Disclaimer: This is not financial advice. I just work in the Medicare industry and thought I would share some knowledge. I have no affiliation with any of the companies mentioned in this post. I do own shares in some of the securities discussed.
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There are two keys to success in the Medicare market:
- Membership growth
- Star ratings
Due to the impact of COVID on healthcare utilization and outcomes, star ratings aren’t likely to change until 2023. Therefore, growth is the key determinant of CLOV’s value over the next 12 months.
The average growth rate for Medicare Advantage (MA) plans is 9.2% nationally. CLOV has proven a unique ability to grow its MA plan membership over 30% annually. That’s 4x the growth rate of leading incumbents like Humana (HUM) and UnitedHealth (UNH). That’s why it has a 4x higher EV/Sales multiple than the large incumbents.
CLOV’s growth rate is comparable to Alignment Healthcare (ALHC), another MA insurer that went public in 2021. If you look at ALHC’s valuation multiple, CLOV should be worth $8.87 per share just based on its MA members. However, in addition to being one of the fastest-growing MA plans in the country, CLOV has now become the largest Direct Contracting (DC) entity. They currently have 65,000 DC members, while ALHC only has 1,500.
If CLOV can report expected unit economics in its DC business line, the stock should more than double. The market is effectively valuing CLOV’s DC business at $0. Since the unit economics of MA are well-known, the key catalysts for CLOV over the next 12 months are:
- MA growth
- DC growth
- DC unit economics
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Drivers of growth
CLOV is achieving these high growth rates by investing across all three drivers of growth:
- Differentiation within a market (price, network, benefits)
- New markets (to expand the pool of eligibles)
- New provider contracts (Direct Contracting alignment)
- Differentiation
CLOV’s MA membership growth has been completely organic, which means Medicare beneficiaries are choosing CLOV plans over other insurers. They achieve this by offering differentiated PPO plans that are more flexible and affordable. The large incumbents grow by acquiring regional MA plans.
2. New Markets
More recently, CLOV has started to expand to new markets beyond New Jersey. In 2020 they were in 34 counties. They expanded to a total of 108 counties in 2021, and have announced further expansion to a total of 209 counties in 2022. If they can post similar enrollment rates in these new markets they will continue to be one of the fastest-growing MA plans long-term.
3. New Provider Contracts
Participation in Direct Contracting (DC) represents the third driver of growth for CLOV. They are already the largest DC entity with 65,000 lives. That effectively doubled the number of lives under management this year. CLOV needs to invest in partnering with providers in existing and new markets to continue increasing the size of their DCE long-term.
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Sources of growth
Medicare Advantage (MA) plans naturally shrink over time if they’re not enrolling new members. They lose around 3% per year just due to deaths. They shrink by another 2% due to members switching to original Medicare, and 10% by members switching to another carrier. So, how do plans overcome this churn and actually report net-positive growth rates? There are three sources of new MA members three sources of DC members.
New Eligibles (MA and DC)
- Approximately 10,000 new people become eligible for Medicare each day
- More new Medicare beneficiaries are selecting MA each year, and it’s directly correlated with overall Medicare Advantage enrollment. This is probably due to increased advertising and awareness each year as the overall pool of MA members (new or switching) grows.
- With 42% of Medicare beneficiaries now enrolled in MA, it’s estimated that 40% of new beneficiaries are selecting MA over original Medicare these days.
- The other 60% of Medicare beneficiaries that select original Medicare can also be enrolled in CLOV’s Direct Contracting (DC) entity starting in 2021.
Switching (MA -> MA)
- MA is extremely sticky. The estimated switching rate between carriers is only 10% annually. Every MA plan loses some members and gains other members due to switching between carriers. The best plans are gaining more members than they’re losing, due to their favorable price, network, and benefits.
Switching (Original Medicare -> MA)
- Estimated switching from original Medicare to MA is 5% annually. The rate of switching from MA to original Medicare is 2% annually. So the net flow between MA and original Medicare is 3% each year into MA plans.
Claims-Based Alignment (DC)
- 65,000 members are currently enrolled in CLOV’s Direct Contracting (DC) entity. These lives are from claims-based (i.e. automatic) alignment with contracted providers.
- CLOV estimated they have access to 200,000 total DC lives with those providers , which indicates a 32.5% automatic alignment rate for each contracted DC provider.
- That is very high considering overall MA selection is 40%. That’s the equivalent of enrolling half of all a provider’s MA patients (32.5% of the 60% original Medicare = 20% of overall Medicare patients). The average MA plan usually only covers 5–10% of a provider’s patients.
Voluntary Alignment (DC)
- Enrolling the other 67.5% of DC lives through CLOV’s contracted providers requires voluntary (i.e. opt-in) alignment.
- This is equivalent to how MA enrollment works, which is driven by the Medicare beneficiary selecting a plan each year. This is why marketing is such a large and strategic expense for MA plans.
- DC voluntary alignment rates could potentially be higher than MA enrollment rates due to the involvement of the contracted provider.
- Providers are incentivized to recommend their original Medicare patients enroll in the DCE, which is less commonly done with MA plans.
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Expected growth for CLOV
We know that CLOV is projecting over 30% annual membership growth for the next few years. This seems quite achievable considering their historic MA growth rates and their claims-based alignment rates are both above 30%. If they start to invest in acquisitions, they could drive their growth rates even higher.
Georgia and South Carolina will be the key new markets for CLOV’s growth. Most of the new counties for their MA plans are in these two states. That’s why they hired a Head of Community Engagement in Georgia, who is already organizing interesting community events to create awareness. This is a promising sign for MA membership growth in these key markets.
They are also likely investing in partnerships with local providers in these counties to expand their Direct Contracting (DC) entity. Focusing on building provider relationships in a narrow geography will result in more successful recruitment of providers into the DCE and more adoption of the Clover Assistant across MA and DC membership.
Overall, I’m bullish on CLOV achieving and maybe even exceeding the 30% growth projections. They have plenty of cash to invest in growth and multiple ways to deploy capital in their key markets (NJ, GA, SC):
- MA enrollment (marketing +/- acquisition)
- Voluntary alignment (marketing)
- Claims-based alignment (provider contracting +/- acquisition)
