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Kevin O'Leary

Clovers Q1 22 Earnings: Pivoting to an MSO

May 15, 2022
Company Research

TL;DR: Here's our takeaway from Clover's earning announcement this week:

  1. Clover appears to be signaling that they’re a physician enablement platform now, de-emphasizing the insurance business
  2. Clover is focusing the insurance business on getting GA and NJ MCRs down (given the 120% MCR in Southern NJ in 2021, they should probably consider just exiting the market altogether) and halting expansion
  3. Clover’s substantial growth in Direct Contracting has it excited about the opportunity to become an agilon / Privia-esqe platform, although it remains unclear that providers are using Clover Assistant (CA) for anything other than getting paid more 

Unofficially Announcing Clover's Pivot to an MSO

Clover’s Q1 2022 earnings announcement included a relatively big change even if it lacked much fanfare - Clover is now a physician enablement company. Check out the difference in its tagline between the last two quarters:

It’s actually helpful strategic clarity that Clover is providing with this update. Clover also repeatedly hints at this ambition during the earnings call:

From the prepared remarks:

Our goal from a CA product standpoint is to allow for total Medicare panel coverage with any given PCP, including those that have never participated in value-based care. And we continue to engineer the business with this in mind.

From responses in the Q&A:

Toy: we're getting requests now for how can you help us with the entirety of our Medicare panel. And that's something we alluded to is our ultimate goal is to cover the entirety of the Medicare panel and enable physicians to feel like because exceeding value-based care with their entire Medicare panel, and that'll be a really great place to be.
Garipalli: our goal is absolutely to cover the entirety of a PCPs Medicare panel and make it easy for them to deliver great data driven care and be successful in value-based Medicare. And we are actually getting a lot of inquiry from our CA partners around that because they really -- there's no difference between how they care for folks clinically, folks who are on Medicare based upon which Insurance company or what their form of insurance is, whether they're on M&A, Clover M&A, fee-for-service. 
And so, they want to bring all of that together and have a central place that they can manage those capabilities. And we can provide that with Clover Assistant. So, we believe there's a significant opportunity here for us to really play that role with CA for our physician partners.

While Clover stopped short of outright saying “we’re pivoting”, the tagline change and the tone of the responses above say a lot about org strategy moving forward. When we wrote about Clover’s SPAC filing less than two years ago, we asked ourselves somewhat incredulously if Clover saw itself as an MSO business. The answer to that now clearly appears to be “yes”. 

This invites two key questions:

  1. What does it mean for the MA business?
  2. Are they positioned to succeed as an MSO?

Before we jump into those two questions, let’s revisit some of the data that Clover shared during its initial SPAC less than two years ago to give us some context for where they’re at in the journey.

Clover is Missing Numbers Across the Board Since its SPAC

Given the SPAC was only 18 months ago, you might have expected Clover to have a decent grasp on what its business would look like going into 2021 / 2022. Based on the key metrics highlighted at the time of the SPAC, you would have been wrong in that expectation. Check out this slide below highlighting some of the key financial metrics for Clover from their SPAC materials, along with what they reported this quarter:

As you can see, Clover is meaningfully off on every key metric it laid out, and most worrisome, it is the most off on the metrics that are key to business performance - they’re not seeing expected penetration of the Clover Assistant, the Clover Assistant is not driving lower MCRs, and the entire book of business is running a higher MCR than expected.

It gives you some perspective into the performance of the business over the last 18 months. That performance gives us a great deal of skepticism that any of the numbers they are citing today are actually real, versus more sleight of hand to paint a rosy picture when in reality the business continues to sink. Let’s take a look at each portion of the business. 

The Insurance Business

The insurance business still appears to be struggling, posting an MCR of 96.4% for Q1 2022. When you look at the MCR performance of the insurance business by region in the chart below from the Q1 earnings release, it’s not surprising to see why Clover is pivoting to the physician enablement business given the performance. A charitable description of its insurance business at the moment would be as a struggling regional MA plan. 

