Q2 2022 Cano Health Inc Earnings Call
Okay.
Good afternoon, and welcome to Kanno Health's second quarter 2022 earnings call.
All participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded.
Hosting todays call are Doctor Marlow, Hernandez, Chairman and Chief Executive Officer, and Brian copy Chief Financial Officer, Mccann Health Press release webcast link and other related materials are available on the Investor Relations section of Ken Oh helps website.
As a reminder, this call contains forward looking statements regarding future events and financial performance, including our guidance for the 2022 fiscal year investors are cautioned not to unduly rely on forward looking statements and such statements should not be read or understood as a guarantee of future performance or results.
We intend these forward looking statements to be covered by the safe Harbor provisions for forward looking statements contained in section 27, a M best.
Securities Act and section 21 E of the Securities Exchange Act, we caution you that the forward looking statements reflect our best judgment as of today based on factors that are currently known to us and such statements are subject to risks uncertainties and assumptions that could cause actual future events or results to differ materially from those discussed as a REIT.
So there are various factors.
<unk>, but not limited to risks and uncertainties discussed in our SEC filings, we do not undertake or intend to update any forward looking statements. After this call or as a result of new information.
During the call. We will also discuss non-GAAP financial measures. These non-GAAP financial measures.
non-GAAP financial measures, we will discuss today are not prepared in accordance with GAAP a reconciliation of the GAAP and non-GAAP results is provided in today's press release and on the Investor Relations section of our website with that I'll turn the conference over to a Doctor Marlow Hernandez, Chairman and CEO of Kaino Health. Please go ahead.
Thank you and welcome to the call.
We appreciate your joining us today.
Start I'd like to recognize the entire kind of help team for their hard work and dedication to our mission.
When you enter a kind of a health center and speak to our patients you can immediately appreciate just how special our services are because of the people who treat them like family.
Our team is dedicated to transform patient care by delivering superior primary care services, while forging lifelong bonds with our members.
<unk> delivered another quarter of strong membership growth and is now carrying for over 280000 members.
Patients and providers continue to join kind of hold across the country in large numbers.
This strong membership growth we are now on pace to end the year with 10000 more members than we included in our most recent guidance for 2022.
Year to date, we have added nearly 55000 members all organic.
For context, we ended 2020 and 2021 with approximately 106000 and 227000 members respectively.
This accelerated membership growth came with higher utilization than we expected.
Putting pressure on our consolidated medical cost ratio or MCR, which was 82, 6% in the second quarter.
This was due to a higher proportion of new members, who came in with higher acuity than our historical experience.
Third party medical expense from these new members was higher than expected due to higher cost for hospital admissions and outpatient procedures and branded prescription medications.
Importantly, our core utilization management programs are performing well as demonstrated by stable admissions per thousand across our membership base.
Stable generic prescription drug dispensing rates high patient engagement and industry, leading quality metrics.
Moreover, we continue to observe the historical trend of decreasing MCR the longer a member is with counter health.
Therefore, we expect the MCR for these new patients to decrease over the next 12 months as we diagnose and manage the conditions of these new members.
For 2022, we're increasing our estimated MCR range, 278% to 79% upfront in the previous guidance range of <unk> 76 to 76, 5%.
This increase was driven primarily by incremental third party medical expenses from new Medicare advantage and Medicaid members, which we estimate at approximately $60 million for the full year.
This is partially offset by approximately $40 million and lower provider payments and higher fee for service revenue for.
For a net impact to adjusted EBITDA of $20 million for the calendar year.
Additionally, while <unk> performed well during the quarter, we realized a $6 million unfavorable prior year development, primarily due to higher than anticipated delayed claims for 2021 third party medical expenses and given periodic benchmark updates we're decreasing our expected 2022 contribution from TCE by.
<unk> $9 million the combined impact from these items is expected to reduce our full year adjusted EBITDA by $15 million.
Overall, the combined impact from new member growth and DCE resulted in approximately $35 million reduction to our 2022 adjusted EBITDA guidance.
Nevertheless, we view these factors as investments, which affect 2022, only and we expect proportionately better revenue per member per month in earnings in 2023, as we diagnose and manage the health of these members. We believe the clinical capacity, we have built the natural maturation of the new member cohort and the accelerated growth.
City position us very well for the near and long term.
The momentum of our business can be best observed by looking at our care margin.
The care margin is the gross profit we generate from operations and is defined as our total revenue minus our third party medical expenses and our direct patient expenses.
Year to date, our care margin is $203 million, which is already more than what we generated in the full year 2021, and this is despite the new patient and DCE headwinds I just discussed.
Turning now to new positions, we created within our executive team. It has been over a year. Since we went public and we have grown significantly while expanding our operational infrastructure and management team.
To support future growth and ensure operational excellence in new and existing markets, We announced Bob <unk> Chief Operating officer, Bob previously served as our president of healthy partners Medical centers and affiliates is now overseeing our daily business operations and will work closely with the rest of our executive team to implement counter health strategy and drive sustained performance.
