agilon health Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 15 speakers on the call.

Operator

You all for joining. I would like to welcome you all to the Agilent Health First Quarter 2023 Earnings Conference Call. My name is Brika, and I will be your operator for today's call. At this time, all participants are in a listen only mode. And after the speakers' remarks, you will have an opportunity to ask a question.

Operator

Thank you. I would now like to turn the call over to Matthew Gillmor, Vice President of Investor Relations. Sir, Matthew, you may begin.

Speaker 1

Thank you, operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sall and our CFO, Tim Bentley. Following prepared remarks from Steve and Tim, we will conduct a Q and A session. I'd like to remind you that our remarks and responses to questions may include forward looking statements.

Speaker 1

Actual results may differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward looking statements. Additionally, certain financial measures we will discuss in this call are non GAAP financial measures. We believe that providing these measures helps investors gain a better A more complete understanding of our financial results and is consistent with how management views our financial results.

Speaker 1

A reconciliation of these non GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8 ks filed with the SEC. You'll note from the press release We've changed presentation for certain non GAAP financial measures. Before Steve's remarks, Tim will review these changes. So with that, let me turn the call over to Tim.

Speaker 2

Thanks, Matt. Before we give our prepared remarks, I want to review the revised presentation for adjusted EBITDA and gross profit. As you know, we've always been committed to transparency and provide a lot of details on our performance. We recently made the determination that we should include geography entry costs within adjusted EBITDA to conform to the SEC's recent guidance on non GAAP financial We will continue to provide transparency around these investments on a go forward basis. For clarity, we want to define gross profit and adjusted EBITDA before we begin the call.

Speaker 2

We've replaced network contribution with GAAP gross profit. Gross profit is total revenues less medical services expense and other medical expenses, which include a portion of geography entry costs. Adjusted EBITDA now includes total geography entry costs, which was $12,000,000 in the quarter. This includes the portion of geography With that, I'll turn the call over to Steve.

Speaker 3

Thanks, Tim. Good evening and thank you for joining us. We've had a very successful start to the year and we are making rapid progress against our vision to transform healthcare in 100 plus communities by empowering primary care doctors. We are hosting today's call from the Twin Cities in Minnesota, Where we recently launched our partnership with 2 leading physician groups, Entyra Family Clinics and Richfield Medical Group. Entyra and Richfield are highly respected with a deep history and connectivity across the region.

Speaker 3

Through our partnership, We have introduced a new model for senior care in Minnesota with a multi payer full risk platform. We see significant opportunities for growth in the Twin Cities as physicians have a strong history of participating in early value based care models. Primary care is largely fragmented outside of several large health systems. And our partnership with Entyra and Richfield is serving as a catalyst for other physicians to make a similar choice and move to full risk for their senior patients. As discussed at our Investor Day, Once the infrastructure for full risk is established in the community, other doctors can easily join our network and access a new and sustainable model The associated long term growth opportunity or end market TAM in the 14 states and 32 communities we serve is now 10,500,000 seniors and 33,000 primary care doctors.

Speaker 3

We are excited for more of these doctors And their senior patients to join our platform in the Twin Cities and throughout the entire Agilon network. Now to our performance in the Q1. Our overall momentum remains strong entering 2023. During the quarter, our MA membership grew 61% to 402,000 members and revenues grew 74% to $1,140,000,000 This was above our guidance ranges and supported by faster stand up of new primary care doctors and pull through of members in new markets. Our ability to pull through more members in 2023 supports our long term earnings power as we improve the quality and efficiency of care for those senior patients over time.

Speaker 3

At the same time, our profitability continues to inflect higher With 1st quarter medical margin up 88 percent to $162,000,000 and adjusted EBITDA more than tripling to $24,000,000 Our growth in medical margin and adjusted EBITDA was especially impressive given a modest net headwind from prior year claims and revenue. Even with our stronger membership growth, our medical margin increased 17% on a per member per month basis to $135 And by 110 basis points to 14.3 percent of revenues. This was primarily supported by strong performance in our maturing partner markets. Our ability to expand margins while driving higher membership growth remains very distinctive, reflecting the power of our partnership model, Platform and Scale. With our strong start to the year, we are maintaining the full year adjusted EBITDA outlook we provided in March.

Speaker 3

Under the revised presentation that Tim outlined at the top of the call, our adjusted EBITDA outlook ranges from a loss of $3,000,000 to a gain of $25,000,000 which includes $78,000,000 to $65,000,000 of geographic entry costs. Our guidance also reflects faster pull through of members in our new markets and increasing confidence in the contribution from Reach based on higher than initially projected outperformance against national cost benchmarks. We are also encouraged with the progress We are seeing with enrollment in our clinical programs targeted at the most complex and high cost patients. These programs such as renal and palliative care leverage our deep alignment with primary care doctors while driving continuous improvement to patient experience, Quality and Costs. I'm especially proud of our performance given the magnitude of the growth we are driving across different partners, markets and payers.

