Health insurers still think of themselves as financial product companies instead of consumer services companies, and that’s a problem, according to Vivek Garipalli, CEO of Clover Health speaking at CB Insights’ Future of Fintech conference.
The misalignment between existing health insurers and their customers is that insurers view customers in terms of annual income instead of customer lifetime value. This is where Garipalli believes Clover’s edge will be — capturing the data around customer lifetime value
“At Clover, we’ve built everything around this centralized view of our customer and try to capture as much data as we can about each customer … The traditional insurer is not set up to drive workflow management with their customers.”
Those data sets could eventually help Clover expand beyond insurance into therapy and care itself, Garipalli told Drew Armstrong of Bloomberg in a fireside chat.
“We’re building one of the most longitudinal datasets in healthcare, and that might mean we start building our own therapeutics.”
But Garipalli talked about how it’s not just alignment with the customers that’s important, but also with the government.
One of the challenges in the health insurance market (especially in the current environment) is building within an industry with so much regulatory uncertainty. He noted that Clover launched only once there was regulatory certainty around Medicare Advantage, and with the understanding that the Medicare population values healthcare.
The individual marketplace is a more difficult area:
“It’s really hard to build an outcome-based business in the 50 and under category where there’s a lot of churn and people don’t prioritize buying healthcare.”
But he does think that this will change soon. Garipalli believes the US is “on a 10-20 year slow walk to a fully government funded system but privatized.” The government will eventually have to reform the healthcare system and will have to look at some of the places that have been relatively successful, such as Medicare.
Transcript
Drew: So, Vivek, thanks very much for being here.
Vivek: Thanks for having me.
Drew: It’s a pleasure. You are the CEO and co-founder of Clover Health. You guys manage Medicare Advantage plans for senior citizens in the U.S. You’re in a government business essentially where the U.S. pays you all to help manage these plans. When we think about, you know, some of the successes you guys recently had, you raised, I believe, $130 million and around…to get to around $1.2 billion valuation from some serious tech backers. You’re in a business that when we talk to VCs and things like that, a lot of people say they wanna stay away from, you know, government reimbursement, you know, older people instead of that beautiful, young consumer segment, highly regulated industry. Was it difficult to go out when you need to pitch investors who maybe aren’t familiar with the type of business that you guys are in or the type of returns you own and operate? Is that hard to go out there and raise money? Obviously, you had a lot of success doing it but…and tell me what the process is like going out and talking to people and trying to convince them to get into the space.
Vivek: Sure. So prior to Clover was kind of more of the traditional healthcare space, built an outpatient services company and a hospital company, then got involved in the oncology space with Flatiron Health. And raising capital for Clover was one of the most fascinating and, I think, difficult experiences I’ve ever been through. So we started trying to raise outside capital in middle of 2014. And so my capital-raising kind of pattern recognition prior to that was wearing a suit and presenting investors in New York City area, historical financials, and positive EBITDA, and cash flow, and raising equity off of that or debt off of that, and taking that approach in the middle of 2014 where we were trying to demonstrate kinda all the merits of Medicare Advantage. Being privatized Medicare, regulations having been stable for, you know, the last 6 years, but have been started over 20 years ago. Talked about how it’s a real asset that we’re creating hard to get licensed, really high barrier to entry, and it was really an impossible conversation to have.
Drew: Did people not just understand what you’re trying to do, or is it more of, “Hey, there’s a lot of other things going on in tech that don’t present some of the hurdles that you guys have?” I mean, what was the reaction like when you were going in there meeting with these folks?
Vivek: Yeah, it was…so the first meeting ends up turning into, “What is Medicare?” So we spend the first hour talking about Medicare, and then there’s a…
Drew: Let’s just do it. Does everybody know what Medicare is? I want a couple non-embarrassed people to raise your hands if you couldn’t roughly explain the Medicare program to me in 30 seconds. Anybody? That’s great. Okay, good, thank you. We like this audience. All right. Sorry to interrupt you. Go on.
Vivek: So I would save an hour if I was pitching people in this audience. And then the second meeting is really talking about Privatized Medicare, which some may or may not know, but was started in 1997. As Medicare spend was going up dramatically, the government introduced a private option, so the big players there, Humana, and United, and Aetna, and the Blues in that space. So that’s definitely a pretty extended conversation.
