Q3 2022 Clover Health Investments Corp Earnings Call
[music].
Please standby your program is about to begin.
Ladies and gentlemen, good afternoon, and welcome to the Clover House third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the prepared remarks.
At that time, if you wish to ask a question. Please press star one on your telephone keypad. As a reminder, today's call is being recorded I would now like to turn the call over to Ryan Smith Investor Relations for colder Clover House. Please go ahead.
Good afternoon, everyone. Joining me on our call today to discuss the company's third quarter results or is that Garrett Poly Culverhouse, Chief Executive Officer, Andrew Toy, the Companys, President and Scott <unk>, Our Chief Financial Officer, you can find today's press release and the accompanying supplemental slides in the <unk>.
Investor events and presentations section of our website at <unk> Dot com.
This webcast is being recorded and a replay will be available in the Investor Relations section of the global Health website.
I'd also like to caution you that we may make forward looking statements on today's call that are subject to risks and uncertainties, including expectations about future performance.
So that may cause actual results to differ materially from expectations are detailed in our SEC filings, including in the risk factors section of our most recent annual report on Form 10-K infill.
Information about non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can be found in the earnings materials are available on our website.
I'll now turn the call over to Vivek.
Thank you Ryan and thanks, everyone for joining us today.
One network approach powered by global assistant, enabling great primary care helped deliver a solid set of results for the third quarter.
Proud of the hard work being done by everyone at Clover. So far this year, leading to consistently improving financial results and our insurance line of business and a maturation of our non insurance business.
Fortunately I also believe that this quarter's results further illustrate our positive momentum towards achieving profitability.
Before handing it over to Andrew I'd like to briefly touch on some key highlights from the third quarter.
We delivered significant improvement in insurance NCR continued stability in adjusted SG&A spending and strong revenue and large growth relative to the prior year period.
We're assisting continues to be a key differentiator in our mission to improve every life support.
<unk> physicians and catching and trading conditions earlier.
Continue to see MCR performance that has over 1000 basis points better for returning members, whose tcp's used cologuard assistant.
Care to members with Dcp's do not.
Believe this differential in MCR performance evidenced that corporate assistant is in fact, helping to improve clinical outcomes. Finally, I am pleased by our increased focus on operational excellence at <unk>, which contributed to our maintaining three five stars on our flagship PPO plan.
We look forward to continued execution against our strategy as we head into 2023 with that I will turn the call over to Andrey.
My feedback.
It is exciting to see the results of our hard work manifest and increasing momentum across the business.
Our Q3 results were highlighted by significant improvement in our insurance MCR to 86, 3%.
I am excited to see that our focus on sustainable insurance operation, bringing equivalent to more doctors and our consistent improvement October assisted platform capability are having such a meaningful impact on performance.
As a reminder, we are being paid this year. The restart therefore, our 2022 results are not yet reflective of the favorable impact that we expect from being paid off.
Beginning in 2023.
Furthermore, we recently about maintaining the three five star rating runs out of the year continuing the favorable revenue effect in Q2 thousand 24.
While some uncertainty exists future typical end of year seasonality and medical expenses as well as the ongoing risk of Covid searches. We are revising our 2022 insurance MTR guidance to reflect our overall improved performance and positive momentum.
We now expect a range of 93%, 94% favorably updated from the previous range of 95% to back to 9%.
As I've previously discussed we are now highly focused on striking the right balance between growth and profit.
<unk>.
We believe our global assistant enabled model gives us a structural advantage over other industry participants, allowing for profitable above market growth.
However, it is a well understood attribute all M&A plan.
Remember.
Is that a headwind to SCR.
Okay comprehensively diagnose health condition at Brigham effort under care management.
This transition period for your members impacts both NCR and star ratings.
In the past we emphasized growth in life.
Understood. This would result in a near term profitability headwind.
Our business matures, we picked up at a more balanced philosophy, emphasizing not just growth but profitable growth.
To be clear, we expect to continue to grow membership above market rates, but we also expect overall growth in life that will be lower than previous years.
We intend to accomplish this balance through a combination of tweaks to <unk> growing our core markets versus expansion and further focusing our marketing spend.
