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

Here today. It's my pleasure to be introducing Bright Health Group. Bright Health is one of the fastest-growing managed care companies that has a focus on the individual MA markets, but it also has a fast-growing capitative provider business as well. Presenting today, we have Cathy Smith, CFO; Stephen Hagan from Investor Relations is also in the audience. So I think let's jump right into Q&A if anybody has any questions, by all means, raise your hand, but I'll certainly kick it off.

I guess your company fits into the whole disruptive category as a company who's growing very quickly, but pricing to kind of the margin you expect to be able to deliver over time. How should we think about that intersection and the path to profitability? What has to really happen to get from where we are now to that breakeven?

Yes. Thank you, and thanks for having us, Kevin. Let me first maybe put a little bit of context around your question, and then I'll get you the path to profitability. So just for those that do or don't know us, we bring the financing of care and the delivery of care together. And why that's important is we believe that's how we'll eventually drive better outcomes and more affordability in the health care space. So to get to Kevin's question, we're now -- we just reported the first quarter, we're now over 1 million health plan lives. We have a little over 1.40 million or so commercial lives and 120,000 Medicare Advantage lives, that we're serving. So we have sufficient scale as part of that -- the criteria to the path to profitability. We are also serving over -- or approximately 530,000 value-based care lives through our NeueHealth, our integrated care delivery side of the business. So the first part of your question on the criteria, what's necessary for path to profitability is that sufficient scale. So as we moved into then 2022, knowing that we were at sufficient scale, we are now really focused on operational execution and thinking about those efficiencies that come with scale. And that's what this year is all about as we move to the through to 2024 and our path to profitability. We just -- we gave guidance for this year to give you a sense of the size that we're going to do between $6.8 billion and $7.1 billion in revenue. As Kevin said, one of the fastest growing, grew over 100% this last quarter, and the business has obviously continued to deliver great growth. But equally important, this last quarter, we also reported in MLR of 84.8% are right in line with our guidance. So for the year, we're going to be at $6.8 billion to $7.1 billion. We've guided to in MLR guidance of 90% to 94% and an EBITDA loss guidance of minus $500 million to minus $800 million. So all of that is the backdrop to your question on how do we think about that path to profitability in 2024, which is what we're focused on. Well, let's break it down a little bit. The MLR, we're now at sufficient scale. The MLR would need to go from the midpoint of our guidance this year of, say, 92% net midpoint to roughly 85% or so in 2024 to be able to get to breakeven. We've done a fair amount of work around operational execution and capabilities, which I could talk deeper about. But you'd have to believe we have 2 pricing cycles. So you'd have to believe we go from that 92% to 85% over the course of 2 pricing cycles. We'll get to know members better every year so that maturation of that membership as we move into year 2 or year 3 of that membership gets better and better as well, which drives in-network keep edge, better knowledge of those members, so it drives the MLR down as well. And then on the other side, we'll continue to drive better and better risk capture as well, obviously, as we know that membership. And then lastly, on path to profitability, operating expenses. We're kind of at the peak of inefficiency right now. We always say that, but it's true. If you think about -- we've come from a set of vended solutions, and we're now moving to any proprietary set of solutions that will be our kind of in-state set of solutions. But we are running multiple claims platform and claims administration and management platforms today. We just moved all of our new markets onto a new claims administration platform this year. but we're going to maintain multiple platforms through this year and next year, 1/1/23, we bring on all of the legacy commercial business into our new platform. So that will help us to start reducing some of that operating expense, things like moving all of our population onto our own Panorama system for care management, utilization management, provider authorizations. All of that is now all of our legacy markets are on that. But we're still running multiple, we'll continue to move down to just one or a few and then all of the kind of the core infrastructure or plumbing for the company, one common financial system, one common people system, et cetera. So we're kind of at that peak of inefficiency today running multiple, but we're on our path very, very soon to getting too few, and that will help us to get to breakeven and profitability in 2024.

And how do you think about growth during that transition because oftentimes trade-off between margin and growth. So what should we be expecting for top line?

