NeueHealth, Inc. (NEUE) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our next presentation at Morgan Stanley's Global Healthcare Conference Day 5. I'm Rivka Goldwasser, Morgan Stanley's Healthcare Services Analyst. And really happy to introduce our executive team that is here with me this afternoon. So we have Mike Mikan from -- who is Vice Chairman, President and CEO of the Bright Health Group; and Cathy Smith, who's Bright's CFO. So Mikan and Cathy, great to have you here. Before we kind of like dive into the conversation, just wanted to make everybody aware that this webcast is for Morgan Stanley's clients only and not for the member of the press. So if you -- the member of the press, we ask you to disconnect. And for any risk in holding disclosures, please see our website at www.morganstanley.com. And with that, again, Mike, Cathy great to have you here with us. And Mike, I would like to pass it over to you to provide some for the audience that is not as familiar with Bright Health Group, provide an overview of the business and strategy.

Great. Thanks a lot, Ricky, and good morning, everyone. I'd like to begin by making some brief remarks about our business model and strategy. I'll follow this with an overview of our 2 businesses and an update on recent performance trends before moving it back to you, Ricky, for question and answers. Our business model is designed to move health care towards an integrated model, which aligns incentives of all stakeholders and drives better clinical and financial outcomes. The health care system in the U.S. today is broken. It has been built on legacy models where payers are focused on price management and restrictions. And while providers are compensated for the volume of the services provided. This type of model has caused widespread of raging across the health care ecosystem and has not proven to be successful at controlling costs sustainably nor significantly improving outcomes for patients. Bright Health Group builds and operates high-performing, integrated systems of care, not just a network that connects consumers and providers. We achieved this through an alignment model that defines our provider partnerships at the local level and our go-to-market strategy. We're disrupting health care by building deep local relationships with the highest-performing providers who are interested in clinical, financial and data and technology alignment. This model delivers better results over time because it transforms a traditional network relationship into an aligned relationship. We call this our care partner model. We have a model that leverages our national infrastructure, our connected technology and aligned model of care to promote appropriate touch points across the ecosystem and deliver better results at national scale. We have 2 independent, yet interdependent businesses, Bright HealthCare and New Health. Bright HealthCare is our health care financing and distribution business. It's our health plan business, and it's focused on aggregating and distributing consumers. Our person-centric health plans are tailored to consumers' individual needs and preferences at an attractive price point. Our plans enhance the relationship between a consumer and his or her provider, which we believe is the most sacred relationship in health care today. And we offer a diverse suite of products to serve patients through the entirety of their lives. New Health, on the other hand, is our personalized care delivery business. It allows us to vertically integrate in local markets. New Health builds high-performing, integrated systems of care for both Bright HealthCare and our other payer customers. It directly delivers care through our risk-bearing primary care-centric clinics. And it provides the tools, capabilities and expertise to successfully manage risk in value-based care arrangements. And lastly, what drives empowers our company is our technology-enabled operating system that connects consumers, payers and providers and delivers real-time insights to support better clinical and financial outcomes. Here's just a quick snapshot of our business growth and performance as of June 30, 2021. We serve approximately 663,000 Medicare and commercial health plan consumers, an increase of 220% year-over-year, of which 83% has been organic. We also serve approximately 170,000 risk-bearing lives through our new health-owned primary care-centric clinics. We've delivered consistent performance with an adjusted medical cost ratio below 80% through the end of the second quarter. While our reported medical cost ratio was impacted 360 basis points by COVID-19 costs, our underlying utilization, excluding COVID-19 remains slightly below normalized levels in both IFP and Medicare Advantage over a comparable pre-COVID period. Given that COVID-19 is top of mind for many people listening in, I'd like to provide a brief update on recent utilization trends for our business. With the rise of the Delta variant, like others, we've seen increased inpatient admissions and professional services due to COVID across our business, but in different ways. In Medicare Advantage, the impact is well below 2020's peak, given the high rate of vaccination among our senior population and our geographic concentration in California. In IFP, utilization impacts have been most pronounced in the Southeast, including in Florida, where we've seen a significant increase from earlier in the spring of 2021. While we've seen an increase in COVID utilization, early indications are showing that core non-COVID utilization, such as nonemergency inpatient surgeries and certain outpatient services like diagnostics are decreasing over the same period. So as we look to the future, we believe our integrated systems of care position us for continued near and long-term growth. We're entering 4 new states, plus adding California to our IFP portfolio for 2022. We're expanding our MA offerings next year, building on our 35% organic growth rate this past year, a segment in which we now serve over 110,000 members. And we continue to drive differentiation through New Health with plans to add over 25 new clinic locations across Texas, North Carolina and Florida next year as well as managing Medicare fee-for-service lives through our direct contracting entities. And with that, I'll turn it back to you, Ricky, for some questions and answers. Thank you.

