Q2 2022 Oak Street Health Inc Earnings Call
[music].
Good morning, everybody and welcome to todays Ice Street House Cheeky 2022 earnings Conference call. My name is drew and I'll be coordinating your quotes day, if he would like to ask a question. During the presentation. You may do say by pressing star followed by one on your telephone keypad. If you change your mind. Please.
Press Star followed by Chi we do ask that you. Please just ask one question and one follow up I'm now going to hand over to Sarah Clark head of Investor Relations to begin. Please go ahead.
Good morning, and thank you for joining us today with me today are Mike <unk>, Chief Executive Officer, and Tim Cook Chief Financial Officer. Please be advised that today's conference call is being recorded and that the Oak Street Health press release webcast link any other related materials are available on the Investor Relations section of Oak Street Health website.
Today's statements are made as of August 3rd reflect management's view and expectation at this time and are subject to various risks uncertainties and assumptions.
In addition to historical information certain statements made during today's call are forward looking statements.
Please refer to our 2021 annual report on Form 10-K, and other periodic reports filed with the Securities and Exchange Commission, where you will see a discussion of certain risks uncertainties and other important factors that could cause the company's actual results to differ materially from these statements.
Certain statements made during this call include non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute or superior to measures of financial performance prepared in accordance with GAAP. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP.
Measures.
With that I'll turn the call over to our CEO Mike <unk>.
Yeah.
Thank you Sir Thank you everyone for joining us this morning.
Joining me on today's call. In addition to Sir Tim Cook, Our Chief Financial Officer.
I want to first thank our team for the impact they make every day for our patients.
While daily by the stories of our team members literally saving Accubation wise.
We continue to be pleased to outperform in 2022 with Q2 performance above the top end of guidance range for revenue and adjusted EBITDA.
It remains a difficult operating environment health care more broadly and testament to our team that we're able to continue to drive strong results.
A key enabler of our success at Oak Street Health, It's all the components of our model reinforce each other creative platform, where the whole is much greater than the sum of the parts for.
For example, our unmatched patient experience enables our BDC patient acquisition model.
In other words patients join Oak Street, because you often a concierge level patient experiencing no additional cost.
We were able to offer a differentiate patient experience because of the investment we make in a patient's care, giving patients more time easier access for their care teams, while providing support navigating the health care system more broadly.
We're able to make this investment in primary care, because our care model keeps patients healthier significantly improving health outcomes and lowering metal costs, leading to savings, which routine for our value based contracts.
We're able to execute our care model because our focus de Novo go to market approach, which enables us to consistently run our model, especially on specializing in older adults with operation staffing custom build technology to meet our patient needs.
And we were able to successfully execute our global go to market approach because our consumer focused average model allow us to add patients without having to rely on buying or partnering with existing physician groups.
Okay.
The reinforcement nature of our model provides a barrier to entry and a durable competitive advantage.
Primary characterize we're not able to provide a differentiated care model patient experience. We do at Oak Street. These are operating up and undifferentiated and less effective fee for service chassis.
The components of our model also form the basis of our focus at Oak Street.
As we've discussed previously we have four key objectives and Oak Street as we execute on our mission to rebuild help me here.
As I, we actually our ambition to rebuild healthcare and should be.
First provide the best here anywhere.
Delivering unmatched patient experience.
Third grow the number of patients with third and fourth would be the best place to work in health care.
As proud of we are as we are of our success to date. We also know that continued improvement all of these dimensions.
As we continue to invest in our model will further our differentiation compared to traditional primary care and improve our standalone economics.
While COVID-19 is obviously still with us over the last quarter is continuing to recede from the dominant challenge to navigate to persistent but manageable part of our everyday brokerage.
This is allowed us to continue to focus on executing on all of our objectives.
Prior to the pandemic, we had a consistent track record of improving our performance against all of our objectives, which led to a corresponding improvement in our unit economics were excited the data stretch where our focus is consistently on the drivers of our long term success as opposed to dealing with the day to day changes in our operating environment caused by the onset of the pandemic.
We're optimistic we'll be able to retain the focus on the drivers of our impact centre economics going forward.
The operating environment Q2 remained challenging across a number of dimensions.
It is a very challenging labor market.
To navigate this environment and our center opening plans remain on track we are now expected to be impacted by labor shortages.
We are pleased with our performance in both the first half of the overall and in the second quarter, particularly in the second quarter, we generated record revenue of $523 7 million in the quarter exceeding the high end of our guidance range.
Our revenue growth continues to be driven by our organic BDC marketing approach.
Medical claims expense trended in line with our expectations in the second quarter. Additionally, prior periods of developed favorably also contributed to Q2 EBITDA cost of care, which includes care team labor marketing and corporate costs were all in line with expectations.
These factors all contribute to an adjusted EBIT loss of $53 1 million for the quarter, which is $9 4 million favorable to the top end of our Q2 guidance.
We achieved these results despite continued headwinds from direct costs from Covid hospitalization and a negative retrospective trend adjustment by CMS to our direct contracting revenue. We believe this speaks to the effectiveness of our care model and driving improved patient outcomes and thereby significantly lowering third party milk cost for our patients.
Tim will cover the specifics around our model across another turn shortly.
Our performance in the first half there continues to be in line with the projected center ramps for 2022 by cohort we shared earlier this year as.
As a reminder, our guidance. This year is based on same level performance within that range performing favorably to our guidance for the first half of the year means we are achieving the same level performance we set out.
Continuing performing along the center ramps going forward will create an outstanding finish returning the capital invested in New Center development.
We are pleased with our performance in the first half of the year and what it means for our center level results. We are optimistic about the investments youre, making to improve our platform and excited to continue on our journey to transform health care.
With that I'll turn it over to Tim to cover some more of the details regarding our financial performance in the second quarter.
Thank you, Mike and good morning.
As Mike shared we were pleased with our second quarter as we delivered results above the high end of the guidance for at risk patients revenue and adjusted EBITDA and.
In terms of membership are at risk patient base. The key driver of our financial performance grew.
<unk> grew by 51% to 134000 patients driven by our <unk> marketing model and growth in the number of our centers.
