When ‘the centre cannot hold’: three board members exit at Cano Health, failure looms at Bright Health Group

Surely some revelation is at hand? The first: the high-profile board troubles at primary care provider Cano Health. Last Friday, three directors resigned loudly from the board: Barry Sternlicht, Elliot Cooperstone, and Lewis Gold. Sternlicht, the chairman of Starwood Capital Group and for some years the CEO of Starwood Hotels in the 1990s, is a ‘name’ real estate and private investor. The other two are hardly slouches: Cooperstone is founder and managing partner of private equity firm InTandem Capital Partners; Gold is co-founder and board chairman of behavioral health company Advanced Recovery Systems. They resigned as a group due to differences with the CEO and management. 

The trio filed a 13-D with the Securities and Exchange Commission as a partnership to change things, “including, but not limited to, the replacement of the CEO, sale of non-core assets and enhancement of shareholder value.” Sternlicht’s release detailed their grievances with CEO Marlow Hernandez, including dubious transactions with a Miami medical claims recovery company, MSP Recovery (also known as LifeWallet), but mainly around the burn-through of the $800 million PIPE raised along with the June 2021 SPAC via Sternlicht’s JAWS Acquisition Corp.–an eye-watering total of $1.4 billion for a valuation at that time of $4.4 billion. From his release, Sternlicht apparently could not get the time of day from Hernandez. “I have never witnessed such poor corporate governance at any company, let alone a public company, and I have been involved in at least nine and served as chairman or CEO of six.”

Certainly, there is a case around shareholder value. The stock has cracked by over 90% from the initial price of $15. Sternlicht also had $50 million reasons to be mad as an investor of that amount in the PIPE. Cano Health called his “method of resignation particularly reckless.” But one wonders what Cano’s physicians are thinking, as well as the health plans with which they work, when three high-profile board members bolt the company, one of them with a stellar track record and some fame, with prejudice. Yet the majority of the board members were seemingly fine with how the company was run.

Last October, Cano, a 4,000 employee value-based primary care provider to mainly underserved markets, had its tires kicked by CVS Health [TTA 21 Oct 22] but the deal never got beyond discussions, and Humana, which has a right-of-first-refusal, made no moves. Share price fell from that time from just above $8 to today’s close of $1.25 on the NYSE. The time may be right for a payer or a provider group to make a cheap pickup, but not if the company has intractable troubles–and now there is a deep-pocketed rival. MedCityNews, New Times (Miami)  The New Times article digs deeper into the MSP Recovery relationship and CEO John Ruiz. MSP Recovery specializes in collecting from primary insurers that don’t pay and put the burden on commercial or public plans like Medicare or Medicaid. As of December 2022, the company owed Cano roughly $60 million in receivables, not a drop in their bucket.

Now to Bright Health Group, an insurtech which may well be on the brink of utter failure and the dubious distinction of being one of the largest failures of a Minnesota business, if their local media (Star-Tribune, unfortunately tightly paywalled) is accurate. Reports one month ago were dire: investors were told that Bright was facing credit insolvency, having run through $350 million in revolving credit. It also violated a liquidity covenant and desperately needed $300 million to cover it by end of April.  This did not stop the company from paying out about $4 million in bonuses to its management team–outrageously at 100%. Two of the bonuses are to ex-company members. Meanwhile, hundreds of their once 2,800+ employee group are being discharged.

18 months ago, Bright Health seemed to be the most promising insurtech out there, with a healthy Medicare Advantage (MA) plan base, family and individual plans, substantial growth, acquisitions of Zipnosis (‘white label’ telehealth triage for health systems), development of the NeueHealth value-based care provider management network, and a blue-chip management group. But it also lost $1.5 billion in 2022 on top of $1.2 billion in 2021 and has $1.2 billion in debt. Bright exited individual and family plans in six states plus cut back MA expansion plans and will no longer offer individual, family, or Medicare Advantage plans outside of California.

