Bright’s stock jumped 20% after an earnings announcement for reasons I’m not quite sure I entirely understand. Bright did $1.8 billion of revenue for the quarter, with a net loss of $180 million, an enterprise MLR of 84.8%, and an operating cost ratio of 22.8%. The earnings announcement included no new bad news, solid growth, and as-expected massive losses.
Bright appears to be shifting its language towards “capital-efficient growth,” a phrase that feels a lot like a company trying to get valuation credit for both revenue growth and moving towards profitability. Given it’s estimating an Adjusted EBITDA loss of $500 - $800 million in 2022, it still has some work to do to on the profitability side, which will continue raising questions about how sustainable any growth is. As we discuss below, Bright is talking about many of the changes you’d expect to see an insurer make to drive towards profitability, and we’ll have to see how it plays out over the next few quarters.
Bright is taking a number of early actions to move toward profitability
Bright outlined in the call five actions that Bright is taking to improve the performance of the business:
Pricing. Sounds like some pricing changes have been made in legacy commercial markets, but that we should still expect a price hike in 2023 that supports the drive to profitability. Not much in the way of details on this one. Obviously the issue with future price hikes is the impact on growth in 2023 and beyond.
Unit cost and medical management. Bright outlined a number of areas including “contracting, out-of-network rates, specialty provider networks and more closely managing high-cost cases.“ I’m still a bit surprised that this many years into the business Bright still needs to call out that they're implementing initiatives to do basic insurance functions such as managing high-cost cases, but here we are. Bright calls out that utilization management in the Medicare book of business has driven down inpatient hospitalizations, as well as lowering SNF utilization and behavioral admits. I’m sure they’re happy to see the reduction in medical costs associated with that, but I have lots of questions about how members / providers are reacting to that activity.
Risk adjustment. Per usual, risk adjustment looms large in the profitability of these models. The comments here were interesting, as it basically seems like Bright’s care partners (both Neue and affiliated) were not ready for Bright to attribute lives to them last year. This year, Bright’s providers apparently were ready, which Bright expects to lead to better capturing the risk of the population and better engaging the population. It seems important to understand why Bright’s providers weren’t ready last year and what happened operationally there to change that for this year. Keep in mind that Neue is growing its value-based lives very quickly - from ~40k value-based lives in Q2 2021 to ~170k in Q3 2021 to 530k Q1 in 2022. Given the issues there last year, I’m not sure we’ve seen evidence yet of a reason to be confident in their effectively managing 530k lives this year, so we'll have to see how this plays out over the year.
Claims and clinical platform. Bright is quickly moving off its legacy claims platform to its new Panorama platform. Given the issues highlighted in the Colorado fine of Bright, it's not surprising that they are quickly trying to address the claims platform, and they intend to have all membership on the new platform Jan 1 2023, up from 30% today. It does sound like they're seeing improvement, as claims over 60 days unpaid are now down around 3%, which Bright cites as significant progress. Would love to know the number that was coming down from. It’s worth noting that Bright isn’t emphasizing the BiOS / DocSquad care platform in this conversation, beyond a brief note that virtual visits are growing. Will be curious to watch if that comes back as a central part of the story moving forward.
Talent and cost structure. This one lacks specifics, aside from sharing that the decision to exit six states should result in ~$100 million of operating expenses and capital needs.
My takeaway from this portion of the call is that Bright is prioritizing the right initiatives in order to get the business to profitability. But it’s still quite early in the process and Bright hasn’t provided much clarity on how it’s executing on these initiatives, nor has it generated much confidence in its ability to execute well after the issues of last year. Given it’s still so early, we’ll have to wait and see the impact of these changes over time. On the one hand, it’s a bit unnerving to see that Bright is still talking about basic insurance blocking and tackling, like reducing the time it takes to load provider contracts by 50% and getting claims unpaid over 60 days down to only 3%. On the other hand, I suppose it means Bright has a lot of opportunity in front of it to improve both its medical margin and its operating expenses.
Bright is quickly transferring its individual book of business over to risk-based contracts via Neue.
