Thanks, everybody. I'm Dave Windley with Jefferies Healthcare Equity Research. We're here in Nashville at our Healthcare Services and Technology Conference. Appreciate your attention if you're listening live, here in the room live or listening live. We also, I told Clay that we're competing against a CMS CIO topic with AI in the title. That probably attracted some ears and eyeballs. I'm, again, Dave Windley. I'm here with Clay Thornton, the Interim Chief Financial Officer for Clover Health. We're going to talk a little bit about MA over the next 30 minutes or so. Clay, I'm going to start you off with just Clover does have a different model. You're an emerging player in Medicare Advantage, and just talk to us to start with, level set on Clover's differentiation and how you guys are trying to grow.
Yeah, we've definitely taken a contrarian approach to the MA business in a number of ways. First off is we've spent years developing our own proprietary platform called the Clover System, which really serves as our physician enablement platform that engages both the in-network physicians in our network, as well as powers our own employed clinicians that are seeing our members. Ultimately, everything starts with that technology platform. From there, where we get really interesting, is the actual reach of the platform itself. In any given year, we're reaching two-thirds of our members with at least one visit that's powered by our technology. Lastly, where we really differentiate just from an economics approach standpoint, is that we take full risk on our entire population. We don't delegate risk downstream to value-based providers.
We are holding 100% of the risk on our population, which creates interesting dynamics, particularly with a company like ours that's growing at the rate we're growing. Happy to get into that later, Dave.
Yeah. We may come back to that. At a high level, let's start kind of MA level profitability and margin sustainability. The basic question here is the industry through the worst of this? Over the last few years we've dealt with V28, we've been through an elevated utilization cycle, Part D redesign, stars volatility. There's a lot of things that have gone on. Are we through the worst of it?
We don't have a crystal ball, so it's tough to say. It's definitely been a turbulent few years, and I think what you've seen really starting in 2026, and you're starting to see this heading into 2027 as we get first looks, is plans are starting to adjust for that volatility through pricing discipline. So we've seen a lot of that through the national players itself. And I think that'll play out in margins at large in the industry. As far as what happens into 2028, 2029, and beyond, that's really anybody's guess at this point.
Sure. But your reference, so in first looks, you are seeing the pricing discipline, AKA some benefit, stable to down, not up for the most part.
Yeah. That is largely what we have seen. Really, in the past two years, you have started to see a lot of the national players, I would say, move away from PPO and move away from $0 PPO. We are seeing that trend continue, and then again, a little bit more pricing discipline into 2027.
Yeah. On this topic of, I mentioned the utilization cycle and the messaging maybe for the last 2+ quarters has been certainly within year 2026, has been elevated but stable utilization or trend. We got some competitor news in the space this morning that called out a couple of areas of utilization as maybe heating back up again. What views, insights, or comments would you have on that?
Yeah. I think some of those comments were largely focused around inpatient and SNF specifically. Those are two areas that we highlighted on our second quarter call that have actually been bright spots for us this year. Our position on that really has not changed. So we are seeing really favorable trends on the inpatient and SNF side within our business. Where there has been trend pressure, but as we said in the second quarter kind of started to moderate, is more on the outpatient side, less so on inpatient.
So sorry, trend pressure, outpatient, but even that is moderating. Is that?
Yeah, definitely moderated. Like we said at the second quarter, we kind of saw those trends peak in March, and then start to level off a little bit into the second quarter. Yeah.
Okay. Good segue into margins. You commented on a price discipline in first looks, but also some commentary about a moderating utilization, perhaps. I think we all want to be a little careful predicting that too strongly. But how do you think about the contributors to a margin recovery where most MA players are underearning these days?
Yeah. From what we're seeing on benefit design in 2026 and then the first looks in 2027, pricing discipline has been the number one lever that the industry at large is pulling. And really, I think Clover is the beneficiary of that. When we've seen significant disruption in the MA space, the natural reaction from other players is to use benefit design to offset that pressure. So when they use benefit design to offset that pressure, that drives more shopping, that drives more growth within our plan, which ultimately feeds our cohort maturation model.
Sure. On member growth and retention, let's transition to that. I think one of the things that Clover does look at retention as a competitive advantage. Highlighted retention above 95% stands out relative to what we've seen across most of MA, albeit your smaller base. To what extent is that retention being driven by your benefit stability, versus say maybe, other factors like your member outreach and engagement within the Clover Assistant, things like that. Can you attribute on those factors?
