Q1 2021 Oak Street Health Inc Earnings Call

Good morning, and welcome to the Oak Street Health fiscal first quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. We note that today's call will be approximately 60 minutes in length.

Please be advised that today's conference is being recorded.

During today's call are Mike <unk>, Chief Executive Officer, and Ken Cook, Chief Financial Officer.

The Oak cheek Oak Street press release webcast link and other related materials are available on the Investor Relations section of Oak Street website.

Payments are made as of May 11, 2021, and reflect management's views and expectations at this time and are subject to various risks uncertainties and assumptions.

This call contains forward looking statements that is statements related to future not past events.

This context forward looking statements often address our expected.

Expected future business and financial performance and financial conditions, and often contain words, such as anticipate believe com.

Complete continue could estimate.

Intend may plan potential predict project should target.

Or black.

Similar expression.

Forward looking statements by their nature address matters that are to different degrees uncertain.

Particular, uncertainties that could cause our actual results to be materially materially different than those expressed in our forward looking statements, including our ability to achieve or maintain profitability our reliance on a limited number of customers from.

Substantial portion of our revenue.

Our expectations and management of future growth.

Market opportunity and our ability to estimate the size of our target market the effects of increased competition as well as innovation by new and existing competitors in our market and our ability to retain our existing customers and to increase our number of cash right.

Please refer to the annual report for the year ended December 31st 2020 filed on form 10-K.

With the Securities and Exchange Commission, where you will see a discussion of factors that could cause the company's actual results could differ materially from these statements.

This call includes non-GAAP financial measures. These non-GAAP financial measures are in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

There are a number of limitations related to the use of these non-GAAP financial measures.

For example, other companies may calculate similar titled non-GAAP financial measures differently.

Or to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures with that I'll turn the call over to Mike.

E O of Oak Street. Please go ahead.

Thank you operator, and thank you everyone to joining us this morning.

Joining me today's call, Tim <unk>, our Chief Financial Officer.

I'd like to start my comments. This morning by once again thanking our team members, who continue to work tirelessly to support our patient thanks media.

Like most of the country at a time of transition and an exciting time at Oak Street as vaccination numbers rise COVID-19 case count drop in society continued on our path back to normalcy.

Oh sure it's fully vaccinated over 105000 people and administered over 150000 vaccine doses. This.

This activation effort wasn't all hands on deck effort.

In additional in addition to vaccinate patients during business, we opened up our commodity rems to older adults in the neighborhoods, we serve and in early spring when the demand was peaking we kept our facilities opened on nights and weekends to improve access and profit impact of comedian free Sir.

Given the majority of our centers serve lower income communities with large minority population.

Vaccination efforts just like our primary care model helped produce an equity from the communities most impacted by COVID-19.

Looking forward, we are transitioning back to normalcy on the operations from.

We have moved most of our team members that were moving back into our centers and are beginning that process for our call centers.

Well, obviously in adjustments for some team members after over a year of working remotely. We are excited for the relationship building and development opportunities being in person will enable for our team.

We believe being a personal credit positive talent from an efficiency and quality perspective across our teams for the remainder of the year.

We're also beginning to cautiously resume community marketing events.

Well those are largely consisting of outdoor and socially distance events. At this time, we are hopeful that if we continue the current trends of vaccinations and decline in cases, we will be able to execute a greater number and variety of events over the coming months.

We are seeing progress on patient acquisition as our communities continue to reopen and we are hopeful that as a trend that will continue as the year progresses.

As many of you heard me say, we believe our careful which we developed internally and our Q3 refinery is best in class from the market today.

A key to the effectiveness and scalability of our model Kennedy, our proprietary data and technology system that powers our providers workforce every day.

And it enables us to aggregate massive amounts of just for data to develop customized carolines.

Since we only serve Medicare patients, we were able to execute the same turmoil across all of our patients.

This in turn allows assumed by Kenneth <unk> across all of our team and use the system to help us care for every single patient and every center every day.

We also hear from clinicians need Oak Street who've worked in other value based care models, how refreshing it is to have the technology.

Divide the necessary information real time versus having to periodically review GAAP reports after patients have <unk>.

Our use of statistics are great indicator canopies importance to our team in Q1, our provider activity with canopy on average four hours per day.

I wanted to share two external data points from the past couple of months on the impact of canopy.

First.

The New England Journal Medicine catalysts published a study showing the accuracy of our proprietary patient risk algorithms compared to justice judgment.

Rover items, which incorporate over 1000 data fields. Many to Oak Street were developed using machine learning technology.

Compared to provider judgment alone canon sovereigns improve the accuracy of emissions and mortality prediction by two and $3 five X respectively.

Second our Kansas application was recently awarded Med Tech breakthroughs EHR Innovation Award.

In addition to our continued investment in canopy. We're also continued expanding our center base in the first quarter opening seven new centers in four new markets across Louisiana, South Carolina, and we remain on track to open 38 to 42 centers this year.

Moving out future centers in Georgia, Kentucky, and Alabama, and we will likely also expanded several additional states over the remainder of 2021.

We continue to feel confident in our ability to at a minimum maintain the effectiveness of our terminal as well as our ability to sustain the unit economics, we've historically generated as we increase the pace of expansion.

So long as we continue to maintain and improve our clinical results and patient experience and meet or exceed our historical unit economics, we will increase our new center opening pace each year as the white space in our market is vast.

As a reminder, our market is comprised of over 27 million Medicare beneficiaries and could support nearly 10000 Oak Street centers.

Given the significant capital raise during the quarter as part of our $920 million convertible note offering we have ample capital to support our growth strategy.

On April one we officially began participating in the CMI direct contracting model as a reminder, jet contracts you program will enable Oak Street health to assume financial risk for the cost of care for patients covered by traditional Medicare prior to drug contracting we are only able to assume risk with patients covered by Medicare advantage.

