Or are we still in more of a pilot phase, I guess?

Yes. So again, like I said in the earlier -- early remarks, we believe product market fit is proven very, very strongly. There is strong external interest, specifically for payers that also operate a white network where it's difficult to manage from a quality and care management perspective and also cost perspective. So if you think about kind of large players in general, it's difficult to roll out technology. So we've talked about this earlier as well publicly. So Clover Assistant, let's say, it's used by a counterpart using payer can ask their the PCPs that are in their network or not in the network, mostly in the network actually, to use this software. The software actually requires a training of 1 hour. So it's a fairly straightforward implementation. We're also seeing the speed of the philosophy from initial start and the rollout, if you will, it's probably 2 to 3x faster than somewhat similar tech-enabled tools. So again, going back to your question, strong product market fit, strong interest. You've seen that we have hired additional talent and leaders as well. You can see that. Now we're focused on scaling. So both from a leadership perspective, from an infrastructure perspective, implementation team perspective, customer care perspective. So we're scaling over time. We're not in a rinse-and-repeat phase yet where we would have the typical metrics around SaaS and tech-enabled services that you see in health care and other industries as far as ARR, car, et cetera, on a cohort basis. We definitely have that internally. At some point, we'll be in a rinse-and-repeat phase to start publishing that as well.

Okay. And then you've released a few white papers on the benefits to HEDIS scores from CA. Is there any proof points for your clients in terms of the benefit that they've seen so far in terms of the pilot phase? Or is it kind of really still within the Clover MA products where we would theoretically see this?

No, we see similar proof points from a clinical perspective and economic perspective already.

Okay. And then last 30 seconds here. You added an AI scribe to the offering. Given AI scribing has been growing and perhaps more ubiquitous today than it has ever been, I guess why did the company add this function as a doctor presumably has this? And how does this interact with current scrubbing technology and the EHR?

Yes. I think the important point we think is the full integration. So the -- what we looked at earlier, the screenshot of the technology. So scribing is fully integrated there. It's not a separate tool or a separate feed. So it helps the PCP, not only from an admin perspective, but really real-time being able to interact with the patient and not be distracted. So we also believe it's not only efficiency, but in the context of Clover Assistant technology, we believe it at also contributes to better quality of care.

Okay. Great. Well, with that, we're out of time. Thanks. Thanks for joining us, Peter.

Thank you, Jonathan. Great.