We also announced that Amy Charlie has joined the company as Chief administrative officer.
When it comes to kind of help from Alteon health, where she served as chief legal and administrative officer. She is responsible for the management of administrative functions and overseas strategy development organization of governance and change management, both leaders bring an impressive record of building comprehensive business solutions and we believe they will be invaluable in helping us to achieve that.
<unk> operational standards and strengthen the execution of counter health's unique national care platform.
This is an exciting time at kind of a house.
Our total membership grew 80% from the prior year, but what is more encouraging is that we continued to see strong year over year and sequential organic growth particular in our Medicare population.
We ended the quarter with approximately 164000 total compensated Medicare patients.
Which included over 124000, Medicare advantage members and over 40000 Medicare DCE members. Further we continue to expect the total medical membership to represent about 60% of total members throughout 2022 due to continued growth in Medicare advantage.
During the quarter kind of a help realized revenue growth of 101% year over year, which reflects the ongoing execution of our build buy and managed growth strategy.
We are encouraged by the growth we have seen so far and are raising our membership and revenue guidance for 2022.
Brian will provide more detail on our second quarter performance and updated 2022 guidance.
I'm very proud of our expanding national care platform.
We ended the quarter with 143 medical centers up from 137 at the end of Q1 and expect to achieve our guidance of 184 to 19 medical centers for the full year.
As we look forward, we expect to end the year with over 300000 members and by January One 2023, we expect to have over 342000 members, which includes an incremental 40000 Medicare DCE members.
Kind of a health national care platform continues to improve access quality and wellness in the communities we serve.
The role we play in the U S health care system positions us well to transform and redefine how America delivers primary care, which is critical for all Americans and in particular for those in underserved communities. We will continue to capitalize on our momentum our leading market position and the societal tailwind that underpinned.
Our model is in such demand now I'll turn the call over to our CFO Bryan copy, who will walk you through our financial performance and guidance.
Thank you Marla and thanks, everyone for joining us today as Martin said earlier total membership increased 80% year over year to nearly 282000 members in the second quarter.
This represents an increase of more than 125000 members from the second quarter of 2021.
In the second quarter, 44% of our members where Medicare advantage <unk>.
14%, where Medicare DCE, 25%, where Medicaid and 17% were ACA.
Total revenue for the quarter was approximately $689 million.
Up from approximately $344 million, a year ago, but down slightly from $704 million in the first quarter.
Total capital revenue was approximately $655 million in the quarter down 3% sequentially from the first quarter.
This slight decline decline was driven by a reduction in Medicare advantage and Medicaid capitation revenue per member per month RPM PFS.
Sequential Medicare advantage <unk> decline was primarily driven by a higher percentage of new members, which is Marla mentioned generally have more on diagnose conditions.
The sequential decline in Medicaid <unk> was primarily driven by certain contract conversions to non risk we.
We expect the Medicaid <unk> to be approximately $250 <unk> for the full year.
Our Medicare DCE PM TM was essentially in line with the prior quarter.
Immerse regularly updates its evaluation of premium benchmarks and we have factored that into the results we have reported and our estimates for the remainder of the year.
Additional information about our membership mix in our <unk> by line of business is available in our press release and updated financial supplement slides posted on our website.
Our MCR in the quarter was 82, 6% compared to 88, 6% a year ago, primarily driven by our effective diagnosis and management of our members.
Excluding DCE, our MCR was approximately 86%.
This was lower than the second quarter 2021, MCR, excluding DC of approximately 87, 6%.
DCE performed above expectations in the first half of the year. However.
However, given the early stage of the program, we are being more cautious.
For the year and are projecting our full year MCR DC of approximately 93% slightly above our prior expectations.
As we have said before DCE is a profitable business today and positively contributes to our results.
There is incredible momentum and we believe there is an attractive value creation opportunity in this program.
Furthermore, it is capital light and provides a strong return on investment.
As Margo mentioned for 2022, we expect a total MCR in the range of 78% to 79% in 2022.
This reflects our continued expectation that the total MCR in the second half will be significantly lower than the total MCR in the first half.
This is primarily driven by normal seasonality of medical cost and cost recoveries.
It is important to note that the data is clear our Medicare advantage and Medicaid admissions per thousand average annual visits per staff model Medicare advantage member general prescription drug dispensing rates and prices.
Quality ratings and other metrics are performing very well.
The challenge in the quarter was higher cost related to the proportion of new higher acuity members. We have demonstrated that we can reduce MCR overtime from primary care engagement and population health management, improving member health and satisfaction, while reducing the need for.
Avoidable and costly care.
A result, we believe these new members will contribute positively to our earnings momentum.
We expect to see improving MCR for these new members as a function of time within the candle health model.
Direct patient expense was seven 6% of revenue in the second quarter as in the first quarter. This metric was lower than historical levels due to the growth in our DCE revenue, which has lower direct patient expenses.
SGA SG&A in the quarter was 15, 4% of revenue or 12, 8% excluding stock based compensation.
