GoHealth, Inc. (GOCO) Earnings Call Transcript & Summary

Good morning everyone and welcome to this session of the BofA Healthcare Conference. I'm Mike Cherny, the healthcare tech distribution analyst at BofA. It's my pleasure to have with us GoHealth, CEO, Vijay Kotte. Jason Schulz, CFO, along with other members of team are in the audience. GoHealth reported earnings Monday, so we have a lot to cover and they brought no slides, which is perfect because I don't want any slides.

Maybe Vijay, let's just start to level set. Just what were some of the key highlights to you of the quarter I know this is -- we're going to talk about the transition to business plenty, but maybe start by framing what we saw in the first quarter versus your expectations and…

Yes. No, I think it was generally in line with our expectations. What we have planned for 2023 was really having a strong exit run rate from Q4 '22, and then carrying that forward and then continuing to prove that in the open enrollment period, we can have the same quality, really understand the mix dynamics because carrier mix is going to become more and more important as we move forward and that how do the associates and the agents feel about the experience of moving through our Encompass Platform. And so we definitely saw that -- obviously saw a positive movement on cash on a year-over-year basis as we start to think about the trailing 12-month process for us on the cash profile of the business is materially better, right? $300 million on a trailing 12-month basis, the cash flow from operations improvement. And the big part of that was to our efficiency model. So proving that out through OEP. So we have an AEP under our belt, an OEP under our belt, showing that we can generate the margins off of it and having the stability within the revenue bucket as we shift to Encompass has been really exciting.

And so maybe let's just start there. Encompass is taken as a public company name as one of my colleagues in the audience will tell us. But obviously, your focus -- you and Jason and the team have come in has been on building on the Encompass platform. Basically, you can tell me if I'm wrong on this, but turning the whole idea of the broker model kind of on its head in terms of your go-to-market strategy and how the economics change for the business. So just level set, walk us through why you think this has been the right go-to-market strategy, it's clearly paying dividends and early results so far, but what led you to take such a drastic pivot for lack of better term?

No, we're so excited about it, as you know, the Encompass platform. And the model that we're -- why we did it? One, we need to change the model. The old model wasn't working very well. So let's say -- let's start there. But when we picked this model, what we loved about it was it got us in the right spot of what we do best. And it made sure that we had a laser focus on who matters most, and that is putting the consumer at the center of it, whereas previously, the old model served the consumer, but in reality, it was really designed to serve health plans, to give health plans access to beneficiaries. So by putting the consumer at the middle of the Encompass model and building the technology around that with specialized resources. So we talk about our first level of resource. We have specialized resources who verify eligibility and do that scope of appointment, right? They get the scope, they initiate the intent to actually have a conversation, then we have a specialized resource that helps shop and do the personal needs assessment. These are things we never did before. We didn't do a full needs assessment that was algorithmic that fed into a tool. And this is why that's so important in the Encompass model. If you look at 2021 AEP, only 20% of our sales used our plant fit tool. In 2022, 100% did. And here's a challenge in the industry, right? We talk about, on average, 43 options for Medicare beneficiary. If you go to metro areas, go to New York, you'll be up to 100 options there, right? So beneficiary doesn't know how to navigate it nor do agents. An agent has a hard time trying to encapsulate 100 plans and do that. So the Encompass model also integrates the technology to say, I can understand your needs. It goes through an absolute scoring algorithm and outputs the primary plans out of those 100 options and now assist the agent to be able to facilitate that process. So by doing -- that's all of what Encompass is and, by the way, we also changed the cash flow dynamics and how we get paid for that specific service to work with the carriers to align what's important to them, which is maintaining a long-term relationship with the beneficiary and what they're having trouble doing on their own, which is getting access to beneficiaries who want a multipayer type marketplace.

