Devoted Health: Checking in

We got the below question from a reader this week that piqued our curiosity and so we’ve decided to dig into get a sense of how things are going at Devoted lately and see what we can learn:

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Is anyone paying attention to Devoted?  They've raised ~$2B, most recently at a $12B post I believe, but must be encountering most of the HTN-discussed headwinds of their next-gen MA peers.  Yet they don't ever seem to come up in the media or in our ecosystem chatter.  Perhaps they are just laying low while their peers burn, but I also generally think no news is bad news for these companies.  In any case, curious what they're up to.

Our Takeaway

This doesn’t necessarily seem like a case of “no news is bad news,” rather an intentional part of Devoted’s strategy to quietly build an enduring business. This approach shouldn’t come as a surprise, particularly given the public markets shifting focus towards profitability over growth and the reaction to Devoted’s fellow startup insurance peers over the recent months. That said, it certainly appears that Devoted is privately facing many of the same headwinds its peers are facing on the public markets.

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Devoted’s valuation has always been the most egregious of the insurance startups, dating back to when it raised $300 million at a $1.8 billion valuation in 2018 before it even had a member. As recently as January 2022, Devoted’s former CMO and current board member / venture investor Bob Kocher suggested in a Modern Healthcare article that Devoted’s most recent $11.5 billion valuation was not only realistic, but that it would likely continue to grow in valuation as a private company. Keep in mind, at ~73,000 MA members this year, that means Devoted is being valued at roughly $164,000 per member. It was less than two years ago when we were collectively scratching our heads at Clover’s valuation of $64,000 per member during its SPAC, and yet here we are. 

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Kocher’s view seemed far-fetched at the time, and only appears even more so given the last few months of market dynamics. Bright, Clover, and Oscar were all trading at around $2 billion market caps back in January, and since then have traded down materially, with the viability of their respective businesses called into question. So either there is a massive arbitrage opportunity between the private and public markets, or Devoted’s valuation is going to be coming back to earth at some point. Our bet is the latter. 

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Each one of those public peers has faced significant headwinds, worsened by the fact that they are now public and everyone can see just how much money they are losing. Devoted similarly appears to be experiencing a mixed bag of results. Its growth has been impressive in MA (70k members in 4 years), but its MLR performance to date (above 100% in Florida, Texas, and Arizona in 2021) has been equally unimpressive. Insurance filings show a net loss in 2021 of $113 million across the four states it was operational in, Florida, Texas, and Arizona (and so presumably had even higher losses in total with other market entry and parent costs). The Devoted Medical Group appears to be mostly an idea at the moment, while growth appears to be coming from handing risk over to VBC primary care groups. And those two strategies seem fundamentally at conflict with one another - Devoted is trying to capture margin by owning the Medical Group but is also delegating risk to its primary care partners. All-in-all, it appears Devoted is trying to combine the best elements of the narratives of Clover, Oscar, and Bright into one, while attempting to build it all from scratch in house. It's an incredibly complicated task that still appears in the early stages. You can see why founder Todd Park views this as a 30-year journey.

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At the end of the day, none of this really matters for Devoted as long as it can stay private and convince someone to continue funding it through losses. Devoted has sworn off a sale, and doesn’t appear to be going public anytime soon either. Devoted’s founders, Todd and Ed Park, clearly have a massive vision for the company that has attracted a whos-who of healthcare around the table. As Devoted inevitably goes through bumps in the road, whether in the private or public markets, it will be interesting to watch how bought in everyone is to the vision. Will the team stay engaged if Devoted needs to raise money at a down round? Will venture investors get cold feet as they’re asked to continue to fund massive losses for a company that was projecting to be nearly breakeven in 2023? 

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Similar to Oscar, you can’t help but root for Devoted to succeed in achieving its mission. The vision is bold, the leadership seems committed to changing healthcare for the better, and they’re attempting to build a better system from the ground up. The optimistic lens is that Devoted will succeed where Oscar is failing.

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But also similar to Oscar, it seems that there are a lot of headwinds for Devoted in getting there. The practical lens is that Devoted is running into the same issues as its public peers that will undermine its ability to achieve its vision. 