Adjusted EBIT in the quarter of $29 million was lower than our expectations, but up from a loss of $15 $2 million a year ago, resulting in an adjusted EBITDA margin of 43%.
As mentioned the second quarter results include $6 million of unfavorable prior year development related to the DCE line of business.
The full year adjusted EBITDA is expected to be approximately $200 million.
Down from the prior guidance range of $230 million to $240 million.
The lower estimate is primarily driven by $20 million of net impact from higher third party medical expenses, partially offset by lower provider payments and higher fee for service revenue.
$6 million of unfavorable prior year development from DCE and $9 million related to our estimated higher MCR for DTE.
Now, let me turn to our cash flow and liquidity.
We ended the second quarter with about $48 million in cash and our $120 million revolving line of credit was undrawn.
Total debt at the end of the second quarter was $938 million and includes current and long term debt capital leases and payments due to sellers. Our total net debt was $890 million defined as total debt less cash.
During the first six months of 2022 cash used in operating activities was $82 million.
This was largely related to working capital requirements.
As of June 30, approximately $38 million in Medicare risk adjustment payments have been posted to our accounts. We continue to expect the MLR MRA to be posted this year to be approximately $130 million.
The actual cash to our balance sheet from this MRI was partially reduced by the higher third party medical expenses, which we.
As discussed a few minutes ago.
Given the higher than expected third party medical expenses from new Medicare advantage and Medicaid members and the lower performance expectations for DCE, We now expect cash used in.
Operating activities to be in the range of negative $80 million to negative $90 million.
We continue to expect to achieve our 2022 guidance without the need for additional financing.
Now, let me summarize our updated 2022 guidance for full year 2022.
We expect membership for 2022 to be in the range of 300000 to $305000 an increase from the prior guidance range of 290.
Two 295.
Total revenue is expected in the range of $2 85 billion to $2 9 billion an increase from the prior range of $2 8 billion to $2 9 billion.
We expect our MCR will be in the range of 78% to 79% up from the prior range of 76% to 76, 5%.
Our adjusted EBITDA is now expected to be approximately $200 million a.
The decrease from the prior range of $230 million to $240 million.
Medical centers are expected to remain in the range of 100 184 to 189 no change from prior guidance.
Additional guidance for 2022 includes interest expense of approximately $60 million de Novo loss add back of approximately 70 million stock based compensation expense of approximately $65 million and capital expenditures of roughly $40 million to $60 million.
In conclusion cannot help continues to build momentum and drive long term value creation.
With that I will ask the operator to open the call to your questions.
Thank you Sir once again that is star one to ask a question up first is Gary Taylor Cowen.
Okay. Thanks.
Gaming.
Yes.
Two questions I wanted to ask but I just wanted to start with.
The higher costs on new members and just.
What additional color you could provide or such as are those primarily all class a 'twenty two members is that <unk>.
<unk> centers, our newest states our newest affiliates is there any other pattern.
That you're observing in the higher cost cohort.
Yes, let me tell you Gary and thanks.
So we are seeing that across the board in terms of of new member the quantum of new members is quite significant so I mentioned in my remarks that we've grown 55000 members.
Since December 31.
Take.
Just a little bit back to the last three quarters, we've grown 70000 net new members.
And.
Those new members.
For this year and take another quarter before are coming at <unk>.
MCR that are higher than our historical estimates.
And.
What we believe is the reason, which there could be a component of regional impact in Florida.
Is likely related to COVID-19 associated delays in care.
As patients new to candle didn't have as many encounters in 2020 or 2021.
And this is particularly true for underserved communities and as you know we predominantly serve underserved communities is well documented that they have not been getting the care they need it.
<unk> was aggravated over the past two years.
Some cases, they're conditions have worsened due to this prior lack of care in these new members are driving higher costs as I mentioned in my remarks.
Our scene.
And the prices of branded prescription medications.
As part of the many things that we do once a patient is established in our platform we control better their conditions, many times with equivalent generics, which are more affordable to them.
And.
We continue to observe the historical trend of improving NCR or medical cost ratio.
With time with.
The company, we improve outcomes and ultimately are rewarded for that.
We are carrying for an incredible amount of of new members.
And they are.
With higher than historical MCR, but we're also seeing already early evidence.
That.
Those costs are coming down more consistent with historical as it relates to new members moving forward.
Got it so sounds like pretty broad.
I'll work with that.
Good question.
And then I'll, let you go with just needed to Brian just thinking about the.
The EBITDA.
Cadence in the back half maybe could get some help so 200 million EBITDA for the year, we did 68 in the first half.
That's a $136 million in the.
In the <unk>.
Back half or $132 million.
So.
Does that look pretty evenly split at this point between three Q4 Q do you think <unk> with NCR coming down should be the highest how should we think about.
Modeling the seasonality.
Yes, I think the seasonality is not going to change and we certainly.
We expect that.
Seasonal trend to favor more the fourth quarter.
I would expect.
Fourth quarter to be higher than the third quarter, and we've talked a lot about the seasonality and just the overall.
Utilization that happens in the fourth quarter as well as certain cost recoveries are on stop loss et cetera that can.