So I want to come back to the cash flow dynamics, obviously, incredibly important, but I want to stick with the technology side. The overarching term that typically is used for your company is an e-broker. But in the broker side, I always want to focus on the agent side. That being said, the E is incredibly important component in terms of technology. Maybe give us a sense and dive a little deeper, if I'm an agent that's especially one that's been tenured with you, a couple of years, has seamless transition with Encompass. What does my day-to-day interface look like? What do I have available to me that I didn't before? And how, as an agent, am I using that technology better beyond just plan fit in order to make sure that I'm helping deliver the best for the customer?

So I think there's -- I'll give you a little bit of -- I talked about it on the earnings call our uniform agent experience, right? Because today, it isn't ideal, that experience, not a very efficient model for our agents today, mainly -- and it never has been. They always had multiple screens up. They had different processes. There wasn't not a standard approach for how you take the needs assessment and then use the technology tools. So we've developed and deployed right now this unified agent experience, which decreases the number of extra screens they've got. They have more qualified leads that come through. So that season tenured agent is that at Tier 2, right? Tier 1 is really more administrative in the way it's structured. We had the first interaction. We understand they are eligible. And then it goes to Tier 2. Tier 2 are the ones who are really used to doing the shopping experience. So that shopping agent now will have the beneficiary coming with a number of the demographics already populated for them. It flows through into the technology, it primes them to ask the right questions and the needs assessment to understand what matters most to them. What do they care most about? Some people really care about dental. Other people care about SNF copays, right, whatever it may be, factoring those in and then now they will have a guided process. They see the scripting, they see the tools, it outputs in front of them, the forced ranking of the plan options that are available by carrier that are appropriate. And then they -- it scripts them as to the key differences between those top 3 options, to then be able to facilitate being an educated personal shopper of sorts to help them decide what plan is best and then they hand that off to an enrollment agent that is actually a dedicated agent for the health plan that fit best, right? So we get a dedicated agent who understand let's say, Humana or United. So at the Tier 3, they are absolutely trained on knowing the specifics about that plan that we were now recommending for them. They actually take the application. So what did that happen to that tender agent? They spent less time in the shopping experience because they're not taking the application anymore. They have a secondary partner who's actually verifying all the information again, and they can get back on and take another lead. So they've enhanced their efficiency by nearly 10% to 15% of being able to get more throughput on that most constrained bottleneck assets that everybody talks about.

And what do you, as an organization, needs to do to make sure these agents were ready to go? I mean I know this is a model where having permanent agents is great, but there's also a seasonal aspect to it. How do you redesign the training process that investment in your people beyond just the platform to make sure that all of these tools are now available to them allow them to actually use them and generate success?

I mean, I think the wonderful part is they were involved in the process, right? So we had many of the agents involved in designing this process for themselves. What was going to be most helpful for them. So it's not as much of a, hey, here's a brand new thing we just dropped and you go figure it out. They see it coming. They knew it was coming. And then we in tranches during SEP do more of that new training on the new tools to give them access to it. So we take some of the agents off the lines, we have them do the training, we do it in tiers, and we make sure that we don't miss productivity. We're still taking all the calls that are coming in. But we also are giving them the opportunity to continue to refine the tools and learn the processes and script through it. So it's the uniform process of it has actually given us the opportunity to bring on new agents as necessarily because there's always natural attrition. But when you have the uniform agent experience, what we found is we've narrowed the gap between your most tenured agents and your newer agents because they can get up to speed so much faster. And so this tool is actually both helping the training and onboarding of the new tools for new agents, but also for the existing agents, it's built around what they've already decided what best practice is, and we're making it more efficient for them.

And every -- so from your agent experiences, every agent have access to every tool at this point?

That's the goal of this process. Because before we found it, certain tenured agents would go to different websites to get information that made them really good. We said, well, okay, well, if you're going to the website, let's watch you. We watched what they did with it. Well, let's just make this a standard for everybody and give them access to the information.

Let's talk about the '23 guidance. Something you came out -- obviously put out last year. You reiterated one of the most important line of sights you have into your targets, especially given that even with the changes in Encompass, this is still always going to be a seasonal type financial model because of the dynamics of AEP.