And so just going back to what they’re used to experiencing in an investment conversations, it’s typically, if you think about the company that have been funded and have been successful for the last 40, 50 years in that 50-mile radius in Silicon Valley, have typically been consumer products or really, really specific technologies around…whether it’s medical devices or chips, for example. And we haven’t really seen many technologies come about or companies really disrupting complex industries, whether it’s energy, healthcare, education, defense, infrastructure in terms of physical infrastructure.
So the conversation is definitely not one they’re used to having because it does take, I think, a pretty deep understanding of the space to even start getting comfortable. And then the third kinda meeting…usually, I would say typical companies were done after one meeting. The third meeting or many meetings after, we’re describing how is technology or software really gonna drive transformational change in this space. And that obviously, in our space, kinda permeates kinda everything we’re doing. And that conversation typically goes well when we first go through it. Then the fourth meeting, when they forget a lot of what we talked about, they say, “Wait a second, why don’t you just sell software to insurers?”
Drew: And why not? I mean, you know, that would be probably a lot easier than taking on, you know, I mean, what is millions and sometimes billions of dollars’ worth of financial risk when you guys are saying, “All right, we’re gonna be a health insurer, which is a big capital intensive business, you know, doing that.” And why not?
Vivek: Sure. So the basic thesis in terms of the way we look at insurance or healthcare in Clover is we got into health insurance because we saw an opportunity for alignment with our customer. So if you take life insurance, for example, I view that as an industry where there’s alignment, where, as a life insurer, you have a vested interest in seeing your customer live as long as possible.
Drew: And the customers tend to agree with that sort of outlook as well. They would like to live as long.
Vivek: They would love that.
Drew: Yeah. That’s pretty easy one, I think, to sell.
Vivek: And so as a health insurer in Medicare Advantage, we tend to have a pretty long customer life in terms of our customers who are with us for a long time. And if you think about most of the businesses in healthcare today, the business models are pretty misaligned with the consumer. So the business I built prior was a hospital business. The hospital business model is a very broken model in the United States, where it’s all about consolidating market share and then leveraging that market share to get higher unit pricing from local payers. And that’s why we’ve seen skyrocketing co-pays, deductibles, and co-insurances. We’ve seen kind of all the press around pharma drug pricing or hidden spreads of PBMs.
What we saw with health insurance, especially in privatized Medicare, is the ability for us to collect premiums on a risk adjusted basis. Meaning, the premiums we get from the government are tied to someone’s diagnosis and their age. And so now, when you think about managing care, managing outcomes, you have a direct correlation with improving someone’s long term outcomes and generating a higher margin, where you could take those dollars and pass them in the form of cost savings to consumers and to the government. So that’s what got us really excited about health insurance.
Then when we look at the existing players, whether it’s in health insurance or insurance in general, it’s a very transactional business. Health insurance, flood insurance, life insurance, you sell the policy, you’re kind of done. Your job from a DNA perspective, from the CEOs and executives on down is very much around how do we manage these policies and pay out the least amount of claims possible. They’ve morphed over time to become a little bit more friendly, but that’s not kind of the core DNA.
And so if you sit in the board rooms or talk to folks who run some of these large health insurers, especially even on the Medicare Advantage side, they look at their profits in terms of annual EBITDA per member, or annual income per member. That’s not a lifetime value notion. And that changes the whole make of how an organization operates. So even if we sort of had the ability which would be impossible, but if we went into United Healthcare and took out their tens of billions of dollars of legacy architecture, and infrastructure, and acquisitions they made over time, and take out all their data silos that have been created over time, and try to rebuild everything from scratch in a full stack way, there’s still the DNA issue of the company where they haven’t set up their personnel to actually drive improved outcomes and focus on clinical interactions and creating those feedback loops.
