P3 Health Partners Q2 2023 Earnings Call Transcript

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August 7, 2023

There are 10 speakers on the call.

Operator

The P3 Health Partners Q2 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to your host today, Karen Blomquist.

Operator

Ma'am, please go ahead.

Speaker 1

Thank you, operator, and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward looking statements And are based largely on our current expectations and projections about future events and financial trends that we believe may affect our These statements are subject to risks and uncertainties that could cause made on this call is contained in our periodic reports filed with the SEC. The forward looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise the forward looking statements. We will refer to certain non GAAP financial measures on this call, including adjusted EBITDA, adjusted EBITDA per member per month, Medical margin and medical margin per member per month. These non GAAP financial measures are in addition to and not a substitute or superior to measures Information on this call is contained in the press release we issued today and in our SEC Doctor.

Speaker 1

Abdu, CEO and Co Founder of P3.

Speaker 2

Thank you, Karen, and welcome, everyone, to our Q2 2023 conference call. I would like to kick off the call by saying we have had a strong 2nd quarter and I would like to thank our team for their hard work and contributions to this success. Adjusted EBITDA for the quarter was positive approximately $200,000 compared to a loss of $29,000,000 in the prior year same period. As a matter of fact, adjusted EBITDA was positive in 4 out of the 5 states that we serve in this quarter. This is a reflection of what we have shared with you previously That would more persistent lives on the P3 platform than new lives and a higher level of maturation translate into funding improvement, Medical cost improvement and enhanced medical margin, which all flow through to the bottom line and lead to profitability.

Speaker 2

I would like to share with you a few helpful data points from this past quarter that are reflective of where the P3 model is operating now And serve as the foundation for our 2024 expectations that we have shared with you previously. Number 1, Medical cost ratio was 84% in the quarter and that led to medical margin of about $50,500,000 We view this metric as the best reflection of the value we deliver to our stakeholders, The ability to bend the cost curve and answer the key demand drivers of our business in the marketplace. Number 2, Medical margin was approximately $161 PMPM versus $72 PMPM in the same period of the prior year. If you were to compare that to the other value based care provider peers, 161 PMPM or a 16% margin is squarely in the maturation range of any cohort and exceed Agilent margin of $113 PMPM for the Q2 of 2023 and we believe that we can even improve further. Number 3, medical cost strength was about increase of roughly 1% for Medicare Advantage lives year over year.

Speaker 2

When you compare that to the overall market at mid single digits or higher, it is clear that the P3 care model is working $85 PMPM versus $102 PMPM in the same period prior year. That's down approximately 20% compared to the prior year. Number 5, Finally, adjusted EBITDA PMPM was close to breakeven versus negative $95 PMPM In the same period of the prior year, an output of all grade trends that I just noted and consistent with our previous remarks that we believe we are on the path to sustainable profitability on an adjusted EBITDA basis in the near term. The above metrics are just a few validating data points of P3 model and our trajectory. And in particular, we are achieving great outcomes now and not just projecting in the future.

Speaker 2

As a result, we're updating our 2023 full year adjusted EBITDA guidance range to loss of $50,000,000 to $30,000,000 for the year from the original range that we gave in the beginning of the year of loss of $60,000,000 to $40,000,000 More to come from Atul on this topic. In the past, we have told you that we can expand into adjacent counties with minimal cost by leveraging the existing infrastructure. In the quarter, we did just that. We have entered Jackson and Josephine Counties in the State of Oregon with a large national payer partner. Also in the Q2, we made an important announcement.

Speaker 2

We named Bill Betterment, our Chief Operating Officer. He recently joined us from OptumCare, where he led their Pacific Northwest operation and served as the Chief Operating Officer of the Everett Clinic and the Seattle Poly Clinic. He was drawn to P3 because he is a strong believer in P3 mission and the affiliate model with which he has significant prior running it and optimizing it. He is an exceptional operator and now runs the day to day operation of the company and local markets. As we think about achieving our long term guidance for the company, operational excellence will be critical to achieving those goals.

Speaker 2

We believe that Bill is the right leader with the right experience to help us to do that. With that, I'm going to turn it over to our Chief Operating Officer, Bill Betterment. Bill?

