Disclosure: I am an owner of BFYT as of March 23, 2020.

What is Benefytt Technologies?

Benefytt Technologies, Inc. (BFYT), formerly known as Health Insurance Innovations, is (in the company’s own words): “a technology driver distributor of Medicare, health and life insurance products.”

In other words, it is primarily a lead generation service for other health insurance companies. For those unfamiliar, “lead generation” is jargon for “gets a fee for finding customers for the companies actually providing the insurance, without taking the insurance policy risk itself.”

In more detail, what do they do?

The company has two main business segments:

• IFP: Stands for “Individual and Family Plans”. These plans are for health insurance, short-term medical (STM) insurance, health benefits insurance plans (HBIP). BFYT connects people looking for health insurance with insurance options.
• Medicare: A newer business for them where they distribute and broker Medicare plans.

They accomplish these through a variety of subsidiaries they’ve acquired. The most publicly eye-catching brand is its newly-launched HealthInsurance.com.

This is arguably the greatest brand to own if you’re in the health insurance business. Benefytt bought this website domain name in July 2019 for a little over $8 million dollars.

And how do they make money?

The two big business segments have a couple of different revenue streams:

• IFP
  • Receiving commissions and/or fees for brokering/selling insurance policies that are underwritten by other insurance carriers.
  • These may be collected at the point-of-sale when someone buys an insurance policy, or collected as monthly payments from the insurance companies.
• Medicare
  • Lead Generation or what they call “Consumer Engagement”: People call BFYT phone lines which get redirected to insurance companies or licensed insurance salespeople.
  • Distributing Medicare Insurance: Prepare and execute the insurance plans for their partner insurers.
  • These cover Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans.

Below is the summary of their annual revenue and profit split by these two segments:

It is most important to note that while the Medicare segment is currently much smaller, its profit margin is about 47% versus the 21% for the IFP segment. I will expand upon this distinction later in the report.

To reiterate, they are not primarily an insurance company themselves. They are a marketing partner for the actual insurance companies and receive commissions and fees for their sales and marketing support.

“The health insurance products we sell are underwritten by third-party insurance carriers with whom we have no affiliation apart from our contractual relationships. Other than with respect to the activities of Benefytt Reinsurance…we are not an insurer, we assume no underwriting, insurance, or reimbursement risk.” – BYFT 2019 Annual Report, Page 6

The BFYT Buyback Program

On October 13, 2017, the Board of Directors authorized the company to buy up to $50 million worth of its own stock, and then increased this amount to $200 million on March 14, 2019.

The purchases the past couple years have been:

• $63 million in 2019: 1,981,241 shares at an average price of $32.23
• $55.9 million in 2018: 1,550,136 shares at an average price of $36.05

So about $119 million out of $200 million has been spent.

When a company is buying its own stock back in the public market, they typically either believe it’s undervalued or they’re trying to explicitly push the price higher.

With the stock price now well below where management was buying it before, I would not be surprised if they continue to buy more of it now. This also implies they think the stock should be worth more than the $32-$36 range they paid for it.

Why Has the Stock Declined Since Then?

First, and most obviously, is the coronavirus. From its March peak of $30, the stock declined 50% to a bottom of $15 before bouncing back last week to about $22 today. This decline has mirrored most of the stock market.

Second, the IFP revenue was down 10.6% in 2019 from 2018. Although profit was actually still up 12.4% for the IFP segment, this could be seen as a short-term drag on what’s called “top-line” overall revenue growth.

Third, cash flow was negative (-$4 million) in 2019 due to a bunch of acquisitions (including HealthInsurance.com).

Fourth, the company has taken out about $180 million in debt from credit lines and loans to help pay for the aforementioned acquisitions.

The three latter reasons can be explained by management. All that spending is investment in a pivotal strategic shift: Medicare.

Why Buy BFYT Now

Medicare Advantage is The Next Big Thing

“On December 20, 2019, we announced a change in our overall business strategy to accelerate growth within the Medicare segment. The IFP segment will be de-emphasized moving forward and our focus for IFP will be to maximize cash flows….We will be able to use cash flows from the IFP segment to invest in accelerating growth of the Medicare segment.” – Page 38-39 of the 2019 BFYT annual report.

On June 5, 2019, just a month before the HealthInsurance.com acquisition, BFYT bought a company called TogetherHealth for about $50 million in cash, $12 million in stock, and another $50 million in future bonuses (“earnouts” in their financial terms) to the TogetherHealth team if they hit certain revenue targets over the next few years.

TogetherHealth was founded in 2010 as an insurance sales and brokerage specializing in Medicare and the over-65 age group.

