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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-09 · 214 added, 248 removed, 252 unchanged (65% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”).

Please read the following discussion and analysis together with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”).

This discussion and analysis contains forward-looking statements, which involve risks and uncertainties.

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Business Update

Beginning in the fourth quarter of 2021, the Company began to execute significant strategic and management changes to transform our business and adapt to the evolving needs of our customers in order to position ourselves for long-term success.

In 2022, we purposefully slowed down our enrollment volume and revenue growth as we worked to implement several transformation initiatives aimed at increasing the effectiveness of our sales and marketing organizations and further enhancing consumer experience, as well as rationalizing our cost structure.

As a result, we entered 2023 on a significantly improved cost foundation compared to the same period prior year.

During the first nine months of 2023, we have continued to execute on our multi-year transformation plan with an emphasis on enrollment quality, member experience, engagement built around audience segmentation and targeting, differentiated messaging based on our unique value proposition and gradual scaling of our direct and strategic partner marketing channels as we reduce our reliance on lead aggregators.

In October 2023, we launched our Company rebrand which we have spent the past several months developing.

This rebrand has been designed to reflect our transformational work from the past two years and is expected to increase our brand recognition.

It includes our refreshed marketing plan that will differentiate us in the market and includes a redesign of our omni-channel user experience.

Over the past nine months, we have continued to improve our member retention and Complaint Tracking Module (“CTM”) scores.

As a result of positive retention dynamics, higher quality performance and the favorable commissions environment of the past two years, we recognized $12.2 million and $32.5 million in net adjustment revenue across most products during the three and nine months ended September 30, 2023, respectively.

Additionally, in contrast to the prior year, we expanded our advisor headcount in preparation for the fourth quarter annual enrollment period in which we expect to resume Medicare enrollment growth year over year.

Our fiscal 2024 growth strategy focuses on pursuing deliberate enrollment and revenue growth, while diversifying our revenue streams, continuing to build out our unified omnichannel marketing engine, driving higher conversion rates on our platform and enhancing enrollment quality and member retention.

During the first quarter of 2024, we maintained the momentum we built during the most recent Annual Enrollment Period (“AEP”), and we delivered strong enrollment growth in both our core agency choice model (“Agency”) and dedicated carrier model (“Amplify”).

This has been driven by our enhanced marketing strategies and the retention of our tenured benefit advisors.

We have also continued to observe improvements in our constrained lifetime values (“LTV”) of approved members across all of our Medicare-related plans and have been executing on our fixed cost reduction efforts initiative to drive further profitability.

In our Employer and Individual segment (“E&I”) we have been focused on implementing operational enhancements with a plan to resume enrollment growth in the fourth quarter.

We have progressed into the next phase of our retention strategy where we introduced additional initiatives, including updating our member onboarding experience, launching our loyalty program and personalized communications with our new and existing customers over a variety of channels meant to foster year-round awareness of eHealth and the services we provide.

We have also developed targeted retention programs for audiences with higher propensity for attrition, which include coordinated marketing outreach and specialized training for our benefit advisors to cater to specific member needs.

Additionally, we have built on our co-browsing technology to improve the interaction between our advisors and beneficiaries and began piloting this updated technology in the second quarter of 2024.

We expect this feature to impact enrollment quality and sales efficiency.

For the three months ended March 31, 2024, we observed improvements in our operating cash flow as compared to the same period in the prior year.

Additionally, we achieved positive trailing twelve-month operating cash flow of $3.3 million as of March 31, 2024, which exceeded our target of break-even cash flow for this period and was reflective of our enrollment growth from the most recent AEP as well as our business transformation plan that we completed in fiscal 2023.

Change in Expense Allocation Methodology

Beginning in the first quarter of 2024, primarily as a result of vacating excess office space, we modified our methodology used in allocating certain expenses for the purpose of evaluating financial and segment performance and resource allocation.

Specifically, we no longer allocate our facilities-related expenses, and as a result, these costs are now reported within the “General and administrative” line in our Condensed Consolidated Statements of Comprehensive Loss and within Corporate for our segment profit (loss).

We have recast the Condensed Consolidated Statements of Comprehensive Loss and our segment profit (loss) for the prior period presented to conform to our current methodology.

