October 7, 2020

Breakingviews: Clover Health takes knife to two sick systems

by Breakingviews.

Disruption is coming in double doses. Insurance upstart Clover Health said on Tuesday that it plans to go public by merging with a blank-check company, uncatchily named Social Capital Hedosophia Holdings Corp III. Like many newly listed stocks, Clover boasts a higher calling: to cut away the fat in an inefficient and uncompetitive U.S. healthcare market. It’s apt, because companies like Social Capital are trying to do something similar with finance.

Clover insures patients under Medicare Advantage – fast-growing plans for typically older Americans where premiums are set by the government, but the nuts and bolts are handled by private companies. It also makes software that crunches data that doctors can use when treating patients. The theory is that bills will be lower if doctors have better data, because conditions will be prevented, or recognized and treated earlier. The money saved then gets shared between patients, who have less to pay out of their own pockets, and Clover itself.

The company capitalizes on the U.S healthcare system’s extraordinary dysfunction. While the country spends more on healthcare as a share of the economy than any other developed country, it also has the highest number of hospitalizations for conditions that were preventable, and the highest rate of avoidable deaths, according to the Commonwealth Fund, a private foundation. Middlemen abound, doctors are too few, and data is both overwhelmingly abundant and patchy where it is sometimes needed.

That alone suggests there’s plenty of room for efficiencies, though cutting the Gordian Knot isn’t simple. Clover is loss-making, and expect to remain so until 2022, and has aspects of its business that are yet-to-be-proven. While doctors need help organizing, for example, they already have technology coming out of their ears. At $3.7 billion, Clover would be valued at more than 4 times next year’s forecast revenue, quadruple what big health insurers command and roughly the same as fellow disruptor Uber Technologies.

But investors are prepared to pay for ideas that upset the status quo. Social Capital is itself an example. So-called special purpose acquisition vehicles, set up purely to buy other businesses, are booming, and offer to streamline a clunky IPO process. Their pitch is less red tape, and less power to the fee-reaping de-facto cartel of investment banks who underwrite traditional offerings. Clover and Social Capital don’t guarantee a cure, but they have pinpointed similar diseases.

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