Weekly Health Tech Reads | 11/10/24

Welcome to this week’s free weekly newsletter, where we share our take on select recent news and reports plus highlight other noteworthy news and content. For access to exclusive paid content and a highly-engaged network of 5,500+ other folks in healthcare, join the HTN Community.

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Q3 EARNINGS SEASON

CVS hits the reset button during earnings, indicating 2025 will be a transition year and Aetna could lose money in 2024

CVS’s new CEO, David Joyner, hosted his first earnings call, and laid new groundwork for the organization moving forward. CVS is positioning 2025 as a transition year for the organization, which will set it up for long-term growth in the future. Two new leaders were announced, including Steve Nelson, former CEO of UnitedHealthcare, who joined the organization as the president of Aetna. Given the magnitude of the miss in Aetna, it is understandable why they moved quickly here to bring in someone from outside the organization.

CVS sees two of its three business segments performing consistently with expectations, with Aetna sticking out as the outlier in its poor performance for the year. This quote from the earnings call sums up the challenging year that Aetna has had well:

It’s remarkable to see how the insurance business is failing in almost every key line of business, with negative margins across Medicare, Medicaid, and the ACA business. It’s also remarkable to see CVS share that Aetna could generate a negative operating margin on the entire business in 2024. In 2023, Aetna generated $5.5 billion in operating profits. Keep in mind that CVS is sharing this with analysts in early November, meaning it must view it as a likely scenario, but it doesn’t yet have enough confidence in how the next two months play out to say it definitively or give guidance for the full year.

There was some discussion in the opening remarks about how Aetna’s core problem in Medicare Advantage was its 2023 bid pricing, which will surprise nobody reading this. What is a bit more surprising is hearing Aetna needing to make changes like this: “Our risk management processes have been restructured to pull underwriting and pricing authority out of the business units and into the financial chain. This realignment will help improve transparency and accountability as we execute our margin recovery and drive profitable growth.” It sounds like a lot of work is underway at Aetna, including some very basic blocking-and-tackling to ensure they’re getting things like pricing right.

It’s all a good reminder of how razor-thin operating margins are for payors and the importance of getting pricing right. Aetna was making these pricing decisions about how to price its 2024 book over a year ago, and those decisions are still weighing down the business today. You’re talking about companies that generate 3-5% margins in good years, and as CVS demonstrates, in bad years, can generate operating margin losses in excess of -10% with a multi-year climb back to profitability. CVS is now on that journey back from a challenging 2024.

Read the earnings transcript and key financial highlights (fellow HTNer Bishoy Saleeb pulled together this document for the community — thanks Bishoy!)

HOSPITAL ACQUISITIONS

HATCo and Summa Health sign the definitive merger agreement

HATCo will purchase Summa for $485 million. HATCo will also commit to $350 million in capital funding over five years and make a $200 million investment to drive innovation over the next seven years. As a result of the transaction, Summa will be able to eliminate $850 million in debt. Summa had $937 million of free cash on its balance sheet in mid-October.

This quote from the Akron Beacon Journal provides an indication of what those innovation dollars are going toward:

It’s interesting to think about the interests of the various parties in a transaction like this. For Summa, it’s understandable as they get a sizable capital infusion that puts the organization on surer financial footing. For the General Catalyst portfolio, it seems like a huge boon as it has an incumbent partner to work with (which clearly appears to be part of Taneja’s thesis in the space). For HATCo, it remains a little more opaque to me. Presumably, whoever is providing the $1 billion in total capital commitment for HATCo to provide to Summa over the next seven years will want to see a return on that investment. Yet the decades-long view that HACo leaders discuss indicates that HATCo isn’t too worried about demonstrating an ROI in the near term. That seems like an awful lot of capital to tie up without a clear view of how it will generate returns for the entities putting up that capital.

Read the press release
Read the Akron Beacon Journal report

Q3 EARNINGS SEASON

Agilon and Privia’s earnings highlight the differing strategies for provider enablers

Looking at the stock price performance after earnings this week tells you all you need to know about the relative performance of agilon and Privia in the quarter: agilon is down 31% for the week while Privia is up 13%. Over the last year, agilon stock is now down 85%, while Privia is roughly flat.

Privia’s stance that VBC contracts are “called risk for a reason” and focus on FFS contracts with a deliberate entry into VBC contracts is clearly the winning financial strategy today as payors and providers grapple with higher medical spending. Even agilon, which historically has focused on global cap agreements, shared that they’re now discussing “glide path to risk” relationships with upside-only contracts in year 1 markets for providers. More and more, it seems like the market is moving away from global capitation deals (see the Astrana earnings quote below as another example here).

More details on the performance of each company below.