Clover MA Performance by Region (2021 Data)
Clover MA Membership Growth by Region

Four things in particular stand out in the two charts above:

  1. Northern New Jersey (NNJ) remains at a 99.3% MCR in 2021. Roughly 50k lives are in NNJ, which checked in at a 99.3% MCR in 2021. Keep in mind that NNJ is Clover’s longest standing market, entering the region almost a decade ago in 2013. Clover got its start initially there as a provider sponsored health plan with a health system that Vivek Garipalli owns, so it’s hard to imagine a friendlier market to enter given the circumstances. Yet nine years into operating a plan, it is still running at a 99.3% MCR. In its SPAC materials, Clover suggested that returning members should be at MCRs between 70% - 85%, and you’d hope that given how long it has been in the market, that it’d have figured out how to manage medical better by now. The fact that it hasn’t in its core market is a huge red flag for the business.
  1. Southern New Jersey (SNJ) MCR of 120.4% is awful. SNJ, a market that Clover entered in 2018/2019, is performing significantly worse than NNJ, running at a full-year MCR of 120% in 2021. Here’s some rough math on a 120% MCR: at a PMPM of $1,100, a 120.4% MCR means you’re losing approximately $224 per member per month on medical spend alone (leaving out any admin expenses). At ~15,200 members, that means that Clover lost over $40 million last year in the SNJ market. On top of that, the earnings call doesn’t suggest Clover has a great grasp on what’s happening in SNJ, with leadership referring to it as a “newer market” and suggesting that they have “a lot of levers at our disposal around Clover Assistant deployments, around working with our physician partners in Southern New Jersey, around deploying things like our in-home care program within that region”  in order to manage medical costs. We’ll get into the Clover Assistant use in MA and in-home care more below, but it is a bit unnerving to see an answer that vague in response to an MLR of 120% on a significant chunk of the population, in a market where Clover has been operating since 2018. It seems to indicate some larger underlying issues with the insurance business.
  1. Georgia’s Growth is Worth Watching. On a relatively positive note, Georgia seems like an outlier in terms of growth performance for Clover, going from  3.9k members in 2021 to 11.9k currently, along with an MCR of 99.9% in 2021. Admittedly, for most plans that have been operating in a state for five years, you’d like to see an MCR of better than 99.9% in that state. It’s also worth remembering that Clover had a partnership with Walmart to offer co-branded plans in 2021, which appears to be no more. Either way, it appears something different is happening in Georgia, and that is worth keeping an eye on.
  1. Lumping all markets outside of NJ / GA into “Other”. Clover only had 3.2% of its membership outside of New Jersey and Georgia in 2021, and is de-emphasizing growth in new markets. You can see in the chart above how challenged Clover has been in growing membership in those markets. Clover has now been in most of itsmarkets for four years and barely cracked 1,000 members in any of them. Clover mentioned in the analyst Q&A that its strategy is focused on “going deeper in our existing markets. And that really necessitates a focus on growing the markets that we're currently successful in and where we can continue to drive improvements and MCR”. It appears we shouldn’t expect to see them entering new markets any time soon in the MA business, which makes sense given its performance. Not surprising given the performance of the business and the way the public markets have turned, but it does seem a marked departure from the GROWTH * GROWTH * GROWTH positioning during the SPAC. It’s hard to view this as anything but a major failure for the company. Granted, you could probably say this for all of the newly public insurers at the moment.
CA Penetration in the MA Business

Analysts asked a few times about the Clover Assistant penetration in the MA book of business, seeming concerned that penetration seemed to be declining, particularly in core markets. Remember in the SPAC presentation, Clover suggested that penetration in MA would increase to about 68%, up from 59% in 2019. This was cited as a critical driver of business performance given the expected improvement in MCR among members using CA. It doesn’t seem like it’s an exaggeration to say this is the core thesis of the business - get members on CA, manage them better, run a more profitable insurance business. But in Q1 2022, CA penetration actually declined, going from only 50% in Q4 2021 to only 46% in Q1 2022 - both numbers very far off of where Clover was saying it would be, and obviously trending in the wrong direction.

Here was Clover’s response during the earnings call explaining why CA penetration had decreased over the quarter:

we wait to see claims data, physician data, lets us know which PCPs are actually being seen by our members in the various regions we're going. As we expand geographically as well as grow, what that means is that it takes a little while for us to build up that CA user base in those markets. We are actively doing that in all of our markets right now, but there is a bit of a lag as we grow in those markets to see which PCPs we should be targeting.

