Outside investors pay up for Medicare brokers

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Six months after signing up for a Medicare supplemental plan, Rob Erick was diagnosed with pancreatic cancer.

Erick believes he navigated his 12 rounds of chemotherapy as seamlessly as possible thanks to his Medigap plan, and the guidance of his local, independent broker. A Medicare Advantage plan could have included the headache of prior authorizations, provider restrictions and out-of-pocket expenses, he said.

Without the broker’s advice, Erick said he could have been enticed by former New York Jets quarterback Joe Namath’s pitch for privatized Medicare Advantage plans or influential investors’ promises of expanded care.

Although his cancer has left him with an estimated 18 months to live, Erick said he feels grateful for the incredible care his Medigap plan helped him afford.

“Private equity-backed brokers would possibly be a red flag and something that I would want to learn a little bit more about, just because it adds another layer of potential profit motive,” said Erick, a Cleveland resident and retired chemicals company manager.

However positive, Erick’s experience with an independent, local broker is becoming rarer. As an estimated 10,000 new individuals reach Medicare eligibility everyday, a growing share of private equity firms and venture capitalists are betting on brokers that help older adults enroll in the Medicare health plans. Medicare Advantage in particular has exploded in recent years, with the average consumer facing 39 Medicare Advantage plans to choose from this year. Insurers banking on the growing population and lucrative returns from the product, even as research from the Kaiser Family Foundation shows that most individuals don’t price shop for coverage.

During the first five months of this year, U.S. insurance broker deals continued their fever pitch from 2020, with 215 announced deals worth a combined $24.6 billion, according to PWC’s insurance deals insights report. While most deals focused on consolidating independent life and annuity carriers, investment in health insurance brokerages is growing, the report said.

Over the past three years, private equity investors have increasingly banked on health insurer brokerages, attracted by a growing market that is increasingly choosing Medicare Advantage over traditional Medicare, said Richard Kes, a healthcare partner at RSM. By 2025, half of all eligible beneficiaries are expected to be enrolled in the privatized health program for older adults, according to the Commonwealth Fund.

With federal regulators restricting brokers commission rates and marketing operations, agents are largely left to compete based on the services they provide—leading some new operators to differentiate by combining their navigation services with other industries like in-home grocery, retail or pharmacy, Kes said. While these agents represent more plans than brokers hired to work with a sole insurer, the financial incentives they face could accelerate adoption of Medicare Advantage, he said.

“One of the things I love about In-N-Out Burger is there’s two things on the menu. Do I want a cheeseburger or hamburger?” Kes said. “Whereas if you go to The Cheesecake Factory, the menu is crazy, I don’t even know what I want. There’s the challenge of providing a lot of options.”

Like the life and annuity sectors, most private equity investors are aimed at connecting and professionalizing mom-and-pop brokerages with tech to help them maximize their returns, said Gretchen Jacobson, vice president of Medicare at the Commonwealth Fund. By consolidating into larger organizations, she said independent brokerages may be able to negotiate additional payments from insurers, as well as offer new services to attract and retain enrollees.

In recent years, federal regulators have revised Medicare’s marketing guidelines to allow insurers to pay agents for scheduling an individual’s first doctor appointment, working with a clinician to ensure all their medications are included in their formulary and other services, Jacobson said. These fees build upon commissions brokers already receive for enrolling members in specific plans, which are tilted in private operators favor.

Agents can receive greater compensation for enrolling seniors in Medicare Advantage than in Medicare supplement plans that pair with Part A and Part B, creating financial incentives to recommend Medicare Advantage, according to a Commonwealth Fund report co-authored by Jacobson.

“Ultimately, we want people to be able to choose the coverage that best meets their needs,” Jacobson said. “Whereas investors in brokerages, they will want to maximize their profits, which may not always align with what’s best for beneficiaries.”

No shop has been a more prolific investor in this space than Bain Capital Private Equity, said RSM’s Kes.

