eHealth, Inc. (NASDAQ:EHTH)
March 13, 2013 2:00 pm ET
Gary L. Lauer - Chairman of the Board, Chief Executive Officer and Member of Equity Incentive Committee
Charles Anthony Butler - Barclays Capital, Research Division
Charles Anthony Butler - Barclays Capital, Research Division
All right. Good afternoon, everyone. We got up next, eHealth. They've have actually been in our conference for a couple of years now, and I appreciate that commitment. Gary Lauer, the Chief Executive Officer, will be presenting. We're going to have the presentation here in this room, and then after this, we're going to do the breakout. I think there might -- I don't know if the break now is after this or maybe one more after that, but we'll go to the breakout in Poinciana 3 right after this. So without further ado, let me introduce Gary. Thank you so much.
Gary L. Lauer
Great. Charles, thanks. Yes, we have been here a couple of years. And we really like coming to Miami Beach. If you guys decide to move this to New York or Boston at this time of year, it's going to be a bit little more of a decision, but here is great. So our company is eHealth. Some of you may know the business, some not. I'll just give you a quick primer for it, I will give you some things. We are an online marketplace. We're headquartered, by the way, in California, right in the center of the Silicon Valley. We are a technology company first and foremost. We market and sell health insurance products online, principally to individuals and families both people who are under 65 years of age and older.
Safe Harbor statement, if you would like me to read this to you, I will. Look like it, so you can see it here, we can give you a copy as well.
So let me begin by just making some comments about what we do and really how we add value, and what's different about this. We really introduced the Internet to health insurance about 13 years ago. It was a very archaic distribution process. Agents and brokers all over the country are also selling auto insurance and homeowners insurance and on and on, and we knew it was a daunting complex decision process. We thought if we could take the Internet and reduce this tremendous volume of data, which is health insurance, down to something that's understandable and navigable, we could really make a difference in terms of how people access these products. And so that is really the inspiration for the company.
Today, we've become the leading source of health insurance products for individuals, families and small businesses. We do this all online. There's not a shred of paper in the process, which, in our opinion, in my opinion, is exactly how this entire healthcare sector ought to operate in and run.
Really, 3, I think, important components or characteristics of our business. The first is demand generation. Last year, we had over 20 million individuals come through the eHealth -- come to eHealth, to the site. They find us through a number of different ways and I'll show you some examples of that in a while, but we think that this is a -- not just the competency of ours but in many ways a science in terms of how we approach it.
We are a technology company first and foremost. We spend an awful lot of energy, time and money to technology and constantly evolving and developing this technology, so it's a better experience for people to use. We are deeply integrated with our carriers or suppliers. By the way, as I said earlier, we're a marketplace. We do not underwrite health insurance. Think of us as the amazon.com of health insurance. When you come to us, you'll see Blue Cross, Blue Shield, Aetna, United, Kaiser, the list goes on and on, and we're deeply integrated from a technology standpoint with these health insurance companies. And we think we have a lot of expertise in this area. We've learned about this as we've really blazed the trail. We were the first to do this, and today, we're the largest. We've insured over 3 million Americans.
The market opportunity is large and is growing larger very quickly as the result of healthcare reform, the Affordable Care Act. If you look at what's up there in yellow, it's really the market or the markets that we address today. The blue, we don't add a lot of value at the moment, but that could change. But let me talk about the yellow. And by the way, this is a breakdown of the U.S. population from the data sources, or the Census Bureau and the U.S. Bureau of Labor Statistics. Individuals and families who buy their own health insurance for various reasons: They're self-employed; their employer doesn't offer health insurance and on and on. It's about 19 million people today. That was the genesis of our company. That's a fast-growing marketplace. There's over 50 million people who are uninsured today. There are 46 million people who get their health insurance through small business, employer-sponsored plans. And you've got about 48 million people over 65 years of age on Medicare today.
These are all very important opportunities for us. We're the market leader in the individual market. We're one of the market leaders in the small business market. The Affordable Care Act, known affectionately in some places as Obamacare, will take over 30 million of this -- of the 50 million who are uninsured and move them either into Medicaid, which is the blue up above, or the individual market, which is where we reside, so very important market opportunity for us. And additionally, Medicare is fast growing. I'll show you some examples of that as well.