We expect to serve approximately 6500 patients in Q2, 2021, and we would expect those patients to grow in Q3, and Q4 2021 and beyond as we grow our patient panel.

CMS recently announced a moratorium on new applicants that moratorium does not prevent us from adding new markets to our current direct contracting footprint.

Early data that we have received related to patient revenue historical metal cross suggest that the per patient economics will potentially be better than we initially estimated.

This reinforced our confidence in our ability to benefit from the investment we make an extra so Medicare patient care by taking risks from direct contracting program.

Our demonstrated success, taking risks working with Medicare advantage clients.

Finally, turning to Q1 results, we generated record revenue of 297 million in the quarter exceeding the high end of the guidance, we communicated to investors and representing 47% growth compared to Q1 2020.

We care for 75500 at risk patients as of March 31.

We'd like to point out that 47% revenue growth is off of pre COVID-19 comparison quarter, Q1, 2020 compared to COVID-19 affected quarter in Q1, 2021 and the growth in Q1 2021 is in spite of low growth for the spring and summer of 2020, we are confident that we will exceed 50% quarter over quarter growth for the foreseeable future.

In summary, we continue to be very excited encouraged by our from our results our center expansion opportunities, our patient acquisition momentum and our patient economics for <unk> MF patients and direct contracted patients. So very very exciting time at Oak Street.

I will now turn over to Tim Cook, who will walk you through our financial results in more detail Tim.

Thank you Mike and good morning, everyone. We were pleased with our first quarter as we delivered results above the high end of the guidance. We provided in March in terms of membership are at risk patient base, which drives our financial performance grew by 37% to 75500 patients at the end of the first quarter. We operated 86 centers and an increase of seven centers.

Compared to December 31, 2020, and representing 32 more centers.

Before we operated at the end of the first quarter 2020.

<unk> revenue of $291 2 million grew 48% year over year driven by growth in our at risk patient base total revenue grew 47% year over year to $296 6 million.

Our strong revenue growth was primarily driven by the increase in our at risk patient base.

I will note that $6 $9 million of Cabot's weighted revenue in the first quarter of 2021 was related to 2020 patient retroactivity, where payers paint Oak Street, a catch up for patients manage in 2020, but not previously included on our rosters.

Our medical claims expense for the first quarter of 2021 of $199 7 million reps.

Representing growth of 51% compared to the first quarter of 2000 2026.

$6 $6 million of our first quarter medical claims expense was related to 2020, primarily related to the previously mentioned patient retroactivity.

Our cost of care, excluding depreciation and amortization was 60 $63 million for the first quarter, an increase of 38% versus the prior year driven by growth in the number of centers, we operate in a more.

Our more team members to support our larger patient base.

Sales and marketing expense was $24 1 million during the first quarter, representing increase of approximately 103% year over year as we continued to invest in this area to support patient growth now much larger footprint of centers.

Corporate general and administrative expense was $72 9 million in the first quarter, an increase of 200% year over year. The majority of this year over year increase is related to an increase in stock based compensation expense, which represented $41 2 million of.

G&A expenses in the first quarter 2021, compared to $1 7 million in the first quarter of 2020.

As a reminder, the increase in stock based compensation is primarily related to an accounting change related to awards issued prior to our IPO in August 2020, and is not a function of stock awards issued since our IPO.

Excluding stock based compensation corporate general and administrative expenses was $31 7 million in the first quarter of 2021, an increase of 40% compared to the first quarter 2020, driven by costs necessary to support the continued growth of our business.

I will now discuss three non-GAAP financial metrics that we find useful in evaluating our financial performance.

Patient contribution, which we defined as Capex you did revenue less medical claims expense grew 42% year over year to $91 5 million during the first quarter, we expect at risk per patient economics to improve the longer that our patients are part of the Oak Street platform.

Platform contribution, which we define as total revenue less the sum of medical claims expense and cost of care, excluding depreciation and amortization was $36 7 million, an increase of 43% year over year.

From the individual center matures, we expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers as well as improving our per patient economics over time.

Adjusted EBITDA, which we calculate by adding depreciation and amortization transaction offering related costs and stock based compensation, but excluding other income to net loss was a loss of $17 4 million in the first quarter of 2021 compared to a loss of $8 7 million in the first quarter of 2020.

We finished the first quarter with a strong balance sheet and liquidity position during the quarter. We completed a successful convertible debt offering issuing $920 million in aggregate principal notes due in 2026 at a zero percent interest rate with an initial conversion price of $79 16 per share.

Our net proceeds after issuance costs.

$898 million.

We used a portion of these proceeds to purchase a capped call which increased the effective conversion price to 138 88, $138 88 per share.

As of March 31, we held approximately 115 billion and unrestricted cash.

Our liquidity position will support our continued growth initiatives, primarily our de Novo center expansion.

Cash used by operating activities was $8 8 million in the first quarter of 2021, while while our capital expenditures were $7 8 million for the quarter.

Now I'll provide an update to our 2021 financial outlook.

For fiscal 2021, we are increasing our guidance for total at risk patients to a range of 107 to 112000 patients.

<unk>, our direct contracting patients we.

We are increasing our full year revenue guidance to a range of $1 3 billion to $1 $34 billion.

From our prior outlook of $1 75 to 132 5 billion.

While our adjusted EBITDA guidance has been tightened to a loss of $205 million.

102, a loss of $165 million.

We continue to expect to have 117 to 121 centers opened by December 31 2021.

For the second quarter of 2021, we are forecasting revenue in a range of $315 million to $320 million and an adjusted EBITDA loss of $40 million to $35 million.

We anticipate having 93% 94 centers and in at risk patient count of 86 to 87500 patients, including direct contracting patients.

June 32021.

I would like to make one final comment regarding stock based compensation expense as we've received a number of questions on this topic.