Yes, it's a great question. So our Bright HealthCare membership, which is our health plan side will. So the MA business will continue to grow in year, we have a very strong offering around our C-SNP population, which grows in here. We have a great offering in our and our cultural and ethnic responsive plans, and we also get IFP agents thinking about that's how we grow our M&A business. So that business will continue to grow and we've seen pretty steady growth there in that business. Our commercial population will grow in the states we're in. We've already said we're not going to go into any new states in 2023. That was intentional as we think about now that we've reached sufficient scale let's get to profitability, and then we'll think about additional states at some point. But we will still grow in states. So think about those largest big markets. We're in the 10 markets that we're remaining into in 2023 is 50% of that IFP or federal exchange marketplace. So we still have great opportunity to expand and grow into those markets, which we'll do. And then lastly, really important, we'll see a great number of growth in our NeueHealth business, and that's a capital efficient way to grow thinking about NeueHealth, we have the business it serves from Bright HealthCare first, other payers. So we do currently serve other payers through our risk-bearing care delivery. And then the government is a third-party payer. So think about the direct contracting entity business where we'll serve almost 50,000 members this year. So all of those are great growth vehicles for us. But to your point, we're going to make sure that we're balancing growth and profitability in all of those cases.

And how do you think just on the IFP business, how do you think about the end market growth because if the subsidies expire -- extra subsidies expire in the way they're set to, is that market going to be growing next year? Or is it going to be down?

I think, first, let's step back, though. The federal exchange or the IP marketplace has continued to grow since I think it's inception. We're probably close to 14 million, 15 million members today. So that's a positive. I think it's a positive for the United States and for consumers. So I don't think it's going away, and it's more and more stable every year. The markets have been very rational over the last several years, and you can look at all the statutory filings that will tell you that. So it's actually a real marketplace serving consumers in a meaningful way. So start there. Last year, for sure, SEP -- the ongoing SEP grew that marketplace last year with going through and then the expansion of the subsidies grew the marketplace last year. I think it's going to continue to grow, especially when you think about other macro factors that will be going on. But to your question around subsidies, there's probably a couple of competing possibilities in the regulatory environment. So Medicaid redetermination and family glitch fix probably increase the population. If they were to remove subsidies that probably does put some -- a little bit more pressure on the population. However, and Kevin, maybe you know better because you've been talking to a lot of people, I don't know that there's going to be a lot of political will to remove health care subsidies right now on either side of the aisle. So we'll have to wait and see. But that one could provide some pressure for sure.

Yes. I think everyone would like you to stay in is just getting Congress to do anything.

It's second time I've heard that today.

It's difficult. But I guess one of the things that you've been wrestling with is what the risk pool might look like because to your point, if you said 3 million people got coverage through the subsidies and 5 million people might qualify through the family glitch being fixed and maybe you only get 20% of them. That's 1 million coming back in. Medicaid determinations might solve that at whole and keep the business flat or maybe even grow the business next year. But in theory, people who drop off because they lose subsidies, good risk pool, people who move from Medicaid and then decide to buy insurance on the exchange, probably a bad risk pool. So it kind of feels that the risk is going to opt the wrong way next year. And how do you think about pricing into that. And again, because particularly when it's like, well, it could be flat or up or it could be down like it's hard to that. So what kind of visibility or how are you thinking about pricing, particularly as you focus on [ margin ]?

Yes. So I think generally, though, the IFP population, we have seen them come in and out of Medicaid or in and out of employment, right? It's been -- that's been generally the population in the federal exchanges. And so I would argue that we're probably seeing a good portion of them in the risk pool already to some degree whether -- on either side of that equation you just talked about. So -- and I think none of us know for sure. So we're going to have to wait and see. What I would tell you is that I don't know how to think about pricing that in particular into next year. What we can do is look at the entire population that's being served and in those markets where we have very strong market share gives us higher confidence that we actually already know the community. And so let me maybe spend a moment on the reason why I say that is, think, take South Florida for us. We have 30% or so market share in South Florida. And over the course of normal retention in any given year over the course of a period of time and the fact that our NeueHealth clinics are serving other payers in that market, we're going to know that whole community. It doesn't matter if they were in or out of employment, in or out of Medicaid or on the exchange. We're probably going to know that community over the course of a couple of years. If you just think about where our market share is that we're serving other payers and just the normal, if you're there for 2 or 3 years with normal retention. So I say that because I think longer term, that's -- you're going to know those populations more and more as we know the community.

I think that makes sense. I guess as we think about that, going back maybe to the first question about the path to profitability, because there's 2 businesses. What you were saying, generally speaking, seemed to fly more to the Bright Health plan side of the equation. What about NeueHealth because that is also kind of subscale or losing money. So is it the type of thing where if you fix the margin on the health plan that kind of flows through down to NeueHealth? Or are there specific NeueHealth actions that have to happen to get that to where it needs to be as well?

