Q2 2022 agilon health inc Earnings Call
Medicare advantage membership growth was driven by the addition of six new geographies in January and 13% same geography growth in existing markets.
Direct contracting membership benefited primarily from the addition of new markets joining the program.
Revenues increased 34% on a year over year basis to $670 million during the second quarter.
Year to date revenues increased 45% to 132 billion.
Revenue growth was mostly driven by membership gains from our new and existing geographies normalized for the timing of a large retroactive group contract in the prior year revenues would have grown 42% in the second quarter.
On a per member per month basis, or <unk> revenue declined 2% during the quarter, which primarily reflects market and member mix as well as the expiration of the sequester moratorium.
Medical margin increased 49% year over year to $82 million during the second quarter year to date medical margin increased 57% to $168 million.
Even with the dilution from our membership growth medical margins increased as a percentage of revenue and on a <unk> basis medical margins were 12, 2% of revenue during the second quarter compared to 11, 1% last year and medical margin <unk> increased 8% to $103 compared to $95 last year.
Year.
Medical margin growth was primarily driven by the maturation of our year to plus partner markets, and remember cohorts, which offset the dilution from stronger membership growth.
On a year to date basis medical margin <unk> in our 10 partner markets that have been live more than one year increased 26% from $108 to $136.
Utilization trends were consistent with our expectations and remain near 2019 baseline levels utilization for inpatient services continues to run below historic baseline, while outpatient utilization is modestly above baseline.
Covid related utilization was relatively modest in the quarter and similar to prior year.
Network contribution, which reflects agile and share of medical margin increased 50% to $37 million during the second quarter.
Year to date network contribution increased 44% to $78 million.
The year over year increase in network contribution reflects the gain in medical margin as well as the relative contribution of medical margin across our geographies.
Platform support costs, which include market and enterprise level, G&A increased 18% to $36 million.
On a year to date basis platform support costs increased 19% to $70 million.
Growth in our platform support cost continues to trend well below our revenue growth and highlights the light overhead structure of our partnership model.
As a percentage of revenue platform support cost declined to 5% during the second quarter compared to 6% last year.
Our adjusted EBITDA was $7 $5 million in the quarter compared to a negative $1 $7 million last year on.
On a year to date basis, adjusted EBITDA was positive $19 5 million compared to a positive $2 1 million last year.
The increase to adjusted EBITDA reflects the gain in network contribution and leverage against platform support as well as a positive $6 $2 million contribution from direct contracting.
Direct contracting performance during <unk> was solid reflecting positive trends in both revenue and claims expense.
Medical margins for our Dce's increased over 100% in the quarter to $21 million and increased 12% on a <unk> basis to $79.
The results from our direct contracting entities are reflected on a net basis within other income.
Turning to our balance sheet and cash flow as of June 30, we had over $950 million in cash and marketable securities and under $50 million in outstanding debt.
Given the strength of our balance sheet and low capital requirements, we invested $285 million of our cash into U S treasuries and high quality corporate debt during the quarter. These investments are reflected in the market and the marketable securities line and our balance sheet.
Cash flow from operations was negative $60 million for the quarter, which was consistent with our expectations. The.
The increased use of cash this quarter, primarily reflects the timing of risk pool sediments with our health plans, which we expect will normalize in the back half of the year.
We remain extremely well capitalized and do not anticipate needing any external capital to drive our future growth.
Turning now to our financial guidance for the third quarter and full year 2022 for the third quarter, we expect ending membership live on the agile platform will grow 50% at the midpoint to a range of 348000 to 356000.
This includes Medicare advantage membership of 263000 to 266000 and direct contracting membership of 85000 to 90000.
We anticipate revenue in a range of 645 million.
The $655 million or 42% growth at the midpoint.
We expect continued progression with our medical margin and adjusted EBITDA as members and markets mature on the platform for.
For the third quarter, we expect medical margin in a range of 65 million to $70 million, representing 55% growth in adjusted EBITDA of negative $2 million to negative $5 million compared to negative $14 million in the prior year.
We estimate direct contracting will contribute low to single digit EBITDA in the third quarter and for the second half of 2022.
For the full year 2022, we have raised our membership and revenue outlook.
<unk> greater pull through of commercial agents and year, one market membership, while largely maintaining medical margin and adjusted EBITDA at these members generally start with lower than average margins.
We now expect total membership on the agile platform will grow over 49% year over year to $345 to 355000 with revenue growth of 43% at the midpoint to a range of $2 65 billion to 2.635 billion.
