Insurtechs notched feverishly high MLRs in Q3. But it’s not necessarily a mark of poor cost management

Clover Health, Oscar Health and Bright Health Group reported eye-poppingly high medical loss ratios in the third quarter. High MLRs historically have been taken as a portent that payers are failing to adequately manage member spend.

But that wasn’t the case, some analysts and company management say. Instead, the newly public insurtech startups are tethered mostly to one product or one geography, leaving them more vulnerable to regional influences. Combining that fact with higher-than-expected COVID-19 costs from the surging delta variant and the risk of new members in the individual exchanges gained during the special enrollment period left them with higher MLRs relative to larger, more diversified peers.

In third quarter earnings announced last week, Clover, Oscar and Bright — tech-focused insurance upstarts jockeying for a slice of the trillion-dollar, highly concentrated insurance market that joined the public markets this year — all saw revenues skyrocket due to big membership increases, but notched significantly wider net losses as MLRs reached near-triple digits, or surpassed the triple-digit mark.

The stock of all three plunged last week following the results. As of Wednesday, shares of Bright, Clover and Oscar were down 73%, 59% and 67% year to date respectively.

But investors shouldn’t be concerned unless costs remain elevated deep into 2022, even as COVID-19 cases wane, analysts say.

Rebecca Pifer/Healthcare Dive, NYSE data


Under the Affordable Care Act, insurers have to shell out at least 85% of their premiums on patient care. They can keep the rest to cover other expenses and profit, so an MLR over 85% means payers are pocketing less for themselves.

In the third quarter, Minneapolis-based Bright’s MLR reached 103%, up from 90% same time last year, while New York-based Oscar’s MLR reached 99.7%, up from 90.5% same time last year.

Both payers sell individual, small group and Medicare Advantage plans and reported similar headwinds in the quarter, chalking their MLR increases up to a jump in COVID-19-related claims and difficulty accurately measuring the risk of new enrollees who signed up during the SEP.

The Biden administration set up the SEP from February through August this year in a bid to ensure Americans had access to coverage options as the pandemic drove widespread job losses, putting millions of workers at risk of losing employer-sponsored insurance.

Bright and Oscar aren’t the only payers to report the SEP contributed to higher medical claims. Larger peers Cigna and Molina (which are both very active in the ACA marketplaces) said members who joined during the SEP were more likely to use medical services.

But the bigger U.S. payers mostly reported major year-over-year profit increases in the third quarter, though many also saw higher-than-expected MLRs.

The main difference is in membership and geographic diversity, Credit Suisse analyst Jonathan Yong told Healthcare Dive.

Oscar, for example, is largely tethered to the ACA exchanges, which saw a spike in utilization and COVID-19-related expenses, and “given their less diversified membership base compared to larger peers, does leave the company exposed to large MLR gyrations in that product,” Yong said.

Meanwhile, Nashville-based Clover Health, which operates MA plans, reported an MLR of 102.5%, up from 86.7% at the same time last year due to hefty COVID-19 costs.

Clover is largely tethered to the MA market mostly in New Jersey, which has seen generally elevated costs related to the coronavirus and a rebound in normal utilization. This geographic concentration and lower member diversity resulted in a higher MLR, Yong said.

But not all insurance startups reported MLRs brushing up against or surpassing the three-digit mark. One insurtech, MA provider Alignment Healthcare, reported a relatively healthy MLR of 85.7%.

One could be tempted to hold up Alignment and say it managed costs better than its peers, but it’s not a direct comparison. According to Yong, Alignment was an outlier because of the makeup of its network.

Oscar operates in the health insurance exchanges with minimal MA membership, so its results don’t correlate to Alignment. Meanwhile, Clover is largely an MA business that operates under an open or wide network, which could result in greater use or higher costs compared to Alignment, which has a more narrow network.

Oscar and Clover “have offered richer benefits in pursuit of growth in their respective markets,” Yong said.

And insurtech executives and market watchers alike don’t think the volatile MLRs will continue into 2022.

“Looking through these drivers, we believe they are predominantly issues that we anticipate will not carry into next year based on the landscape we see today,” Oscar CEO Mario Schlosser told investors on a call Wednesday.

Schlosser noted that although special enrollment growth has proved a headwind in 2021, mostly because Oscar had less of a chance to collect risk adjustment scores on the members, it’s expected to shift to a tailwind next year because of membership retention.

And Clover, despite notching an 102.5% MLR, pointed to how that’s actually a drop from its MLR of 111% in the second quarter, and 107.6% in the first. That sequential decrease illustrates its MLR is “reverting to the mean,” Clover CEO Vivek Garipalli told investors on Nov. 8.

Clover in particular has seen its medical expenses balloon this year because of the pandemic compared to other insurers in the privately run MA program. Its management has chalked that disproportionate hit up to the fact that half of its members identify themselves as minorities, a population which has contracted COVID-19 at higher rates than other enrollees.

Additionally, the older Medicare population is more likely to have severe health complications from the virus, and nine-state Clover is more subject to regional COVID-19 influences than other, larger payers.

“Generally, we believe the MLRs will continue to see some volatility in 2022, just not to the extent seen in 2021,” Yong said, noting Credit Suisse expects insurtech MLRs next year to normalize from those seen in the third quarter.

The delta surge in August did create higher volatility around costs, and the extension of the special enrollment period did create unanticipated membership that couldn’t be adequately risk scored. But in a bright spot, insurtech startups reported strong year-over-year revenue growth due to big membership gains.

Bright, Clover and Oscar saw three-digit revenue growth in the third quarter amid hefty membership gains

Insurtech revenue and membership figures as compared to Q3 2020

Oscar, Bright and Clover reported revenue gains of 336%, 206% and 153%, respectively.

Meanwhile Alignment, which reported a much healthier MLR, saw much slower revenue growth by comparison. The eight-year-old payer, which went public in March, saw revenue grow 18% year over year to $294 million.

To be successful, insurtechs need to weather ongoing coronavirus headwinds in the fourth quarter and price or adjust benefits as necessary to achieve profitable growth, according to Yong.

“Investors should be concerned if costs remain elevated deep into 2022 despite easing Covid utilization,” the Credit Suisse analyst said — which could indicate the companies don’t have a good handle on their pricing and benefit design, and aren’t appropriately accounting for their members’ health.

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