Devoted Health, a prominent health insurance and provider startup, has faced significant financial challenges after five years of selling Medicare Advantage plans to older adults. Despite its efforts, the company has yet to turn a profit, raising questions about its future sustainability in the competitive healthcare industry.
A Close Look at Devoted Health
Launched in 2017, Devoted Health is a health insurance company based in Eagan, Minnesota. The company provides Medicare Advantage plans with a focus on the unique needs of older Americans. To date, Devoted Health has garnered an impressive $2.144 billion in funding, with notable investors including Andreessen Horowitz, Emerson Collective, Maverick Ventures, F Prime Capital, GIC, among others. Despite this substantial backing, Devoted Health has yet to realize profitability, drawing attention to the challenging nature of the health insurance industry, particularly within the realm of Medicare Advantage.
The Medicare Advantage Landscape
The Medicare Advantage market is complex and highly regulated, with profitability increasingly difficult to achieve. A recent analysis by Moodyâs Investor Service showed a declining profitability trend within the Medicare Advantage sector. This decline is primarily due to increased utilization, which puts significant cost pressure on insurers, thus affecting their earnings.
The Centers for Medicare and Medicaid Services (CMS) recently proposed a reduction in the Medicare Advantage base payment rate for 2025. This proposal is part of a series of policies initiated by President Joe Biden to control Medicare Advantage spending while elevating the standard for quality bonuses. Additionally, the 'two-midnight rule' has been implemented, a standard that traditional Medicare has adhered to for a decade. This rule was introduced after it was discovered that Medicare Advantage plans were often denying coverage for necessary services.
Future Challenges for Devoted Health
Devoted Health, like other healthcare insurance startups, faces an array of challenges. The CMS anticipates that the average benchmark payment for Medicare Advantage plans will decrease by 0.2% in 2025 due to the new risk adjustment coding system. This reduction will undoubtedly contribute to the financial strain on insurers.
Additionally, Medicare Advantage plans are required to cover hospitalizations at a higher inpatient rate if doctors anticipate that members will need to stay beyond two midnights. This requirement could lead to higher claims costs for insurers, further exacerbating the financial challenges faced by Devoted Health and others in the Medicare Advantage market.
The financial struggles of Devoted Health underscore the difficulty of achieving profitability in the health insurance industry, particularly within the Medicare Advantage sector. With a combination of regulatory changes, increased utilization, and a challenging market landscape, the future of Devoted Health and other similar companies remains uncertain. However, by understanding these challenges, startups can devise innovative strategies to navigate the complex Medicare Advantage market and eventually achieve profitability.