Beyond the Byline: Medicare Advantage companies’ lofty valuations draw skepticism

Modern Healthcare Senior Hospital Operations Reporter Alex Kacik, Senior Hospital Finance Reporter Tara Bannow and Insurance Reporter Nona Tepper talk about the investment and valuation surrounding the $350 billion Medicare Advantage market.

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Alex Kacik: Hello, and welcome to Modern Healthcare’s Beyond the Byline, where we offer a behind-the-scenes look into our reporting. I’m Alex Kacik, Senior Operations Reporter. Our Insurance Reporter, Nona Tepper and Senior Finance Reporter, Tara Bannow are joining me today to talk about the investment and valuation surrounding the $350 billion Medicare Advantage market. Thanks for coming on, Nona and Tara.

Nona Tepper: Thanks for having me.

Tara Bannow: Thanks for having us.

Alex Kacik: All right. Perfect. Nona, let’s start with you. I was hoping you could give us a bit of an overview of how Medicare Advantage differs from traditional Medicare and who has been investing in the sector.

Nona Tepper: So Medicare Advantage is like privatized Medicare. It’s essentially like an HMO and it limits where beneficiaries can go to receive care. The idea is by enlisting private companies to manage care for members, it’ll introduce competition in the marketplace, which will result in lower costs and better patient outcomes. Whether that’s been achieved is debatable. We’ve seen a lot of investment in this space as the population ages. And some companies have succeeded in profiting by apparently better managing patient care and keeping a greater portion of the set payment that CMS pays them for managing beneficiaries’ care. We’ve seen a lot of private equity and venture capital investment in the space and it doesn’t look like it’s slowing.

Alex Kacik: Yeah. One of the interesting parts of your story, just to quote an excerpt is, “Part of what’s driven the initial valuations is a massive buy-in from private equity and venture capital.”

You’ve listed a few major investments here, but I was hoping you could talk about some of those valuations and some of the popular insurtechs in these spaces. And we could be potentially heading towards somewhat of a bubble.

Nona Tepper: I would argue that the bubble has already popped. There’s a lot of insurtechs in the space. Clover Health, for example, is backed by a meme stock startup, social media investor guy. They went public at the start of January. And their stock price has, in the year since, already fallen 70% or so. They argue, they must know something that we don’t. But it’s been kind of the same story for all the insurtechs in the space. None have been able to generate a profit, aside from Alignment Healthcare, which is very small, and at this point, focused primarily in California, which is a good market to start in, but very competitive. A lot of these stock prices have fallen. And then some people say that’s a sign that the bubble has already burst and these valuations will kind of right size.

Read more: Medicare Advantage market shows signs of valuation bubble ready to burst

Alex Kacik: As you listed out in the story, yeah, some of these valuations are more than a dozen times the company’s earnings.

Tara, I know you and I both covered this space a bit, but what are regulators looking at? There seems to be just a higher-than-average risk score associated with MA enrollees compared to traditional Medicare. Some MedPAC analysis has found that score disparity between MA patients and traditional Medicare is around 8%. And they’re worried that this increase in coding intensity could add hundreds of billions of dollars to Medicare spending over a 10-year period. So as we’ve seen hospitals beef up their coding and revenue cycles and these insurers in recent years, how could these reimbursement strategies affect Medicare Advantage’s growth outlook and investment trends?

Tara Bannow: Yeah, I think those risk scores are really interesting. And it kind of aligns with when I talk to these Medicare Advantage providers, the line is always, “Well, we get paid more, because our patients are sicker. They have more chronic conditions than patients in traditional Medicare.”

But, when you look into the research on this, most of the research that’s been done disputes that. So there was a Commonwealth Fund study that we cited in the article, but it found that Medicare Advantage enrollees don’t significantly differ from those in traditional Medicare with respect to income, race, chronic conditions. They don’t visit emergency rooms more frequently. So the data really disputes what some of these providers are saying. And so those risk score differences are kind of alarming when you put it in that context.

I think regulators are really looking at this pretty intensely. I mean, there was that recent Office of Inspector General Report that said that 20 Medicare Advantage insurers accounted for more than half of the $9.2 billion in federal payments for care that patients didn’t get, or didn’t need, in 2016. And I think you’re also seeing the Justice Department intervene in more whistleblower lawsuits against Medicare Advantage programs. So the government is definitely getting more aggressive about this, getting more confident in the fact that these companies need to be really scrutinized.

I doubt we’re going to see legislative change, because there’s just so much lobbying against any kind of payment cuts or any kind of legislative change. But I do think we could see regulatory tweaks. So that is the power really that I think the government does have and will go after is these retroactive audits of their claims and that kind of stuff.

Read more: 
Justice Department accuses Anthem of Medicare Advantage fraud
Why the Justice Department is targeting private equity

Alex Kacik: Yeah. This paragraph stood out to me in your guys’ story, “Amazed popularity combined with pressure from insurers could be preventing lawmakers from making big changes to the program. More than a dozen U.S. senators in both parties wrote to CMS in October that they stand ready to protect Medicare Advantage from payment cuts.”

I mean, that’s just posturing at its finest. Like you said, it goes to show how big some of these lobbying arms are of these insurers and how that could maybe dissuade some regulatory oversight. And I know it’s something on the hospital end, they’ve been focusing on too, where you have entities like the Massachusetts Health Policy Commission that have been looking at coding severity among hospitals and how they’re saying that their patients are sicker, even though their length of stay, their treatment trends aren’t indicating that they require more acute care.