Our call weight more heavily towards.
The fourth quarter in terms of improving the results in that quarter. So thats kind of how I would think of it as you think the back half of the year.
Okay. Thanks.
Thanks, Kara and next.
Next up from credit Suisse.
Thanks, Hi, everybody.
Just thinking through this issue with the higher cost newer members I know last quarter, you talked about how <unk> helps you out in the fourth quarter and I don't know specifically for sure where your stop loss is targeted but is that part of the reason why you're optimistic about later in the year or is that not a relevant factor here.
Yes, no I think you hit it exactly right Thats one of the key factors as we look at the seasonality for the back half of the year as some of these <unk>.
Higher acute members, we'll hit the stop loss.
It will help the overall performance from a trend perspective for sure and then obviously from an operational clinical and care management. We start you have more time to engage with those members changing their behavior and ensuring that they start to come into the clinic start to ensure they take their medications start to ensure.
There.
Doing the right thing to take care of their health and the <unk>.
<unk> any of the chronic conditions that they may have and follow that while the direction of the primary care Doctor, which is the most critical thing and why it's important for that member engagement.
Take hold and as Martin mentioned.
All of our operating metrics are performing well. So we continue to believe that that will continue to.
Engage with that our members and see that performance occur.
Throughout the back half of the year as it normally would have.
When you step back and look at what you've observed here and these members are coming to you.
And think through it on the fly here and come up with anything but is there any reason to think that this is sort of a pool of.
Of new members that have an adverse selection element to it that have come to you for some reason.
Any way to talk through that how do you think you ended up with that.
Or is that just the luck of the draw in any given period of time when you are growing rapidly.
Yes, I don't believe we've been adversely selected.
Any systematic way, we are serving a tremendous number of new patients and as one of the very few providers across the markets and certainly in the communities. We serve that has a proven track record for improving outcomes were.
On high demand.
<unk>.
What we have shown.
Is that we are able to manage patients with higher acuity and chronic.
Chronic conditions in a way that.
Results in them.
I am having longer healthier lives.
When you're talking about.
This <unk>.
Significant number.
Of members.
And not having the benefit of.
The funding catching up or of having platform acquisitions, which.
Established a members.
We are seeing.
Those higher cost pressure the rest of the business but.
Come the next six to 12 months with the diagnosis and management of these members we will see a nice positive momentum to our earnings.
Okay, and maybe last question, if I could slip it in.
Obviously I appreciate the comments about.
Certainly having sufficient funding to get through this year with Alere growth objectives, you are growing quite rapidly do have.
Our significant growth profile in front of you we've seen.
Not a closer to peer but another peer in the broad space.
Align with choose to align with Amazon I guess, it gives them deep pockets.
Pursue their growth objectives, how do you think about the next few years the volatile markets. We're in.
Potential for capital needs.
And how you might.
Satisfy that any updated thoughts on that.
Yes ill start and Martin can jump in I think the first thing Thats really important to note and to some extent this is.
A good problem to have were growing were growing fast we're engaging with members that need care.
And really the way we view this as.
<unk>.
A phenomenon of our accelerated growth our attractiveness in the marketplace and members looking to cannot health to receive better high quality care and the key here for US is to engage with those members diagnose those members and then manage those conditions and as we do that we see.
The incremental revenue and earnings potential into 2023, so from that perspective, I kind of view this is.
Short term 2022 impact in nature, and as we turned the corner to 2023, all the benefits of our engagement should fully play out into our financial results.
I agree with Brian .
I would just add that.
To your question, we see an acceleration of consolidation in our space given how critical it is for the present and future of health care at this point, we're focused on growing our business.
<unk> tremendous demand that we're serving but as always remain open to considering all strategic alternatives that allow us to accelerate value creation.
Alright, Thanks, a lot.
And your next question comes from Adam Ron Bank of America.
Hey, Thanks for the question.
Just wondering if you could talk about the cash in a little more detail it sounds like the cash burn this year.
Cash flow from operations, and Capex will be kind of similar to the cash and revolver that you have.
But then it sounds like the boost from the MRA payment, but generally I think about the first quarter of 2023, what the cash drag from a working capital perspective.
Just curious if you could walk through how youre thinking about cash and I think you filed a mixed shelf offering in the quarter and so curious at best.
Pardon me to be tapped.
Growth.
Yes, I would say the shelf was not related was just procedural we.
Hit our one year anniversary Mark So that's the really the first time you could you could file for that so.
That's more.
Going public corporate activities more than anything.
And then as far as the cash clearly the results of the quarter have lowered our our cash position and projections, but I think we have several options and believe we have the flexibility.
That we had that we that we need in order to meet our financial commitments.
And we will continue to manage through very diligently are our working capital and always are working with the business leaders and the operational leaders.
To make sure we're controlling our spend through our and our de novo's overall, SG&A to which can certainly enhance our over our cash position and then obviously, we have our very strong clinical and care management teams.
That are continually working to improve the overall financial performance and ensure that engagement.
