Ari Gottlieb’s Post

Good reporting from Noah Tong on what is the least surprising story of the year - Bright Health needs more money after saying they didn't and majority shareholder (and $1 billion+ investor) New Enterprise Associates (NEA) continues to throw away their investors' capital on a worthless, failed business. Most surprising, NeueHealth said they need the money so urgently they don't have time for a shareholder vote on the warrants for 10% more of the company they gave to NEA, even though they have a shareholder meeting scheduled in three weeks. I guess they really needed that $20 million quickly, despite not mentioning it with their Q4 financial report under a month ago (after reporting having $90 million in unrestricted cash). The big question is why - and I have three hypotheses: 1) End of quarter cash bonus for Bright's CEO, since the 10-K said "the loss of his contributions...could significantly delay or prevent the achievement of our strategic objectives." Ah, ok 2) Molina Healthcare is asking for maybe $80 million in capital adjustments post sale of the MA plans, as their financial performance continues to be very, very bad 3) Florida Office of Insurance Regulation somehow has leverage and is asking for capital since the local plan is about to run out of cash to pay still-outstanding claims (less likely) My other key question is why CalSTRS, the California State Teachers Retirement System, didn't continue to participate to bail out NEA as they have at least twice in the past. The CalSTRS/NEA/Bright story is much more complicated and emerging than one would generally assume...more to come Unfortunately, though, for the bystander health plans that are owed nearly $400 million by Bright this move reflects and even further diminished chance of recovery. At least Centers for Medicare & Medicaid Services can continue to collect interest payments on the health plans' money

At least they're consistent...Despite the Neue name, Bright Health's Board continues to pay-for-failure - millions in cash bonuses, including $2 million to Bright's CEO, while also disclosing that it needs additional capital (presumably to fund more than next year's bonuses?) and is "actively engaged" to find it. I'm all in favor of pay-for-performance but I really wonder what "performance metrics" were achieved at "100% of target." This is a leadership that has overseen and orchestrated the destruction of billions in value, was found to have acted so improperly - at the expense of members- in Nebraska they revoked their license to operate, and still owes nearly $400 million to other health plans via the Federal Government. I'm sure they are searching hard to find the money they need. I can help out - call New Enterprise Associates (NEA) and CalSTRS since they're the only investors uninformed enough to continue funding this. NEA, NeueHealth's majority shareholder with over $1 billion invested, controls the Compensation Committee. So I guess they're happy with the performance, as ultimately they are awarding their investors' money. But Centers for Medicare & Medicaid Services needs to answer why they didn't seek out any protections against cash bonuses when they stretched federal law to allow for the interest-only repayment agreements. Since ultimately that money could have been used to partially repay the obligations - due March 2025 - that the Company now admits it does not have sufficient capital to make. It seems we finally know what Bright's leadership is best at - being paid-for-failure and needing capital after claiming to be fully funded.

Clover Health is scheduled to release earnings Tuesday and I’m really interested to see what they have to say. My guess is they’ll post very positive results in the Medicare Advantage business, while also announcing a dilutive capital raise. Clover's MA plan had a solid year and achieved overall profitability, quite the turnaround, with a very good Medical Loss Ratio in the low-80s. It is the rest of the business, including the Clover Assistant technology piece and the exited ACO REACH driving the losses. But the most immediate attention item is likely Clover’s need for a capital infusion. Much like that other failed zombie company with a neue name that no one cares about (at least until they have to pay Molina Healthcare tens of millions in post-purchase capital adjustments), Clover has been leveraging the timing of cash from ACO REACH to fund parent company cash. Given they exited the program in December, the need for near-term capital is real. With no debt and a seemingly viable Medicare Advantage business, Clover should have the ability to raise such capital. I suspect the significant weakness in the stock –trading below 80 cents – is likely due to the company shopping a convertible offering and the expected dilution from it. We’ll learn more tomorrow about the rest of the business, including hopefully an update on Clover Living, the company’s award winning semi-periodic print magazine that may have last published a year ago. With a viable and profitable MA plan, to really maximize enterprise value, I would have kept the magazine going and exited Clover Assistant

