Would it blow your mind if only five startup health plans interested in Medicare Advantage (MA) have collectively raised over $3.9 billion in private funding to-date? Well, readers, that is the reality. Now I know there are some skeptics out in the healthcare ecosystem, so I’m here to break down some of the investment thesis. Not going to necessarily defend, but explain some reasons why you should love and hate these investments. Let’s start with who raised these mind-boggling sums of money. The five startups are Oscar Health, Bright Health, Clover Health, Devoted Health, and Alignment Healthcare.

• Oscar Health has raised $1.3 billion
• Bright Health has raised $1.1 billion
• Clover Health has raised $925 million
• Devoted Health has raised $362 million
• Alignment Healthcare has raised $240 million

I think it’s safe to say that the MA insurance market (also known as Medicare Part C) has captured the imagination of the venture capital and private equity community. The changing demographic trends of an aging baby boomer population, the increased selection of MA plans versus traditional Medicare fee-for-service (FFS), and the opportunity of technology-first MA startup plans to better reduce administrative fees (“Administrative Loss Ratio” or “ALR”) and control medical spend (“Medical Loss Ratio” or “MLR”) seems too good to pass up. If you were going to start a health plan, of all the lines of business you could be focused on, MA has highest profit margins, growing population, and better potential to impact patient spend and manage chronic diseases. It is certainly harder than writing the previous statement, but there are some real benefits versus the traditional commercial or Medicaid managed care.

To put some perspective on the current market opportunity, total Medicare spending grew to $750 billion in 2018. Likely higher now, we just haven’t received the official CMS results yet for 2019. Today, there are ~61 million Americans enrolled in Medicare coverage, however only approximately one-third are enrolled in MA plans. Although MA enrollment has grown significantly from 11.1 million in 2010 to 22.0 million in 2019, most experts believe we’re still in the early-to-middle innings. Nearly everyone agrees that the MA penetration rate (i.e., % of the total Medicare population is enrolled in MA plans) will rise higher over the next decade. The Congressional Budget Office (CBO) projects that 47% of the population will be enrolled in MA by 2029. A consulting firm called LEK published a more investor-friendly estimate, declaring the potential for 70% of the Medicare population to be in MA between 2030 and 2040.

Now just because a startup mentions a market opportunity worth hundreds of billions of dollars, that does not equate to guaranteed funding and success. The founding teams at each of the five startup health plans are equally impressive and visionary. Let’s take Devoted Health for example, who has three founders, Ed Park, Todd Park, and Jeremy Delinsky. Todd was the co-founder of Castlight Health and Athenahealth, and the former Chief Technology Officer (CTO) of United States who is widely credited for helping save healthcare.gov. Not to be outdone, Ed was the former CTO, COO, and President of Services at Athenahealth and Jeremy is the former Chief Product Officer and CTO of Athenahealth and the former CTO of Wayfair (furniture and home goods company now worse $10 billion market cap). If we quickly switch to Bright Health, you have Bob Sheehy at the top of the helm, who literally served as the former CEO of UnitedHealthcare, the largest commercial plan in the country, along with two other extremely talented and successful entrepreneur co-founders, Tom Validivia, MD and Kyle Rolfling. The point being, these people have walked the walk and talked the talk in healthcare at the highest levels.

Additionally, it would be deceiving to believe the monthly burn rates or company expenditures would match these hundreds of millions or billions of dollars of funding. Part of the reason why these health plans have raised so much money is due to a National Association of Insurance Commissioners (NAIC) concept called risk-based capital (RBC). Basically, all health plans (including MA) must maintain a certain balance of reserves to cover unexpected losses or actuarial risk. The NAIC and subsequent insurance commissioners generally set a threshold called the authorized control level, in which any plan that drops below that dollar amount based on risk and size of plan, can be subject to change of control. These MA startups must effectively keep a rainy-day fund to stay in business. Once the plans achieve significant scale and begin to generate positive cash flow, the RBC will accumulate in the plan, be reinvested to fuel expansion, or distributed to the owners as dividends.

One question that is often raised in skepticism is why a senior would actually select a MA startup versus the range of MA competitors or sticking with the traditional Medicare FFS program? The first question is pretty complicated, because the reality of MA is that everyone who runs a health plan is also focused on targeting the Medicare population. To give you a perspective, the top 7 largest MA plans control 77% of the total January 2020 MA enrollment. The combined market cap and resources shared between these national healthcare organizations is enormous. You can see the actual breakdown of market share below.

