Why is it so hard to disrupt health insurance?

Start-ups have raised tens of billions of dollars to build new plans. It hasn't been easy.

I’m reeling from a critical take from short-selling specialist Hindenburg Research, which was published today on Clover Health. Clover, if you’re not familiar, is a health insurance player backed by notable investor Chamath Palihapitiya. Clover’s shares tumbled off the back of the report. I won’t delve too deeply into that, in part because Clover hasn’t yet responded to the allegations. 

But I did want to take a step back and reflect on the crop of companies trying to disrupt the health plan market. 

For context on that, I turned to Ari Gottlieb, principal at A2 Strategy Corp, who specializes in health insurance. Gottlieb pays close attention to the slew of venture-funded health plans, including Oscar Health, Bright Health, Clover Health and Devoted Health, including by poring over state filings. Between them, these start-ups have raised tens of billions of dollars from investors.

Here’s what he had to say about the space - and note it’s one person’s perspective. If you feel differently, feel free to reach out! As always, I’d love to hear from you. 

CF: What were your initial impressions of the report?

AG: “It felt like there are understanding gaps around how health plans really work, and as a result, the report missed the point. As I read it, they’re basically saying that Clover is manipulating sales to drive enrolment growth, as well as manipulating coding to drive financial performance. But they stopped there. So then you have to take this further: To what end? If they’re manipulating sales to drive growth, then they should have some amazing scale. But that’s not reflected - at least not yet - outside of New Jersey. They’ve been in Pennsylvania for years now and they’re still in the hundreds of members. Georgia is in the low-digit thousands across a few counties, which isn’t bad. There have also been struggles in Texas. And I’m not cherry picking data.”

CF: Why did investors pour so much money into tech-backed health plans in the first place?
“A lot of these investors are looking for large, addressable markets and revenue growth. It’s hard to argue with Medicare Advantage. It’s a multi-trillion opportunity. But that doesn’t take away from the fact that this is hard. The health plan business is not a great business to be in, in my opinion. It’s a low-margin business with deeply entrenched incumbents plus high barriers to entry and government limits to how much money you can make. Not to mention high capital requirements. These are major structural challenges.”

CF: Why is it so hard for some of these newer plans to attract new members?

AG: “The reason it’s so difficult to grow is because the products in a lot of cases are fairly standardized. It can feel like a race to the bottom. So how do you attract and retain customers? In a lot of places, there is a land grab model. In Medicare, it’s really around providers and brokers selling the plan, lately through direct response TV. It’s a little different on the individual side. But the biggest challenge is that you need scale to negotiate with providers for competitive prices and scale to fund administrative costs. Some tech players think that health insurance is broken and a United Healthcare or Anthem doesn’t know what they’re doing. Many of them come around to having to hire a lot of people from health care.”

CF: Are there exceptions to the rule? Is anyone doing this well?

AG: “Well there’s some that have done well with public relations. There’s a smaller class that are really well run. I think Devoted Health has done a good job signing up members in 2020, but 2020 was a weird year that hopefully won’t happen again. They’re at tens of thousands of members in several states. These are respectable numbers after only having been in business for a few years. Alignment is another one I’m seeing grow. Bright Health in the individual market seems to have a good story, but I think it’s still to be determined in Medicare outside of acquiring plans in California. Oscar is growing, but slowly, in Medicare.”

CF: Is it a better business model to build tools for existing health plans, versus trying to disrupt them?

AG: “It depends on what you’re trying to do. It’s going to be hard to get to a billion dollars selling health plan tools. If your goal is revenue growth or to take an asset public, growing members is probably a better way to go. The problem is that we have created plans that are so large and dominant that a lot of them can build these tools on their own. The interesting thing though that has happened in the past few years is the businesses starting provider practices that take on risk, like Oak Street Health or ChenMed.”

CF: What’s up with the SPACs? You’re seeing a lot of it now…

AG: “It seems to be associated to me with the rampant speculation I’m seeing go on. I suspect that a lot of these plans will look at the SPAC route because there’s less diligence and less of an understanding about health plans. I don’t know Chamath personally. But does he strike me as someone who has a detailed knowledge and background of the health plan business, maybe not? You can dangle terms like ‘big revenue opportunity’ or ‘high growth,’ and look at some of the comparable private market valuations - and it might not be the worst way to access public markets. Clover and others have done a really impressive job of raising money from investors. They need a lot of capital to support these businesses. Every additional member you get means you need more capital in the bank.”

CF: Can you make a big difference with tech? Is it the secret sauce for a venture-backed health plan?

AG: “So technology matters if you think about the business. But the big question is whether these newer health plans have tech that is different and really stands out from the pack. It’s not enough to have an iPhone app or a better customer experience. How far does that get you and is it enough of a competitive advantage? The real competitive advantage depends on the space. For Medicare, it’s all about deep provider relationships and distribution. That’s how you can get new customers and control costs. In individual, it’s probably pricing and actuarial skills. On the commercial side, it’s all about scale. So tech matters, but there’s other things that matter a lot more.”