Yes, so I think in general, the seasonality doesn't change, right? There's a little bit within the 12-month period, you should expect the same volume type seasonalities. What -- you know, they think about the 2023 guidance and how we built our plans for the year. We didn't assume anything crazy positive or negative happens. We took the exit run, rolled it forward, right? We proved certain things in AEP. We didn't expect any extravagant improvements in frankly anything. We said we've got the best tenured agents, we want to maintain that performance of conversion, of throughput and with some efficiency through the new tools, maybe they get a little bit more throughput through the model. But with that, I mean if you -- I mean as Jason and I alluded to on our earnings call, the seasonality will happen, but we do see that efficiency pickup that comes in the back part of the year that will make a solid growth year-over-year in Q4 to Q4.

And along those lines, so much of what happened during AEP is the work being done now to prepare for it. So how are you tracking the metrics to make sure that you can achieve that 4Q improvement?

Yes, I think there's a couple of things. One is average handle time. That is one of the most -- the strongest leading indicator of the efficiency of the model that we're trying to deliver with the unified agent experience. So as we see that come down for call at the Tier 2 level, making sure you're efficient at the Tier 3 level as well, but Tier 2 is really where the throughput efficiency comes. So you look at average handle time. You track your attrition rates of your top agents because they're still valuable. You're monitoring attrition on that and obviously, the macro dynamics have been very helpful on that. There's less attrition than historically had been there year-over-year. And then making sure that you do still need to add some more agents every given year, right? We have 3 tiers. We need to get specialized agents for that and ensuring that we have the efficiency of this unified agent experience to bring them on and that we are shrinking the training time. So we don't have as much carrying cost in Q2 and Q3 that you used to have to have to ramp up. That was always a limiting factor. You would spend all of this cash in Q2 and Q3, and then you would assume everybody was at a run rate by ADP and maybe they were, but the quality was really low. And so that's what we're really focusing on are those key metrics.

And you mentioned cash, so we have to go there. This is a business model that was timing wise and scaled spending a lot of cash, and having that weird dichotomy of the faster you grow, the more cash you spend. You literally reversed it almost immediately. So I have to ask the very simple question, how?

So I think the major focus was let's not think about LTV to CAC. LTV, we need to spend a little bit more time to figure out the accuracy of. But let's make sure our CAC is as most as efficient as possible. And let's do some analysis of what are the right cohorts of agent volumes and leads that balances that trade-off, right? So we talked on the last Q4 call about diseconomies of scale. So if we look at what we think is the optimal staffing with the right experience who can do the right quality of our team and then we look at where are the sources of leads that we can generate that are still high quality that convert well, we looked at that balancing act and the net effect was we decreased our marketing cost per sale by nearly 40% by doing that. Our agent costs are down significantly. So when we looked at the Q1 over Q1, this last quarter, you saw the slide, we put out was 23% improvement on CAC. So when you make that adjustment, then -- now it's a question of what is the revenue against it? If you can keep moving that down faster than anything that was happening on LTV, then you've now added that cash dynamic. And so that was one big thing. If you -- we had the $300 million year-over-year improvement, over $200 million of that was just efficiency on what I just described, marketing and headcount. Then there's only about $70 million that came through contract dynamics, which is timing of cash flow that pulls forward a little bit. But the majority was through the efficiency and being prudent about that spend. So we made that reduction for us last year, so that we knew that this was the optimal staffing for our current technology structure. And as we made the technology more efficient, you actually don't need to add a lot of agents to get more throughput. And so that's what we're delivering this year.

And you mentioned something earlier about the dynamics of how you're getting paid by the carrier. So it leads me to what I think is obviously an important topic is that carrier relationship. You've been in health care for a long period of time. You've intertwined with company taxpayers, types of providers. What has been your biggest focus about the carrier partnerships and how the relationship has evolved with GoHealth and the carriers?