• UnitedHealthcare: 26% market share
• Humana: 18% market share
• Aetna: 10% market share
• BlueCross BlueShield Plans (incl. Anthem): 10% market share
• Kaiser Health Plan: 7% market share
• WellCare / Centene: 4% market share
• Cigna: 2% market share

To put that in perspective, the remaining 284 MA plans split 23% of the market. If you’re talking about brand recognition and scale necessary to negotiate provider rates and vendor fees, and stand out from the crowd in a sea of options, it is daunting task to compete with the large MA plans. In addition, the large national MA players have large balance sheets allowing them to acquire small-to-medium size plans at higher short-term multiples to gain further market share and eliminate competition. Among the 23% of the market not-owned by the “big 7” plans, you can include the five MA startups mentioned earlier in this blog. According to the January 2020 MA enrollment files, the combined MA enrollment of the startups who have raised nearly $4 billion represents 0.55% of the current market. See below for the breakdown.

• Alignment Healthcare: 59.5K MA lives
• Clover Health: 52.5K MA lives
• Devoted Health: 15.1K MA lives
• Bright Health: 5.3K MA lives
• Oscar Health (also known as Mulberry Health): 1.4K lives

A few important points to mention before we go on. First, not every startup plan above exclusively focuses on the MA market to achieve scale. For example, I believe Bright Health and Oscar Health also focus on attracting ACA exchange membership to initially broaden reach and increase brand recognition. Second, it is absolutely critical to remember that the MA Open Enrollment Period began January 1^stand ends March 31^st. Therefore, these enrollment numbers will change by the end of spring 2020. I feel sorry for anyone who turns on the television in targeted markets over the next few months. Third, to accelerate growth, I believe we will these well-funded startups begin to deploy their capital to acquire small existing plans in the market. Earlier this month Bright Health announced the acquisition of the Medicare-focused California plan, Brand New Day (owned by Universal Care, Inc.), with 44K MA lives across 13 counties in the sunshine state.

In terms of my second question about differentiators for the startup plans versus traditional MA health plan options, they can be boiled down into provider networks, consumer engagement, and technology-enabled marketing. If you believe that the future of the world is based on value-based care and direct provider-payer integration, some of the MA startups focus on partnering with local providers to improve brand and manage MLR. In a recent announcement, Bright Health will be partnering with AdventHealth, Ascension Health, and Tenet Health in Florida, as a part of their Care Partner Network, to help drive provider change and assist with enrollment. The points about consumer engagement or marketing are factors related to the DNA of the founders as a group of highly-skilled technologists looking to build a tech-enabled health plan from day one.

When it comes to adding lives, the reality is that all MA plans will receive bulk of their enrollment from existing brokers and agents who sell policies to Medicare beneficiaries on behalf of the companies. Sometimes these individuals are employees of the contracted company and other times they are independent consultants. As a guiding principal, brokers usually receive the highest payment for initial enrollment of a member, and then a smaller amount any subsequent renewals. The actual payment varies by the plan. In the CY2020 CMS Agent Broker Compensation Data, you are able to view the high and low compensation ranges by state, plan, and contract number. The highest standard fee amount noted is $636 for an initial enrollment and $318 for a renewal. Majority of plans also provide a $100 referral fee. This is the proverbial “pay-to-play” example and the higher the fee you offer, the more likely your plan will be promoted by local professionals. If we dig into the specific MA startups, here are the broker payments for an initial confirmed enrollment.

• Clover Health: $510-$636 for initial enrollment
• Devoted Health: $510 for initial enrollment
• Bright Health: $510 for initial enrollment
• Alignment Healthcare: $636 for initial enrollment
• Oscar Health: $510 for initial enrollment

Clearly there is an argument that a rising tide will lift all boats and these MA startups will benefit from the changing demographics. In addition, seniors have continually been swayed to convert from traditional Medicare FFS to MA given the offering of supplemental benefits like dental and transportation and plan options with $0 premiums. The big question is if you see the glass half full or empty? Is the task of competing with the dominant incumbents too great, or is the sheer fact that MA startups have so much room to grow enrollment to fair market share values too great to pass up? At the end of the day, these MA startups will own the initial premium dollar and have the flexibility to pay for services at the rate and volume they believe will reduce MLR and ALR spend. This provides a whole host of issues, but not the ones majority of healthcare technology startups face in coming years related to reimbursement. These companies, along with many others, will be deciding the fate of who gets paid, and therefore, who survives.