Great. Thank you, Mike, and thank you for addressing the utilization topic ahead on. I know that from past conversations, it's something that's clearly on investors' mind. You have a long tenure in the health care industry. You've seen health care from the inside, what works, what doesn't work. And you're putting together kind of like Bright Health Group is kind of like -- the vision is really kind of like integrating the health care system. What are the gating factors to the integrated model? And sort of what are the building blocks or the path to get us there?

Well, thanks. It's a great question, Ricky. Let me start with, as I said, we have a misaligned system. It's where stakeholders really aren't incentivized to work together for a common purpose. The gating factors, as you say, our peers focus on price management and generally restrictions, restrictions in network, restriction in benefits. And while providers, they're reimbursed on the volume-based fee-for-service system that has proven really never to control cost or improve outcomes. I believe the key building block to solve for this is really behavior change. It's really -- that we believe that's achieved through our aligned care partner model. Frankly, breaking muscle memory that has been built over decades, it takes time. It's hard to change. We really believe in what we call the future of integrated care. It's where the different layers of the health care system are connected and aligned, and it's where the tools of managed care are embedded and delivered through the care delivery system, where they touch and interact with patients directly. So in order to do this right, frankly, we believe you need to start with a model that connects consumers, payers and providers. That's core to our strategy. And then we believe you need to focus on a system that is actually simple, personal and affordable for the consumer. And then we leverage -- we believe you need to leverage purpose-built technology that's designed for the aligned model of care. So Ricky, we believe this is the alignment model of the future, and I believe it's core to our future strategy.

So when we think about this, technology is such a key factor, right, in that integration and connecting consumers, providers and health plans. How are you going about building the tech infrastructure? Can you talk a little bit about sort of your technology and what innings are you at?

Yes. Technology is just, as you know, is a continuous journey. Overall, I'd say we're in the early innings on our journey to build what we call our unified operating platform. However, I want to be clear, we have a strong foundation in place. and that was intentionally built to support our business model and data needs. It started with we created what we call Consumer 360. It's a purpose-built intelligent data hub that serves as a single source of truth of all consumer data, which provides longitudinal whole-person record that combines multiple sources of data to drive predictive modeling, clinical interventions and improved consumer engagement. But along with that, concurrently, we've also been building additional front and back-end office functionality while in-sourcing key consumer and provider-facing systems from our external vendors. So over the next 3 years or so, we'll move our entire operating platform, including our acquisitions that we've made to a single integrated end-state platform. Interoperability is and it will always be core to our model. A single digital patient record enables consumer engagement and allows us to better manage underlying health needs. So with respect to results from technology, I've often said, technology alone doesn't drive results. Technology allows us to get information at the right place and at the right time to improve outcomes. This means embedding technology into existing workflows and using it as a catalyst for behavior change, again, a gating factor to change the current system. In our longest tenured markets, this has allowed us to leverage multiple data sources to create what we call a comprehensive care plans for our high-risk patients. And as a result, it has allowed us to lower unnecessary admissions, reduce emergency room visits, increase in network utilization, which is a core metric of ours and overall, Ricky, improve affordability. And that's really what our technology is designed to do.

So Mike, why don't you -- I have a follow-up question on that because to me, kind of the consumer-centric EMR sort of the Holy Grail to change and to really kind of like change the demand -- supply-demand sort of equation in the marketplace. When you think about that connectivity between providers between health plans, between consumers, do you need to own providers in order to have that integrated system? Or could that relationship be a sort of arm length. And also, as you build sort of your ecosystem, is it -- are you thinking about kind of like end game being also just multipayer sort of multipayer multi-provider.

So let me start with -- go back to the first question that you asked me in terms of what needs to change? Well, I think behavior needs to change. And when I say behavior, we've got to build a trusting relationship and that trust has really built what we call on alignment. We think it's alignment through clinical alignment, financial reward, incentive alignment and then integration through technology and data. I don't think you need to own the provider, so to speak. But we need to all be aligned, and we need to recognize jointly that having one whole-person record at the right time at the right place to engage with consumers to build that work relationship between the care provider and the patient is critical to performance over the long run and a better consumer experience. And so we do that today. We do that through a trusted relationship with our care partner systems. We do that through our affiliated partners in our clinics within New Health where we don't employ them, we contract with them. We share in our tools and our capabilities. We enable them to essentially take value-based care, if you will. And then we connect them to our payer relationships. Our payer relationship will, of course, Bright HealthCare, but also with our other value-based contracts with other payers in the market. And so -- and then, of course, we do that within our own systems, and that enables us to demonstrate the power of our technology and roll it out faster because obviously, we control the delivery system in that regard. And that's really what we're doing with DocSquad right now. We're rolling out our integrated solutions that's for the consumer, consumer engagement and is also a modern, call it, what I would say, value-based care practice management system for the provider. And so that -- because of that ownership, we're able to get to market sooner and then we'll be rolling it out to our affiliates and care partner network. And then with regard to your question, Ricky, on -- do I believe in a multi-payer strategy, I think you asked, definitely. Today, in our clinics, we have multi-payer relationships. Scale matters, and we want to serve consumers. We just believe that all consumers through the entirety of their life journey are better served in alignment model. And so we're not just focused on one product line or product category. We're focused on serving all consumers. And we'd love to serve them and distribute to our network and providers through Bright HealthCare, but we also know that we can build deep relationship with other payers who are committed to an aligned model. And so definitely a multipayer model is important to our strategy going forward.

