Clover Projects It Will Have Only Half The Medicare Members It Promised Investors Before IPO

When “SPAC King” Chamath Palihapitiya announced his special purpose acquisition company IPOC was merging with Medicare Advantage insurer Clover Health last October, he told investors the “business already has 200,000 lives under contract for 2021” through a new Medicare program known as direct contracting. It was part of his pitch for taking Clover public, calling the program “a very low cost acquisition channel” to scale the company “by an order of magnitude.” 

Fast forward seven months later and now Clover executives said during the first quarter earnings call on Monday that the company expects to have just half that number—or even less—enrolled in direct contracting by the end of the year. Nashville, Tennessee-based Clover did report a company record for quarterly revenue, but the Medicare Advantage insurer faces other hurdles in the months ahead beyond halving its direct contracting enrollment projections. Those include higher-than-expected costs for patients stemming from Covid-19, as well as being the subject of two ongoing investigations from the Department of Justice and Securities and Exchange Commission.

Clover posted a net loss of $48.4 million on $200.3 million of revenue in the first quarter. The 21% revenue increase, up from $165.5 million in the same period last year, was mainly attributed to new Medicare Advantage, bringing the company’s total enrollment to 66,300. This program allows private insurers to administer healthcare benefits to around 24 million seniors out of the 62 million Americans in the government-funded Medicare program.

Clover’s stock price was trading around $10 per share prior to the SPAC merger and hit $15.90 in its first day of trading in January, catapulting Garipalli to a short-lived billionaire status, which he quickly lost as the stock fell. Palihapitiya, who landed on the 2021 Forbes Billionaires List in April with an estimated net worth of $1.2 billion, is also no longer a billionaire, according to Forbes estimates.  With Clover trading at $6.80 at 3pm ET on Monday, Forbes pegs his fortune at just over $900 million.

While Clover has an extremely tiny sliver of the market compared to giants like UnitedHealthcare and Humana, cofounder and CEO Vivek Garpialli was optimistic on the call. “We believe that having our value proposition centered around software will allow us to scale more rapidly than others who are dependent on brick and mortar or other asset heavy approaches,” he said.

But scaling in direct contracting is proving more difficult than expected, as Clover lowered membership expectations from 200,000 people in 2021 to between 70,000 to 100,000 by the end of the year. This program allows Clover to enter into contracts with doctors who are treating patients in the traditional Medicare fee-for-service program and manage the care of those populations. The expectation is that private entities who enter into these risk-sharing contracts will be incentivized to deliver care at a lower cost. Garipalli said Clover has contracted with 1,800 providers across eight states, since the program launched in April, adding 65,000 members. “We believe our direct contracting entity will have a material impact on lowering costs and improving outcomes for all patients across the clover ecosystem,” he said on the call. 

Perhaps anticipating the negative reaction of institutional investors, Clover’s earnings call had an interesting twist: questions from Reddit.

These 65,000 additional members are much lower than the 200,000 members that Clover promised potential investors were “already” contracted before the company went public via SPAC in January. This claim was also reflected on a slide in the investor presentation (page 47) delivered by Palihapitiya on October 6. Clover’s participation in this program didn’t start until April 1, 2021, which was 6 months after the presentation. [Editor’s note: A Clover spokesperson said the company was accepted into the direct contracting program on September 9th, 2020, but the program did not begin until April 1, 2021.]

On Monday, Garipalli continued to hedge this comment by saying the company “believes we have access to up to 200,000 Medicare beneficiaries through our contracts with participating providers.” However, Clover’s CFO Joe Wagner acknowledged that the company “began the program with fewer claims-aligned beneficiaries than initially expected,” which are members that the Centers for Medicare and Medicaid has identified as eligible for participating based on claims data. This means the company will need to depend on seniors choosing to sign up with Clover direct contracting  through their primary care provider. Wagner said the timing of adding these voluntary members would be “difficult to predict,” so the company was taking a “conservative approach” with the forecast of 70,000 to 100,000 members by the end of 2021. 

The company also lowered its 2021 revenue projections from $820 to $850 million by the end of the year to $810 to $830 million. Clover said this was due in part to the cost of caring for Covid-19 patients, particularly in the hard hit New Jersey market, where more than 90% of all Clover members reside. In the first quarter, the company saw its medical loss ratio increase to 107.6% from 89.4%, meaning the company was spending more money on caring for each patient than it was taking in through premiums. 

The reaction from Wall Street was swift, with Bank of America downgrading Clover from buy to neutral with a price target of $9, down from $15. Perhaps anticipating the negative reaction of institutional investors, Clover’s earnings call had an interesting twist. The company interspersed questions from traditional analysts with those pulled from Reddit. That social media site caused a frenzy over GameStop earlier this year, generating a massive surge in the beleaguered gaming retailer’s stock. Palihapitiya is a popular figure among certain investing subreddits, where several users discuss holding long positions on Clover. Commenting on sourcing questions from Reddit, Garipalli said: “We are a big believer in the retail investor community.” 

Additional reporting by Kerry Dolan.

Update: This story has been updated with additional share price information and to reflect that Chamath Palihapitiya is no longer a billionaire. Clover Health began participating in the Medicare direct contracting program on April 1. The Centers for Medicare and Medicaid Services did not make this information public until April 8.