At the end of the first quarter, we operated 144 centers and increase of 49 centers are 51% versus the 95 centers. We operated at the end of the second quarter of 2021.
<unk> revenue of $516 $1 million grew 49% year over year, driven by growth in our at risk patient base.
<unk> revenue in the second quarter of 2022 included a $3 $7 million reduction related to prior periods due to the retrospective tread adjustments made by CMS as part of the direct contracting program, which were partially offset by favorable developments in Medicare advantage.
Adjusting for prior period.
<unk> in 2022 and 2021 Cabot.
<unk> revenue grew 56% year over year in the second quarter.
Total revenue grew 48% year over year to $523 7 million.
Adjusting for prior period changes total revenue grew 56% year over year in the second quarter.
Our medical claims expense for the second quarter 2022 of $391 $6 million.
Representing growth of 39% compared to the second quarter of 2021.
Medical claims expense in the second quarter of 2022 was lower by $10 $9 million related to a reduction in prior period medical claims expense as the costs for Q1 2022 have developed more favorably than our expectations.
When adjusting for prior period changes in 2022, and 2021 medical claims expense grew 53% year over year in the second quarter 200 basis points slower than our comparable <unk> revenue growth.
Covid continues to impact our medical costs, we estimate that COVID-19 represented $18 million and year to date medical claims expense.
For new patient economics, we continue to see risk scores that are more consistent with historical periods, albeit not at pre pandemic levels.
We'll have a more complete sets of these risk scores when we received a mid year update later this quarter.
At this point, new patient medical costs appear better than 2021 levels, but also done a pre pandemic levels.
Given our performance to date the impact of both Covid costs and new patient economics are consistent with our expectations included.
And our full year guidance.
Our cost of care, excluding depreciation and amortization was $98 9 million for the second quarter, an increase of 48% versus the prior year driven by growth in the number of centers. We operate a number of team members supporting our significantly larger patient base.
Sales and marketing expense was $42 $6 million during the second quarter, representing an increase of 65% year over year as we continue to invest in this area to support patient growth and much larger footprint of centers.
Corporate general and administrative expense was $94 9 million in the second quarter, an increase of 28% year over year.
Excluding stock based compensation, which is partially insulated due to the treatment of our pre IPO management equity plan corporate general and administrative expense.
Grew 38% year over year.
The majority of this year over year increases related to an increase in head count to support our growth.
When factoring in the prior period changes in revenue, we improved our corporate general and administrative expense excluding stock based compensation as a percent of total revenue by approximately 110 basis points in Q2 2022 compared to Q2 2021, continuing our expected trend of declining corporate costs as a percent of revenue.
I will now discuss three non-GAAP financial metrics that we find useful in evaluating our financial performance.
Patient contribution, which we define as catheter is revenue less medical claims expense grew.
<unk> grew 91% year over year to $124 5 million during the second quarter.
Excluding the impact of prior period revenue and medical cost patient contribution grew approximately 71% year over year.
Platform contribution, which we define as total revenue less the sum of medical claims expense and cost of care, excluding depreciation and amortization and stock based compensation was $34 1 million, an increase of 580% year over year.
Excluding the impact of prior period revenue and medical cost platform contribution grew approximately 230% year over year.
As an individual center matures, we would expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers as well as improving our per patient economics overtime.
Adjusted EBITDA, which we calculate by adding depreciation and amortization transaction and operating related costs.
One time litigation costs and stock based compensation, but excluding other income to net loss was a loss of $53 1 million in the second quarter of 2022 compared to a loss of $53 $5 million in the second quarter of 2021.
Adjusted EBITDA benefited from the net prior period favorability in the quarter due to favorable development on Q1 medical costs.
We finished the second quarter with significant liquidity in the business in line with our internal expectations.
As of June 30, we held approximately $550 million in unrestricted cash and marketable securities.
For the six months ended June 30 cash used by operating activities was $179 million.
While our capital expenditures were $40 million, both of which are in line with our expectations.
We expect over the course of the year that our adjusted EBITDA loss will approximate our uses of operating cash flow.
All those figures diverged in the first half of the year due to working capital seasonality, we expect them to converge over the second half of the year.
Moving on to our 2022 financial outlook.
We are increasing our full year guidance for at risk patients in total revenue.
We now expect year end at risk patients in the range of 155000 to 158500 patients.
On a total year the full year total revenue range of $2 <unk> 5 billion to $2 45 billion.
We are reiterating our full year 2022 guidance for centers and adjusted EBITDA.
While we are encouraged by our year to date performance I'd highlight two factors impacting our adjusted EBITDA.
The first is COVID-19, which remains at uncertainty, particularly in light of the keys surges and the resulting medical cost experienced in Q4 of 2020 in Q4 2021.
In the most recent rising cases.
The second factor is a retrospective trade adjustment related to direct contracting mentioned earlier that negatively impacted revenue for year to date 2022.
We assume this adjustment, which reduced direct contracting revenue for all participants by approximately seven 5%.
Entirely through.
Two our adjusted EBITDA will continue for the remainder of the year.
To provide more context.
Set direct contracting <unk> rates for Q1 2022 based upon an estimated cost trend for direct contracting eligible patients.
And may CMS revised those <unk> rates based upon actual cost trend from Q1 2019 compared to Q1 2022.
The actual cost trend was significantly lower than the estimated cost trend, resulting in the reduction in the <unk> rates CMS pace.
This reduction was retroactively applied to January one 2022 for all direct contracting participants.
CMS will revise our calculation each quarter and the actual cost trend varies meaningfully from the estimated cost trend CMS will adjust rates higher or lower as appropriate.
Thus as I said, while we are pleased with our first half results medical cost development in particular, we have reiterated our adjusted EBITDA range of prudent in light of these exogenous uncertainties.
For the third quarter of 2022, we are forecasting revenue in a range of $535 to $540 million and an adjusted EBITDA loss of $90 to $95 million.
We anticipate having 158 to 159 centers.
And the at risk patient count of 143500 to 144500, including direct contracting patients at September 32022.
We remain optimistic about the momentum in the underlying trends we are seeing in the business.
