Q1 2022 Oak Street Health Inc Earnings Call
Good morning, My name is Mary.
Conference call Peter Richardson.
I would like to welcome you to Oak Street Health first quarter 2020 earnings Conference call.
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I would now like to hand, the call over to Sarah.
Investor Relations. Please go ahead.
Good morning, and thank you for joining US with me today are Mike Petters, Chief Executive Officer, and Tim Cook Chief Financial Officer.
Please be advised that today's conference call is being recorded that the Oak Street Health press release webcast link and other related materials are available on the Investor Relations section of Oak Street Health website. Today's statements are made as of May four reflect management's view and expectation at this time and are subject.
Various risks uncertainties and assumptions.
In addition to historical information certain statements made during today's call are forward looking statements. Please refer to our 2021 annual report on Form 10-K, and other periodic reports filed with the Securities and Exchange Commission, where you will see a discussion of certain risks uncertainties and other important factors.
That could cause the company's actual results to differ materially from these statements.
Certain statements made during this call include non-GAAP financial measures. These non-GAAP financial measures are in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with GAAP. Please refer to the appendix alert 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 our CEO , Mike pick up Mike.
Thank you Sir.
Thank you to everyone for joining us this morning.
Joining me on today's call. In addition to ferrous Tim Cook, our Chief Financial Officer.
I want to first thank our team for their continued dedication and focus on our patients our communities and our mission.
I feel privileged to work with such a dedicated group of individuals and impressed with the stores out here every day of Oak Street team members going above and beyond for our patients.
We are pleased with the start of the year in both the positive momentum we feel across our organizational objectives and the operational results from the quarter itself.
With performance above the top end of our guidance range for revenue high risk patients and adjusted EBITDA.
It remains a difficult operating environment health care more broadly and as a testament to our team that we were able to continue to drive strong results.
At Oak Street. It is an exciting time across the organization. We are focused on the programs and services that our patients need to stay healthy and out of the hospital and that will transform the way care delivered for older adults over the next decade and beyond.
This is a welcome change from the past few years.
When we often need to react to in the moment COVID-19 driven needs of our patients and communities for.
For example, today, we're investing canopy, a proprietary technology platform using our deep set of patient data to provide actual decision support to our care teams through applications that are both easy to use and improve workflow adherence.
A specific example is our technology integration work with Rubicon Mb.
After completing the first phase of the integration of Rubicon MD into our referrals module, we have seen an increase in E Council volume over 200% over the last several weeks.
As we complete phase II and phase III of integration, we expect to see even larger jump in volume.
<unk> that the investments, we're making today will drive higher quality care and lower cost for the long term.
Yeah.
We continue to focus on our team our culture and our mission to rebuild health care there should be.
We believe our deliberate approach to building and reinforcing our culture combined with our team's focus on our mission as a key driver of Oaktree success and will continue to be a differentiator.
Today's operating environment is not without its challenges.
We are Washington, the current Covid wave closely making sure our patients are protected by vaccines and receive therapeutics that they do contract COVID-19.
It remains a difficult labor market, we continue to navigate this environment I was seeing a negative impact on our financial or operational results.
We have not and do not expect to experienced delays in opening centers due to labor shortages to date, we have not experienced higher labor costs than forecasted coming into the year.
We have been able to leverage our culture mission and the advantage of working at <unk>.
And team members.
Inflationary pressures have a different impact on our business than traditional health care providers.
First our labor costs at our centers are relatively low on a comparative basis, representing a little over 10% of revenue versus hospital systems and home health companies that are more in the 50% range.
If there are future increase in labor costs. The overall impact on the business will be much less than traditional health care providers.
Second in future years increases in the cost of health care Labor will impact Medicare rates, which will increase Medicare benchmark and therefore, oaktree revenue, making oak street, largely insulated from inflation in the medium and long term.
There is a sustained increase in labor costs in health care. Our revenue arrives alongside the increases in labor costs, allowing us to maintain our margin on higher revenue.
Said differently if the.
Cost of health care labor increases across the board that will increase the cost of populations and therefore increase the value of the observations we are reducing increasing the savings we are capturing and more than offsetting any change to our cost structure.
More tactically at our centers, we continue to see a return to normalcy with our focus on patient experience <unk> execution, and making Oak Street, the best place to work in health care for our team.
Our average teams are ramping up events in the community, allowing us to meet thousands of older adults, who can benefit from our care model and.
And we are bringing back events in our community rooms.
In April we partner with AARP wish of lifetime program to do events and all of our centers and next month, we are bringing back open houses for prospective patients in our computer rooms across the organization.
We remain hopeful that bringing back the in center and community based events that were a core part of our marketing approach pre pandemic will allow us to return our field based I received global successfully achieved pre pandemic.
And we believe we're just scratching the surface on the potential of our AARP partnership.
One of the greatest aspects of being part of Oak Street as a tight alignment between our mission.
In fact, we make in our financial performance.
We make an impact by providing meaningfully higher quality care at an unmatched patient experience to a growing number of older adults.
We recently published our first ever social impact report detailing out the impact we make on our patients our communities and the health care system.
Credibly proud of the impact our teams have made.
The full report can be found on our website.
And if we continue to make a greater and greater impact for providing high quality care to an increasing number of patients and communities. We will continue to drive strong financial performance.
We are pleased with the impact we have made and the resulting financial performance so far in 2022.
In the first quarter, we generated record revenue of $513 8 million in the quarter exceeding the high end of guidance and representing 73% growth compared to Q1 2021.
Our revenue growth continues to be driven by our organic BDC marketing approach.
This includes both central channels, such as digital marketing and our core community based outreach team.
We also opened 11 additional centers, including our first centers in Arizona and remain on pace to open 40 centers in 2022, bringing our total at the end of the year to 169 centers.
Medical claims expenses have trended in line with our expectations coming into the year cost of care, which includes care team labor marketing and corporate costs were all in line with expectations.