Our business structure is a rather simple one. It's one-technology platform, which you see at the bottom. So really one e-commerce site that supports a lot of different businesses.
Our newest business is Medicare. You see that on the left. That's a very important business for us, I'll show you why in a short while. It's an area where we're investing quite heavily and the reasons for that will become obvious as well.
Our core business are individuals and families who buy their own health insurance or what we call ancillary products. So these are related products. It's dental, vision, things of that nature. That's a growing business, and it's a very, very important cash flow generator for us. And then we also monetize our technology both through work that we do with the governments as they're building exchanges or governments and what we call sponsorship, which is carriers who actually pay us to help to market their products in a lot of different ways.
So let me talk about this Individual & Family Plan market. First of all, this is becoming a consumer-centric world. And whether you get your health insurance through your employer or you buy it on your own, you have probably noticed, you're spending more money out of pocket every time you utilize some kind of a service, whether it's a physician visit, whether it's buying a prescription or what have you. And there are some interesting evidence of this right here. In fact, if you look at the way employer premiums have been increasing over the past 12 to 13 years, you'll also see that the contribution made by each of us out of our per payroll check has essentially doubled over the last 10 years. And so what we're finding is that the benefits providing healthcare to employees is becoming more expensive. The number of Americans getting their health coverage through their employers are on a decline. In fact, we're finding more and more employers who are offering health benefit to the employee but not dependents. Government entitlement spending is very much under the microscope right now, as you know of all the sequestered discussions going on. The Affordable Care Act is now being implemented. There is a lot more focus on moving responsibility for the costs and the burden of health care to individuals, and this goes on and on. These are all reasons why people need to be using the Internet. They need to be using handheld devices to get more information and knowledge about what they're doing, and it's what we do.
To consumers, the value proposition is really, again, a pretty fundamental but we think awfully important. When I say consumers, I'm talking about individuals, families, and certainly, businesses, small business owners, specifically. But what we give people is very quickly, a view of the entire marketplace and all of the relevant products that are available to someone in that marketplace. In fact, when you come to eHealth, we actually formulate 3 pieces of information online: your birthday, your gender and your zip code. And from that, right away, we begin to show you just a very broad palette of products from very high quality brand names that you would recognize.
That is over 180 carriers across our product inventory. We have over 10,000 products, which we don't show you all at one time, but that's the inventory of products for which we are able to select and present to you. It's essentially every quality product that's in the marketplace. We do all of this online for people who needs -- who want more than that. They can pick up the phone and chat with us or they can communicate with us online, as well through online chat.
Interestingly, however, over 80% of people in the Individual business who did business with us dealt without any human interaction at all. It's all done online, no discussion.
We have built a lot of what we think are intuitive, very powerful tools to help people through this process. We begin to -- information, we help you to sort through these different plan options. For example, one thing that we learned several years ago is that people really don't care whether it's the Blue Cross, Blue Shield or Kaiser at the top of their health insurance. What they care about, in many cases, is the relationship they have with their physician or the relationship that they have with a physician for their children. We built a database of every physician in the country who takes health insurance. We give now individuals the ability to indicate to us right upfront who their physician is. And through that, we will show the individual all of the health insurance products that support their physician. If you're thinking about children, we show the products that have got great maternity care and on and on. So a lot of different ways to interact with these products. And by the way, this is complex stuff. It's not a whole lot of fun to have to go buy one of these products. And what we try to do is to still listen to something again that's very understandable and navigable for people.
For our suppliers or the carriers, we think that there is a very important value proposition. First and foremost is volume. In fact, for some of the largest carriers in the country, we're their single, largest source of sales. We have very unique demand generation. It's a very efficient distribution channel. And we're told by them, it's may be less expensive than other distribution sources that they have. We know that there are fewer independent ages -- agents selling these products these days. We are able to take their other products that these carriers have and sell them as well, these ancillary products, it's dental, vision, things of that nature. And in the world of what I call private exchanges, which may come into being next year when the Affordable Care Act is implemented, we're also able to help these carriers get to more potential membership and customers through some unique things that we're able to do as well.