We continue to expect significant gains in medical margin and adjusted EBITDA. We now anticipate medical margin in a range of 292 million to $305 million and continue to expect adjusted EBITDA in a range of breakeven to positive $10 million, which represents a year over year gain in adjusted EBITDA of approximately $40 million to $50 million.
With that we're now ready to take your questions operator.
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I think we're ready for Q&A.
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Remainder if you are using a speaker phone. Please remember to pick up your handset before asking your question. Our first question comes from the line of Lisa Gill with J P. Morgan. Please say your line is now open.
Hi, Thanks, very much and thank you for taking my questions I have a couple if I can.
Let me start with your comments around entering new States. Obviously, we knew about at the analyst day, but how are you thinking about the opportunities.
Some of those other states I think you've talked about Tennessee, South Carolina, Minnesota.
What are you seeing around around the physician the opportunity that the class size opportunities or anything that you can give us around that would be my first question.
Yeah.
Thanks, Lisa I really appreciate the question, we're really proud of the class of 2023 as we've talked about before.
It's a really big deal for us to be able to enter new states. There are a limited set of entry points and to be able to be first in terms of full risk value based care and then do it with a partner at scale, that's really well respected I understand those communities is a huge advantage as I said.
In my remarks, we believe this gives us the ability to really shape value based care in these communities for decades.
And each one of these groups is wrestling with the challenges of growing senior population in the Medicare fee for service economics, and they've seen the success that our other partners are driving and they recognize the value.
A primary care physician on our platform and they really believe see opportunities to grow. So let me walk through these just a little bit in Tennessee, we are a great partner in Jackson, Tennessee. This is a rural underserved markets, we have 40.
<unk> that gives us a real scaled position in the market. This is a high growth market growing about 13% in the year and MMA, which is well above the national average and what we'll be able to bring in terms of investment and access around primary care and enhance care team resources will be really transformational.
In Charleston, South Carolina, we've got two great groups. They represent about 35% of the independent primary care physicians within that market that too has an incredibly high growth market and as we talked about the value for pcp's, they see a real opportunity to grow in other pcp's.
That can join in.
And then finally in terms of the Minneapolis, St. Paul area in Minnesota, I was there last week I'm originally from.
Minneapolis, St. Paul and I think we see a real opportunity to change the trajectory in that market, we're working with both the regional and national players. There. It's a market that has large health systems. In these groups are incredibly well respected they have great relationships with those systems until we think that they can drive.
Just incredible success for us So I think it's a real positive for us and one that we see driving more growth and very strong performance.
And then Steve.
Please culminate with membership growth that you had in the quarter.
But how do I think about the impact on <unk>.
<unk>.
From that higher membership and how does that impact your full year outlook and your ability to really start to manage those costs for those patients.
Sure Lisa so.
Very proud of our quarter and the growth.
Extra growth was about 5000 members above the high end of our Medicare advantage membership guidance about 8000, I think above the average.
Thats really a function of strong same geography growth, but this quarter the big chunk of that was in our year. One markets. Those that went live as of January one and seen a faster pull through by working with these health plans.
That membership so we're executing better the dilution in the quarter was about 30 basis points from that that extra membership and Tim can walk you through kind of how that carries forward into the second half guidance, but I guess, what I'm really proud of as we talked about the key metric being.
Our year to plus markets and their performance in that step up year over year from $108 <unk> to $1 36 that really allows us to grow year, one markets, even more to absorb it in the quarter and really drive strong performance as well as this is the first quarter that we've had a year over year.
Year comparison in direct contracting and that strong performance jumping from $71 <unk>, a year ago up to $79 growing 63% as Tim talked about those two things will carry into the in the second half forecast, yes, Steve a couple of things that was great. A couple of things I would add is that that.
Incremental membership that we grew over our guidance range on average it was about 5000 members on the high end of our range.
Drove really almost all up over the lion's share of the incremental revenue, we were about $18 million higher than the high end of our guidance also on revenue, but that incremental revenue really does flow through to very little medical margin. Initially because of the reasons, Steve talked about a lot of those members are either agents, which come in at a very low medical margin or were actually growth from our newest.
Markets are year, one markets, which are also starting out at a lower medical margin. So the overall medical margin flowing through from those was really lesson really $500000 in the quarter, Hence the 20 to 30 basis points, depending on how you want to look at it of of delusion.
Notwithstanding that I think be pretty happy with the overall numbers.
<unk> medical margin dollars that we delivered of $82 million or the high end of our guidance.
