Shares of Clover health ((NASDAQ: CLOV) have lost about half their value since Chamath Palihapitiya’s special acquisition firm went public a few months ago. Despite a few months of poor performance, the excitement for the digital health boom on Wall Street is still high. Bank of America recently reiterated its Buy recommendation on the stock with a target price of $ 15, which suggests your money could double.

A new direct contract program from the Centers for Medicare and Medicaid Services (CMS) inspired Bank of America analyst Kevin Fischbeck to make such a bold call. Could he be right or is that just a bolt of lightning?

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A difficult start

Before we can measure Clover Health’s ability to flip its stock price, it’s important to understand why it fell in the first place. In short, investors hoped that access to more capital through a recent IPO would accelerate growth.

Investors were more than a little disappointed this March when the company announced to investors that they should expect between 10,000 and 12,000 new Medicare Advantage customers by the end of 2021. That’s nothing to sneeze at, but it doesn’t get any better than the company. The merger with one of the companies raised approximately $ 670 million Palihapitiyas SPACs in January. Clover expects to handle 68,000 to 70,000 members in 2021, but as of February, Clover Health had over 66,000 Medicare Advantage members.

It is important to remember that the vast majority of Medicare Advantage beneficiaries update their registration status at about the same time each year. Therefore, there is hardly any reason to panic that only a few thousand new members are expected by the end of 2021. Clover Health continues to believe that Medicare Advantage membership will grow at a healthy rate that is between 17% and 21% higher than it was in 2020.

Clover Health is a technology company with an unusual quality. In the past, around 80% of sales came from direct contact between employees and Medicare beneficiaries. If we look at the impact of lockdowns on general pedestrian traffic among older adults over the past year, the company’s recent performance has been more impressive than it looks and it will improve.

Something new from Medicare

Recently, CMS implemented a new program right down the alley from Clover Health called the Global and Professional Direct Contract Model. This is an attempt to reduce costs while improving the quality of care for Medicare Advantage beneficiaries. If this sounds familiar, it’s because the Affordable Care Act established Accountable Care Organizations (ACOs) for the same purpose nearly a decade ago.

Generally, to receive rewards from Medicare ACOs, ACOs just need to keep their own members healthy enough to avoid expensive hospital stays, which leads to some flawed incentives. In short, some ACOs have learned that it is much easier to exceed national quality standards through selective agreements with health care providers and suppliers than through real care management for those who need it.

With the new direct contracting program, a company like Clover Health can be held responsible for all Medicare expenses incurred in certain geographic areas. This is an incentive for companies to group every available patient in their area while penalizing any attempts to avoid registering less healthy subgroups.

Right up in the alley of Clover Health

Once Clover Health is present in the Medicare Advantage markets, this seedy underdog wins the majority of new beneficiaries and keeps them at a higher rate than huge competitors like: CVS health ((NYSE: CVS) and UnitedHealth Group ((NYSE: UNH). Offering doctors with significantly higher reimbursement rates for making appointments with the Clover Assistant app is the most effective tool that Clover Health uses to engage new doctors. Over time, well-coordinated care with the help of the Clover Assistant will help keep medical costs down, including the expenses of the beneficiaries.

Clover Health expects the total cost of Medicare Advantage to reach approximately 90% of the premiums received this year. Medical coverage rates that fall below 85% will be severely punished by CMS. This means that Clover Health’s operational performance is little worse than that of its gigantic counterparts. Remember, CMS reimburses Clover Health the same rate for coordinating care that it offers UnitedHealth and CVS Health. Somehow, though, Clover still manages to cut a much bigger piece of the cake for doctors.

New beneficiaries with uncoordinated care tend to increase significantly more medical expenses in her first year at Clover Health than in subsequent years. Despite the challenge, Clover expects the medical coverage rate for direct contacts to be around 100% in 2021 as the company gains access to 200,000 Medicare beneficiaries through contracts with participating providers.

Clover Health’s past performance does not guarantee year-on-year growth in sales, but the company is able to achieve it. The next few quarters will likely be very volatile for the stock, but there’s a good chance your money will more than double in the long run.

This article reflects the opinion of the author who may disagree with the “official” referral position of a Motley Fool Premium Consulting Service. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.