With Bright Health shares down to $0.20 and delisting looming, Bright asked shareholders to attend a 4 May meeting to approve a reverse stock switch “at a ratio of not less than 1-for-15 and not greater than 1-for-80.” It’s just a small problem of the share price….

Far more disastrously for Bright, state departments of banking and insurance are taking action. Tennessee and Florida placed the company under supervision; reportedly Illinois is considering the same. Texas may precipitate matters. According to strategic analyst Ari Gottlieb, the Texas Department of Insurance is preparing to place Bright Health’s Texas subsidiary into receivership. Such an action will constitute an immediate Event of Default under Bright’s Credit Agreement. Bright can then choose default–or seek bankruptcy protection.

Shockingly, over a million Americans have had to find a new health plan due to what is happening at Bright. Now, where’s the Barry Sternlicht they need on the board to take action? Are the directors from investors like Bessemer and New Enterprise Associates in cloud-cuckoo land with management?

FierceHealthcare. Both Fierce’s and this article quote liberally from Ari Gottlieb’s posts on LinkedIn, the most incisive coverage this Editor has seen so far: Since Bright Health’s executive compensation approach is best described as pay-for-failure from one month ago, Bright Health’s $4 million pay-for-failure cash bonuses… from two weeks ago, and from earlier this week, The Texas Department of Insurance is preparing for anticipated litigation…  Others are listed in his feed here

Zipnosis, health system telemedicine/triage provider, acquired by insurtech Bright Health Group

Breaking: Zipnosis, a telemedicine/telehealth company that provides telehealth and diagnosis triage for large health systems, had a stealthy announcement of its acquisition by Bright Health Group late yesterday. The announcement is not on either corporate website but was made by Zipnosis’ financial advisers in the transaction, Cain Brothers/KeyBanc. Neither the value of the transaction, the transition plans for Zipnosis management and staff, nor operating model, were disclosed. Both Zipnosis and Bright Health are HQ’d in Minneapolis. Release

Why This Is Verrrry Interesting. Zipnosis developed an interesting niche as a relatively early starter in 2009 by providing white-labeled telemedicine systems to large health systems. They made the case to over 60 health systems across the US, including large systems like Allina Health with a ‘Digital Front Door’ that provided initial triage for a claimed 2 million patients, moving them into synchronous or asynchronous care fully integrated with hospital EHRs. They were named as the ‘Hottest Digital Startup from Flyover Country’ by Observer.com, once upon a time in this Editor’s wayback machine an actual print weekly newspaper and, as is obvious, NYC-centric. Release Their funding to date is, surprisingly, limited: under $25 million from seven investors, including Ascension Ventures, Safeguard Scientifics, Hyde Park Ventures, and Waterline Ventures, with the last round back in 2019. Crunchbase

Bright Health Group, on the other hand, is an insurance provider in both the exchange and Medicare Advantage (MA) markets in 13 states and 50 markets, covering 500,000 lives. Their model integrates both technology like web tools and apps with their insurance plans to be an ‘insurtech’ like Oscar Health and Clover Health. They claim to be the third-largest provider of the highly specialized type of Medicare Advantage plans called Chronic Condition Special Needs Plans (C-SNP) for those with severe and/or disabling chronic conditions. Bright Health operates in 13 states and 50 markets. In January, they announced the acquisition of Central Health Plan in California with 110,000 MA members.

However, what is verrrry interesting about Bright’s model, compared to other ‘insurtechs’, is that they own or manage a care delivery channel–40 advanced risk-bearing primary care clinics delivering in-person and virtual care to 220,000 members. The ‘risk-bearing’ is also interesting as it leads one to believe that some of these practices may participate in Center for Medicare and Medicaid Services (CMS) value-based care models such as Primary Care First, the Medicare Shared Savings Program, or End-Stage Renal Disease (ESRD).