Speaker 3

During the Q1, we added 130,000 plus new Medicare Advantage lives, 8 new markets, Four new states and 9 additional payers. With this growth, we are now operating close to 100 distinct full risk contracts with nearly 30 Payer partners, including national and regional plans. When you consider that most of our payer partners have never done full risk, Our ability to be first in the market and build the infrastructure for risk based care that all physicians can access is a significant competitive advantage and requires the management of complex data flows such as member and financial data reconciliations. Increasingly, we believe Agilent is differentiated in our ability to move new markets to risk and successfully work with a broad diversity of payers. Before updating you on our future growth opportunities, I wanted to say a few words on our revised non GAAP measures.

Speaker 3

The most important change is we are now including geographic entry costs within our adjusted EBITDA calculation. I want to stress that our revised presentation does not impact how we think about our business, our cash flow or returns on capital. Ultimately, our goal is to get members on the platform, improve access, quality and efficiency of care delivery and develop medical margins over the long term. Geographic entry costs are investments we make to set up our partnership, establish processes that enable primary care doctors to be successful in value based care, especially around patient access and quality and expand overall primary care capacity. Because we partner with existing physician organizations, The efficiency and returns we generate on our geographic entry costs are very compelling.

Speaker 3

As we have discussed with you in the past, Member acquisition costs have consistently remained in the range of $400 to $600 per member. They generate an LTV to TAC of greater than 10 to 1 and these costs only grow on an absolute basis as the number of new members increases. Now for an update on our 2024 partners and some early observations for 2025. As we shared with you in March, We expect 2024 will be another record year of growth. We are currently implementing over 100,000 Medicare Advantage lives across 6 new partner groups, which include primary care only groups, multi specialty scale networks and health systems.

Speaker 3

Our implementation work is progressing well, supported by a recently completed acquisition of MPHRX and our established infrastructure in existing states and markets. Additionally, our early engagement with payers has been encouraging. We are optimistic that the combination of new and existing partner growth could pull through greater than 145,000 Total new MA members for 2024, which Our business development team is now shifting their focus to 2025. Well, it's very early. We are seeing significant opportunities across diverse partner types and geographies, including new markets And large physician organizations in existing markets.

Speaker 3

Similar to last year, we are encouraged with the quality of the dialogue this early in the cycle, which should translate into longer implementation periods. In fact, we expect to begin implementing several new partners for the Class of 2025 during the second half of the year. As I've said in the past, the inflection in demand among physician groups for a sustainable primary care model reflects both structural factors from all payers pushing for value and the level of success that our partner groups are seeing on the platform. I wanted to close by offering a few comments on the 2024 rate notice and recent policy developments. We are encouraged and supportive of the risk adjustment model changes included in the 2024 rate notice, including the 3 year phase in.

Speaker 3

We believe the phased approach will limit industry disruption, especially for health plans and at risk provider organizations that serve high risk populations. Operationally, we are already implementing the necessary changes for the 2024 notice. As I mentioned on the last call, We believe the rate notice is very manageable for Agilent. This reflects our combined power and nimbleness from centralized operations Paired with local teams tightly integrated with primary care doctors, as well as our focus on historically unmanaged fee for service markets that serve the entire Medicare Advantage population and yield relatively lower risk adjustment levels. In addition, The distinctive levers in our business provide the ability to manage through disruption.

Speaker 3

Lever such as getting more members on the platform early, Delivering a more effective and longer implementation for new partners and accelerating quality and medical cost performance In mature markets, the 3 year phase in of the risk model change removes uncertainty and reinforces our confidence in our ability to continue to inflect adjusted EBITDA in 2024 and beyond. From a macro perspective, the rate notice along with the RADB final rule reinforces the central role of primary care doctors in our healthcare system, Which is very positive for Agilent and our partners. With these changes, health plans will need even closer alignment with PCPs To drive better cost and quality outcomes and support competitive benefits, while doctors will need infrastructure, resources and technology To succeed in value based care and meet the demands from all payers, including CMS. Agilon's partnership and platform is the solution for existing doctors to move into full risk and the success of our growing network continues to demonstrate the critical role we and our partners are playing in transforming the overall healthcare system. With that, let me turn things over to Tim.

Speaker 2

Thanks, Steve, and good evening, everyone. I'll review highlights from our financial statements to provide some additional details on our guidance for 2023. Starting with our membership for the Q1, Total members live on the Agilent platform increased to 491,000 including both Medicare Advantage members and ACO REACH beneficiaries. Our consolidated Medicare Advantage membership increased 61 percent to 402,000. This was above our guidance range of 385,000 190,000 driven by retro membership from 4Q and the faster pull through of members in new markets including better than expected payer contracting and attribution.