As I mentioned earlier, the vast majority of the increase in stock based compensation was driven by the accounting treatment for pre IPO awards dating as far back as 2016 that converted from an uncertain investing timeline to defined investing timeline of IPO.

These awards vest between August 2022, and August 2023.

Q4, 2020 was our first quarter that reflected the full quarterly cost of this accounting treatments.

We expect our stock based compensation expense to remain at elevated levels until August of 2022, when the expense will begin to taper significantly as some of these awards are fully expensed by August 2023, we would expect stock based compensation expense to reflect market equity compensation.

And with that I'll turn the call back over to the operator, and we will now take questions operator.

Great. Thank you at this time, if you'd like to ask a question. Please press star followed by the number one on your Touchtone phone.

To withdraw your question press the pound warehouse Shang.

So in the interest of time, please limit yourself to one question and one follow up.

Thank you. Your first question here comes from Robert Jones from Goldman Sachs. Please go ahead. Your line is now open.

Great Good morning.

Wanted to ask on direct contracting Tim you made some comments in the prepared remarks around <unk> decision to.

To close the program for new applicants and wanted to just get a better sense of how you think that affects the opportunity as you view it for Oak Street, specifically, obviously as an entity that was already approved for the program and then you mentioned.

Better economics potentially around the program just curious what specifically would.

Good driver present, those those better economics for Oak Street.

Yes on the first one as far as.

CMI and then their decision to pause new applicants.

We don't think that will have any impact on us since we're already in the program and our ability to continue to expand within the program.

We're certainly not governor relations experts here at Oak Street.

But when you look at the program take a step back I think it is very much in line with kind of be.

Kind of bipartisan and certainly even the even the kind of programs under the Obama administration supporting providers and moving.

Value based care models deeper and deeper and nutritional Medicare.

So.

My at least my understanding would be relative related to me it's lots of.

Around the support of the program is much more around just the new administration that <unk> inherited a program that was kind of just about to be implemented I really wanted to make sure. They understood. The program before day further credit before they took another round of applecare. So.

Again I think.

Okay.

From what we understand today I think that we feel really good about our position within the program.

The ongoing viability of the program moving forward.

On your second question around the economics.

I think the.

There's lots of anything that's unexpected as far as the economics go I think there's just a question when does the new program you can kind of do it on paper and in theory, but until you start seeing the real patients that are in the program and you start seeing more of that historical claims and the revenue flow through you are not.

Totally share right. So we've talked about this a fair amount in prior prior calls around trying to triangulate around what this program will look like compared to Medicare advantage and I think what I would say is.

Our belief today is it will look very similar to Medicare advantage, which is obviously program were very successful.

But.

Does.

The government keeping a smaller portion of the premium or revenue per patient will be higher although we do expect.

A similar increase in <unk>.

Cost because you won't have you and.

In network and some of the levers that help planting on Attritional Medicare about share.

Traditional managed care levers that Medicare advantage plans Paul too.

You had a lower cost and so you kind of think about it from a net perspective, the patient contribution I think will look very similar to what we see across our Medicare advantage population.

But higher revenue and higher patient cost along with it but that's.

That's a big win because we do very well in our Medicare advantage patients.

Until this program started we obviously spent the same market share for our share so Medicare patients, which I think is a really important point why we are such a strong position coming into the program and we always provide our care models. These patients.

But now we're kind of able to kind of get the economic reward from the investment in making their care.

Got it and if I could just ask a follow up around around the centers and the plan for openings don't want to get too far down the road, but you made a comment that as long as you are able to continue as an organization to maintain and improve clinical results and patient experience. The unit economics that you'd consider new center openings each year.

Tick increase new center openings each year, just curious if you have any initial thoughts just given how important that metric is to forecast from the model.

How youre thinking about new center opens in 2022 and beyond.

Yes, I think we think about increasing new centers is almost titration up and so if we go through a year and we do.

To all on the same trajectory or improving our unit economics and as we've shared I think in prior prior prior calls.

And our.

Ill call a couple months ago, and we've actually seen our global economics improve year over year with vintages, and we really want to keep that trajectory going.

We get out of the year and that happens then we'll want to open up more of the next year, but we're not going to open up four or five times as many centers right.

We are giving you guys a range of 38 to 42. This year. So certainly don't expect to open up a 150 to 200 next year.

Could we probably but I think then you risk something unexpected becoming a bottleneck. So I think we'll think about it more like we saw in the last couple of years, where we've gone from 12 to 28 now to something around 40 plus.

Similar levels of titration up every year, where youre, where youre, increasing the number but youre not really.

Tripling or quadrupling the number so you can expect something similar if you kind of just take out that trajectory into next year and you asked me. After I think is how we think about it.

That's super helpful. Thanks, Tim.

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley. Please go ahead. Your line is now open.

Hey, good morning, and congrats on the quarter.

Your guide.

One follow up question on direct contracting specifically as we think about that move all voluntary line patients to claim the line patients after a year.

What how do you see day impact on patient economics.

Forward.

For this population.

Now manage.

Now I have content.

Sure Hey, Ricky it's Tim Good morning, Thanks for the question.

As you mentioned in functional areas as part of some some updates on the program from <unk> over the last several weeks they mentioned that patient that our voluntary lines in one year will become claims volume next year.

There is a.

A difference in methodology for how you calculate the revenue for each of those patients.

So as it pertains to that change Ricky.

We actually feel as though that change will not have a significant effect on the economics for our patient population.

I won't go into the technical details here, but essentially because of the way that the risk scores calculated for those patients based upon looking back to a reference here. So long as the patients that you are managing that reference year, you were managing with the same level of intensity by managing and engaging rate seen in the center the same level of intensity that you do today.

You Shouldnt expect a significant impact on the overall risk score for the portfolio of patients who are serving so from our perspective as Mike mentioned earlier, our care model has been consistent across our patient population over time.

