Clover Health (CLOV investor deck) is a Medicare Advantage startup trying to disrupt healthcare. They are betting that they can use data, machine learning, and preventative healthcare to reduce medical costs and improve care.
Medicare Advantage allows private companies to provide Medicare insurance.
The beneficiary pays monthly premiums to the federal government
The Medicare Advantage company pays for treatment
The government reimburses the Medicare Advantage company
If the company can optimize treatment costs of their patients they can charge lower costs than original Medicare and make a profit margin. The percentage of money paid out in treatment vs money received for care by the government is called the Medical Care Ratio (MCR).
Traditional Medicare Advantage companies are able to control MCR by offering limited provider networks. They do this by only allowing patients to see certain physicians in an HMO or charging more for a more flexible PPO). Clover Health strives to have costs lower than an HMO with a wide open PPO network. They believe they can accomplish this by using the Clover Assistant to manage care.
The Clover Assistant is software that health care providers are encouraged to use by paying primary care physicians higher reimbursement rates. This assistant tracks all data / records associated with the patient and surfaces recommendations and coordinates healthcare. It may recommend a physician run a test based on data it has about the patient or recommend followup in home care from a nurse practitioner.
The bet is that tracking more data about a patient will allow for better physician visits and the application of more preventative care. This preventative medicine will reduce the amount of hospital visits reducing MCR. This reduction in MCR will allow Clover Health to charge cheaper rates than its competitors while remaining profitable. These cheaper rates will enable massive growth. To create this cycle to begin with Clover has to start by charging cheaper rates to get customers to use the Clover Assistant. Therefore, Clover Health is currently not profitable, and currently has a MCR > 100%.
The risk is that Clover Health will run out of money and go bankrupt before being able to achieve enough cost synergies to be a profitable company, or that the Clover Assistant can't actually provide the level of improvement of care that they are predicting.
Clover Health went public via a SPAC at $10 a share and now sits at $4 a share. This reduction in share price is two-fold:
Clover Health’s overestimation on how many direct contracting lives they would have on implementation of the program.
The large effect COVID has had on their MCR ratio and the fear that they may never be profitable.
At a market cap of 1.88B and 2021E revenue of 1.42-1.47B vs 2020 revenue of 672.9M and expected growth in lives under management in 2022 of 60%, I think this is a seriously undervalued company. Even without a complicated machine learning model, the value of just using a checklist to manage care is massively understated. I believe Clover Health can reduce MCR with simple common sense interventions in the care process. The power to A/B test a medical recommendation across 1000s of patients to see if it improves care also cannot be overstated.
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