With regard specifically to 2023, we believe that the current AEP season will be actually competitive with some of our competitors improving their benefits in an attempt to come in line with our offering.
While others can try to match our insurance plans, we believe they lack the ability to managed care on a wide physician network, which is what clover assisted affords us.
Turning now to our non insurance segment.
Our Q3 non insurance at <unk> was 104, 2%, which is the result that we intend to improve.
If you reach is that inhibitor program and its rules and benchmark rates continue to be adjusted by <unk> <unk>, resulting in some amount of unpredictability.
Given the programming environment.
Learning to all participants we have modified our ACO target at NCR lowered that's what quasi percent next year and have made adjustments to the number of physicians participating in the ACO reach program.
Despite having many of you are appropriate for 2023 lots were substantial program growth.
<unk> decided to significantly decrease the total number of participating physicians.
We believe this will reduce total attributed lives and revenue managed by our ACO by up to two thirds.
We still expect this business likely have a scale of approximately a $1 billion of annual revenue and importantly, we very much believe EBIT adjustments will result in a sustainable business line with NCR below a 100%.
To be clear, we continue to strongly believe in Clover assistant being used for the entirety of our positions Medicare kind of including fee for service.
For the physicians, who we will not be exiting to our EPS. In 2023, we are exploring alternate opportunities to support them and shifting their fee for service population on to value based care.
For example, we are looking at potentially partnering with them on existing statutory program such as the Medicare shared savings program.
We believe these other program could be a very good fit for a number of disposition and we will provide more update here as they come about.
With that I will now highlight Scott for the financial update.
Thanks, Andrew I'll first cover the third quarter 2022 highlights and then review our updated 2022 outlook.
I also want to echo, but I am proud of <unk> performance. This year and look forward to building upon our positive momentum next year when were paid at three and a half stars on our flagship PPO plan.
Vivek and Andrew mentioned, our Q3 results were highlighted by significant improvement in insurance, MTR, which improved to 86, 3%. This quarter from 102, 5% in Q3 of last year.
This improvement was driven by favorability and underlying operational trends as our portfolio continues to mature.
Our year to date insurance MCR through Q3 also demonstrate the meaningful improvement over a more extended period with Q3 year to date MCR improving to 91, 7% from 107, 1%.
Q3 year to date period last year we.
We believe that these improvements are a reflection of our focus on building best in class insurance operations and expanded Clover assistant covers and capability.
Turning to the benefit from normalizing COVID-19 related medical expenses compared to last year.
In general we won't be sharing prior period development in our results.
The insurance MCR does reflect favorability from prior period, and we don't view at 86, 3% of the go forward run rate, we do feel that our full year guidance range of 93% 94%.
Fair representation of the overall underlying run rate of the business in 2022.
It sets us up to do well in 2003, when we layer in the incremental benefits of being paid on $3 five stars maturation of our portfolio and other operational tailwind.
Our non insurance NCR was 104, 2% elevated versus Q3 of 2021 as Andrew mentioned, we're excited about the changes, we're making to the program, which we believe will result in an MCR below a 100% for the non insurance line in 2023.
During the third quarter insurance and non insurance revenue growth of 32% and 163% respectively was driven by growth in lives under management, resulting in total revenue of $857 million.
And net medical claims incurred $840 million.
Looking forward to 2023, we expect the insurance line to continue to grow at above market rates, although somewhat moderated from recent years.
In addition, the decision to reduce the scale of participation in the ACO program will result in a reduction of our non insurance revenue by up to two thirds as Andrew mentioned, we still expect non insurance can be $1 billion revenue line of business.
Both of these changes are reflective of our increasing emphasis on profitability and we will drive continued improvement in the MCR and adjusted EBITDA performance ultimately driving us towards profitability.
Third quarter, adjusted SG&A, which we previously referred to as adjusted operating expenses were $75 3 million.
Representing 9% of total revenue a modest improvement since last quarter and down nearly 800 basis points year over year.
This quarter represents another proof point that we're being prudent and spend decision to complement our increasing focus on profitability.
Our net loss for the quarter was $75 3 million.
Compared to $34 $5 million loss in Q3 of 2021.