Yeah. Benefit stability is certainly a huge driver of our retention rate. When you think about 2025 and 2026, we've zigged while the market zagged. We've either enhanced our benefit offering in 2025, and in 2026 was more of a strategy built around stability. When there's wide-scale disruption in the market and you're offering consistent benefits to consumers, you're going to see favorable retention. We've absolutely seen that. As it relates to Clover Assistant and its impact on retention, it's not a direct impact, but it's absolutely an indirect impact. Ultimately, what happens when we see high engagement in Clover Assistant is that powers our cohort maturation, which improves our financials, which then allows us to maintain stable benefits.
It's absolutely a driver of our retention, but indirect in that that's really the secret sauce that allows us to hold benefits stable while the market is disrupting.
Sure. Clay, you and the management team do think, I think pretty, explicitly about your vintage, your cohort economics and how that progresses. You alluded to it a little bit just there. Maybe talk about how you see year one to year two and year two to year three progress in a typical fashion, and are you holding to that?
Yeah. Historically, what we've seen is from year one to year two, we see about a $70 per member per month step-up in insurance gross profit. Then when members move from year two to year three, we see that increase another $85 PMPM. So that's what we've measured historically within our own book of business, and we're focusing really closely on that this year and feel like things are progressing well. So that's a good signal into 2027. The other leading indicator that we look at really closely on that form, Dave, is what is the Clover Assistant engagement within a particular cohort?
Because the engagement of the year one cohort or the year two cohort is a really good leading indicator into the cohort maturation we'll see next year. That is another thing that we are seeing track in line with historical results this year.
Yeah. On margin, I am stepping off the page here a little bit. You mentioned the $70 improvement at the insurance gross margin line, and then one of your larger competitors has talked about commissions drop approximately in half from year one to year two as well. You get that would be more at the SG&A line. Is that something that you see, and is that a big contributor to your scaling as well?
We see that a little bit, but there is a lot of nuance in that statement, so I want to clear that up.
Please do. Yeah.
Yeah. When you think about commissions, plans are generally structuring their commissions through the lens of are you an MA switcher or are you new to Medicare? The standard maximum fair market value rates dictate effectively 2x the commission on a new to Medicare. People generally equate that with year one members. But in reality, that's for us in particular, last year, about 86% of our AEP sales were actually MA switchers. So they're at that lower fair market value commission rate. In that case, you're not really seeing that major step down from year one to year two in general. Our approach, we actually switched this in 2026. We've now set the commission rates for an MA switcher versus a new to Medicare enrollee at the same factor.
Okay.
We really don't see that dynamic, Dave.
I shouldn't have stepped off the page. As I asked the question, I remembered that you had told me that already. Excuse me. My apologies. On the technology, we talked about Clover Assistant a little bit, and the Clover System has been built on that assistant since before AI was a twinkle in somebody's eye, maybe.
But AI, I'm guessing, has an augmentative effect. How are you thinking about investments in AI and application within Clover Assistant?
Yeah.
Or other places, for that matter.
We continue to invest a significant amount of R&D dollars into the Clover Assistant platform every year. We've been at the development of Clover Assistant for over eight years now, and with the advent of AI, it accelerates the impact that we can see from Clover Assistant and the progress we can make. As far as AI at large, an area where we really haven't tapped into to this point but see significant opportunity coming down the line is the more traditional back-office insurance functions, right? Things that are repetitive tasks by humans that can be sped up through AI. That's really low-hanging fruit on things like claims processing. There's significant applications in payment integrity. There's applications in member services to address simple inbound phone calls, right, and reroute those to an AI front door effectively.
There's a lot of low-hanging fruit out there that we really haven't tapped into yet, but will do in the coming years.
A topic around this, again, we probably didn't specify this as much, but prior authorization is an area that has gotten attention and scrutiny, and some of the bigger peers are touting a fairly significant reduction in prior auths, but the magnitude to which they actually have an impact is questionable. Given your PPO model, is that as prevalent of an issue? Is prior auth that significant in what you're doing in the first place?
I would say relative to the national MCOs, no. We're a bit lighter touch on the prior authorization front. It is a necessary function within a Medicare Advantage plan, but relative to Humana, United, Aetna, others, we're not leveraging prior auth at the scale that they are.
Yeah. In my earliest introductions to Clover, I know a point of emphasis was we are ingesting and integrating tremendous amounts of data around the patient, and then making those tactile to the doctor at the point of care. There's a part of me that says, "Well, aren't the big guys doing that, too?" Can you bring to life how it is that you're able to assimilate that in a way that's more usable for the providers than you think your competitors are?
Yeah. I think the key phrase in that question is at the point of care.
Okay.
Where the national MCOs and our other competitors have really focused a lot of their efforts for years is more on the population health management standpoint. Think of that as retrospective analytics that are fed to the providers in a report mechanism so that they can inform what may happen in a future visit. In our case, our technology is live at the point of care. The Clover Assistant platform integrates into the physician's workflow, and actually helps the physician work through each individual patient encounter, so they're reviewing that data in real time with the patient in the room. That's the key. The patient is in the room, and it's part of the workflow.
