Bright Health Group seeking outside investment

Bright Health Group must raise outside capital to sustain its business, executives said Wednesday.

The health insurer’s board of directors formed a special committee to solicit proposals from prospective investors and has received significant interest from new and existing backers, according to company leaders. Bright Health Group plans to raise an undisclosed sum in the near-to-intermediate-term, CEO Mike Mikan said during the company’s second-quarter earnings call. 

“We’ve always talked about the need for additional financing to get to break even,” Mikan said. “We’ve taken significant actions over the last 12 months to improve our operating performance and cash burn. Part of the process of building an enterprise in the insured risk business is you’ve got to capitalize your legal entities and insured entities.” 

Bright Health Group generated $1.5 billion in revenue during the second quarter, a 41.5% increase from the year-ago period. The insurtech’s net loss quadrupled to $251 million, partly because of a $37 million charge for failing to retain the necessary minimum in its state reserves.

States require insurance companies to hold a specific portion of their revenue relative to the size of their local membership to ensure they can pay claims. If reserves fall below the mandated amount, insurers are charged a fee known as premium deficiency charge. This represents a one-time operating expense that will “reverse out” in the latter part of the year, Chief Financial Officer and Chief Administrative Officer Cathy Smith said during the call. The company has withdrawn $154 million from its rotating credit facility during this quarter, she said.

The company aims to break even on an adjusted earnings before interest, taxes, depreciation and amortization basis in 2024. 

Bright Health Group went public through a $12 billion initial public offering last year, the largest among the health insurance upstarts that entered the equity markets in 2021. The company’s stock price has since fallen 89%; shares closed at $1.92 on Tuesday. 

The insurtech received a $750 million cash infusion from rival insurer Cigna and New Enterprise Associates, a venture capital firm, last year. Matt Manders, a 30-year Cigna veteran, joined Bright Health Group’s board in March, provoking speculation that Cigna is interested in acquiring the company. “We’re pleased with Cigna as a capital partner and continue to look for ways to work together,” Mikan said. 

As part of its march towards breaking even, Bright Health Group will exit six states and end its group insurance business next year. The company will also increase the amount of risk covered by reinsurance to reduce operating expenses, a tactic known as quota sharing. The insurer has quota sharing arrangements in three of its markets and will pursue a fourth, Smith said. “It’s a great way to leverage someone else’s balance sheet and an important cash lever,” she said. 

Bright Health Group blamed part of its $1.17 billion loss in 2021 to a backlog in its claims processing system, which led to delays paying providers. The Colorado Department of Insurance fined the company $1 million in April for failing to make timely payments and communicate with customers. 

The company is in the process of transitioning to an electronic auto-adjudication claims management system named Prism. Thirty percent of its commercial business operates on Prism and the remaining commercial markets will move to the platform on Jan. 1, Smith said. The backlog in the claims processing also led to issues accurately coding the risk among its commercial members, she said. This led to a $93 million charge during the second quarter. 

Under the Affordable Care Act’s risk adjustment provisions, insurers that attract healthier members must transfer funds to insurers that enroll higher-cost policyholders. The Centers for Medicare and Medicaid Services nixed a rule in April that would have changed how regulators compare risk across exchange insurers. 

By gathering more information about members’ needs, the company will increase the number of risk codes captured from its Florida and North Carolina business by up to 25%, Mikan said. The company counted 970,000 commercial and 120,000 Medicare Advantage members during the second quarter. 

“Risk adjustment obviously last year was very challenging for us, principally in Florida,” Mikan said. “We’re engaging earlier, and that helps us with accuracy with first-year capture of consumer risk scores.”