Speaker 2

Revenues increased 74% on a year over year basis to $1,140,000,000 during the Q1, which was also above our guidance range of $1,070,000,000 to $1,090,000,000 Revenue growth was primarily driven by membership gains In new and existing geographies, on a per member per month basis for PMPM, revenue increased 8% during the Q1. This is primarily driven by benchmark updates and membership mix, including higher benchmarks in several new markets. Medical margin increased 88% year over year to $162,000,000 during the Q1. Medical margin increased as both a percentage of revenue and on a PMPM basis even while accounting for the dilution of our membership growth. Membership margin was 14.3 percent of revenue during the Q1 compared to 13.2% last year and medical margin PMPM increased 17% to $135 compared to $116 last year.

Speaker 2

Medical margin benefited from the maturation of older markets and member cohorts, Which continue to offset dilution from our year 1 members. Medical margins for our year 2 plus partners, which excludes the dilution from year 1 markets, increased 72% during the Q1 on a dollar basis and by 47% on a PMPM basis. As we've discussed with you in the past, Medical margin growth in our year 2 plus partners drives the majority of our adjusted EBITDA gains. Our medical margins for the quarter included a net headwind of $12,000,000 from prior year revenue and claims. This was primarily a function of true ups with health plans including new contracts, which include both prior year claims and revenues, a number of smaller older high cost claims And some retro members, which also include both prior year claims and revenue.

Speaker 2

Gross profit, which is replacing network contribution, increased 82% to $77,000,000 during the Q1 and includes $2,000,000 in geography entry costs. The year over year increase in gross profit reflects our strong medical margins as well as the relative contribution of medical margin across geographies. Platform support costs, which include market and enterprise level G and A increased 41% to $48,000,000 Growth in our platform support cost continues to run well below our revenue growth and highlights the light overhead structure of our partnership model. As a percentage of revenue, platform support costs declined to 4.2% during the Q1 compared to 5.2% last year. Adjusted EBITDA was $24,000,000 in the quarter, which is a threefold increase from $8,000,000 last year.

Speaker 2

Adjusted EBITDA now includes geography entry costs, which was $12,000,000 in the Q1 of 2023 $4,000,000 in the Q1 of 2022. The increase to adjusted EBITDA reflects the gains in medical margin and gross profit along with leverage against platform support costs. Adjusted EBITDA contracting for direct adjusted EBITDA contribution from direct contracting was $3,000,000 in the Q1 similar to last year. Turning to our balance sheet and cash flow. As of March 31, we have over $800,000,000 of cash and marketable securities.

Speaker 2

Cash flow from operations was negative $61,000,000 for the quarter, which was in line with our expectations. In February, we completed the previously announced acquisition of NPHRx, a leading provider of value based care technology and interoperability solutions for a cash consideration of $44,000,000 Agilent remains well capitalized and given our efficient partnership model, we do not anticipate needing any external capital to drive our future growth. Turning now to our financial guidance for the Q2 and full year 2023. For the Q2, we expect Ending membership live on the Agilon platform will grow to a range of 488,000 to 495,000 including 55% growth in MA membership to 403,000 to 405,000 and ACO Reach membership of 85,000 to 90,000. We expect revenue in a range of 1 point $105,000,000,000 to $1,115,000,000 or 60% growth at the mid 66% growth at the midpoint.

Speaker 2

We expect medical margin in the range of $138,000,000 to $148,000,000 representing 74% growth And adjusted EBITDA of $2,000,000 to $10,000,000 compared to negative $3,000,000 in the prior year. Our adjusted EBITDA outlook The Q2 now includes $19,000,000 to $16,000,000 in geographic entry costs. For the full year 2023, we expect total membership live on the Agilon platform will grow to 490,000 to 500,000 members. This includes higher MA membership outlook of 405,000 to 410,000 representing growth of approximately 51% at the midpoint And ACO Reach membership unchanged at 85,000 to 90,000 members. Revenue growth is now expected to increase 63% at the midpoint to a range of 4 $41,000,000 to $4,440,000,000 We anticipate medical margin in a range of $535,000,000 to $560,000,000 And adjusted EBITDA in a range of negative $3,000,000 to positive $25,000,000 Our adjusted EBITDA outlook for the full year 2023 now includes $78,000,000 to $65,000,000 in geography entry costs.

Speaker 2

Finally, our adjusted EBITDA outlook Includes $5,000,000 to $10,000,000 in contribution from Reach, but we now have increased confidence in the higher end of that range. With that, we're now ready to take your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. We have the first question from Lisa Gill of JPMorgan.

Speaker 4

Steve, I want to go back to the comments that you made about the 2024 class. And There's just so many things that are changing right now. And I understand what you're saying around the risk model changes and your ability to absorb that. But we also have changes coming for many of the plans when it comes to STARZ. We do have rates that Not as robust as they've been in the last few years.

Speaker 4

I'm just curious about the conversations that you're having with the physician groups. 1, is that Helping to maybe accelerate some things as we think about you're now talking about this 2025 class already here and we're only in the Q1 or Q2 here of 2023. Just curious around, one, those conversations that you're having? And 2, is there any more detail that you can give us to really give us the comfort going into 2024 when we think about margins and the potential impact of all these changes.