So talking about scale, over the last 4 years, you've meaningfully grown your membership base. What's your go-to-market strategy? Let's just -- if you can just dive a little deeper into it. And how do you balance growth and margins?

It's a great question. Thank you. Our go-to-market strategy is rooted in the understanding that every market is different, and you need to understand the nuances of each market. I've said it before, if you've seen one market, you've seen one market. So it starts with understanding the market type and selecting the right care partners. And then critical is to price to our underlying capabilities and the unit cost within that market. And then we collaborate with those local market partners to ultimately drive results. We follow up this with continuous operational performance improvement. This is where we leverage New Health as a differentiator. It's to reduce medical costs, improve outcomes and ultimately retain patients in our membership. As you know, Ricky, there's always challenges that come along with growth. However, the standardization of key processes, tools and back-end capabilities allows us to improve overall performance across our 2 businesses in tandem. This goes back to what I mentioned earlier, the integrated systems of care, which enables performance improvements over time. As patient and provider relationships to the tenure increases, we're able to refine clinical programs and better manage health conditions. A natural byproduct of a deeper relationship is more accurate and timely risk capture, higher engagement and reductions in unnecessary utilization. So Ricky, we know scale matters. Our book of business will get better over time as we collect more data, as we improve our predictive modeling and as we drive continued operating cost improvements while maintaining our rapid growth trajectory.

So Mike, building on some -- a few of the things you've said here. One, when we think about the integrated model what's it based, it's value-based, which is now for now, it's predominantly Medicare Advantage. When I also think about the tenure of the relationships, right, the tenure, we usually see that with the Medicare Advantage population, they're stickier. So when you think about your book of business, what's the ideal balance between Medicare Advantage versus sort of kind of like more of the exchange lives for your book of business? And how do you get there?

Well, thanks, Ricky. This is a great question, and it's really critical to our differentiation and our strategy. As we've stated before, our goal is to serve all consumers across their life journey through an integrated model. We started an IFP and Medicare Advantage because they align best with the consumer choice today. But we continue to believe that a broad shift to more consumer involvement in health care decision-making will allow us to further diversify our business. We typically enter markets with IFP, and then we follow on with MA in select markets, where we see the greatest opportunity to create tighter alignment with our care partners in local markets. At the end of the day, we don't think about our health plan business in terms of product lines, like I said. We think about it as finding ways to serve all populations through a consumer-driven, personalized offering. We believe our integrated model will continue driving performance above industry growth rates. As we build deeper patient-provider relationships, our model will create a natural transition from IFP to Medicare Advantage, allowing us to capitalize on the agent opportunity as consumers look to maintain their provider relationships. We've built our Medicare Advantage business today into a significant contributor with over 110,000 consumers and nearly $1.4 billion in run rate revenues today, which represents 1/3 of our revenue today. So Ricky, we like our diverse -- we like our diversification, and we believe we have a healthy mix of business today. And we also believe we plan to expand into other lines, business lines in the future and continue to have a healthy mix of diversification over time.

So Mike, should we think about it is, to your point, you enter a market sort of with kind of like IFP lives, that's how you build the scale fairly quickly. And then you have the scale and you then supplement it with kind of like those MA lives that contribute meaningfully to top line growth? I know it sounds like simplistic, right? But is that how I should kind of think about the strategy?

It's simplistic, and I think eloquent. Yes, I think entering -- we enter through IFP. It's a great way to partner with the care partners in a market to demonstrate our differentiation, to demonstrate our alignment model and how it can work. And then we broaden that to other consumer retail marketplaces. Today, Medicare Advantage, as it's defined as a product line is a great opportunity, and we're demonstrating that today. But I do believe, as I said earlier, in the future, while IFP and MA are today, we believe there's going to continue to be growth in the consumer retail marketplace from other sectors of health care, and we think it positions us well for the future.

So as we think about growth, last couple of years, I think you integrated 3 acquisitions and M&A is not included in our model. But as you think about sort of the growth trajectory you think about it's kind of like scaling and kind of like what role right, new acquisitions have?

