Shares of Medicare Advantage insurer Clover Health (CLOV 0.71%) have seen wild performance for much of the year. In June, a short squeeze prompted by Reddit's WallStreetBets forum pumped the stock to a record $28.85 a share from about $7. But the rally quickly lost its momentum, and the stock fell back near pre-squeeze levels.

The speculative saga has brought a seldom-discussed problem into the spotlight -- Clover Health's lack of a clear path to profitability. With nearly 20% of its shares outstanding still sold short, can the company prove its skeptics wrong? 

Person consulting a doctor about a prescription via videoconference.

Image source: Getty Images.

The impossible seesaw

It's pretty clear why it's difficult, if not outright impossible, for Clover Health to turn a profit. It's a Medicare Advantage company, meaning statutes mandate that it must spend 85% of federal reimbursements on patients' healthcare needs. But since the company is in its infancy, it must spend far more than the minimum requirement to solicit customers. This is different from competitors such as Humana and Cigna, both of which dish out about 85% of premiums to generate positive cash flow.  

On the one hand, patients are flocking to Clover Health thanks to its better coverage, leading to spectacular revenue growth. But all that excellent coverage costs more money, causing losses to accelerate as well. Clover Health could do what its peers do and lower its spending, but that would surely derail its momentum. It's basically stuck in a catch-22. 

Outlook is not good

This is clearly evident in its financials. During the second quarter of 2021, Clover Health grew its sales by 140% year over year to $412.5 million. Lives covered under Clover Management close to doubled from the second quarter of 2020 to 129,000. However, its medical loss (or care) ratio (MCR) widened from 70.1% to 111% -- meaning that it is paying out more than it gets in federal reimbursements. During Q2 2020, the company saw utilization rates decrease as patients delayed elective medical treatments in fear of catching the coronavirus, though it did manage to turn a profit. But year over year, Clover Health's net income swung from positive $5.4 million to a loss of $317.6 million. That's a pretty significant change, even accounting for a $134.5 million noncash expense related to fair value warrant adjustments.

In addition, I'm not a fan of the company's attempts to "normalize" (in this case, lower) its MCR using non-GAAP (adjusted) measures. It does this mainly by excluding coronavirus-related costs and risk adjustments. But even as we speak, the delta variant is ravaging across the country, so it's almost certain that these items will continue affecting the company's bottom line in the near future.

So is there no hope? 

That's not to say Clover Health doesn't have a chance of turning around. In the most recent quarter, the company launched its new Medicare Direct Contracting program, allowing physicians to use its Clover Assistant health analytics software for their patients directly. The model could be less costly than running an insurance program.

Unfortunately, the company anticipates new member enrollment for the program to remain flat for the rest of the year. And if we were to subtract Direct Contracting sales from its total revenue and compare only its Medicare Advantage revenue, then sales only grew by 13.5% over last year's quarter.

Overall, I'm not convinced that Clover Health has its profitability situation figured out. Until it does, it's not looking like a good healthcare stock to pay 4.3 times revenue for -- especially when its competitors like Cigna and Humana are trading at 0.4 and 0.6 times revenue, respectively.