By combining the salesforce and insurance carrier relationships of TogetherHealth, the online branding and insurance processing platform behind HealthInsurance.com, and the existing cashflow coming from the ongoing individual and family health insurance sales, they are creating a Medicare insurance sales machine.

As a quick primer in case you are young and only vaguely know what Medicare is, Benefytt explains it on pages six and seven of its annual report:

“Medicare is a federal program that provides persons 65 years of age and over, and some persons under the age of 65 who meet certain conditions, with hospital and medical insurance benefits. Medicare beneficiaries generally have a choice between Medicare Fee-for-Service and Medicare Advantage plans. Medicare Fee-For-Service is a government health insurance plan where the consumer is responsible for select health care related payments with no limit on out-of-pocket expenses. To increase coverage, Medicare Fee-For-Service beneficiaries can purchase commercially offered Medicare Supplement plans. Medicare Advantage is an alternative to Medicare Fee-For-Service. Under Medicare Advantage Plans, the Centers for Medicare and Medicaid Services (“CMS”) contracts with private health insurance carriers under the Medicare Advantage program and Medicare Part D prescription drug plans. Under these programs, the government generally pays insurers a fixed amount of money each year per enrollee to cover healthcare expenses rather than making payments directly to providers under Medicare Fee-For-Service. Medicare Advantage plans are required to cover the same services as Medicare Fee-For-Service and usually cover a variety of other health care services and include a cap on out-of-pocket spending for the consumer.”

As previously mentioned, the margins on the Medicare customers are much higher than on other health insurance plans. Page 41 of the BFYT annual report states that the Lifetime Value of an approved insurance application (meaning the insurance partners will underwrite and sign the insurance contract for the customer) is $1.16 million, whereas other non-Medicare insurance applications are worth roughly $760-$780K.

The reason Medicare insurance is such a unique growth area right now?

A new rule change by the Center for Medicare and Medicaide Services which activated in 2020 allows for:

1. Medicare Advantage insurance to cover “telemedicine” (doctor appointments over the phone)
2. Relaxed restrictions on insurance sales across different states to support the digital era

This rule change and the expansion of access to Medicare is a government priority made clear in the 2020 address by the Secretary of Health and Human Services Alex Azar:

“Convenient, tailored benefits to promote health is also what we’re trying to do with new flexibilities in Medicare Advantage, which now allows plans to provide more supplemental benefits, such as home-delivered meals, transportation, and home modifications.

You may or may not be aware of that change, but if you watch a lot of cable news—which none of us should do, unless it’s to see Dr. Fauci talk about coronavirus—you may have seen frequent commercials talking about how Medicare beneficiaries can call a 1-800 number to inquire about whether they’re eligible for these new benefits….

One particular ad looks a bit like something out of the 1990s, with red, white, and blue graphics, and, to complete the picture, there’s an NFL star from the 1960s involved.

On its surface, this doesn’t look or sound like the future of healthcare—but it represents important work done here at the department, placing patients at the center and providing them with a tailored set of benefits that will keep them healthy and keep their costs affordable.

We’ve delivered significant results on affordability over the past year: Average Medicare Advantage premiums are now the lowest in 13 years, while Part D premiums are the lowest in seven years. We saw 1,200 MA plan options added from 2018 to 2019. These are real savings for our seniors—let’s thank everyone at CMS who worked hard to make that happen.”

The red, white, and blue ad which Mr. Azar is referencing was created by TogetherHealth/Benefytt Technologies, and the video has been made available courtesy of the investment firm Citron Research:

The value of telemedicine can be seen in the stock price of the company Teladoc, the leading provider of doctor-over-the-phone services, doubling in the last three months.

Teladoc’s sessions can now be covered by the insurance sold through BFYT.

BFYT is Actively Looking to Be Bought

Just as appealing to investors than the opportunity for insuring Medicare and new kinds of doctor-patient relationship is that Benefytt is a company that is trying to sell itself to larger firms.

Coming straight from page six of their annual report:

“On July 26, 2019, we announced that our Board of Directors commenced a process to explore, review and evaluate a range of potential strategic alternatives focused on maximizing shareholder value. These alternatives could include, among other things, a sale of the Company or a portion thereof….On March 3, 2020, the Company announced that the review of potential strategic alternatives was ongoing.”

Who would buy them? Two major obvious types of buyers would be existing health insurance giants who Benefytt already partners with like Aetna and Humana, or private equity firms would plan to simultaneously ride the Medicare growth while finding ways to cut costs and make back their investment with a return over the next decade, if not flip it to the insurance giants.