Speaker 3

Sure. Thanks, Lisa. Great question. And I think for the class of 'twenty four and even as I shared The class of 25, we're very encouraged by the conversations. I think never has the case been stronger for physician groups to make the move to value.

Speaker 3

And that's really a macro thing. Structurally, More payers are pushing for value in the constrained world you talked about, the benefits of better quality, the benefits of better experience, The way Medicare pays for that all rewards a total care tight relationship between the primary care doctor And their patients. And so I think that is really at the heart. The second thing I would say is The fee for service challenges just become that much more dramatic. Rising labor costs for doctors, Compressed primary care rates with the Medicare fee schedule, all of that makes the status quo that much more difficult.

Speaker 3

And so The combination of those structural factors are really pushing these groups forward. The payer conversations are extremely constructive. Payers are looking for us to go to new markets, bring on new members. The pull through that Tim talked about is accelerating. We continue to bring on new members faster and early growth is really impactful.

Speaker 3

That will benefit us In 2024 to your forward question. And I think the maturation in our mature partner markets, Coupled with a rate notice that as I said is really very manageable and we're implementing that right now and that's going very well. I think that all leads to a very strong picture for us, not just in 'twenty three, but in 'twenty four and beyond. And we are becoming the partner of choice for physicians and we're moving more and more markets to value for the first time.

Operator

Thank you. We now have George Hill of Deutsche Bank.

Speaker 5

Yes. Good morning, guys, and I appreciate you taking the question. Steve, kind of a popular topic we're hearing a lot about these days is the changes in insulin drug pricing. You would think insulin could be a meaningful cost contributor And the diabetic population as it relates to Medicare Advantage, I guess my question was just really is, are the changes in insulin prices big enough to be needle movers as you guys think about medical costs and kind of the cost that your provider partners face?

Speaker 3

Yes. No, thanks, George. I really appreciate it. I mean, Diabetics represent 25% to 30% of the senior population. As we shared with you At our Investor Day, we do an exceptionally good job of managing that diabetic population And controlling blood glucose levels and showing improvements in cost and keeping people out of the hospital at a magnitude of 2x to 3x better than the overall Medicare Advantage population.

Speaker 3

Insulin is a component of that. I don't The changes that are contemplated would be a massive game changer for us. And each year there are Things that move up and down and we believe we'd be able to manage that within the context of our overall outlook.

Operator

Thank you.

Speaker 1

Thanks, George. Prika, why don't we get to the next question, please.

Operator

We now have Ryan Daniels of William Blair.

Speaker 6

Yes, guys. I'll echo the Congrats on the strong start to the year. My question relates to the acceleration you saw in same store growth in Q1 being up 14%, Up from Q4 despite what appears to be kind of slower overall MA growth. Is there any nuances there to explain it? You talked about bringing on members more But I assume you've also got novel payer partners, some providers joining, maybe some share gains.

Speaker 6

Just what explains the relative strength versus the market, Which is an even bigger delta than what we've seen in the past? Thanks.

Speaker 3

Yes. Thanks, Ryan. I mean, We typically outperform above the market growth rate. We shoot for 1.5 to up to 2 times that. Same geography growth has continued to be a really strong area for us.

Speaker 3

I think if you would ask What's really different on that is that our doctors continue to win in a really meaningful way, and other doctors are wanting to join us In bringing new patients with them. We also have got tighter pull through with our health plans as Tim kind of dimensioned, Which is really resulting in a faster acceleration of that same geography growth. But Tim, would you add others?

Speaker 2

Yes. Just a couple of other things, George. One is, We did mention in our comments that we had a little bit of retro membership coming through from last year, so that's going to help our Q1 and that's going to look like better same geography growth as well. And then the second thing is, if you remember back last year, we did have a chunk of retro membership that came in Q2. And so that actually Our Q1 same geography overlap a little bit and we had a very, very strong Q2.

Speaker 2

We still think for the full year this year, our overall same geography growth It's going to be around that double digit range, just to kind of refer back to the guidance that we provided at Investor Day.

Speaker 1

Thanks, Ryan.

Operator

We now have Justin Lake of Wolfe Research.

Speaker 7

Thanks. First, wanted to say appreciate the increased transparency on the new market costs. I think it's really helpful. Dan, just talking a lot of questions around cost trends. So maybe you can talk to us about the Q1 and how it shaped up.

Speaker 7

First, Yes. What drove the PYD? How did you see trend in the quarter? And what I mean, there's a fair amount of PYD. What went well in the quarter to offset it and still allow you to kind of get the numbers?

Speaker 7

Thanks.

Speaker 3

Yes. Thanks, Justin. I'll start with what I said in my prepared remarks. I mean, the Q1 performance was really strong. Membership growth, revenue growth, membership up 61%.