So that gives us opportunities to enhance the overall financial performance, which then will enhance the cash projections as we have today, but right now we'll manage through through what we have and certainly.
I think we're positioned for.
Enhanced performance as we turned the corner into 2023.
And then in terms of the levers is there anything in the guidance assuming further M&A from here or is everything in terms of the center growth.
Nope.
Yes no.
No additional ill call it M&A.
Into our guidance, it's really finishing up our de novo builds that we've started and wrapping those up and once again that does de novo's are a critical component of our continued growth. They open up capacity they provide additional opportunities.
Within our markets for scale and density and then really gives us that ramp as we enter 2023 and particularly during the important annual enrollment period as well. So a lot of those de novo's will start coming online in the next few months here.
Okay got it thanks.
Yes. Thank you.
Next is Andrew Mok UBS.
Great.
First wanted to follow up on Gary's question. It sounds like you're at least partially attributing higher cost to regional differences outside of South Florida are you able to point to specific geographies and have you reflected on why there might be higher acuity in those regions beyond COVID-19, whether it's networks maturity or recruitment.
Yes.
Most of our business today is in Florida were growing.
Rapidly outside of Florida, but most of our business today is in Florida and we are.
<unk> seen.
The majority of that new patient impact in totality from the growth that continued strong growth in Florida.
And what I can tell you. There is we are seeing higher drug.
Branded spend.
From new members as well as higher cost admissions outpatient procedures.
And.
That is above our historical averages and then just given the quantity of new members in relation to the base as we described.
The proportion of Nu.
Acuity members not having that share over the last couple of years.
Is it perhaps has been in the past.
Is what.
We can.
At this point.
Talk about we may have.
Overshot our conservatism.
In this first half and rolling some of that forward into second half dynamics as I said.
We have early data of.
Perhaps.
Some.
More normalization of that MCR, among new patients in the last couple of months, but we need more complete data.
Before we can definitively.
Say, how it will perform and thus we've taken all the measures that Brian described.
Described to manage.
The good problem of having very high demand and very high growth.
Got it and of those drivers of higher cost and you just mentioned.
Hospitalizations outpatient procedures and branded drugs.
One can you give us the relative weighting of each in terms of what's driving medical costs higher and two are there specific branded drugs you can point to driving the increase.
I can tell you that branded.
Medication costs are.
A significant factor.
Also.
<unk> per admission.
In general.
For new members in particular has been above.
The permission cost for new members in particular has been.
<unk> historically.
And.
While.
We can.
As we get more completed data get back to you on more specifics it does.
Accumulated issues.
From years of not getting.
Care and then.
We now are making sure they're catching up to their preventative screenings were making sure that we're controlling chronic conditions, we're making sure that we get those undiagnosed conditions treated.
And we're doing so at a very significant scale, which.
In perspective during the remarks and during Gary's question.
With respect to the to the MCR, but let me give you just another.
Yes.
Our initial membership guidance for 2022, when we set our outlook was approximately 277000 members.
We're ready to care for more than that number today and we've done it entirely organic.
Within six months.
So when you look at all.
All lines of business, Medicare and non Medicare and Medicare alone since.
December 31.
Growing 38000 members and so.
Even the payment lines.
Given just the natural.
Dynamics that we've served historically of those patients plugging into the platform.
And getting there the care manner.
Managed we've got a walk through that but.
As I've said.
Very optimistic as to Jan one next year, when we will add.
Yet another 40000 at least another 40000 Medicare members for.
$3 40.
Plus or so that will be carrying four.
And at that point.
Half.
Funding catch up as well as.
The required time.
To manage the conditions of our patients and lower costs as we have repeatedly published.
Okay, if I could sneak in just one more maybe one for Brian you mentioned that <unk> is profitable today, but I think you said there is a 90% MLR in that population in your G&A load is north of 10%. So I'm just trying to square those comments as the G&A for those members less than your MA members.
For sure it's much less there is very little cost and Thats why.
I mentioned very capital light.
Business.
I would say on a year to date basis that NCR is going to be just around 90% there is a little bit of SG&A.
And I think overall.
Overall as we said.
<unk>.
Full year total of approximately 93% and I think the important piece to remember is for the <unk> business.
It's not it's just a slight.
Number of members that are served through our SaaS model.
Most are served through our affiliates. So that's why you see the very low cost.
Of that remember within our within our operation So.
It provides a really strong revenue.
Opportunity for us.
And if you can continue to manage it.
With the low SG&A you can you can get some really nice drop through to earnings and Thats like I said, we've seen a good a good performance year to date, we're being very cautious given a lot of the noise in the marketplace and et cetera around the CMS and its benchmarks. So we didn't want to get ahead of the game, we wanted to watch Washington program.
They out is as you know, it's new it's just over a year.
So we think we're doing the right thing in terms of taking a slow methodical prudent approach to this program yet remained very bullish as Marla mentioned.
We're going to have an additional 40000 or so DCE members come in in one one and.
We think they provide a nice launching point for us to continue to grow our overall operations and expand that scale and density in the markets that we serve.