Bright Health is also extremely well funded now–and may be even better funded in the near future. Last September, they raised $500 million in a Series E led by New Enterprise Associates with Tiger Global Management, T. Rowe Price Associates, and Blackstone, as well as existing investors including Bessemer Venture Partners and Greenspring Associates (Crunchbase and Mobihealthnews). The purpose stated at the time was new market expansion both geographically and to small groups. Last week’s rumor was that they are preparing for an IPO in the $1 bn range with a valuation between $10 and $20 bn, which is Big Hay indeed. No paperwork has been filed yet with the SEC. Twin Cities Business, YahooFinance.

As an acquisition for Bright Health, Zipnosis brings in large healthcare systems with a unique triage platform that could be modified for primary care practices. It seems like a snack-sized acquisition that doesn’t require Federal approval but can be operated stand-alone–as health systems may be leery of an insurer’s ownership–with technology that can be integrated into other parts of the Bright Health business. This will be updated as additional news develops.

‘Neoinsurer’ Oscar Health goes for $100 million IPO; Clover Health’s big SPAC under SEC microscope

Oscar Health, one of a number of US ‘insurtech’ or ‘neoinsurance’ private health insurance companies that have nipped at the heels of the Big 9, announced late Friday an IPO on the NYSE. The number of shares and their value is not on the SEC S-1 filing but the estimate of the raise is $100 million. Timing is not disclosed but rumored to be by March or early Q2. The offering is underwritten by Goldman Sachs, Morgan Stanley, and Allen and Company.

Oscar was one of the first to offer members apps, telehealth, and fitness trackers–revolutionary back in 2012 but routine now. Expanding beyond its original base of individual health insurance coverage, it now offers Medicare Advantage and small group coverage in 18 states to over 500,000 members. Oscar remains a virtual-first platform with the majority of its members in Florida, Texas, and California. Oscar makes much of member engagement and its partnerships; 47 percent of its overall subscribing membership and 44 percent of its 55-and-up subscribers are monthly active users. Oscar has also partnered with Cleveland Clinic and other larger insurers like Cigna. 

Financing for Oscar to date is over $1.5 bn. It has tidily grown in geographic coverage, members, and revenue–$1.67 billion in 2020 and $1.04 billion in 2019–no simple feat against the Big 9. Oscar’s problem is profitability–operating losses grew proportionately, $402.3 million (+56% from $259.4 million). Operating expenses also grew by 16 percent. TechCrunch gives additional crunch in the financial analysis (article in part, full paid access). Mobihealthnews

Oscar is one of a few health-tech heavy survivors of insurance companies that bloomed like flowers–and wilted–during and post-Obamacare. Clover Health, which thrived in a slice of the Medicare Advantage market, went the SPAC (blank check) route 8 January with Social Capital Hedosophia Holdings. Now with an enterprise value of approximately $3.7 billion, the SPAC indeed put Clover in the clover [TTA 14 Jan].

But perhaps short-lived. Clover’s SPAC is now being scrutinized by the SEC based on last week’s explosive charges by short-seller maven Hindenburg Research (!). Hindenburg’s research report alleges that Clover “lured retail investors into a broken business” by not disclosing a Department of Justice (DOJ) investigation that started (at least) last fall. Clover countered that the investigation is “routine” since Clover is in the Medicare business. Thus, it was not disclosed by Clover to investors as ‘non-material’. DOJ investigations are far more serious than CMS fines for compliance violations, which are not uncommon. Back in 2016, Clover was fined just over $106,000 by CMS on misleading marketing practices.

In short, DOJ investigations are never routine. They usually are the start point for enhanced claims scrutiny and a concatenation of charges, as WellCare, then a scrappy upstart insurer, found out over six agonizing years, 2006-2012, that were serious enough to send much of top management to Club Fed.  The Hindenburg paper (linked above) details other business practices that if true, are dodgy at best and fuel for further investigations.

The SEC notice of investigation was disclosed by Clover last Friday evening, usually a good time to disclose Bad News. This SPAC may have feet of clay.  PYMNTS.com, CNBC