Adjusted EBITDA for the third quarter was negative $58 3 million improving significantly from a loss of $79 7 million in the prior year period.
Our consolidated cash cash equivalents and investments totaled $783 million.
Cash cash equivalents and investments at the parent company and unregulated subsidiaries was $416 million.
Note that we received both the September and October MAA payments from CMS in the month of September caused in Q3 cash to be elevated by about $96 million at the regulated entity level. This effect will normalize in Q4.
Regarding capital requirements, we are in a strong liquidity position and we continue to see no immediate need to raise new capital are focused on improving <unk> for both lines of business should help delay any requirement for additional capital at least through 2023 and potentially beyond.
Finally, I'll provide an overview of our updated guidance.
As a result of another strong quarter and favorable momentum we are updating our guidance for the full year 2022 to include an improved insurance MCR range of 93% to 94%.
Total revenues are expected to be in the range of $3 2 billion to $3 4 billion.
This included projected insurance revenue of 1.1 billion to $1 $1 billion and non insurance revenue of $2 2 billion to $2 3 billion.
Insurance membership is expected to average 86 to 87000 lives.
And non insurance beneficiaries are expected to be 165000 to 170 <unk>.
<unk> beneficiaries on average.
We estimate that full year non-GAAP , adjusted SG&A will be between $320 million and $330 million, representing adjusted SG&A as a percentage of revenue between 9% and 10%.
Furthermore, while we are not providing explicit standalone guidance for the fourth quarter of 2022, we do expect Q4 revenue for each line of business to be similar to our results in the third quarter.
In conclusion, we recorded strong financial results during the third quarter with a meaningfully improved insurance on CR, coupled with strong insurance revenue and lives growth and great operational execution, which will benefit us in the future. We will look to build upon this positive momentum as we head into 2023.
Now, let me turn the call over to be back for some closing comments.
Thank you Scott first a big thank you to the entire quarter team and all of the extremely hard work that has led to a very good quarter. The continued.
Evolution of quota system is having a bigger and bigger impact on our results and I believe that trend will only continue.
This will be my last earnings call as CEO , So I thought it'd be good to lay out a few thoughts on the long term.
Firstly, Andrew transition to CEO is going extremely well and there is no better person and leader to be at the helm of killer for the next many years to come.
And speaking as the largest shareholder I am very confident he will deliver for me and for all of our current and future shareholders in ways that will be spectacular and chunky and a good way over the next many years not looking ahead, firstly, it's important to remember that the public and private markets and yet to see a health care company achieved a P.
Positive disruptive impact at scale versus just a slice of it.
It's simply never happened before and has occurred in other industries consumer retail with Amazon those with Apple knowledge acquisition with Google Entertainment with Netflix cars with Tesla case travel with Spacex short distance travel Uber and hotels with Airbnb.
Healthcare education, and energy production or three industries with positive disruptive impact that scale has not yet been proven out.
Until that occurs shareholders current and future should expect and embraced the skepticism that we face the human mind is not geared to believe something that has not yet been proven our job at <unk> is to demonstrate that proof.
Healthcare is a vast and complicated system I've been fortunate to be a part of building and investing in businesses at all stages of lifecycle across outpatient hospital provider revenue cycle medical device data technology, and therapeutics domestic and international as well as many businesses outside of healthcare.
This experience provides me with a hopeful vantage point and unusually wide perspective on what works what doesn't and what is and isn't sustainable.
Many health care Prognosticators out there have knowledge of one or two areas, but very rarely across many limitation to Hana is a natural advantage to the team at <unk>.
One conclusion I've come to you over the years.
The vast majority of the public market value of health care companies today.
<unk> created on the back of medical cost inflation said more simply healthcare cost inflation in excess of GDP growth has accrued to mass market value plain and simple.
That is not sustainable and we are hitting the proverbial wall over the next decade with that dependency and.
Any investor who believes it will be straightforward for large and small companies to pivot from a business model benefiting for medical cost inflation to our model benefiting for medical cost reduction is not only wrong, but also delusional.
We never tried to pivotal business and that seismic up of fashion.
I would boil it down to three areas as to how costs can and will be reduced over the long term for the benefit of patients and taxpayers from my vantage point I would be very surprised three things I'm about to describe did not manifest itself within the next 10 years.
