Billionaire investor Chamath Palihapitiya recently took Clover Health Investments (CLOV 0.83%) public through one of his special purpose acquisition companies (SPACs). He has pointed to the Medicare Advantage plan provider as "the greatest growth opportunity" that he's seen.
But Clover Health stock isn't going in the right direction. Shares plunged more than 10% on Thursday after short-seller Hindenburg Research posted a scathing report online that referred to Clover Health as "a broken company." Here are three key things you need to know.
1. The allegations
Hindenburg Research's allegations can be summed up as follows:
- The company hasn't disclosed that it's under investigation by the U.S. Department of Justice (DOJ).
- The company's sales are driven by misleading marketing practices.
- The company's Clover Assistant software "deceives the healthcare system" and "poses a significant regulatory risk."
The short-seller pointed to a Civil Investigative Demand (CID) related to an investigation by the DOJ into whether or not Clover Health "improperly induced patient referrals for services paid for by Federal agencies." The online report stated that Clover Health has failed to disclose this investigation.
Hindenburg's second allegation is based on the belief that the issues that the DOJ is investigating have merit. In particular, the online report maintained that Seek Insurance Services, a subsidiary of Clover Health, "misleadingly markets itself as providing 'independent' and 'unbiased' advice to seniors looking for Medicare."
The short-seller alleged that much of Clover Health's sales stem from a brokerage controlled by the company's head of sales. It also cited former employees of Clover who reportedly said that the company has paid physicians' office staff to refer seniors to Clover's Medicare Advantage plans.
In addition, Hindenburg claimed that the Clover Assistant software is designed to enable healthcare professionals to game the Medicare system by not removing old diagnoses that are no longer applicable. If this happened, it would make patients appear to be sicker than they really were and increase Medicare reimbursement payments.
2. Potential implications for Clover Health
Probably the most serious allegation made by Hindenburg research is that the company has compensated physicians' staff to refer patients to its Medicare plans. Paying for referrals to federal healthcare programs is illegal.
The potential penalties for anyone found guilty of this include fines of up to $250,000. Individuals convicted of Medicare fraud can be sentenced to jail for up to 10 years in some cases.
The immediate implication for Clover Health, though, is the toll the allegations have taken on the healthcare stock itself. It's likely that the stock could remain highly volatile until the company can move past the cloud hanging over it related to Hindenburg's report and the DOJ investigation.
3. Too soon to draw conclusions
For investors, the most important thing to know is that drawing any conclusions is premature at this point. Clover Health hasn't publicly responded to Hindenburg Research's allegations. It's always good to hear both sides of a story before deciding what you think.
As for the Civil Investigative Demand issued by the DOJ, it's basically like a subpoena. Just because one is issued doesn't necessarily mean that actual problems exist. These investigations often fizzle out.
It's worth noting, though, that while Hindenburg Research is a short-seller, the company stated that it doesn't have any position in Clover Health stock. Usually, when short-sellers post allegations about a company, they have a financial interest in driving the share price lower.
The bottom line is that more facts are needed. Clover Health could be damaged, at least to some extent, if Hindenburg's allegations are borne out. The company could also emerge from the controversy clean as a whistle and become the tremendous growth story that Chamath Palihapitiya thinks it is. The best thing to do is wait for the dust to settle.
This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become Smarter, Happier, and Richer.