We feel as though as our patients move from voluntary to claims lines and when they do so this risk or cap comes into effect as you would have less of an impact on us given the fact that that cap as compared to historical baseline that was on a well managed population.

Okay.

And then my follow up question is on the.

Activity in our relationship with Walmart.

In the last few weeks Walmart is really sounds like it's.

Is it activity in healthcare launching day.

Brian Your telehealth asset.

And making some comments around sort of how they view their goal.

From a health care system.

Now that you have the centers.

<unk> been running.

Any sort of.

Data or observations you can share with us.

Overall, how does that day.

How do you see the opportunity with Walmart playing out.

Okay. Thanks, Rick This is Mike.

I think the same approach and.

Kind of criteria that we've talked about from Walmart.

We announced I think last fall remains which is.

I think that the hypothesis of y.

Putting oak Street centers in Walmart I think remains strong, but I think we have to test that hypothesis and I think we're still we're still doing that.

And for US, it's not just about equal.

Equal to an Oak Street Health center as far as the ramp goes they got it got it.

If you have any better.

They can't just be better for the first couple of months because theres hyphen.

<unk> got to be sustainably better than an Oak Street otherwise.

Otherwise, we'll just we'll just do centers ourselves right and so.

We're encouraged by the results so far and.

We'd like the partnership with Walmart I think our teams worked really well together.

So so far so good but again.

If not supposed to be.

I guess, maybe said differently there are such a huge opportunity to put up.

De Novo centers, and we saw such a massive market and we really as we just talked about as far as the scaling goes we really feel like we have the ability to both.

Continue to improve the result of every individual vintage as well as put up more and more centers every year.

So.

If we can just keep doing that and have a day.

Very strong growth trajectory for a very very long period of time, and while Walmart lots to go to some more rural markets and potentially grow a little faster, we don't need that to really I think incredibly successful. So the bar is pretty high right. We're not only true we're not really chasing a business opportunity I think we're being.

Opportunistic perhaps in the decade.

Take it to another level. So we want them, we want to make sure we have a high conviction around that.

That's what I thought were looking at the opportunity today and Walmart.

Walmart as you know Matt.

Massive right to just the number of employees they have is.

As a health plan itself and so I think theyre and theyre going to keep investing in a number of different opportunities and obviously on the telehealth profit has made an investment but that obviously is very different than what we do here at Oak Street. So I think there's plenty of opportunity to still work with them and we are.

Optimistic about those centers, but having it obviously made a decision of what we're going to be going forward.

Thank you.

Your next question comes from the line of Ryan Daniels from William Blair. Please go ahead. Your line is now open.

Hey, guys. Thanks for taking the question Mike I wanted to go back to your prepared comments, you talked a little bit about a resumption to normal with some of the community marketing events and I am curious as we go through the back half of the year assuming.

Things continue to stabilize with the pandemic will you reallocate dollars from board towards community marketing or will you continue with some of the digital initiatives you did last year.

Along with the community, maybe hope that that amps up member acquisition into 2022.

Yes, Thanks, Ryan definitely the latter.

And the channel and the channel working it's bringing in patients below kind of our cost of acquisition thresholds now we're going to keep doing that channel.

Because we have obviously.

Amount of capacity within our centers that we can fill up and as again as long as the cost of acquisition has a strong ratio and when we look at kind of comps in other industries are our CAC to LTV ratio is really strong. So we wont be doing the channel. So I would've thought centers faster and default centers faster you, obviously kind of bring forward.

The positive economics that you see with vendors get closer to full.

So I don't if somebody is working in digital is certainly working and block out thresholds, we have no plans to lower the spend against it I think if we can if we can find ways to put more sales and marketing dollars to work at positive tax we will absolutely do that and I'm hopeful we'll keep finding out.

Do you view that that said.

We are incurring today, the cost of our community marketing approach.

We have our average executive is kind of our on the ground field team. They are in every center right now.

Out there working today.

As effective as they were in 2019 pre pandemic.

They're getting better every day every every every month and I think as society can use reopened and add more and more opportunity to meet people I think they'll continue to get more and more effective.

Both as we see opportunities to invest more in sales and marketing we will we will certainly do so but I guess, we can get the best of both worlds, having our central and digital other central channels up and running and have our field based off and running without having actually a significant increase to our our sales and marketing because we are already occurring a lot of that cost.

Okay. That's helpful color and then just as my follow up question just wanted to get an update on some of the new clinical programs and initiatives that you're planning for this year. I know you spent some time talking about those investments last quarter. So love to get an update on progress there if any have rolled out any early results just any color you can offer thanks guys.

And there they are in the process.

Them around additional care in the home and.

So more updates to our behavioral program and then we kind of.

Focused program, they're all in various.

Stages of piloting the rollout and.

And just to give you a little bit more context on what that means when we think about new program at Oak Street.

We are constantly evaluating.

Dozens of great opportunities, but what we are really really disciplined about oak street, if not throwing a bunch of stuff at the wall and see what sticks.

But making sure we do a program we're very methodical about it.

And so we'll kind of think through hey, what are the what are the.

Dozens of things we can do what are the kind of three to five that we feel the most confident about.

How do we then.

The program pilot the pilot worthwhile to do a beta test and if that works out well rolled out more broadly and we roll it out more broadly we need to make sure. It's integrated into canopy, we need to make sure you have the reports and data we can to make sure. We have incentives aligned across teams that we're going to change management work is in the center et cetera et cetera. So it's a pretty it's a pretty thorough and comprehensive process again I think that's one of the really.

First about Oak Street is not just we say we have all these different programs, but we run them every center every day and to all the patients who need them and it's really a.

Very consistent application of the model, which drives it and a consistency of results across vintages and across markets.

We are in that process right now, depending on which of those programs thats at different stages, but none of them are in the stage, where we're we're fully rolled it out now where we really have results against them. So I think we remain optimistic in the ones that are in pilot mode. The initial pilot results are good but.