No. It's a wonderful question. We definitely have a lot of symbiotic conversations, right? They are an important piece of the puzzle. Tanner marketplace, which is what we really want to be, even calling it the broken mirror, it's a marketplace first. And the marketplace -- and what's important about the marketplace is having broad option set. And what that brings to carriers is access to the shoppers who come to us consistently every year, right, from the marketing that we do. So what we are able to provide back to some are the insights, what are the beneficiaries really want? What matters most to them. So the very symbiotic relationship on helping them provide the best product for beneficiaries. And they -- we have found unique ways to do marketing and we do -- the lion's share of our marketing is our leads are self-generated. We don't buy them on the open market. And that enables us to have a lot more insight into how to access beneficiaries who want a multipayer marketplace. And I've had a number of health plans jotted, 10 that that is the value they see in us. There's only so much they can do as a single carrier. They need to have the multipayer marketplace and as a leading source for enrollment for almost every one of the major carriers. They are very open to trying new things. It was a test last year and we saw the metrics, CTM is down significantly in OEP down 80% year over year. Those complaints that were going to Medicare 50% down in AEP, the effectuation rates were up year-over-year in a significant way as well. So the quality was coming through and so they they've leaned into the model with us and we're super excited about it.

And I guess this is a market, the MA market that's going to always be tied to concentration just by the simple nature of the scale is from the client perspective. How does that -- as you make changes to your business, how does that interplay with the fact that you really have although a number of plans for plain shopping, there's a few that obviously can drive the vast majority of everything that goes through your model. So how much is getting not only buying from the carriers, but partnership with them, making sure they understand what you're doing Encompass. How much of that factor in the way that you're rolling out different changes to the covers?

Yes. So I think it's a great question because if you look at it, our operational -- operating -- Encompass operating model is consistent for everybody. Tier 1, Tier 2, Tier 3, works exactly the same for every carrier. The dynamics on how we want to address their specific value props on onboarding at the end and additional tweaks and services that meet their needs, while aligning with our core focus are unique. So every contract is not exactly the same. And we work with them to partner to address their needs relative to our pain points and come in with the best relationships and agreements we can. But I will tell you that we have more health plans coming to us now that we don't work with, who want to be part of the marketplace. And that selective opportunity for us is really exciting, right? We can bring more quality options on the table. And I think the carriers appreciate the fact that in our truly carrier agnostic platform, if they do something differential with benefits, they'll actually have the effect that they're looking for in their access to new enrollees.

And when you have those discussions with carriers about the broadening of the marketplace, obviously, carriers are spending their own capital and building their own in-house agent forces, sometimes accelerating starts pulling back. What do you -- what's the best argument? Or what do you lead with when you tell them, no, don't spend $50 million, $100 million on your agent for us because we're going to be able to deliver better returns for you?

I don't know if I could ever really convince that I don't need them to. It's okay. I love them doing marketing. It makes our jobs easier because generally, when you think about marketing to Medicare beneficiaries in the AEP period, it's a series of advertisers that generates action, right? So the more they see the ads, there's always one that triggers them to make a phone call and pick up the phone. So we don't mind that. And health plans will always feel better about having control over a fixed pool. And that's why there's been oscillation over the years. Some are all-in on captive, some go back to no captive because at the crux of it is, it's a lot of carrying costs and they'll always likely prefer the efficiency of accessing scale capacity in those periods of time when they want most. So there's a mutual value proposition there that seems to make sense. But yes, there is always that desire to control quality and to control volume of leads access. So the question is, can they get access to beneficiaries that want a multi-period experience by having dedicated in house. I think the data is proving probably not. And so the idea of partnering with somebody who's delivering that marketplace is a value to give incremental access that they can't get on the road.

Thinking about the competitive landscape. It is obviously 3 publicly traded peers that you have in your space [indiscernible] whatever you want to call it. Other participants that play into this shopping approach, marketplace approach. How have you seen the competitive dynamics evolve, especially being new to the organization and coming in with a fresh of eyes? Where have you seen the changes that you've made versus change that others have made and your ability to go out and continue to win your fair share? I mean even before the couple of changes? GoHealth is still the #1 intermediary with regards to MA enrollments. So I guess, how -- what's changed about that dynamic given the changing landscape of the broker and marketplace market as a whole?