Yeah. On utilization, we have touched on this a little bit, but I am going to combine the trend call-outs that you have given us with how we are thinking about 2027. I insinuated this, but is it right to think that your philosophy and your management's philosophy is an extension of current trend as you are thinking about out-year, or were there some assumptions about, say, a moderation from current level or otherwise?
Our view of base trend heading into 2027 is not going to be all that different than our peers. We know what the CMS fee schedule increases are, we know what core utilization will generally do. We are largely focused on our individual cohorts and what the contribution profits are of that cohorts and making sure they mature from one year to the next. If the question is centered around how did you think about your 2027 bids and what trends did you assume, we are not going to be assuming a different baseline trend than anyone else. What we will be assuming, though, is more detailed, more granular expectations of how our individual cohorts mature into 2027, and what that means in our aggregate results.
Yeah. Do you think investors, as you talk to them, do you think investors understand well the current utilization environment, or are there elements of confusion or misinterpretation of utilization? For context, I ask the question in so much as the news this morning is causing a decent amount of volatility, and is it new? Yeah, it probably is. But again, back to the understanding level.
Yeah. I think there is a level of confusion, and there is a level of confusion because there is a different level of sophistication and trend mitigation that exists at different companies.
Yeah.
Some of the news that you heard this morning, like I said, was really focused around the inpatient and skilled nursing facility space. That is a space where I think we are particularly well equipped to manage trend in that space. We manage trend in that space first through our clinical programs. I have talked about this on prior earnings calls, where engagement in our longitudinal home-based primary care program is up significantly, and that is the program that is managing the sickest of the sick, right? The 10% of members that drive 60% of your cost. That is also where you see a lot of inpatient utilization. So, where you might hear individual competitors cite pressure in a particular space where others do not, it is because others have different capabilities to address different areas of the trend problem, if you will.
Yeah. I think you guys have said that you are expecting the upcoming AEP to be another disruptive period. Your earlier comments about early looks and seeing generally some pricing to margin, is that what you mean by that, like that it is disruptive, kind of a go shop for the member type of disruption?
The level of disruption remains to be seen. At this stage, we have the first looks. We do not have the full view into benefit design for all competitors. I think what you are going to see is selective disruption in different geographies. When you have a large national payer execute a strategy of pricing margin recovery, you can see that play out over the entire country. In this case, I think we are going to see selective disruption in specific geographies, some of it from some of the smaller payers.
Yeah. We, I guess relative to, depends on the timeframe I pick, but relative to maybe four to six months ago, the level of continued PPO plan exits is perhaps a little higher. I thought maybe most of that got taken care of for 2026. It seems like there is still a level of shifting away from PPO into 2027 that, depending on whether that happens in your markets or not, could be beneficial to you. How do you see that?
Yeah, we definitely see that trend continuing. As far as full-on exits, remains to be seen how much of that is in play. But we are absolutely seeing a shift away from the zero premium PPO market. And frankly, it's not surprising to me because of our differentiation versus others. We're actually purpose-built to succeed in PPO because we don't heavily rely on traditional value-based contracts or capitation arrangements. Those types of arrangements are incredibly difficult in a PPO product. They're much more easy to navigate in an HMO product. So because that's not core to our strategy, that's why we're able to win in the PPO space where others have struggled and are now retreating back to their guns of HMO because HMO is really purpose-built for value-based contracts.
Mm-hmm. And to what degree do you survey your members, query your members to gauge how explicitly is their Clover plan choice because of the Open Network PPO?
That's a good question, Dave. I would say I don't have a firm answer for that. I would let the data do the talking. We have roughly 98% of our members are on the PPO plan, and the benefit value that we're offering on the PPO in terms of cost-sharing supplementals, Part D, is actually fairly consistent with what we offer on HMO, but our members are selecting PPO time and time again.
Got it. On the cohort economics, we already talked about $70 incremental in year two. I think 85 is the number for year three.
That's right. Yep.
And then continues to expand thereafter. Have you quantified where does that top out?
We have not quantified that. What I can tell you is every incremental year of tenure, we generally see incremental margin associated with that. That ties back to the underlying thesis, the underlying impact of Clover Assistant itself. What Clover Assistant is designed to do is to identify chronic disease earlier and then enable clinicians to manage that chronic disease. So when you identify that chronic disease earlier and you manage it, you see those savings accrue over a period of years. Those savings extend really deep out into a member's tenure.