And is that.

It's still too early for us to declare victory and Theyre certainly not.

Fully operational yet.

Your next question comes from the line of Sean Wieland from Piper Sandler. Please go ahead. Your line is now open.

Thanks very much. Good morning. My question is on the comments you made on canopy specifically.

<unk> to improve accuracy of admission and mortality predictions.

Just maybe if we can go into a little bit more detail on exactly.

What are the inputs there and what makes this these algorithms unique.

And your ability to do that and secondly, do these algorithms offer you the ability to predict economics of either new centers, new markets or even down to the risk forecasting the risk scores patients. Thank you.

Thanks, Sean.

So I think.

Yes.

I'm quite biased, but I think one of the things that make the Oak Street, so so impactful and so effective.

The whole of much greater than some of the parts and so it's not just about.

Doing machine learning and big data side, I mean, that's something that many organizations can do but it's about the ability to really create a really differentiate.

<unk> data set and then do the machine learning on that asset and then apply.

What comes out of the algorithms to actually drive action and change change trajectories for patients and so if you think about the data element. Some are your kind of your basic health care data I was wrong around claims and admissions and types of claims and things of that nature. Some of our basics like demographics, but a lot of the data points are things that we are understanding what the patient.

Because we spent a lot of time with them on our intake process. So we have a very.

Throw in systematic intake process that all of our patients go through we spent six times as much time with new patients like in their first month and a half than we do kind of an ongoing patient on average.

And that allows us to really get to know the patient while we gather a huge amount of information on that and we have huge efforts together med records across the system and we use.

Nationally is processing and things like that to read the med records and in some cases.

<unk> <unk>, who will read through them and determined here as the risk factors for the patients here is that here's here's why that patient.

Different different chronic illnesses are different.

Activity, moving challenges et cetera, et cetera, et cetera, So really sponges for all the information, we can gather and sometimes thats a health information exchange.

At some state those were pretty well from say if they don't so.

Health care is the only industry I know that pleased with faxes and low rate well, we'll get back to that and we'll we'll upload those and digitize them and go from there.

What we're doing is really from all the third party information, we can gather on our patients plus all the information we are gathering spending a lot of time with those patients and they are in their first part time at Oak Street, and then ongoing we're spending obviously significantly more time with our patients and the average doctor, we're creating we're creating a really.

Differentiated data set and part of that data set is a subjective judgment of our doctors, we want we want that right. We want our doctors to use their judgment they've seen a lot of patients and there are things that sometimes data cannot pick up at a doctor to seeing the patient spending time with them. So we'll put all that together, which creates a pretty unique datasets and ask the data set that we will do these.

It uses machine learning algorithms on.

And then yes, we use it certainly more than just the two data points I share. Those are just the two that got published in the.

New England Journal Medicine catalyst article, but there's other things we can predict and other things. We can we can annualize about our patient population.

It is much more focused on the patient level than kind of the center or market level. Today, So that's really where character deliberate right and so if we can better understand our patients and their risk going to the hospital and obviously other risk factors. We also look at we have a readmission risk model. For example, that's been highly predictive if we can better identify who's at risk and we can if we can spend a lot more resource.

So you get it in front of those challenges before they happen.

And again.

Or you can pinpoint the patient at risk from where you can intervene and it's a positive cycle because when you intervene and you figure out hey, some of them are positive.

That's okay, because the ones that are real and you can understand even more and more and more and keep keep investing in the right places. So thats kind of how we think about both models working and again I think it's something that.

The machine.

Machine learning and data Sciences.

As an important component, but it's necessary, but not sufficient to get the type of results you also need.

The ability to pull in kind of more more and different data types in the beginning and then you need the ability to act upon that data, but if you have all three of those you can really make a big difference.

Thanks for that.

So.

Is that am I reading too much into this your commentary around that.

Predictive elements of the algorithms and then you're saying economics will be better than you thought in the direct contracting are those two statements.

Related or no.

They are related in the fact that one of the reasons we can generate.

Really strong patient surpluses is because we're able to identify our at risk patients and we're able to act upon it to keep them healthier right, which obviously is one of the reasons. We are unable to drive non metal costs. The one of the reasons, we have improved kind of over time right and our care model effectiveness. As we are much more effective at using data and identify who their risk and cannot be allows us to.

Act upon that in a more systematic manner. So the Oak Street care model today is better than it was four or five years I wasn't bad four or five years ago, especially really good but it's even better today and so I think to that extent, yes, we are not saying hey, we have these great predictive algorithms and they are predicting that met costs for our traditional Medicare patients and therefore those are direct contracting.

Thanks.

The improvement in the actual real improvement in patient outcomes that drives the surplus is in part driven by a lot of things, but in part driven by canopy and the data algorithms, but thats.

That's not it's not that those things aren't used from a finance right. It tends not the one you have the customer of <unk>.

Those that algorithm is really more of our doctors.

Alright, thanks for the clarification.

Your next question comes from the line of Kevin Fischbeck from Bank of America. Please go ahead. Your line is now open.

Hey, Good morning. This is Adam on for Kevin quick.

Quick question about the quarter and then I have a follow up question.

With the guidance range, how much of it was due to sequestration.

The revenue and EBITDA.

Okay.

Yes.

Tim So as folks know sequestration.

The sequestration holiday was extended from just Q1 of 2021 for through the remainder of the year that is a bit of a pickup from a revenue perspective typically speaking are.

The revenue we received from plans to reduce by that 2%. So there is a bit of a pick up for.

For the last three quarters of the year relative to what we had before so it's it is <unk>.

Included in there to a degree.

Also increase our medical costs for the year. So I think from a net impact when EBITDA impact the benefit of sequestration is relatively small it's essentially our MLR applied against the incremental revenue.

For the for the year, so sequestration isn't there to the degree that impacts our business.

So ex that it was things were kind of tracking in line.