I get this question a lot, which is, "How do we find consumers, customers?" In the health insurance world, they're called members. So we acquire members or consumers through really 3 different major channels. The first is online advertising, which you see at the top right. That's principally what's called paid search. That's Google, Yahoo!, MSN, that someone keying in eHealth insurance, medical insurance, health insurance in Miami, health insurance in South Beach, what have you. And typically, they'll -- you'll find us in the number one paid position, which we pay for. It's expensive, by the way, in Google. You'll also find us indexing typically to the #1 natural position, which is very unusual for an e-commerce company. We find this very legitimizing in terms of consumer reaction. So that's online advertising, that's paid search.
Secondly, our partners, marketing partners. We have thousands of different organizations we partner with. And this is an area that we've been very focused on since the inception of the company. It's Walmart, it's the Bank of America, it's the National Federation of Independent Businesses, the American Bar Association, the list goes on and on and on. These are all groups that have got customers, constituents, members and so on that have got a need for health insurance that we're able to address. And typically, we cobrand with them. So Walmart, for example, introduces us to seniors who are looking for Medicare products.
The third source, which is our largest, is direct. These are people who typically key in the URL eHealth or eHealth insurance or eHealth Medicare or come to us through what's called natural search. Last quarter, 49% of our members were acquired directly. This is highly unusual, once again, in the e-commerce world, and it's something that we're -- we like a lot because the cost to acquire that somebody coming direct is almost 0.
Let me move now to Medicare, this is our newest business. We've been in this for a little over 2 years. It's a fascinating place to be. There are 47.5 million Americans today on Medicare. My mom is, your parents probably are as well. About 13 million of these 47 -- almost 40 million people have got Medicare Advantage products. About 10 million have got what's called Medigap or Medicare Supplement, and almost 20 million have prescription drug plans.
There are 76 million people in this country who are going to be turning 65 years of age over the next 16 years, 76 million baby boomers. And the data is amazing. Over 70% of these people are online every day, and over 70% of them have bought something online as well. When we looked at this a few years ago and saw what was happening in our individual business where our fastest growing age segment was people 59 to 64 years of age and the interest we had from our carrier partners, we decided to go into this business. There is very little online competition. The barriers to entry are very high because this is highly regulated by the Centers for Medicaid & Medicare Services. And it's a very lucrative business for us. There is over 10,000 people a day on average everyday having their 65th birthday, and it's a bell curve that actually keeps increasing over the next 6 years.
In fact, here you go. 76 million baby boomers turning 65. Like what I said, over 10,000 a day. Life expectancy is increasing. In fact, it's gone up over 8 years in the last 50-plus years. And not only are more people turning 65, but Medicare enrollment is projected to grow from 47.5 million to close to 64 million people in a very short period of time.
And so what we do is we capture these people online, and we help them roll them in these products. We really launched into this in '09. We didn't do much. We began in 2010. What we just ended in 2012 was our first significant year in this business. It started as a lead generation business, which means that we weren't selling products directly. We were selling names, and addresses and phone numbers of people to carriers and others who were fulfilling. This past last quarter, the fourth quarter, we did all of the fulfillment of these products in-house. That's important because we then generate a recurring revenue, and I'll give you some examples of why that's important to us. And we've been investing heavily, but we believe this year, 2013 is the year that this business, standalone, turns profitable.
In terms of revenue, you can see in 2011, Medicare represented 13% of our overall revenues. Last year, it was 20%. It's growing at a very, very nice pace and a really nice rate.
The way we generate revenue, by the way, and I should have mentioned this earlier in both businesses, the Individual & Family Plan business as well as the Medicare business, is that we are paid a commission by the health insurance companies, the carriers, the payers, to market and sell their products. What's unique about health insurance products is that they're typically billed and paid on a monthly basis. And in the individual business we earn a commission every month the product is in force. In fact, in the individual business, our commissions average around 7% of the premium value every month essentially in perpetuity. So it's a recurring revenue model. And the Medicare business, it's similar. We're paid on an annual basis, and we're typically paid for a Medicare Advantage product, for example, for the first 5 or 6 years of life.