Speaker 3

Thank you for the very kind words, Sherif. I'd like to start by sharing my objectives for the company over the next few years with some background context. P3 onboarded over 100,000 Medicare risk lives In a relatively short period of time, you can see that by moderating growth for just the past 6 months, you begin to see the effectiveness of the P3 model. Medical margin PMPM at $161 is a testament to that. In my prior experience, I saw the affiliate model in action in 2 important ways.

Speaker 3

1st, ability to grow and second, ability to bend the cost curve. I was drawn to P3 because I believe the model is highly effective and the team has significant experience in helping drive it to optimal outcomes. The affiliate model works across geographies, Although there are differences in models across the value based care industry, capital intensity and scalability similar whether you compare it to Oak Street's clinic employed model or Agilon's affiliate model. There are more similarities than differences. The value based care model in all its current forms share the same thing.

Speaker 3

It is the right model. There is actually more variation do you have to spend to achieve the desired outcomes? T3's model is high growth, low CapEx. It is the most capital efficient model in the marketplace. There is limited CapEx to build clinics or significant market spend to attract members.

Speaker 3

Our outcomes relative to other models speak to our ability to effectively engage physicians and patients to bend that cost curve. Members mature on the P3 platform after 24 to 36 months. Success requires strict The demand side is there because of our outcomes. On the cost side, there's no one thing that bends the cost curve. It's many, many little things done really well.

Speaker 3

It requires operational excellence. My focus and the objective is to further instill a culture defined by and to optimize P3's clinical outcomes to near perfection. That's our team's goal and that's my goal. With that being said, I want to take a minute to focus on our oldest market, For folks that are focused on cohorts, This is a relevant example of a market cohort not that dissimilar to our peers that discuss market cohorts publicly. If we compare the Arizona market from 2018 to the Q2 of 2023, the Today, it is approximately 45,500.

Speaker 3

Revenue PMPM, in 20 in the Q2 of 2023, it was $9.21 PMPM. Medical margin PMPM, in 2018, it was negative $53 PMPM. In the Q2 of 2023, it was we will be positive $163 PMPM. And in the future, we expect continued improvement. So how was this achieved and how do we improve upon it?

Speaker 3

It is a culture where everyone at all levels is driving towards KPI benchmarks, exceeding them and resetting new ones higher. I'll leave you with this. T3 is an incredible company Thank you for your time today. And now I will turn the call over to Atul Kathakar, our CFO.

Speaker 4

Thanks, Bill, and good afternoon, everyone. I'll start today by providing detail around our strong quarter and Top line results for the Q2 were strong with capitated revenue of $325,600,000 and total revenue of 300 It was $624,300,000 and total revenue was $631,200,000 both an improvement of approximately 16% In the first half of twenty twenty three, we had funding increases of 12% As a result of the maturation of the lives on the platform. And to give you a more updated sense of P3 scale, At the end of the quarter, we had 129,000 members on our platform. This consists of 116,000 Medicare Advantage and ACO reach members, plus an additional 13,000 members in Part D membership and fee for service relationships. We remain as optimistic as ever about our membership growth over the long term as we have guided in the past.

Speaker 4

In the Q2 of 2023, our medical margin improved to $50,500,000 or $161 on a PMPM basis, Which is a 132% and 123% improvement, respectively, compared to the prior year. Gross profit improved significantly over the prior year to $26,800,000 This is the 2nd quarter in a row that we have seen Significant progress and begins to paint a clear picture of our expected trajectory overall. Furthermore, These improvements to our medical margin and gross profit reflect the increases in funding in 2023, the mix of persistent lives on the platform As it relates to cost trends, we saw a significant drop in our platform support costs, Going from 12% of revenue in the Q2 of 2022 down to 7% in the current quarter. This high single digit percentage is consistent with the prior commentary I provided around this metric and was driven by a realignment of our staffing model We will continue to monitor our spending with an eye towards continuous improvement and efficiency and incorporate this mindset into our everyday cash management. Adjusted EBITDA was positive in the quarter at $200,000 an improvement compared to a loss of $28,700,000 in same period of the prior year.