The private equity behemoth, whose co-founder is Sen. Mitt Romney (R-Utah), announced earlier this month that it was dropping $150 million to launch a new health insurance brokerage committed to the Medicare Advantage market, named Enhance Health.

In addition to helping consumers navigate the dizzying Medicare landscape, Enhance promises to be a “care navigation platform” that helps consumers use their benefits once they’ve chosen a plan.

“Bain has a real operational focus, and when we see opportunities that don’t see scale assets that map to those opportunities we’re willing to deploy our resources and expertise to start companies,” said Andrew Kaplan, a principal in Bain’s healthcare vertical. “We call them scale startups, where we can deploy significant capital and expertise to go big in a space where we have a high degree of conviction.”

By launching its own startup, Bain bucked private equity’s traditional investment strategy of funding established businesses, as well as bypassed a number of other recent entrants in the Medicare brokerage space, including EasyHealth and Chapter. As the digital agent space is relatively new, most companies in this category have received only seed investment or Series A rounds.

EasyHealth, for example, raised a $135 million Series A round last week, for a platform that enrolls new Medicare customers as well as helps insurers collect data on their members through AI and home visits. The Beverly Hills, California-based company has partnered with insurers like UnitedHealth Group, Humana and Bright Health Group to enroll “tens of thousands” of members since its launch in March 2020, CEO David Duel said.

The startup earns a fee when its customers enroll in a health plan, as well as licenses out the clinical side of its business. EasyHealth eventually aims to leverage its consumer purchasing experience to become either a full-risk provider or health insurer.

“Insurance distribution is our Trojan horse into healthcare services,” Duel said.

Its funding comes as older adults continue to defer care during the COVID-19 pandemic, with large Medicare Advantage insurers reporting that foregone care is impacting their financial results and driving their operational strategies. By outfitting insurers with tech to better capture safety and quality information, EasyHealth aims to help payers maximize their risk-adjustment and patient experience returns. The vendor’s method of partnering with insurers to conduct home health visits has been criticized for helping payers upcode patient conditions to gain greater reimbursement from the federal government.

“Our objective is to provide a comprehensive clinical profile to the health plan,” Duel said. “Ultimately, what they decide to do with it is at their discretion, in terms of how they code. Our goal is to make sure that they know every chronic condition that exists, and our view is that there’s no loss by knowing all the conditions somebody has. If you don’t know, how can you provide care?”

New York City-based Chapter, meanwhile, raised $17 million in September, led by “Hillbilly Elegy” author J.D. Vance’s firm Narya Capital. At the time of the Series A announcement, investor Peter Thiel announced he would join the company’s board.

The company was co-founded by CEO Cobi Blumenfeld-Gantz, who previously worked at the Thiel co-founded data company Palantir. Palantir’s software provides the technological backbone for Chapter to comb data on every Medicare plan available to make personalized recommendations. Since its launch in March 2020, the company has advised “thousands” of Medicare enrollees and partnered with some 50 insurers, including UnitedHealth Group, Blue Cross Blue Shield and Clover Health.

Chapter eventually aims to evolve beyond a Medicare broker to help consumers understand their in-network benefits and proactively refer them to the lowest cost site of care or service, like recommending one pharmacy over another.

“Companies like ZocDoc are amazing,” Blumenfeld-Gantz said. “But they are not widely used by people on Medicare.”

Like other brokers, Chapter earns fees from health insurers when a person enrolls in a health plan. But the company differs from these agents since it doesn’t limit its recommendations to plans sold by insurers that pay commissions. The company pays its advisors the same regardless of what plans they enroll customers in, Blumenfeld-Gantz said.

“People are rightly skeptical of Medicare advisors,” Blumenfeld-Gantz said. “The vast majority, if not all, other Medicare Advisors succumb to the same challenge of incentive misalignment. We are the only ones who are truly aligned with our end users, and it speaks volumes.”