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Let’s unpack more of this below:

The vision is massive; much larger than building a disruptive MA plan

• Todd Park spoke on the A Second Opinion podcast recently and articulated his goal for Devoted as: “I ultimately want to be able to say, look, if you become a member of Devoted, you will live this many more quality of life years than would have happened otherwise”. It’s a pretty nice goal, right? Park also talked in the podcast about how this is a 30-year endeavor for him to change the healthcare system for the better. When you hear someone as credible as he is talking so passionately about driving that kind of change, it’s hard not to get excited. 
• It’s also worth noting that this mission has nothing to do with building a Medicare Advantage company. In multiple places, Park talks about how the insurance product is just a means to finance the business. Given Devoted’s energy spent building the Devoted Medical Group and Orinoco, its purpose-built internal technology platform, it wouldn’t be surprising to see them pursue external revenue through those product offerings in addition to the MA product. This is an area where their narrative feels a lot like that of its insurance startup peers. As Devoted learns the MA plan potentially is not the cash cow that it had envisioned, how quickly does it decide to light up other revenue streams?

The MA plan growing membership nicely, hitting 70k members in 4 years across 5 states

• Devoted has had solid membership growth compared to other MA startups over the past few years. While Clover, Oscar, and Bright have struggled to organically grow in various MA markets they’ve entered, Devoted has demonstrated an ability to gain a foothold in markets. Take Houston, for example, where Devoted’s membership has grown to 22,729 over the three years Devoted has been in the market. The Houston counties that Devoted is operating in for 2022 have 557,857 enrolled members as of March 2022, out of an eligible population of 1,024,832. So Devoted’s current penetration of the Houston market is 4.1%. It’s a good start that can either be viewed optimistically (look at how much room they have for growth in existing markets!) or pessimistically (they’re still not a major player in their biggest markets). 
• While the growth is impressive when compared to the other startups in the space, it’s worth noting that it’s still a drop in the bucket compared to the growth of the major MA players in terms of number of new members. This Axios chart (see below) highlights how in 2022, while the MA startups grew by 170k lives combined, UHG grew by almost 800k lives, and Humana, CVS, Anthem, and Centene all grew by over 300k lives. Scale wins.
  

• Devoted’s membership appears to be beating expectations based on its financial projections shared with Business Insider back in 2019. Those projections estimated membership at 64,368 in 2022, with 2023 at 103,722.
• 2023 membership will be a very interesting temperature check of Devoted’s investors willingness to continue funding losses. Will Devoted continue its rapid expansion, both in existing and new markets, and clear 100,000 members? Given its current trajectory, it seems like it’ll happen without a major course correction. But it also wouldn’t be entirely surprising if its investors are looking at Bright and Oscar pivot towards profitability over growth and pump the brakes a bit here. 

Devoted’s growth in D-SNP and C-SNP plans is worth keeping an eye on

• Devoted has been getting into Duals plans, launching a D-SNP product in Florida that is attracting a decent chunk of membership - 8,355 people are enrolled in Devoted D-SNP plans this year, up from 2,387 last year. Given the complexity of these populations, and associated revenue, I’d assume Devoted is performing relatively well on these plans, and continued growth here could be an advantage for them over other MA startups.
• Devoted is also launching C-SNP plans, in Arizona, where 983 members enrolled this year, and San Antonio, where 701 members enrolled this year. They appear to have one plan design targeting members with diabetes and one plan design targeting CHF. It doesn’t appear many companies are focusing on C-SNP yet as a market, and it will be curious to watch what Devoted can do in this space. It would appear that it allows Devoted to offer more tailored benefits to enrollees, and presumably capture higher premiums in the process
• If you’re a health insurance product nerd, Devoted highlights its various product offerings quite nicely on page 30 of its 2022 Broker Manual

While membership growth is nice, the MA plan is still hemorrhaging cash, driven by poor MLRs

• Devoted’s results in its two biggest markets, Texas and Florida, are not encouraging from an MLR perspective, where both are above 100%, with Texas at an MLR of 112%. This is driving massive net losses in each market of over $100 million in those two markets alone. 
• In total, Devoted was losing $239.51 per member per month in 2021 across its four states of operations. Given the performance of companies in the public markets recently, you have to wonder if investors will be willing to continue funding those sorts of losses per member, or if Devoted’s investors will encourage it to similarly seek profitable membership. After all, that is the purpose of offering an MA plan for Devoted - to finance the rest of the business. If the MA plan is underwater for the foreseeable future, that isn’t possible. 
• It’s worth noting here that Devoted’s 2019 financial projections suggested it would have an average MLR of 85% in 2022, with year 5 markets getting to MLRs around 82%. Devoted was projecting to lose only $25 million in 2022, getting close to breakeven in 2023.  As you’ll see a few times in this piece, it creates an interesting dynamic for Devoted’s investors - are they fully bought in with essentially using their funds to subsidize these losses over time, and is there a pathway to profitability that Devoted is able to articulate that generates a return on investment for those providers? 