Higher than projected revenue combined with costs in line with original projections, resulting in an adjusted EBITDA loss of $42 4 million for the quarter, which is favorable to the top end of our Q1 guidance.
Tim will cover the specifics around medical cost and other trend shortly.
Taking a step back we shared projected center ramps for 2022 by cohort earlier this year. Most recently at our Investor Day in March.
Continual performance along these ramps.
<unk> outstanding financial return on the capital invested in New Center development.
Our guidance. This year is based on center level performance within that range.
Performing favorably to our guidance for the first quarter means we're on our way to achieving the Standalone performance, we set out.
By continuing this level of performance just the 169 centers will open by the end of this year will generate over 1 billion of EBITDA when their scale.
Okay.
We are pleased with our performance in the first quarter and what it means for our central results. We're optimistic about the investments, we're making continued to improve our platform and we're excited to continue the journey to transform health care.
Now I'll turn it over to Tim to cover some more details regarding our financial performance in the first quarter.
Thank you, Mike and good morning, everyone.
As Mike shared we were pleased with our first quarter as we delivered results above the high end of the guidance. We provided in February for at risk patients revenue and adjusted EBITDA and at the high end of the range for centers.
In terms of membership are at risk patient base.
The key driver of our financial performance grew by 64% year over year to 124000 patients driven by our BDC marketing model. The introduction of direct contracting in Q2 2021 and.
And growth in number of centers.
At the end of the first quarter. We operated 140 centers an increase of 11 centers compared to December 31, 2021, and representing growth of 54 centers or 63% versus the 86 operated at the end of the first quarter of 2021.
<unk> revenue of $506 1 million grew 74% year over year, driven by growth in our at risk patient base.
The favorable benefit of prior period development related to Q1, 2021, <unk> revenue grew 76% year over year.
Total revenue grew 73% year over year to $513 8 million.
Our medical claims expense for first quarter 2022 of $379 4 million.
Representing growth of 90% compared to first quarter 2021.
When adjusting for prior period medical claims expense related to Q1 2021 reported in the first half of 2021 medical claims expense grew approximately 75% year over year, which is 100 basis points slower than our comparable compensated revenue growth over the same period.
Recall this year over year comparison includes direct contracting which is reflected in our first quarter 2022 results, but not in our first quarter 2021 results as the program went live on April one 2021.
As we have previously described direct contracting is higher per member per month medical costs relative to its per member per month revenue compared to Medicare advantage, and therefore skews the year over year comparisons.
Adjusting catheter unit revenue and medical claims expense for the prior period effects I, just mentioned as well as adjusting Q1 2022 for the direct contracting program.
<unk> revenue growth rate was 350 basis points greater than our medical claims expense growth rate in the first quarter on a year over year basis.
I want to briefly comment on the key headwinds we experienced in 2021 related to medical costs.
Direct COVID-19 costs, non acute utilization and new patient economics.
We estimate that Covid costs in Q1, 2022 were approximately $10 million, which is comparable to our Q1 2021 direct COVID-19 costs.
We estimate we incurred $40 million in total COVID-19 costs in 2021 based upon claims received through March.
It is too early to predict what COVID-19 costs will be in 2022, given uncertainty around local prevention strategies and emerging variance.
December 2021 in January 2022 represented some of the highest COVID-19 related hospitalization levels, we've experienced during the entire pandemic.
However, these hospitalization levels decreased dramatically in February and March to some of the lowest levels we've experienced.
As we stated in our Q4 call the non acute utilization increase we experienced in the spring of 2021 dissipated as 2021 were on <unk>.
We estimate our non acute utilization was within it was within a historically normal range in Q1 2022 as it was in Q4 2021.
Finally for new patient economics, Youre remains early given the number of new patients. We are caring for today relative to the total new patients we expect to add during the year.
Early indicators are that we will not experience same level of revenue degradation. We did in 2021 on new patients that we do not expect overall, new patient economics to return to 2019 levels. This year as was assumed in our guidance.
Our cost of care, excluding depreciation and amortization was $95 $2 million for the first quarter, an increase of 58% versus the prior year driven by growth in the number of centers, we operate and accordingly, the number of team members supporting our significantly larger patient base.
Sales and marketing expense was $33 $8 million during the first quarter, representing representing an increase of 40% year over year as we continue to invest in this area to support patient growth and much larger footprint of centers.
Corporate general and administrative expense was $88 $7 million in the first quarter, an increase of 21% year over year.
The majority of this year over year increase is related to an increase in head count to support our growth.
Stock based compensation expense.
Included in corporate General and administrative expense represented $38 2 million in the first quarter 2022, compared to $41 2 million in the first quarter of 2021.
Excluding stock based compensation corporate general and administrative expense grew 54% year over year.
We decreased our corporate general and administrative expense, excluding stock based compensation as a percent of tool revenue by approximately 90 basis points in Q1 2022 compared to Q1 2021.
I will now discuss three non-GAAP metrics that we find useful in evaluating our financial performance.
Patient contribution, which we defined as catheter revenue less medical claims expense grew 38% year over year to $126.
$7 million during.
During the first quarter.
Excluding the impact of prior period revenue in medical costs related to Q1 2021 patient contribution grew approximately 77% year over year.
Platform contribution, which we define as total revenue less to some of the medical claims expense and cost of care, excluding depreciation and amortization.
Was $39 8 million.
An increase of 8% year over year.
Excluding the impact of prior period revenue in medical costs related to Q1 2021.
Viacom contribution grew approximately 140% year over year.
In 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 of offering related costs litigation costs and stock based compensation. Excluding other income to net loss was a loss of $42 4 million in the first quarter of 2022 compared to a loss of $17 4 million.
In the first quarter of 2021.
We finished the first quarter with a strong balance sheet and liquidity position as of March 31, we held approximately $660 million in cash and marketable securities.
As discussed on prior calls we expect our liquidity position will support our continued growth initiatives, primarily our de Novo center expansion.