Yes. It's a little bit of both, but we actually got this question a lot from coming off of the first quarter call. So maybe to help a little bit of perspective on NeueHealth. NeueHealth did run a 98% MLR in the first quarter. And so I understand why people are asking that. A couple of things are driving that for right now, which is important as you think about that longer-term path to profitability. So first and foremost, NeueHealth is risk-bearing care delivery, and it is serving Bright HealthCare about 60% of its revenue will be Bright HealthCare, 40% will be external payers. So as we think about it dimensionally. And Bright HealthCare went into Texas as a new market -- went into 4 new markets, Texas being a large population. And NeueHealth is the -- we have 20 clinics in Houston and Dallas. And so we're serving those Bright HealthCare members in Texas through our owned or affiliated clinics. So I say that as context because any risk-bearing provider is going to require a higher MLR in a capitated arrangement that first year when you get to know that population. And so that NeueHealth is running a higher -- it has a higher MLR cap into that first year population into Texas. So that's driving that MLR to be up year 1. That will come down as -- and structurally, it will come down, but also just as you get to know that population and manage that population better. So that MLR just like it does on the health plan will continue to come down over time as you have multiple years of incumbency in that population. So that's one. The second thing driving NeueHealth MLR where it is right now, is that direct contracting entity that we have this year, we've very, I think, appropriately booked it at a pretty conservative 97%, 98% MLR this year. And so we're basically planning for breakeven in that business. As we get to know the population and the program, we do believe longer term, there's -- it will be a profitable program. We think it's a great strategic move to have risk-bearing care delivery in the Medicare fee-for-service population. So it's a bigger strategic conversation. But that one is driving it's $182 million of the $620 million of NeueHealth this quarter that drove that 97% MLR. So I say that as a backdrop as to why MLR is so high for NeueHealth right now. And -- by the way, it also remember, only gets roughly $0.85 on the dollar out of Bright HealthCare. So that drives MLR to be higher. Now what does it take for longer term, to your question, DCE will probably -- we're going to continue to think it's probably a couple of hundred, 300 basis points baby type of a profitable program someday, but we'll plan for that conservatively. The rest of it is all of the stuff we do in our integrated care delivery to drive down that MLR. So it's Bright HealthCare working in connection with NeueHealth in its risk-bearing care delivery that will drive that down. So it's all of the great pricing and product design from Bright HealthCare, understanding the underlying cost structure as we move into NeueHealth, great management and risk capture of that population, that's been working together in that integrated fashion.

That's all helpful. I guess when you think about the direct contracting side of the equation. It seems like companies do have different points of view about how profitable that business might actually be. So why won't it be as profitable as a capitated MA?

Yes. And it may. So this is the way we're thinking about it right now, obviously, the program is early. So let's -- it's brand new. First off, we -- I think most of us would believe the government needs to do something about the 2/3s Medicare eligible population that's in a fee-for-service and unmanaged, and this is a great way to get at it. We also very much believe that risk-bearing care delivery is how you will ultimately drive down health care costs as well as improved outcomes. So let me full stop there. I think it's a very large strategic opportunity, and it's directly aligned to our model, which is risk-bearing care delivery. So connecting the financing of care just happens to be the government here. and the delivery of care. So start there. We think, though, at least in the foreseeable handful of years, probably a couple of hundred basis points margin is what we're going to expect. And that's just if you think about where the -- how the program is structured and the performance against the benchmarks, that's about what we're planning. Now longer term, do I think there's more opportunity there like there has been a Medicare Advantage possibly.

Okay. That's helpful. And then I guess when you exited a number of states this year, and you talked about exiting the commercial market as well. Bright -- when you came public, you talked about a few different models. You talked about a highly engaged health system partner. You talked about kind of either supplementing or building out a high-performing physician network through NeueHealth. Is there any rhyme or reason or theme to the state that you exited that you found that one model actually is working better than another? Or anything we take away from the states that decided to exit?

No. So it wasn't that we do believe, first off, every end market is different in health care across the United States. And so having a flexible model to address the market where it's at is we still believe fundamentally is appropriate. That said, the markets we chose to exit, we used a number of criteria, and it's not that all markets long term couldn't be good. But we did -- we said what's the duration and given that we're trying to be very capital efficient right now. We said we kind of use 3 criteria. Can we be differentiated? So do we have a care partner or a delivery network where we've got an opportunity to get down the risk-bearing path, so to take on value-based care. And it has to get into a path towards upside and downside risk because that's where you get through alignment, where we can have not just financial alignment, but technology and data alignment. Are we going to get access to data on a real-time basis. And then obviously, clinical programs. So we look to -- it may not be there today, but have we seen that willingness from the care partners, whether it's a single system or a delivery network, have we seen the willingness to move down that risk-bearing path because that's where we believe fundamentally has to be where we go. That's differentiation. Secondly is, do we have sufficient scale in that market today? Because if not, is it going to take too many years and too many resources, dollars, to give it to sufficient scale, where we may just not want to be there today. It doesn't mean we won't want to Sunday, just not today. And then the third one is beyond the -- can we be differentiated? And do we have sufficient scale is what are the market dynamics? So if you just look at the NAIC filings or the statutory filings for every market, you can see is the underlying market making money, meaning is the IFP, the federal exchange, is there enough gross margin in that state to make it make sense to financially make sense, economically makes sense. So we look at those criteria, and that's what helped guide us on the 6 markets we chose to exit was we just didn't -- it doesn't mean they won't be a great market someday. But in our desire for capital efficiency, just decided not now.