Well, look, we've done obviously several acquisitions over the last couple of years, mostly they were targeted on in the Medicare Advantage, in the health plan side and then it really helped to seed our New Health business in Florida. So -- and we're really excited about how those businesses have performed and how they've created value for our shareholders. But frankly, we're not really focused on mergers and acquisitions per se. We're really focused on organic growth and fundamental execution. We'll look opportunistically at mergers and acquisitions, if they can add to scale or differentiate us in a product category or local markets. But we know that capital decisions, they always have a trade-off. So any M&A will be considered in the context of not only our strategic direction, of our businesses, but also the cash burn and the time would be required to build internally. And how does it compare to capital allocation if we did it through internal measures, if you will. So we're always comparing capital allocation to the best return. And so right now, we really believe our best return is our organic growth and continuing to get to scale and demonstrating fundamental execution, improved performance over time.

So talking about sort of cash burn and capital requirements. It's a question that we get from investors. Clearly, it's top on mind for them. I think you have about $760 million of nonrestricted cash on the balance sheet as of the end of the second quarter. There's still some time, I think 3 years from profitability. How do you finance all of this?

Well, let me start with -- and I appreciate the question and the concern. But we believe our current capital position supports our expected liquidity needs to continue to drive meaningful growth and performance for the next year or so. This is obviously always dependent on the volume of growth, which we've seen significant growth of late, which could impact the time line of capital needs. But we believe we've got a strong capital position and it's tied to our growth. While we've not specifically committed on any time line to profitability per se, we do believe that our model, as we get to scale, will generate strong operating cash flows and support the future growth of the business over time. But as we said, as we went through the road show late last spring, early summer, we've always planned the need for additional capital at some point. And that really is needed for our continued growth and expansion of the business.

So is that how we should think about it? Because that's one of the questions we got sort of the puts and takes on needing to raise capital sort of in the near to midterm. So when you think about those puts and takes, I mean, clearly, M&A is one of them. But what other things should investors kind of like keep in mind?

Well, clearly, as you think about just -- well, first of all, look at our operating cash flow that we've generated year-to-date, it's pretty significant on top of what we did last year. So we're really excited about the cash flow generation of this business. It's always been something that I've been excited about in this industry, and it's something that I hope investors appreciate over time. But it's got to tie to profitability as well. And I would say we -- there's many different levers that we can pull to improve our capital and liquidity position. And a lot of it is tied to that growth, not just growth and what we've achieved, but planned growth. A fair amount of our operating burn rate as they call it, is tied to the expansion markets that we're growing in. And so to the degree that capital is scarce and there are trade-offs to be made. We're balancing that every day on capital priorities. And let me just give you an example of that. When we went into COVID last year in 2020 in March of 2020, capital was critical in managing, making sure that we had -- we've just come off a large capital raise and making sure that we had adequate capital to meet our near-term goals was critical for us because we didn't know what liquidity environment or capital market we were entering into. Frankly, last year, we pulled back on market expansion, Ricky, because we wanted to maintain adequate capital and that improved our capital position to get us to the point where we could have another raise to support the robust growth we ultimate saw. But we saw that last year, not an expansion states. We saw that in existing states where we expanded in Florida, state-wide in North Carolina, additional markets in Colorado and the like. And so the point that I'm trying to make is a lot of the capital need is really to fund expansion, expansion in product growth but also capital surplus for the regulated entities as we enter new markets with insurance license and the like. But it shows you we have levers to pull should we need to continue to maintain adequate capital for the future.

So Mike, we have time for one more question. I think you mentioned before that investors might not fully appreciate sort of that operating cash flow. But really, as you think about in your conversations, what do you think the market is still missing about the story that they might realize because of how the business develops 12 months from now.

Well, I could go on and on here. And since we only have one [ pin ] and all, I'll focus on 2 kind of business areas, if you will, and then one more macro, if you will. I hope that in 12 months, the market will start to realize that our aligned and integrated model with our 2 interdependent yet independent businesses really support our continued outsized growth and consistent and improved performance over time. So it's truly a model that is designed to outgrow the existing market as we enter and grow in existing and new markets. Second, I hope the market realized that New Health is our differentiator and a major contributor to our growing and deep relationships in local markets. and our efforts ultimately get to scale so that New Health is really a major contributor to our growth and performance over the long run. And then I guess maybe a little more macro is I hope the market as I've been -- as I believe for some time now that the market will continue to see that consumerization in health care is increasing rapidly. We believe people want to be involved in their health care choices and the decision-making. And I believe you're going to see more consumers come to the market and seek retail health care as employers, as an example, shift ICRA and other more flexible network options to reduce the cost trend and add choices for employees. And we believe, Ricky, we're uniquely positioned to take advantage of that shift. Thank you.

Great. Mike, thank you very much for the discussion. Cathy, great to see you. And for everybody on the webcast. Thank you for tuning in.

Thank you.