And with that we will now open the call to questions operator.
Okay.
Thank you we will now start today's Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad now and if you change your mind. Please press star followed by Tim We ask that you. Please ask just one question and one follow up on Wednesday, and so ask your question. Please I'm sure you all fine as Amit said nicely. Our first question today comes from Lisa Gill from J P.
Mr. Your line is now open.
Alright, thanks, very much good morning, and thank you for all the detail.
I just wanted to go back to thinking about higher patient volume and the impact on revenue and EBITDA one of the things that stuck out to me is that you talked about the fact that risk scores are still not at pre pandemic levels, but while maintaining EBITDA and increasing revenue I'm just curious as to how those.
<unk> ability of those new patients look.
And then how much of this is being offset based on your comment around opex.
Yeah. Thanks for the question.
Yes, Tim said this is Mike.
So the names as Tim said.
We're between where we were in 2019, and where we were last year on new patient economics and so we're.
As we shared at the beginning of the year that was.
A key factor that we wanted to get more experience with as we saw how and if things return to normal from what was a pretty abnormally 2000 22021 from a patient economic perspective and so.
We're pleased to see them returning more than normal side.
And then from where they were before and feel comfortable at this level of economics.
And I think that again to your point.
<unk>.
Yeah.
With our business is always puts and takes around new patients and existing patients and different trends and so I think we were pleased with the performance in the first half of the year that without new patients coming in kind of the same over there between Nike. We are so ahead of the high end of our ranges on an EBITDA speaks to the overall performance of our care model across all of our patients.
And Mike as we think about the cost side you made the comment that you weren't having issues with hiring people for new facilities, but are you seeing an elevated.
Cost when we think about labor costs or even on the supply side as we've seen inflationary.
At cost across the board.
Gary One company that can call that out specifically I'm, just curious if youre seeing an impact there.
Yes.
Let's talk about a little bit of a very tight labor market and.
Labor is a relatively small portion of our total cost structure. So we spent a little over 10% of our revenue on our care team labor. So it's very different than the big hospital system or a home health company. One of those companies that are obviously north of 50%.
And so.
Selectively.
We'll revisit compensation for rolls.
We've always done that and what do you do that to.
To make sure that we're competitive in attracting great people to our team and retaining great people on our team.
Labor is a relatively small part of our.
Our cost structure, and we think any investments we make in our team will be able to offset with the kind of over performance. Other places there's nothing better than our mind, then investing in our team and are paying for those investments by keeping patients healthy and out of hospital.
Alright, thanks for the comments.
Our next question today comes from Brian Daniels. Your line is now open Ryan Im sorry, I apologize from William Blair. Your line is now open.
Yes, thanks for taking the questions, Mike maybe a big picture one for you just in regards to the M&A activity, we've seen in the space I'm curious if Walmart is a retail partner has amplified.
Prior to expand clinics and wanted to get an update from you about the performance of Europe , Walmart clinics, which have been in operation now.
Yes. Thanks for the question Ryan, we certainly see the same headlines.
From our perspective, one thing, we really love about our model in the market. One is it's just an absolutely massive market opportunity for us or trying to and we've talked about this before.
But we look at where we are successful today with the demographic of patients in the type of markets. We're thoughtful today and that creates a market opportunity of 30 million Medicare patients, which.
Which would require $10 incentives we have.
A fraction of that today so.
That means we can keep doing what we do over and over again without having to look for adjacencies or new opportunities and drive.
<unk> growth for a decade and beyond.
So again, we really feel like we are unfortunate, but having a very proven profitable model and huge growth trajectory.
As we talked about when we go into the partnership we were intrigued by the partnership with Walmart because we can run the same care model inside of Walmart sooner versus just inside.
And Oak Street.
St.
Enter.
And so we should be able to generate the same patient economics.
The other key driver of results rate, how many patients reserving and the reality is in most Walmart a huge percentage of people in the community putting older. Adults are are shopping at Walmart it tends to be a similar demographic to up to what we serve and so we thought that was a great way to kind of be in a convenient location and get to know a lot of people.
And then I would say the results are still still TBD on apparel I know, it's been around for a bit of time, but again the bar is not do they perform like an Oak Street Center right. We can we can open up as many opportunities as we want.
What the bar is are they performing simply better than an Oak Street Center.
Two.
Support.
Our partnership, which obviously always more complicated doing yourself and.
In hindsight it was.
Not an ideal time to try and Thats on a partnership op. If you remember we opened those centers up really in the height of the pandemic and.
People werent necessary excited about someone walking up to them when they walked into store and E.
Conversation with that Brian joined the minds with staying with Fiat and my bubble.
And so I think that we will still want to see the results play out a bit longer to from our perspective decided hey, if there's something that.
We will make a meaningful difference I still think the kind of the rationale behind it I think saw a lot of merit again, one of the key drivers is bringing in patients and we've seen over and over again the more people we need.
People can kind of show our centers to the more will join as patients. So I think that the.
The logic behind it still makes sense from our perspective, I think just seeing seen that logic actually play out in the results.
And so kind of TBD.
Okay. That's very helpful and then going into another partnership and maybe a broader question wanted to get an update on AARP and then more broadly just your marketing initiatives and kind of how you've <unk>.
Settled in on a digital versus community outreach model now that we've effectively returned to normalcy have you been able to balance the cadence of spending and.
What kind of returns you're seeing from the various media channels for customer acquisition. Thanks, guys.
Yes, Ryan Thanks for your question on that one we don't settle into a.
So everything all of the above approach on patient acquisition. The way, we think about it is how can we bring patients in under kind of our our cost per acquisition target and generate.
CAC to LTV ratio that generate wishes.
As we've shared before is kind of north of what you would see in most most kind of tack recurring revenue businesses. So we really love the return on the investment we're getting in our marketing.
So something like digital and Facebook and Google and those types of channels.
As long as we're continuing to generate leads below our bid numbers, which we have done we know that will bring on patients.
At a really strong cost per acquisition and we'll keep doing that right now at the same time.
As long as our field based teams are bringing in.
Minimal number of patients per kind of outreach executive on average right that will generate the cost of acquisition.
