Risk adjustment, claims processing woes still troubling Bright Health Group

Bright Health Group continued to struggle with risk adjustment calculations for the second-straight quarter as the company saw losses surge amid worse-than-expected medical costs and troubles with claims processing.

Following the release of fourth quarter earnings Wednesday, the health insurer's stock price plunged, closing down nearly 20% for the day.

"We did not deliver the financial results we had planned," Bright Health Chief Financial Officer Cathy Smith said on a call with investors. "Let me be clear: We are very disappointed in our financial results and are swiftly working to improve and provide more predictability to our results."

Bright Health struggled last year to get data on the health status of enrollees in its individual health insurance business, where people under age 65 buy coverage through government-run health insurance exchanges.

The data problem — which executives first disclosed in the company's third-quarter results — got worse during the final three months of 2021 and was compounded by emerging troubles with how the company processed claims for payment from health care providers.

Bright Health grew more quickly than it had the capacity to handle in 2021, said Mike Mikan, the company's chief executive.

"A once-in-a-century pandemic and our large group of new members without risk scores — combined with scaling up our organizational capabilities and emerging technologies — impacted our results in the fourth quarter more significantly than anticipated," Mikan said.

Bright Health sells coverage to individuals as well as seniors buying Medicare Advantage health plans.Last year, it raised more than $900 million through Minnesota's largest-ever initial public offering of stock, with shares closing on that first day of trading in June at $16.47. On Wednesday, the stock closed at $2.51.

Fourth-quarter results showed a loss of $813.4 million on revenue of $962.3 million. On a per-share basis, it came to a loss of $1.29 when analysts surveyed by Refinitiv were expecting a loss of 45 cents per share.

Overall in 2021, adjusted earnings before interest, taxes, depreciation and amortization came in at a loss of $1.08 billion — significantly worse than the $550 million to $600 million range that executives forecast during an investor conference in December.

Through the fourth quarter and into January, the company realized the extent of problems with handling medical claims, Mikan said. Bright Health tried to play catch-up, processing between 40% and 50% of its underlying claims for all of 2021 in the final three months of the year alone.

"With that amount of claims processing, we didn't have the data or the insights to really understand how we were capturing the risk codes and what other underlying medical trends were we seeing," he said.

Understanding risk is key to any health insurance market, but it's raising a particular problem for Bright Health in terms of premium revenue.

In the individual health insurance market, patients' risk scores factor into a complex calculation whereby carriers with low-risk populations transfer revenue to insurers that cover higher-risk groups. Bright Health's risk-adjustment calculations have been off significantly, so the insurer has been forced to significantly increase estimates for payments the company must make to other carriers through risk-adjustment transfers.

"The significant deterioration in our results ... was due to specific identifiable issues including COVID costs, catching up on claims payments and resolving resubmitted claims," Smith said.

To address the financial performance, Bright Health raised prices on health insurance products for 2022 and is doing more to manage medical expenses. The company also is implementing new and better systems for processing claims and calculating risk adjustment, Mikan said.

Bright Health says it's reducing operating costs and has made management changes. Simeon Schindelman stepped down in February as CEO of the insurance division, which is now led by interim chief executive Jay Matushak.

Earlier this week, Bright Health announced Matt Manders, a former executive with health insurance giant Cigna Corp., had joined the company's board as an independent director. In December, Cigna made a large strategic investment in Bright Health as part of a $750 million fundraising package.

Despite the problems, executives continue to tout the company's growth prospects. In January, Bright Health said it expected to exceed 1 million health plan members this year.

Bank of America downgraded its rating on Bright Health shares to underperform based on what analyst Kevin Fischbeck called a "surprisingly bad quarter."

"The magnitude of the miss was especially surprising after given an update at its December Investor Day," Fischbeck wrote in a research note on Wednesday. "We are cutting our forward growth estimates as BHG signaled strategic exits to conserve cash, but we are widening our losses on lack of cost visibility."