Cash used by operating activities was $91 million in the first quarter of 2022, our capital expenditures were $20 million for the quarter. Both in line with our expectations for the quarter and the year and our ability to fund the growth of the business in line with the center growth we previously outlined.
Now I'll provide an update to our 2022 financial outlook.
We are reiterating our full year 2022 guidance across all key metrics and for the second quarter of 2021, we are forecasting revenue in a range of $517 five to $522 5 million and an adjusted EBITDA loss of $62 5 million to $67 5 million.
We anticipate having 144 to 145 centers.
At risk patient count of 131500 to 132500, including direct contracting patients at June 32022.
Regarding the shape of our full year guidance.
I would note that we expect around two thirds of our remaining new centers in 2022 to open in Q3.
We historically have seen greater new patient growth just in terms of the sheer number of patients in Q3, and Q4 due to seasonal trends such as weather and the annual enrollment process.
In closing we remain optimistic about the momentum in the underlying trends we are seeing in the business.
With that we will now open the call to questions operator.
Thank you at this time I would like to remind everyone in order to ask a question.
And the number one on your telephone keypad.
Could you limit yourself to one question and one follow up. Thank you, we'll pause for just a moment.
Q&A Washington.
Our first question comes from the line of Mr Hill from JP Morgan Your line is open.
Good morning, and thanks for all the detail.
Mike I, just really want to go back to.
What we saw in the quarter around MLR and then what you're talking about going forward. So it sounds like things are starting to normalize talking about omicron here at the beginning of the year like many of the other managed care companies, but.
As we think about trends going forward.
Maybe just give us some color on and I know you feel like things have gotten more boring and normalized but.
Anything that you would call out as we think about trends going into the second quarter.
Okay.
Please I appreciate the question.
I think from our perspective.
Our company exists to take better care of older adults to improve the quality of care.
Lower acute hospitalizations, and therefore save costs and obviously over the last two years the kind of.
Ebbs and flows of the pandemic and some of the kind of <unk>.
Secondary implications of that have kind of had.
I had a big impact on our third party medical costs.
What we're seeing today and I think what we're excited about knock on wood for the remainder of this year and beyond is that we're kind of really back to.
Our care model and quality of care, we are providing our patients.
Driving a reduction in hospital admissions and therefore driving savings thats driving our MLR and so yes, I certainly think January as we've talked about had had had a high amount of COVID-19 costs due to omicron that drop very quickly into February and March.
Again now we're feeling like our performance is really being driven by by our care model advocacy, that's always going to be a focus of the extra help it always something around our control so.
So we think we're back to a place of kind.
Kind of really driving the net cost performance and more more predictability around that similar to what we saw pre pandemic and obviously.
There can be another variant and that could change things, but at.
At least right now it feels like a.
A much more normal time and that should drive more more normal performance on the EMR front.
And then just as we think about the sales and marketing aspect to that you did talk back Marvin normalize people coming back to the community coming into your centers.
Your sales and marketing expense was better than what we had modeled I know last night you told me that it was in line with your expectations, but do you think that as people come back in you're going to have more of an opportunity to leverage some of your cost as we move throughout the year.
Yes, I think our cost from a sales and marketing sector I really kind of two pieces.
One of the largest chunk of that is the labor cost for our outreach executive in our centers. So there is a there's a number of key members think about them as a cross between a community health worker and a salesperson at all of our centers, whose job it is to be in the community meeting older adults.
Helping them become patients and so that cost is relatively consistent.
Month over month quarter over quarter, and obviously rises in proportionate to the number of centers, we have and I think that's the cost we hope to leverage more effectively as we get back in the community they're meeting more people.
There are cost doesn't go up a whole lot that a lot more patients, which can give us more leverage I think we're pretty we're pretty excited about the opportunity as the year goes on the other part of our cost is.
More.
Marketing expense.
Digital advertising things of that nature.
Commercials.
So not a lot, but a little television and.
That actually we did lower a bit in January just because of the kind of magnitude of the omicron wave and.
Even things like.
Staffing out shake things of that nature.
That might be a little bit why Q1 was a little bit wider.
On markets I reflect about.
Again, I think that we do expect it to rise over the course of the year in proportion with the number of centers, but.
Again, our goal is to really better leverage.
The kind of community sales force to drive more patients and I think that's a big opportunity for us great.
Alright, well, thanks for the comments and congrats on the first quarter.
Our next question comes from the line of Kevin Fischbeck from Bank of America. Your line is open.
Hey, Thanks, This is Ryan on for Kevin.
Going to the membership guidance for the full year and I guess now that you've reiterated.
You initially guided to that membership.
At the beginning of the year did you assume.
Relatively normal ability to run in person events.
You said Covid was deteriorating the levels are deteriorating exiting March and so if it were to continue at these levels would that be upside as youre able to do more in person events.
At the same time, the upper end of the guidance was based on cohort performance from 2019 before direct contracting and since.
The largest input into ramping of centers filling capacity and now that you have.
A lot more ability to add at risk patients with direct contracting just wondering how those two dynamics.
Would play out as if COVID-19 levels were to persist at these levels.
Yeah, when we created our guidance on membership.
Similar to what we reiterated in our guidance this quarter.
We didn't didn't have not baked in or assumed a bump in our outreach performance driven by incentive events I think can hang out a center events I think we are.
Hopeful that that can occur.
Obviously theres been so many ebbs and flows across the last couple of years that we don't want to rely on it.
And number two it's always going to take time to get back to where we were in 2019, there's bolt.
Getting back on the community completing the events there is kind of getting older adults back to getting used to meeting in person, which obviously have a different rates in different parts of the country and.
And then once you are meeting people there is forming relationships, which takes time gave them try visiting and then move on to risk roster.
Hey.
It's a process and even if even if community events, where the exact same place they were.
In 2018 today you'd be in a month before we saw that flow through to our arris rosters and so.
Again, we're hopeful that as the year progresses, we kind of see the benefits of that are not baked into our numbers and it may be a situation, where we really don't see the benefits for a couple of periods out if and when they occur.
That's kind of the first part around around how.
How we thought about.
The return to normalcy in our guidance on the second question.
We did not actually look at 2019 performance as the across the board for centers as the basis of kind of the top end of the range, we shared at Investor day on our center ramps.
We actually looked at.
2019 level forms across just two dimensions, one one being COVID-19, which obviously 2018 performance and coverage was $0 of Covid costs. So I think we know at this point of the year, we're not going to we're not going to see $0 of COVID-19 costs with our hope is that.
It continues to remain low like it is today versus where it was in January .
Number two the.
The other thing we looked at that was really impacted by Covid last year was our economics on new patients and as we've.
We've talked about.
Yes.
The kind of patient contribution was was very different in 2021 that had been historically on new patients and we believe that was driven by a variety of pandemic related factors impacting both the revenue cost to those patients and so we did assume kind of in the top end of that range that that was back to kind of a more of a steady normal state.
And so it doesn't so it wasn't a full 2019 level performance as the basis for the top end of the range was just I think kind of goes to pandemic related measures and everything else.
It was driven off of kind of the current performance and frankly, the current churn guidance performance.
Alright I appreciate it.
Our next question comes from the line of Jeff Donnelly.
From Wolfe Research your line is open.
Hi, This is harrison on for Geoff.
Maybe if we could just get an update in terms of the TCE membership.
That's trending like.
And maybe what you expect for that to be within the membership composition by a.
At year end or end.
End of 2020, I guess, we're just a little curious in Hawaii.
More of the fee for service isn't converting over I think it was <unk>.
Our understanding that some of these other CMI.
Payment models kind of sunset there'd be more opportunities to align under DTE.
Just wanted to get the latest on that.
Hey, Aaron this is Tim thanks for the question.
On on direct contracting I think we've described this once or twice.
We're excited about the program even with the changes made as part of the transition ACO reach.
The challenge that we've had in direct contracting is related to the attribution logic that CMS uses for patients that are going to be voluntarily aligned.
So.
Our organization is different than many many other health care providers that are principally in the program because we're growing very rapidly in new markets and bring in new providers to Oak Street, and one doesn't even providers join Oak Street by and large they do not bringing patient panel with them. So the net patients were adding to the program are really voluntarily aligned by and large.
And what happens within the logic of direct contracting is that patients when they come in they're voluntary line CMS checks that she bought it that patients can be claimed aligned to any participant in the other cmos programs, particularly the ACO programs like MSP we.
We don't have visibility to know when a patient walks into an Oak Street center, whether or not that patient is aligned to an ACO and I can promise you that no patient knows whether or not youre excuse aligns with ACO. So there's where we've had a challenge which is we have had great success as patients coming to Oak Street.
Email beet joined our platform become part of our program.
Signing those forms.
Aligning to Oak Street. The problem is is that when we ultimately see who flows through from CMS that number ends up being much lower than we would have originally thought when the program started because its attribution logic now.
As we fast forward over the course of the next couple of years and we continue to care for those patients at some point those patients will be claims a lie to oak Street and that will be a tailwind to growth, but it's going to take at least a year if not two years for us to represent the plurality of that patients claims and therefore for them to be claims line. So that is.
The challenge that so I'd say growth has been at the lower end of the range that we had outlined last year that we would say 2000 to 3000 patients per quarter I would say even more than the lower end of that just because of this dynamic where it has been more pronounced than we had it we had expected and again at some point that will.
That will reverse a bit as the patients. We've added last year that weren't able to be voluntary line becomes the claims line, but that just going to take time.
Got it.
That's really helpful. And then maybe really quickly just on in terms of the guidance.
Kind of maintained for the full year I think you beat the street by maybe $10 million this quarter and then you'd guided maybe seven going below.
So maybe just for the back half is there something we're not.
Contemplating in our numbers is there maybe some shed costs.
With the centers that you're no longer opening this year that kind of land in the back half drag a little bit.
I think that was previously sized around $5 million I just wanted to make.
Sure, we're not missing anything here.
Yeah.
Yes, Eric.
I apologize.
So familiar with your specific assumptions, but I know I think what youre, describing is probably true for a number of others and I'd say the biggest thing is perhaps just the assumptions around the pace of new center openings over the course of.
2022.
Generally speaking the street had a relatively evenly distributed across the year.
We obviously had 11 in Q1, we've guided to four to five in Q2, which leaves.
Absolutely.
It's 20 or more than half 24 in the second half of the year.
And just generally speaking what the cheap would typically look like is typically speaking Q2, and Q3 will be the busiest months from new center opening perspective.
Q1 would be busier than Q4, this year was a little bit different when we came into the year with the expectation of opening 70, we obviously had a number of centers ready for Q1 in order to achieve that piece.
And as we got as January and February one we had the centers ready to open we get the teams hired it didn't make sense to defer opening because they were ready to go.
A more typical year. If we were if we had wanted to youre expecting 40, I would've expected more in Q2 and less in Q1.
So I say all of that because if you think about the shape I think generally speaking the full year I think the industry is aligned with our full year guidance the composition across quarters looks a little different my guess is Q2 books were a little more conservative, but my my assumption and again this is an.
And outside looking in is that that is driven by assumed center count growth in Q2, and Q3, and then Q4 approach are probably.
Better than we are from an EBITDA perspective, when you net all that out.
Zero right because from an annual perspective are in the same place.
My sense is that's probably what the driver is.
Okay. That's helpful. I appreciate it thanks.
Our next question comes from the line of Ryan Daniels from William Blair. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions a couple on the growth outlook, Mike very helpful commentary on the Labor front, obviously key concern big issue for healthcare. So good to hear that it is not impacting you on the cost front, but what's unique about your growth model is it youre not acquiring practices youre not dependent on trying to find it.
You kind of control your own growth with center openings, but that does mean, you're hiring a lot. So can you just comment on that portion of the growth and are you having any challenge is finding the right staff, whether its outreach coordinators or clinicians as you continue your growth pattern.
Thanks, Brian I appreciate the question.
You are right I think.
Being a global organization.
We're hiring great team members for all of our New center openings.
We have not seen any issues. So far this year on having to delay centers or not having enough staff, where they need to be open we don't anticipate those issues going forward.
What it really gets down to for us as well as.
I mentioned before the mission and the culture of Oak Street health and the atmosphere or you can create for our teams. So we've had a lot of success, bringing people into our model whether that be <unk>.
The outreach associates or providers or nurses or analysis and everything in between I don't really believe in our model and believe in the way we are backing healthcare.
It gets into our culture.
Have a great team now that it does a great job of providing referrals.
Our network to to join out Street, and that's again, that's our favorite way to recruit and hire and so I think we've been able to leverage those aspects of what we do.
We didn't have a leveraged the fact that you have.
From a health care professional we can provide a lot more consistency in hours and days of the week Wednesday, a hospital system.
So again I think we would have been able to really navigate those things to date.
I think we will expect to for the rest of the year I mean, certainly it's.
It's harder to hire people and a lot of different roles and it was five or seven years ago.
But again, it's something that we've been we've been able to essentially navigate through so far in <unk>.
<unk> yourself.
Great I appreciate that and then maybe one for Tim I think an important part of the thesis is just the implied EBITDA at scale of a $1 billion just in the current footprint at year end I'm wondering if you could just remind us what some of the key considerations arent getting there, meaning how long would it take for that footprint to scale to that level.
And any assumptions that could move the needle one way or the other to get you above or below that $1 billion.
Thanks, Brian Yeah, I'd say first it's just an assumption.
It is an extrapolation of the sentiment of the results that we outlined at our Investor Day, and then earlier this year at the Jpmorgan Conference.
Folks may remember we have <unk>.
10 centers this year that we expect to generate over $8 million of four wall margin. So.
If you take the centers, we expect to open by the end of the year and.
And use it as a proxy.
Apply.
Yes, some normalized level of sales and marketing and G&A to that that's how you arrive at a $1 billion Brian So.
From from today I would say based upon that performance you are talking about six to seven years.
Our goal obviously is to.
Shorten that timeframe to the best of our ability, but I think that.
That's what's implied in the logic.
Our next question comes from the line of Jamie Paris from Goldman Sachs. Your line is open.
Hey, good morning, guys I wanted to follow up on some of the questions around MLR experienced in the corner and I'm looking at this versus 2019 and 2018 trends.
Things have obviously changed since then just in terms of Covid in new patient economics, but I was wondering if you could help us bridge.
And how to think about the rest of the year to year 800, or so basis points above where you were in 2019, how should we think about that spread.
Progressing throughout the rest of the year as COVID-19 costs, hopefully come down and.
And you get a handle on some of these non acute cost.
And any comments on how Rubicon MGE integration helps with that.
Okay.
Hey, Jamie it's Tim I'll start Mike feel free to jump in if you'd like but.
I'd say, there's a couple of key drivers that have changed since Q1 of 2019. The first is just direct contracting as I described in direct contracting has a higher MLR than our EMEA business and it's a relatively meaningful part of our business in Q1 of 2022 and it was not a part not any part of the business in Q1 of 2019, obviously so.
That's one of the drivers second is the COVID-19 costs that I mentioned thats $10 million in Q1 that we didn't have in Q1 of 2022 excuse me that we didn't have in Q1 of 2019, that's roughly 2% right. There. Those are those are the two largest drivers.
And I'd say the last thing is is as he described patient economics improve the longer patients are with Oak Street, we think about the center growth we've experienced in the last two years in there and correspondingly the number of new patients we have as a percent of our total that number has grown a lot that is going to you all else equal blend up the medical loss ratio it doesn't change your.
Patients who are those patients will be when they've been with us for the same period of time, but the weighted average tenure of our patients just like the weighted average tenure of our centers is less today than it was in Q1 of 2019.
Okay. That's helpful. And then just a question on cash flow from operations negative $91 million in the quarter. You said that was in line with your expectations and it looks like there was some development around accounts receivable just can you walk us through that specific dynamic and how we should be thinking about modeling cash flow for the rest of the year.
Yes so.
It was within our expectations I'd say Q1, when we think about Q1 cash flow Q1 operating cash flow.
Few drivers one is I'd just say that.
Depending on one health plan settled with us that will drive the working capital balances at the end of any given period depending.
Depending upon the plan, we set a more or less frequently but to the extent that you settle on the last week in March versus the first week in April that can change, obviously, what you've what each reflecting the balance sheet and for folks just just for folks recollection.
For over half of our plans the way our contracts work is we are paid an upfront payments.
That is meant to help defray some of the costs that we incurred to support our care model, which are obviously more expensive than what you would receive in a more fee for service environment and then we settled with plans on a monthly or quarterly basis, depending upon the plan, where they true up that upfront payment to what we were actually owed and because of our performance typically speaking.
A lot more than what was paid upfront.
Until we've actually settled with the plan for that period, we carry the full amount of the revenue in <unk>.
And we carry the full <unk>.
Claims medical claims expense in our liability for unpaid claims and so youre going to see that build I mentioned that only because again, depending upon the timing of those settlements. We saw some settlement slip into Q2 that would have otherwise closed in Q1 that bounds probably looks higher than it would have.
The other thing I'd mention is.
We accrue for what we expect our risk scores to be and our patients as folks know real risk or adjusted in annual basis.
You don't you don't have an update until the mid year sweeps over the course of the summer.
Based upon all the work that we do to care for our patients we document about 85% of all of the codes associate our patients. So we have a very good understanding of where our risk or will ultimately be once.
Risk scores are settled and they take.
This year's reimbursement won't be settled till next summer summer of 2023, just the way the risk adjuster process works, we're making an estimate today for what that risk score will ultimately be and will be paid on and that number is highest in the first half of the year, because we are waiting for that midyear settlement, where trues up.
Payment for the.
Part of the year that that has transpired so said another way.
For the first two quarters that balance will grow more significantly than it would in Q3 and Q4, so what youre seeing in operating cash flow in Q1, which I take.
The question is the combination of the timing of settlements as well as this risk adjustment. The last thing is direct contracting which plays a little bit and with settlements direct contracting silicone annual basis. So it is actually.
Yeah.
So the least preferable of all contracting settlement timelines, but the combination of those three things led to operating cash flow being wear.
You outlined I'd say that by and large timing related from our perspective, and that's why I mentioned it was expected.
Okay. Thanks for the color.
Our next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.
Hi, guys. Thanks, so much for the question today I think I heard you say earlier on the call that <unk>.
200% in the last couple of weeks.
I guess I'd be curious sort of how do you think about the penetration of Rubicon M. D into your current base versus sort of where you expect it to be over the longer term just as sort of we think about that ability to help.
What was the cost line there thanks.
Yeah. Thanks for the question.
Were the reason if you go back to we first announced the acquisition that we felt it was important to share.
Purchase Rubicon D versus partner with them, because we really believe that making it easy and embedded in the workflows for our provider teams would allow us to get the full benefit of.
Of.
What the potential of the console so really.
Drive better patient care, better quality and lower costs and.
We're one of kind of our three phases of kind of the first the first set of integrations, we're doing and the good news is it's become a lot easier for our team is now you can now conclude the console option within our broader referral model you want to go to a separate portal to do it and again that will make it easier. So we've seen.
A huge percentage of almost all of our providers at least one or a couple of <unk> and try and get a sense to understand why it works.
Some early adopters, who are doing kind of a much larger portion of their all of their kind of eligible for all the new console. So we like the direction. We're moving because again. It is both the technology is also kind of the the culture, the buying and the understanding of our provider teams around the value of it.
I think when we get to phase II and phase III of the <unk>.
Can you guys aren't going to happen across the year, but it will keep making it easier and easier and do kind of more and more of the kind.
Kind of preparing the consult and sending it out doing more and more then automatically which I think will drive higher and higher adoption of the program and so as I said before I.
I think we have.
Two or three more that we will get by the end of the year and economy saw volume from where we are today, we're already obviously way up from where we were.
Before we made the acquisition so.
We feel like we're where we wanted to be kind of in realizing our underwriting case and kind of getting to a place where this is just.
A core part and the vast majority of eligible referrals are are leveraging any console and again, if we're allowed to heat pumps all of that means we're going to save cost because some percentage of the referrals. We would've made we find out we don't need to make because it expert specialists kind of reaffirms the care plan on health adjusted without having to actually build heater specialists provides better patient.
Should they not to go to the specialist and don't clinical base.
It also benefits of just getting faster and better coordinated specials opinions integrated into our model. So again.
Excited for it I don't think youre seeing much if any cost impact in Q1, so far from it but again thats one of the things that we've obviously made an investment in a company and an even bigger.
Very time intensive investment in the integration work and we're excited to see the results play out at the end of this year than next year.
Got it that's super helpful.
And then how do we think about the G&A spend either on a per center basis, or total sort of scaling across the year given what you said about the pacing of center openings.
Yeah.
Sorry, Elizabeth was that just the the amount of G&A, we expect over the year, how that will follow center openings may correct, yes for that gap.
Mhm.
Yeah.
I'd say.
There is I think we mentioned that on the.
The call several weeks ago. One is there are investments that we have made that we're all going to make coming into the year that where it is appropriate one else has left to come.
It looks like no one else is going to join this call.
Goodbye.
Excuse me this is Joe.
Please remain on the line.
Today's conference.
Yeah.
Again this is the operator, please remain on the line.
Conference.
Yes.
Excuse me. This is the operator piece remain underlines your conference will resume shortly.
Again. This is the operator, please remain on the line to your conference will resume shortly.
Okay.
Sure.
Excuse me presenters you May now continue your conference.
Thank you.
Two questions.
Or was it that you just that seasonality.
Operator are you there.
Yes, I'm here. Our next question comes from the line of Richard close from Canaccord. Your line is open.
Yeah. Thanks for thanks for the question guys can you hear me okay.
We can sorry about that our Arctic our line dropped to spend a few minutes on hold trying to dial back in so.
Okay, great. Thanks for the questions question for you Tim maybe.
So good progress I guess I'm on Covid and a non acute.
Care trends.
Can you talk a little bit.
About geography is there any G geographic comments that you can talk about are you seeing those trends over dinner, though the whole center base.
Richard I would say by and large if donut.
From a financial performance perspective, we're seeing trends across the whole business I'd say generally speaking.
New Covid has been more of a factor in the northern geographies of our business and our southern.
But by and large.
I'd say its been pretty consistent growth has been better than southern geographies only because they've been more open in the weathers just frankly better.
But other than that I'd say, everything's pretty normal and pretty consistent across.
The business.
That's helpful. Obey me one for Mike a follow up too.
Ryan's question on Labor, obviously health systems are having a real difficult time on the labor front and I'm just curious whether you guys may be benefiting.
It's easier to hire people for you know organizations like.
Oh.
Hello.
This is Peter.
The speakers have.
Disconnected again.
The line the conference which room shortly.
Yeah.
Our next question comes from the line of Jessica <unk> from Piper Sandler Your line is open.
Thank you and so I I ask one on the end of 2017 cohort that or the year five centers in 2022.
How long post exclusivity and I guess does it take for those centers to catch up with and with their peers in that particular year for it or like how long will it take for the 2017 it better to match the historical performance of other cohorts.
Thanks, Jeff I appreciate the question.
<unk> keep in mind on the on the 2017 cohort.
One I believe it's five centers and so it's actually a very small number of centers.
Actually given that it's a whole number of centers we have today.
So that's why I kind of the uniqueness of a couple exclusive centers can really kind of move the average in the whole cohort.
And when you think about catching up to results.
It's really more of a cumulative membership catch up and so if you are a couple of years behind in growth.
Youre going to continue to be a couple of years behind in until you get to kind of more the near capacity level and then you will catch up so I would think about it more of a.
They'll remain behind every year, but you don't but don't have improvements longer than a more normal center right. So they'll they'll have a larger growth in kind of the the latter years of the center from a contribution perspective.
As they start to catch up on membership is at some point youre in your capacity to enter start started slowing down their membership growth of reaching capacity. How many centers is going to reduce capacity a couple of years. Later, therefore, the they'll get the same economics long term.
Take a little longer for them to get there.
Matt that actually makes a lot of fans.
Yes.
And I think that consistency and repeatability of the models one of our favorite think Red Oak Street, but just if you had to isolate kind of one factor that does vary the most between vendors are between markets.
What would it be just like marketing responsiveness specialty care management chronic condition prevalence what is it and how do you guys manage it.
Yes, I think the probably right to pick Atypic too I think one.
Kind of.
The kind of density of the market the types of community organizations that will obviously impact your approach from a community outreach perspective, and so you know some of the communities you're your dense urban markets in New York Chicago those types of places.
Obviously youre working with.
You know a large senior living buildings or working with dense.
Dense community groups instead.
And some of your other markets that are in where you're Rockford near Fort Wayne.
So it's a more spread out communities youre looking for kind of.
More hyperlocal group things of that nature. So you've got I think theres, a kind of a difference in how.
The team on the ground needs to kind of figure out who are the sticky aggregates roller Dol tour of the group's or work with them.
Look we've had a lot of pickup in the Rockford and the Fort Wayne We've got a lot of excesses in the Chicago. So I don't know if I said, what is definitely better than the other is just kind of finding the.
The right way to to get in front of older adults and when we get in front of all routes. We're very good at helping them understand why Oak Street health is a great place for them to get their care.
The second one.
I think some of the aspects pressure on like post acute care or some of those I mean, the aspect in Medicare where the most geographic variation is kind of post acute costs in post acute.
Kind of a paas.
Practice patterns and so that's one I think that as we go to market, we really try to figure out.
You know what are the referral patterns for discharge coordinated hospitals, what are the preferred skilled nursing facilities those types of things that's a place where you see a lot of variation.
Not necessary by patient need, but its by kind of patterns in the community.
Got it thank you.
Our next question comes from the line of Ricky Goldwasser from Morgan Stanley . Your line is open.
Hey, guys. This is Mike on for Ricky.
So a question on <unk>.
Incidental COVID-19 emissions, so last week Humana mentioned seeing higher in central Covid emission to chose unfavorable PPD wondering did you see this encouraged where just a greater percentage of your admissions cannot recover than was initially tagged as non COVID-19 cures.
Curious on your visibility and you.
You didn't discuss activity. So I was wondering if it was an unfavorable guy or could this potentially be a negative item condensate.
It makes Tim Thanks for the question.
We have been experiencing that headwind related to COVID-19 being a secondary diagnosis or even a tertiary diagnosis for hospital admissions. It isn't a relatively small for us. It has stayed small so we haven't we had no material prior period development. In Q1, there is always some truing up the investments of course, but nothing material.
<unk> as it pertains to this specific issue I'd say, our arc Q4, or 2021 med cost accruals are still in line with all the data that we've received since the end of the year and I don't expect that this issue to create that are the.
The issue that you may have mentioned two degree any.
Incremental headwinds to what we've already reported that's been it's been.
Relatively.
Prevalent in the market over the course of the time that that.
Incremental payments to help hospitals has been around.
Got it and just one more question.
Our AARP partnership.
I think Mike mentioned, yeah, we're just scratching the surface of what's possible.
They understand the power of marketing in the co brand name, but could you talk more specifically about how you view the membership opportunity like how should we think about theres been benefiting membership growth near term and long term and.
How does the partnership work outside of the co branding element, how should we think about the economics of the arrangement as well.
Yeah, I mean I think.
When you think about.
The AARP.
As the most trusted brand for older adults.
The reach of the brand is is massive I believe that the AARP kind of magazines are the number one and number two most distributed magazines in the country. Just as an example of the scale they have and so I think from our perspective, they're just say a large number of ways that we.
We can tap into the the scale and the trust and the breadth of what they do and.
When we when we come back to what what drives growth at Oaktree right.
We're not we're not buying or partnering practices as our source of growth where it were a consumer organization, where we're educating.
Educating older adults of why they can get a better patient experience and better quality care at Oak Street and the what we find is if we get in front of people.
We get them to believe us and try us.
That they'll be very happy with Oak Street, and stay as long term patients.
So I think there are two ways in that framework that that we can really benefit from the relationship with AARP.
Number one is it allow us to get in front of more people.
And it'll be another channel to meet people.
We can invite AARP members into open houses in health education events in some of the things we do.
You know again, we find.
A very large percentage of people, we need and certainly a large nikola come visit a center end up becoming patients ask have you guys kind of piece wanted way to meet more people and get more people engaged in the number two I think it is a way to.
Engender more trust early on I think one of the one of the challenges we have.
Is rising about kind of the noise in health care, where everyone's saying the same thing and you know people are used to things that are too good to be true you know being that way. So a situation, where we can leverage the fact that as the most trusted brand and then they have selected us as their sole.
Primary care part nationally I think that's a great way to you know.
Two.
Can overcome the the fear of the unknown for people and again if people try out there they're going to be satisfied so that that's really a huge opportunity.
Hard to quantify exactly at this time, but but again, we remain optimistic over the coming years is going to be a nice driver of our vessels.
Got it thanks guys.
Our next question comes from the line of Brian <unk> from Jefferies. Your line is open.
Oh excuse me, Brian talk a lot from Jefferies. Your line is open.
Our next question comes from the line of Sarah James from Barclays. Your line is open.
Thank you I wanted to go back to the comment on the member economics, the expectation that it's not going to look like 2019 is that primarily because of COVID-19.
Okay.
And and when would you expect that to get to 2019 levels.
Thanks, Sara it's Tim I'd say for it.
Covid has been the primary driver and that is impacting it's impacting the dynamic through a.
A few different angles. The first is just.
Patients accessing the health care system in a way that's consistent with how they did in 2019 and prior.
It's hard to predict when the world will look more normal, particularly when we've got new variants every three to four months, creating different levels of responses across the country right. If we think about.
Generally speaking the northern geographies, they've reacted more strongly towards COVID-19 versus art southern geography. So it is a challenge it to put a specific time as you win the world might look more normal from a health care utilization perspective, but that would be the biggest driver of that and a combination of of just lower COVID-19 costs in the system more generally.
<unk>.
But it's yes, it's a combination of both revenue and med costs and unfortunately.
Is.
It's almost akin to predicting when Covid world.
B less of it a driver in the market than it is today and I think that's or look more endemic all other flu and I think they're just hard to predict at this point.
Got it.
And then on D. C. He commented that structurally it it's got a higher medical cost ratio, but are you still thinking today.
As an EBITDA margin profile similar.
To your other business or how should we think about the profit contribution.
Yes, so that the the MLR or the medical loss ratio is higher but the revenues higher therefore, the net P. M. P. M dollars to us from many of those patients is fairly comparable to our average I'm a patient that has remained unchanged.
Thank you.
Yes.
Our next question comes from the line of algae remark from UBS. Your line is open.
Hi, good morning, given the increases in input costs, even outside of labor can you help us understand how the startup cost of a new clinic. Today compares to 18 months ago is that $5 million of cash investment over a two year period still a good number to anchor too or are you starting to see that number drift upward.
Yeah I don't.
Apologize, we misspoke I don't I don't think we mentioned in our input costs being higher I think are worthy.
And we're working we're seeing similar cost structures to where we saw a seeing the paas.
Whether that be a waiver or our other inputs to our model.
So I don't I don't I don't anticipate our see any any changes to kind of.
From what we shared in Investor day, and what we showed previously to kind of the cost of startup with honor and the kind of the return profile of those homes.
Got it so you're not seeing any inflation on either construction costs of raw materials on the de Novo side.
No not yet.
Sure why not.
Okay. That's helpful. And then independent of clinic opening is there a natural component to elevated SG&A in Q4 related to the Medicare open enrollment period that we should consider.
Yeah.
No there's nothing specific related to AEP.
That would create higher levels of G. M. G&A seasonality as it exists is is more tied to that that.
The pace of investments that we're making in the business and our center gross and Theres nothing really there aren't really one time costs related to G&A I would say from a sales and marketing perspective, we would expect heavier investment in Q4.
To support that time of year, when Theres a lot of seniors focused on their health care for the following year and correspondingly lower investment and sales and marketing in Q1 generally speaking about from a G&A perspective, nothing that AEP is going to drive.
Got it okay. Thank you thanks for all the color.
Our last question comes from the line of David Larsen from <unk>. Your line is open.
Hi, can you talk a little bit about the cabotage revenue per at risk patient like the dollar as you're bringing in from the MA plans. How do you expect that to trend over 2022, it looks like it was up around 6% year over year. This quarter and then related to that how do you expect the patient.
<unk> margin to trend over the course of 2022, it looks like it was down.
Down over 600 basis points year over year, but up sequentially. Thanks a lot.
Yeah.
David Tim So from a from a revenue P. M. P M perspective, I would say.
Your question I believe was how is that going to trend over 2022 or over the longer term sorry, just to clarify.
Well since you brought it up over the course of 2022 and any M. E rate increases for 2023 look very healthy up anywhere from 4% to 8% or more any thoughts there would be helpful as well. Thanks.
Sure. So for 2022, I'd say I'd expect you know last year, we had the benefit from Q1 to Q2 of direct contracting entering the mix. So that was a little bit anomalous in 2021, but I think generally speaking the you can look at our historical financials and I wouldn't expect anything.
Dramatically different from a.
Intra year seasonality on revenue P. M P M perspective.
The one caveat being that Jason that we have faster new patients that will tend to lower that rate because new patients are going to come in at a lower revenue level.
Over the longer term, it's hard to know exactly how those rate increases well what those rate increases from the government to the plans of benchmark increases will be and it's also hard to know how those great increases will work themselves into the MA plan bids and then ultimately slow down to Oak Street, sending it's it's difficult you can look at kind of where we're at year over year end.
And make some suppositions I'd say over the course of time.
Well, we I wouldn't expect it for M. A raise to increase 6% annually into perpetuity of course.
From a patient contribution perspective over the course of the year. You know generally speaking Q1 is always going to be the most profitable quarter.
From a on a margin perspective in Q4, the leased and.
And back to this dynamic on new patients in Q1, the average patient 10 years, the highest because we.
We have most more of our patients were patients in 20 in the prior year, then will be the case at the end of the year right over the course of the year will it trip patient it will have attrition of patients.
Much of the attrition will be for patients who have joined us in the prior year and those patients again.
Our more profitable, so you're replacing more profitable tenured patients with less profitable newer patients and you're also growing the business of course, so the combination there the effects of that new patient growth are going to blend down that patient contribution over the year and then you would expect a step up from Q4 to Q1 as you mentioned.
Okay very helpful. Thanks, a lot Tim.
There are no further questions at this time I will turn the call back over to the presenters.
Oh that is all thank you apologies for the technical difficulties and happy to follow up are there additional questions. So thank you very much for your time this morning.
This concludes today's conference call. Thank you everyone for participating you may now disconnect.
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