And we will continue to look to properties to optimize both of those channels right and to the extent we can.
<unk> productivity of our field team Bell just bring in more patients at a very similar cost wishing able to both improve our CAC, but also more importantly, improve improve our unit economics and the same thing on the central Jets and so.
So for us, it's not about kind of finding balance between the channels for us about kind of maximizing the number of patients within each channel.
Under under our Cat threshold.
And again I think there is opportunities to do both.
AARP, specifically I think AARP.
<unk>.
Enabler and I think will be a long term tailwind on both of those dimensions right. Because it is the most trusted brand for older adults. It is incredibly well known brand.
We've definitely identified one of our challenges is.
People are taught in life, if something is too good to be true then it is right and no. One has added a corollary something its going to be true that it is except for Oak Street health, which is actually real.
Ralph it's on quite as much and so our goal with AARP as too.
Have a partner that is very trusted that kind of.
<unk> works with Alkermes exclusive obviously national with Oak Street, and so we think that'll be a long term competitive advantage.
And to your point as we continue to ramp up more marketing channels.
As you to get more and more word out of what we do more and more people hear about ERP to more benefit we'll get from that brand.
Okay.
Our next question comes from Justin Lake from Wolfe Research. Your line is now open.
All right.
Thanks, Good morning wanted to follow up Tim on your comments around direct contracting just want to make sure I heard that right you said a 7.5% change.
Uh huh.
In cost trend in terms of what CMS reimbursing on first is that correct and then second <unk>.
Given the the economics I think you were saying were going to be breakeven give or take.
This year may be slightly profitable.
Does that do to the economics in your mind.
And from a margin perspective this year.
Yeah. Thanks, Justin So you didn't hear me correct that the change in revenue was seven 5% just to give you some more context, there coming into Q1 of this year CMS estimated that the total trend from 2019 to 2022 would be 16%.
Not annualized of course, just 16% while they calculated based upon Q1 expenditures.
And again, it's just one quarter's worth of data was only 7% and.
And it's not as simple as subtracting those you actually need the ratio of them and when you do that math you get to about seven 5% reduction.
We will see as the year rolls on whether or not Q1 was indicative of the full year medical cost set another way Q1 costs may have been lower for a variety of reasons, which impacted that calculus for Q1, but as we see claims out of <unk> in Q2, and Q3, we will see how those how that does or does not change.
<unk>.
The retrospective adjustment.
On the impact to our patient base.
The good news theoretically as if youre getting paid less on a revenue perspective that should mean your costs are lower and.
And we did see as you can tell from our are released in Q1, we did see some benefit both in the MA book and direct contracting book for medical costs, and we still run a good marginal as patients. So they are not they are our direct contracting patients are better than breakeven.
So we do generate economics more consistent with our MA book and are different than other participants, but just us again.
A difference in our approach to caring for patients and I think the others have so.
It doesn't.
It obviously impacts our expectations on a full year economics, we will see how cost trend for.
Direct contracting patients in all of our patients frankly for the remainder of the year and that will be obviously, a key driver in where we end up in the range.
Okay.
Okay, and just to be clear in the first quarter, even with that 75% reduction in you are saying that given what you know about claims you were still.
Slightly profitable on those members.
Yes, Justin.
Slightly I mean, our direct contracting performance as we've shared before pretty consistent with our MA performance. So.
Yes, obviously, we have a seven 5% reduction in what you've got revenue is going to be that that does impact the profitability of those pinpoint.
At least for Q1 better costs are coming in favorably as well, which helps offset it.
Assuming that favorably continues into Q2.
That cost perspective, obviously, we hope we hope it does.
And so again I think I would reiterate.
Sure.
Again.
Profitable for us.
And it wasn't just slightly profit I think.
Others, others less.
Success in the program, we have seen similar levels of profitability that may in the program.
And so even with this revenue reduction if it continues throughout the year we.
We feel we feel good about our participation in the program.
And I think I wonder if it's inside I mean.
Medicare saw much lower trend than they expected Q1 over Q1.
Assuming that continues we extend it.
Doesn't continue right. They may revise it retrospectively every quarter right. So if so.
There are still three quarters left.
More data so I want to make sure that that's clear that we feel like we are.
Managing it appropriately but.
I wanted to play out.
Okay.
Our next question comes from Jamie Pass from Goldman Sachs Go ahead, Jamie.
Hey, good morning, guys I wanted to spend a minute just on the guidance.
Your range this year.
<unk> is built around two key variables COVID-19 trends and the new patient economics can you give us a sense of where you are in the range for those two variables and what youre assuming in the updated guidance.
For the second half.
Yes so.
Jamie for Covid costs as I mentioned, we were this is Tim. Thanks for the question, we were $80 million year to date.
Last year, our total corporate costs were roughly about $40 million.
Better to think about the <unk> basis last year.
It was about.
$40 <unk> million number of months.
This year.
We've disclosed number months, but.
We're talking.
It's much lower obviously, just given where if.
If you take it ratably now that we've grown a patient's care of it. So we are seeing lower COVID-19 costs. All in that being said if you remember from our guidance. We had the low end of our guidance was consistent with 2021 performance, which we have been the $40 <unk> high end was sort of halfway between 2021 and 2019, so call. It $20 <unk>. So we're trending in the range of that on Covid.
On new patient economics.
I would say its pretty comparable on the Covid side, obviously unrelated, but just from a general direction perspective.
In line with the.
The mid point.
As you can tell give our performance thus far right mid mid point, the upper mid to the upper half of our range.
Okay.
Okay.
And in the second quarter you guys.
Internal EBITDA expectations adjusting for some of the out of period changes.
Hugh you mentioned that MLR is were in line with expectations. So thankful that became crowded.
Items further down the P&L can you just give us a sense of where that occurred if it's sustainable.
Leverage some of our faster than expected or if it was more about timing.
Sure. So there was there were obviously was the benefit of the Q1 medical costs into Q2 in line with our expectations to your point.
The incremental benefit above and beyond that is just <unk>.
Conservatism within our cost forecast it so.
Biggest late and the biggest cost we have is labor.
And.
And this market is obviously it can be again.