The overall MLR that we delivered.
87, 7% is still a pretty big increase over a year ago. So we're happy with that as well obviously those numbers also include some some prior period development in them as.
As we look forward into the second half of the year, which I think was the other part of your question.
We had a pretty nice improvement in an MLR in the first half of this year when you adjust for some of their prior period development. It was about a 190 basis points improvement in the second half of the year, we're essentially.
<unk>.
Forecasting the same kind of improvement when you look at our guidance now so.
Second half we've also guided to incremental revenue I think the <unk> incremental revenue over the former high end of our guidance is about $27 million, but again almost all of that is going to be driven by the incremental membership growth that we've now guided to which will flow through to a pretty low medical margin number and be relatively dilutive, but still allow us to.
To deliver that 190, or so basis points increase in MLR in the second half.
That's very helpful and just a point of clarification.
One of your competitors talked about direct contracting having a retroactive adjustment of roughly seven 5% does that not impact you or were you able to just kind of work through that.
Talked about the increase on a <unk> basis at that kind of stood out to me that it did.
<unk> seem to impact you in the same way.
That's really a great question. So just two seconds on the way the model works.
The <unk> comes out at the beginning of the year Intel's you Hey, Here's what we expect your trend to be which is drive the revenue number.
And the way they set up this year was the originally said and by the way they use 2019 as a baseline. So the idea was 2022 trend will be 16, 1% over that 2018 baseline. Obviously, there were some low years and theyre, including 2020, which was a decline, but what that really implied for year over year in 2022 was more than a 10% increase when we went into the year.
We talked a little bit about this in Q1.
We looked at and said that looks really high to us we've got a lot of experience now we have a lot of members on the platform. We've got a lot of data in our analysis that that number of deals high we're expecting that there's going to be some.
Relatively sizeable retro trend adjustments during the year. So when we booked our Q1, we actually booked an assumption of a retro trend adjustment, even though it hadn't happened yet and then of course, when we booked Q2, we're already booking in line with that kind of a number I think the actual adjustment that.
<unk> announced in their May update was seven 9% of that 16, 1%, but we've been both booking two and our assumption for the first for the full year is much more in line with with a sizeable retro trend adjustment. So we're not seeing that kind of swing back and forth quarter to quarter.
Okay, great. Thanks for all the detail and congrats on the corner.
Sure.
Thank you for your question. Our next question comes from the line of Justin Lake with Wolfe Research Justin Your line is now open.
Thanks I appreciate the question.
First just following up on what you just talked about.
I think so.
When they're looking at with 'twenty, you're saying 2019 to 2022 was I think you said, 16% to 17% now its adjusted lower.
We spoke <unk> 10 is that the way to read it.
No. So I'm just kind of give it to you in two different ways. They quote to everybody. The number of a trend number of 2022 over 2006 over 2019, which was about $16, 1% now if you want to look at that and say well what is that 2022 over 2021 that same 60% would've implied over a 10% improve.
In 2000.
10% trend in 2022 over 2021.
They've adjusted those numbers are they announced a.
Interim retro trend adjustments sort of guidance of down seven 9% from that number in there may update so that's the way that works.
No for US personally we had already accounted for a retro trend adjustment because we've been through this last year, we kind of saw how that when we've got a lot of data now we're able to do our own estimate of what we think the trend is going to be and we expected there to be a retro trend adjustments. So we were already.
Accruing for that in Q1, even before the May obviously before the May announcement came out I will say that the underlying direct contracting performance. So it's still really strong and we're very happy a big increase in membership right.
I think from year end, we've increased like 39000 members from a year ago, we've increased something like 34000 members and EBIT with that increase.
Spoke about where.
We're seeing a pretty nice pickup in medical margin either on a <unk> basis and $79. This Q2 over $71 in the first quarter second quarter of last year, which was the first quarter. We had it that's like a 50 basis point pick up in MLR. So we're seeing really positive trends in the second year, notwithstanding that huge membership growth both in claims.
And our ability to drive revenue so membership and revenue. So so we're pretty pleased with it Justin just a quick add I mean, we're 90000 members in direct contracted now it's 25% of our membership.
I know, we don't consolidate revenue, but on a revenue equivalent basis, it's a larger percentage of that.
We spent a lot of time with the innovation Center, we certainly learned a lot through the first year. So I think what Tim just described is really kind of a prudent approach to what we're doing and I think it gives us just incredible confidence around our strategy right. We sort of said all along we're going to look at this as a single line of business our partners.