Firstly less than 1% of the acute care hospital services take place in the home in 10 years that number will be at least 10% or more likely 30% of our higher.
That will dramatically lower the cost structure of hospital admissions and have tremendous negative cost structure implications for hospitals themselves.
Second.
A significant amount of health care technology being developed today has nothing to do with aiding clinicians and making better clinical decisions.
Most treatment options viewing off of evidence based protocols clinical errors and knowing when to do something and when not to do something or what actually drives costs up.
10 years, the most valuable health care technology companies will be driving true clinical intelligence to clinicians and health care technology companies that are not driving impact in this way will be extremely challenged in 10 years.
Finally, a minority of therapeutics coming to market today are truly curative a decade ago that number was near zero and a decade from now the majority will indeed be curative.
We will enter an era, where an incremental dollar of therapeutic spend will lower medical costs by greater than a dollar therapeutics coming up today are tied to development breakthrough is may 10 years ago, and 10 years therapeutics will be tied to breakthroughs developed today.
There are many other areas of cost reduction opportunity automation streamline regulations, better incentives alignment better access et cetera, but the three I described will have massive implications.
What does that mean for closure.
What we built <unk> homecare to date and what is to come over the next many years and <unk> will be a game changer. It would be an understatement to say, but I am extremely excited about our long term plans for this area.
For health care technology, a huge portion of our R&D spend is around the clover assistant and clinical intelligence for clinicians our progress to date has been impressive and for various reasons will only accelerate.
Our first foray into therapeutics is our spin out company character Biosciences.
Core with RPX character has initially focused in AMD and is off to a very promising start.
And 10 years I strongly believe that it is possible for closer to have made the biggest positive impact in healthcare, while simultaneously, creating the largest market value in healthcare in excess of any health care company that exists today.
Their journey, there, while having already been very volatile over the last 10 years will only continue to be so we are in the extremely early innings and I am excited for Andrew to lead us on this next and extremely important days.
When I look across the health care CEO landscape and my top three list of where value will accrue. It's obvious to me that Andrew is head and shoulders above anyone else out there now that we've put enough pressure on expectations upon and we will now take questions.
At this time, if you wish to ask a question. Please press star one on your telephone keypad may remove yourself from the queue by pressing star team in the interest of time, we ask that you. Please limit yourself to one question and one quick follow up.
We'll take our first question from Jason Kessler from Citi.
Great. Thanks, Good evening, guys just wanted to start with a decision to scale back your non insurance business with the reach program. Just can you discuss that this isn't a bit more what the main drivers of that movement away.
From where you are with the direct contracting and then maybe just high level could you give more detail into the potential other areas for corporate systems, such as the MSP, perhaps on how your participation in those types of programs could differ from our contracted in the ACO program.
Yeah, absolutely. Thanks for the question. So as you said that we are very excited about our presence in fee for service.
<unk> seen a lot of data about how core versus the performed well, but the fee for service environment acquisitions are really enjoying using it for a majority of the Medicare panel, what we're moving away from it.
Hope you are all people that come from.
<unk> program the direct contracting now ACI reach program, which is not yet a statutory program. What that means is that those rules can still change rates or tweak the models being adjusted so we still intend to be one of the larger participants in that program, but we're very excited to extend the fee for service into other areas.
Like you said MSP is already statutory rules are much more of the final rule.
We will vacate its much will define it like it is on the Medicare advantage side.
We've identified from our data is a lot of physicians, who will do well in that particular program as well so you'll see us move away from how that everybody is deeper service just an ACO reach and then we will discuss more about MSP at having a blended portfolio for fee for service and we'll talk more about that in the future.
Okay got it and then I guess just as a follow up here just a couple of that decision I. Just wanted to go back to your commentary on how youre thinking about 23%, including the benefit from this year's Star performance on revenue I think for next year I think you flagged that before in the past is a 300 to 500 basis point benefit to insurance MCR. So does any confirmation.
And there and then any early thoughts into cost trend expectations for MAA.
The improvement on insurance margin, just any other puts and takes that we need to be mindful of.