As we discussed we're not immune to the labor challenges.
We are more than sufficiently staffed in our business, but we probably havent ramped hiring as much as we otherwise would've normally youre just given the competitive dynamics of the marketplace and there's probably a little bit of tailwind there frankly, not not tremendous but some benefit there and then timing of new centers is obviously an impact that so.
Just really a combination of those two dynamics.
Our next question comes from Gary Taylor from Cowen. Your line is now like to Gary.
Hey, Good morning, just wanted to go back to direct contracting for a second make sure I understand everything if we take the.
Three point.
$7 million I think you said.
Divide that by seven 5%, it's like $49 million. So did you say that was.
It implies like $49 million of revenue would you say this way all the way back to the.
Beginning of direct contracting back in April 'twenty, one with a trailing 12.
Adjustment impacted this quarter.
Hey, Gary it's Tim two things of that no. It goes back to January one of this year. So they will they will revise it in may for Q1, but we will get another notice here at some point late in August that will well if to the extent that they're updated math suggests that there is a further deviation. They will also revise it.
All the way back to January one so this is.
<unk> is a bit different in MA set rates or the rate notice those rates are set in stone for the following year there was a similar <unk>.
Ponant, our dynamic with indirect contact where they do that but then during the course of the year. They retrospectively look back and assess that.
That rate, which is not ideal from our perspective and create the volatility we're talking about but that's just the realities of the program.
On the $3 7 million remember that is the out of period component, so that would be one quarter, but.
I think youre thinking about roughly correct. There was there was some offset from our EMEA book. So the actual impact was probably a little bit larger that under a contracting but from a net basis youre thinking about it correct.
Okay.
When do you reconcile that.
But first full year of direct.
Contracting in.
I think thats in the <unk>, but I just wanted to understand when.
Youre carrying both receivables and payables related threat contracting. So my thought is when you reconcile both of those.
Dollar amounts come down so I just wanted to maybe sort of frontline for the street, a little bit how that might look like so people aren't surprised or confused when we see that <unk> balance sheet.
Sure.
So Gary we will settle in 2021 in Q3 of this year than we have already received.
The final statement for the 2021 readout.
And cash get settled in Q3 so.
Our working capital follows cash settlement and to your point. So in Q3, we would expect the receivables related to 2021 direct contracting and the payables on the medical cost side to both released from the balance sheet.
Obviously, the net margins the difference and then what the incremental accrual for Q3 right. As you would expect but there will be there will be an impact because youre, releasing nine months and youre accruing, one or excuse me nine months and accruing an incremental three for Q3.
Our next question comes from Jessica <unk> from Piper Sandler Your line is now open.
Thanks, So much for taking my question. So I was just hoping to follow up on two things first off on on marketing.
Can you just discuss kind of the extent to which BDC marketing it's recovered.
We're events.
<unk> signed pre pandemic and just to what extent have.
The cadence of those events recover at each of your centers.
Okay.
Yes. Thanks for the question, Yes, we are.
Still between where we were last year and where we were in 2018 as far as the number of events presenters, but we keep we keep ramping that up so again, our all of our marketing related or the Baxter b to C. So we don't think about our central channels such as.
Digital marketing and kind of more traditional marketing approaches and that.
Is ongoing and something that we have.
Having had increasing success with since the pandemic and related to develop those capabilities and then obviously of our kind of more traditional community based average model.
We're again, we're ramping up the activities.
In the community, but we were really clicking on all cylinders in 2019, and a lot of relationships took years to develop.
And the reality is for a lot of groups that host seniors. They stopped doing in 2020 during 2021, some senior living facilities, having hired back there.
Is that coordinator that they had prior so theres a lot of changes to work through and then we hire those people back we need to go format relationship and educate the group about Oak Street, and then get access in and around events and so.
Again, we feel like moving the right direction.
We're still optimistic that we'll get the pediatric Baxter off in 2019 over time, but it is never going to be a step function up because it really is about kind of every center and every team member.
<unk> relationship rebuilding relationships getting the event set up and then once you have events. It up you meet people. It takes multiple interactions generally someone to schedule a visit and then.
A month after the visit the high flow through to our at risk membership. So again, it's about building the pipelines.
And kind of keep taking incremental steps forward, which again, we we're guardedly optimistic about and we're kind of performing from an average perspective.
Where we expect it to coming into the year, but I think we still feel theres a lot of upside from where we're performing today, we got it we got to execute to get that upside it won't happen overnight.
Got it that's helpful. Thank you and then just on direct contracting do you guys feel like you're effectively kind of confined with certain medical cost ratio just due to the quarterly reconciliation.
Got it and then is there anything about ACL reach that would make that program more attractive.
We have more more margin or margin potential.
Relative to direct contracting thanks again.
Okay.
Sure sure.
Jessica.
Let's turn around myself not to colliers thereafter, I'm not unless they Jessica so I apologize if I'm looking at there again, so the associated sorry, Jessica it's Tim.
On the MLR front for direct contracting patients.
No I would say that the way that revenue is reset is based upon overall cost trend that broader market.
And we hope given or are we expect given the strength of our platform that we should be able to manage trend better.
Better than the overall market. So we should still be able to expand margins in there I mean, obviously theres going to be an impact to profitability, but we still feel as though we can manage these patients too.
A better MLR than the market at large so that would be that would be one on.
On that component and sorry can you just just ask your second question again.
Oh, sorry.
Reach and the dynamics there.
Yes. The simple answer is we believe that the changes as part of the Acs reach will be neutral or favorable to oaktree.
There's a lot to learn about changes will make to the risk score cap and a few other dynamics from what we do know.
Which the changes to the discount applied to the program in the outer years as favorable previously that discount would go to 5% over time now.
Now it will.
I think cap out at three 5%, so thats favorable relative to where it was before.
I believe there may have been some adjustments to the quality withhold.
That being said so those are net positive.
We will see what changes if any happened on the on their risk or cap and how that may or may not impact us. So.
A lot to learn those changes or they could come in I want to say 2024 and 2035. So we've got we've got some time before they're a reality one and then two.
We will we just need to see some more information before we can better assess what the impacts going to be to our business.
