Bright Health shares plunge on pandemic-fueled quarterly loss

A late-summer surge of COVID-19 patients drove medical costs surprisingly high for Bright Health Group, indirectly hurting the company's risk adjustment scoring — a complex but crucial calculation that took a significant bite out of its premium revenue.

As a result, the Bloomington-based health insurer reported a third-quarter loss that was significantly greater than expected on Thursday.

This drove a sell-off of the company's stock, with shares losing nearly a third of their value in intraday trading.

Bright's chief executive Mike Mikan told investors Thursday morning that these headwinds experienced during the quarter ending Sept. 30 are short term and that his outlook for 2022 is still positive.

"With a predominantly new and rapidly growing business, population health risk is difficult to estimate in the near term, but improved as our markets and populations mature," Mikan said. "Late September and early fourth quarter indications show COVID-19 greatly subsiding, especially in the Southeast."

Founded by veterans of Minnetonka-based UnitedHealth Group, Bright Health Group sells health insurance coverage to individuals under age 65 and seniors buying Medicare Advantage health plans. In June, Bright Health raised $924 million in the largest-ever initial public offering by a Minnesota company.

Most of Bright Health's enrollment comes from people who buy individual coverage. These health plans often are purchased by self-employed people and those who don't get health insurance from their employer.

Mikan said the company's largest geographic concentration of enrollment is in the southeastern U.S. — the region hit particularly hard by COVID-19 cases, including serious illnesses that required hospitalization, during the July-to-September reporting period.

Expenses for those sickened in the pandemic had an impact on medical costs during the quarter, Mikan said. But the bigger factor was the company's inability to accurately capture the riskiness of people who newly enrolled in the company's individual market health plans.

Carriers in the individual market go through a risk-adjustment process where money is transferred from health plans that enroll healthier people to insurers that cover those with greater health risks. These risk-adjustment transfers are based on overall risk scores calculated by insurers for their enrolled membership, based on the medical codes that were used for their health care services.

The problem during the third quarter, Mikan said, is that health care providers were focused on COVID, so they weren't providing new enrollees with as many services. The insurer, in turn, lacked the coding data needed for risk-adjustment calculations.

"This hampered our ability to accurately capture the risk of our members and therefore our estimated 2021 risk score is lower than we had originally anticipated," Mikan told investors. "This resulted in an increase in our risk adjustment payable and a corresponding decrease in our reported premium revenue."

He added: "The impact of direct COVID utilization and the change in the estimated risk score for our population resulted in an increase in our overall medical cost ratio for the third quarter."

In the company's second set of quarterly results since going public this summer, Bright Health on Thursday posted a net loss of $297.6 million on revenue of $1.08 billion. During last year's third quarter, the company lost $59.3 million on $352 million in revenue.

On a per-share basis, the loss came to 48 cents, compared with the 18 cents per share loss expected by analysts surveyed by Refinitiv.

When Bright Health went public this summer, the stock initially priced at $18. Shares traded down sharply when the company on Aug. 3 released disappointing financial results from its first quarter as a public company — the stock that day closed at $8.49, off by about 22%.

The company's shares have been trading down since then, as well, closing at $7.30 on Wednesday. When the market closed Thursday, the stock was trading at $4.94, down more than 32% for the day.

The individual health insurance market underwent a dramatic transformation in 2014 under the federal Affordable Care Act, which brought significant subsidies for many who buy individual coverage through government-run health insurance exchanges. Bright Health was one of several health insurers that seized on that change as an opportunity for growth in the market. The company sells individual coverage in 11 states and plans to add four more next year.

Bright Health also operates a division for clinics called NeueHealth that as of this summer owned all or part of 44 primary clinics and had affiliation agreements with 87 others.

Bright Health is part of an industry trend where health insurers and health care providers are connected more closely in hopes of better controlling expenses. This "alignment" also helps with things like risk adjustment, Mikan said Thursday.

The highly-contagious delta variant of the virus that causes COVID-19 hit particularly hard during the third quarter in Florida, which also is the state where Bright Health this year has seen disproportionately large growth, Mikan said.

"So, we basically had the care resources constrained, focused on COVID, that limited our ability to engage with our consumers and accurately code and understand the health status of the population," he said. "We view that as a tailwind going forward into next year, because we see some strong signs, encouraging signs, from our fully-aligned model."

Bright Health employs nearly 3,000 people. The company on Thursday narrowed its revenue guidance for the year to between $4.1 billion and $4.2 billion, which is the top half of the previously announced range.