On average have 400 senior patients across direct contracting in Medicare advantage and the 10 markets, where we've got both and they are now seen the real power that's being driven off of that we've got over a 100 Bucks <unk> year to date, an MAA, we're approaching 80 Bucks <unk> in direct contracting all with.
The growth that Tim just talked about so I think I think the power of that approach in the first time, we've been able to now do a year over year comparison I realize it's in a different spot and you got to pull it out of the queue, but get them teed it up for you.
It's extremely encouraging to me and to all of our partners and I think other physicians out there are seeing that and that's how we're seeing this uptake in terms of growth with other physicians joining the platform and just if I could just add one other thing real quick.
Obviously consolidate.
These results were just report them on a net basis in other income, but we do actually report out to you can you can obviously pick those up in our 10-Q and just as a point of comparison.
We've generated over $500 million of revenue indirect contracting through the first two quarters of this year. So and you can pull that out of our out of out of the 10-Q, but it's a big number. This is really a big part of our business now.
Thanks for all the detail I appreciate it then.
A couple of numbers questions. One can you tell us what the drivers of it.
The negative development has been this year.
And versus what normal normal.
Normal should be positive to some extent some reserve Roberts deviation.
So how far off review for where you would expect it to be.
And.
Have you learned anything from that that you think educating our reserves going forward, if you increase the reserves, but it sounds like.
Yes, that's a great question first of all our expectation would be we always.
We're always seeking to be correct right, so and obviously it'd be nice to be correct with maybe a little bit of conservatism. Obviously this time around it was the other way and we do have we do have some prior period development. The drivers of what we are really a couple of things that we think are a bit anomalous.
One of them was as we've now.
Sorry to complete the run out of claims in the back half of for the back half of last year. We did see some change in seasonality in the back half, we're especially Q4 was a little bit higher seasonality of claims than we had seen previously and so that caught us a little bit off.
We have a couple of large.
Large value claims at large dollar claims that we didn't have visibility to that had become apparent to us now.
And then we did have a little bit higher COVID-19 costs, and we were originally expecting in Q4, but obviously, we see now as we move through the run out. So all of those things are kind of contributed in stacked up in one direction to create.
Some.
Negative PPD that we recognize now a little bit in Q1, and some more in Q2 as.
As we go forward, we've actually looked at that seasonality now and included those learnings into how we're both accruing and forecasting for the second half of the year. So our guidance for the second half of the year include some of those changes that we've seen in trend and.
We'll just continue obviously to continue to use all the data all the operation operational information, we have and try to make sure that we're getting the getting the.
The ball is close to depend as we can on our accruals.
Got it and last quick one.
You said you have to physician groups signed up for 2024.
Where were out last year in terms of at this point, how many job in 2000 22021 at this point in 2020 data just to give us a little bit of a comparability.
Yes.
It's a quick one Justin we've never had group signed up this early.
When we talk about an inflection in demand when we talk about group's understanding the value that they have and what they can achieve through our partnership with agile on.
That's accelerating this and so the two that we signed last year at this point, we had zero in every year prior to that.
We've had zero. So these will have.
16, 18 months implementations.
Which should give us just a tremendous leap forward and.
The rest of the funnel for 2024 looks extremely.
Strong basically at every step down on that process from qualifying all the way down to signing letters of intent like we talked about we're ahead of where we've been and I think it's a function of just what we talked about which is the challenge of these practices face the need for this new model the success that you've had.
And the ability to talk to enough peers now so that it's not agile on <unk>. Its appeared went through a similar decision.
Perfect. Thanks again guys.
Yes.
Thank you for your question. Our next question comes from the line of Stephen Baxter with Wells Fargo. Stephen Your line is now open.
Yeah, Hi, Thanks, I wanted to ask a big picture question on the medical margin performance. So we've generally heard from your health plan partners that the utilization environment, especially for Medicare and Medicaid is pretty benign running below baseline levels. I know you are characterizing as closer to baseline levels.
So I think you said your markets at year, one markets are performing a bit ahead of plan.
The combination of these two things I guess, maybe I'm, a little bit surprised that maybe the medical margin guidance on a dollar basis diluted impacting our members have on the percentage, but I guess im little bit surprised that dollar basis, maybe it has not increased more throughout the year essentially the health plans seem to be saying they are expecting higher utilization in the future than they are seeing today it doesn't necessarily seem to be the way that you guys are.