Growth appears to be coming from Percent of Premium deals with VBC primary care groups, who are encouraging members to sign up for Devoted plans

• In this Modern Healthcare article, Kocher credited enrollment growth to “word of mouth by providers, including those that work at clinics VillageMD and ChenMed.” Which raises the question, why are those VBC clinics promoting Devoted over other insurance plans? One answer is that it could be because Devoted is an easier insurer to work with, which is probably true to a degree. It also seems like it is likely true that Devoted is paying them well to drive some of that positive sentiment.
• Devoted’s Broker Manual also notes that it leverages Percentage of Premium contracts with risk-contracted PCPs, which you’ll recall is one of the core MA money machine games outlined by Rick Gilfillan and Don Berwick in their Health Affairs articles last year. Regardless of your stance on the MA Money Machine on the whole, it seems hard to argue that the mechanics of these Percentage of Premium deals creates a strong financial opportunity for both payors and providers
• In addition to the relationship with VillageMD and ChenMed that Kocher cited above, Iora, Equality Health, and onehome have issued press releases about their partnerships with Devoted. Onehome is particularly interesting as a relatively under the radar full-risk in-home post-acute care company that Devoted is apparently working with for 3,500 lives across Arizona, Ohio, and San Antonio, TX. That’s 23% of Devoted’s 2022 membership in those three geographies, which is a huge number, particularly when Devoted Medical Group is supposedly building out an in-home business.
• Check out this Devoted sales video, which features a primary care physician in the first 60 seconds talking about how they encourage their patients to evaluate MA plans. It also includes one more PCP later in the video. That they’ve got PCPs highlighting the MA enrollment process to potential members highlights just how close they are with these PCPs.
• If you’ve never perused a provider directory, it can be a kind of fun activity for a very particular type of healthcare nerd. For instance, in Houston, where Devoted and Iora announced a primary care partnership referenced above - want to guess what percentage of Devoted’s primary care network Iora consists of in terms of number of providers? One percent. Iora has 11 PCPs in-network in Houston, out of a total of 1,151. Link (Houston) Link (all directories). It’s a reminder of the provider / payor dynamics in these deals - while they get a lot of press in the innovation / venture community, Devoted still has a lot of work to build a primary care network that meets adequacy standards.

The Devoted Medical Group appears to still be in its infancy and still building out key functions

• Based on the Devoted Medical Group website, Devoted appears to have 40 clinicians on its team, six MDs and 34 NPs. The team is heavily concentrated in Florida at the moment, with four of the MDs located there as well as 19 of the NPs. Texas has one MD and 11 NPs, while Arizona, Ohio, and Illinois all split one MD and Ohio and Arizona each have a handful of NPs. 
• Devoted Medical Group’s clinicians currently provide four services to Devoted members in partnership with their primary care providers: 1. Comprehensive Assessment visits, 2. Transitions of Care Visits, 3. Intensive Home Care Visits, 4. Palliative Care Visits
• Devoted shares that 80% of its members are eligible for Devoted Medical Group services, but there is little in the way of information on how many people are actually using those services
• It’s worth remembering that in its investor deck back in 2019, Devoted cited a operating margin per member of 14.6%, which isn’t achievable via a MA plan and is presumably reliant on Devoted driving margin through its Medical Group. So it’s a bit concerning to see that Devoted currently only has one Devoted Medical Group PCP listed as an in-network option for primary care for its members, and that PCP is located in Arizona, one of Devoted’s smaller markets. So it doesn’t appear to be very far along yet in development of its primary care offering, which makes you wonder how real the margin opportunity improvement has been. Again, if you’re an investor in Devoted, this is a critical part of the model working and getting to a margin worth continuing to invest in.
• Devoted is currently hiring a position called “Devoted Strategy and Business Operations Manager, MBA Opportunities” to come in and run its house calls business, with the number one success attribute being: “You're an entrepreneurial self-starter able to help take a new house-call business from its early stages to a multi-state organization supporting thousands of patients.” While this sounds like a very cool role for a recent MBA graduate, it seems odd that five years into building Devoted they’re just now getting around to hiring a recent MBA grad to run their house-call business, which seems like one of the biggest value props for creating Devoted Medical Group.
• Devoted is also hiring a position called “Senior Manager, Specialty Care Operations”, which includes the following description: “We are on a mission to replicate best-in-class speciality care through our virtual care platform. Our multidisciplinary team combines remote monitoring, automated medication management, and high-touch disease education to deliver seamless speciality care in the comfort of our members’ homes.” They’re building four specialty care programs: hypertension, CHF, diabetes, and COPD. It’s not hard to look at Devoted’s growth in C-SNP plans and draw a line to this aspiration. But it also provides some sense both of how early they are in building this out and how big their aspirations are with Devoted Medical Group.