✍️ Going Deeper

agilon shares were down on Friday after another poor quarter during which they experienced a negative gross margin of $58 million — a loss of $36 per member per month. This loss was a steep decline from the $111 million positive gross margin it posted for the same quarter in 2023. As a result of the loss, agilon is reducing its medical margin target for 2024 to $225 million, down from a previous target of $400 million. Here is the bridge of what has changed since August:

agilon shared that it is taking three actions to stem the losses:

• exiting two partnerships with providers and 10% of its payor contracts (as well as not renewing several other unprofitable payor contracts)

• reducing exposure to risk that is outside agilon’s direct control (specifically. Part D risk)

• delaying onboarding of a 2025 physician partner due to the local payor environment; specifically, they’re looking for improved data exchange with three regional payors in that market

Despite the losses, agilon believes it has a solid underlying business, citing a couple of factors — 80% of year 1+ partners are generating positive adj EBITDA on a market basis, the 2024 class is performing above the high end of historical year 1 performance, payors have high interest in moving lives to agilon, and its performance on Stars scores.

agilon’s experience over the year provides good insight into the challenges of managing full-risk contracts. agilon has had a tough stretch, going back to January when it had to revise down its 2023 medical margin substantially. It’s no surprise to see agilon walking back the global cap model and talking more about a “glide path” to risk in this earnings call. It’ll be interesting to keep an eye on how this pivot impacts their relationships with providers (and payors) over time.

Read aglion’s Q3 earnings press release
See the agilon Q3 earnings slides

On the other end of the spectrum, Privia had a solid quarter. It shared that it will be at or above the high end of guidance for all of its key business metrics for the year. The slide below indicates the consistent growth they’ve had:

Privia also announced it is entering the Indiana market with a multi-specialty practice that has 35+ providers as its anchor partner in the state. Given the overall solid performance during the quarter, analysts focused a number of questions on this Indiana partnership and Privia’s expansion strategy moving forward, which has slowed down recently. A couple points on the expansion strategy:

• Privia mentioned that the new Indiana partnership is a typical one for them — they’ve acquired the tax ID, they own 100% of the medical group, an ACO that will be established, and a MSO entity. Privia anticipates being “cash flow buyers” and that as the market disruption continues, there will be opportunities to flip provider groups that are looking for a new home.

• An interesting question was asked about Privia’s health system partnerships and how that strategy is playing out in Florida, Ohio, and North Carolina. Privia answered that the model should work, but also that they “don’t think that every partnership will go to plan. There’ll be some great ones over the years. There’ll be some that won’t pan out. And I don’t think it’s for everybody.” It’s not exactly a ringing endorsement of that model and hints at some potential challenges in working with health systems.

All-in-all, Privia leadership has to be feeling pretty good right now about its position that going all in on global cap contracts is not the right approach and that “it’s called risk for a reason”.

Read Privia’s Q3 earnings transcript
Read Privia’s Q3 earnings press release

Q3 EARNINGS SEASON

Oscar’s positive outlook for the exchanges

Oscar’s stock dropped 25% this week, seemingly in part over political concerns related to the election and its implications for the future of the ACA. Despite the potential for macro headwinds as Trump comes back into office, Oscar seems confident that the exchanges are well-positioned moving forward, and that while subsidies might change, they’re not going away. Regardless, Oscar should be in a good position to exceed expectations as its future guidance assumes no extension to subsidies.

Oscar is on track to generate positive net income this year and hit its target of 20% revenue CAGR and 5% operating margin by 2027. It’s worth pausing on that performance for a second — gone are the days of questioning whether Oscar could ever reach profitability. Oscar’s execution over the past few years has been impressive, particularly in a market where you have a peer like CVS indicating that its operating margin losses could approach double digits on the individual business.

Read the Oscar Q3 earnings release
Read the Oscar Q3 earnings transcript

✍️ Going Deeper

Here are a couple of the more interesting strategic insights Oscar shared on the earnings call:

• The discussion in Q&A of Oscar’s new Guided Care HMO product launch was interesting - Oscar is attempting to leverage its tech platform to build a “frictionless” HMO via a better digital experience that solves the traditional member pain points that HMOs introduce. Bertolini shared that Oscar is launching it in a few markets this year and intends to use it to re-enter the California market. Oscar exited the California market for the 2024 plan year as it struggled to get MLRs in the market below 100%, but at the time, indicated its interest in re-entering California in a more financially sustainable way. So it seems this product is designed to accomplish just that — better managing medical spending while maintaining a good member experience. This seems like an important product launch for Oscar moving forward.

• Oscar saw SEP enrollment tapering off, adding only 73,000 members in the quarter via SEP as Medicaid redeterminations slowed down. The membership influx is driving higher revenue on the year, but also lower profitability as SEP members are around an 90% MLR while the entire book of business was at 84.6% MLR. This book will be a tailwind for Oscar in 2025 as risk adjustment catches up.

