In the summer of 2015, senior citizens who had signed up for a fledgling insurance plan called Clover Health started receiving unexpected medical bills for blood work.
Most were living on fixed incomes in New Jersey, the only state where Clover, a venture-backed start-up based in San Francisco, was available.
As a Medicare Advantage Plan, Clover makes most of its money from the federal government, which covers the bulk of insurance costs for people age 65 and over. Members expected the Clover plan to cover clinical lab tests, even if the providers were out of network.
But Clover was playing a different game -- one which would put patients in a bad situation. Before Clover would make payments, it first wanted patient data from the country's biggest lab-testing providers, LabCorp and Quest Diagnostics, according to two people familiar with the matter who asked not to be named because the information they provided was confidential.
That data would help Clover develop the predictive analytics technology that was supposed to help patients and keep costs down -- and was a big reason why venture capitalists plowed $425 million into the company.
Sources say that despite its $1.2 billion valuation, Clover has struggled to navigate a highly challenging and slow-moving health insurance industry that rewards size and scale. The "growth-hacking" tricks and aggressive sales and marketing techniques that software start-ups and app developers use to juice their numbers have proven less effective in health care, which is heavily regulated.
In this case, as a small start-up plan, Clover had little negotiating power with giant lab companies. So Clover started pushing back on the claims, telling the labs that it lacked sufficient proof that the tests were medically necessary. The start-up outlined a list of items that it needed within 30 days before paying these bills.
Rather than adhering to Clover's demands, the labs turned around and billed the patients -- Clover's elderly members. It's not supposed to happen that way, as Clover tells its members that it doesn't allow for so-called balance billing by providers.
But in hundreds of instances, according to a person familiar with the matter, Clover customers contacted the company, angry and confused. "Members were harassed with bills," the source said.
The Centers for Medicare and Medicaid Services (CMS) received a complaint about an unpaid claim from Quest in 2016, which was resolved when Clover told the member not to pay.
Clover eventually paid its bills to the labs after learning the full extent of the situation, and it negotiated in-network contracts and data-sharing deals with both Quest and LabCorp by the end of 2015. Internally, the company views the incident as a gamble that paid off.
But in Clover's efforts to take a Silicon Valley approach to health care and disrupt the insurance market, it also disrupted the lives of members.
Quest didn't respond to requests for comment and LabCorp didn't provide one.
CNBC spoke with six former Clover employees and advisers for this story. They all spoke on the condition of anonymity, because of various agreements they signed with Clover and because of the sensitivity of the topic.
Sources described an operation with some deep flaws, from its culture and leadership to its business model, which relies on payments from the government.
The turmoil has led to hefty turnover of late in Clover's C-suite. Co-founder and Chief Technology Officer Kris Gale stepped down in December, four months after Wilson Keenan, the chief operating officer, left the company.
Clover has also missed internal financial targets, is reckoning with mounting losses and has seen its Medicare star rating dip from 3.5 out of 5 to 3, which is a problem because lower scores result in reduced payments from the government.
But the company is pushing ahead with some new hires and geographic expansion.
In September, it brought on Varsha Rao, the former head of operations at Airbnb, as COO. And the company is beginning to serve parts of Georgia, Texas and Pennsylvania in early 2018, after thus far being unable to operate outside of New Jersey.
The big-name venture capitalists, who have poured hundreds of millions of dollars into Clover, have plenty at stake in the company's success, as does board member Chelsea Clinton. They're all buying into an "entirely new approach to health insurance," as Clover proclaims on its website.
Sequoia Capital and First Round Capital are among Clover's top backers. In May, Alphabet's venture arm GV joined a $130 million financing round that put Clover in the billion-dollar start-up club. And here's what an investor at Greenoaks Capital said about Clover in May 2016, after leading a $160 million financing round.
"By combining a data-driven approach to improving health outcomes and a genuine desire to delight its members, Clover offers a Medicare Advantage plan that creates a truly positive impact on member health, while delivering a superior member experience and value that continues to get better and better at a rapid pace."
Clover was started in 2012 by Vivek Garipalli, who previously co-founded a New Jersey hospital chain called CarePoint Health.
At CarePoint, Garipalli's model involved cutting ties with large private insurers to make these hospitals out of network for most plans. That meant insurers generally ended up paying higher rates, a scheme that Aetna's former head of national networks described as "taking advantage of members who seek emergency services."
In 2013, a New York Times investigation revealed that Bayonne, one of the CarePoint medical centers, was the most expensive hospital in America, charging the highest amounts in the country for nearly one-quarter of the most common hospital treatments.
Those close to Garipalli say he knows the industry and has the entrepreneurial drive necessary to battle entrenched interests. First Round's Josh Kopelman was so struck by Garipalli that in 2015, his early-stage firm wrote a $4 million check to Clover, the biggest initial investment it had ever made.
With Clover, Garipalli was jumping into a new market. Clover is among a small group of Medicare Advantage start-ups, along with Bright Health and Devoted Health, offering plans that are increasingly popular among the growing number of retirees because they purportedly offer greater consumer choice and extra coverage while still maintaining government subsidies. Consulting firm PricewaterhouseCoopers expects the Medicare Advantage market to generate more than $350 billion in annual revenue by 2020.