Drew: I wanna back up a little bit. Walk me through, let’s say I’m Drew Armstrong, 60-year-old, you know, Medicare beneficiary. I might have some high blood pressure, my cholesterol needs to be managed. Maybe I’ve got, you know, diabetes at a relatively early stage. Talk to me. I’m your customer. What do you guys look like to me? Walk me through what my interaction is like with you all, and how it’s gonna be maybe different from, you know, a Humana or somebody else like that who all say that they wanna do a lot of the same things that you guys do? I mean, these are companies, you know, that say, “Hey, we’ve got expensive patients. If we manage their care better, we will manage to, I suppose, keep them around because we’ll be very good businesses for them as a customer, and, you know, we’ll also make money along the way.” Walk me through what it’s like to be, you know, Drew Armstrong, Medicare beneficiary, if I’m a Clover customer here.
Vivek: So, it’s nice to have you as a customer. So our first job is, one, is onboarding you. And the way Clover is set up is the entire organization is built around a centralized data architecture. And while it seems simple, it’s a really important foundational element of the company. So if you think about an e-commerce company, so let’s say you’re logging on to Amazon, for example, the reason Amazon has been able to scale mass personalization is every interaction we have with them on a daily basis or monthly basis, it’s all live, where your mouse cursor is, what’s in your shopping cart.
And that experience becomes iterative over time. They don’t really know you day 1, but day 365, or year 10 you almost feel you’re literally on one massive, impulsive buy site, you know, when you’re there. And that’s what happens with Amazon over time. So very similar at Clover, we’ve built everything around the centralized view of our customer. So when you’re onboarding, our goal is to capture as much information on you as we can within reason, what medications you’re on, your emergency contacts and so forth, what conditions you may have, caregivers, your physicians that you see. So all that is brought into a centralized data structure and in one ontology. So now, in Medicare, typically, an average patient is seeing the doctor about five times a year.
Drew: And that’s very different from, you know…
Vivek: Very different.
Drew: …you and me now, right? It’s a much more intensive interaction with the healthcare system that your customers have versus, you know, I go in when I need maybe some antibiotics or if I, you know, bust my knee and I needed some stitches or something like that, right?
Vivek: Absolutely. And it’s a really, I think, great point in the sense of we think of insurance as truly a financial product. And it’s been hard for, I think, the insurance industry to really take on the mindset of it being a true consumer service, and that people do want services along with it. In Medicare Advantage, it’s been easier to make that shift, at least for us, because our customers really use it as a daily-use product. Five times a year to see a doctor, doing three prescriptions on average, going to the hospital once a year for some type of service. So our customers view health insurance as their most important purchasing decision or one of the most important purchasing decisions each year.
So these frequent interactions allow data to be created in the system, whether information gets faxed to us by a hospital when a patient submitted all their clinical information, or when an MRI, for example, is being asked to be approved, whether we’re getting phone calls inbound around questions around the plan, when information is being logged in a physician’s HR, we’re ingesting all this information. A lot of it’s very messy and unstructured, everything from handwriting to free text, and we’re aggregating all of that, structuring into one ontology. And the key with that is, you know, every single person who works within Clover has access to that. So if for example, now, we’re nine months in and we know you’re on a statin, for instance, you can say Lipitor, and we see that you didn’t get your refill for month eight…
Drew: Right, it’s not good because I might end up having a heart attack if I don’t stay on my meds.
Vivek: And statins is…the interesting with statins is it’s not taking a statin. For example, you don’t necessarily feel bad. So you always have an issue, low adherence with a medication like that, because sometimes, people equate, “Oh, I feel great. I don’t need to take my medication.”
Drew: I might even feel better off my statins [inaudible 00:13:02], yeah.
Vivek: You may, yeah, or you may even have because you have side effects or whatnot. And so now, that, in and of itself, creates alert in our system. So that alert, just that simple thing that makes sense and what we would think in kinda any other type of industry, let’s say, a manufacturing plant, that does not exist amongst any of our competitors. The traditional insurer is not set up to drive workflow management with their customers. They’re not able to take information and drive workflow out to their existing personnel or people out on the field. But for us, it’s vital to affect outcomes. So that alert goes to our customer experience team. So they’re outreaching, now, you as a customer to find out what’s going on. So let’s say you pick up the phone. A conversation is had around what happened, were you away, you need help with getting a refill. Let’s say the simple response is, “Thank you so much.” And so we’re now able to see if once we get the claim again, did you actually get that refill or not?