Yeah. On that, you hear AI, I'm coming back to AI and jumping around a little bit, but you hear AI applications of having AI read imaging and do a better job of diagnosing the disease through a more accurate assessment of an image or something like that. You talked about AI applications more on the back office and SG&A functions. I suppose it gets into a little bit of technology as a medical device and are we practicing medicine through the technology. Is there an opportunity for AI over the data that you have to do an even better job of identifying comorbid indications earlier?
Is there an opportunity to be better? Absolutely. That's where we continue to invest R&D dollars. One point I want to make very clear is we are still very much operating in a human-in-the-loop environment and must continue to do that on the clinical side in particular. The Clover Assistant technology is designed to enable the clinician to deliver better care, not replace the clinician's decision-making itself. It's there to provide support. It is the Clover Assistant. It is named the assistant for a reason. We've seen incredible results when providers engage with it.
Right. To the previous question I asked, you haven't quantified how many years you can continue to add incremental GP dollars. Have you alternatively quantified where you think a mature MLR can be?
We have not quantified that, Dave, and we likely won't for some time. Even inside of this year, we're tracking toward our first year of GAAP net income profitability, and 49% of our members are in their first or second year.
Yeah.
We are going to continue to look to feed the growth engine through cohort maturation and where that MLR stabilizes over time remains to be seen.
Okay. Moving on to stars and your specific situation. The company prevailed in getting a recalc on the stars outcome. I believe, high 90s percent of your members are in the PPO contract that recalc'd to a 4.5. How do you proceed strategically, in terms of the potential volatility around stars that your peers have seen you have been able to avoid? Was your assumption that you get that money, and so you went ahead and put star bonus payment into benefits, or is it dropping through to the bottom line? How should we think about the star payment coming through?
Yeah. I am not going to be able to comment too specifically on the litigation itself. But as it relates to 2027, our bids were submitted at 4.5 stars on the PPO contract and also 4.5 stars on the HMO contract. So our benefits were submitted and designed under a 4.5 star construct. As it relates to how we approach benefit design and the growth versus margin standpoint, we did the same thing that we do every year in the bids. We assess our competitive positioning in 2026, what growth that drove, and what we expect the competitors to do in 2027. When we are designing our bids for 2027, we expected continued disruption.
We made assumptions around what key competitors would do, and based on the first looks, those have largely played out pretty close to what we assumed when we went into the bid. We feel like we're in a pretty good spot heading into the AEP.
Okay. From a star strategy standpoint, it seems like there are pros and cons. You have fewer H contracts to worry about, so it's more streamlined, it's less noisy and messy. On the other hand, you lose it in one contract and it's a big deal, kind of like 5216 for Humana. How do you all think about the pros and cons to diversifying that across more H contracts?
That's a good question. As we progress further and look into new markets in the future, that may be something that we entertain, right? Do we break up the diversification and bring new H contracts into new markets? At this point in time, we feel really comfortable with what we have with our large PPO contract and aren't looking to break that up anytime soon.
Okay. Maybe as a final question, on the EPS bridge, you mentioned breaking into net income profitability. What should investors think about as the factors that inflect or deflect the model?
The factors that drive the model for us are largely Clover Assistant engagement within our membership population. I mentioned in any given year, two-thirds of our members are going to receive a CA-powered visit, and that's the number one leading indicator for us that tells us how 2027 will play out. So long as we continue to see strong engagement with our technology and our R&D efforts in that technology continue to yield fruit, we feel like the model's got a lot of momentum behind it.
Are all those CA-powered visits in person in the clinic?
There's three primary channels through which we deliver CA visits. One is our in-network physicians that are contracted to use Clover Assistant, and they do that each time that a member is in office. The other two are actually our internal employed clinicians through Clover Care Services. So we operate two verticals within Clover Care Services. One is an assessment arm, and the other is our home-based primary care, which is longitudinal in nature. The assessment arm itself often serves as kind of a warm handoff into the home-based primary care. So that program is designed to care for the sickest of the sick patients, and a lot of other companies use an algorithmic approach to determine who should be in those programs.
We certainly use that approach too, but we use a human in the room to make the final assessment and then ultimately drive that referral into the home-based primary care program.
Okay. I kind of lied. It's my last series of questions. On this Clover Assistant, and you kind of segued into this, for the assessments, where is Clover's RAF score? How influential is RAF on your economics?
I think accurate documentation of risk adjustment is critical to the success of any Medicare Advantage plan. I'm not going to comment specifically on what our RAF score is. What I'll say is, we're really confident in our practices around documentation and the quality and rigor of that documentation to ensure it's clinically supported.
Great. I think we're really close. I'll land the plane on time, which is rare for me. Clay, thanks for making the trip down I-65. Really appreciate it.
Thank you, Dave.
And hope everybody has a good rest of the day. Thanks for joining.
Thank you.