Thinking about it wed love to just get your insight into some of the maybe the things that could be holding back the medical margin dollar guidance for improving this year and also thoughts on kind of your view of utilization versus maybe some of your health plan partners. Thanks.
Yes, Steve absolutely.
I think our medical margin forecast for the second half of the year first of all we do have a little more confidence in the range and we've tightened it up a little bit by by raising the lower end of the range and that is based on some of the performance that we've seen so far this year, but our expectation is so.
So far through the year, we have seen utilization just slightly below that 2019 baseline now I don't know if everyone's talking about theres a couple of different components of that and we've talked about this on previous calls, but it's still pretty consistent.
Acute utilization is definitely below baseline, but we're seeing.
A pretty good offset for that in outpatient and that kind of continues that's what we are basically built into our balance of year as well that we're going to continue to see those those utilization numbers that hasnt changed since our previous guidance.
We did tighten up the range a little bit as I said, because we are a little bit more confidence I mean in addition to that of course, we did increase our revenue guidance, but I think as we talked about earlier on the call. We wouldn't expect that to flow through too much incremental medical margin, because it's primarily being driven by incremental agents or more members in our new geographies.
One geography markets.
Yes.
Just to add.
Okay.
Go ahead please.
When I was just if you wanted to add onto that just going to add to that.
What Tim said is I mean, he just gave you the context earlier about kind of run rate first half performance relative to last year first half to first half and comparing continuing that forward.
That first half performance has the clinical programs that we've invested in and those kind of expand throughout the year, but the utilization comments you made about being in line I think is right on.
Okay I appreciate that and then just on.
The managed care contracting side of things I do remember.
Maybe earlier in the process and you guys were going public there were some markets where some of the national plans participated in some but not others, but just love an update.
The health plans has seen more data.
And kind of the coverage of your markets of the National Health plans changed at all or is that still an opportunity for you guys in the future.
Well, we have very deep partnerships with five national payers, we have joint operating committees.
We plan growth I mean, there are markets that they would like us to expand to that we've got out there. We're planning on in every market in which we were.
We're working with the National plan that we've approached them on where we've been able to contract and do that successfully so I think the depth of that relationship is pretty significant Stephen and I think.
There's a lot of opportunity in terms of additional markets going forward.
Stephen I think what is probably differentiated and Steve can comment on this.
Our ability to contract with regional plans is very differentiated in that gets us into a lot of different markets. We have a lot of experience with that now and then our ability to contract and take risk on PPO is also fairly differentiated it's something that actually drove a little bit of upside in the quarter in terms of the membership pull through it because there are some attribution.
The processes that go along with taking PPA risk.
Yes, the majority of our health plan, Steve and I have never done full risk contracting before we contracted with them.
Those are obviously regional payers some are relatively new to Medicare advantage.
So our ability to do that our ability to.
Take full risk on PPO products in many parts of the country.
We're the only one doing that period and so for the nationals for the regionals I think the partnership is working well.
And for them I think we can go to the next question.
Okay Perfect. Our next question comes from the line of Brian <unk> with Jefferies. Brian . Your line is now open.
Thank you so you've actually got tashi filling in for Brian . Thanks for taking my question.
Just curious as you approach providers for partnerships can you just clarify the incentive structure there specifically on the gain share component.
Sorry, you broke up what was.
On the gain share asking about.
The incentives for our partners, particularly on the gain share you mean on like surplus sharing.
Talk about the <unk>, yes.
Yes, you Didnt catch up no question.
I think we got it I think we yes, let me let me tell you how it works so.
We enter a new market, we talked about four states today that we've entered we've got a partner in each one of these markets. We entered into an exclusive 20 year joint venture with them. We take all of the downside we bring the people the process the capital to the table. They bring all of the local know how the investment.
They've made.
Patients.
Physicians facilities et cetera, and we put that together.
And create a partnership that's focused on Medicare advantage and focused on moving to full risk and we do that in a 12 month implementation.
And just asked about some of the airlines, sometimes it's even longer than that.
That implementation is done so that when we hit day one year. One we're really set we've got an excellent baseline from a cost perspective and from a revenue perspective, as we talked about in our prepared remarks, who really understand who those complex patients are that need even more services and we're able to wrap.
<unk> them with the care team and the incentives.
The surplus is split 50 50 on the upside so when we talked about investing $80 million back into these communities year to date, that's really a reflection of the surplus that's generated by being able to manage cost and take out waste and then that less local expenses that 50.
Percent going to those.
To those partners so thats how the.
The incentive structure works.