Molina Healthcare announced today a reduction in the price of Bright Health's California Medicare Advantage plans, something I've been expecting since basically the day they announced the transaction. I think the main takeaway is this makes what already was an incredibly narrow path for Bright to remain solvent even more narrow and I'm really curious how regulators in Colorado and Florida Office of Insurance Regulation respond. I was first a bit surprised Molina "only" cut $100 million, but it makes sense and I don't think they could go lower. When this closes in two weeks, Bright is not receiving anywhere near the $500 million purchase price in cash; I think they will likely get $310 to $350 million. Unrelatedly, J.P. Morgan is owed $308 million in February. Here's why: Molina is holding $110 million in escrow, $100M gets released later in 2024 if - and only if- the Brand New Day Star rating improves or they can merge the two contracts. Bright is also on the hook for funding transaction costs (let's say $10M) any capital deficits in the entities (I'm a bit unclear on the basis, but they are probably $45-70M below) So what happens absent intervention? Bright pays off JPMorgan and the rest of the credit facility, and maybe some of majority shareholder New Enterprise Associates (NEA) $1 billion+ investment, plus I'm sure some cash bonuses to management for successfully completing the MA sale and business transformation. And other health plans owed $380 million wait (hopefully they are multitasking or doing other things since the wait is going to be very, very long) I do think we'll see some movement in Texas, however. After learning more, I believe Texas Department of Insurance was smart and right in putting Bright's Texas subsidiary in liquidation, even if it confused CMS (more soon on that)...Bright's subsidiary NeueHealth owed the entity over $125 million, so the move likely enables the receiver to sue Bright's continuing business to recover for Texas health plans. So we'll see what happens next but I think we're getting closer to Bright going dark, finding myself with a lot more free time...

Last week, a Texas judge issued an order granting Texas Department of Insurance's seizure and liquidation of Bright Health's Texas subsidiary. Originally filed on November 15 with Bright’s consent (and still not disclosed by Bright), the event constituted an immediate default on Bright’s $90 million statutorily-suspect interest-only repayment plan with Centers for Medicare & Medicaid Services (so that worked out well…) If CMS follows the rules, they should have turned the debt over to U.S. Department of the Treasury for collection, with Treasury adding fees and penalties that warrant a complaint to CFPB for predatory lending. However, and this is significant, due to the liquidation collection is enjoined, and likely will take years. As a reminder, this isn’t the government’s money, it is owed to other Texas health plans including Blue Cross Blue Shield of Texas, Centene Corporation, Molina Healthcare, and Community Health Choice. We don’t know why Texas did this – and TDI is “not going to comment on the receivership proceedings.” As of Friday, Florida Office of Insurance Regulation has not taken any new actions and no petitions have been filed by Colorado in Denver County Court. But TDI isn’t stupid and this action effectively moves Texas to the back of the line to ever recover from Bright. If I had to speculate – and this is complete speculation – something changed their view on Bright's ability to ultimately pay. My guess is Molina reducing the purchase price of the MA plans, with $8 million more lost in October, likely making $100 million less in 2023 than projected at the time of the sale. (Molina not renegotiating would almost be negligent.) In this scenario, Texas acceded to reality. Other states have good intentions, and I assume they believe they can maximize recovery for stakeholders by letting things play out, even if it means subjugating their state’s interests to private investors like J.P. Morgan and $1 billion investor and majority shareholder, New Enterprise Associates (NEA). And so they wait, taking what they believe is the least bad of a set of bad options. One of my most significant learnings from following this and the Friday Health Plans debacle is this bias to always pick the least bad option and hope things don’t get worse, even when it is clear they will. When they do, they select the least bad option from a new set of worse choices. This isn’t just regulators, it likely also applies to groups like NEA, whose lead on the Bright investment was involved in getting CalSTRS to continue to invest (I have emails). But, as I’ve said for 18 months and despite Bright’s constant claims to the contrary, this isn’t going to work out well. More people are going to continue to be harmed – for a good example, read Christopher Snowbeck’s reporting on Nebraska finding over 20,000 willful violations of not paying claims. Others would be well served to follow Texas’ lead and just be done with it.

