September 10, 2015 by Tony Novak
A law firm that represents investors is investigating whether officers of EHealth, the nation’s largest commercial health insurance broker, made false of misleading claims that affect valuation of the company’s stock.
A press release issued by the law firm says: “On January 14, 2015, eHealth lowered its fiscal year 2014 revenue guidance to a range of $178 to $180 million from its prior revenue guidance in the range of $185 million to $194 million. Shortly thereafter, on February 24, 2015, The Company issued disappointing fiscal 2014 financial results and disclosed that historical trends for conversion and churn had changed “significantly”. Following these revelations, eHealth’s stock price fell dramatically and a class action lawsuit was filed against the Company, its CEO and CFO. As recently as January of 2014, eHealth’s stock was trading at more than $60 per share. The Company’s stock closed on August 28, 2015 at $14.42 per share.”
The current investigation centers on the company’s calculation of conversion rate (the percentage of online applicants who became paying policyholders) and its churn rate (the percentage of attrition due to cancelled policies). These two factors are critical in evaluating the earning potential of any online health insurance operation. Measurements of these performance benchmarks have varied widely in the industry since passage of the Affordable Care Act (ACA). The question here is whether Ehealth management intended to mistake the operating results.
There is no doubt that industry trends have changed significantly, as Ehealth management states. This is an understatement. The fact is that the health insurance sales industry is attempting to rebuild a market selling a product that people don’t like, can’t afford and are ready to drop at the very first opportunity. I was surprised reading the rosy performance statistics and I remember wondering how Eheath was able to generate such a positive user response. It now appears that they did not have any better results than the rest of the industry.
Smaller online health insurance firms like our Freedom Benefits look to Ehealth announcements as an indication of industry performance and trends. It now appears that our forecast that the online health insurance enrollment industry was beginning to stabilize after the disruption of ACA have been premature.
When we started in the online individual health insurance industry in the 1990s the conversion rate was about 8% and now it is only a fraction of 1%. Our average policy life was more than 13 months (including short-term and travel medical insurance policies) before 2010 but we know that it is much shorter today.
The take-home lesson seems to be that the health insurance enrollment industry is still in disarray, the owners are financially suffering, and that there is no magic formula to correct those performance woes. Ehealth shareholders have lost 75% of their value over the past 15 months. It appears that the owners of smaller health insurance enrollers have lost even more. I estimate that today Freedom Benefits has dropped about 90% from its peak value in 2008 so the percentage loss is even greater. Historically the leading market share firm tends to retain value better than smaller companies during an industry downturn, and this rule seems to be true here.