Great. Thanks for the color.
Sure. Thank you. Thank you. Thank you. Thank you for your question. Our next question comes from the line of.
With SBB Securities.
Your line is now open.
Hey, Thanks. Good afternoon, you guys have talked around this a little bit but is there any way to excuse me to potentially quantify how much of the member growth annually comes from agents and as this you are tracking higher than normal.
And are there any really big differences in the conversion ratio on the Ma.
And TCE.
So in.
In the quarter, we were 13% same geography growth that's a combination of those age ins.
And organic growth those are electing and then physicians joining that physician component continues to grow.
In the quarter. It was just under half came from physicians that are joining so thats a very strong.
Component within it the split on <unk> versus fee for service.
I'm going to guess, it's 80% or more agents.
We can work offline with and get you more on that but I'm guessing that's about what it is of the.
Same geography.
I guess, they just put a finer point on the 13% same geography growth that we reported about 60% of that in the first half of this year was organic which is asians or fee for service conversion done the majority of that would've been Asians I don't know the exact percentage break on that part of it but yes.
Do you feel like you are seeing.
Conversion of agents this year versus normal years and I'm. Just wondering if this is a function of.
Any internal initiatives or just the way the year sort of landing.
So I think we're seeing what what drove the outsized performance on membership growth in the quarter was a faster pull through with our health plan partners around on PPO products. In this attribution work that we do with them that is a function of working more closely with them.
I'm getting that that logic agreed to in accelerating the touch points with those patients as an example, a health plan might require you to have a patient verbally verify.
That this is their primary care physician.
Before that attribution becomes effective and so I think that we are seeing more senior patients choose at a at a faster rate I think it's a function of execution I also think it's a function of that.
Their primary care physicians really seen incredible value and comfort within this so I think it's a combination of those two and just sorry, not to belabor, but nearly all of the incremental.
Membership that we saw versus our guidance in the quarter and for balance of the year.
Vast majority of that is coming from either agents or incremental members in those year, one markets, which are also because they are in their first year are lower medical margin <unk> as well, so thats kind of what caused the delusion and it's one of the reasons why.
In the second quarter, we can we can raise our revenue by about 27 million, but don't anticipate that there'll be a huge incremental medical margin driven by those members now ultimately there will be we'd love to get those members on the platform because it means obviously there is a ton of embedded margin there for us to get as those members mature on the platform, but initially in that in that first six months in the second half of the year as they come.
And there will be.
Pretty low medical margin contribution.
Okay. Thanks, I'll hop back in the queue, we got a pretty busy night. Thanks guys.
Sure.
Thank you for your question. Our next question comes from the line of Kevin Fischbeck with Bank of America. Kevin. Your line is now open.
This is.
Kevin going back to that gain share discussion other medical.
Came in higher than we were modeling at least.
And if you divide other medical expense and live geography divided by medical margin year to date, you get about 54%.
Which is more than the 50%. So is that just timing throughout the year, how should we think about what's in that line and how exactly we should be modeling.
Yes, other medical expenses has two components to a part of it is the partner sharing and part of it is the actual other medical expenses, which the primary portion of that is another incentive that we pay to physicians, which are incentives we pay for their completion of annual wellness visits. So those are kind of the two components of those.
<unk>.
Which is one of the reasons why.
Over the.
Partners sharing part itself is not 50% of medical margin because it's what we're sharing is actually the market level profitability not the market level medical margin, but the reason that starts to approach 50% overall as other medical expenses that are also deducted, which.
Other medical expenses not partners sharing which are again the largest part of that is going to be AWP incentives.
And there can be some fluctuation quarter to quarter. Some of it is dependent on market by market.
For instance, just that part of the broader other medical expenses that is not partner sharing a part of that is for instance, that's AWP expenses that can be accelerated earlier in the year for completing those more quickly obviously that would be a good thing if we get them done earlier in the year, but that's kind of how that works.
Okay got it.
And then some other point as there was some discussion quarter.
Okay.
Kate.
Okay David investigation.
But you no longer own, but just curious if you could comment on that.
California.
Okay.
<unk>.
I think he is talking about.
I think he is talking about the.
California.
Yes.
No.
We've been out of California for.
A couple of years now.
I think he was really a strategy decision.
That said a delegated model state Kevin.
In which to basically be able to pass risk you have to have in MF. So the group's pay the claims they do the they do a lot of the customer service around that very different from what we do in other places and so the logic was really focus on the partner business in.
That's what most of the country it looks like much more PPO products in other places so.