Our next question comes from Elizabeth Anderson from Evercore Capital. Your line is now open.
Hi, guys. Thanks, so much for the question.
Wondering if you could talk about some of the drivers and cost of care, obviously, that's come in a little bit better than our expectations. So far this year, but.
Guidance for the back half of the year has a bit of a step up I mean I know your patients are ramping you are opening more centers.
Could talk about the puts and takes on that line that would be super helpful.
Yes, I mean cost of care is honestly pretty pretty straightforward from a budgeting and projections perspective from us.
When we opened a center we have a standard staffing that a new centre has and.
As a center ramps patients between a brand New center with no patients all the way to a center.
That is full we have a standard ramp up when we add certainty members right. So you add your youre accessing care team at a certain time in your third care team year fourth guarantee based on patients.
So really the two drivers of our direct cost of care is one.
Rent and kind of everything associated center outside of labor and labor and we add labor it.
At the same ratio across all of our centers and so.
Those those ratios.
Kind of how we hired really hasn't changed from the first after the second half of the year. So.
So to the extent, we're growing faster, we'll add care team members asked it but obviously that's a good thing for the business overall.
The opposite is true and we're really doing a center level now at a company level.
Got it that makes sense. Thank you.
Okay.
Our next question comes from Michael <unk> from Morgan Stanley . Your line is now open.
Hi, Michael Ha.
But thanks for the question just wanted to revisit Gary just a question on cash flow and working cap and Akshay mentioned networking caps should converge in the back half of the year.
And with direct contract termination fee from new balance sheet dynamics that play for <unk>, but just taking a step back it looks like net working cap historically and QQ is positive, but this quarter. John 50, now year to date is down 100 mill can you talk about what's driving this unusual.
Negative net working cap is it DC related or maybe some other peer timing related dynamic.
Ive been out in the back half.
Yes. So thanks, Mike. This is Tim you are correct direct contracting is a big contributor there just given that we continue to carry all of the 2021 profitability related to the program on the balance sheet.
We would expect that to release in Q3, as I mentioned and that would be one of the tailwind to cash flow or operating cash flow in the second half of the year.
The other is related to the timing of full year midyear payments and again, because we cut the quarter off at June 30.
The timing of those things.
Our excuse me full year mid year, and just general plan settlements those timings of those that we discussed can fall either pre or post the quarter and obviously because of the balance sheet at June 30. So.
There is nothing abnormal from our mines, we will see how things develop as going up here, but as we said generally speaking adjusted EBITDA and operating cash flow.
Move pretty consistently together and for the full year and we would expect to see that converge in the latter half of the year.
One thing I'd, just remind folks is mid year payments come in in Q3.
So that is a relatively large source of cash that we don't have in the first half of the year. So that's another big tailwind in the second half of the year in one of the things that drives.
The adjusted EBITDA loss to mirror operating use of operating cash flow and just build on that if you look at 2020 2021 and then obviously for us years before being public.
Generally EBITDA has been a good approximation of.
Operating capital actually EBITDA, our operating capital has been slightly more favorable than prior years then.
Then.
EBITDA and.
We had the same dynamics in the first half of your second half of your Indo here. So we don't we don't think it's any different this year.
Keep in mind in 2021 cash and operating.
Sorry, EBITDA and operating cash flows.
We're still in that same dynamic and we carried into 2021 EBITDA, we haven't got the cash yet right. So any of that.
There is no there is no differences in timing that we see I think it's just a question of.
Always the first half of the year as is worse from Gaslog is likely the second half is better than that so we expect that dynamic to continue.
There's nothing abnormal so far about this year that we've seen.
Got it thank you for that.
Well in my mind, and a bit of a highlight high level. One as you think about kind of future upside leverage for Oak Street.
And I understand in the past you've communicated that.
Or is that maturity could see at risk patient occupancy around 70% to 75% I think that was before direct contracting before the new patient outreach playbook you implemented just looking forward how should we think about your at risk patient occupancy levels ramping up in your centers.
Yeah.
Yes, I mean, I think thats that you're referencing was we shared in.
January I believe.
At that centers that were nearing capacity, we're making $8 million and kind of four wall contribution and.
Those centers going to aggregate or I think on average about 75%, Paul Ryan and so.
<unk>.
Those centers are still growing right will keep filling them up.
Theoretically over time, all of our tenants will get to a 100% full of at risk patients.
We recognize that that is a kind of.
A ceiling right, we're never going to put more patients under our care team, who don't want to lower that experience or quality of care, we can't add more care teams in our exam rooms for them to work out so.
So that's kind of that kind of come to your maximum rate and so we have a couple of centers there but.
And others will get there, but we will keep adding patients. So we do get there so.
I don't know.
Certainly.
To the extent that if we keep performing the same level on a patient countries expected fill all of our extended up that will obviously have more opportunity to improve that kind of mature four wall margins of our centers.
And then obviously one of our I think our biggest opportunities for can also had explained faster right. So instead of taking kind of six seven years to get to those levels lets get there.
A couple of years right. So that is why I think we are so focused on the sales and marketing approach. We again, we feel like there's a number of levers to pull including getting our community marketing back towards 2018, continuing improve our our brand leveraging the AARP partnership et cetera, but we feel like that.
The opportunity for us both to get the.
Kind of a handful of centers that are near capacity to full capacity, but also get the rest of our theatres to get there faster.
Our next question comes from Sandy Draper from Guggenheim. Your line is now open.
Thanks, very much most of my questions have been asked and answered. So I really appreciate all the detail just one one quick question and then a follow up on ACO reach can you just remind me and I apologize if you've gone over this multiple times just what the exposures to DC, whether we think of that in.
Ally's revenue EBITDA, but just trying to think about that and then I heard you correctly on ACO reach is it too early to call whether.
The same type of quarterly revision is going to happen under that model or is it. We just don't know the exact details. Thanks.
Yes. Thanks for the question on your first one.
We haven't we haven't released the breakdown between direct contracting Ma risk lives.
We have shared.
