It's no secret that the Medicare program faces some daunting challenges. However, small health insurer Clover Health Investments (NASDAQ:CLOV) thinks it provides some solutions. In this Motley Fool Live video recorded on Nov. 16, 2020, Tom Gardner, co-founder and CEO of The Motley Fool, talks with Clover Health co-founder and CEO Vivek Garipalli about how he thinks Clover Health can address some of Medicare's biggest problems.

Tom Gardner: We will talk portfolio management a little bit later, but I do just want to shift to global health now and hear from Andrew and Vivek about what is insufficient and inadequate about provision of healthcare for those over the age of 65 in the US?

Vivek Garipalli: Yeah. So great question, and when we think about our reason for being, my first three businesses that I built in healthcare were all on the services side, starting about probably 16, 17 years ago. On the outpatient services side, a hospital business, built a nationwide revenue cycle company, and I built a lot of business value doing that. But I would say what was very clear to me during that all those experiences is that for most healthcare businesses, particularly in the services side, business value is not correlated with consumer value, and many times, it's at conflict with that.

So we think that the many trillions of dollars of public market value and private market value that exists within healthcare companies today, you can't really correlate that business value with consumer value. Now, there's no doubt that those trillions of dollars of market value, private and public, has led to innovation in healthcare that has helped the whole world. Even when you look at the vaccines announced in the last couple of weeks, that was due to heavy R&D starting 10-15 years ago and we're seeing the fruits of that.

So I would be the last one to say that the money sloshed around in healthcare hasn't led to very positive things. But when we think about where we're at, the sheer cost of which it's taken to do that have gotten to astronomical. A lot of this is a lot of it is driven by alignment of interest. So whether it's hospitals, or skilled nursing facilities, or EHR companies, or PBMs, a lot of the ways they generate business value, whether it's keeping prices high, keeping patients longer, keeping drugs on-brand, data blocking, those all lead to business value, but actually don't drive consumer value. Many times, they're in conflict with that.

My thinking started to shift as frankly as I started determining what types of businesses that I want to build going forward, and for me, it was really around how can I get around a very hard problem that I think is important and solve it at scale. So my experience before Clover and after the services, I was building a cancer data company called Flatiron Health that we ended up selling to Roche for about a couple of billion dollars two years ago, and that was my first experience building anything on the technology side, whether in healthcare or out of healthcare.

Frankly, for someone starting on the services side, when you build something where software and technology is at the core, your brain really gets rewired in how to think about solving problems and your ambitions grow because you know what can be done at scale. You know what would normally have been thought of impossible is actually possible. Through that experience, as we thought through what was the next problem we wanted to tackle, we saw a huge opportunity in terms of reducing the variability of decision-making by physicians.

When we think about where that has the largest negative impact, ie the variability decisions, and just to bring a clear lens to that. Put really simply, if you take an elderly individual, let's say who's 80 years old, if he or she goes to see 10 different primary care physicians, each physician is going to come out with a different set of diagnoses, treatment plan, medication regimens, even different dosage levels, and it's not because they're bad physicians, they're not. They really lack access to accurate, prioritized, actionable data at the point-of-care. When that happens, these physicians, in that 10-15, 20 minutes, they rely on intuition, pattern recognition, rapid set of questions, and then you end up having a wide dispersion of decisions. Many times, it's not tied to evidence-based protocols, and that wide dispersion of decisions leads to a wide dispersion of costs and poor outcomes over the short, medium, and long-term.

If we look at that population, so we take the 60 million individuals in Medicare, it's the highest per capita costs when we think about demographic. So the average cost for someone in that demographic to the United States government is over $10,000 a year, 80 percent of those individuals have at least one chronic condition. Almost 70 percent of those individuals have two or more chronic conditions.

So when we think about what is a true consumer space, Medicare is very similar in terms of a consumer space as the way we may think about Amazon as a consumer product in e-commerce. Healthcare, when you're under 50, is not necessarily what we would call a daily use product. When you get a Medicare age for 70 percent plus of the population, it is, from the frequency of seeing a physician five plus times a year on average three medications. So we didn't set out actually saying, let's build a better Medicare insurer. For us, it was really around what is the problem we want to solve. For us, it was reducing that variability decision-making and our determination was if we could bring great software to bear to physicians, we could reduce that variability gap.

We started this on a first principles basis, which is, could we build something that could service the existing incumbents? Can we bring something and just be a vendor to participating players and work within the ecosystem? Having started within the ecosystem myself, I didn't have this fascination of disrupting a sector that I was already part of in many ways. But it's really, really important if your goal is to really solve a problem. It really is not about what's the hardest path to execution, but what actually gives you the highest probability to solve that problem.

Sometimes the path to drive the highest probability to solve that problem may be the hardest path to execute upon. So the easiest path to execute upon would've been building something as service vendors, but it would have created the lowest probability of us actually being able to solve that problem. There's a reason for that.

So when we thought about how do we build the best software, we need to check a few boxes. One, we needed data access on our customers. Two, we needed to be able to deliver software to physicians and ensure that there was high engagement, and ensure that we could drive really high utilization and customer experience in terms of physicians using it. Then three, if we were able to capitalize on that use, improve decisions, lower total costs, improve outcomes, drive down ER visits, drive down hospital admissions, extend mortality rate, or extend mortality, how do we benefit as a company, as an organization?

So for us, it was building best-in-class software. In our minds it was only possible if we built it in our own verticalized insurance company. That's really where the thesis started, and why we started our own insurer, and why I had to put my own capital and to start it over those many years, because everyone we went to initially on the venture side wanted us to take the lowest risk execution path. As an entrepreneur, you're sometimes are very optimistic and delusional, and you take the approach of, well, I want to solve the problem, and this is the path that I need to do and no one is going to remember if I lost that money because it's just going to be what I have to limit myself with. But when you can get through those early parts, then it becomes more clear to investors that maybe that is the right path. You've gotten through the harder part on the execution side.

So here we are at a point now, many years later, where we've scaled software to physicians, productized it to where it emanates itself to consumers in the lowest cost product, in terms of insurance plans for our consumers. But from a physician perspective, they get great access to information at the point-of-care around accurate diagnoses, proper treatment planning, evidence-based protocols, care coordination.

Now we're extending that software beyond traditional Medicare advantage or private Medicare, which is a little over 20 million of the 60 million. But now into the additional 40 million of individuals in traditional fee-for-service Medicare where the government is rolling out a program called direct contracting next year, where Clover, we fill a large or a leading position in, where we can extend our software into the population of Medicare patients that don't actually have private Medicare insurance, but are directly paid for by the government, and where physicians actually can take full financial risk, offload it onto Clover. Then Clover monetizes that by giving our software away for free and keep the savings that we generate for the government and for consumers.

A lot of this wasn't possible until about three years ago when Andrew and I met. So at that point, we were just at the point of making the turn to completing the build of our data platform, and then having to turn that or take that now to physicians, where we were literally bringing that pane of glass depositions to productize it essentially. Andrew and I got to know each other over quite a while and there's very few individuals who have been able to pick up healthcare as quickly as he has that I've ever met. His background, as he'll go through, is really uniquely positioned, setup to not just understand the technology side really well, but to actually bring that to bear in healthcare and what we've done over the last few years or so.

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