• Oscar currently has 3,700 members enrolled in ICHRA.

• A curious omission from the earnings call: I believe there was no discussion of +Oscar on the earnings call this quarter. It seems like there generally is an update provided on that business (i.e. last quarter it was mentioned in the opening remarks) so it was curious to see that there was no mention of it here.

Q3 EARNINGS SEASON

A roundup of the other interesting Q3 earnings calls this week

Astrana stock dropped 20% despite generally solid performance

• Astrana dropped the high end of its EBITDA guidance for the year to account for CHS as it completed the acquisition in October. CHS will add $200 million of revenue, but cause a $4 million EBITDA loss in Q4. Astrana is seeing MLR pressure in the Medicaid business, similar to other payors, but noted it feels good about trend in the Medicare Advantage and commercial business. This was a particularly interesting analyst comment to see in the Astrana call:

  It’s interesting to see that sentiment expressed here and think about how that relates to both the broader market, and also the strategic shift we’re seeing other MSOs like Privia and agilon make. Astrana’s answer to the question sounded similar — they’re open to moving to full-risk contracts but want to ensure they have the guardrails in place.

  Astrana also announced the acquisition of Prospect Health for $745 million, which includes a California health plan, medical groups in four states, an MSO, a pharmacy business, and an acute care facility. Prospects footprint, existing VBC contracts, and MSO business were cited as the key strategic reasons for the deal. Prospect will generate $1.2 billion of revenue and $80 million of adj EBITDA in 2024.

  Read the Prospect Health acquisition press release
  See the Prospect Health acquisition slides
  Read the Astrana Q3 earnings press release

Clover’s stock dropped 10% despite what appeared to be a strong earnings report

• Clover is outperforming on medical spending for the year, and it increased its Adjusted EBITDA target for 2024 as a result, even while increasing SG&A spending substantially in Q4. The increased SG&A is focused on marketing dollars to drive growth as Clover leans back into growth as a Medicare Advantage plan, and is investing an extra $15 to $20 million in Q4 to drive membership growth. In addition to the insurance business growth, Clover expects to sign up more clients to Counterpart Health, its platform for the Clover Assistant, in 2025 and 2026. Clover shared that interest in Counterpart is being driven by Clover’s success with Stars and HEDIS measures while on a PPO network, and that as more organizations feel the impact in 2026 and 2027 it will lead to more adoption of Counterpart.
  
  Clover’s CEO Andrew Toy succinctly articulated the current strategy for the business: “we plan to grow our own MA plans significantly and profitably within our current markets, and we plan to also expand to new geographies. For markets where we don't have an MA plan, Counterpart Health allows us to bring in our model of Medicare Advantage managed care via partnerships with local providers and plans.” It’s interesting to see them reprioritize the growth of the MA plan as the key strategic focus, which is perhaps not surprising given the business's recent positive performance.
  Read Clover’s Q3 earnings transcript
  Read Clover’s Q3 earnings press release
  See Clover’s Q3 earnings slides

Evolent Health drops 45% on earnings miss driven by higher medical spending in Q3

• Evolent’s stock drop was driven by challenges in managing specialty spend in its Performance Suite product, where it reported $42 million in higher-than-expected medical spend losses. $24 million of those costs were associated with prior quarters, and $18 million was associated with accelerated spend in August and September.

  
  Evolent is going back to its payor partners to negotiate higher rates as a result — in August, they had negotiated an incremental $35 million in rates, which they thought would be enough to cover the medical expense spike. However they now are seeking an additional $100 million in rate increases for 2025, which gives a sense of how much medical spend has ballooned. Evolent noted its contracts with a a small number of customers have MLRs in excess of 100%, but then during the analyst Q&A noted that those customers represent 40% to 50% of Evolent’s performance suite revenue, which gives a sense of how big the challenge is here. The earnings call does a nice job going into some of the details around what Evolent is seeing, particularly in the oncology space, how it is attempting to manage spend, and some of the mechanics of how it is renegotiating payor contracts.

  
  While the big news was the miss during the quarter, Evolent also announced six new revenue agreements with different payors, the largest they’ve ever had in a quarter. Payor demand for managing specialty care is there. One of Evolent’s deals is with a BCBS customer selling into a 250k life employer, Evolent’s first employer arrangement.
  Read the Evolent Q3 earnings release
  Read the Evolent Q3 earnings transcript
  

GLP-1s

KFF Data on Medicaid prescriptions of GLP-1s

An interesting look from KFF on GLP-1s in Medicaid populations and the rising number of prescriptions and gross spending in the market - which almost doubled in 2023, growing to $3.9 billion, up from $1.9 billion in 2022.

Read the KFF report

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