But despite the marketing hype and flood of investor dollars, Clover has been falling short of its goals. Rather than using tech to provide a more cost-efficient product, Clover is currently a money-losing insurance company.
"Terms like big data are good buzzwords to get you that better valuation when you're going to shop to VCs or growth equity funds," said Ari Gottlieb, director of health services and payer strategy at PwC. "But at the end of the day, most established plans already use big data and do predictive analytics."
In May 2016, CMS fined the company $106,095 for misleading its members about their ability to receive covered services from any out-of-network (OON) provider. Clover failed to notify its members after repeated notifications from the agency dating back to late 2015.
In the enforcement letter, CMS said it "received a high volume of complaints in January and February 2016 from new Clover enrollees who were denied services by OON providers after being told by Clover that they could see any provider they wished."
Clover has also tried to play hardball to keep costs down, but interrupted the care of its members in at least one case.
In 2016, AtlantiCare, southeastern New Jersey's largest health provider, stopped accepting Clover's members. The companies had been negotiating a contract, but the talks fell through after Clover refused to accept the rates that AtlantiCare demanded, according to a person familiar with the matter. Instead, it sent members to a smaller in-network hospital, Shore Medical Center.
Hospitals are occasionally willing to negotiate lower rates with insurance plans in exchange for volume, but start-up plans have less room to bargain because they don't have enough members.
Jennifer Tornetta, AtlantiCare's director of media relations and public affairs, said in an email that AlantiCare informed patients that "we could no longer accept Clover insurance, other than for emergency care, due to the lack of an in-network contract" as of Jan. 1, 2017.
Clover lost several hundred members after the deal collapsed, although it regained them later thanks to its lower prices.
These back-and-forth tactics have led to a troubled balance sheet.
According to a source with knowledge of Clover's financial projections, the company's plan in 2015 was to double membership every year. Public filings show that its membership only grew from 20,000 in 2016 to just shy of 27,000 by September 2017. Clover missed its target to enter new states by 2016, when its request for out-of-state expansion was held up by CMS.
An investor who met with the company early on about its growth trajectory said that Clover predicted it would reach 65,000 members by the end of 2017 and book $500 million in revenue from premiums. Its gross profit margin was supposed to reach 20 percent.
But according to an analysis from PwC, Clover makes about $860 per member per month in premiums, equating to annual revenue of closer to $270 million.
Clover is also losing money on the average customer. Its medical loss ratio, which refers to the difference between claims paid out and premiums received, averaged about 109 percent last year. This number is based on quarterly statements, which can be less reliable than the annual statement that will be published in March of 2018.
"A poor-performing Medicare Advantage plan has a medical loss ratio of 90 percent," said PwC's Gottlieb. "When you're spending more than a dollar of revenue on medical costs, it's not sustainable."
Clover did not provide a comment for this story.
Clover has been attempting to lower its medical loss ratio since late 2016 by focusing on reducing fraud and abuse. It's also been controlling costs in other ways, including through a hiring freeze on engineers in early 2017, according to three people familiar with the plan.
Cutting back on tech hires dealt another blow to the company's effort at creating a sustainable advantage over the incumbents. In 2016, a bug was discovered in one of Clover's most important software projects, a system that was designed to rank members to call from sickest to healthiest and remind them to get an annual checkup.
To rank the call queue, Clover used risk score data from CMS, which helped determine people who had diabetes or were on key medications. But because of the software glitch, the list was reversed. For several months, Clover's representatives called the healthiest members first.
"We can't grow if the house is a huge mess," said a former employee. "It was decided that we would fix the plumbing first."
The company has a new CTO joining soon to replace Gale and is revamping its engineering team, a source said. A new finance chief will also be announced soon.
Controversy has even followed Clover into the social media sphere. In October a senior engineer named Marco Rogers, who'd worked at Clover for over two-and-a-half years, tweeted about the company's approach to people of color. Those tweets were later deleted, but not before they generated hundreds of likes and retweets.
CNBC accessed screenshots of the tweets.
"I can say it's the primary reason I left Clover," Rogers wrote. "I did leave voluntarily, but it was because I felt I was being passively aggressively pushed out by people who found me 'adversarial.'"
Prior to Clover, Rogers spent over three years at Yammer, where Clover co-founder Gale was vice president of engineering. According to his LinkedIn profile, Rogers joined software developer Lever in August. He couldn't be reached for comment.
Clover appears to be responding to such complaints. The company just hired Jessica Wusthoff to the position of "diversity and inclusion manager."
Clover has taken numerous steps to address its technology and financial challenges as well. But it's clear that the company has a long way to go to upend health care the same way other tech upstarts have taken on retail, travel and food delivery.
Health insurance, particularly when it comes to Medicare, poses unique challenges that have historically kept venture investors away. As the Clover story has shown to date, it's not the right place to move fast and break things.