Speaker 4

The first half of twenty twenty three adjusted EBITDA loss was $18,900,000 Margin with an ongoing discipline to leverage our existing infrastructure and drive continuous improvements in operating efficiencies. As we move into August, the strength we are seeing across our markets reinforces our view and for the Q2 in a row, we are going to raise our guidance. We still expect 2023 revenue to be between $1,200,000,000 $1,250,000,000 and our medical margin guidance to now be at a loss of $50,000,000 to $30,000,000 compared to the guidance at the start of the year of a loss of $60,000,000 to $40,000,000 And the revised guidance we gave in Q1 of a loss of $55,000,000 to $35,000,000 Thank you all once again for your time today. And with that, I'll turn the call over to Doctor. Bachus, our Chief Medical Officer.

Speaker 5

Good afternoon. Today, I would like to provide some color on what we're seeing for utilization trends. Utilization trends are running consistent with our expectations and at levels similar to those of the last four quarters. We are certainly aware of all the discussion regarding increased medical costs out there However, we at P3 have only seen a slight uptick in medical expense overall, in part due to strong inpatient cost reductions. In fact, after reviewing the paid claims data, we have seen a medical cost trending of approximately 1%.

Speaker 5

We attribute our strong success to actions like: Number 1, significant provider engagement in all our markets, which has led to an increase in access by 6 to 7%, and access is the key to driving improved revenue and quality and decreased medical expense. Number 2, we have seen our network specialists more than double their use of ASCs as compared to utilizing hospitals for surgery or other procedures like endoscopies. Number 3, continued success on activities with our teams leading to a system wide acute and mits per1000 of At the same time last year. As we have stated previously, the maturity of the model, now that we have had the majority of our populations greater than 24 months, is bearing fruit in these persistent lives. Whether our teams working with the patients or providers to influence behavior change, educating providers on proper documentation, performing prior authorization and concurrent review or even encouraging both patients and providers to close gaps in care.

Speaker 5

All of these actions and many more are consistent with Sherry's and Bill's remarks that P3 Tier Model is managing revenue, quality and cost efficiently. With that, I will turn the call over to the operator for Q and A. Thank you.

Operator

Yes. Thank you. At this time, we will begin the question and answer session. And the first question today comes from Josh Raskin with Nephron Research.

Speaker 6

Hi, thanks. Good afternoon. First question is just on the G and A number down $10,000,000 absolute dollars sequentially. I think there might have been some one timers in the Q1, what drove that? And how sustainable is that $27,000,000 on a quarterly basis?

Speaker 4

Yes. Thanks for the question. So on the one timers part of it, there were actually relatively little in terms of the one timers. You'll see some disclosure year to date. There's maybe a total of $3,000,000 But this is really on the back of a complete redesign, as I was mentioning, of how do we staff the business, how do we position ourselves for growth, getting people in the right And making sure that we have adequate resources in the places that they're really critical to our success.

Speaker 4

So when you think about it, we think it's very sustainable. But not only is it I think there is probably some opportunity. I don't think you're going to see quite the same quantum every quarter of reduction going forward. But I think this is a very, very solid base from which I think we can become even more efficient.

Speaker 2

Yes. To add to that, Josh, to what Atul just said, It is measuring it will per member per month and it's an improvement per member per month is a sustainable measure as we grow and add more members More than just the absolute dollars.

Speaker 6

Yes, I get that. And then on the provider side, I know we talked about this last And there was a little bit of a culling. I think your provider count, I saw 2,600 is down about 200 from last quarter. Is that still more intentional? Were there some providers that left, is that more on the ACO reach side where you're kind of calling the book, maybe just any color on the provider count?

Speaker 2

Yes, it is intentional. We are focusing on expanding our mind share and wallet share of the Existing practices and reducing the number of unengaged and that don't have that many membership, they engage in value base. So the sustainable discipline growth focus on increasing the number of engaged

Speaker 6

And then if I could just sneak one more in. I know you mentioned on Some of the new county expansions up in Oregon. I'm just curious how we should be thinking about the game plan for 1 sort of Number of new counties that you guys are thinking about in the next year or 2? And then how long does it take these to ramp? What's a reasonable expectation in terms of even just number of lives under management over say 12, 24 month period?

