The Medicare Advantage Startups: Unicorns or Donkeys?

Bright Health, Clover Health, Devoted Health, and Oscar CEOs
Source: “Health Insurance Startups like Bright and Oscar…” Business Insider Prime, Aug 19, 2019

With $3B invested across four highly publicized companies — Bright Health, Clover Health, Devoted Health, and Oscar — I frequently get asked, “so what are they: Unicorns or Donkeys?” After immersing myself in Medicare Advantage for almost a decade now, first as an investor and now as an entrepreneur, my perspective is informed by the whole stack, from on-the-ground primary care operations all the way up to MA plan operations.

First and foremost, it’s important to understand that Medicare Advantage is not a commodity insurance product (in contrast to Medigap, commercial health, auto, life, P&C, etc.). Although many plan functions (customer acquisition, underwriting, compliance, member services, etc.) are indistinguishable across MA plans, how plans perform on three key levers — risk adjustment, quality scores, and utilization — sets them apart. The gold standard Kaiser Permanente, for example, excels at all three; as a result, every KP enrollment is more profitable than its peers and KP’s 5-star plan ratings allow it to acquire customers all year round vs. only the 10-week enrollment period for everyone else. This is why KP’s MA plans have far and away the largest market share wherever they operate.

Next, because the three key levers are all delivery-side functions (clinicians move the needle on these), Medicare Advantage is fundamentally a provider-side business. Each of these MA startups has a different strategy for getting their participating clinicians to excel at the three levers, so that is where I will focus this analysis. As an aside, this is why UHG/Optum is gobbling up medical groups: it’s much easier to nudge docs when you employ them!

So let’s dive in…

Delivery-side strategy: Partner with health systems and let them figure it out

This is not a winning strategy. Success at the key levers requires a lot of process change and technology adoption, two things that health systems don’t have a great track record with. Calyx Health, the company I co-founded, is tackling this exact problem — getting health systems to excel at the key levers. Without a similar solution, Bright Health and Oscar NYC are destined to fail at MA.

PSP = Provider-Sponsored Plan; 5-star plans grow at 10x the rate

To make matters worse, growing enrollments in health systems is incredibly slow without 5-stars (see Figure). Bright Health (3.8K lives) & Oscar NYC (launching now) will never be more than niche players in MA if they don’t have a concrete strategy to get their provider partners to generate 5-star level results.

Delivery-side strategy: Deploy provider reps and care teams to engage and supplement participating clinicians

There is a lot to love about this strategy, but the devil is in the details. Density is absolutely critical to the success of this approach — the more Clover members in a clinician’s panel, the more mindshare Clover will have with that clinician — particularly when it comes to risk adjustment and quality scores. Unfortunately, in Clover’s rush to grow, they accumulated 30K+ NJ lives spread across almost 3K physicians. As a result, their risk adjustment suffered (MLR in 2018 was reported to be 95%) and quality scores deteriorated (they went from 3.5 to 3 stars). If I was Clover, I would either immediately pare back the network or look for a buyer in the same geography so, together, they can have more mindshare with clinicians and give this strategy a chance.

Delivery-side strategy: Partner with sophisticated medical groups who “get it”

This approach has a real shot, since the medical groups are actively engaged and tackling the key levers, but I have two concerns: 1) Market opportunity: are there enough sophisticated medical groups in the country to partner with? and 2) Margin pressure: if the medical groups are the ones creating all of the value, the plan-side becomes commoditized and medical groups will eventually demand more % of premium. If I were leading these companies, I would be laser-focused on driving down my admin costs because something will have to give in future partnership negotiations and it won’t be the medical groups.

In summary, I have a grim view on the unit economics of all these companies. That’s not to say they can’t have Unicorn exits: the incumbents are woefully behind in their technology and competencies around engaging clinicians, so for those reasons alone, $B exits are still on the table — they just won’t be venture home runs.

Structurally, I believe the delivery-side companies — folks creating value in primary care where the three key levers are pulled — will be the real winners in Medicare Advantage. This includes the health system enablers (Calyx Health), the independents enablers (Agilon, Aledade, Privia, VillageMD), and the Medicare-focused clinics (ChenMed, Oak Street, Iora Health). And it will only take most of them $10s-100sM to create $B outcomes.

* Using the “Fundamental Law of Growth” framework introduced in Unicorn vs. Donkeys, most of the variables are consistent across Medicare Advantage: customer lifetime is 3–5 years, ARPU is $10k, CAC is ~$800–1000 (unless you deploy a brokerage like Calyx Advantage); the only variation comes from margin % and that is a direct function of risk adjustment, quality scores, and utilization (the key levers in the business model). With the current stated strategies, almost all of these startups will have negative margins even at-scale.



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Abhas Gupta, MD

Founder & CEO @ Calyx Health. Former VC @ Wildcat/MDV, Tech Enthusiast, & Fun Seeker