Clover’s answer to that question actually says a lot about how it is convincing providers to use the CA. Here’s how it appears to be happening:

On the one hand, it's a pretty brilliant approach to getting folks onto the platform, and is probably reason alone for Clover to continue offering its Medicare Advantage plans (assuming it can step losses). On the other hand, this also raises a lot of questions about what providers think they’re signing up for in a world where Clover is heading down an MSO route. 

Clover’s In-Home Care Model

Clover spent more time on this call describing their in-home primary care program for complex chronic seniors, which it views as an extension of care for its PCPs, not competitive to them. Clover cited the benefit of this being that they get more utilization out of the in-home primary care program - whereas other models only see enrollment rates below 30%, Clover has an enrollment rate of 60%+ of patients who are in the program. Clover notes that it was unable to do in-home care from February 2020 until this year, so there was no in-home care in 2021. So this does present upside for Clover moving forward in this year if they can get in-home and influence care patterns. Clover also noted in the Q&A that it’s now launching a palliative care program as well in some markets. 

One interesting strategic question for Clover in all of this is how this strategy ties to its MSO pivot. It is a logical strategic move for an insurer to make, and one that Clover should continue leaning into if it is continuing to try to get the MA book of business to profitability. But in that world, it’s a traditional adversarial relationship with the provider (even if you are a “friendlier” insurer, you’re still the insurer trying to better manage patients than a provider). But the set of strategic considerations in the MA space are very different from the set of conversations in the MSO space, where you are supporting the provider. For instance, look at the difference between Alignment and agilon in how they talk about building these sorts of programs. Alignment’s S-1 had a very defined model for providing care for the complex chronic population outlined in the document. Meanwhile, agilon is working with its local provider partners to pilot programs like palliative care. In a world where Clover is going this direction, I think they’re going to be in for a number of challenges telling providers that they have to use Clover’s owned palliative care group. 

The Big MSO Question: Do Physicians Find CA Useful? 

As noted above at the beginning of the article, Clover appears to be shifting its strategy to focus on the physician enablement space based on the success of its Direct Contracting Entity, Clover Health Partners. This will put it up squarely against the likes of agilon and Privia. 

Given the growth in number of CA members recently (and the underperformance of the MA insurance business) there is a logic to focusing on provider enablement moving forward. Perhaps the biggest change in this strategy is that Clover’s end user goes from being the member who is purchasing insurance to the provider who is choosing to use their software platform. Organizations like agilon and Privia have spent years building up the muscle to understand how to serve those provider organizations well, and the question becomes how well Clover is able to do the same.

CA’s Pitch to Providers: Get Paid More

Clover pitches a three pronged value prop for providers to use the CA, which features two ambiguous values about improving quality of care and access to care delivery programs, and then one very tangible benefit: increasing revenue by approximately 40% per visit (the provider manual further clarifies that Clover is paying $200 for a handful of E&M codes. Elsewhere Clover mentions it’s paying $100 for certain types of virtual visits while the PHE persists. Check out the language in the Provider Newsletter below. 

Clover’s Provider Newsletter from Winter 2021

For all the talk of how CA drives clinical improvements for providers, it seems pretty clear that there is one tangible benefit for providers that is leading to adoption: Clover pays providers more, and in a timely manner.

It’s not necessarily a problem that CA pays providers more. We hear all the time about how PCPs are underpaid in this country relative to other providers (and we agree that payments to PCPs increasing as a percent of total healthcare spend is generally a good thing). The question, though, becomes whether this payment is actually tied to improving outcomes in any meaningful way, or just a way to drive more business to Clover? 

Who exactly is using the Clover Assistant?

One of the challenges with evaluating the CA is that it’s not clear who is actually using it or for what. Is it actually being used at the point of care by providers to influence care delivery patterns? These bullets from the earnings announcement perhaps provide a clue on usage:

Why does Clover refer to the benefit of a PCP in the third bullet, but in the paragraph above note that 3,000 people with NPIs (“unique users”) are using the Clover Assistant platform? If those unique users were PCPs, you’d think that Clover would just say that given they do in the bullet below? The most logical explanation for this is that many of those 3,000 people using the platform are not PCPs, but rather someone else on staff (i.e. PAs) who the PCP is telling to document the visit in Clover Assistant to get paid more. 