We try to go for profitability generation and balancing that between growth and profit.
Jason Thanks for the question. This is Scott speaking so yes.
There's a number of different drivers that we have going into 2023 that we think will take us from our what we think is a significantly improved performance in run rate here in 2022, I think that we mentioned in our comments earlier that we view the run rate coming out of 2022 is being more or less in line with the full.
Your <unk> guidance of 90, 394%.
In terms of the insurance line MCR Youre right. We have made comments in the past or on the incremental impacts from the $3 up.
Being paid on <unk> as being 300 to 500 basis points.
We do expect some incremental impact from operational improvements and continued expansion of CA at this point, we're not ready to come out with guidance in more detail than that we're just very excited about the momentum that we have going into 2023.
Yeah.
Our next question comes from Richard close from Canaccord Genuity.
Yes. Thanks for the question can you hear me okay.
We can hear you.
Okay, great. Thanks, sorry about that.
As we're entering into.
A peak period for this year and you guys pulled back on the number of counties New County, as you were going after can you just talk a little bit about how you're viewing the sales and marketing spend.
And effectiveness of that I know you said.
You're expecting maybe.
Little bit lower growth rate versus past years, because of the competitiveness, but still above market market rates, but just if you could talk a little bit about the annual enrollment period would be helpful.
Yes, definitely so the way.
Let me think about growth is we feel like growth is really a differentiator for us and that our ability to offer a wide network product.
Really core to our growth ability and then what we demonstrated in the past is that that's really what Medicare eligible is one is that wide network and clover assistant lets us manage care on that wide network. So we've always spent that much on marketing.
Always sort of queued.
How we look at growth because we are able to grow without having to put a lot of capital into marketing. So this year, we really are adjusting our growth rate not because of competitiveness because.
Third the grow the board members, we have and because it takes a year or two to bring them. Other care management that provides a headwind to MTR and are on a path to profitability. So because we are absolutely focused on MCR profitability and operating expenses, we've decided the boarder rate growth a little bit and therefore that will.
Provide a tailwind towards that pathway and our breakeven point.
Okay. That's helpful and then.
In the first quarter you had.
Provided.
C are on different regions.
Southern New Jersey sort of stuck out have you guys seen any improvements there over the last couple of quarters or any update you can provide.
Yeah.
Definitely took us there so we'll look forward to discussing that more.
Early next year again in that same vein, there, but more returning members who.
Who are under cohort within management.
Our model really coming through with that so because we're shooting down growth a little bit this year and going into next is that we will have more of those were hurting members, especially adopt jersey in Georgia.
Cause that percentage of returning members will be that will be higher we expect to see significant improvements in NPR.
We look forward to reporting more on that next year.
Okay. Thank you.
Once again, if you'd like to ask a question that is star and one we will take our next question from Kevin Fischbeck from Bank of America.
Great. Thanks.
I understand a bit more about the decision to.
Back on BCE.
I guess what have been your.
<unk> differentiated with doctors.
Between when Thats good high performing one that isn't.
And then I guess when you say youre declining by two thirds are those is that one third is going to be with or are they already at your youre 100.
MLR.
And is there any G&A deleveraging, we should think about throughout this process.
Yes, Kevin.
So a couple of different base not every single Doctor is that that 100% MLR go through but we have strong belief that engage well with the bottle that care management programs in place that are complementary to our care management programs and so we really feel like based a lot of tailwind hasn't performed well as they go into.
Next year, the other direction, but I would say here is that as the rules change like I'll give you. A simple example, CMS continues to maintain the benchmark on a national basis.
Constant because FX market nationally different regions performed differently, which means that some doctors just have more of a headwind to perform even if they do deliver savings that other physician. So we look at things like that we look at Clover assistant engagements out the individual usage physician usage, we look at care managed care management synergies.
That algorithm because turbine who will do that.
It is made for next year.
Okay.
And I also know you wanted to.
Pardon me Kevin.
I would say on the G&A deleveraging, we should be thinking about from exiting this or is there not much.
The G&A that.
Stranded what have you.
The size of that business.