And to that point, 2024, your breakeven, 2025, you're making money, would we expect essentially to get back into these 6 [indiscernible]?

Possibly -- so possibly, just I think long term, do we believe we want to serve all consumers, yes. And so that means, by definition, you would. Now some markets are at different levels of maturation and the stability of those markets. So and that's for a variety of reasons where the structure of the program is statewide are, et cetera. So I would say that I think they won't all be highest game at first.

And then the commercial employer response business, that was kind of another kind of add-on to the 4 individually-focused businesses. Why exit it that business?

Yes. Long term, we do believe employers have a desire to move from a defined benefit to a defined contribution type of a structure, just like they do with pension plans. We do think that there is a move in time for consumers to be more involved in the health care and to be able to -- so if I could give you a stipend I worked for very large employers in the past. And if I could have given a health care type as part of the medical benefit to our employees and let them purchase what was important to them and their families, we would have. So we believe longer term, that is a move that's going to happen. Three -- so that's why we were in the commercial business and think it's a great feeder for that IFP or that federal exchange population. As you know, we already were serving small groups here and have the ability to do that. But when we looked at we're, again, back to focus and getting to path to profitability in 2024, we just decided that juice wasn't worth the squeeze for right now, meaning that some day, do I still see that as a great feeder. It's a great set of broker relationships, it's a great way to meet employers and move them down that path to define contribution. Yes, all of that still makes sense to me and to us, but we just time and resources and focus right now.

Yes. And I guess the other business that you talked about getting into over time is Medicaid. Is that also kind of delayed to? Or is there some reason to think that, that's still a medium-term opportunities?

Yes. I would say it's probably more on the delayed side for right now. Again, back to do we believe we want to serve all consumers someday? Yes. I think it's just a time and pace at this point.

Okay. That's helpful. And then, I guess, just broadly speaking, I mean, when you think about the quarter, as you mentioned, it was in line with the guidance. And just generally talk about how trends developed and how you're thinking about the rest of the year playing out.

Yes. So we're pleased to have a good solid quarter and within our expectation so we'll start there. And then we did reaffirm our guidance, which helps us with confidence. We've done a ton around improving our operational execution this year. Our -- everything from our claims processing through our risk capture -- our risk code capture capabilities attributing our members early on, starting to already [indiscernible] by the populations and engaging with those members. So we've done so much to give us more confidence in how the first quarter developed and then obviously, subsequent quarters will develop. That said, we still have a very large part of our population that's new this year as we went into predominantly Texas is a new large market this year. And as we move into '23 that will only get better because all of that population with normal retention will just mean our stronger incumbency as we move into 2023, just becomes a great tailwind into next year. But this year, to your point, we feel good about where we are in operational capabilities. I feel good about the start of the year. But we're still going to have a good portion of our members we have to get through. We'll have to see if COVID does remain endemic. We did -- we noted on our Q1 call, we saw January with a COVID spike, but it came right down really fast. It was offset by a little under levels of inpatient utilization, which was a great offset. Outpatient and primary care physician specialty were pretty much in line with the utilization trends that we've seen historically. So we feel good about the underlying utilization of the business and then as we think about it progressing through the year.

Okay. That's helpful. And I guess when you think about the guidance, like is there another COVID spike kind of assumed by year-end? Or does it not matter because COVID goes up, COVID goes down and...

Hopefully. So with what we saw in the first quarter, we were still confident that what we priced in and to remind us. We priced in about 2% for COVID, whether it was either COVID or deferred utilization, we weren't sure how it would show up, assuming that we're at a level of endemic level for the pandemic. And gosh only knows, right, what we'll see. But the first spike we saw in the year made us at least feel like we can -- we've got it covered. So we'll obviously have to see how the year plays out. But so far, with what we've seen, at least it would tell us we're okay.