Speaker 2

Yes. So as we grow, as we mentioned before, we'll go to the counties right next door. So It's really almost in the same state and literally it's half an hour or 45 minutes Drive between the counties that we're in and the new counties. And so that was purposefully, Josh, done. So we can leverage the infrastructure and don't have to do extra build up.

Speaker 2

So we're going to continue to focus on the growth of the contiguous counties and adding more Lives through expanding the network in these county and the relationship with the payers. Does that answer your question?

Speaker 6

Yes, I guess, is it similar provider groups or what makes it so easy when you talk about other than the corporate infrastructure? How is it easier to get the docs? They part of large groups that practice across counties?

Speaker 2

Not only that, but the Staffing, the care managers can cover more than one practice. The education provided by the medical directors can So the common services that we share across practices can be leveraged over that space.

Speaker 6

That makes more sense. Thanks. Thanks, Sri.

Operator

Thank you. And the next question comes from Ryan Daniels with William Blair.

Speaker 7

Congrats on the strong performance. Thanks for taking the questions. I guess, number 1, Given the outperformance you saw this evening, what are your thoughts on kind of getting to a sustainable EBITDA breakeven target? I know you talked about early 2024, do you think you can accelerate that? Or is that still the right point to think about from a kind of a launch point and positive EBITDA on an ongoing basis?

Speaker 4

Ryan, thanks. This is Atul speaking. Look, I think it gives us more and more confidence in what we said earlier. I think we're still in the view, 'twenty four is EBITDA profitability. With regards to 'twenty three, the increase in guidance It's just reflective of our increased confidence.

Speaker 4

We'll evaluate that as it goes forward and update. But at this point, we're just sort of a higher degree of confidence in what we said earlier.

Speaker 7

Okay, great. And then great case study on Arizona. It really shows The power of the platform for growth and increasing PMPM rates and medical margins. And I'm curious, given that that's the case, given that you're now profitable on an EBITDA basis 4 or 5 states, what do you think about reaccelerating membership growth? I know that's been fairly flat.

Speaker 7

I know you've called some of the smaller underperforming physician groups, is it now time to maybe step that up a little bit more or do you need to balance that in order to hit that EBITDA positive level?

Speaker 2

Yes, Ryan, this is Sherif. So we're definitely excited about the good performance from all the states that we're in. And as I mentioned in the last call, it is not because of softening of the demands, but rather we have as an industry term use Class 24 and Class 25, almost ability to double the size of the company, but we have determined and shared Profitable growth.

Speaker 7

Okay, perfect. I'll hop back in the queue. Congrats again. Thanks.

Speaker 5

Thank you.

Operator

Thank you. And the next question comes from Gary Taylor with Cowen.

Speaker 8

Hi, good afternoon. 3

Speaker 4

This is Atul speaking. Look, I think there's a couple of components to it that really drive it. And it's not on the back of one single I think as we went through the quarter and as we go through we're already in August, We look at a couple of key metrics around, for example, physician and patient engagement. Those are going exactly as we expected and Frankly, a little bit better. That gives us some confidence that where we're able to engage with those patients, we think we have a better opportunity to control medical cost.

Speaker 4

The second part of this is persistent lives, and I think that's a theme for the year where the balance of the persistent lives is substantial one, and I think we're seeing the benefits of that. We do have we're optimistic around growing our membership as we're going through the quarter. The Business developments and the demand that we see is every bit what we thought and maybe even a little bit better. And then you do have the efficiency factor. I think that this is a sustainable cost reduction.

Speaker 4

As I mentioned just a minute ago, I think this is there's an opportunity to get But it's a combination of all those things. It's not just anyone.

Speaker 8

Second one for me. I know one of the key issues in the Anticipated improved margin and performance was the Suite revenue for 'twenty three versus Not booking any in 'twenty two. I saw in the Q, dollars 14,500,000 in the first half. So Was that all in the 2Q? And should we think about the EBITDA impact as being roughly half as being shared with your affiliated docs?