Speaker 3

We were able to drive that inflection In medical margin of 110 basis points year over year, even inclusive of that higher growth and the it's a net $12,000,000 of prior period development, And Tim can kind of dimension that for you. I think part of it, Justin, is really a function of the true ups That we've got, I called out, we're up to almost 100 risk contracts with payers. Last year, it was at 60 across 20 different organizations. Many of those organizations were doing it for the first time. And so there's a lot of data flowing back and forth And we need to have credible information to the point at which we can book revenue and cost.

Speaker 3

And that was a big part of the period. The utilization was very much in line with what we would expect. But I think the power of our clinical programs that I talked about, the power of the Primary care physician touch points were really strong in the quarter. We enrolled thousands of seniors Within those complex medical programs I talked about, things like palliative care and renal care, they had an impact in the quarter, Justin, but the impact is going to be far greater On a forward basis. So those were the things that I would dimension.

Speaker 3

Tim?

Speaker 2

Yes. The only other thing, Steve, that I would say just first before I jump into is, George, I'm sorry. Justin, thanks for the comment on the transparency on the geointing process. Although I would say, I think we've been very transparent all along in what those costs are. But, yes, we're going to continue now to report it under this new presentation.

Speaker 2

So thanks for that comment. The only other thing I would add to what Steve said around Drivers in the Q1 is, we also did have obviously incremental membership that helped drive some incremental medical margin That helped the quarter as well, both retro and just overall higher membership than we expected. As Steve said, We've got a very complex model. We are bringing a lot of new payers and a lot of new markets to risk for the first time, and that's going to result over time and it's having some true ups. As we move along, we, of course, have really are committed to try and have the most accurate accruals for revenue and cost that we can.

Speaker 2

And so we want those true ups to be obviously in a manageable level. And I think for the Q1, a $12,000,000 net number between revenue was actually quite manageable for us. And when you look at the factors that drive it, they are the factors that kind of come out of that complexity. Just some true ups around both revenue cranes Across a number of payers, as we got more data after we'd already reported the Q4, we had a couple of old very high cost claims that were It's kind of spread out through the year that we got visibility to after we closed Q4. And then we also talked about we had some retro members that came in and those members come with, Of course, both, as I mentioned in my prepared comments, both revenue and claims as well.

Speaker 2

So there's going to be those kinds of true ups. But again, Yes. We want to try to keep that as accurate as possible and obviously within a manageable range, which I think it was for the Q1.

Speaker 1

Thanks a lot, Justin. Preetha, why don't we move to the next one?

Operator

We now have Stephen Baxter of Wells Fargo Securities.

Speaker 8

Hi, this is Carol on for Steve. So we see in the And your payer disclosure that it looks like a lot of your growth this year is coming outside of your top 2 payers despite both of these plans putting up membership that's Probably above industry as a whole. Can you maybe talk a little bit more about what trend is being across the payers and whether these top players could be looking into Spirit members towards internal primary care assets? Any color there would be helpful. Thank you.

Speaker 3

Thanks for the question. I think The payer dynamic is increasingly favorable for us. We consider our payer partners, to be great partners. And As I said, we added 9 payers this year. So we continue to expand the number of payers that we're working with.

Speaker 3

I think it reflects the fact that more payers want to be in value in a much larger way. It also reflects that we're going to new markets that have been 100% fee for service, and we're moving the market and these payers into that. And so, we'll continue to diversify. We'll continue to add new payers as we expand a new park To new markets, our large national payers continue to be very strong partners and we work with them very Through quarterly joint operating committees, we are collaborating very closely on next year as they work through benefit designs and what they want to do around that. And also just the clinical programs and the quality performance that I talked about is very advantageous to them.

Speaker 3

So I think all of that leads to a very constructive environment for payers and one that we think is just strengthening.

Speaker 2

Yes. I think the only thing I would add is when you're referring to the numbers in When you see the shift in mix amongst payers, especially in 2 of our biggest markets that we just went live with, we have Pretty good regional payer representation in those markets. So you're going to naturally see a shift in that direction when we add large markets like Maine And, the physicians in the Detroit area that have a very large representation of regional payers because at this point, when we go into a market, we're essentially contracting Across all payers in the market. So I think that shift to markets that have very big regional presence regional payer presence is what's driving some of that mix shift that you're seeing In the queue reporting.

Speaker 1

Thanks for the question. Why don't we move to the next one please?

Operator

We now have Jalendra Singh from Truist.

Speaker 9

Hi, thanks. Thanks for taking my question. This is Jalendra Singh from Truist. I want to better understand your 2023 Medical margin outlook. I know it's unchanged, But it seems some moving parts there.

Speaker 9

Now it has PYD from Q1 and then looks like utilization is probably trending Maybe favorable to your expectation. Maybe talk about some puts and takes which are now in the guidance given that you're coming in at the revenue membership higher than what you previously thought. Splash some color there in the guidance.