The majority of people with vast majority of our at risk lives, our Medicare advantage right and that's just based on the demographic of patients we serve and the plan choice. They make most of them have chosen Medicare advantage. There's also been some dynamics, where not all of our traditional Medicare patients flow through to direct contracts right away it keeping that number a bit lower.
So still the Medicare advantage is a big driver of our our at risk business. Although obviously we are.
Sure earlier, we really like the economics.
The direct contracts can be ACO reach program.
And our understanding obviously as Tim said earlier, there's still releasing all the details on ACO reach but I don't we don't expect any change to this.
They process.
And what I want to make sure we're pointing out in because obviously this is a.
A big factor in new to the market.
It's not it's not a situation, where maybe one quarterly reconciliation and it changes right. So.
It's always going to happen is you're going to have the least data for what the actual trend is going to be after Q1.
Because you have one quarter over one quarter. So theyre comparing first quarter of 2018 to first quarter of 2022, and obviously in their analysis, which keep in mind Q1 actually still haven't fully complete FERC CMS. When they did estimate of what Q1 2022 will be so there's a lot of it.
Atlanta in that estimate trended come in significantly lower than they expected and frankly significantly lower than we see medical cost trend historically right that would be.
Historically low Medicare trend.
And if it persists and we are assuming in our financials, but how we book the first half of the year and how we're thinking about guidance that it does persistent persists then there's lower revenue from the program.
As we said we would still be profitable in the program, even with that lower revenue.
In Q1, we did see lower metal costs across the board in Q1.
We're not necessarily assuming that continued in Q2 as we booked Q2, nor are we assuming that fees in the back half of the year.
So they will double the data points that they base that trend off of when they release the update in a couple of weeks.
And then they will update it again after Q3 and updated again after the end of the year. So.
Released the final Dol quadruple the number of data points and today so.
Again, we want to make sure we're being prudent in assuming that this <unk>.
Revenue decrease maintained.
And not necessary, taking also the corresponding benefit in medical cost reduction.
It would be it would be a very low annualized trend in Medicare is it possible.
It's certainly possible that persist for the year. It's also possible that it goes back.
A lot of ways. It is a more accurate way than what they do for Medicare advantage, where Medicare advantage.
Each year as a public company the way that Medicare advantage, because you know what you're right, they're going to be coming into the year.
It ends up being a higher trend year, then you eat it appears the lower 10 year, you got a benefit right. This way actually what happens in reality, just kind of how you are greater and so in some ways, it's actually a <unk>.
More accurate way to do it, albeit after one quarter one quarter over one quarter of data.
I think it creates a little bit more variability and given this is the first time, we're all doing it I think we want to be.
Prudent in how we think about that variability.
Thank you. Our next question comes from Whit Mayo from SBB Securities. Your line is now open.
Thanks.
Reflecting back on 2000 22021, you guys have certainly indicated that there's been a lot of.
Distractions with Covid that has precluded you from perhaps ramping and investing into all of the care delivery initiatives that you would want to you have to stand up a bunch of vaccination distribution support there was telehealth just a lot of things I don't think Youre supporting today is there anything that you can point to this year in terms of some of these new initiatives that youre doing that you havent been able.
To do with the distractions anything beyond marketing and community outreach anything more more care delivery focused sticks.
Yes, absolutely.
I'd, probably say, there's really three main.
<unk> that we're focused on this year for for care delivery and things that I think.
Equally we would've pulled forward.
Without the pandemic.
And then we talked about in our last call, but it's a continual integration of Rubicon.
So we're very excited about kind of having a fully integrated virtual specialty platform. We think that's going to really continue to improve patient experience lower specials cost and most importantly, really drive better quality care by just having that kind of integrated specialty list approach, though.
Something that had been discussed.
We expect to kind of hit its stride sometime in the fourth quarter and we're going to be fully implemented going into 2023, and where we are.
We're optimistic about the process and approach and the savings you can generate.
John .
Number two is I think there is a set of improvements to canopy.
One thing, we love about our technology approach.
Continue to bring in more and more decisions.
Decision support.
More and more clinical protocols and really take off more and more kind of a base decision, making from our providers.
And leverage but model the team as we execute that and that frees up more and more provider bandwidth to focus on the more challenging patients maybe you can't protocols right. We think our we felt we are most challenging patients our VIP patients and we take those patients. There is a number of factors generally multiple chronic illnesses social factors behavioral factors et cetera.
Impacting those patients and that's what creates such a high risk of them going to the hospital and.
And so you never have a protocol right or a check the box of activity is going to manage those patients while you need.
The expertise of the entire team working together and really for lack of it in terms of settling about how we can keep that patient on the hospitals and the more you can free up the bandwidth to do that.
By taking some of the based off like checking the boxes on it and people get to preventive screenings and use metrics and more of that can be driven by protocol technology and about it right and so.
We are taking we expect forward on the technology to enable that.
Think we're kind of we're past now what I'd call that kind of check the box around kind of heat discrete cost mammograms et cetera, now we're moving onto more efficient support around kind of a disease management. So with these types of conditions here that here the recommended drug regimens et cetera.
And again, it's not that I actually don't know those things, but it reduces variability ensures that every doctor everyday every patient is practicing evidence based standards.
Always ensure they have the best standards updated and then it takes a lot of that pressure off our doctors to remember all of those things. So we're really excited about that but thats kind of number to that.
And then number three is softer which is more of the bandwidth right focus right.
And again to the point I made before you can really be focused on how do I create an unmatched patient experience how do I treat everyone delight every patient every day and how do I make sure that I'm really proud.
And we are planning to keep that patient on the hospital, if I'm doing that generate results right. It's harder to do that when you are trying to navigate infection control protocols and St staffing and you're trying to learn new telehealth protocols et cetera, et cetera et cetera, right. So.
I think there is just that final component really does make a difference.
Thanks, guys.
Our next question comes from Kevin Fischbeck from Bank of America. Your line is now open Kevin.
Great. Thanks, I was wondering if you could talk a little more about cost trend in the quarter. It looked like it sounded like you guys are saying that the quarter came in largely in line with your expectations I guess, when we looked around and listen to other managed care companies. They seem to be talking about core volume not coming back the way they would have thought.