Great. Thanks for the color.
Next up is Josh Raskin of Nephron research.
Hi, Thanks.
And I apologize for beating this dead horse, but these new lives I'm, just curious where are they coming from are these individuals that were new to MMA. These health plan assignment type of lives of these new providers to Cana that are bringing a man and then why isn't there a risk adjustment offset sort of an accrual up higher.
Revenues upstairs.
Higher chronic conditions with or fees or just procedure costs even.
Right.
So Josh let me take the second part first.
In the past.
We would.
Accrue the acuity at the time that we're providing service.
Now were just booking the cash generated.
Which is informed by the care provided the previous year Theres no patients were not cared for by US and thus there is a lag as these patients now get their chronic conditions documented.
For that matter acute and others that have a particular risk score that then would inform the funding for the.
Subsequent to year end in that subsequent year as where we would have that funding lineup with the acute.
The first part of the question is where we're getting the new patients from well.
Overwhelmingly.
90 plus percent selecting us.
Sure.
Whether it is at our medical centers, our new medical centers.
Four.
Provide us.
Selecting us getting then now contracts being on our platform and then.
Selecting those affiliated providers as part of the kind of platform.
We get.
And negligible.
Number of of assignments.
The only.
Assignments quote unquote would be whatever.
A broker or community sales agent.
It puts under us based on the patient asking for the.
For <unk> health.
So we.
Generally do not.
Bulk assignments, we've done that very rarely in the past not that we are.
Open to working with our payer partners.
But we get.
The overwhelming majority of our patients through organic growth selecting our our providers and as you know.
Just to round out the question and where.
It's predominantly of the new centers and other tuck in centers, So Brian talked about the investments we've made in the de Novo some tuck ins to expand that clinical capacity. So we're getting it there that also offload.
Some of our other centers and so we get new patients there as well and we are.
Same.
<unk> most of that in Florida, given that's where most of our medical centers and affiliates are.
So hope I answered your question.
That's helpful. And then just on the center, Okay, sorry, Brian No I was going to say, Josh I'll just add.
Continue to see that our new members are coming through word of mouth. So.
What that means.
Is the current existing patients are referring their friends and family and they know the type of care they receive in our centers and they want their friends and neighbors et cetera to be part of that particularly those that desperately need to care. So.
That's kind of where.
There is no adverse selection and it's really just the desire.
We call five star quality care and some of these underserved community. So that's really the key generator of the.
The new membership we are seeing across all of our centers.
And then just on the centers you know you've opened 13 in the first half I think it was six centers this quarter seven last quarter and you've got guidance for another I think 41% to 46 or so in the second half maybe talk a little about the visibility into that I assume it's got to be pretty high by August .
Any sense of slowing down center openings in light of.
The cost trends for the newest members.
Yes.
You are right we are moving rapidly towards opening a number of these centers I think you're hitting on a good point, we're continually working with our.
Field teams to see where we can control costs what are the some of the options are going but we don't we don't want to.
Stifle the growth engine and I think it is important to keep that momentum going we can continue to.
Finance these as we move through the year and as these members come on particularly during the annual Roma period, Thats really going to give us that boost.
In the fourth quarter and into 2023, so that's a critical leg to our growth strategy and.
It's not just new centers. These really are important part of the scale and density. So as you open. These up your SG&A broader gets leverage you open up capacity in centers that may be nearing full capacity.
Then allows us to continue to have that full opportunity to engage and meet the needs of these these new patients and the existing patients.
And I'm sorry, one last clarification I heard then that the comment no need for external capital through the end of the year is that.
Was that comment just through the end of 2022 is there any contemplation of.
The growth that you guys are expecting for 2023 or are you, saying you don't need capital for the next year foreseeable future or was that just we're good through the end of 2022.
Yes, I mean, it was clearly a 2020 to comment but think about the add in the other commentary around how the expectation is for the results of the business that we're growing this year should start to generate additional revenue additional earnings into 2023. So I will say, we should be able to continue to.
Generate the organic financing needs that we need for further expansion and further growth as we go into 2023 and ties into what Marla was mentioning there is this delayed delayed revenue that comes in based on the way we see the patients in the.
Accounting for that so as we planned towards the future, we certainly believe that.
What we're seeing today will help us.
Hit our hit our growth targets for 2023.
Perfect. Thanks.
Thank you.
Your next question is from Jason Kim with Citi.
Great. Thanks for taking my questions. So just I hate to beat a dead horse on this as well, but just on the high acuity.
Would you be able to completely offset that $20 million EBITDA impact next year through risk adjustment or are there other considerations that we should be mindful of as we think of 2023 that wouldn't allow you to completely offset there and then just as a quick quick follow up.
We continue to target pretty hefty membership growth.
That $20 million impact compared to the $29 million of EBITDA in the quarter. So I guess I'm. Just wondering are there ways to help offset the possibility of this type of impact occurring in the future.
So what I would say is that our expectation with both funding catching up and management of medical costs that it would more than offset.