Speaker 3

Sure. I'll start, Tim, and then you can fill in. I mean, I think it starts, Jalendra, with Our Q1 performance was really strong and you've got that inflection in medical margin and adjusted EBITDA even with The PYD. So I think that the run rate out of the Q1 is extremely strong. I think if you look at sort of the rest of year And reaffirming that guide, it would have us within that 80 to 150 basis point improvement.

Speaker 3

And we just had a run rate that was North of 200 in the Q1 ex that PPD. We're able to digest Sort of additional members coming on, which are going to be at a obviously a lower medical margin. The maturation of our year 2 markets was Strong in Q1 and that continues within the balance of the year, and then just the power from our clinical programs. But that, Tim, what else would you add? Yes.

Speaker 2

I think to now, but Steve, I think those are all the primary components driving it. I think that pointing out that coming off of a strong Q1 And absorbing that $12,000,000 of prior peer development. And then looking going forward, I think that range of that Steve was quoting of say 80 or 90 to 150 basis points improvement is kind of right on the trend that we showed in the Q1.

Speaker 1

Thanks, Jalendra. Operator, why don't we move to the next question, please?

Operator

We now have Adam Raun of Bank of America.

Speaker 10

Hey, guys. Thanks for the question. If I could go back to the 2024 rate model revision maybe from a different Engel, on the Q1 earnings call from Humana, they were kind of touching on it and they were saying that they think it would be a net headwind even When contemplating benefit changes and they would look for mitigants over time, But it sounds like you're saying it's going to be a little bit more manageable than how they're painting it. And you did touch on geographic differences. They're more exposed to Florida, where value based care is more penetrated and risk scores are higher.

Speaker 10

But on the other hand, being a new market, you would probably be more of an outlier as a New entrant, and so that would make it harder to overcome benefit changes. And so just wondering how you would frame your characterization versus maybe Humana and what differences you see

Speaker 3

Yes. Thanks, Adam. I really appreciate the question. I mean, I think I'd start with a headline of There are real differences between our partnership model and payers. It is a very different model.

Speaker 3

I think that the Risk adjustment changes really have emphasized the importance of the primary care physician Patient relationship, and that's our bread and butter. What do we focus on? We focus on increasing touch points, Identifying the most complex patients, getting them enrolled in the clinical programs and that's what we saw within the quarter and what gives us sort of confidence Not just in 2023, but in 2024. I think, as I said, we're encouraged by the risk model changes and the phase in. We've started implementing them and continue to see it as very manageable.

Speaker 3

I think it's a function of that Patient physician relationship and the proximity there, but also what you said, which is we are in markets that are 100% fee for service and lower overall. But I think the last thing I would say is the levers in our business and this is a big difference versus a payer is The value of really getting members on the platform earlier in a long term subscription model, The ability to have these longer implementation periods, so our year 1 members are going to start in a higher place. And then the ability to show this maturation, which we So again Q1 to Q1 in mature markets, that just continues as you move going forward. So all of that is Leading to our ability to say it's very manageable.

Operator

We now have Sean Dodge with RBC Capital Markets.

Speaker 11

Yes. Thanks. Good afternoon. Maybe just going back to medical margins again. You've historically talked about year 1 being in $30 to $60 CMPM range.

Speaker 11

When we look at the class of 2024, is there anything different about its composition, the geographies, The fact you all have a little bit longer lead time on implementations than you've had in the past, I guess the capabilities from the MTHRx Acquisition that would cause, you'd want medical margins for 2024 to be a bit different than they've been in the past. And I guess directionally where I'm heading is, could they be higher than that or at least toward the higher end of that range?

Speaker 2

Yes, Sean. I think you answered the question very well. I think all three of those things. One thing that can impact it just as a starting point is what sort of the level of sophistication The partners that we're starting with, and I think we have a pretty high level there going into the class of 'twenty four. So that gets us a little bit of a starting point.

Speaker 2

The second thing is, As we have talked about and you pointed out, we definitely have a longer implementation cycle for these members coming on board, and that's going to help us as well. And now with the acquisition and the implementation of NPHRx, we really are prioritizing that against Getting up to speed faster with data that will help us also move that forward and will allow us to impact both the revenue side as well as Getting markets up and started on some of our clinical programs earlier than they would otherwise. So I think all three of those are contributors. And because of that, we did say, we're normally in that $30 to $60 range. The class of 'twenty three looks like it's dead center in that range more or less.

Speaker 2

And we do think that the class of 24 and as we talked about on our Investor Day is going to be at or above the high end of that range.

Speaker 1

And Sean, there's one more thing I'd love Steve to hit on this would just be when you're adding groups where you have existing infrastructure, There is a little bit of a different dynamic. So, Steve, if you could Yes.