In the quarter a lot of the providers had weak volumes relatively speaking so just a little more color about kind of what you were expecting or what you saw.
As far as utilization in the quarter.
Hi, Kevin it's Tim Thanks for the question.
You track others better than I do so it is always hard to know what they were expecting versus what we were expecting and therefore, how actual results played out relative to expectations.
We did see generally speaking lower as Q1 developed.
Obviously, a lot of Covid costs, as we mentioned with the Omicron Spike in January and February I think January was our highest COVID-19 month in the history of the company somewhat aided by the fact, we've grown our patient population a lot, but still a lot of COVID-19 dollars.
We saw non carb utilization, a little lower in Q1 and Thats. The release that we extent we saw in Q2.
As we took our approach in Q2 from a from an accrual perspective was similar to Q1. So we will see how Q2 ultimately plays out I will say.
<unk> utilization was a little more normal for us in the quarter as you can imagine given the growth of our business the error bars around normal.
Probably wider than it would be for a larger player with a relatively steady patient population. So I would say.
We're optimistic believe we'll see how Q to develop just as we saw Q1 developed and Kevin the only I'd add to that.
I think when we think about this at Oaktree with something I think about it.
Given that maybe a health plan, we look at metal cross something we control.
Yes, we don't control all of them, we don't control Cabos surges.
But everything our care model to try to do is to manage chronic and let's keep our based on hospital. We are actively seeing our patients in changing the trajectory of their care.
And I think we're doing a two level of depth that obviously is helping.
And our capabilities at that time their permission space us on what they do.
And so we talked about metal costs, certainly internally, we never talked about all this is what the trend happened to US we talk about.
Drive metal costs, lower by lowering observations and when when we are generating strong results low ATK and which corresponds to strong MLR is like we are.
Our team and when those are going up.
We talked to you about how do we kind of doubled down.
The question I answered before about the Caroline how do we improve our care model resolved. So I want to make sure we point that out when you hear me talk about the trend I'm I'm not thinking about what's happening in the macro market and more thinking about how are we executing our model and how is that driving great results and I need guys.
What we do and what we're very proud of as I think we can get the best care model anywhere for older adults with chronic illnesses and that makes a big difference in their care right and we think that can kind of kind of <unk>.
Overshadow.
Any kind of smaller macro trends, which is kind of different than what I hope I'm looking at.
Alright, Thats helpful. And then I guess you guys mentioned that number I gave a number of numbers.
And then sometimes it look like you are giving them on a gross basis, sometimes on a net basis. So like I think you said that they would develop was actually $10 million versus the $7 million you talked about.
In the press release and it sounded like you were kind of netting that against direct contracting, but then when you mentioned direct contracting a 3 million. It sounded like you were saying that that number was even net of some.
Favorable number maybe on the M&A side is it possible kind of give like the.
The gross numbers on all of these things and help me understand kind of what exactly.
How is that going to think about these out of period numbers.
Kevin you're right. So at some point to in the press release is the net of the $3 $7 million.
The revenue headwind in the $10 $9 million of med cost favorability, we are not breaking out the components of each of those and the reality is there's always going to be interplay between EMEA and direct contracting and this quarter was pronounced just because of the retro trend adjustment.
Yes.
Just I just wanted to highlight it folks who are doing the math and try and do some I think Gary is trying to do some of this.
Implied math around direct contracting.
Or impact that it would be larger than just the three points that are unsafe.
Our next question comes from David Larsen from BTG. Your line is now like David.
Hi, what are you looking at for June volumes, and then also July volumes. It's my understanding that in June volumes are up a lot in hospitals are you seeing that is that continuing through July .
How are you thinking about the da five variant and when do you expect to reach EBITDA breakeven. Please thanks a lot.
Yes. Thanks for the question. So the point I made a second ago.
We think about compensation for our patients again, I don't necessary think the <unk>.
Macro trends.
What's happening in the broader market, including commercial and Medicaid et cetera, and just even healthier Medicare apply to us. So when we look at what's happening with half mentioned broke through patients and again to Tim's point when theres massive Kelvin waves, obviously, we are impacted by that.
But when we look at our hospital patients ATK and we look at that as an indicator of our performance all of our all of our all of our providers and our affinity members are bonuses based on their performance against admissions per thousand right. So that's one of the key metrics amongst should help keep our patients help me out of hospital, and we mean and we feel like that's what our care model does and so.
Hey, guys.
We're just we're not going to share in.
July results already by that.
Again, I don't think that necessarily reading reading into what's happening with hospital volumes more broadly always translates to what's happened with Oak Street, our patient population in our care model results.
The Covid question.
We obviously do our best to make sure our patients are vaccinated and make sure our patients are boosted.
You do get cover that they get the therapeutics like Pat Colombia that can make a big difference in their health trajectory.
We are making a difference there.
But that said when you look at kind of the.
Covid rates of populations for Oak Street, we're in 20 states a little bit more weighted towards the the great Lakes and.
The mid Atlantic region, just given historically, where we opened up first but.
Generally kind of our COVID-19 costs are going to be in relative proportion to what is the observation rates in those communities that.
We have patients today.
We get more and more national that all we've got to keep approaching kind of the more the more national levels.
And as we as we've shared we will be break even in 2025 or prior.
Okay, great. Thanks, very much appreciate it.
Our next question comes from Craig Jones from Stifel. Your line is now lakes and Greg.
Hey, Thank you I think originally you had said.
Platform contribution margins here $68 million.
74, so far as <unk> is still a good number or should that.
How has that gone up.
Good evening.
No.
This is Tim I'd say, our expectations for the year.
Unchanged on that.
Okay. Thank you I think we are.
I think we are over time, so I want to be respectful of our schedule and others time and.
Well I think we should end the conference.
Yes, sorry, yes, we do need to hop. Unfortunately, we're past the hour Greg It hopefully that was any of your questions and I. Appreciate everyone's time this morning, and before that can I can say.
So.
Thank you everybody. So that does conclude today's Q&A session at the end of today's conference call. Thank you for joining the eighth straight house cheeky 'twenty to 'twenty two earnings conference call. You May now disconnect your lines.
Everyone else has left the call.