This is further supported in the documents that Clover shares with its providers. In the Provider Resource Guide, for instance, Clover mentions that in order to get paid, a “Clover Assistant Visit” must be documented within 90 days of the actual patient visit. The Clover Assistant Visit takes 3 - 5 minutes per Clover Assistant Member, depending on the patient and diagnoses. None of this makes it seem like providers are actually using it at the point of care to influence how care is delivered. It all seems like a program designed to pay practices more for better documentation of risk. 

The biggest challenge that this approach presents, other than the questionable long term viability of relying on risk coding as a core business model, is that it doesn’t seem like providers are actually viewing Clover as a value-add for clinical care, but rather an easy way to get paid more for doing the same work. It’s not shocking that providers want Clover to pay them more for their entire book of business. I would say the same thing if I were a provider who is struggling financially. But eventually, that game will run out - you’re not going to be able to pay a PCP above market rates forever, eventually the market is going to catch up. And at that point, you’re going to need to be providing value beyond that.

What Impact is the Clover Assistant Having?

The other way to assess the impact is to look at the data Clover shared on the CA and its ability to impact MCR. See the below chart from the Q1 2022 earnings release:

As mentioned above, clearly this is a long way off from the target articulated in the SPAC presentation of 76% MCR in 2022. Even for the longest standing populations, members who have been on CA for four years now, Clover is only at an MCR of 89.2%. Clover has never articulated particularly well how the Clover Assistant is getting used, and this data is deeply problematic for the platform. As Clover enters into upside / downside risk through the Direct Contracting program, it is going to be interesting how they perform over time, and whether they can consistently manage risk better than they do in the MA book of business. As a side note, it also shows how poorly the pure insurance business is running with over 50% of its members (non-CA members) at a 112.5% MCR. 

As Clover makes this shift from insurer business to MSO, it will need to figure out how to change the dynamic of its model today and start figuring out why providers find value in the platform beyond getting paid more. Clover will need to figure out what value it is actually providing to physicians in the process, instead of just being a payor who pays them more for filling out an online form after a visit.

Provider Confusion

On top of those issues, it also seems that providers and patients are confused about the implementation of Direct Contracting. If you go to the website for Clover’s Direct Contracting Entity, Clover Health Partners, there’s a FAQ for Participating Providers which includes this question below along with some basic logistics on the model:

It’s interesting to see that this is one of the most frequent questions they’re getting from their provider partners, such that they feel the need to address it online. This would seem to indicate patients are confused when they’re getting this letter, and reaching out to their providers, who are also confused why they’re getting the letter. It doesn’t seem great for the long term sustainability of the program that both patients and providers are confused why the patient might be getting a letter that the patient is aligned to Clover Health Partners. This is going to be one of the more interesting dynamics in the VBC space over the coming years - how do patients feel about all the business entities competing to attribute said patient to their model? 

What to Make of Clover’s Chances as an MSO

We remain quite skeptical that Clover is going to be able to successfully transition to building an enduring business in the MSO space. They have certainly found a clever business model hack to sign up providers on their platform and grow the number of attributed lives, which results in a top-line number that looks nice - though as we mentioned, we’ll see if that growth hack remains as they pivot to being an MSO. If this growth remains, it could give them time to build out the capabilities of an MSO platform to service their providers. However that growth belies the challenges that Clover has in front of them in building a successful business in the MSO space. Just ask agilon how quickly a business can turn given its experience in the California market - if you aren’t able to manage the risk of the population, you can lose the business very quickly.

The big question to answer seems to be whether you believe this strategy shift can give Clover the runway to build out a real provider enablement business. For us, it strains credulity given the SPAC experience and rosy business projections that only 18 months later seem to not be based in reality. The MA business continues to sink, and it appears only a matter of time before the provider enablement business joins it. 

Other Jottings from Earnings

  • Clover filed an S-3, providing Clover with the ability to raise up to $300 million in additional funding, indicating that they might be preparing for a capital raise.
  • At the same time, Clover continues to suggest that it can get to profitability next year if “a number of things fall into place”. It’s not exactly clear what that means specifically, and hard to place any real weight on it
  • In Clover’s 10-Q it notes that Seek Medicare, Clover’s Medicare brokerage business that it invested $20 million into in 2020, is currently in the process of winding down operations

Link (release) / Link (transcript)