Speaker 3

So the class of 'twenty four, Sean, is really the 1st class in which you start to see Really scaled new partners across multiple markets coming on in existing geographies in which We've got a team. We've got existing payer contracts. We've got existing clinical programs and they are able to take advantage of all of that As they go through their implementation, which is can be longer, as Tim said, for this class of 2024. So you put that as an added Sort of modifier on top of it and it leads you to really strong potential year 1 performance.

Speaker 1

Sean, thanks for the question. Rekha, why don't we move to the next one, please?

Operator

We now have with Mayo of SVB Securities.

Speaker 12

Hey, thanks. Tim, sorry, I'm just a little confused on the reserve development. The net $12,000,000 that's net of the retro payment and the 10 Q has the $28,000,000 reserve development. I'm just trying to make sure I get these numbers right, sorry.

Speaker 2

Yes. So if you break down components, we want to make sure that For all the reasons that we talked about, and we do have some of these variations that are happening versus our original estimates after we've already reported and that's just going to be driven by all the factors that we talked about. That can happen on both the revenue and the claims side. Of course, in the 10 Q, in that section, we do have to report out what the Development was, which was a little over $28,000,000 We have about $16,000,000 of revenue prior period That goes against that. So when you of positive prior periods, when you net those 2, it's about $12,000,000 $12,000,000 impact of the P and L in Q1 All in prior period.

Speaker 12

Okay. No, sorry. That's helpful. And just looking at your Plan Partners, are you seeing any changes with the payers to speed up the attribution process? I'm just wondering if there's anything that you're seeing that's enhancing Your visibility on that process going forward?

Speaker 3

With our longer term partners, Absolutely Whit. We are working particularly with some of the larger nationals accelerating Shortening the period to get a member attributed and getting them into a total care relationship is a goal of Both of our organizations, Agilon and the payers. So that is definitely true. We have We added 9 payers this year, the vast majority of which had never done risk before. And so They don't even have an attribution process.

Speaker 3

So we start from 0. We kind of work through. That's part of what we're doing as we're moving these markets to Risk for the first time, it's just not the groups and the patients. It's also the health plans. And so we've got sort of Folks across the spectrum in terms of where they're at on this process, but we continually work to improve across all of those payers.

Speaker 1

All right, Whit. Thanks very much, Birkka. Why don't we move to the next one?

Operator

We now have Jamie Perce of Goldman Sachs.

Speaker 13

Hey, good afternoon guys. Just a longer term question. You guys just gave guidance for 2026 adjusted EBITDA of over $600,000,000 I'm wondering if you can help us bridge that given the new presentation structure and any Longer term considerations for geography entry costs as we start to kind of tease those pieces apart a little bit more. Thanks.

Speaker 3

Sure. Jamie, so the just to kind of reiterate, the geographic entry costs, They've been there all along. They're part of our business. They're really important for getting these physicians and partners Into value for the first time and allows us to get patients in and start at a really good standing point. This is really just a reporting change.

Speaker 3

So we're just moving the no pun intended, the geography of these costs to within our Financial statements, so they're part of the adjusted EBITDA calculation. They're super predictable. And so It should be relatively easy to do the math. It's in that range of $400 to $600 per patient that will be added for The coming year and so they only grow in absolute dollars when that membership grows. The return on them continues to be extremely The LTV to CAC is greater than 10:one.

Speaker 3

And our commitment is to Continue to dimension this for you, so that we've given you guidance for next quarter, we've given you guidance for the full year And we'll continue to do that on a go forward basis. And then Tim?

Speaker 2

Yes. No, Steve, I think that's right. So if you try to dimension it specifically, we just said that we're going to do about $65,000,000 to $78,000,000 of geography entry costs this year and that's going to support About 145,000 member growth that we've guided to for 2024 because the cost obviously, the investment in growth kind of Supporting that membership the year before they go live or the year before we can get them attributed or go live. And if you look forward into The 2024 to 2026 period, we said we continue to add about 150,000 members a year to get to 2026. So that would say that if you use that same range of $400,000 to $600 it's going to be your geography entry costs will be in the same dollar range.

Speaker 2

Obviously, it will be a much smaller percentage of our overall EBITDA. EBITDA is growing to a larger number out at that point. And to Steve's point, one of the reasons why EBITDA is growing to a larger number is because we're making these investments in growth each year. And yes, the return on investment in these are phenomenal. I mean, Steve quoted Yes, the lifetime value to customer acquisition cost ratio.

Speaker 2

I mean, another way to look at it is we're typically paying those costs back in certainly less than 2 years, Usually closer to an average of about 1 year or so. We'll continue to make those investments. But I think to Steve's point, if look at the membership that we said we're going to grow, use that $400 to $600 per member range, that's going to be about right.

Speaker 1

Thanks a lot, Jamie. Operator, why don't we move to the next question, please?

Operator

We now have Gary Taylor of Cowen.

