Just a few years ago, a crop of venture-backed health insurance startups embarked on planting a flag in the crowded but lucrative health plan business for seniors.
While the battlefield is now marked with failed attempts, a couple of young insurers still managed to grow their membership in that business, known as Medicare Advantage.
Devoted Health and Alignment Healthcare grew membership by more than half in February 2024 compared with a year ago, despite the numerous challenges confronting the Medicare Advantage market, according to Business Insider’s analysis of the latest federal data.
Even so, these insurers haven’t captured 1% of the total Medicare Advantage market, a Stephens analysis found, underscoring just how tough it is to grow and compete with entrenched companies like UnitedHealthcare and Humana that have long dominated.
Some upstarts weren’t up for the challenge. Bright Health, which has exited the insurance business entirely as of this year, sold its Medicare Advantage plans in December. Oscar Health abandoned the senior business after years of failing to attract more than a few thousand customers. Meanwhile, Clover Health’s membership shrunk slightly as it tried to break even.
A challenging Medicare Advantage market
Medicare Advantage is the private alternative to the traditional Medicare program that provides health coverage to people 65 and older and people with disabilities.
The market has been one of the fastest-growing corners of the health insurance industry, with membership more than doubling over the last decade. Established insurers have invested heavily in Medicare Advantage, and venture capital firms put billions of funds behind startups angling for a piece of the $400 billion the federal government spends on the program each year.
However, there are signs that the Medicare Advantage business isn’t as much of a goldmine as it used to be.
Many insurers are having a harder time making money as seniors get more medical care than expected, competition increases, and the federal government phases in changes to the way it pays insurers. Those changes, expected to lower insurers’ payments, came in response to the widespread practice among health plans to exaggerate their members’ illnesses so they’re paid more.
Some, including TD Cowen analyst Gary Taylor, also question if enrollment in Medicare Advantage is nearing its peak, but membership is still growing for now. About 33.7 million people were enrolled in Medicare Advantage plans in 2023, an increase of about 7% over the year before.
Upstart insurers struggle to capture market share
The mounting challenges didn’t slow Devoted and Alignment’s growth. Devoted, a private insurer backed by more than $2 billion in venture capital, grew membership to 203,000 as of February 1, 2024, an increase of 63% over February 2023, according to Business Insider’s analysis of enrollment data from the Centers of Medicare and Medicaid Services.
Alignment, which went public in 2021, had almost 156,000 members. That’s up 44%, according to the company. (Alignment said federal data undercounted its membership in 2023, so it provided corrected figures.)
Scott Fidel, an analyst at Stephens, said the young insurers attracted members by offering better benefits than other insurers. They could provide those extra benefits because they notched high federal quality scores from the federal government and were rewarded with bonuses, which can fund perks like lower out-of-pocket costs, dental and vision insurance, and even transportation for members.
But it’s tough to grow fast without incurring higher costs that make it hard to profit. Bright’s stunning failure — the result of rapid growth, soaring expenses, and technology problems — is a prime example. And while Alignment has said it expects to break even on an adjusted basis this year, it’s not clear if they’ll be able to pull it off with so many new members.
Clover also went public in 2021 and after years of expanding aggressively by way of rich benefits, it tapped the brakes to finally turn a profit, which it expects to do in 2024, before things like interest and taxes. This year, Clover scaled back the number of counties in which it sold plans and increased cost-sharing for prescription drugs, Fidel said. Clover’s membership dipped 6% to about 79,000 in February compared with a year ago.
Ultimately, these young insurers that wanted to disrupt the stodgy industry are still tiny, and any disruption they’ve done has been limited. They’re up against a lot. It takes an enormous amount of capital to grow big in the insurance business, Fidel said.
Plus, a strategy that works in one market might not work in another. Most of Alignment’s growth is in California, and Clover’s membership is concentrated in New Jersey. Neither have managed to gain strong toeholds in other states across the country.
The biggest insurers remain untouchable. UnitedHealthcare, the country’s top Medicare Advantage insurer with more than a quarter of the national market share, enrolled 9.5 million members as of February, an increase of about 7%. The second biggest, Humana, had 6.1 million members, up about 9% over the same time a year ago.
CVS Health, the owner of insurer Aetna, was the closest thing to a threat that these giants experienced. CVS grew faster than any insurer over the last year, adding almost 700,000 members, an increase of 21%. Its Medicare Advantage membership totals about 4 million.
Read the full article here