Speaker 4

Well, I'll tell you about the first part. Yes, that's in the disclosure. That was all in the Q2. But look, we don't really talk other than sort of the requirement of disclosing, we don't really talk about it because we sort of We think about sweeps as part of the normal course of the business. We're going to be seeing those across the year in the various quarters.

Speaker 4

But again, I think we feel good about the performance of the quarter and also our ability to kind of predict the amounts that we wind up seeing.

Speaker 8

But you're going to continue to book those on a cash basis, right? We will. Okay. Last one for me. I just saw the note about the cybersecurity incident, is there a quick just explanation on kind of what happened and contained or any go forward impact

Speaker 4

Yes. I think the quick answer is no go forward impact. We did have an event in the quarter. It was relatively small, immaterial as we see it, but it did happen and we reflect that as part of expenses, but we don't We have quickly closed all of the gaps that we saw in security And elevated everybody's awareness around it. So we think we've got it under control, but yes, that is something that we excluded.

Operator

Thank you. And the next question comes from Brooks O'Neil with Lake Street Capital Markets.

Speaker 9

Good afternoon, everyone. I have a couple of questions. I guess I'd start off with appreciate Atul's comments about demand and activity in the first half. Can you just talk a little bit about what you anticipate for the second half in terms of patient demand and the provider response to what could be either one time or seasonal increase in demand?

Speaker 5

Hey, Brooks, this is Amir. Our demand continues to be high, not only from our payer partners, but also from our clinicians and our providers willing to grow with us. So we are very bullish in regards to our growth as we move forward. So for us, it's continued to work with our clinicians as we bring more opportunities with payers that want to continue to grow. So I think as we look from the 3rd and the 4th quarter that we'll do quite well as you roll through

Speaker 9

Great. Let me ask you a second question. Obviously, the financial performance shows significant improvement year over year, which is terrific. Do you have anything you can point to that indicates Whether you believe quality remains as good as it's been or perhaps is even getting better in terms of the way you're taking care of your patients and members?

Speaker 5

Yes, Brooks, I'm here again. So as we've said before, a lot of what we see is as far as improvement of quality of care comes in the maturation as well, right. So as physicians start to learn more and more of the tools that P3 can bring to those practices, working with the care managers, working with the overall team, quality team, etcetera. We start to see those results. So the quality of care does improve as we work with our clinicians.

Speaker 5

So I think that's part of the reason why we're seeing such success in the model overall, as Atul mentioned earlier. In addition to that, from a just straightforward quality measures, those things also rise as physicians indeed get more engaged with closing gaps in care, working with teams, etcetera, to drive those very things. So we expect quality overall, whether

Speaker 9

And then the last one I had, I was quite impressed with the funding improvement that you've achieved so far in 2023? And I'm curious if you have any indications of whether that's sustainable into 20

Speaker 5

There's many little things that we're doing. What I'm excited about is the level of engagement we have with our groups. Right now, you're seeing us See 6% to 7% more visits than we did the prior year. That is not by chance. That is a focus within the organization.

Speaker 5

And so as a result of that, you'll see revenue continue to and funding continue to improve From the first half into the beginning of next year. So we're excited about where we're headed.

Speaker 7

Great.

Speaker 9

Congratulations. Keep up all the good work.

Speaker 2

Thanks, Brooks. Thanks, Brooks.

Operator

Thank you. And this concludes the question and answer session. I would like to turn the floor to management for any closing comments.

Speaker 2

Great. Thank you very much, Keith. Before end of the call today, I would like to glean couple of things. Number 1, we are not change the utilization, but there's no evidence that we're seeing that patient and provider demands for service are increasing. Number 2, as we continue to perfect our ability to predict the sweep and to smooth out the year, As Atul said, we're going to continue to discuss with the accounting and the auditor to allow us to be able to accrue for the sweeps in the right time and the period that it belongs to and we'll continue to have We'll update you as we go along.

Speaker 2

I will leave you with this. The first half twenty twenty better clinical outcomes and our model does just that while lowering medical costs. The mission and the model are working and the momentum we are Seeing in the business is quickly driving us toward profitability. With that, I'd like to thank you all for your time today and have a great evening.

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