A small business trying to compete with giant health insurers like UnitedHealth Group and Humana may seem like an impossible battle to win. Clover Health Investments (NASDAQ: CLOV), however, thinks he can beat the big insurers. In this Motley Fool Live video recorded on November 16, 2020, Tom Gardner, co-founder and CEO of The Motley Fool, and Bill Mann, director of small-cap research, speak with co-founder and CEO of Clover Health Vivek Garipalli and chairman and CTO Andrew Toy on why they’re confident in their strategy to take on the biggest players in health insurance.

Bill Mann: So when I think of the healthcare industry in the United States, it almost looks like the biggest fortress in the world. The only way a small business can attack a fortress is to look for the seams, to look for the vulnerabilities. What is it about this market that you saw that made you believe the Fortress was something you could take?

Vivek Garipalli: I would say the cynicism within mainstream health care is enormous. If you talk to people who have spent many years with the big, incumbent health insurers or consultants who work with them, or whatever, they don’t really believe that you can lower the total cost of care and improve the bottom line. They just don’t believe.

Bill Mann: Why not? I’m super interested in knowing why the system exists as it does from your point of view. Why don’t they care?

Vivek Garipalli: I think they care, but I don’t think they believe it can be done. I don’t think it’s a lack of attention. If large incumbents had a very clear, scalable way to lower the total cost of care and improve outcomes, I think we would hear about it 24/7 in commercials, commercials, etc.

If you’re old, you get tons of advertising on Medicare plans. That would talk about how, if you sign up for our plan, we’re actually going to help you. This is just not what is advertised. If we think about the nature of health insurers or payers, this is an actuarial based space. It is measured on EBITDA per life, per year.

This is not how we think of health care as consumers. It is important to note that there is actually not a lot of knowledge and expertise at the senior management level about how decisions are made by physicians. How do they come to understand a patient and make better decisions? This is really the essential.

When you hear a lot about value-based care and shared savings today, many of these models or concepts started to be promulgated as part of the Affordable Care Act or after the Affordable Care Act. So you see a big incumbent start to say, “We now have 60% of our lives on a value-based program. “

Bill Mann: The calculation of the quality-adjusted life year. Correct.

Vivek Garipalli: When you present a values-based program to a doctor, a doctor doesn’t say, “Now that I’m values-based, now I’m going to make good decisions. If you look at the metrics, you read any revenue call, that’s their metric now, the number of lives on a value-based program. If you asked them, what do you provide doctors with to improve their decisions? You’ll have crickets because that’s not how they think about their internal KPIs, their metrics. Outwardly, we look like a Medicare Advantage plan.

Bill Mann: It’s horrible to even hear a lifetime called KPI, because that’s basically what this relationship is.

Vivek Garipalli: Law. We’re never going to beat the big incumbents at their own game, and that doesn’t interest us either. So we’re looking at most of the cost structure. It’s on medical expenses and drugs, not administrative overhead. We’re very excited about being able to optimize administrative overhead, but really in a way that helps optimize medical and pharmaceutical spending over time.

So when we spend a lot of time on gray matter during the week, it’s with our clinical team, with our product team on improving our platform. Our measure in terms of how we think we are generating value is the number of lives that are fueled by Clover Assistant.

Starting in April of next year, we’re going to go from our nearly 60,000 lives on MA to more than nearly 300,000 lives powered by Clover Assistant, including MA and fee-for-service. Mainstream investors fear the managed care side and look at it and say, “Well, this is Medicare Advantage and this direct contract business is pretty new.” Our point of view is that they are the same individuals. They are part of a private health insurance plan or a traditional health insurance plan. In both scenarios, we own all the savings we generate. In both scenarios, Clover Assistant generates value and these are the same physicians who use our software platform.

Tom Gardner: Let me ask Andrew about Clover Assistant. Can you give us some technical aspects of Clover Assistant? Do you all have data on how often doctors use this advice?

Andrew Toy: Yes. Absoutely. I come from the business software background. So I’m relatively new to health. I started a business before, I sold it to Google, but it wasn’t mobile, it wasn’t in the healthcare industry. It was in the Android team, the Cloud team.

As a forerunner, I think of Clover Assistant because I really wanted to focus on saying, how do we create software that helps doctors, and therefore if you were helping doctors, would you help patients too? It makes sense. Technology should be able to do it.

The problem is, and the reason I didn’t just start a business, an HCIT, or a software company, is that the type of software that is bought in healthcare is unfortunately not bought. to help doctors, or to help patients. It is built for regulatory purposes, the checkbox. Huge amounts of money are spent on this, but it is very rare that anyone wonders how it is used to help doctors. That’s what results in really low Net Promoter scores, really low usage, all of those things.

They are literally not the customer. These are the administrators of the practice, the billing services, the paying services for handling complaints. The entire bureaucracy is the customer of technology, not the doctors, who, therefore, not the patients. Part of my thesis was that in order to really crack that nut to get into the fortress, as you say, you kind of just have to get inside. You can’t be an outside salesperson saying, “Hey, buy my stuff”. They don’t want your stuff. It won’t work.

But you can do it from the inside. This is why at Clover I want to be the payer, because now we are in the allocation of capital. We can decide how to use that leverage to do the best thing for physicians from a data perspective, from a capital allocation perspective. When we build the software, and the Clover system is a software platform that I would build as if I was on the outside, if I was in an enterprise software company, but we are building it in-house for Clover. because that way there is no business cycle of sales between us and our iteration rate to constantly improve it and make it better and better.

Hope this makes sense. Because otherwise it’s so slow. Chamath and I talk about it all the time. It’s so slow. It is fundamental to the need for technology to iterate these days. If you talk to someone at Tech, it’s not about being right the first time, it’s about adapting to that product market and then finding your way to where you need to be. That’s where I think we’re at with Clover Assistant, is because it’s built into a payer, we’re rolling it out.

To complete your question, Tom, we are really proud of what we do with the assistant. For those who have signed up for the assistant with us, we have a very high engagement rate. In fact, the number we share is over 90%. Thus, for each office visit of a person who is going to see a PCP, Clover Assistant uses a very high percentage of the time. Our Net Promoter score is also very high, and measure it religiously.

The reason is just that we see the doctor as our customer, except I don’t charge them for my software. That aside, our economic model is the model of health economics. But we distribute the software. We’re like, how do we drive engagement? How can we measure it down to the future level? We’re constantly deploying new clinical protocols to help with all the chronic diseases we see in the environment, and we’re having a two-way conversation with these doctors as well.

We’re not saying, and Vivek alluded to it, we’re not saying we think this patient needs this, just do it. Doctors don’t like it on the one hand, and it’s not appropriate on the other. This is not a path to a high engagement rate.

What we’re just saying is we have a lot of data. Let’s make it workable for you. So we put very usable pieces of information in front of the doctor. It is completely their call. Their hands are on the wheel all the time in terms of what they want to engage with. They just think about it. If they decide whether to follow our recommendation or not or confirm a diagnosis or not, then they also provide us with feedback and say, “Look, this is why I think this exists” or, “This is why I don’t. don’t think it exists. ”That feedback immediately feeds back into our product development cycle to improve ourselves again.

So rather than those big massive static evaluations, which are the norm; it takes hours to do, it’s the same for everyone, and the doctor just has to go through it all. It’s personalized, it’s easy to use, it’s dynamic, it’s tuned to be relevant. I think that’s what keeps our engagement rate really high and also informs the doctor with the best data possible so they can provide better care.