What happened
Yesterday, short-sellers suggested Health Insurance Innovations (BFYT) was overvalued because of investigations into its marketing practices, questions regarding its licensure, and insider selling.
The report caused a 22% decline in the stock and sparked a response from management after the closing bell. Apparently, though, its attempt to reassure investors fell flat. Investors continue to sell shares today, forcing them 15% lower at 12:30 p.m. EDT.
So what
Health Insurance Innovations sells short-term health insurance and hospital indemnity plans online and via third-party distributors.
IMAGE SOURCE: GETTY IMAGES.
Its plans provide stop-gap coverage for individuals who are otherwise uninsured, and sales have been steadily increasing since the creation of Obamacare and the instituting of penalties for failing to obtain health insurance.
While Health Insurance Innovations' products are noncompliant with plans sold on Obamacare marketplaces, that hasn't stopped customers from buying them. In the second quarter, revenue grew 39% year over year to $61.8 million and adjusted EPS grew 70% to $0.46.
Revenue and profit growth, plus potential upside associated with reform that may end the health insurance mandate, have provided tailwinds to the company's stock price, which has shot up significantly over the past year.
However, the rapid run-up has attracted the interest of short-sellers who maintain that Health Insurance Innovations could face setbacks if state investigations result in settlements or hamper its ability to do business. Furthermore, short-sellers question the long-term viability of Health Insurance Innovations given poor ratings on consumer websites and wonder if insider selling totaling $50 million is a harbinger that shares have peaked.
Among the issues raised by short-sellers is a 42-state investigation of the company's marketing. In Health Insurance Innovations' recent quarterly filing with the Securities and Exchange Commission, management discussed the investigation, and in its response to investors last night, it said it's ongoing and that regulators have yet to report their findings.
The company also discussed the rejection for a license to act as a third-party administrator (TPA) in its home state of Florida. Florida rejected its license application in June, citing a failure to respond in a timely manner and "that the applicant is not competent." Health Insurance Innovations maintains it filed an appeal to keep its options open, that it's discussing its appeal with Florida's regulator, and that it may not even require a TPA license given its business model. I recommend reading the rejection letter.
In a press release issued this morning, management didn't address the matter of insider selling by its executives, but it did have this to say about the Florida license issue (emphasis mine):
The Company has operated in the State of Florida since its inception, and based on discussions with the OIR, the Company determined that its business activities likely require licensure as a TPA even though the Company is not a traditional TPA. Although the Company has pursued the licensure process described above, the Company believes that further contemplated dialogue with OIR could result in a conclusion that TPA licensure is not necessary, and otherwise the Company intends to seek such licensure and has since provided all information requested by the OIR. The OIR has not to date informed the Company that it intends to request that the Company modify its business activities in Florida, and the Company is in regular communication with the OIR on other compliance matters.
IMAGE SOURCE: GETTY IMAGES.
Now what
Management says discussions with regulators led it to conclude it needs a TPA license and Florida has rejected that license, yet the company hopes in its appeal that discussions will change the regulators' mind. Perhaps, but clearly there's uncertainty in how this issue will shake out.
Similarly, there appears to be a lot of uncertainty into the potential impact from state investigations into its business practices. In the company's quarterly SEC filing, it had this to say about the investigations (again, emphasis mine):
The Company is aware of and managing additional claims and inquiries in other states that, except for the inquiries described below, the Company does not believe are material at this time. Except as otherwise described below, it is too early to determine whether any of these regulatory examinations will have a material impact on the Company. The Company is proactively communicating and cooperating with all applicable regulatory agencies, and has provided a detailed action plan to regulators that summarizes the Company's enhanced compliance and control mechanisms.
Overall, there are a lot of questions that remain unanswered, despite management's recent comments. Over time, the Florida licensing issue will be resolved and investigations will wrap up. Until then, it's become difficult to handicap potential impacts on the company's business and that makes buying its shares very risky.