Drew: And who do you guys have calling [SP]? I mean, do you have people working at call centers? Do you have nurses? Do you have someone’s doctor? I mean, who’s making the phone call to me, the patient?
Vivek: Yes. So our customer experience team is filled with…we hire for two things on our customer experience side. It’s kindness and empathy. There are a lot of people who work in customer experience in this country, who have just been beaten down by lots of big corporations. So AOL is a great example, where some genius there decided that their customer experience approach was gonna be, “We can tell when, via our algorithms, when someone’s really close to leaving America Online.” And then they would basically, you know, get to that customer and try to talk them out of dis-enrolling in America Online. In reality, you wanna take that data as part of a feedback loop and go really far upstream to solve root cause. That’s sort of like how the world should work. Well, that person got poached in when we got brought to Comcast, applied the same things, why we hate cable companies.
Drew: I got a knowing laugh. I think a lot of Comcast customers in the room here.
Vivek: So the end result is you have individuals on the front line who really…a lot of customer experience folks really like talking to people. They like solving problems, they like being engaged, and they’re not given the tools, and they’re not given the autonomy to solve problems. So at Clover, we don’t set time limits on the amount of time someone could take on the phone. Now, we try to create efficiency in that call by decreasing the amount of time people have to switch screens and look at different pieces of information.
But for us, it’s, one, solving the problem and really engaging with that consumer. We view building customer trust as something that directly correlates with lowering churn long term, increases engagement, drives up adherence with any sort of interactions or requests we have, where we benefit and the consumer benefits at Clover. So even that conversation, there’s a component of asking you to do something that makes sense for you and explaining why, but really taking the time to understand what are sort of potential root causes of you as an individual as to maybe why you didn’t take your medication.
Drew: I wanna turn a little bit and ask you, you know, given when you guys were starting, we were seeing Obamacare rollout. A lot of health insurers decided, you know, they looked at it, they said, “All right, there’s gonna be billions of dollars, government subsidies flowing into this program, millions of new potential customers,” you know, there were a number of companies that were either starting in-house at some of the traditional insurers, you know, I think there’s a relative rolling out on Oscar that was started to go after this market. People have run into a lot of problems, but you guys didn’t go into that market. You chose Medicare Advantage. Talk to me about why Obamacare was not the decision you all made to pursue, I think, in, you know, the last six months or so. That probably feels like a pretty great decision, given the chaos we’ve seen in some of the markets there. But why not there as opposed to, you know, as opposed to Medicare Advantage? That enticed a lot of people to be over on that side. Why not you guys?
Vivek: Sure. So I would say just having been in healthcare for a while, it’s really hard to build a long-term-oriented business when you don’t have stability of regulations and you don’t have a clear sense for how an industry is gonna sort of evolve. You have to have a view, obviously. And Medicare Advantage, for example, started in ’97. It went to a tonic chaos between ’97 and 2006. You know, for example, prior to this component called risk adjustment, insurance plans would get a fixed payment from the government for each member, no matter how healthy or how sick they were. So, of course, by 2003, insurers enrolled all the healthy people. The government identified that as a real issue and they almost shut down the program, but came to this grand compromise around risk adjustment. And then with the Affordable Care Act for up until then, Medicare Advantage rates were much higher on an equivalent basis compared to regular Medicare. And so the Affordable Care Act actually brought that back in line, which actually created much more stability policy-wise.
Drew: It changed people’s business models, just wanting to put huge pressures on people to manage care and figure out how to, you know, treat these people like customers that they needed to manage rather than just saying, “Okay, we’ve got a nice big pot of money, and let’s, you know, go and deal with them,” right?
Vivek: Absolutely. And as we’ve seen, it’s created some growing pains for companies that had old models, like United, for example, that are now getting sued by the Department of Justice for kinda risk adjustment stuff. And so it took about basically about 15 years for privatized Medicare to stabilize, where at least someone like me looked at it and said, “There’s enough stability here and the rules are logical enough where you could build something pretty special.” So the exchange market, at least for Clover and the way we think about building our business, the churn is just really, really high in individual insurance. When you’re selling to an age group of 50 and under, you just don’t think of health insurance as that important of a product. You need it, but it’s sort of bottom five, you know, on your purchasing list.