Benefytt is not trying to sell out of desperation. It’s because they’ve seen how much their competitors have sold for in just the past couple years.

What is BFYT Worth?

Disclosure: I have not done a complete financial model for BFYT. This would ideally and primarily involve estimating the next few years worth of approved insurance applications, especially for Medicare Advantage, multiplied by the profit or lifetime value per application, and compare against any decline in the non-Medicare business.

However, we have a couple of close comparison companies that can demonstrate how undervalued BFYT is right now.

Last year, GoHealth, a health insurance search and sales company based in Chicago, was sold to a private equity firm for $1.5 billion dollars when it had an estimated $500 million in annual revenue (I actually spoke with GoHealth a few years ago when I was considering joining them).

In the past two years, another health insurance shopping website called eHealth has seen its stock increase 5x from $20 to $120 per share.

Here’s a table comparing these three companies:

The valuation used for Benefytt is the Enterprise Value which includes its debt. eHealth has no debt and GoHealth’s valuation is based on what we know from the press about its acquisition.

Benefytt’s market capitalization is only about $290 million, less than its annual revenue (the Enterprise Value is this plus the $179 million in debt minus some cash). This can happen to companies which either have declining revenue, are not profitable, or have debt. Benefytt has one segment that is declining (IFP), but management has already stated that IFP is less important than its new, growing Medicare business, and Benefytt is profitable in both its segments. We’ve already covered the debt being taken out specifically to fund the Medicare acquisitions.

Let’s ignore eHealth for now because its numbers scream too-good-to-be-true (eHealth is possibly overvalued). If Benefytt were valued similarly to GoHealth, it would be a more than billion dollar business with stock worth at least $50 per share, more than double its current $22 price.

Alternatively, we could get to roughly that same number based on the Price-to-Earnings ratio. Right now, Benefytt is trading at a “P/E Ratio” of roughly 8.4. The S&P 500 average is right now about 19. If we believe Benefytt’s profits will grow at a faster rate than the average S&P 500 company (which we are assuming will happen due to the Medicare strategy), then its stock would trade in the mid-$40 range if it were valued like the S&P 500 average.

Recall the company’s buyback plan? Management already believed the company was worth more than $36 per share. Investors now have a chance to get in at an even lower price.

Can a company’s valuation swing upward that quickly? Yes, because we’ve already seen it happen to both Teladoc and eHealth.

Risks and Where I Could Be Wrong

• IFP Segment Decline: The stock may stay low or decline if the transition period between focusing on IFP toward Medicare takes longer than expected
• Competition: If those competitors like GoHealth and eHealth get more aggressive in marketing, pricing, and insurance product offerings, especially for Medicare, they could eat into Benefytt’s business or generally decrease profit margins across the industry
• Customer concentration: It is important to note that Benefytt primarily gets paid by the insurance companies in exchange for Benefytt finding customers for them. At the end of 2019, three insurance companies were 43% of BFYT’s revenues, and one insurance company was 56% of its outstanding accounts receivables (revenue payments it had not received yet). This poses risks where the insurance companies may be able to dictate price on their commissions and fees more aggressively in the future. Though I’m skeptical this will happen quickly, as the customer lifetime value estimates would make me think the insurance companies like Aetna will still be willing to pay up for Benefytt’s clients so Humana doesn’t get them, as an example.
• Legal Risks: Being in a highly regulated space and working with distributed and third-party sales forces creates opportunities for lapses in government compliance. Page 19 of the Annual Report outlines lawsuits of their third-party sales partners for which BFYT has had to provide documentation and defense. At any time, one of these could end up being more serious, and I have not vetted each lawsuit individually. Generally, given the praise we saw from the Secretary of Health and Human Services, it would seem like Benefytt is in alignment with the government’s goals, so regulatory risk seems low. But I am also not an expert on Medicare legislation and more due diligence should be done there.

In Conclusion

Despite the above risks, Benefytt Technologies has the benefits of:

• A profitable existing business
• An incredible new brand in HealthInsurance.com
• Paired with a recently acquired, existing Medicare sales force
• Selling a product (Medicare Advantage) that doesn’t appear to be going away any time soon and is being updated for the digital age with telemedicine coverage and new nationwide sales rules for online insurance
• Is noticeably undervalued compared to similar health insurance brokers
• And has publicly disclosed it’s actively trying to sell itself because management knows this business is of value to the broader health insurance industry and its giants.

If the above plays out as planned, BFYT’s value could double within the next couple years as Medicare Advantage becomes an established insurance product for the elderly.