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.
Clover Health (CLOV) offers Medicare Advantage (MA) insurance plans. More specifically, they offer PPO plans which are preferred by most people. PPO plans allow patients to keep their current primary care physician (PCP) and see any specialists. The downside of PPOs is that they’re usually more expensive, since they cover medical expenses for in-network and out-of-network providers. CLOV has pioneered a new PPO model using technology to offer more affordable plans for Medicare patients. This is what is fueling their >30% annual growth rate, and why they’re taking market share away from the largest players in the game including UnitedHealth.
Most MA plans are HMO plans. Competitors like UnitedHealth (UNH) and Humana (HUM) price their HMO plans far below their PPO plans. HMO plans have narrow networks, allowing the insurer to more closely control cost and quality. HMO plans coordinate with their network PCPs through periodic “quality reports” that tell the provider about possible quality gaps, including missing diagnosis codes, skipped screenings, unfilled prescriptions, etc. That’s not just to help the PCP deliver better care. These reports help the MA plan get paid more from Medicare through better quality measures. These static reports are generated by mainframe-era technology, using data that’s weeks or months old, and then faxed to the PCP’s office. The PCP then uses these reports to schedule visits, follow-up with patients, and close quality gaps.
The Clover Assistant
Instead of utilizing the same quality reports as competitors, CLOV decided to take a different route. They built the Clover Assistant (CA), a software platform that aggregates data and makes real-time recommendations directly to the PCP. The PCP accesses the platform through a secure web portal during the visit with the patient. The Clover Assistant has telemedicine capabilities, so the PCP can use it to see patients in-person or through video visits.
During the visit, the PCP answers questions that are dynamically presented based on the aggregate data as well as the PCP’s previous answers. The Clover Assistant then makes recommendations using evidence-based guidelines and quality measures. So, instead of the PCP receiving a quality report weeks after they see their patient, the PCP can use Clover Assistant to identify missing diagnosis codes, screenings, refills, all while the patient is in front of them. Tests and treatments can be ordered right away. This results in quality gaps getting closed in real-time, not months later or never.
Currently, the Clover Assistant has one major issue. It’s not integrated with the PCP’s electronic medical record (EMR). This means the provider has to document in two systems for the visit. This is one of the main “findings” of the Hindenburg report. In reality, this is the status quo in healthcare IT. My company offers a system that clinicians use to remotely monitor patients, and it’s completely separate from the EMR. EMRs are notoriously difficult to integrate with, because they are designed to be closed systems. This is changing though, with the advent of open standards like SMART on FHIR. These open standards are enabling “app stores” on top of the EMR.
This is definitely a short-term weakness for the Clover Assistant, and yet, they’ve already gotten very high adoption rates and strong net promoter scores from PCP users. That’s because providers make 40% more per visit when they use the Clover Assistant. Providers benefit, patients benefit, and CLOV benefits. Adoption will only increase as the Clover Assistant becomes available through the EMR app stores, and providers don’t have to use a separate web portal to access it.
Benefits of Clover Assistant
There are three main benefits achieved when PCPs use the Clover Assistant.
MA plans get paid a premium from Medicare based on the risk of the patient. The more conditions the patient has, the higher the premium paid to the MA plan. In order to get paid more, those conditions must have diagnosis codes documented by the PCP. Very often, the PCP forgets to document one or more more diagnosis codes during the visit. This means the MA plan isn’t getting paid as much as they should be for that patient. This is especially common at the start of the year, because Medicare requires conditions be documented again every year. If you’re seeing a diabetic patient who had a lower leg amputation, Medicare believes the leg grew back every January 1st.
The Clover Assistant presents recommended diagnosis codes based on past codes, as well as on test results, prescriptions, and other data points. If a patient is prescribed a diabetes drug, but the diabetes diagnosis code is missing, the Clover Assistant will highlight this for the PCP. In 2020, there were 22,000 new diagnosis codes captured through Clover Assistant, increasing the risk-adjusted premium received from Medicare.
Another revenue-generating benefit that Clover Assistant brings is improved quality measures. MA plans are rated on a 1 through 5 star rating system each year. The rating is based on the individual performance across 80+ quality measures. The Clover Assistant isn’t just programmed to close risk-adjustment gaps, it now also closes quality gaps. For example, if a diabetic patient hasn’t had an eye exam yet this year, the Clover Assistant will see that in the claims data and recommend an eye exam to the PCP.
CLOV has a star rating of 3 (out of 5) in 2021. They are just middle of the pack. Star ratings, however, are based on quality measure data from two years ago. Medicare collects the data at the end of the performance year, analyzes and then releases the updated star ratings in October for the next year. The 2021 star ratings are based on 2019 data. The Clover Assistant wasn’t released until late 2018, and wasn’t programmed to close quality gaps until late 2019.
So what star ratings can we expect to see in 2022 and beyond? If CLOV achieves a 3.5 star rating, that usually generates a 6% increase in enrollment due to Medicare beneficiaries selecting higher rated plans. If they achieve a 4 star rating, that would be a 12% increase in enrollment and a $500 bonus for each member in the plan. That’s $32.5M in revenue for CLOV’s 65,000+ members, and without any additional costs it represents pure profit.
In addition to the impact on top-line revenue, the Clover Assistant can help reduct cost and prevent avoidable medical expenses. So far, they’ve seen a 12% lower rate of hospitalizations for PCPs using the Clover Assistant. This results in more Medicare premium (revenue) turning into profits.
CLOV is up against some major incumbents in companies like UnitedHealth and Humana. It’s similar to where TSLA was five years ago. Automakers resisted electrification because it would hurt the design centers, production lines, and intellectual property that they had invested so much into. Short sellers knew this, and did everything in their power to try and make TSLA fail.
The Clover Assistant could hurt big insurers that have invested in building narrow HMO networks and acquiring the providers in those networks. They know the static quality reports aren’t enough to lower costs and improve outcomes. That’s why they’re spending billions to become a Payvidor (payor + provider). This allows them to coordinate more closely with the providers in a direction that financially benefits the payor (MA plan).
That’s what the Clover Assistant is designed to do, and the results prove it. This technology represents a much more scalable and cost-effective way to become a nationwide Payvidor. Instead of spending capital to acquire providers, CLOV can collaborate with them through the Clover Assistant. All it takes is a 1-hour onboarding call. We’ve seen UnitedHealth grow 16x over the past 10 years through an ownership-enabled Payvidor model, acquiring new MA plans and provider groups all over the country. Imagine how quickly CLOV could scale with this technology-enabled Payvidor model.