Drew: People change plans, you know, once a year. My recollection is, you know, the government was encouraging people to shop around. You have one insurer at one year, one insurer the next year. That would make your business relatively difficult to run if your customers are constantly changing, right?
Vivek: Absolutely, so it becomes highly transactional. It’s about, I think, two to two and a half year customer life. And there’s the cost of customer acquisition. So you end up really getting focused on how to optimize claims payments and so forth. Then you also have a component where there was such vitriol in passing of the legislation. You had, you know, this whole side of the legislature, the Republicans, who were very focused on finding ways to kind of cut that industry off that at the knees by holding back on certain payments that the industry, or that was obligated to the industry, that created excessive losses. You had moral hazard, in terms of the penalties weren’t big enough. So folks who could have enrolled to kind of lower the overall risk pool didn’t enroll, you have no pricing history, and then you have chaos. And so, you know, healthcare is the Wild West in general, like the exchange, I think, is almost sort of was anarchy for the first kind of few years.
It’s inevitable that it should, as long as they don’t get rid of it, it’s inevitable it should stabilize over the next 5 to 10 years because it’s insurance. At the end of the day, if you can redo your pricing each year, the math should work as long as you have enough money to figure it out. But to us, it didn’t really fit our model because it’s really hard to build an outcomes-focused business in a population that’s really kind of 50 and under.
Drew: How will the law have to change for you guys to be in there? I have to imagine that, you know, the way you’re talking now, and you’ve thought, “Okay, maybe 5, 10 years down the line whatever this program is called, it’s Obamacare, if it’s Trumpcare, if it has some new four-letter acronym that we, you know, haven’t heard yet as we go through this process.” What would that program or what would that business have to look like for you all to say, “All right, this is a good place for us to be in”? What does the reimbursement look like? What do the customers look like?
Vivek: Yeah. So I think we’re on a kind of a 10 to 20-year slow walk to fully government-funded healthcare, but privatized. And obviously, that’s self-interesting because we’re doing that right now.
Drew: Was it in a government-funded, advertised?
Vivek: Yeah, but I actually believe that’s gonna happen. I sort of view what’s happening now and has happened in the last sort of 60 years. If you take some of these really famous, you know, athletes or celebrities who make a ton of money, they live lavish lifestyles, they get advice to try to manage their spend better, but in reality, they just run out of money, and then maybe change happens. Sort of what we’re doing with healthcare. They have all these great ideas that in theory none of them make mathematical sense. The commercial health insurance business is completely broke and employers are literally like padding the wallets of health systems and pharma companies. It’s obnoxious as to what’s going on in healthcare.
And eventually, the math’s not gonna work. The government is highly reactive. The government historically has never been proactive about anything. That’s just the way government is. In 10, 20 years eventually the reactive requirement’s gonna come to bear just because of a financial issue. And then the logical outcome’s gonna be, “Well, what is working in healthcare?” And they’re gonna say, “Well, in Medicare, we’ve got fixed rates. It’s hard for hospitals to make a ton of money in it. It’s hard for insurers to make a ton of money in it.”
We’ve got really great data because everything’s coded. And there’s total traceability in payments, traceability in terms of outcomes, and you end up going towards something fully government-funded where the government is actually on the hook from age zero to death. Like, if you ever go to Canada, and Canada I don’t think has the greatest system, but there’s an interesting alignment, where the government will actually insure if you live on the second floor and you broke your hip. They wanna make sure that, you know, you’re able to get your groceries and get down the stairs.
If people are seen smoking, people will get upset at you because they really understand that they’re on the hook for that. It’s really hard to have personal accountability in healthcare today if we actually don’t all feel where we’re on the hook for it. It’s pretty similar where, you know, you see someone littering on the street, you kind of feel that’s your street as well. And that maybe you don’t say anything, but it definitely kind of bothers you. And that’s sort of, kind of what will happen over time, and it will lower spend dramatically when we get rid of that ability for large local monopolies to dictate really high pricing with commercial insurers.