This resulted in a classification change of expenses from marketing and advertising, customer care and enrollment, and technology and content into general and administrative.

Additionally, our segment profit (loss) no longer includes our facilities allocation to each of our segments and instead, these costs are included within Corporate.

There was no impact to total operating costs and expenses, loss from operations, net loss or net loss per share attributable to common stockholders on our Condensed Consolidated Statements of Comprehensive Loss.

Summary of Selected Metrics

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• the number of approved members for Medicare-related, individual and family, small business and ancillary health insurance plans from whom we have received an initial commission payment;

• the constrained lifetime value (“LTV”) of approved members for Medicare-related, individual and family and ancillary health insurance plans we sell, as well as the estimated annual value of approved members for small business plans we sell.

• the constrained LTV of approved members for Medicare-related, individual and family and ancillary health insurance plans we sell, as well as the estimated annual value of approved members for small business plans we sell.

Approved Members

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Three Months Ended

September 30, % Change Nine Months Ended

September 30, % Change

2023 2022 2023 2022

March 31, % Change

Medicare Advantage 65,750 60,451 9 %

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Total Approved Members 98,259 97,576 1 %

Three Months Ended September 30, 2023 and 2022 – Total Medicare approved members declined 10% during the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a decline in Medicare Advantage and Medicare Part D prescription drug plans.

These declines were due to lower variable marketing spend as we focused on implementing operational enhancements to our sales and marketing organizations with a plan to resume enrollment growth in the fourth quarter on a significantly improved operational and cost foundation.

Individual and family plan approved members declined 23% during the three months ended September 30, 2023 compared to the same period in 2022 primarily due to reduced member acquisition spend.

Ancillary product approved members declined 24% during the three months ended September 30, 2023 compared to the same period in 2022 driven by declines in approved members across all ancillary insurance products that are typically cross-sold with new individual and family plan enrollments and lower overall volume.

Small business group health insurance approved members decreased 46% during the three months ended September 30, 2023 compared to the same period in 2022 primarily due to reduced member acquisition spend.

Nine Months Ended September 30, 2023 and 2022 – Total Medicare approved members declined 25% during the nine months ended September 30, 2023 compared to the same period in 2022, reflecting a decline across all Medicare products that we market as a result of reduced member acquisition spend, including marketing and customer care and enrollment, as we focused on implementing operational enhancements to our sales and

marketing organizations with a plan to resume enrollment growth in the fourth quarter on a significantly improved operational and cost foundation.

Individual and family plan approved members declined 6% during the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to a 10% decline in qualified health plans as a result of lower volume.

Ancillary product approved members declined 22% during the nine months ended September 30, 2023 compared to the same period in 2022, reflecting declines in approved members across all ancillary insurance products that are typically cross-sold with new individual and family plan enrollments and lower overall volume.

Small business group health insurance approved members declined 23% during the nine months ended September 30, 2023 compared to the same period in 2022 due to reduced member acquisition spend.

Three Months Ended March 31, 2024 and 2023 – Total approved members grew 1% during the three months ended March 31, 2024 compared to the same period in 2023, driven by:

• a 10% growth in Medicare approved members, primarily due to an increased number of benefit advisors and increased variable marketing spend year-over-year, specifically contributing to a 9% increase in Medicare Advantage approved members;

• partially offset by a 29% and 15% decline in individual and family plan and small business health insurance approved members, respectively, primarily due to a decrease in volume as we focus on implementing operational enhancements with a plan to resume enrollment growth in our E&I segment in the fourth quarter;

• a 16% decline in ancillary approved members due to declines in approved members across all ancillary insurance products that are typically cross-sold with new individual and family plan enrollments.

Estimated Constrained Lifetime Value of Commissions Per Approved Member

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Three Months Ended

September 30, % Change

March 31, % Change

Medicare (1) (2)

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Small Business (1)

215 233 (8) %

(1) Constrained LTV of commissions per approved member for Medicare, individual and family and ancillary plans represents commissions estimated to be collected over the estimated life of an approved member’s plan after applying constraints in accordance with our revenue recognition policy.

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These factors may result in varying values from period to period.

For additional information on constrained LTV, see “ Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022.

(2) The constraints for all Medicare products remained the same during the three months ended September 30, 2023, as compared to the same period in the prior year.

