The elephant in the room: 'Insurtechs' aren't working

In the world of health insurance, there's a subgroup of unique companies that have grabbed headlines and promised an industry shakeup.

Some have dubbed these organizations as "insurtechs" to reflect their combination of insurance and technology. Others have referred to them more simply as disruptors or startup health plans.

"I refer to them as disasters. I also call them securities fraud violators," said Ari Gottlieb.

Mr. Gottlieb is a consultant at his firm A2 Strategy Corp. and previously was director of payer strategy at Strategy&, a part of PwC. His writings have garnered attention on LinkedIn for his blistering critiques of the fledgling insurtech industry, a task not too difficult all of last year as the more notable firms pulled back on many markets and offerings.

Among the most prominent of these companies are Bright Health, Oscar Health and Clover Health — each was founded in or after 2012 and to date, none have ever turned a profit. 

"They never had enough administrative scale to be able to effectively compete in a certain space, and they never had enough local scale for costs," Mr. Gottlieb said. "People like to call them disruptors, but the only thing they've disrupted is their investors' wallets."

Bright Health

Bright was founded in 2016 by a group that included former UnitedHealthcare CEO Bob Sheehy. The Minneapolis-based company set its sights on ACA marketplaces and later Medicare Advantage — its first health plans were sold in Colorado through a partnership with Centennial-based Centura Health.

In 2017, Forbes included Bright on its list of 25 "next billion-dollar startups" and by 2019 it was operating in 12 states.

The company went public in 2021 and surpassed 1 million members that year — it also recorded a year-end loss of nearly $1.2 billion, a 374 percent increase over the previous year.

"Serving 1 million health plan members was a key milestone for the company. We are making the necessary investments now to position ourselves for long-term success," CEO Mike Mikan said.

In August, Bright executives told Florida regulators there was "substantial doubt" it could remain financially viable without additional outside investment. Third-quarter earnings showed a net loss of over $691 million in 2022.

"Bright's original business model wasn't that bad — it wasn't great — but it was the subsequent hyper-growth under the current leadership of the organization that became an issue," Mr. Gottlieb said.

In April, Colorado's insurance department fined Bright $1 million after it received more than 100 consumer and healthcare provider complaints starting in 2021 that indicated systemic operational problems: failure to pay provider claims according to state law, failure to communicate with members, an inability to accurately process consumer payments and accounts, and untimely process of claims for physical and behavioral health problems. Colorado's insurance commissioner said the fine was meant to be an alternative to ordering the company to cease all operations in the state.

By the end of 2022, the company had pulled out of all Medicare markets except California. It no longer sells plans on the ACA marketplace, and it could even be delisted from the New York Stock Exchange by summer.

Despite the heavy losses, Bright Health Group granted its top executives retention bonuses in the form of restricted stock units in November. Mr. Mikan received 7.6 million units and CFO Catherine Smith received 2.8 million. 

The company laid off 150 workers, or 5 percent of its workforce, in March. It laid off another 99 employees at its headquarters, effective Jan. 7, 2023.

For 2023, Bright says it has raised $175 million in outside capital to "take the business through profitability," which it says will occur this year. It will also continue to participate in CMS' ACO REACH program in 11 states through its value-based care delivery business, NeueHealth.

"In 2023, we are focused on executing on our fully aligned care model across our business," Mr. Mikan said. "As evidenced by our guidance increase, we have been successful in retaining value-based consumers and are excited about our growing partnerships with leading payors and providers."

Oscar Health

Oscar was founded in 2012 and offers ACA plans and Medicare Advantage. 

The company received high praise in the first few years of its launch, with descriptions ranging from "hipster" to "the Uber of health plans." Its advertisements promised to deliver "health insurance that won't make your head explode," adding, "and if it does, you're covered."

"They're really good at getting press and getting people to talk about them," Mr. Gottlieb said. "I also think there's a morbid fascination with these companies telling a story that people in the industry know doesn't make sense."