For the near term pressure, we're getting on our base business as a result of these new patients out.
There is.
A significant ROI and that's <unk>.
Effectively.
Our business model is.
How were providing so much value to all stakeholders, because we are rewarded for improving the health of our patients.
And.
Well.
Brian do you want to add any further color, yes, no I think that is.
This simple we continue to view, yes, you'll you'll pick up the additional revenue, but as our model is showing we also leveraged down and improve.
The cost of that care you can go back to some of the published data that we have is we certainly see the management of the care gives us leverage to improve the financial performance over time. So I think we can certainly more than make up the headwinds we're seeing this year as we move into 2023.
Got it okay. Thanks for that color and then maybe just going back to your commentary on cash generation and I apologize if I missed it but does your cash generation year to date.
Change the expectations and given <unk>, given previously reaching free cash flow positive for 2023 at this time.
Yeah like I said clearly are.
Expectation for cash this year is changing.
<unk>.
And I would say, how I'm thinking about free cash flow in 2023, I think given the change in dynamics at this time.
A little too early to update any projections for 2023, but we're going to continue to focus in on managing overall working capital et cetera, as I talked about so.
It's high focus of the organization, but we also don't want to lead off the accelerator for the growth because it is a investment that will pay strong dividends in the years ahead.
Got it okay. Thanks.
Thanks, Shneur Raymond James is up next.
Hey, How's it going thanks for taking the question. Yeah. This is Parker on for John Ransom. So some of your peers have mentioned, a seven 5% retroactive adjustment to DCE revenue I was wondering if you guys could quantify the impact there and just to be clear that wasn't the PPD you mentioned and then was that factored into your.
For your guidance and how do you expect that to continue to affect you in the back half of the year.
So let me take that so we've always taken a more conservative approach to DC than most of our peers. We don't think margins are going to be equivalent to Medicare advantage or at least not in the near term and thus we continue to take a prudent view, which is reflective of our.
Numbers.
Okay.
We are seeing less contribution than anticipated from these new members.
As I explained we expect this to be temporary in nature due to care management and to a lesser extent for the DCA program documentation of acuity.
I'll just add.
We factored in a number of these.
Population specific variables into the DC program is.
In Q1 et cetera.
And we factor that into our forecast. So we feel we feel good about our projections for the business. We have a great management team running this business they have significant momentum at their back.
And has given us the long term value opportunities and just to reiterate I put a finer point on it. It is a very capital light business that generate strong revenues.
And provides us a nice drop through of earnings as that business will continue to improve.
So we remain very bullish on it.
Okay, and then just one quick follow up.
The operating cash flow guidance of negative 90 million to negative 80.
I believe before you guys were saying cash flow positive or cash flow from operations positive, but your EBIT guidance only.
Move lower by $35 million.
Maybe $50 million Delta in there what exactly in your working capital assumptions, it's changing that's driving that difference.
Yes, I'd have to go through your math, a little bit I Wouldnt I would say just the cash from operations a lot of that is just the working capital a lot of and a lot of that is the the MRA that.
Being offset by these.
Higher third party medical expenses that we've been discussing.
And I think.
All of that it's a number of factors that are playing through to the cash but generally we feel good about how we can manage through.
The next couple of quarters here and continue to be diligent NR.
Our focus on enhancing the operations of the organization to strengthen our cash position for sure.
Alright, great. Thanks.
Next step is Justin Lake Wolfe Research.
Thanks, a few questions here first just starting on the membership side.
You've mentioned the growth in DCE members and I'm just curious.
Any of those are new patients I should say to your business in 2022 versus existing patients that were there on a fee for service basis, but you've converted over.
The overwhelming majority of Justin are new to us.
Maybe there is.
A couple of thousand or so that are being served at our center 5000, or so perhaps out of 40000.
Already have been in.
The accounting model.
No.
The overwhelming majority would be no.
I guess I find out a little bit unusual just because youre growing Medicare advantage this year to date.
A few thousand for three to 5000 members by my math.
Youre, saying youre growing DCE by 35000.
Right yes.
That was all Jamie keep in mind for IDP.
I'm sorry to interrupt the DC comes in January one so think about you get that one one.
What time period, where you can.
Enhance your membership for January one and then you get another one and then the next January one and Thats. What Marlin was mentioned earlier is that additional 40000 is coming in.
On January one of 2023.
That's what our DTE management teams working on it.
Finding those providers that are willing to work with us willing to be part of the organization willing to.
Engaged and establish and continue to manage through high quality care and those are the types of providers that were very selective in seeking out.
So all of that factors into the growth within the <unk> program.
And just for further clarity.
We mentioned in the first quarter call that we would see conversions into Medicare advantage.
During the year.
And so so now you're at.
Somewhere in the 6000.
Net new MMA patients at this quarter, we see that continuing to grow quite significantly.
And.
As I.
I mentioned in my remarks.
We continue to expect around 60%.
Our membership to be Medicare.
And.
As you know the current DCE lives.
Will slowly decrease and then bill now increase by.
By 40000.