While I've been working to confirm rumors around Bright Health which may have to do with Texas seizing the plan (confirmed) and everything falling apart, Clover Health has significant news that furthers the allegation they may be trying to run a viable business after all... Clover announced this morning they are exiting their consistently loss-making ACO REACH business. This is yet another in a series of wise moves, including outsourcing the Medicare Advantage plan administration to UST HealthProof to save $30 million and focusing on actually operating a well-run and profitable MA plan (which they are actually doing this year). Now if they were to shut down the Clover Assistant and just focus on the MA plan and semi-quarterly, critically acclaimed Clover Living print magazine, they might actually have something of value that another company would be interested in buying. It won't be worth billions of dollars, but it certainly is better than the alternative... (Note: I edited my earlier post about rumors I was hearing about personnel changes at Bright after Bright stated the rumors were not happening.)

Well, that was quick (especially for government)! Less than 24 hours after calling out concerns with Centers for Medicare & Medicaid Services offering Bright Health a below-market loan with other health plans’ money, CMS released details (and questions I previously asked about failed Friday Health Plans). Link in comments – and sorry CMS for making you work late last night! First, the magnitude of this issue is massive - $1.1 billion expected and owed to other companies was not paid. This highlights the need for significant changes to how the risk adjustment functions. But turning back to Bright, it turns out the arrangement is much more favorable than I thought. In Florida, Bright only has to pay $1,000 per month (~50% of the average one-bedroom apartment rent in Florida), not even the $2 million interest-only obligation, until maturity. I sincerely appreciate CMS’ response and attempt to publicly add to disclosure. But I honestly still don’t understand why they made this deal, which disadvantages everyone aside from CMS and Bright. And if they do have a good reason, why did they not add protections or terms or at least charge the same rate as Bright’s controlling shareholder New Enterprise Associates (NEA)?  Did the government just make a bad deal? I’ve posed several additional questions to CMS, which I’ll summarize here and update with any response (and sorry if I’ve made some CMS folks work this weekend!): * The stated reason for the repayment plan strains credulity. All entities are currently in wind-down and will not have any additional capital absent an infusion from the parent, so the notion it was done to maximize the initial payment does not make sense. What other factors went into the determination? Why does Bright not need to make any principal payments prior to the end of the term?   * Bright is selling a significant asset - why did CMS not condition repayment on the proceeds from that asset sale or assert priority to J.P. Morgan, New Enterprise Associates (NEA), and others?   *Bright has a track-record of pay-for-failure, with millions in cash bonuses paid to executives as the business failed. Why did CMS not prevent paying cash bonuses while they are in default?   * The cited regulation permits adjusting the interest rate to protect the interests of the United States. Bright's controlling shareholder gave Bright a loan at 15% interest plus warrants for ~20% of the company. Why is a below-market, unsecured rate of 11.5% appropriate?   * 45 CFR § 30 permit withholding other payments. Bright currently has Medicare Advantage and ACO Reach programs - why did CMS not withhold payments?   * People have pointed out in the comments that connections exist between former CMS employees and Bright? In light of the bad deal, does CMS have any comment on the potential for the appearance of impropriety?   

