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Kevin O'Leary

4/30 Earnings Week in Review

April 30, 2022
Community Update


Teladoc's stock plummeted 40% as its earnings announcement underwhelmed, with Teladoc revising its 2022 guidance downwards. Center stage in this conversation was the D2C mental health market, which apparently has taken quite a turn in the past few weeks. Teladoc cited that CPA for paid search increased by 20% in March versus Jan / Feb. Mind you paid search represented 20% - 25% of newly acquired members in Q1. On the earnings call Teladoc's CEO didn't mince words sharing what he thinks is happening in that market - calling out companies taking advantage of the public health emergency to prescribe controlled substances virtually:

We know that some companies are exploiting the temporary suspension of the regulations that prohibit the prescription of controlled substances during the national health emergency. For better or for worse, that puts us at a bit of a competitive disadvantage relative to those who do. We don't think either of those practices, either bidding up the search auctions or prescribing controlled substances is a sustainable practice.

It's interesting to see some of the analyst questions on this topic of D2C growth - it's almost as though they dislike the volatility of the D2C market and would prefer that Teladoc to focus on the B2B sales channel, which I suppose is understandable when you look at it through the lens of an analyst trying to build a predictable financial model. Of course, the B2B business isn't exactly performing well either, as Teladoc noted that sales cycles are becoming elongated, and it had to take a $6.6 billion impairment on the Livongo acquisition. Still, repeatedly cited optimism on products like Primary360, but shared little concrete data to back up the optimism. Between this and the Accolade earnings call covered below, the employer market sure seems to be becoming more challenging for digital health startups.

Link (transcript) / Link (press release) / Slack


Not to be outdone, Accolade's stock plummeted 50% as its earnings announcement underwhelmed the investor community by just a bit more than Teladoc's. Accolade announced that its largest customer, Comcast, is ending its contract with Accolade as of December 2022. Comcast of course was Accolade's founding customer and played a key role in getting the business off the ground over a decade ago. Accolade leadership didn't have a great answer to why Comcast left - implying that Comcast's priorities shifted away from improving health outcomes while demonstrating ROI in this quote below, which seems a bit odd:

We’re focused on servicing clients who are looking at improving healthcare outcomes while achieving return on investment that is associated with achieving those healthcare outcomes. In terms of that specific instance, I would say we may have seen a divergence of motive and mission there.

Brian Dolan has a good breakdown of the magnitude of this breakup on Twitter, positing that either Grand Rounds (now Included Health) or Transcarent took over the relationship here, which seems to make sense and is more likely than Comcast deciding they don't want to achieve health outcomes while demonstrating an ROI. Either way, it feels like the end of an era in digital health innovation where Comcast spurred the creation of a bunch of new employer focused startups, including Accolade (this is a great read on Comcast's role in spurring employer innovation).

Beyond the Comcast change, Accolade mentioned that it is seeing broader market softening in its core advocacy business, which also played a major role in its revised estimates. Not surprisingly, Accolade signaled it is pivoting hard away from growth and towards profitability, bringing down revenue estimates significantly and targeting FY 2025 for profitability. Analysts seemed concerned in the call, asking a number of questions about whether Comcast is an isolated event or a sign of material weakness in Accolade's model. FY 2025 is a long way off to achieving profitability particularly given all of the questions Accolade will inevitably face between now and then on how unique its offering is for employers if its biggest customer is jumping ship.

Link (earnings call) / Slack


Unlike digital health companies, big insurers seem to be doing quite well as Humana raised guidance for the year after a strong Q1. Humana spent a good portion of the earnings call providing insights into their healthcare services business and how they're moving it to value - they laid out a three step strategy that is:

1. Build capabilities. They note this includes organic growth, i.e. pharmacy, as well as inorganic growth, i.e. the acquisition of Kindred at Home and partnerships with Heal / Dispatch

2. Flip the capability to VBC contracts. They note the primary care business is in this phase today, where they are growing value-based presence while making tuck-in acquisitions in specific geographies

3. Integrate assets to improve performance. They note that integrating CenterWell Primary Care, home health and pharmacy in a local market will lead to better triple aim-esqe outcomes - lower costs, better clinical outcomes, improved satisfaction. It's hard to argue that, although interesting to note that this is the third step in the equation.

Overall the approach isn't rocket science, but interesting to see how they are approaching it. It's also worth paying attention to the quote below as it should tell you everything you need to know about why every insurer is building out a healthcare services business using a similar approach to what Humana articulated:

Recall that a health plan member who utilizes the full suite of our healthcare service assets can drive 2x to 4x the direct margin contribution for the enterprise as compared to the health plan margin alone. This is what we refer to as the flywheel effect.

A member who uses healthcare services drives 2x - 4x the margin for Humana than a member who uses just health insurance alone. That is a great financial opportunity for every insurer to go after, particularly when you have the membership in local markets to support a services business at scale. Look no further than Humana's growth in the value-based primary care space as a great example of the opportunity here:

We are the largest senior-focused, value-based primary care provider in the nation with 214 centers today. This includes 37 centers in the Welsh Carson joint venture, which began in 2020. We expect to have approximately 250 centers by year-end and intend to add 30 to 50 centers per year going forward. As shared in February, we are committed to funding the organic growth of our primary care organization in 2023 and beyond

Link (transcript)


Centene joined Humana in raising guidance for 2022 after a strong start to the year, as well as an assumption that Medicaid redeterminations will start in August, which is pushed back three months from its previous assumption. Centene spent a lot of time talking about value creation / operating efficiency during the call. Interesting to note the analyst questions on inflation and labor costs impacting Centene's provider network, and that Centene isn't seeing any impact yet but sees it as a reason to move faster into value-based contracting. Yet another sign that payor / provider contract negotiations over the next year are going to be really important to watch.

Centene mentions that they've made progress in Medicare moving providers to upside and downside risk, and are now making strides in Medicaid as well. Centene’s exchange business is growing well, and it shared it retained 69% of its members from 2021 into 2022. It’s hard not to read into the Q&A below on exchange competitive dynamics as a shot at Oscar and Bright and the challenges they’re facing related to their ability to price products:

Analyst Q: It seems like you were largely able to improve your exchange margins and hit the enrollment targets that you outlined. So I'm wondering after the open enrollment experience that you had, if you noticed any increased price competition and if you would expect that to continue and how you think about growing off the space setting aside expiration of subsidies.
Centene A: Yeah. So there's certainly competition. You've seen that increase in some markets exponentially in the last couple of years. I think some companies are figuring out this -- at the core is an insurance business. And so, you've actually got to get to an earnings standpoint to have a viable business. And I think that's going to help the market sort of balance out a little bit better as we lookahead. But you're absolutely right. We powered through that competition.

Certainly gives some insight into how incumbent payors like Centene are viewing the growing pains that Bright and Oscar are going through - at the core they're building insurance businesses and they still need to learn how to build a viable insurance business.

Link (transcript)