Yes, I mean, I think we are.

At this point.

Only may right. So early may at that so we'll continue to be very optimistic about the prospects for the remainder of the year.

As you can tell by the increase in pretty.

Pretty much all of the metrics for from a guidance perspective, but I think we will continue to see how things develop for the remainder of the year and update you all as we learn more.

Okay and then my actual question is there was a $1 million acquisition.

Cash flow statement, it's obviously really small, but with all the new cash on the balance sheet, just kind of wondering what the latest thinking was around M&A and if we're going to see more of these kind of I mean, that's a really small deal, but that's kind of a signal of more to come.

Hey, this is Mike.

I think we will continue to be opportunistic.

On the M&A front, and I think that can that can take a lot of different different shape. So in that case.

Very small practice that we just closed on it we are where we are beginning to integrate and we think about M&A.

On a practice front. The key is we're not going to buy things and kind of be an overlay business right. There are people doing that thats not thats not what Oak Street does we believe the effectiveness of our care model is having a focused only on Medicare patients and having it be.

Kind of run in its full right.

I truly believe what I said in the last question, where the whole is much much greater than some of the parts. We have a lot of parts, we need around all of those parts.

And so that means we can just have a normal physicians group that feed all different age of patients in kind of a normal staffing and just kind of put our model on top of that doesn't work.

And so in the case, when we do acquisitions, we will flow.

Break that break the practice apart.

In some cases keeps keep running a practice that the commercial patients.

Under patients, but then take the Medicare patients and see that separately, sometimes we will wind down the practice and see the Medicare patients out of our centers.

Different ways, we can we can execute upon this but the key is really the doctors in the practice.

They believe in the way oxy practice of medicine.

Want to see patients with as part of Oak Street, and we can try to find a way to compensate them for what they built a independent practitioners, but then bring them onto our model if they're just looking for.

Check what they built.

It'd be a great fit with us because we really.

We practice medicine differently and it works very effectively but we want it we don't need to keep that from a culture and a patient focus perspective.

And so in the case of the ones that you're referring to we should obviously with a very very small practice a.

Couple of doctors, who.

We're.

We're relatively far along in their careers. They are panel was mostly Medicare patients already just naturally.

They love what we're doing actually found us and said can we because of the way to work together and so we were able to make it work out.

There are number of patients won't want look different than the rest of the patients we care for us so that will be something we do but again, we're talking about a $1 million.

In the big scheme of things for expenditure on that one and so I think there'll be some small ones like that that are much more opportunistic we do bigger M&A I mean, that's not that's not a core part of our strategy. So it's obviously something presents itself that we feel very strongly about we can always will look at it by that.

Right now Theres no hose remain the biggest approach and I think.

I almost think about these small tuck in acquisitions, it's almost an extension of our sales and marketing activity.

Makes sense appreciate it.

Yes.

Your next question comes from the line of Lisa Gill from Jpmorgan. Please go ahead. Your line is now open great. Thanks, very much and good morning, Mike I just wanted to start with your initial comments around vaccinations. You said 105000 people have been vaccinated can you talk about.

How many of those are your existing patients and is this a potential recruitment tool sales.

Okay. We can now bring people in and see the opportunities of an Oak Street.

So that would be my first question and then secondly, I just really want to understand your telehealth strategy and how that fits into canopy I know we've talked in the past about longitudinal care, but.

How do you how do you see your telehealth offering over time.

Yes on the first question around the vaccinations, I mean, first and foremost and most importantly.

Really proud of our vaccination effort because it really helped positively impact the communities. We serve many of them some of the hardest communities hit by COVID-19.

And so we were really glad to step up and we were very early on we were doing one a health care workers and the finished Chicago and Cook County, Other places have asked us to help them vaccinate.

Health care providers, who Werent play with Big Hospital systems. They are having trouble finding ways from that again. So we are glad we gladly so fast up calling it did at nights and weekends.

It was a broad effort.

The vast majority of obviously all of those 105000 people world are adults given who we serve.

And I do think historically.

The more people spend time with Oak Street, and Oak Street. The more excited they are about it in a higher percentage of them that become patients and so one of the reasons why our community marketing efforts in 2019 and prior were so effective is because you really are taking something that sounds too good to be true when youre, making it real.

You are taking something that people arent really shopping for the consumer and you are helping them understand why theres something better out there right and so many times our patients are just.

Going to the ER for their care prior to prior to becoming part of Oak Street in ways that are sick or.

They haven't Doctor's office, but generally federally qualified health center kind of a standard Doctor's office as part of also system.

It's hard to get appointments right four week wait to get appointments and the appointments are short and they can't get follow up and what that means.

Have a doctor right that's not that's not the type of care that they need right and the challenge for US is that people don't realize is really better right. It is expectations are so low.

They kind of accept them and so the more we can meet people. The more we can educate them about what oak Street does in and really educate them. Most importantly about what they need and what they should expect from care and how that will kind of improve their overall well being.

Our people are pretty likely to join oxygen patients. So.

I am hopeful we will see the same thing and I'm optimistic and we're starting to see people that met us from the vaccination standpoint.

I grew up in the Chicago area, and so not too far from one of our centers.

In the suburbs.

When people who are people I knew our.

Old Navy or things like that some of them got back net Oak Street and.

They were really in France right now.

Thanks for question why they werent patients already at Oak Street, but yes.

It came back and while Youre centers really nice and I didn't realize how great. It was and I was thinking because what I am saying you guys. What's my mom with telling you for the last seven years. It doesn't bragging about Exxon right. This is real.

But I think that.

Yes.

It kind of opens your eyes about how much.

How much of opportunity we have to continue to reinforce our message our brand what we do because even people that really should know about OTT and why it's special still really surprised when they visit the centers for the first time.

A long winded way to say, yes, I would.