Devoted is blending the best parts of the Clover, Bright, and Oscar narratives

Devoted is unique in that it combines some of the most compelling elements of the stories of its peers into one:‍

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Clover: this is more than just an MA insurance plan, it’s a platform to change healthcare‍

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Similar to Clover, Devoted distances itself from being just an insurance plan, as described above in this article. For further proof, check out this 2021 update, where CEO Ed Park describes Devoted as building the “world’s first virtual ‘blue zone‘''. Similar to Clover, while its great to talk about being more than a MA plan, when the substantial majority of your revenue and losses come from an MA plan, it kinda makes you a MA plan by default.

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Bright: we’re going to increase margins by owning care delivery via our medical group

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Similar to Bright, Devoted tells a narrative of how owning care delivery will help Devoted achieve higher margins on patients - with year five operating margins of 14.6% versus 5.0% for industry benchmarks (per these slides). Similar to Bright, we’d expect that over time, Devoted looks to earn external revenue from Devoted Medical Group as a way to drive additional profit into the business, although it seems like that has a way to go. Different from Bright, it doesn’t appear that Devoted will be acquiring any third party medical groups any time soon given Todd Park’s staunch belief everything needs to be built internally (which is an odd position in and of itself given Devoted’s willingness to partner with external PCP groups). It wouldn’t be surprising to see Devoted build a VillageMD-esqe approach over time, with a mix of both de novo clinics and acquisitions.

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Oscar: our tech platform and experience is going to transform health insurance

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Similar to Oscar, Devoted believes its tech platform and experience will allow it to better manage admin costs. In Devoted’s 2019 slides, they share a few bullets on how they expect to manage costs - the first bullet articulates how its tech stack will reduce admin costs, and the third bullet is how its better experience (higher NPS) will reduce sales costs (via lower churn). Oscar has told the exact same story related to how its tech platform will reduce admin expense, with limited success to date. Similar to Oscar, we wouldn’t be surprised to see Devoted attempt to commercialize its tech platform Orinoco to third parties, but given how poorly Oscar’s roll-out has gone there, it’s hard to be optimistic about that.

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The concern here is obvious - all three of Devoted’s public market competitors have struggled to demonstrate that any of these narratives actually result in a viable business that isn’t entirely reliant on Venture Capital to subsidize ongoing losses. Each of those companies has failed to demonstrate that they can operate a profitable insurance plan, and they are facing major challenges as a result. Of course, all of Devoted’s public peers have faced their own specific headwinds, and both Bright and Oscar have to manage non-MA insurance business. Devoted, similar to Clover, is focused only on MA currently, which potentially allows Devoted to focus more on that population.

An exit isn’t on the horizon - Devoted has sworn off a sale, and also hinted it won’t be going public anytime soon

It appears Devoted is intent on testing the patience of its venture investors and their LPs. As mentioned above, Park has shared that this is a 30-year endeavor for him. He also made it clear that Devoted getting purchased by another organization isn’t on the table. I tried to capture the quote from The Second Opinion podcast here: “we’re never ever, ever ever ever ever ever ever ever ever going to be bought. Period. I don’t care how much people want to buy us for, the answer is no.” Given that the Park brothers appear to control an ~86% voting interest in Devoted per their insurance filings, it’s not clear how that will change unless those two have a change of heart. Additionally, given Kocher’s quote about Devoted remaining private for the foreseeable future, it doesn’t appear that they have any interest in going public.

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It’ll be curious to watch how evolving market dynamics pressure test the relationships between founders, VCs, and employees at Devoted. The Park brothers presumably have done quite well financially and have pretty large net worths, bolstered by their stakes in Devoted. But for employees who joined an organization with zero members that was already worth $1.8 billion, and is now worth $11.5 billion, do they have any financial upside in the business? If Devoted raises a down round at some point here in the future, what happens to team / morale at that point? And lastly, but perhaps most importantly, for the VCs who are supposedly in this for the long haul with no exit opportunity in sight, how are they feeling about the current market dynamics? 

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Said differently: if you had a million dollars to invest in one of the insurance startups at their current valuations to generate a profit, which one are you investing in?

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• Bright Health ($1.1 billion market cap)
• Clover ($1.4 billion market cap)
• Oscar ($1.8 billion market cap)
• Devoted ($11.5 billion post-money valuation)

Given Devoted losses, massive valuation, and no line of sight to an exit, I can’t see how Devoted would be the answer to the question. Personally, I’d be sitting on the sidelines on all of these at this point.