See below for our take on what membership growth and Neue’s membership growth appears to look like based on both numbers shared in the earnings release / call and some assumptions below:
Neue is experiencing very fast growth with Bright shifting its membership to value-based contracts, with 410k value-based lives in Neue from Bright Health (as well as 49,000 lives via Direct Contracting, and 71,000 lives via Third Parties). Interestingly, it looks like it is essentially all exchange membership that Bright has moved over to Neue, not Medicare Advantage. In the earnings call, Mikan mentions that “it's about 40% of our IFP book of business, mostly in South Florida and Houston and Texas”. 40% of Bright’s 1.04 million commercial lives is 416,000, so it looks like almost all of Neue’s value-based members are individual exchange members in Miami and Houston. It seems like a rather large opportunity for Bright to get those 120k Medicare Advantage lives in Neue capitated deals, but presumably they need to figure out how to build out the provider business in California first.
Of particular interest in regards to the Neue performance that when asked about the performance of Neue and how it intends to get MLRs down there, this is the response below:
If you look at our non-related Bright HealthCare business that NeueHealth has its customers, we performed very well, well below the 100% level for sure. And so, we know we've got the capabilities implicit to achieve better results in NeueHealth. NeueHealth is absorbing some of the new market entries that we've had, Texas being a significant entry this year and last year, of course, with Florida. The other impact that is a high loss ratio for NeueHealth that we've tried to break out separately at DCE just given the contractual relationship with the government of the high 90s or so, 97%, 98%. And so, we believe, over time, NeueHealth is going to contribute additional margin to the enterprise
It appears from the explanation above that the Bright Healthcare book of business is in the first year of a value-based contract and working through the cycle of improving performance over time (of course whether you believe that’s due to improved medical management or risk adjustment mechanics is another conversation) and so Bright expects that to get down over time to where the Neue third-party contracts are today. I’d be very curious to know what sort of percent of premium deals that Bright is negotiating with themselves at the moment, and what sort of risk adjustment lift it is expecting from Neue to get those arrangements to profitability on par with the Third Party agreements. You can imagine Bright putting a lot of pressure on its internal care delivery groups to drive profitability via risk adjustment.
Analysts asked a couple different times if Bright was going to need to raise capital this year and Bright suggested repeatedly that it will not need to raise capital. Bright mentions that as it resolves medical claims outstanding it expects to be able to reduce the statutory capital it is holding in states, which could potentially give it some additional cushion. It still will be interesting to watch if (/when) they need to raise more capital.
BrightHealthcare’s MLR was 83.1% from the quarter, up from 80.2% in Q1 last year (remember, Bright ended the full year at 101.3%). During the call, Bright noted that given the way the year played out, that last year number should have been ~88% given challenges related to claims processing and risk adjustment (they couldn’t engage with the population because of COVID and SEP). Gives some insight into how much of a surprise last year was for the business, which again, isn’t exactly confidence inspiring.
Bright, which grew significantly during Special Enrollment last year, cut broker commissions to avoid that this year, and doesn’t expect growth during the year. Interestingly, they didn’t answer the part of the analyst question about the longer term impact cutting commissions will have on brokers for Bright.
Bright is focusing on markets where they think they have existing scale (Florida, Texas, North Carolina) or have strong care delivery partnerships in the seven other states they’re in. Not that this should be a surprise, but I don’t think we’ll be seeing any market expansion near term.
Bright clearly is attempting to drive a lot of change inside the organization to correct for a messy 2021 while trying to turn the ship toward profitability in 2024. I have to imagine that given all of this change underway, the internal environment at Bright is pretty stressful at the moment. There is a lot to get done, and get done well, between migrating most the legacy business to a new claims platform next year, dealing with state regulators upset with the complaints, getting care delivery partners prepared for growth, exiting multiple states, managing broker commission changes, and all while still trying to drive “capital-efficient growth”.
One Medical, which has taken a beating just like rest its new public market healthcare peers in losing 55% of its value since the beginning of the year, didn't have much stock movement after announcing earnings. One Medical hit 767,000 members in Q1, with 728k in the commercial business and 39k in the Iora VBC business. 13k of those 39k lives are in Direct Contracting.
One Medical's results provides a friendly reminder of the revenue difference between commercial FFS and Medicare advantage capitation contracts - for the full year in 2022, at-risk members are expected to be 42,000 while commercial members are expected to be 800,000. Yet despite having roughly 20x the number of members in commercial, the revenue from the two divisions is expected to be almost equal - $530 million for Medicare and $545 for commercial.