So it’s interesting to see the confluence here of the Medicare Advantage pools and the hospital end. It seems like there’s just more focus, in general, these days on coding and revenue cycle. And these entities are saying, “We’re finally appropriately coding after under coding for years.” But I think there’s some gray area when it comes to what actually requires higher payment and what needs to be more closely regulated.

Nona Tepper: I would absolutely agree with that. There’s kind of a cottage industry that’s popped up to help these insurers code. And something that’s interesting to me that I’ve noticed, is CMS kind of broadened how Medicare brokers, the types of services they can offer their health insurance partners. And one of them is home health services, as well as being able to identify patient conditions just by asking them. So even some of these brokers have kind of turned into vehicles for helping to increase the risk scores of these Medicare Advantage plans. And it’s so early, this was kind of the first year that we’ve seen these companies pop up. Many of them are backed by venture capital, many with political ties too, which is fascinating. But it’ll be interesting to see how that influences Medicare Advantage growth in the future.

Alex Kacik: Yeah. And it’s something, at least on the hospital end, there seems to be a little more slack given to these big health systems. I know there is a False Claims Act case that was settled, I believe, two years ago, brought against Baylor Scott & White down in Houston. Or Dallas, excuse me. And they said that there is more or less, a lot of leeway. The judge ruled that they have room to code appropriately, and then it won’t be deemed as upcoding. So it’s a seems like, in general, they’re giving the benefit of the doubt initially to hospitals. I don’t think the case law has progressed much on either side. So I imagine it’ll take more litigation and some of this court precedent, case precedent to sift out, what exactly is that line between appropriate coding and upcoding?

I know you were both at JPMorgan this month and there’s a decent amount of Medicare Advantage news. So yeah, I wanted to learn a little bit more about what you heard from the insurers there. And Humana, Cigna, Alignment all reported about their MA numbers. So what did you hear from those companies in terms of if membership in the MA sector was reaching their expectations?

Read more: Reporter’s notebook: J.P. Morgan’s 2022 health conference

Nona Tepper: It sounds like there was a lot of aggressive pricing and aggressive benefit structures in the market, apparently from startup plans. And that helped take some of the market share from some of these larger players like Humana, which said their membership did not reach expectations. Cigna, same way. Alignment was also disappointed with their growth, but they did still grow. But yeah, they…

Alex Kacik: A little background, the cat’s climbing all overTara, so it’s…

Nona Tepper: She’s like a parrot.

Alex Kacik: Sorry. Go ahead, Nona.

Nona Tepper: Yeah. So a lot of companies missed their MA expectations. That’s because there’s a lot of new entrants in the market. A lot of these new entrants, they have yet to generate a profit. So we’ll see how long their cash reserves play out, because insurance is an expensive business. It’s easy to lose money if you don’t understand it. And not everybody’s going to be willing to bail you out there. We saw Cigna had to, not had to, they chose to invest in Bright Health Group at the end of 2021, after they essentially ran out of cash. You could just argue these health insurers like Humana, United, they might be playing a long game. And the fact that they missed expectations may not be the worst thing. They don’t want to lose money. They want to make margin. And who knows how long these health insurance startups will survive?

Read more: 
Humana grows private equity-backed primary care
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Tara Bannow: The only thing I would add is that some of the larger health systems, like Ascension, did really try to emphasize their investment in Medicare Advantage plans. So they’re trying to show how much they want to be a part of this, too.

Alex Kacik: So generally, what’s the outlook you got from the experts you talked with on the Medicare Advantage sector? It sounds like they’ll be continued interest, just still high valuations of these companies. Yeah, generally, what was the feeling there?

Tara Bannow: I would say the investment and interest in this model will continue to be strong. I don’t see it really going anywhere. But there’s going to be winners and losers. I mean, some of these companies, not everyone obviously is going to survive. And when we talk about the problems with Medicare Advantage and some of the fraud that’s happening, every company you talk to will say, “Well, that’s not us. I mean, we are clearly doing everything right. And we’re this unique model and our technology is amazing and we are going to change healthcare.” So obviously, that’s not true for everybody. I guess I think it’s going to continue to be a strong market, but some of these players are going to drop out.

Nona Tepper: I would have to just kind of double click on what Tara’s saying. And I think she makes an important point by noting that a lot of these companies claim to be different and incomparable to the other players in the market. I think that’s a common marketing slogan and I don’t think that’s realistic. And I think that’s something that investors should keep in mind when they see these pitch decks. I also think Medicare Advantage, there’s a lot of room to grow. Some markets, they have up to 39 different choices. Others, there’s not as many. So I think we’ll continue to see the large players continue to dominate. Maybe the startups will survive. Maybe some will crash. And I think it’s also interesting that the Blues have been getting involved recently. They have a good starting point, because they have such a large commercial employer base and individual base. If they could convert those members to Medicare Advantage, they could really succeed, too.

Alex Kacik: Well, Nona and Tara, thank you so much for your reporting and coming on to talk to me about it.

Nona Tepper: Thank you.

Tara Bannow: Thanks for having us.

Alex Kacik: All right. And thank you all for listening. If you’d like to subscribe and support our work, there’s a link in the show notes. You could subscribe to Beyond the Byline on Spotify, Apple Podcast, or wherever you listen to your pods. You can stay connected with our work by following Nona, Tara and I at Modern Healthcare on Twitter and LinkedIn. We appreciate your support.