Oscar went public in 2021, where it received net proceeds of about $1.3 billion. 

In May, an Oscar stockholder filed a proposed class-action lawsuit in the Southern District Court of New York, alleging company executives misled investors about financial issues caused by COVID-19 ahead of its IPO.

In its most recent financial earnings report, Oscar posted a net loss of nearly $383 million in the first three quarters of 2022.

The company has also nearly abandoned its Medicare Advantage business, opting to focus almost entirely on ACA coverage instead — by Dec. 12, the company had paused all new ACA enrollments in Florida because of "strong open enrollment performance."

Health First Health Plans, which offers MA and ACA plans, canceled a $60 million administrative services deal last year with Oscar. CEO Mario Schlosser said Aug. 11 the company would be pausing all external deals around its platform, +Oscar, for the following 18 months because of challenges with integrating large systems.

"We have built an operating- and a capital plan that is designed to allow us to deliver a profitable insurance company in 2023 and to minimize parent cash outflows," Mr. Schlosser told investors Dec. 29. "That plan includes significant improvements in medical loss ratio driven by pricing for margin expansion and planned total cost of care improvements driven by our technology and strong operational execution."

Clover Health

Clover was founded in 2014 and focuses on Medicare Advantage primarily. The company went public in 2021 and posted a $254.8 million net loss in the first three quarters of 2022.

Former CEO Vivek Garipalli told investors on a Nov. 7 call there has yet to be a company to achieve large-scale disruption in the healthcare industry — he also said the company is reducing its participation in the ACO REACH model by two-thirds.

"Healthcare, education and energy production are three industries where positive disruptive impact at scale has not yet been proven out," he said. "Until that occurs, shareholders, current and future, should expect and embrace the skepticism that we face."

In February, a judge denied a motion to dismiss a lawsuit out of Nashville, Tenn., that accused Clover of misleading investors.

The company is accused of committing "multiple legal and regulatory violations," including claims that its "financial success was tied to kickbacks" and it "failed to achieve generally accepted accounting principles on financial reports."

Federal regulators fined Clover in 2016 for misleading consumers about their out-of-network benefits — both marketing materials and Clover agents had said any out-of-network providers must accept Clover members.

"As we go into 2023 and 2024, the next phase of Clover is absolutely about profitability," CEO Andrew Toy said Sept. 27. "With the COVID headwinds receding, we believe the hard work we’ve done over the last couple of years will firmly emerge in the economics of our business."

Future outlook

Though insurtechs have not found a path to sustainability just yet, the future of both ACA markets and Medicare Advantage is bright. The Inflation Reduction Act extended ACA premium subsidies through 2025 and exchange enrollment has reached a record high. Similarly, Medicare Advantage recently surpassed a milestone of 30 million enrollees and is expected to overtake traditional Medicare this year.

The global insurtech market among all industries was worth $3.85 billion in 2021 and is expected to double by 2030, according to Grand View Research.

As venture capital funding becomes more scarce, insurtech organizations will need to be able to vigorously defend their business and operating models, showing investors they can survive and also grow in the near future.

Some companies are likely to partner with others and pursue M&A, while others will need to find a specific niche with enough room for growth.

According to the AHA, Bright, Clover and Oscar will focus on different strategies in 2023. Bright will spend the next two years maintaining its ACA coverage and then pivot to growth once its aligned care model is solidified. Oscar still has plans to commercialize its administrative platform +Oscar, and Clover is pursuing expansion of its platform, Clover Assistant, to offer more home care services.

But for Mr. Gottlieb, he's not convinced that a path toward profitability will emerge for healthcare insurtechs anytime soon. 

"These companies say they're going to be disruptive in these large industries. They think that because it needs to be disrupted and because other industries have been, that health insurance can be too. That just hasn't been born out by reality and facts," he said. "When all is said and done … the most significant asset they have created is in their tax losses."

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