That's kind of logic around that.
Within the Medicaid business that was a part of what we had there in California.
And I think that's that's progressing.
In terms of where we're at right now and you can of course read our SEC filings. There is information about the divestiture. It does reference some noncompliance issues that we're actually self disclose by agile on those predominantly predated agile into ownership.
You can read about that in our filings.
The penalties that were paid by some of the health plans for relatively immaterial, but encourage you to read our SEC filings on that.
Thanks.
Thank you for your question. Our next question comes from the line of Ryan Daniels with William Blair Bryan. Your line is now open.
Hey, guys. This is Jackson on for Ryan Daniel Thank you for taking my question and congrats on the solid quarter.
Wanted to just touch on the conversations you're having with clients and specifically other health systems.
Curious, how that's progressed during more volatile market.
Especially as it relates to main help are you still continuing to see an uptick in conversation with health systems.
And if so do you see that kind of stemming from the Maine health partnership announcement or is it more just from the overall thematic trend from the shift from fee for service to value based care.
Is it a little of both just kind of curious if you have any comments on that.
Yes.
I think health systems are a tremendous opportunity for us I think that we're seeing pretty robust conversations with a number of health systems.
I do think that the main health announcement certainly helps that.
There is also a series of health systems within existing geographies, where we've got a partner that.
There is some dialogue so I think that.
Health systems face allow the same challenges in terms of Medicare I think they face the same challenges in terms of primary care.
In terms of what it's costing to subsidize those primary care physicians and how they really integrate them and I think increasingly they are realizing the value that they have within that and the opportunity for this new primary care model. So it's it's a tremendous opportunity for us we've got a number of conversations going.
On that the last thing I'll say is these tend to take longer just given the size and the complexity of these health systems and the number of stakeholders that are involved but we're encouraged.
Great understood. Thank you and just as a really quick follow up regarding guidance. So just given third quarter guidance and then calculate calculating out the implied fourth quarter guidance.
It appears as though like revenue will be flat to just slightly up in the fourth quarter.
Am I thinking of this correctly and is there any additional information that you might have on how we should kind of think of the revenue cadence during the during the remainder of the year.
That is a good question I don't think it's flat in the fourth quarter.
Normally what you would expect in our seasonality is for.
Revenue is not to grow much during the year and part of what's going on there is just the seasonality of the business I thought you meant flat versus prior year I think it is not flat versus prior year in the fourth quarter, you mean flat quarter to quarter.
Sorry, yes sequentially sorry.
Yes, yes, no that's yes, that's exactly what sorry, I always misinterpreting it.
Definitely not going to be flat year over year.
Yes, that's typically what's going to happen as we move through the year and we will pick up more members, but our revenue <unk>, we will start to decline a bit as well and the reason for that is I think what Matt was just about to say is as we lose the older members of our platform.
The trade off the platform as we move through the year. There was a higher revenue <unk> members and the new members that come on which as we've talked about before are primarily agents have very low revenue <unk> part of the fact that is driven by partly by the fact that when the agent. They have we have kind of a default very low RAF score that goes against there that goes against there each of those members. So.
We would expect that revenue <unk> kind of decline a bit as you move through the year now that's offset total revenue dollars now were helped out by the fact that we're also increasing members, but the two of those can either can result in either.
Net revenue number saying from Q3 to Q4 relatively constant dollars or maybe even dropping a little bit in Q4.
Okay perfect. Thank you I appreciate that.
And by the way just because everybody didn't pick up on the other factor that will affect obviously second quarter revenue our second half sorry revenue <unk> as we will see the second half of the re institution of the sequester as well so had about a 1% impact on Q2, but it will have a two 2% impact for the back half of the year.
Perfect. Our next question comes from the line of Gary Taylor with Cowen Gary.
Hi, good afternoon, good evening guys.
Few questions I, just want to come back to you just on TCE.
If CMS was.
Implying a 10% for 'twenty two versus 20, 179% now so there.
Low twos fee.
For service cost growth that actually seems.
Awfully low in terms of how I'd imagine the year plays out but the CMS will they look at this every quarter do you have any visibility on when the next retro.
Yes.
Yes, so Gary a couple of things one is that does seem low in I think.
They do it and update in May we'll do another one later this month and then another one in in November so not every quarter, but three times a year.
We look at kind of all the overall trends.
From the data, we have and so we kind of make our own estimate of how we think that will work over the full year.
We'll get another update in August , but it does feel like the seven 9% adjustment is probably high and may be driven by just.