I would hope that this will become a tailwind for growth, but I think it's just the tip of the iceberg around what we can get back to as far as working in the community and educating people about Oak Street now that COVID-19 is hopefully continuing to subside.

That's the first question.

On telehealth.

I think we look at telehealth.

It's really for two purposes right.

Purpose number one.

To have a heavy option for a patient that is that it's more convenient for them.

When they want it.

Telehealth is not just.

Longitudinal wellness check it's also kind of on demand help it fits there.

Sure.

Urgent needs and so it does allow us to kind of add more.

Kind of tools in our toolkit, so to speak to meet our patients where they are to improve their experience and improve their quality of care.

The second thing I think about this new is kind of more efficiently oak.

Often up kind of more touch points right. So maybe not a full visit right, but it's just a quick telehealth interaction right I think one of the things that we are breaking at Oak Street, because we're not encumbered by a fee for service economics is kind of this idea of low to visit with a doctor right.

There is just kind of a very well defined.

<unk>.

Provider visit and a lot of that's driven by what you need to do to build that business right and even on the telehealth front theres some of that still don't know.

Billable, we really don't care about that right, we care about interacting with our patients and intervening when it's necessary or kind of longitude, we manage them and get ahead of things and so we think about that where you can blur the lines a bit between what's the visit and what's not and I think telehealth is great. There because it allows you from a more personal interaction between a phone call.

Actually bringing someone in person so right now.

A very small fraction of our visits not because we don't want to do more telehealth, but because that's what our patients one patient.

So far has strongly preferred coming into <unk> in person.

Part of that is due to the demographic we serve by day part of that is due to that.

Relative clinical complexity of our patients.

But I do think as telehealth becomes more prevalent and as people age in who are now using telehealth for the first time younger I think it will I think it will continue to be a larger portion of what we do.

But I think it gives us a really nice complement to our model and we really aim to have and I feel very strongly about this if you have kind of a telehealth option et cetera from the primary care option.

Our trading.

Issues of coordination youre, creating more fragmented care and we need to do the opposite we need more coordination and less fragmentation in patients care and so that's why we aim to have kind of a one to two no.

Health option, which is by the same provider that provides them care in person right on top of that we're going to have the kind of more urgent.

Adoption that will likely be a different central nurse practitioner, but we'll have the same record same care planning from access to canopy et cetera, and so by doing that we can really create.

A seamless experience, but more importantly.

Our coordinated non fragmented.

<unk> environment for our patients across all these channels great.

Great. Thank you very much.

Your next question comes from the line of Justin Lake with Wolfe Research. Please go ahead. Your line is now open.

Thanks, Good morning.

Laughing covered here, but I have a few follow ups one I just want to make sure I heard correctly, Mike you said.

That all things being equal I think it was a response to Bob's question around.

Center growth, we could think about a similar increase in centers over the next couple of years relative to what your increase from 'twenty to 'twenty, one as long as things were kind of going similarly in terms of improving economics.

Yes.

Net debt that is what I said and as you can read back to me I agree with the sell so I think yes.

Yes.

Yes.

I wanted to follow up on the direct contracting.

Specifically I think what you had said previously was that.

You expected.

The claims aligned members to be.

Economics that were materially lower.

In an uncertain relative to Medicare advantage and now it sounds like you expect the entirety of direct contracting to be kind of in line with Medicare advantage economics.

Is that would you would is that what you are.

See it out there so the revenues that much better that we expected all to be kind of similar to Ma.

I mean with a bunch of Asterix on it were.

A month into the program and we're getting early data et cetera, et cetera, I mean, yes from both.

The more detailed methodology that we've.

Now understood understand has gotten more under the program as well as what we're seeing from the initial revenue and kind of historical cost data, yes, we feel like kind of across across the bucket will look a lot similar to Ma.

Okay, and especially on those claims allied members I wouldn't expect there to be much of a ramp.

<unk> been seeing them for a year or two you know there.

No theyre kind of medical medical issues all of that is this something where the next couple of quarters, you should be able to tell us kind of what's going on with those members and we should be seeing them kind of running.

A real meaningful margin.

Adjusted I think it's a good question.

We are.

Undecided at this point and we'll.

I hear the requests, but as far as how much were going to break out.

Kind of are different different patient components and different patient groups and so.

I hear the question.

Again, my expectation is the.

The contribution will look very similar from a two to a kind of our MA book overall on our Archrock contracting book.

But again I think we're still.

We're still figure out exactly how we're going to report what.

We don't want to break out too granular things because 6500 patients like three months and 65 innovations is not non actuarially sound either right. So we know revenue, we know historical cost and that'll give us a good sense, but.

It's more of a book there'll be some movement.

Driven by small numbers.

Maybe Justin if I could just add to that Tim.

Mike mentioned this earlier.

A lot of data on patients, but until we see what specific patient flow through on the actual direct constant rosters. It's hard to know exactly all the data will look like and therefore, what you get paid and I think as we've gotten more data and it's confirmed what we had hoped to see we've been more positive on what the economic opportunity could be to Mike's point and then one of the benefits as folks know.

When we take on <unk>.

Medicare advantage or new Medicare advantage patients onto our platform. It takes some time for us document understands their their health conditions.

And that flows through in the form of higher reimbursement in future years, but those are annual cycles I can set and direct contracting because we've been seeing these patients. Some of these patients for a number of years that we've already gone through that period of time and therefore as patients as we as we converted the direct contracting will be able to add more 10 year type economics.

Some patients that we've been seeing from what I think that dynamic wasn't entirely well understood. When we first started talking about this program a few months ago.

Makes perfect sense, thanks for all the color.

Yes.

Your next question comes from the line of Elizabeth Anderson from Evercore. Please go ahead. Your line is now open.

Hi, guys. Thank you so much for the question.

My first question is in terms of the cost of care as Mr. Gao from <unk>.