Yes. I think the observation when I first came in is that you have 3 primary players, you have a lot of private players as well in the space. We're all competing with the same value proposition. -- right? Generally in TV, same general pitch, which were benefit-based, very little brand recognition for anybody, somewhat commoditized and using the same messages, all working in the same little pond. And now when I think about it, there's -- the real competition is that there's a lot of beneficiaries out there who aren't shopping every year. They are just sitting back and waiting, thinking about it there's something else that might happen in the life one time, they actually see that there are better options available. And if you looked at the day there was a McKinsey study that was done. That said that about 7.5 million switchers or shoppers were there, let's say, last year. Of that, only about 2 million, if you look at everybody's public data came through these channels. There's 5 million minimum up to another 60 million out there that aren't utilizing these resources. And so as we think about it we said, look, you've got to change your approach to different cohorts, they have different messages that resonate for them. And we need to be very targeted in doing that. And so part of what Encompass is doing is saying, look, if you care about benefits, we'll help you find the best benefits. If you want just a trust experience, we'll deliver that for you, too. And I think that's what hasn't been there. Nobody has really gotten that level of proving that you're truly carrier agnostic, more than just saying you are.

And I know in the past, prior of the Encompass model, some of the dynamics is when you saw these switchers, then you essentially obviously reset the LTV and the negative implications on a cash flow perspective. Can you walk us through -- I know some of the carriers have talked about the expectations for increased switching increased shopping this year. What that dynamic would do if you do see those switches coming through from a cash flow contribution?

I think obviously, the predominance of our business, we've got -- we've separated into 2 lines of the revenue. You've got an agency and non-agency. The agency is the one that's more of the traditional TV type models. But what we've really done is we've integrated into our modeling an expectation of what we believe the future shopping dynamics will be, right? We've tried to factor that in as best as possible with available data to say, yes, as we said on the Q4 call, we are embracing the idea that shopping is going to happen in a greater rate than it historically has. And that's been factored in as best as possible into our estimates for what we've got. And I think we're the first ones to really go out that aggressively to say that's happening. We're building our model around it and then basing our financials to assume that. So we're excited about it, frankly, because it just proves that our estimates are probably more aligned with what reality is going to look like this year, faster than we'd hoped. So that's great.

Turning on the changes that were made. You made the decision to exit the BPO business. Obviously, not a huge financial impact [indiscernible] at the total, but maybe walk through strategic rationale of what contributing EBITDA. So why it made sense to reallocate resources to non-BPO businesses versus having the BPO side?

So one of the most critical things for us to fix this business is absolute focus on being the best at one thing. And when we have multiple things out there, it distracts. It isn't the optimal use of our resources. And so first and foremost, focus on the one thing. We want to be the leading Medicare consumer marketplace for Medicare advantage shopping. To be true to our statement of being carrier agnostic and as we left those BPO arrangements, we met with those carriers. And we told them, I said, "Look, we can't be true to ourselves. If we're going to put a beneficiary directly into, again, a single health plan experience where they're only considering one health plan. That's not who we want to be. We will include those plans in our marketplace. We will do a true shopping experience, match them with the right plan, and then we will get them to you. So one, it was about focus on let's do one thing, great, which is everything is running through one Encompass model. We can get a lot of scaled efficiency out of doing it one way. And again, tenured agents are precious. So I don't want to put them over there and be dependent on somebody else maybe having leads, not having leads. Let's flow them through our true high-value proposition. But most importantly, let's be true to our commitment to be a multipayer shopping marketplace. And so those are the 2 main drivers why we did it. It did also help us with hedging against any potential attrition we'd have in our core assumed headcount to get through the year, gives you a pool to go to that you know.