Our strategy has -- and our execution has, we think, has been working quite effectively for us. The number of Medicare members sold last year grew 85% over the year before. Medicare Advantage, which is frankly the most appealing of these products to the payers at this point, we grew in excess of 135% last year. As I mentioned, we fulfilled almost 100% of this demand in-house. Medicare Advantage and Medicare Supplement accounted for over 70% of what we sold of all of our Medicare business. And we have over 70,000 Medicare Advantage members at the end of 2012. That's up from about 29,000 or 191% growth in that 12-month period. It will you give you a flavor for what we're experiencing here.
How we get to people here is really interesting in the senior market, and I thought I'd just take a moment to point out Walmart. This goes back to our partnering strategy as well. Essentially, all seniors -- almost all seniors, people over 65 are on at least one prescribed medication. If they're like my mom, they're on multiple prescribed medications. What most people don't understand is that prescriptions for seniors can be very, very expensive. There's a lot of out-of-pocket money that's spent. In many cases, seniors go without fulfilling their prescriptions because they're on fixed incomes and can't afford them, unfortunately.
We have a business called PlanPrescriber, which has got a really interesting technology. It allows a senior to indicate what prescription or prescriptions he or she is taking, and what pharmacy they're being filled at. Here, they would be -- they're being filled at Walmart, presumably. This is embedded in the Walmart site. Once that senior has indicated what prescriptions he or she is on, we go out and look at every Medicare Advantage and every Prescription Drug Plan in the country, come back and then rank order, in realtime, show that senior those insurance products or those plans that will best minimize their out-of-pocket cost. We save seniors on average about $600 a year out-of-pocket. It provokes them to change their Medicare Advantage or Prescription Drug Plan through us. Walmart likes it because it also allows these seniors to buy a plan that they're going to utilize in the Walmart pharmacies. So it's one of the many creative ways that we acquire seniors or customers.
Quickly, financial highlights. This is a very scalable platform, built to be that way because we are all technology people in our company first and foremost. Customer life is long, and the Individual business is well over 2 years. In the Medicare business, it can exceed 5 years. The leverage is really important and the revenues, I described you the recurring revenues, but to give you a flavor for the importance of the Medicare business, of Medicare Advantage senior, beneficiary, many times has got a lifetime revenue value to us, that's 4x to 5x greater than an individual in the under 65 business.
I should point out, by the way, that the cost of acquisition for a Medicare Advantage beneficiary for us is about the first year of revenues. So the next 4 years of revenue in theory are almost all-margin to us because the cost of support is very low. And that's a similar thing in the Individual business in terms of the fact that the acquisition costs is all taken upfront. And after several months, the recurring revenue that comes then is essentially almost all-margin.
Prices are fixed across the industry. There's no negotiating, no discounting, so the price you pay for a Medicare Advantage product through us or an individual products is the same directly through a carrier or exchange next year through the Affordable Care Act. So the way you achieve affordability is you want to see all the products in the market place, and that's what we provide. Very low working capital, it really -- it's servers and things like that in our data centers. We generate very, very good cash flow, I'll show you that in a moment. We think the member economics are very, very attractive, and our balance sheet is solid.
EBITDA or revenue EBITDA was a bit of a dip in revenues as a result of health care reform mandates going to effect in 2010, specifically in medical loss ratio that reduce the commissions we earned on the individual products. We've absorbed all of that. In fact, last quarter was our first quarter again in that individual business where we began to grow, so we're pleased with that. And then on the EBITDA side, we've been investing very heavily in the Medicare business and very deliberately. That we think is going to yield very attractive revenues and margins for us over the next several years as this book of business we built spins off.
You can see what our membership metrics look like. The most important is the top 1 estimated membership, which continues to grow at a very nice rate. Balance sheet, at the end of December, $140 million in cash, no debt. In fact, we've never had any debt. We generate significant cash. We've been buying back shares. In fact, we bought back over $90 million worth of our shares through the end of last year. We put in place a $30 million repurchase program, and we just increased that last week to $60 million. Reconciliation on EBITDA, I'm not going to take you through that. We can give you copies of this if you'd like to see them.
But that's eHealth. That's a lot, I know, in a very short of time, but I hope that's helpful, and I know we have a breakout.
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