Drew: I wanna ask you a bit of a broader question, you know, you’ve been on the hospital side, now you’re in the health insurance side. You talked to a huge amount of folks, I presume, in the investment community. What do you think the biggest either misconception or mistake about getting into the healthcare business in a deep and complicated way is, either for entrepreneurs or investors? When you’ve had these conversations with folks, what’s the biggest misconception they have about is this gonna be easy, is this too difficult. I mean, walk me through the problems that you think are there, that frankly kept a lot of people out of this business compared to some other sectors.
Vivek: I don’t dispute kinda any of their conclusions. I think it’s a really complex industry that’s full of stuff that’s non-intuitive. I mean, when you come into healthcare, there’s a lot of things that you learn that really don’t make sense initially. Overtime, you piece it together and you learn about how the system got to where it got to and why it got set up the way it did. But I think it’s highly non-intuitive in terms of how it’s set up the regulations, whether it’s on the services side or in the insurance side, are numerous and massive. In Medicare Advantage, we get 140-something, like, “new letters” a year, but there’s always these slight changes to some regulations you have to follow.
And I think there’s always a risk of modifications and rules, which you hope that the space that you’re in has been around long enough, where those changes don’t require massive business model changes. I think, today, if you’re getting into a really regulated industry, i.e. health insurance, you have to ensure that your business model is aligned with the government and is aligned with your consumer, right?
Drew: I mean, you’re not coming in and disrupting, like, the cab industry. The government tends to be pretty pissed off when you go in and screw with some senior citizens healthcare. They tend to vote…
Vivek: Yes.
Drew: Yeah, they do not take that lightly. Sorry, I interfered. Go on. Those regulatory problems, those very big hurdles, you say you got 140 of these update letters a year. I mean, are any of those tech-solvable problems, or you’re just having to knuckle down and deal with that stuff through, you know, personnel and kind of brute force work?
Vivek: Yes, so it’s definitely tech-solvable. And I think we’ve done a pretty good job of getting maybe 70% of the way there in that particular area. So, for example, a typical insurer will get this PDF file and it will go to someone’s desk, and that person’s job is to go talk to everyone else in that department to get them to change their processes. For us, you know, we’re able to take that document obviously with pretty basic technology, put into a text-readable format, and impute that information into the workflow.
You see it to make sure it’s done properly. But most of this information, you can push back out into the workflow of your operating system. There’s still work to be done in terms of educating any individuals who are accessing the system and make sure they understand the reason and the regulation. But a couple things happen is you’re not asking people to remember things, you’re educating them on the regulation, but it’s going into the system as part of the workflow, so your risk of not following that rule of regulation goes down dramatically over time.
Drew: We have about a minute and a half left. I wanna ask you what the end point looks like for you all. You have some, you know, very big, prominent investors, you guys have been doing this for a few years, you’re on a very nice path, you have a, you know, billion-dollar plus valuation. What is the exit point for Clover, if you will? I mean, is this something, and there’s a huge amount of interest by insurers, you know, with the time to take over Humana being more in the Medicare Advantage space. I presume that you guys, at some point or another, if you haven’t already, have gotten a degree of interest from some of the legacy players in the industry. Is that something you all would ever consider doing, or is the goal to remain independent for as long as you can or want to?
Vivek: So I’m gonna be doing this forever. One, I will never sell the company. I hate having a boss so that’s never gonna happen. And I think there’ll be a time that we’ll go public at some point. I do think if we’re able to get on this path to success, we have to be public, just all of our revenues from the government, and I think there’s definitely, we never wanna be viewed as being opaque with kind of our financials or anything like that at that point in time. This is definitely an industry where you can’t scale overnight. You can’t rapidly take a bunch of share. We’re definitely running a marathon. It’ll probably be a 10 to 20-year process to get there.
And I think, you know, long term, you know, we’re building, you know, one of the most extremely valuable longitudinal data sets of genotypic and phenotypic information that I think has ever been assembled on a chronic disease population. So, as the cost of therapeutics development comes down, we think, given the data we’re creating, you know, we’re also building a very profitable Trojan horse for 5 to 10 years from now and to start developing our own therapeutics as well.
Drew: Well, this has been really interesting. Thank you so much for the conversation and thank you to our audience as well.
If you aren’t already a client, sign up for a free trial to learn more about our platform.