This article has been updated with comments from Clover.
Insurance startup Clover Health’s shares dropped 12% on Tuesday after a scathing report by short-seller Hindenburg Research alleged that the company is facing an undisclosed investigation from the U.S. Department of Justice.
Clover, which offers Medicare Advantage plans, recently went public through a merger with a special-purpose acquisition company (SPAC), which typically offers a shorter route to the public markets than a traditional IPO. Billionaire venture capitalist Chamath Palihapitiya, who recently skirmished with short-sellers like Hindenburg, led the deal, which valued Clover at $3.7 billion.
Hindenburg said it had obtained a Civil Investigative Demand from a former Clover employee, showing that the DOJ had opened a False Claims Act investigation into the startup for allegedly paying providers, their staff and employees, to refer patients to its Medicare Advantage plans. A spokeswoman with the U.S. Attorney’s Office for the Eastern District of Pennsylvania said she could “neither confirm nor deny the existence of an investigation into this matter.”
In a response posted early Friday, Clover said it had received a request for information from the DOJ, but has not received any civil investigative demands or subpoenas. Both the company and Palihapitiya had been aware of the DOJ inquiry, but attorneys working for both parties concluded that the request for information “was not material and was not required to be specifically disclosed in our SEC filings.”
The company also maintained that it was in compliance with the law. Clover said it was unaware of any other ongoing investigations of the company, but received notice of an investigation from the Securities and Exchange Commission yesterday.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
“We believe this inquiry is based on the short selling report issued yesterday morning,” Clover CEO Vivek Garipalli and President Andrew Toy wrote in a blog post.
Hindenburg said it has not taken a short stake in the company, but shared the report because “…we think in this moment for public markets, it is more important for people to understand the role short sellers play in exposing fraud and corporate malfeasance.”
Clover reported $462 million in revenue in 2019 and a $363.7 million net loss. Notably, more than 97% of its 57,503 members at the end of 2019 were located in New Jersey, according to a recent prospectus.
In recent years, Clover’s plans have received a 3-star rating from the Centers for Medicare and Medicaid Services (CMS), which could affect its reimbursement.
Clover has had other brushes with regulators in the past. It was fined by CMS in 2016 for misleading statements that people who enrolled in its plans could receive covered services from any out-of-network provider.
“CMS received a high volume of complaints in January and February 2016 from new Clover enrollees who were denied services by (out-of-network) providers after being told by Clover that they could see any provider they wished,” the agency wrote in a statement explaining the penalty.
Other regulators have scrutinized events that led up to Clover’s founding. Garipalli previously founded a company called CarePoint, which acquired three hospitals in New Jersey. As the company neared the sale of two hospitals, which were near bankruptcy, the New Jersey State Commission of Investigation found that CarePoint had funneled more than $157 million in management fees to LLCs created by CarePoint’s owners.
One of these companies, Sequoia Healthcare Management LLC, obtained a $60 million loan on the same day that Clover Health Investments was incorporated. According to the state’s report, Garipalli confirmed that there was a connection between the loan closing and Clover’s incorporation.
Clover previously stated it and CarePoint are “entirely separate and independent entities, with different management teams.” But it does have contracts with the CarePoint’s three hospitals, who are part of its network. CarePoint is 80% owned by entities affiliated with Garipalli, who also has a more than 5% stake in Clover through his affiliates, according to the company’s prospectus.
Clover also has a contract with medical records platform ChartFast, which is more than 76% owned by Garipalli.
Photo credit: Creative_Touch, Getty Images