And then when we think about NeueHealth, you are seeing exchange members in the capitation side. That's not something that most of the companies are talking about. So can you talk a little bit about what the opportunity is there, you -- what benefit you get from having that there? And then do you expect it to be as successful from a margin perspective on an exchange members that would be MA number?

We -- so to your point, we are one of the few that take on risk-bearing care delivery for the IFP or the Federal Exchange business. We do believe that's how you get to affordable health care for all consumers long-term. And as you know, we strongly believe that, that's how you'll drive down costs and better outcomes. And it starts with that really important relationship between a primary care physician and their member or their patient. And so that's what we focus on with NeueHealth and specifically in the exchange business. So what we've seen, and this is what gives us conviction about our model. Obviously, last year was a bit tumultuous and gave us some challenges. But if you look at the underlying performance of our NeueHealth-owned clinics and affiliates, they have performed better. So historically, we've seen them perform better in both MA and exchange business coming through last year, even with all the challenges we had last year underlying medical cost of our fully-aligned model performed 15% to 20% better in medical cost. It was it was clouded by our inability to capture risk because of that churn of the population with SEP coming in all year long with the 3 COVID spikes that we had throughout the course of the year, et cetera. But I say that because we saw even in a risk-adjusted medical cost, so combining risk adjustment and the medical cost we still were mid-single digits better and higher in South Florida. So we performed -- it performs better, the fully-aligned model even in that federal exchange marketplace. And again, it goes back to we believe that if you enable that relationship between the provider and the consumer, you'll drive long-term better outcomes out of more affordable price. And we're seeing it perform better even, like I said, with the growth last year and the and the 3 COVID spikes and the SEP. And then I'm going to go back to, I think, Kevin, where I started earlier, and that is over time, it is about local delivery of health care. And we're seeing that as in South Florida is a great example of that. Whereas we serve other payers and we serve Bright HealthCare, we're going to know that community better over time. And so that allows us to then really make sure we have that great relationship with the provider and the consumer but also manage their health care. So that's why we do believe -- and I think at the more macro perspective of margins, and we've talked about this, I think, in the past, all of the health plan business, the combination of Medicare and IFP, we would expect in that 4% to 6% type margin range, EBITDA range. Longer term, NeueHealth would be in that 10% to 15% for a long term of 7% to 10% for the company. That's kind of long-term guidance, which is what we talked about through the IFP -- the IPO, we don't see that's changed.

I guess to go back to the growth question and the IFP growth. So do you think that you can actually grow IFP membership next year kind of based upon the overall view of where the market is going to be exiting states and core growth in your markets? Does that all add up to membership growth?

Yes. So we're not giving guidance necessarily for next year. So let me start there. But what I would tell you is, and we tried to put this in market exit press release we did, which is the markets were -- the 6 markets we are exiting into next year. We're going to serve those numbers this year. But for next year, where 5% of our revenues or 8% of our membership. So tried to dimensionalize it, it wasn't significant to the total commercial population that we're serving.

Okay. That's helpful. And then, I guess, the other question we get a lot with you is just the ability to finance growth because obviously, we're not at profitability yet. You guys did an equity offering last year. So how should we think about the ability to finance growth that bridge profitability?

Yes. So as we shared on our Q1 call as well. The company, first off, is at a very different place of its capital need today than where it has been in the past. As we were financing that growth and moving into new states, as you know, from the health plan point of view, you have to support it with fair significant amount of risk-based capital as well as the front-loading of expenses as you move into a new state, whether it's building networks, broker relationships, marketing, et cetera. So all of that causes you to have a much bigger capital need early on as you're growing and moving into new states. Now that we're at sufficient scale and moving growth in state, the capital need for the company is at a different level. It's just -- it's a very different level. So that's one. Number 2 is we've been taking the actions whether it's the exit markets that we just talked about, which will save us about $100 million worth of capital next year in operating expense avoidance and statutory capital, we don't have to put into those states. So that will save us $100 million or so. And then we've been taking cost out. As we said, we guided at the beginning of the year our operating cost structure. We said we'd be on the low end of our 22% or so. So we've been taking costs out as well on -- all of that helps us to minimize the cash burn. That said, we've got sufficient liquidity depending on growth and performance, of course, to support us for the next year and which obviously will then help us towards that path to profitability but not all the way into 2024, as you just said. We have other levers we're looking at, things like quota share, things like additional capital efficiency, we can do. Obviously, NeueHealth growing through third-party payers is very capital efficient. So there are other ways we can think about that growth.

Okay. I think that's all we have time for. Thank you very much.

All right. Thank you, Kevin. Appreciate the questions.