Speaker 3

Hey, good afternoon. I just want to I think this is pretty clear, but I just want to, I guess, So if we look at the net development of $12,000,000 $35,000,000 of EBITDA under old presentation, really From your view, this was a $47,000,000 EBITDA quarter versus your guide of $32,000,000 to $37,000,000 That's how you're looking at this On a net basis, right?

Speaker 2

No. So Gary, the $12,000,000 of net development would be medical margin, Not EBITDA. I think you were were you saying just add you see, you wouldn't add that to our EBITDA. Is that what you're asking? Yes.

Speaker 2

Under your old report. Yes. So the net development will hit yes, so under the old report Yes. On the old reporting before under either reporting, the $12,000,000 of net under any reporting because we haven't changed medical margin definition, The $12,000,000 would be would have been incremental to medical margin had we not had that prior period development. Typically, about half of that incremental Does that make sense?

Speaker 1

Yes. Thanks, Gary. Gary, why don't you go ahead just because I know it was a numbers question. So go forward and we'll move on. All right, sir.

Speaker 3

For those of us that are Trying to follow and make sense of the claims payable and the receivables. I mean, both of those approximately doubled Sequentially versus like 65% revenue growth sequentially. I think that's just a function of new markets, new contracts, new payers And nothing is actually going to settle out until the year progresses. Is that the right way to think about both those balance sheet numbers being up? Yes.

Speaker 2

It is Gary. That's right. You're always going to see a sequential increase for our DCP, for instance, between Q4 and Q1, I'm driven by exactly the phenomena that you're talking about. So and as we move through this year and we get more and more visibility to pay claims with our new Payor partners in our new markets, by the time we get to Q4, you'll see that number moderate back down again as it has in the previous couple of years.

Speaker 1

All right, Harry. Thanks very much. Hi. Brika, why don't we move to our next question, please?

Operator

Our next question comes from David Larsen from BTIG.

Speaker 14

Hi. I think you announced Five new 2024 partnership wins, which seems like a lot to me. I'm assuming you're on track for 670,000 lives For fiscal 2024. And how far along are you in that life sort of count add guide with these 5 wins that you've announced? You're like halfway there or thanks.

Speaker 3

So we have announced 5 of 6 new partners, David, for The class of 2024. And what we said in our remarks is that We are at 145,000, but just like with 23 member growth, there is the potential for that number to go Higher through a variety of factors. And then we're already on to the Class of 25. And so what I also said in my prepared remarks is that we will begin implementing 2 partners for the Class 25 in the second half of this year. So you continue to see this faster sales cycle.

Speaker 3

You continue to see longer implementation periods. And while there's opportunity in 24 member growth, we're on to 25 in terms of new partners and the work that we're doing there. And David, I would just add that

Speaker 1

The 6th one will be announced when we're ready to announce and we're just thoughtful about the timing around that. So So, Kareka, why don't we move to our next question please?

Operator

We now have Brian Tranklin of Jefferies.

Speaker 3

Hey, good afternoon guys. Just a quick question. As I think about your comment about 2025 development and that's a focus area now And how 2024 is really your bunch of scaled ones. How are those conversations changing in terms of like Trying to pitch potential new partners. And then in terms of like market competition for deals, it seems like there's more money chasing, There are more money or more practices looking to shift to value base.

Speaker 3

So just curious what the competitive market looks like? Thanks. Yes. I think the power of our network is really sort of Helping us within these conversations. When you think about the fact, Ryan, that we've got 30 plus markets with leading groups.

Speaker 3

We've got we're approaching 1.5% of the primary care doctors in the country Are on our platform and they're bringing their senior patients with them. And then we've got national scale like things in the clinical programs That I talked about the track record of the success that our partners are having In addition to the push for more value from payers that I talked about, It's accelerating. I mean, the sales cycle is shortening. We are already talking to 2 Partners about implementing them, starting in the back half of this year. And as I said in my remarks, we're really extremely encouraged.

Speaker 3

The breadth of the types of partners that we're serving, we're now working with virtually every type of physician organization in the country. So Any group that wants to talk to us that is thinking about making the move to value, not only can we say, here's our overall track record, but here's a group that Looks like you, thinks like you and here has been their experience. And that's the best track record that you can have In groups that are thinking about making those types of decisions.

Speaker 1

Brian, thanks very much.

Operator

Thank you. We have no further questions in the queue. So I'd like to hand it back Steve Stowell for any final remarks.

Speaker 11

All right.

Speaker 3

Thank you, operator. In closing, I'd just like to say we've had a really strong start to the year, and we're Making great progress against our vision. I do want to thank our physician partners for the trust they've placed in Agilent. I want to thank my colleagues here at Agilent for their hard work and dedication, in supporting senior patients and physician partners. And we're excited about where we're going.

Speaker 3

We look forward to updating you on our progress in future calls. And I hope everyone has a great evening. Thank you.

Operator

Thank you all for joining. I can confirm that does conclude today's call. Please have a lovely rest of your day, and you may now disconnect your

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Earnings Conference Call
agilon health Q1 2023
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