Got it. There's been some confusion controversy lately on some of the changes that they're making on MA marketing and the dynamics of scope of deployment and timing. Maybe just give a sense on GoHealth's view on that and whether or not you think it's a risk or some of the mitigating factors that you have, especially within the Encompass platform to offset any potential change that would come.

Yes. It has been a big topic of discussion, a lot of confusion on this item. But I think everybody's intentions are pure, right? The pure intention is, let's do best for consumers to have a non-pressure shopping opportunity to see their options and make choices. And so we continue to be very supportive of that and what CMS has been doing there. It's part of why we even built the Encompass platform. So as we think about every year, there are changes that happen with CMS, they issue new marketing guidelines, when they see risks that are happening that are putting beneficiaries that unintended pressure situations or maybe a lack of clarity of information. They do this every year. And with our Encompass platform another motivation there is that when you have specialized resources, you are able to be more responsive to those adjustments. And thus -- though there has been more clarification that's come out about not applying to inbound phone calls in the broker spaces, et cetera. We were actually excited that it was doing a lot of what we were already planning to do and what we think is not bad for beneficiaries in a lot of ways. And because of the Encompass platform, the investments we've made in it already, we see those types of changes as a strategic advantage for us. We're able to be more nimble now than we were in previous years to those types of changes.

Got it. And certainly helpful to have an understanding of -- maybe as we get towards the end of our time here, again, going back to the cash flow dynamic. This is a company that was going heavily scaling or pushing towards cash flow to now being cash flow positive, again, fairly quickly. What does that do in terms of your view of cash and how the organization can best use the cash that's now being generated to help on the business over time?

We have been able to support ourselves in a lot of ways of investing in these new technologies and everything is linked to the Encompass platform. It takes real cash, right? So there's CapEx that obviously hits the financials, you're seeing actual expenses coming through in the current period. It's been an opportunity for us to make the right investments to drive efficiency going forward. It also gives us optionality to think about optimizing our debt structure. We do have a lot of debt there still. just over $500 million worth. And we paid down a significant amount of that even with all the other investments we've been making, we've been paying down that debt to be most frugal there. But at the same time, we've got a lot of good options. The great part about the positive cash flow is it gives us optionality to decide, can we -- are we better serving shareholders by deploying technology that we think has long-term returns and efficiencies in the current period? Do we believe that it's better to pay down debt and optimize that debt structure? Or is it better to just keep ourselves some optionality as we know the nimble markets there? And if we see marketing creative opportunities that come about that we can actually deploy against them in an efficient way.

And I guess my last question is kind of big picture future question. This has always been a model where you can only grow so as faster agents or grow as hire. That being said, Encompass somewhat changes that dynamic a bit. And so as you think about scalability, building this company for the next 5, 10 years, how do you feel those pivot points have changed with Encompass? And where do you see that ability to scale? And what would be the bottlenecks over time?

We don't see a world where you're doing a whole bunch of non-agent related enrollment. We believe this is in healthcare, tech rating services is the most competent thing that we've seen work, right? When you just do technology, it leaves especially in the care delivery setting. It is a very difficult thing for the beneficiary to accept. There's a lot of fear that goes along with them that's having somebody to facilitate it. But when we see Tier 1, Tier 2, Tier 3 and the use of our technology, as I alluded to earlier, we see -- we see efficiencies in trying to isolate those key activities that a human needs to do to follow -- complete the process. And then beyond that, no different than how people talk about machine learning and automation, in general, let's make those individuals as efficient as possible. They will be more successful, they'll have more throughput. It will be a better consumer experience in general because they will be shorter timeframes that they're actually on a phone or facilitating that. And so that's where we see it is that we will grow volume without having to grow agents. There will be skilled leverage that comes out of that. And that's how we get to economies of scale. And that's why we haven't just doubled down on adding a much more agents again. The economies of scale is the key to say that you benefit from growth as opposed to it actually compressing our margins.

Got it. Well, Vijay, ton going on with the business, but I really appreciate the update. We appreciate being here. And thanks, everyone for joining us. Thank you.

Thank you.