Sometimes when you answer one question, it just leads to more important unanswered questions. Last month when Bright Health announced they had entered into an 18-month repayment plan with Centers for Medicare & Medicaid Services for their $380 million default on risk adjustment payments, I asked how could they possibly make the $30 million monthly payments? Well, it turns out they don’t need to, as CMS gave them an interest-only loan – at a lower rate than their largest investor – using other health plan’s money. All while the government (literally) pockets the interest payments. And I just can’t figure out why. I’ve been trying to get more details on the arrangement for weeks now, but I don’t think CMS wanted this out there…and they’ve gone to extraordinary lengths to keep this from public view. I’ve asked simple questions to CMS since September – like “what are the criteria that the agreements claimed Bright met” and “what statutory basis does CMS have?” And I keep being told they are looking into it, which is interesting since they don’t seem to be complicated questions and the person who entered into the agreement has been on the email chain. My guess is they are perpetually “looking into it” because they don’t exist, especially after learning others have questioned CMS’ statutory authority to do this deal. I tried to obtain further details of the Texas repayment plan under the Texas Public Information Act. CMS filed a formal objection to the release with the Texas Attorney General, citing numerous arguments including nonsensically claiming Texas releasing documents would impact CMS’ federal FOIA response and asserting federal FOIA provisions to block Texas state law. Since we all know that Texas is the place to federally infringe on state sovereignty… But I got the details that CMS seems to not want out there from other states, which shows the only payments Bright needs to make through March 2025 are $4 million a month in interest payments. And even if they sell the California MA asset, they don’t have to pay the Government back until 2025 so it is low-cost capital for Bright. This isn’t the Government’s money; it belongs to other health plans that were counting on it. Large plans like Florida Blue, Blue Cross and Blue Shield of Illinois, and Centene Corporation and small plans like Denver Health and Sendero Health Plans that cannot afford to wait 18 months because the government gave Bright a deal that benefits only CMS and Bright. So, I ask why…why did CMS do this deal that may have not even been permissible by statute, that disadvantages other health plans, states, and ultimately individual Americans, all to help a failing company? And I just can’t come up with any logical, ethical reason for it

It was easy to miss Oscar Health successfully accomplishing their MA strategy - Medicare Abandonment - with the exit in 2024 from the one remaining county in Florida. To be fair, the move makes sense given the high Medicare-specific administrative cost to support a small part of the business that was never able to scale and had low Star ratings. But it is quite the change from trumpeting the (largely Medicare Advantage) "massive opportunity" at IPO. I haven't commented as much about Oscar lately as they have benefited in 2023 from tempered growth and a major interest rate-driven tailwind on their large risk adjustment-fueled balance sheet. They will likely continue to do well for the balance of this year, exceeding expectations. But I sense next year will be different as they return to the playbook of years past, because that worked so well...

Is competence underrated?   I've come to believe the similarities between the collective $20 billion failures of Babylon, Bright Health, and Cano Health, and the differences between successful health services businesses is a lack of competence.   Babylon was a British telehealth business that expanded into the US, buying IPAs and launching a text-based, risk-bearing offering. They claimed to be able to lower total healthcare costs by 20%+ in the US through text messaging, which is nonsensical, and appear to have bought the only worthless IPAs in California. Babylon lost hundreds of millions and had two bankruptcy-linked offers fall through, ultimately shutting down in the US, while the UK assets sold for close to $0. They were very good at writing over the top press releases, though.    Bright raised/borrowed $4.2 billion ($1.4 billion from New Enterprise Associates (NEA) and Bessemer Venture Partners- fair to question their competence too) and burned through almost all of it chasing irrational growth. Aside from a fundamentally bad business model, Bright has been an operational mess, struggling to do the basics, like paying bills. Or processing claims. Or pricing appropriately. Or estimating capital needs. I’ll stop now.   Just one example of their incompetence - Bright submitted the very detailed deck they used to sell the CA MA plans as part of regulatory review but failed to request confidentiality, only doing so after the regulator prompted. When they finally did, they stated "competitors could destroy the plan with this info." I got a copy in the intervening period, so we'll see about that...   Cano quickly expanded as a value-based provider, only to have governance turmoil and financial issues. They failed to manage case effectively, lost $300 million last quarter, and are now selling off clinics for next to nothing or just shutting them down.    It isn't just failures, though. With sound business models and competent leadership, it is possible to build solidly profitable businesses.   ApolloMed, for instance, continues to competently and profitably run a scaled risk-bearing provider business, not to mention they were a far better operator of the MA plan they sold to Bright.    Grow Therapy identified a clear market opportunity in the behavioral health space and built a business around it. They continue to grow (brand-aligned) rapidly with consistent profitability.   And, take note Babylon, Curative is proof that even the British can succeed in the US. I think one of the most under-appreciated stories of the pandemic is the incredible success Curative was able to achieve with testing. They've now moved into health insurance with a unique model, a strong grasp of the business , and willingness to experiment.   So instead of hype and large addressable markets and "technology!," focusing on competence seems like the way to go.