I would say that there is some opportunity there and more broadly we are looking across the entire business to make sure that we're operating at the most efficient level and a scenario that we're going to prioritize as we get into 2023, just as part of our overall broader efforts towards profitability not necessarily something I would flag specifically for the <unk> side of the business.
<unk>.
I was going to add Andrew comment as well that we had made a comment earlier that we viewed the order of magnitude.
Go forward non insurance line of business as being around $1 billion of <unk>.
Revenue and obviously, that's going to be dependent on final attribution of lives under the program. So the number will differ from that but we just wanted to give a general order of magnitude per how large the scale of the business would be.
Thanks.
And once again that this time line if you'd like to ask a question. We'll take our next question from Whit Mayo from SVP SBB Securities.
Thanks, I think we've covered most of everything but background DCE did any of the.
Physicians given indication to you that they didn't want to renew or participate in the in the program in 2023 or was this exclusively of Clover driven decision.
As I said in my comments.
We actually had a lot of application. So we could have grown the program quite significantly.
This year, we actually chose to make an adjustment so that it could be more strategic and we could actually broaden that portfolio into other statutory program. So I'm not going to pay it back out to every single position, but by and large our decision because we could have grown it quite significantly.
Got it so if you if youre standing up some type of MSP.
<unk> and <unk> and 'twenty three on what does this look like is this a software driven business.
Maybe any any help would be.
It would be helpful for us.
Yes accurately so.
All of it will be underwritten and driven by October of this that I think the way that we should look at it is is that the pathway into value based care is probably not straight from fee for service into upside downside, which is what if you reach it but we provide we plan to provide a more gradual way where people can go enter.
A lot of folks like I said, we have a lot of applicant and they could move into an upside only program like FSP moved through the various stages of MSP and then when appropriate graduate into something like the ACO reach program. We think that's closer to what you envision any way at it.
Unusual about the OLED.
<unk>.
Now having multiple tiers that they can participate in with all the data from <unk>.
After which they should be at we think can provide a very strong advantage in terms of selecting the right program for a doctor.
Got it.
I don't know if you gave any disclosure around any retro activity in the Dcs segment in the quarter.
Just asking that question.
Thanks, Mike.
Do you mean like peak prior period development impacting our financial performance.
Well given the.
The underlying benchmark that keeps changing and some of the assumptions that CMS is providing to the to the industry.
Yes.
But certainly we're impacted by buyback there was not a significant impact.
From any kind of prior period true up relating to that in the quarter.
Okay. Thanks.
Sure.
Once again this time line, if you'd like to ask a question.
For a moment to allow questions to queue.
Yes.
And it appears we have no further questions at this time I will now turn the program back over to Andrew <unk> for any additional or closing remarks.
Thank you and thank you all for joining us today.
Looking very much looking forward to 2023, where I will share our next quarter results with you all as CEO I'll clever I am very proud that Clover is strong purposely evolving and we're definitely heading in the right direction.
I wouldn't be here today without feedback his vision exploration and believes that healthcare can truly be both different and better than what it currently is our all core <unk> philosophy and integral to why I began this particular journey.
In the last few years there are many things that whoever has executed on under <unk> leadership and vision that we're far from common wisdom I were deemed to be impossible, but we're not seeing these things come to fruition. When Clover started we were the only plan really offer an incredibly strong plan benefit on our PPO.
And we see now that other plants are copying our model.
Years ago, we launched our own complex care program betting the future of chronic care management in the home we know the Kluver homecare practice powered by Clover assistant that had grown tremendously. We believe it's actually one of the largest in new Jersey, and we see others moving to that model of care.
And of course, we have always believed that primary care critical farming physicians. This technology to help them make better decision without forcing them to do anything they don't want to do is crucial clover assistant was born from that impact and we've yet to see anyone who can compete with us on that front.
Theres one last piece of the next vision, yet to address and that is that the future of healthcare can only be realized by a true technology leader at the helm of our scale healthcare company.
I am proud to step into that role and I look forward to presenting to you all as CEO next quarter. Thank.
Thank you.
This does conclude today's Clover House third quarter 2022 earnings call and webcast. You may disconnect. Your lines at this time have a wonderful day.
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We won't be.
Thank you.
Thanks.
Sure.
Yes.
Yeah.
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