The earnings call for One Medical didn’t have a ton of new information in it, but two things that were interesting were the highlights of a new One Medical At-Home program and new cardiology / mental health products - let’s take a look at those for a second:
In the Iora book of business, One Medical was able to decrease medical claims expense to 84%, a 10% drop from Q4 2021. On the call they seem to attribute this at least in part to the One Medical At-Home program, which combines an in-home, virtual, and in-office care team for complex patients. Patients enrolled in that program are seeing a 26% reduction in spend according to One Medical. What’s interesting in this is that as recently as two years ago, Iora never really made it a point to call out in-home providers as being an important part of its care model. See, for instance, this chart below from an article talking about Iora’s MA patient visits per week by visit type at the height of COVID. Note how they break visits into video / phone and then in-office visits, but in-home visits aren't even on the chart as part of their future projection of where visits are happening. It'd be interesting to see how their thinking has evolved on the mix of visits over the past year or so, and in particular how the One Medical integration has influenced this view of the world. Presumably the video visit percentage would be less now, and perhaps a majority of that is being replaced by in-home visits in One Medical's model.
One Medical continues to roll out new programs for employers, highlighting a new cardiovascular program called One Medical Healthy Heart and a new mental health program called One Medical Healthy Mind. These programs have been piloted, seen some good clinical outcomes improvement, and now One Medical is scaling them to other employers. It’s interesting to think about how, as One Medical expands these sorts of programs, in many ways it too is becoming a navigator as well as a care provider for its employer customers. It’s great to offer these programs, but of course if you can’t get people to sign up for them, it doesn't really matter. In many ways, all of these companies selling to employers are going to end up competing with one another - it doesn’t really matter if you think of yourself as a primary care provider or a navigator or a center of excellence or a point solution for XYZ condition.
One Medical continues to expand Iora’s payor contracts, now with relationships with nine payors and an average of four payors per market. This has come a long way since Iora was only working with Humana in markets.
Oak Street released Q1 earnings, also with very little impact on its stock price. Oak shared a solid Q1 that has it now at 124,000 at-risk patients across 140 clinics in 20 states. Oak expects to open another 29 clinics this year, targeting 169 clinics at year end. Oak’s model is still quite unprofitable, as it generated a net loss of $96.7 million in the quarter and an adjusted EBITDA of ($42.4) million. It expects to end the year at an adjusted EBITDA around ($300) million.
One of the under-appreciated elements of Oak Street’s model is that they essentially have a local salesforce in each clinic they operate. As Oak Street describes this type of role during the call as a “cross between a community health worker and a salesperson at all of our centers, whose job it is to be in the community, meeting older adults and helping them become patients.” A cross between a CHW and salesperson certainly is an interesting mix, and hints at how Oak Street is trying to build trust with members, which comes up again in the AARP conversation below. This sales force is now starting up in person events again, and it’ll be interesting to watch how that impacts growth moving forward.
Oak Street noted during the call that they’re doing joint events with AARP, and how they’re “just scratching the surface on the potential of our AARP partnership”. One of the analyst questions gets at the value of the AARP partnership, which Oak Street suggests is two fold - one, it’s another channel for Oak Street to get in front of members. Two, it’s the most trusted brand for seniors. That second element seems particularly important, as noted during the call:
I think one of the challenges we have is rising above kind of the noise in healthcare where everyone's saying the same thing and people are used to things that are going to be true being that way. So a situation where we can leverage the fact that's the most trusted brand, and they have selected us as their sole primary care part nationally. I think that's a great way to kind of overcome the fear of the unknown for people. And again, if people try us, they're really going to be satisfied.
Oak Street shared that they’ve seen a 200% increase in e-consult volume since it completed the first phase of integration of RubiconMD into the Oak street platform. There are two additional phases of integrations where Oak Street expects even larger increases, which has me very curious what the baseline volume of e-consults has been historically. Yet again, there is no mention of RubiconMD’s external business beyond Oak Street, continuing to suggest that Oak Street doesn’t have large ambitions there. It'd be interesting to see what Oak's M&A bankers included in their financial model for external revenue from RubiconMD - if they were assuming that would continue to grow or if the valuation was purely based on Oak Street's internal usage. It seems like Oak Street is leaving value on the table here.
