The past several years have seen headline after headline about investors buying up Medicare Advantage-focused providers for huge sums of money and throwing cash behind startup insurers that promise to disrupt the $350 billion market. Meanwhile, there’s been an eye-popping number of new ventures seeking to capture a corner of the growing patient population.
This all prompts the question: Is the MA market in a bubble? If it is, some of the companies that are flying high today could run the risk of having their valuations tank if they run afoul of future regulations or get saddled with substantial fines after government audits. This fate has already befallen some startups that entered the public market with hot valuations but whose stock price has since cooled.
“If you believe the valuations at their peak, our country was bankrupt,” said Ari Gottlieb, a principal at A2 Strategy Group. “Because the amount of money we would have spent on healthcare to justify these valuations was ludicrous.”
Whatever happens, capitalism promises winners and losers, and not all companies are destined for success in this crowded market, said Alignment Healthcare CEO John Kao. Although Alignment’s stock has dropped nearly 21% since the MA-insurtech’s public debut in March, the startup has retained the most value out of all the other young insurers and many of the value-based care providers that went public this year.
“We do expect there to be a shake-up, and that’s already started. The wheat is separating itself from the chaff, so to speak,” Kao said, adding: “It’s kind of like, if the bubble is gonna burst more next year, then I don’t know how much lower this stuff can get.”
Consider Miami-based Cano Health, an MA and Medicaid-focused primary-care provider that was valued at $4.4 billion when it went public via a special purpose acquisition company over the summer. The company, which declined to comment, lost 37% of its share value between its stock market debut and Dec. 10. Nonetheless, Cano has been on a buying spree in South Florida, nabbing University Health Care for $600 million and then Doctors Medical Center for $300 million.
Another example is Clover Health, an MA-focused insurtech whose stock has, as of Dec. 10, dropped nearly 72% since the startup went public via a $3.7 billion special purpose acquisition company at the start of the year. The memestock startup, which is backed by social media investor Chamath Palihapitiya, aims to differentiate itself through its wide network approach, claiming its Clover AI Assistant tech platform can guarantee patients high quality and low costs at any doctor they visit. More than 60,000 practitioners are in Clover's network. The company offers the technology free for contracted clinicians to use and pays doctors an average of $200 for every visit that they use the tech.
“We want the doctors to focus on accuracy; there’s no incentive we give them to code up or down,” Clover Health President Andrew Toy said.
At the same time, the company is banking on the Centers for Medicare and Medicaid Services’ Direct Contracting program, which enlists private insurers to manage the care for traditional Medicare enrollees. Clover generates more than half of its revenue through the program, which Toy said is the future of Medicare. CMS barred new entrants from participating in Medicare Advantage earlier this year.
Critics have said Clover’s ultimate strategy is to leverage the program to turn traditional Medicare enrollees to members of its privatized preferred provider organization, and alleged that its tech automatically upcodes every patient condition and recommends physicians order unnecessary tests.
“We truly see ourselves as a Medicare company, not MA,” Toy said. “We help Medicare eligibles. We use the Clover Assistant, we use the same approach. A lot of other MA companies haven’t done that because when you take a narrow-network strategy, it’s very hard to translate that to fee-for-service original Medicare. Because we already were taking a wide network strategy, it worked out for us. It’s not exactly the same, but there’s more organic growth to move into fee-for-service.”
More enforcement to come
A chief question in this debate is whether these companies actually deliver better care to seniors for less money. To that end, there have been discouraging signs.
A recent report from Health and Human Services’ Office of Inspector General noted that 20 MA insurers accounted for more than half of the $9.2 billion in federal government payments for care that beneficiaries may not have needed or received in 2016. UnitedHealthcare enrolled 22% of MA enrollees and generated 40% of its payments that year by listing conditions that weren’t verified in medical claims, federal investigators said.
The U.S. Justice Department has been intervening in whistleblower lawsuits related to MA programs, including those run by Independent Health and Kaiser Permanente. OIG’s audits have accused Anthem and Humana of misrepresenting their members’ illness to bilk the government out of billions.
“What it looks like is people have become really good at gaming the system,” said Greg Hagood, senior managing director with Solic Capital Advisors.
Medicare payments to MA plans were 104% more than traditional Medicare in 2021, according to the Medicare Payment Advisory Commission.
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Some MA providers argue that’s because their patients are disproportionately sicker, lower income and more likely to be members of minority groups compared with fee-for-service Medicare. A recent Commonwealth Fund report disputed that assertion, finding that MA enrollees do not differ significantly from those in traditional Medicare with respect to race, income or chronic conditions. The same report found that members of both programs visited hospitals and emergency departments at the same frequency, despite MA members receiving more care management services.
The similarities in patient outcomes and profiles raise the question of why MA plans cost the government more than fee-for-service Medicare, Gretchen Jacobson, the Commonwealth Fund’s vice president for Medicare and the report’s author, told Modern Healthcare in October.
“How valuable are those extra services if the outcomes are the same?” Jacobson said. “It’s really important for the government and policymakers to evaluate this, given Medicare Advantage plans right now are paid more than what it would cost to provide the same care to people in traditional Medicare.”
Other MA providers argue that if MA didn’t offer an attractive proposition to patients, the number of older adults enrolling in the program would not be increasing.
One thing is for sure: MA’s popularity, combined with pressure from insurers, could be preventing lawmakers from making big changes to the program. More than a dozen U.S. senators from both parties wrote to CMS in October that they “stand ready” to protect Medicare Advantage from payment cuts.
“Changing Medicare Advantage is probably one of the hardest things to do because it involves really big money with really big business,” Hagood said, “and they use the retired population as a bargaining chip.”
Since there’s not enough political will to regulate MA through the “front door”—broad-scale legislative changes—it’s going to happen through the “back door”: audits and small regulatory tweaks, said Eric Klein, a partner at Sheppard Mullin who leads its national healthcare practice.
“We’re going to see a lot more enforcement activity,” he said. “We’re also going to see a lot more regulatory changes. It’s going to be incremental. They’re going to take it bit by bit.”
For his part, Klein disagrees that the segment is in a bubble. Rather, he thinks it’s just catching up with a bottleneck in supply that’s existed for years, especially since the Affordable Care Act and subsequent presidential administrations have shifted the focus to value-based care. Regardless, he expects some of the new entrants to fail.
Mike Pykosz, CEO of Oak Street Health, said he thinks the influx of new MA players is “really exciting.” His company’s roughly 100 clinics can’t realistically handle the more than 60 million Medicare patients out there.
“Some will be successful—I’m very confident Oak Street will be one—some may not,” Pykosz said. “But we need that. We need that level of innovation. It’s great for the country. Ten years from now, we’re going to be much better off for older adults and the care they’re receiving and we’ll be much better off in the country because of it.”