The constrained LTV of commissions per approved member increased by 5% and 7% for Medicare Advantage and Medicare Part D prescription drug plans, respectively, during the three months ended September 30, 2023 compared to the same period in 2022.

The increase in Medicare Advantage plans was primarily driven by positive trends in commissions collected as a result of more favorable commission rates and improved retention and carrier mix.

The increase in Medicare Part D prescription drug plans was primarily driven by favorable retention.

The constrained LTV of commissions per approved member for Medicare Supplement plans decreased 13% compared to the same period in 2022 primarily driven by unfavorable commission rates due to carrier mix, partially offset by favorable retention.

Individual and Family, Ancillary and Small Business

The constrained LTV of commissions per non-qualified approved member and per qualified approved member increased 6% and 11%, respectively, during the three months ended September 30, 2023 compared to the same period in 2022.

The increase in constrained LTV of commissions per non-qualified approved member was due to more favorable commission rates and an increase in paying approved applications, partially offset by unfavorable retention.

The increase in constrained LTV of commissions per qualified approved member was due to more favorable commission rates and better retention.

The constrained LTV of commissions per approved member for vision and dental plans increased 18% and 8%, respectively, during the three months ended September 30, 2023 compared with the same period in 2022 due to favorable commission rate trends.

Small business constrained LTV of commissions per approved member increased 4% compared to the same period in 2022.

For additional information on constrained LTV, see “ Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023.

(2) The constraints applied to the total estimated lifetime commissions we expect to receive for selling the plan after the carrier approves an application in order to derive the constrained LTV of commissions for approved members recognized were 7%, 9% and 7% for Medicare Advantage, Medicare Supplement and Medicare Part D, respectively, for the three months ended March 31, 2024 and 2023.

Three Months Ended March 31, 2024 and 2023 - The changes in constrained LTV of commissions per approved member consisted of:

• a 6% increase in Medicare Advantage plans, reflecting favorable carrier and contract mix;

• a 9% increase in Medicare Supplement plans, primarily due to an improved ratio of approved members who became paying members and favorable retention, partially offset by unfavorable carrier and contract mix;

• a 17% increase in Medicare Part D plans, primarily driven by favorable commission rates and improved retention;

• a 4% decrease in non-qualified plans, primarily driven by unfavorable retention trends in older cohorts, partially offset by favorable carrier and contract mix;

• a 4% increase in qualified plans, primarily driven by favorable carrier and contract mix, partially offset by unfavorable retention trends;

• a 13% and 20% increase in dental and vision plans, respectively, primarily driven by favorable carrier and contract mix;

• an 8% decrease in small business plans, primarily due to unfavorable contract rates.

Estimated Membership

Estimated membership represents the estimated number of members active as of the date indicated based on the number of members for whom we have received or applied a commission payment during the period of estimation.

The following table shows estimated membership as of the periods presented below:

As of September 30, % Change

There is generally up to a few months lag between newly approved plans and the receipt of commission payments from the health insurance carrier.

A member who purchases and is active on multiple standalone insurance plans will be counted as a member more than once.

For example, a member who is active on both an individual and family health insurance plan and a standalone dental plan will be counted as two continuing members.

Health insurance carriers bill and collect insurance premiums paid by our members.

The carriers do not report to us the number of members that we have as of a given date.

The majority of our members who terminate their policies do so by discontinuing their premium payments to the carrier or notifying the carrier directly and do not inform us of the cancellation.

Also, some of our members pay their premiums less frequently than monthly.

Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date.

After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation.

We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours.

For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership.

Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active.

We do not update our estimated membership numbers reported in previous periods.

Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period.

If we experience a significant variance in historical membership as compared to our initial estimates, while we keep the prior period data consistent with previously reported amounts, we may provide the updated information in other communications or disclosures.

As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next, making it difficult for us to determine with any certainty the impact of current conditions on our membership retention.

Various circumstances could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.

The following table shows estimated membership by product as of the periods presented below:

As of March 31, % Change

Medicare Advantage 594,457 577,500 3 %

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(1) To estimate the number of members on Medicare-related, individual and family, and ancillary health insurance plans, we take the respective sum of:

(i) the number of members for whom we have received or applied a commission payment for a month that may be up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated);

cancellations over the period being estimated);

and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate).

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We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported.