Q3 2022 InnovAge Holding Corp Earnings Call
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Okay.
Good day, and thank you for standing by and welcome to the innovative fiscal third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to price.
<unk> one on your telephone please be advised that this call is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your host today, Brian <unk> Director of Investor Relations you may begin.
Thank you operator.
Afternoon, and thank you all for joining innovators fiscal 2022 third quarter earnings call.
With me today is Patrick Blair, President and CEO .
Barb Gutierrez CFO Dr.
Dr. Lisa Welch Chief Medical Officer will also be joining in the Q&A portion of the call.
Today after the market close.
Issued a press release containing detailed information on our quarterly results.
May access the release on our company website <unk> Dot com.
For those listening to the rebroadcast of this call. We remind you that the remarks made herein are as of today Tuesday May 10, 2022 and have not been updated subsequent to this call.
During this call we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our third quarter 2022 press release, which is posted on the Investor Relations section of our website.
We will also be making forward looking statements, including statements related to our remediation measures, including scaling our capabilities as a provider.
Spanning our payer capabilities and strengthening our enterprise functions.
Future growth prospects.
<unk> of current and future regulatory actions and other expectations.
Listeners are cautioned that all of our forward looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations.
We advise listeners to review the risk factors discussed in our form 10 annual report for fiscal year 2021, and our subsequent reports filed with the SEC <unk>.
Including our quarterly report on Form 10-Q for our fiscal third quarter 2022.
After the completion of our prepared remarks, we will open the call for questions.
I will now turn the call over to our President and CEO Patrick Blair.
Patrick.
Good morning, Thank you Ryan and thank you all for joining us today before jumping in I'd like to again Express my gratitude to our <unk> employees, who put our participants at the core of what we do every day and for their selfless contributions during a difficult time.
Our federal and state partners for their partnership and support as we work through the audits to our shareholders for their continued interest in the company.
There's a lot to cover today, so our prepared remarks will be a bit longer than usual.
Challenging period for the age in this quarter's results reflect the significant transformation. We are undertaking I'm confident we will manage our situation the right way and we're optimistic about the company's future.
Both in terms of the markets, we serve and the solutions we offer.
While the current sanctions represent a major challenge I'm genuinely excited about the market opportunity. The foothold we have in important markets are incredible pace clinical expertise and the amazing employees, who are proud to work at innovation I've been encouraged by our progress over the last 90 days and while it certainly requiring.
From them. It is clear that our employees have the motivation and ability to overcome the challenges we're facing.
Their efforts are frankly inspiring and.
Any improvements while still early are becoming visible.
As you know, we're currently under sanction or sacramental center as well as our six centers in the state of Colorado.
As a result of these sanctions were currently unable to grow our census in these markets. We're following the lead of CMS and state government partners and working with them to ensure they are satisfied completely with the work we're doing to address the audit findings.
The regulators determine the timeline for the audit process and we're doing everything we can to satisfy the requirements to lift the centuries.
I will provide a detailed overview for each of our markets, but suffice it to say there.
These learnings through a difficult period will make this organization a more disciplined and compliant organization in the long term.
Today's discussion is going to focus on near term operational execution and mid to long term capability development.
These are the core drivers of horizons necessary to comprehensively remediate the deficiencies identified in a recent August and equally important they are the foundational building blocks to ensure we're well positioned for scalable sustainable long term growth.
As a leadership team and organization and with the full commitment of Laborde.
Defining success and holding ourselves accountable across both rises.
My objective today is to delineate and to put into context, the full portfolio of actions we're taking.
On our last call I had been in the CEO seat for 30 days, it's now been a little over four months, so im going to begin with some current reflections and follow that with updates on the critical work underway and the progress to date.
<unk> three dimensions of remediation and transformation, which encompasses what we're calling one year of age.
The status in each of our market with our regulators perspectives on the quarter.
Concluding thoughts.
Ill, then turn it over to Bart to provide a detailed financial overview before we open it up for questions.
To help bridge from our last call I would like to anchor back to some observations shared in February as I was first immersing myself in the audit results and business operations.
I committed in that my immediate highest priority was to address the audit findings and to restore our regulators trust and innovation.
Now with an additional 90 days under my belt.
Much better position to provide additional granularity on what must change.
I've spoken with employees government partners and reached out via personalized letter to all 6800 participants asking them for feedback on how we're doing.
This has led to not only a more detailed understanding of identified audit deficiencies and associated root causes but also the specific transformational actions required to support the lifting of sanctions.
The pace program is unique in the core program design requires both provider and payer competencies to participate.
We're assuming both full underwriting risks for our participants and managing the delivery of care for a very high acuity population.
I want to distinguish between the provider and payer attributes as the capabilities to be best in class differ and.
And in the case of innovate each dimension needs to be robust in seamlessly orchestrate it to be successful at a national scale.
On our last call I communicated my belief that innovate possesses a sturdy foundation and tremendous potential are still believe this but now with more time in the business. It's also clear that to enable a consistent scalable platform our capabilities as a provider and a payer respectively require enhancements and need to evolve.
I also believe that payer capability enhancements represent incremental opportunity and I will share more detail on our plans to execute against this dimension.
Now for the critical work underway.
The portfolio of remediation transformation work.
We're calling one <unk> has three key dimensions and I'll use this as a framework to provide progress updates on this in future calls. They include first creating operational excellence as a provider by formalizing a repeatable blueprint to deliver personalized integrated yet distal.
<unk> care and our centers virtually and in the whole second extending our payer capabilities to ensure we're effectively managing the total cost and quality of care and that our revenue accurately reflect the acuity of the populations we serve.
Third strengthen enterprise functions to enable our centers to reach their full potential to robust talent management data and analytics sales and marketing and government relations underpinned by uniform way of working and success metrics.
Let me walk through each of these dimensions in more detail to give you a flavor of our key areas of focus.
And where we are currently.
First operational excellence as a provider first and foremost our primary focus continues to be addressing the deficiencies identified in recent audits.
Rapid timeline as possible and returning to growth in the mid to long term.
The auto results are found gaps or performance when compared against regulatory and our own expectations in February I categorize the nature of our compliance deficiencies into two broad buckets care coordination and care documentation over the past 90 days my understanding of each identified efficiency the root causes and the <unk>.
Critical capabilities needed to become compliant have come into a much sharper focus.
To elaborate I've established eight initiatives that are intended to support the remediation of audit identified deficiencies can earn back the trust of all stakeholders, one filling critical personnel gaps in each of the centers.
It all begins here to standardizing the process of our interdisciplinary care teams, who plan and coordinate and deliver tier three.
Three strengthening our homecare network and reliability for improving timeliness of scheduling and coordinating care with providers outside the centers five improving our telephonic channel response times and closing critical communication groups.
Six improving the efficiency and reliability of transportation for all participants.
Seven standardizing our wound care program across the enterprise and eight reducing documentation outside of EMR importantly.
Importantly, we have been proactive in the broad implementation of these consistent operational processes at each of our centers to ensure identified deficiencies are resolved and do not recur anywhere in our portfolio, we're making solid progress on all fronts and expect to complete our short term objectives for these initiatives by calendar year end.
Second.
You mentioned to us expanding our payer capabilities as mentioned earlier paces of unique value based risk bearing model that requires excellent at both provider and payer competencies to serve this population scale. Historically pace programs are primarily focused on care delivery side of the equation and the same is true native H.
This creates an opportunity to better manage total cost of care and ensure we receive appropriate payment for services provided.
The core payer capabilities I'm, describing include effectively managing provider networks and contracting to optimize unit costs.
Leveraging evidence based guidelines and rigorously optimizing quality value and utilization of services, ensuring we're paying external providers appropriately for build procedures and accurately matching risk based payments with the acuity level of our participants to name a few.
To be clear these capabilities exist within innovate today, but the scorecard is mixed we compare well to other pace programs on utilization measures like ER visits admittance conversion of inpatient days to observation days and we're proud of this but we're also looking to benchmark ourselves on quality al.
Comms and cost against all other best in class value based providers, serving frail senior populations on a fully <unk> basis.
Given its importance we're actively starting down the path of building a comprehensive payer capability roadmap and an actionable portfolio of quick hit and longer term initiatives with help from our specialized consulting partner. This outside in perspective is important and it will take time to size implement if real benefits to.
Fully materialize in our P&L, we will provide further updates on future calls as we continue to get our arms around the range of incremental value at stake and what's needed to begin to capture it.
Three building the right, enabling enterprise capabilities to empower the centers.
Lastly, and gains from remediation and transformation efforts will hinge on the development of a handful of critical enabling capabilities at the enterprise level starting with talent.
Focusing on talent will be core to everything we do is our success starts and ends with having them.
People in every job.
Therefore, we are building a robust talent engine to attract retain and develop and recognize our people.
To that end, we've made progress this quarter and added key executives to our team to help broaden and deepen our leadership across several important areas.
Enterprise wide, we've added approximately 100 net new ftes, despite the tight labor market for health care talent.
Yes, it's also natural at times a major change.
We have had a few leaders who have left our team.
He will be leaving imminently.
As referenced in the press release, Dr. Lisa Welch innovations Chief Medical Officer.
<unk> has announced her intent to pursue opportunities outside the organization.
To ensure a smooth transition Dr. Welch has agreed to remain in her current role through mid June .
Dr. Anne Wells, our current Chief Medical Officer for population health and quality will assume the role of interim CFO upon leases departure, while the company completes its external and internal search for a permanent replacement I want to personally. Thank Lisa for her numerous contributions to the organization, especially during COVID-19 and meaningful impact on.
Participants I wish her the very best in her future endeavors and would also like to thank Ian for assuming this critically important interim role.
Next technology with people is our true north our initial focus is on technology to make our people more productive and efficient right. Now we're focused on the basics, reducing fragmentation across systems and tools infusing more data and insights into decision, making and automating manual tasks.
Marketing and enrollment once the audit identified deficiencies have been fully remediated and our operational processes are all in place at all centers. It is imperative to our mission to continue to serve more pace eligible participants.
Confident our transformative efforts on this front will position us well to increase our center level organic growth rates in a post sanction environment.
Government and public affairs I've spent considerable time engaging with our regulatory partners to ensure they have full access to have regular opportunities to provide input and direction and can readily observe the results of the changes, we're making we recognize that some of our state partners. We are disappointed in us and it's our job to restore.
For their trust and confidence we're doing this through a commitment to transparency responsiveness of accountability and I'm highly encouraged by the collaboration and positive feedback from CMS and our state partners.
Culture communication and organizational alignment chief.
Chief among building an aligned and engaged workforce is cultivating the wanting of age mindset and organizational culture.
<unk> regular transparent and inspiring employee communications, establishing easy to understand organizational priority pillars, and connecting everything to a balanced scorecard to measure collective success as an organization.
Cost structure.
Lastly, as you would expect we've identified opportunities to better align our cost structure to support the self funding where possible of new investments.
Investing more in field based functions and running more efficiently and some corporate areas Virginia.
We're looking very closely at non center level cost non labor and overhead cost procurement contracts and capital assets to ensure we are operating at optimum efficiency. We believe there is opportunity in every bucket is under scrutiny to this end we've already begun to streamline our change in reporting structures, creating clear.
Lines of accountability across the P&L, which.
Which we expect will result in faster decision, making greater focus accountability and operating together as one innovation.
I will now provide a brief regulatory status by market.
In Sacramento, we continue to execute against the corrective action plan that was accepted in January since February we've progressed significantly and our performance against the key criteria that CMS in DHS will use to measure our progress against the audit findings.
In Colorado, we are pleased to share that CMS accepted our corrective action plan in late April we're responding to the state of Colorado as remaining questions on our submitted tap and we believe that our plan will be sued accepted.
If approved the activities are likely to follow a similar timeline to that a settlement, which began three months prior.
Mexico, we received formal feedback from CMS in March that based on the results of the audit which are consistent with those of sacramental in Colorado, we have been referred to unfortunately, we're currently awaiting feedback from CMS on next steps.
In San Bernardino, we received an audit request from CMS and D. HCS in February and received preliminary findings in mid April the high level findings are consistent with the deficiencies cited in Sacramento, Colorado, and New Mexico, and we are working with both agencies on the specific timing of our corrective action plan.
<unk>.
At this time, our Pennsylvania, and Virginia centers have not received request fronts. However, we are proactively enacting enhanced compliance ahead of any formal request.
In Florida, we've committed to CMS and HCA that will proactively paused the remaining steps in the expansion process to allow us to focus exclusively on resolving our active audit issues and cannot yet determined if a launch in fiscal year 'twenty three remains viable.
We're still not able to estimate when existing or forthcoming sanctions will be lifted or the timing of future audits in Pennsylvania, and Virginia, our regulators will determine the timing of audits and sanction release once we have met all the criteria.
As mentioned earlier, we're in regular communication with our agency partners around the status of existing audits and how best to collaborate with respect to our other centers in the meantime, we plan to focus on proactively remediate deficiencies across our entire portfolio.
With that I will transition to a review of the third quarter business results and drivers. We reported revenue of 177 4 million, which represents a sequential increase of one 1% compared to last quarter.
We ended the quarter, serving approximately 6800 participants which represents a sequential decline of three 5% compared to last quarter.
We also reported a central level contribution margin of 28 million and a corresponding central level contribution margin ratio of 15, 8%, which represents a decrease of 32% sequentially when compared to second quarter fiscal year 2022 central level contribution margin of $41 four.
We've spent the last month utilizing the attribution of these results and I will summarize the core drivers <expletive>.
Net census decline, resulting from the sanctions.
Elevated external medical expenses, which were primarily driven by the lingering impacts of the omicron variant, specifically omicron increase the utilization and unit cost of inpatient days and ER visits.
And non community respite stays in skilled nursing and assisted living facilities relative to historical averages.
We are also seeing the impacts of higher acuity given the frail nature of our population average acuity rises with the passage of time.
The risk pool of our population has become more acute as we have not replenished our population mix with newer lower acuity participants.
Higher general and administrative expenses as a result of investments, we're making on the provider side to accelerate in the remediation of the identified audit deficiencies and onetime costs associated with third parties and restructuring.
These results are disappointing and frankly below our expectations as a leadership team we understand that we must do better we are set up to benefit from scale and this will be a great attribute for innovation in the future. However performance this quarter highlights the financial impact of not growing our participant base, coupled with elevated direct and indirect costs that are largely attributable to.
Right.
Given what we've observed in the quarter along with larger initiatives in flight I wanted to spend a minute on our margin profile in the near term, we are making investments across the eight provider initiatives referenced earlier to strengthen the platform as rapidly as possible to ensure our centers have the people and tools needed to be compliant and successful.
Somewhat offsetting these additional expenses in the near term will be the efforts across our G&A reductions as transparency as my ongoing commitment to you I want to acknowledge that I expect it to be net margin compression in the near term until we close critical gaps and strengthen the foundation what I can say is that the company is putting in place.
Strong SG&A controls and the discipline to leverage our fixed cost base there.
It remains too early to forecast exactly how these will net out in the long term, particularly since we have not yet quantified the potential long term impact of the payer initiatives, but we will continue to hold ourselves accountable to an attractive long term margin profile.
I began the call, noting that our priorities encompass both near term operational execution and mid to long term capability development. So.
To summarize job one and my commitment to our participants employees government partners and shareholders continues to be doing everything necessary to be released from sanctions and to avoid future sanctions by proactively fortifying our foundational operational processes on an organization wide basis.
This work is largely about becoming a better provider and we're making measurable progress on this objective set.
Second the opportunities to manage the total cost of care by becoming a more sophisticated payer will be a mid to long term objective.
Further as an additional part of this horizon, we're committed to building the tools technology and cultural elements needed for a highly engaged workforce, while our confidence increases by today, it's important to acknowledge that we have a long way to go.
As I said before with the right leadership focus execution and ownership and accountability, we will build a stronger innovation I've been fortunate to have been associated with organizations that have successfully navigated periods like this in the businesses emerge stronger there's nothing more important than ensuring we are consistently.
Livery outstanding care to our participants what's more I believe an unwavering focus on people service and quality will lead us to the performance we aspire to.
Earning the right to serve more deserving pace participants across the country again I want to sincerely. Thank you our regulatory partners and our employees for your support and with that I'll hand, it over to Barb.
Thank you Patrick.
I'll provide some highlights from our third quarter fiscal year 2018 performance.
Given the impact of Omnicom during the period in some cases I will refer to sequential comparison to our second quarter of fiscal 2022 in order to provide more meaningful view of our performance.
As of March 31, 2020 tail, we serve approximately 6800 participants across 18 Zachary <unk>.
Compared to the prior year period. This represents an.
Increase of two 1%.
Compared to the second quarter of fiscal year 2022.
Decreased three 5%.
We reported approximately 2600 30 member months for the third quarter, a three 4% increase over the prior year and a decrease of two 6% over the second quarter of fiscal 2022.
Sequentially the enrollment create in Colorado has the greatest impact on member line incentive in the third quarter.
Additionally, as we indicated in our second quarter remarks towards the end of the second quarter and continuing into the third we experienced an increase in total debt.
Well not uncommon during the winter months total depth, coupled with added enrollment growth pressure at.
The omicron Serge also impacted our standard disclaimer.
Yes, im sorry affected our ability to interact directly with potential new participants and caused delays and lengthening of the enrollment process.
Revenue in the third quarter of fiscal year, 2022 increased to $177 4 million or approximately 13, 5% compared to the third quarter of fiscal year 2021.
Year over year growth drivers included an increase in.
The calendar year of increase in Medicare rates.
Alright, <unk> 2022, and an increase in Medicaid rates, which include temporary rate increases from the American rescue plant Act, or ARPA, and Virginia and Colorado.
Specific to Colorado, we recorded a true up of our best guidance for the first half of fiscal year 2022.
Third quarter, and we are still in discussions with other states regarding their ARPA rate increases.
As we mentioned last quarter, we received a mid single digit rate decrease and our California Medicaid rate effective January one 2022.
The decrease is the result of California's experienced base rate setting methodology and the inclusion of our calendar year 2020 experience, which is understated due to the shutdowns during the pandemic.
We cannot predict what our rates will be next year, we have encountered higher utilization in calendar year 2021 at our centers, we opened which will be factored into the rate setting methodology for calendar year 2023.
External provider comp in the third quarter were $103 3 million.
A 37% increase compared to the third quarter of fiscal year 2021.
While some of this variance is due to census growth. The main drivers of the increase are one an increase in inpatient and medical real estate utilization and acuity as a result of the on the commentary.
Two increased housing utilization and three increased housing rates has mandated by certain state.
Including an Argos funded public policy adjustments in Colorado that increased assisted living rates by more than 30% effective January one 2022.
This assistant floating rate increased in Colorado.
Set by a direct increase to our reimbursement rates.
Additionally, while our Houston and specialized utilization has leveled off utilization was higher compared to the prior year as a result of the pent up demand health care services that were delayed during the pandemic.
Inpatient utilization has improved in the back half of the quarter following.
Eric.
However, that number and cost per Covid Avnet has increase year over year.
Additionally, participants that have recovered from COVID-19 have a higher acuity HMD inherit frailty of our population.
External provider comp in the third quarter of fiscal 2022 increased by 13, 4% compared to the second quarter.
<unk> quarter increase is driven by the AMA on search and its impact on inpatient and medical real estate utilization and cost and the increase in Colorado assisted living facility rates effective January one 2022.
We are in discussions with the state of Colorado.
During fiscal year 2023, right.
Our cost of care, excluding depreciation and amortization was $46 1 million for the third quarter, a 16, 5% increase over the third quarter of fiscal year 2021, driven by an increase in incentives and an increase in the overall cost per car.
Okay.
12, 7% per member per month increase is primarily due to one higher wage rates associated with a competitive labor market.
Additional labor cost associated with ongoing remediation and compliance.
<unk> greater operational cost due to the reopening of our centers that were closed during the pandemic and for Preopening losses associated with de Novo locations.
Cost of care increased by seven 4% over the second quarter of fiscal 2022, primarily due to additional labor.
That was created with ongoing remediation and compliance.
One time costs of approximately $400000 associated with organizational redesign.
Increased headcount as we make significant progress in filling vacancies and costs associated with the annual reset of employee benefits and taxes.
Andrew level contribution margin, which we define as total revenue less external provider costs and cost of care, excluding depreciation and amortization was 28.
For the third quarter compared to $41 $4 million in the third quarter of fiscal 2021, and $41 4 million in the previous quarter of fiscal 2022.
As a percentage of revenue center level contribution margin for the quarter was 15, 8% compared to 26, 5% in the third quarter of fiscal 2021.
23, 6% and accretive quarter of fiscal 2022.
The primary drivers of the year over year decline in center level contribution margin as a percentage of revenue are one the impact of the <unk> surge on in patients and medical real estate utilization and cost to increase housing utilization.
State mandated housing rate increases and for medical cost normalization.
We also experienced an increase in cost of care due to wage pressures and additional staffing related to compliance and remediation effort and other occupancy related expenses.
Sales and marketing expense for the third quarter was $6 1 million an increase.
<unk> of approximately $600000 compared to the third quarter of fiscal 2021 and was primarily due to increased head count over the prior year, coupled with one time costs related to organizational realignment.
Partially offset by a reduction in marketing spend associated with the ongoing enrollment sanctions.
Sales and marketing expense decreased sequentially from the second quarter of fiscal year 2022 by approximately $500000.
This decline was primarily due to a reduction in marketing spend associated with the ongoing enrollment sanction.
Partially offset by onetime costs related to organizational realignment.
Corporate general and administrative expense for the third quarter was $24 7 million.
An increase of $6 $1 million compared to the third quarter of fiscal 2021.
The increase was primarily due to an increase in head count increased cost associated with being a publicly traded company and one time compliance related costs and costs associated with organizational realignment of approximately $1 $4 million.
Net loss for the third quarter of $3 2 million compared to a net loss of $10 9 million in the third quarter of fiscal 2021.
We reported a net loss per share for the fiscal third quarter negative <unk> <unk>.
Both the basic and diluted basis.
Our average fully diluted share count was $135 million 516608 shares for the fourth quarter.
Adjusted EBITDA, which we calculate by adding interest taxes, depreciation and amortization, one time adjustments for transaction and offering related cost.
And other non recurring or exceptional caught two net income was $1 9 million for the third quarter.
$23 million in the third quarter of fiscal year, 2021, and $14 8 million in the previous quarter fiscal year 2022.
Our adjusted EBITDA margin was one 1% for the third quarter compared to 13 point narrow our stat for the third quarter of fiscal year, 2021, and eight 4% from the second quarter of fiscal year 2022.
The quarter over quarter change in adjusted EBITDA and adjusted EBITDA margin.
Primarily a function of increased external provider costs and increased cost of care.
Offset by reduced marketing spend and lower corporate general and administrative expense as a result of one time costs associated with leadership changes in the second quarter.
We do not add back any losses incurred in connection with our de Novo centers in the calculation of adjusted EBITDA.
<unk> centre losses, which we define as net losses related to Preopening and startup ramp in the first 24 months, a de novo operation or $1.0 million for the third quarter.
This includes expenses for centers in Downey, California.
<unk>, Kentucky, and our Tampa and Orlando centers in Florida.
Patrick's remarks, with respect to Florida, we have committed to CMS and the agency for healthcare administration or <unk> that we will proactively paused the remaining steps in the expansion process to allow us to focus exclusively on resolving our active audit issues and cannot yet determine.
If a launch in fiscal year 2023 remains viable.
Turning to our balance sheet, we ended the quarter with $199 $5 million in cash and cash equivalents and had $88 million in total debt on the balance sheet.
And any debt under our senior secured term loan plus capital leases and other commitments.
For the third quarter ended March 31, 2022, we recorded negative cash flow from operations of $7 5 million.
And we had $9 9 million of capital expenditures.
Free cash flow defined as cash from operations less capital expenditures.
It was negative $17 $4 million for the quarter and positive $2 5 million for nine months period ended March 31 2022.
In late December we announced we were withdrawing guidance following the sanctions we received in Colorado and subsequent enrollment free.
At this time, we do not believe it is prudent to provide our updated guidance due to the ongoing audits and continuing remediation effort.
As Patrick indicated we plan to focus on proactively remediate deficiencies across all of our portfolio.
We can however provide some insight into the trends we are seeing today and the impact to our business in several key areas.
Starting with revenue, we have already begun to streamline our teams and reporting structure realignment of sales and marketing functions and adding leadership.
Though the recent COVID-19 surge lengthened the time it took us to enroll participants into the program due to disruption from potential or actual exposure, but employees and prospective participants in the second and third quarters. We are beginning to see enrollment levels and our non sanction centers returned to pre omicron level.
And our mortality rate is returning to average level.
From a medical expense perspective, we expect elevated external provider costs due to omicron to continue in the near term.
Typically we expect inpatient and specialty costs and medical rep that cost and skilled nursing facilities to remain elevated due to the increased risk of severe illness from existing underlying condition when contracting Colgate.
In some of our market participants are returning to assisted living facilities at pre COVID-19 levels and above.
Finally from a cost of care perspective, we continue to experience a tight labor market as we manage our employee base to meet the needs of our participants.
As a reminder, we included market wage adjustments when we provided our initial guidance last summer and we continue to closely monitor our wages to ensure we remain competitive.
We have seen elevated wage rate in certain critical positions beginning late in the second quarter and we expect additional labor cost associated with the ongoing audit remediation and compliance.
Can you in the near term.
As Patrick highlighted in his remarks, we are at an inflection point for the company as we emerge from the pandemic and address the challenges of the current sanctions.
However, I believe that the transformation, we are undertaking will solidify our foundation to ensure that we are focused on people service and quality and that we are well positioned for a scalable and sustainable growth for the long term.
Operator that concludes our prepared remarks, please open the call for questions.
And thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby we compile the Q&A roster once again Thats star one and we ask that you limit yourself to one question and one follow up again, we ask that you limit yourself to one question and one follow up.
And our first question comes from Jeff Garro from Piper Sandler.
Your line is now open.
Yeah, good afternoon, and thanks for taking the question.
And I guess I'll start on the cost side of things you cited five items pressuring center level contribution margins could could you help us categories, which one.
Those you feel are near term and which ones might persist for some time.
Yes. Thank you for the question Geoff I'll get started and I'll hand, it over to Barb.
First thing I'd point out is the COVID-19 related costs, clearly, one where we saw a spike.
January I think was.
Roughly half the population that contracted Covid in January and those.
Lose admissions.
We're up for us as well as some of the increases in utilization skilled nursing days in some of the ancillary cost.
Surrounding that.
I'm going to let barb, Google a bit deeper into the drivers, yes, hi, Jessica.
Thanks for the question so as Patrick said certainly in the third quarter.
A significant portion of our higher cost as it relates to external provider costs were related to the omicron Serge so of those excess costs about 50% of those excess cost in some way form or fashion were attributable to that search whether that was inpatient medical rest spent ongoing spur.
T care and while we have seen the data.
<unk> seen COVID-19 abates going into the fourth quarter, we expect we expect those costs to come down in the short term, but not completely go away.
Participants are inherently frail and have a number of comorbidities and so what we are experiencing is a long tail. If you will as it relates to those external provider costs from those participants so.
Good news is we have seen the COVID-19 rate decrease towards the end of the third quarter and into the fourth quarter, but again those costs won't go to zero in the fourth quarter. There isn't there is a tail associated with that secondly, the wage increases were a factor as well and.
I think everyone in the health care industry, we are seeing a lot of.
Pressure in a tight labor market and we've done a number of.
The increase is related to our staff as well as trying to close the gap on some of our staffing so.
That will continue as well.
We did have some more onetime costs in nature related to organizational realignment that will not reoccur in the fourth quarter.
Or in the near term.
And then just some of the overall other other costs.
We foresee sales and marketing are nearly flat quarter over quarter and that really results from the sanctions, we see that being pretty constant NRG.
And our G&A are really investments in.
In transforming transformational activities as well as some compliance activities and we'll see that continue a bit into the fourth quarter as well.
Thank you hit them all.
Yeah, Great all Super helpful, maybe to follow up a little bit and focusing on the cost of care line and just trying to think about I think great.
Great and the tight labor market, you're able to add 100 net new ftes.
Im curious what role as you were able to hire people for and just trying to parse out how much of the increased cost of care despite where.
Has trended.
Related to wage pressures and how much is related to all of those efforts that Patrick discussed around becoming a stronger provider and delivering a stronger value for your members.
No.
A bit of each of those items, we have seen in terms of the wage pressures in the high single digits compared to a year ago, and I think thats been consistent with what we reported on on other calls that kind of high single digits.
And so that is definitely a factor.
And then adding the new.
Sorry, the new employees.
Is another factor, we are continuing to work on that and strengthening our recruiting.
So I think it's a bit of both.
Mike just to add on and just.
Reinforce that view.
We've identified a core set of positions.
We really put into the critical hiring bucket.
Nurses and CMA is personal care workers.
Gary.
Various therapies and social workers and.
Memory serves me the last cut.
A couple of months or at least let me last quarter.
Had roughly about 200 or so of those that we've carried isn't vacancy and I think we've made progress in at least 30% of those just in the last.
Six weeks to two months. So we're making we've got a very focused effort on these critical positions and really I think doing a great job attracting people to the company and attracting people to the mission and purpose of the business and so we're starting to see some screening some improvement in recruitment of these are critical.
<unk>.
Good to hear thanks for taking the questions again.
Thank you.
And our next question comes from Sarah James from Barclays. Your line is now open.
Thank you.
To go back to the comment that Bob made earlier about the ARPA.
Regulatory change in Colorado, just want to confirm that was 30%.
Zero cost increase with no.
Great and then I was going through.
The last couple of calls I guess, you guys flagged five 3% rate increase.
Colorado and Virginia in November related to housing costs. So.
I just want to understand if we look at this as like.
Or to your run rate, what what exactly is going on with housing costs.
How should we think about that as a percent of your total cost structure.
Thanks.
Hello, gentlemen.
Clarify that Colorado, our best sorry, I pause there because it was a little bit of an echo let.
Let me just clarify that so I think in the remarks I said there was no direct reimbursement there is definitely some indirect reimbursement and so we received.
We're seeing some ARPA funds we received.
As a matter of public policy adjustment related to ARPA.
So we've received a couple of increases there.
But the structure of it is not a direct one for one reimbursement and.
The philosophy. There is we are being reimbursed to some of the ARPA and inherently through our rate structure.
So we are still in discussions with the state of Colorado as it relates to FY 'twenty three rates and you did understand correctly. It was a very significant increase for els. It was over 30% and a significant portion of our participants in Colorado actually live in Elf, which is why it's pretty significant for us.
The other increases we mentioned in previous quarters. We also received from Virginia about a two 5% increase related to ARPA and in <unk>.
Sometimes that cover some of that housing increase we do not have the same level of housing.
In Virginia.
It's not the same issue from a reimbursement perspective.
Can you size housing costs.
Percentage of your cost of care line is it.
How should we think about factoring in.
Increases in to the model.
Yes, probably not off the top of my head.
But again think about over a third of our participants in Colorado reside.
Reside in Els and I think that's the way to think about it.
Okay. Thank you.
Sure.
And thank you and our next question comes from Jamie <unk> from Goldman Sachs.
<unk> is now open.
Hey, good afternoon Patrick.
Patrick maybe to just start with you on the initiatives you outlined obviously.
A lot going on to remediate the audits.
Improve quality of care overall.
How would you kind of characterize where you are in terms of.
Establishing these initiatives.
Timing that we should be thinking about for for some of the different initiatives, where the the easier lift saar versus some of the more challenging longer term left.
A little bit more color on how we should think about.
I don't know phasing or implementation of these key initiatives going forward.
Sure. Thanks for the question I would start by saying that we're making progress on all eight of these.
Clearly theirs.
Different impacting value for all of them, but we are simultaneously executing sort of full speed ahead on all eight.
If I think about where it all starts clearly the critical personnel gaps.
For everything.
And as I mentioned, we've identified the critical personnel and are making significant progress I think I said, 30% of some of what's been sort of in our vacancy run rate, we have been able to fill.
When I think in terms of those that I think are.
Having the greatest near term impact.
<unk> I would call out would be one scheduling.
Care with outside providers, we've made a lot of progress on building our tools.
Tools and art.
Process is to ensure that our people are being scheduled.
An external providers as quickly as possible and as timely as possible. So that is an area, we're getting people to their provider really starts.
The care delivery model for us and so that's critically important we're making great progress.
The telephonic channel with their phones, just being available to our participants and their caregivers and make sure that every call that comes into the sooner. We're returning a call in a timely basis and we're documenting the needs of the population I think thats an area, where we're making really good progress on.
One of the areas I think is going to have a longer tail on it probably won't surprise you is sort of strengthening our home care network and the reliability.
This really ties back to the people.
Strength is finding the right number.
Right skill set within the personal care.
Worker is really important to us and it's an important part of what we need to do to keep people living independently in their homes and I think Thats. An example of one of our.
<unk> is going to take take.
Take longer.
But for the most part I would say, we're expecting all of that like fitness call. It phase one of all eight of these to be very solid footing by phase one I mean, we will have addressed the compliance issues. So if I had to break it up into sort of phase one is really about.
Making the changes necessary to address the audit findings and to remediate those issues everywhere there exists.
I think we will be complete with that by the end of this year.
And the next phase is really more transformational in nature, and it's really taking each of these areas to the next level of efficiency using technology.
Using more automated business processes et cetera, So I think that that's probably more on the 18 month to two year timeframe to take things to the sort of the next level, but certainly remediated. The deficiencies by the end of this year across all of these initiatives is an expectation we have.
Okay. Thanks, that's really helpful.
I wanted to follow up just on the status of the Sacramento facility I know the cap is in place there.
I guess the question is what's the level of oversight right now bye bye auditors.
Monitoring you on a kind of day to day basis, or what does that look like and is it still right to think that.
There'll be a phase you go through where they're monitoring pretty closely and then they let you operate more independently for a while and then beyond that is is when the enrollment freeze might be lifted and then if I could just sneak in one more just.
In Virginia and Pennsylvania.
Status of conversations.
They're familiar with.
Your other audits and how you kind of characterize the risk.
Shortly like there thanks.
Starting with Sacramento, I think you articulated sort of the <unk>.
The audit cycle will.
<unk>.
There is always a great deal of engagement with CMS in the state, but you're correct in that.
I'll say at the precipice of where CMS is level of monetary is done much more through reporting.
Reporting oversight so there are specific measures.
Neither of them that.
We are being measured against in Sacramento, and we're reporting that information to CMS, if there isn't a biweekly or monthly basis.
And we're very pleased with the progress we're making.
And if we can keep that progress up.
<unk>.
You are correct in that the next step would be for CMS to give us some time to make sure those changes and those results are sticky and then come back in and do an audit again, a quick audit to see where we are to make sure the changes in stock and it's our understanding if that all goes well then we are positioning herself.
For sanctions to be lifted but of course, that's always in the discretion of CMS. So.
I would just say really pleased with the team's progress in Sacramento.
As it relates to Virginia, and Pennsylvania, how I would describe that is.
Our close work with CMS across multiple markets now.
And the things they are seeing.
Across our markets.
And the progress, we're making across addressing those deficiencies.
I believe CMS is acknowledging that we are making good progress we're focused on the right issues will remediate things timely we've got a strong communication open communication channels between us.
And as a result.
We have not.
<unk> received any notice from CMS or the state of Virginia, or Pennsylvania on any plan audits of course, they can happen at any time, but we always receive a notice in advance. So we have not received anything yet so.
I think our belief is we're working closely with CMS.
And they're very aware of our themes in our progress.
And we're applying learnings.
To all of the market so anything we learn.
<unk>.
Sacramento, New Mexico, Colorado, we are bringing those same things to Virginia, Pennsylvania proactively.
Okay understood. Thanks for the update.
And thank you.
Our next question comes from Matt Larew, with William and Blair.
Your line is now open.
Hi, Thanks, Good afternoon, Bob I wanted to follow up on your comments.
Obviously, you're not giving guidance, but you did kind of describe what you're seeing in terms of current trends with enrollment.
Non thinking centres, returning I do want to clarify, though with about two thirds of your centers.
Call it into sort of Colorado, New Mexico, and California centers, and 2% attrition per month.
We should be expecting sequential declines incentives for some period of time here at Baird.
Fair to say I, just want to make sure that we're not misreading the commentary about enrollment returning.
And then also can centers and to something that's not quite a companywide.
Yes. So thanks for the question, Matt the only clear clarification I would make is that the centers on sanction our Sacramento currently currently on sanctions Sacramento and the Colorado centers. So I know in your question. There are you included other California centers in New Mexico, which are not currently on sanction.
And then in addition to that just Virginia and Pennsylvania.
Alright.
I guess just to clarify.
Your sort of internal expectation given that they are following the path of Sacramento, Colorado.
Right.
They will eventually be telling you about their assembly process or sort of what's in your operating model for that.
That's not what we're assuming.
Especially in the comments that I.
Dave just a bit ago. So the comment is again in the non sanction centers. This is patrik I think I might just pause.
<unk> way to the point in terms of.
Internal expectations as I as I've said before this is entirely in the discretion of our regulators but.
I think internally.
We recognize that both CMS and steaks.
Have a broad range of options available to them when it comes to enforcement of audit deficiencies and a corrective action plan with an enrollment fleece is just one of several options.
Yes, we.
The state has available to them. So I think as we think about each market, we think about it on its own merits and we think about the latitude.
CMS has and that each market that while the themes may be similar.
Actual severity and frequency.
That.
The deficiencies could vary by market and could lead to very different outcomes.
So.
That's sort of how we're thinking about it and then I think as we.
Think more broadly to markets that aren't under sanction. In addition, we also think about.
The proactive nature of our work too.
Address audit deficiencies that maybe all of it hasnt occurred yet, but we're out we're already at that location looking at the opportunities looking at what we've learned from the other markets and.
We've seen if there is an opportunity to get ahead of it so.
I would just add that color to March levels.
Okay, that's really helpful. Patrick.
And then Patrick may be sticking with them some additional commentary.
You referenced some of the corrective actions that you've taken.
We also ask that you identified sort of root cause for all of them I'm curious could you share with us what in your view the root cause a lot of issue, we're and the reason I'm asking is I think it'd be helpful to understand if it was deficiencies and people or processes or technologies in order to help frame what the type of investments.
Are there going to be required to really solve not a <unk>.
This level of root cause across the organization.
Sure be happy to.
First say that for any deficiency I always think of it we always think of it in terms of people process and technology.
And although.
Business process automation or introducing.
New technology can be expensive.
What we're finding in more cases than not is that.
Simple technological advancements or automation can make a big difference in the deficiencies were.
We need to close it very much is about the fundamentals.
Having the right people, having solid business processes and policies and procedures that are followed and having tools that help our employees be efficient and.
<unk> enabled them in the work that they're doing in terms of the root causes.
Working from sort of top of mind here.
It's things like ensuring our medical records.
Documented with all of the required data elements much.
Much more people in policy procedure focused ensuring that our that our care plans are complete.
Timely.
A lot about training and people and process.
The heart of our business is this multifaceted interdisciplinary care team at the center level.
Making sure that team is each day, capturing input from all other team members.
Whenever that information is available is being documented in the EMR or in other tools that feed the anymore. There youre getting again, it training of people process and tools to capture data.
Making sure that.
Our service orders are being scheduled on a timely basis, making sure that when a.
A participant or a caregiver request service that were identifying that appropriately and we're documenting it. So so you can get a feel for those would be the things that I would say our root causes of our compliance deficiencies.
The fundamentals of basic blocking and tackling and the eight initiatives that I articulated I have a great deal of confidence that if we if we execute flawlessly on those eight initiatives by the end of the year.
They substantially account for and it will address all of our audit deficiencies and then next year and the year. After we begin thinking about how do we take those to the next level and become more efficient more automated more control.
Hope that's helpful.
That's really helpful. Patrick.
Thanks for all the commentary.
Okay.
And thank you.
And our last question comes from Andrew locked in from Jpmorgan. Your line is now open.
Hi, Good evening. This is Andrew on for Lisa Gill.
I just wanted to go back to your comments.
Patient acuity going up over time.
So in light of the freezes I was wondering how you're thinking about driving growth in existing markets given the compressed marketing spend.
The limited growth would probably seem to indicate that cost of care would remain elevated relative to historical pattern.
I was wondering if you had any incremental color on that thank you.
Well I can share a little bit on the sales side.
Nelson the team wants to weigh in.
As it relates to our sales and marketing costs, we're very cognizant of our ratios for sales and marketing and we're going to be we've been very smart about how much of a cost structure we maintained.
Given that we have markets under sanction and we've taken steps already to reduce costs in the markets.
<unk>.
In the markets today, and then on the marketing side. Because these are highly variable costs, we've already taken cost out of the marketing side of the equation, which is going to allow us to move.
More quickly.
We're also deploying.
Sales resources and sanction markets too.
Let's call it participant experience and retention efforts in both sanction markets in non <unk> markets and that's relevant because were.
We're very much focused on that portion of our dis enroll right that we can control and we're using those resources from a participant experience perspective to help with some of the disagreement and I think as Bob mentioned, we're starting to see some of that play through.
In.
The current period as it relates to the risk pool.
<unk> to say a little bit about that but youre exactly right that we've had quite a few participants contract COVID-19.
As they leave the hospital many of them are no longer able to be at home.
<unk> higher cost settings, and especially in a market like Colorado, where it's one of our largest markets, where we have the highest degree of.
<unk>.
<unk> utilization.
We clearly have a challenge of.
Not bringing in enough new lower acuity participants into the pool and that's something that we're very focused on.
Looking for every opportunity to manage that population as well as we can but let me ask felicia to weigh into.
Yes, I think Patrick captured the cause of the increased acuity certainly in this last quarter.
Quarter Covid had a huge impact on all participants acuity for the quarter next is important to us. So it is going to be important for us to continue to bring in.
Newer.
Ideally less severe participants on some on some assets to help dilute that but our real focus is going to be on being able to predict the acuity and some of the technology investments that were identified.
Patrick earlier will help us to do that are newly EMR technology is also going to help us to do that.
And I think that that ability to really predict our cohort of acuity and manage it upfront.
More accurately is going to be a significant value for us in the long term.
Yes, I might just add one last thought to that and naturally we have a number of initiatives that that run on a daily basis.
We're focused on things like the short stay skilled nursing facility and the length of stay is beliefs submission variety of site of care strategies, we have in place to try to address the utilization.
A number of things around the use of <unk> and <unk>.
Trying to reduce the unnecessary use of VR.
<unk>.
All of these things I think also play too.
The highlight really highlight the importance of a more sophisticated payer strategy and capabilities going forward, which I mentioned in my opening remarks.
Thanks for the color.
And thank you.
Yes.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
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