What the essentially what the first quarter looked like and that may not hold or probably won't hold through the whole year. So thats a good call out on that one.
Got you and then just going to the prayer.
Developments, a little bit obviously negative is that wood preferred C. You mentioned, a few items related to its actually.
Fairly small as a percent of yes last year's medical claims, maybe 70 basis points or so, but since you're right around breakeven EBITDA actually big relative to.
The EBITDA. So just trying to think about the guidance you have for the third quarter.
On EBIT.
I would imagine at this point in the year you are not anticipating that.
That there is any development weighing on that number.
Is that fair, yes, I mean by this morning by this point in the year. The the run out of prior year is getting pretty close to complete its not 100%, but it's pretty close to that thats right. I mean, if we're going to take.
Prior period negative development from 2021, the obviously the vast majority of that would have already been recognized and seen through Q2.
And how do we think about this quarter, where you had guided toward the midpoint $5 5 million of EBITDA, you did seven and a half that you absorbed $8 million negative development.
In the quarter it would imply.
Current year results well ahead of guidance unless.
<unk>.
Anticipating there'd still be development based on one key trends, but.
Is there any any new line I want me to.
Clearly not the latter yes, clearly not the latter in terms of anticipating it but.
Terms of the former probably two big drivers one is the underlying performance of both our partner markets that have been out there for more than one year as well as better than expected performance in our tier one markets as Steve talked about that underlying performance was.
Was definitely better than what we had forecast and that helped to offset it but the second thing was for the overall EBITDA number that you are pointing to where we delivered about.
$1 million in <unk> better than the high end of our guidance.
Direct contracting definitely performed better than we than we had expected in the quarter. So that helped to contribute to that number as well.
Yes, Gary.
Step back and look at this combined business that we are running across Medicare advantage and direct contracting year over year membership is up 50% and even including the prior period you talked about in the dilution from the above forecasted growth for growing our med margin <unk>, 8%.
That is super encouraging for us and it's really these year to plus markets.
Executing really well and starting to see the benefit across MAA and DCE and Youll see it in the year to membership for direct contracting as well. So there is something to this execution to the scale to the consistency and leveraging the investments that we're making that's running through.
Through our performance, which we're really encouraged about.
Thanks.
Okay.
For your question. Our next question comes from the line of George Hill with Deutsche Bank. Your line is now open.
Yes, good evening, guys and thanks for taking the question, Steve I wanted to zoom out for a second just kind of two big picture questions number one is with the entrance of Minneapolis, St. Paul I'm trying to find my best view of your kind of service method. It looks like this is the biggest market from like an MSA density.
Perspective that you guys are going to enter so I guess I would ask about like what should we be reading into you guys moving into more dense urban settings, and then number two I'd ask you about comments on.
Got it.
The competition for members in market.
And.
As an organization that I would I would assume that you guys compete with in Western Pennsylvania.
Like an amalgam of health systems.
Trying to do with agile on does it seems to be wanting to be aggressive in its marketing.
For members and market. So I guess I would ask about like talk to me about the battle for new members and new agents in market and what you guys can do to arm youll provider organizations as they try to attract new beneficiaries.
Yes.
I really appreciate the question George just first point Detroit would be the largest.
Say that we're in Minneapolis is clearly right up there.
So to US we are moving into these areas, we tend to do it with large groups at scale that have great reputations.
And we're first there and so in Minneapolis I was there last week all of the payers are excited about this as a mix of nationals and of locals.
And it's.
We're encouraged by what's there that's also a market in which.
Like I said, there is two large health systems, but theres a number of independents that I think are really excited about this and so this idea about the value that each primary care physician.
Can provide.
And the benefit that they can see in their practice and the investment back in the community is really resonating and so the best way that we compete there is we continue to perform and we can attract new primary care physicians because they can see the results that they are peers are joining.
I wrote a note out to our partners just about different announcements out in the space and it's a great time to be a primary care physician and it's really it's a sense of urgency that we all have to have to really perform because there is increased competition once you're in a market. We think we've got a lead.
We think we're first we think we're coming in at scale and it's going to give us that performance benefit but people do have choices and the best selling pitch. We've got is the results that they are peers are enjoying that they can get by coming on the platform.
Yeah.
Okay.
I appreciate that thank you.
I, Thank you for joining us.
Another call starting.
Operator, I think we're ready to go ahead and end the call.
Okay sounds good. This concludes today's conference call. Thank you for your participation you may now disconnect your lines.