You talked about I think Houston is the reopening and that kind of thing, but is there anything else you would point to in terms of net piecing does that cost of care as we move here.

No I'd say this is Tim good morning, it's going to fall.

No.

The timing of new center openings so.

As we open new centers, obviously, we're going to incur the costs as you would have in those centers and so we would expect that the cost of care dollars to increase commensurately with with the acceleration of New center openings in the latter half of the year.

Okay. That's very helpful. And then as are most of the pandemic have you and any changes in your thoughts about providing specialty care in any kind of specific areas by their mental health.

Cardiology or any other kind of areas or any kind of mix shift on that front.

Yes, so we actually already provided.

On our care for our patients on the mental health front, we have an integrated behavioral program, including.

Licensed clinical social workers with a specialist on the ground and we have a team of psychiatrists too.

What kind of support them and we will provide kind of in person psychiatry for patients who need it so that it's on.

We arent really kind of already doing.

It's a pretty core pillar of our care model.

The.

Things like cardiology, and things I think that I think one of things we're assessing.

I talked earlier about how we have dozens of things we could do every year and it's certainly one of those is cardiology I think if we the next specialist Adam I guess would be cardiology, because I think it is pretty close into primary care.

We're able to get some of the benefits of having our own cardiology group buy by working with.

D consult with specialist.

Great company called Rubicon, and we work with a very nice job of kind of providing our doctors the ability to kind of a.

Console with specialty cardiology being one of them and so cardiology is a good example of something where oftentimes it's not that the person as you've seen by the cardiologist, but you really want to have the persons.

Test results and kind of condition run by someone's got a bit more expertise, especially for.

Newer primary care doctors, who are less at Wassa at bats, with these conditions and so that's a great way to leverage kind of the console business and I think over time non interventional cardiology could be it could be a good candidate and to bring on for Oak Street, but again, if we do it if not certainly not to generate volume or revenue its really to lower our costs by.

Providing better coordinated and focused care for those conditions.

Got it that makes a lot of sense and do you use rubicon for anything Besides cardiology is it you guys more focused in that area.

It's across it's across specialties.

And again, if you think about the types of specialty business the ones that are much more like.

Our specialized primary carriers that are great candidates for free console, so easy to create across specials and some specialists.

Net.

Certain testing or procedures that only a specialist can do but when it's more just the compensation. So it's a great tool.

Yes that makes sense. Thank you.

Yes.

Your next question comes from the line of John Ransom from Raymond James. Please go ahead. Your line is now open.

Hi, good morning.

How should we think about.

Yes, It's and then MA plan for example has a good loss ratio quarter in March what is the lag in terms of how you recognize either higher or lower cost with Ya population just kind of based on your true ups and some of the natural lag in Europe.

Hey, John It's Tim.

Yes.

What I would say on that is that on.

Honestly, we were receiving plans data from plans on a bit of a delay thesis wrightsville planets. Linda received the claims process those claims incentive to file and so there's just some natural leads in that process.

It can be roughly a month to two months, depending upon the plan and the quality of the data flow.

That being said with respect to your question as it pertains to accruing from medical cost. There is also a factor of just.

How do we accrue for our patients versus what work or how does how do the plans accrue methodologies might be slightly different at the end of the day. We're looking at the same type of data, but the approach that might be different in that day and one of the challenges that we have with the population size of 75000 at risk patient is very different than taking a large national and may plan that has millions of patients that are going to see.

Our <unk>.

Smaller amounts of variability in their data because theyre looking at basically national level trends, whereas we're going to see.

Greater volatility given the fact that we're looking at a smaller dataset across more specific market. So I would say it's.

All of this work is more art than science of course, but when it comes to Oak Street compared to a national health plan, it's going to be even more so that the last thing I'd say is just remember our patients are Medicare advantage patients.

The at risk side, and therefore, what we're going to experience is going to be are more related to that specific population versus a more diversified player that might have a large commercial book that might be seeing other trends in the market that might be different than what we experience for seniors.

Okay, and thank you and just a follow up question.

Given your pace of openings here in <unk>.

War for talent with respect to some scarce assets like primary care physicians.

Yes, I think people in behavioral health.

What's your.

Kind of state of the world in terms of being able to staff this opportunity relative to any point in the past.

Yes, I think actually a lot of ways, it's very similar to how we think about patient acquisition.

A really strong value prop.

For our team and I believe we have won and we regularly survey our provider group.

And 95% of them say, they would recommend oak street to a friend or family member has a place to work and 99% of them say oxy to allow them to do their best work. So we believe we have a really strong value proposition for for our clinicians because.

Most clinicians didn't go into medicine to generate fee for service volume Alright.

And in the medicine, because they want to help people they want to keep people healthier and oak should help we give them the time and the resources to do that and we compensate them for keeping people healthier and so I think a lot of our questions really really appreciate that.

Certainly have had success in the <unk>.

<unk> got hiring great great clinicians to walk through our platform.

I would say from the best conditions, because they want to practice medicine differently. They understand the Oak Street model and they really want to be part of it.

So I think thats one of the I think frankly advantages. We have is we're not we're not relying on trying to purchase or partner with an existing practice in kind of whatever.

Clinicians in their attitudes and their talent and their culture.

That exists in the independent efficient world, where kind of encumbered by where we can really pick and choose who we want and we think we can attract the best because of our model.

Like from a patient standpoint, we were out there every day and our teams out there every day and really helping to get more awareness and efficient and then our stretches from community about Oak Street, and why we're a great place to work and the more people learn about us.

The more we're able to hire so.

We feel we feel really good I don't know if it necessarily I would call. It a talent war, but we feel great about our ability to hire and outstanding questions I think moving.

Amazing Commission team and I think we'll keep adding to that because of the value profit is phenomenal.

Thanks, a lot.

And ladies and gentlemen that is all the content. We have for question. This concludes today's conference call. Thank you so much for participating and you may now disconnect.

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