The number that we ended the year.
So.
The growth.
In.
And Medicare will come.
Exclusively from Medicare advantage for the balance of the year as it did for this quarter for example.
And so doing the math.
Around 60% of the 300000 almost exclusive Medicare advantage and then on top of that Youre going to add another 40000.
Medicare DCE Liars.
Gen. One we're at at least 340000.
Members.
Growth and that does not count additional growth during the AEP period. For example at this point, we're not giving guidance on.
On that but as we get closer.
We'll be more specific.
Okay, and then on the <unk> side, there's been a pretty good ramp over the last few quarter on ECA membership.
Does that is that in center or is that coming from these position.
<unk>.
Lee from shifts that you're driving and then.
What kind of margin do we expect to get on an ECA member I think previously you'd said, that's kind of a low single digit margin business.
So what we are focused on growth there.
Yes.
Low single digits.
It's in center, our medical centers, we're also seeing significant growth in Medicaid patients predominantly in our centers.
And it goes to the counter ethos of we don't turn patients away.
And we are.
We're able to manage the conditions.
All of our value based members in there.
They are voting with their feet.
They are telling their friends and family.
Have incredibly strong organic growth rates.
And our pipeline for our Medicare members.
So we will continue to work hard too.
To serve.
The population in and create that clinical capacity.
While making.
Necessary adjustments as well.
And we worked through significantly.
Significantly higher than anticipated growth.
Got it thanks for that and then on the de Novo's.
You've opened low teens year to date, you've taken up the.
Uh huh.
The losses, there, Brian I think 57% to $70 million, so what's driving the increase in losses given that so much of this growth seems back end loaded.
I would think the losses would be going down not up.
Yes, I would say.
I think the losses are still the same what we were projecting I think the cost per center is going up.
As you remember we were.
We're doing roughly 40 or so de novo's. This year. So certainly the cost per center is going up a little bit and we talked about that as part of our.
Our discussions and previously as.
Cause delays and timing et cetera is pushing those costs, a little bit higher than we anticipated initially but.
I think we've done a.
$35 million of de Novo add backs year to date, we project another 35% for the back half to get to the 70. So the 70 still in line with what we were thinking initially.
Okay, Great and then just last question everyone focused on the on the care side.
Brian maybe you could just give us a end of year given your guidance, where do you expect to end the year on cash.
And how much are drawn down on our revolver.
Yes.
Yes.
As I mentioned we.
We're managing through it we're not going to put out a projection on ending cash balance.
But we certainly don't don't need additional financing or additional capital.
Finished the year.
As I say right now I don't think.
We have any intention on drawing down the revolver and it's nice to have if we need it.
But right now we're going to continually continue.
Continue to diligently manage our working capital to meet the needs of the business for this year and.
As we move towards the back half of the year, we will give some additional color on how we're viewing 2023.
Alright. Thanks.
We will go back to Gary Taylor Cowen.
Okay.
Hi, Thanks, just a couple of quick.
Follow ups, one I just want to make sure I got this down right. Brian I had initially written down I thought you said you were.
Assuming full year DCE MLR of 99%, but then later wrote down 93, so I just want to make sure I do have your rate.
<unk> assumption for the year.
Nope, you've got it right, yes, we said roughly approximately 93% for the full year for DCE, which if you remember is maybe a slight uptick.
What we said what were thinking initially and Thats kind of what we mentioned around the pressure, we're seeing or at least the I'll call. It the <unk>.
Projections that we're putting into the outlook would push that full year full year, DCE MCR up to around 93%.
Okay and then just my last one was just going back to.
The TCE retro trend adjustment.
Went out to the entire.
Industry, so the $6 million that you called out this quarter was that.
The impact on your prior revenue accruals, which isn't really apparent because the per member per month in D. C look pretty stable sequentially or was that actually negative development in the traditional sense where.
Whats you actually wanted to accrue for medical expense for that population you needed to boost.
Yes that was primarily the I'll call it like your word.
<unk> of <unk>.
And but I would say we've also.
We factored in some of those.
Variables around the benchmarks previously.
But once again, we're going to continue to watch it.
I don't want to say too much but we are being prudent on this thing and cautious but you're right. So we certainly saw P Y D and the tradition majority of that in the traditional sense within that business, which for me I'm looking at that I want to make sure. These completion factors arent are a little bit longer than I wish <unk>.
Really intent anticipating for the reserve setting.
I want to make sure we're being smart as we go through the rest of this year until we see some more experience on this membership base, particularly as we saw large ramp up and one one that we just were talking about so see how that plays out.
And also keep a close eye on how CMS is.
Developing this program.
It is a new programming.
I've seen a lot of government programs and around the healthcare.
<unk> sector and they will make tweaks as they go as well so we've got to be smart about that.
Okay. Thanks.
That does conclude our question and answer session I will hand things back to our speakers for any additional or closing remarks.
Nothing on our end. Thank you very much for joining us and appreciate everyones.
Thank you.
And that does conclude today's conference. Thank you all for your participation you may now disconnect.
Okay.
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