Oak continues to focus its story on the profitability of its clinics when they reach scale - as it notes during the call, if Oak can get all of its 169 clinics that will be open this year to scale, it has the opportunity to generate $1 billion of EBITDA annually from those clinics. Of course, there remains a lot of work between here and there and you can see analysts starting to wonder how real that number i, as a question comes up about what needs to be done to actually get there. In response, Oak Street suggests that target of all 169 clinics at scale is roughly 6 - 7 years away.
Oak Street gets a bit into the nuance of the difference between voluntary alignment and claims alignment in the Direct Contracting program, noting that they’ve had challenges with the program because they’re using voluntary alignment, while patients are being claims aligned to other providers. Here’s how they describe the challenge, and how it should get better moving forward:
The problem is that when we ultimately see who flows through from CMS, that number ends up being much lower than we would have originally thought when the program started because of this attribution logic. Now as we fast forward over the course of the next couple of years and we continue to care for those patients, at some point, those patients will be claims aligned to Oak Street, and that will be a tailwind to growth. But that's going to take at least a year, if not two years for us to represent the plurality of that patient's claims and therefore, for them to be claims line.
agilon's stock price saw a brief dip after earnings, but quickly recovered. Its model continues to chug along nicely, hitting 342,000 members on the platform (250k in MA, 92k in Direct Contracting). It hit $653 million of revenue for the quarter, up 58%, and generated a positive net income of $1 million in the quarter.
agilon continues to ride the macro tailwind of provider organizations looking to capture more value by taking on risk, and its capital-light approach allows them to drive this growth without sustaining massive losses. So long as they can consistently execute on relationships and keep their provider partners happy, agilon has a lot of room in front of it.
agilon saw its medical margin trend upwards in the quarter, noting that in markets that have been live more than a year, margin increased from $109 PMPM to $143 PMPM. Its consistent expansion of medical margins across cohorts of providers is really impressive.
agilon announced that it is entering the Detroit market via a new partnership with United Physicians. You can see the growth flywheel in action with a partnership like this. agilon mentioned that Answer Health, its initial partner in western Michigan, had a relationship with United Physicians, which created the opportunity for agilon to partner there as well. As they get local provider groups into the model and have a good experience with them (that’s key), naturally you’re going to get word-of-mouth expansion into their network of peers. It’s a pretty compelling growth story they can articulate in quotes like the one below.
If you'll recall, we entered Western Michigan during 2021 in partnership with Answer Health. Now that we have established our infrastructure, including multi-payer risk contracts and regional resources, other physician groups in the state like United Physicians have the opportunity to transform their business model. This is the power of being a first mover in what has driven our growth in markets like Ohio and Texas. For this reason, adding four new states in 2023 is very important to us.
Agilon noted it’s sitting on ~$1 billion in cash and approaching EBITDA breakeven this year. In response to an analyst question regarding whether they’ll look to use some of the cash for M&A purposes, agilon suggested there are two scenarios where they’d consider acquisitions. 1. Helping their partner providers in aggregating providers in local markets; and 2. Acquiring capabilities that help manage medical spend. Agilon notes that there are multiple opportunities in each category, so it wouldn’t be a surprise to see agilon make some moves here this year.
The uncertainty around the Direct Contracting program seems to be resolving itself in a relatively favorable manner for organizations like agilon. Agilon reported a positive contribution from Direct Contracting of $3.2 million for the quarter. There was an interesting Q&A exchange on whether agilon will consolidate Direct Contracting into the financials moving forward. Agilon explained that they decided not to at first because of all the uncertainty (they didn’t want the optics of increasing revenue and then decreasing revenue if Direct Contracting shut down), but now they seem much more confident in the program. They’re still going to leave unconsolidated because of the physician ownership component of ACO REACH.
It’s worth noting how agilon talks about integrating specialties into its model in specific markets in response to the analyst question. They’re focusing on cardiology, urology, ortho, and spine, apparently in six markets. In an environment where 90% of agilon’s patients are relying on agilon PCPs for referrals, if agilon can effectively identify high quality / low cost providers in those markets, it seems like a strong value prop. I’d imagine this is a place they’ll be seeking to deploy capital moving forward.