Q4 2022 InnovAge Holding Corp Earnings Call

Good day, and thank you for setting by walking through the innovation fourth quarter 2022 earnings conference call.

At this time, all participants Oh listen mode. After the speaker's presentation, there will be a question and answer session.

I'll ask a question during the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I would like to hand, the conference over to your Speaker today, Ryan Kubota director of Investor Relations. Please go ahead.

Thank you operator, good afternoon, and thank you all for joining innovators fiscal 2022 fourth quarter earnings call.

With me today is Patrick Blair, President and CEO embarked with Trs CFO .

Dr. Rich Fifer Chief Medical Officer will also be joining the Q&A portion of the call.

Today after the market close we issued a press release containing detailed information on our quarterly and annual results.

You may access the release on our company web site <unk> Dot com.

For those listening to the rebroadcast of this presentation we.

We remind you that the remarks made herein are as of today Tuesday September 13th 2022.

Not been updated subsequent to the initial earnings call.

During this call.

We refer to certain non-GAAP measures.

Reconciliation of these measures with the most directly comparable GAAP measures can be found in our fiscal fourth quarter 2022 press release, which is posted on the Investor Relations section of our website.

We will also be making forward looking statements.

Including statements related to our remediation measures, including scaling our capabilities as a provider expanding our payer capabilities.

<unk> our enterprise functions.

Future growth prospects.

The status of current and future regulatory actions and other expectations.

Listeners are cautioned that all of our forward looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations.

We advise listeners to review the risk factors discussed in our Form 10-K annual report for fiscal year 2022, and our subsequent reports filed with the SEC.

After the completion of our prepared remarks, we'll open the call for questions I will now turn the call over to our President and CEO Patrick Blair.

Patrick.

Good afternoon. Thank you Ryan and thank you everyone for joining us. This afternoon I want to start by expressing my continued appreciation for our innovative employees across the country for everything they're doing to support our participants each other and our business during these challenging times.

And our federal and state partners for their ongoing collaboration and support and to our shareholders for their ongoing interest in the company.

This quarter represents a continuation of the transformational journey and innovate.

I remain confident that we're pursuing the right foundational actions to keep the business strong and healthy while navigating this difficult moment.

Primary focus continues to be resolving the issues that led to the enrollment sanctions in Sacramento in Colorado.

This includes following the receipt of our regulators ensuring they are completely satisfied with our improvements, we're making and the quality of healthcare delivery.

We're tackling these opportunities across every innovation center, whether in the audit process or not.

Im genuinely encouraged by our progress in the last 90 days by some measures. We are at even ahead of our expected timeline for near term operational improvements and medium term capability development.

The financial results for the quarter highlight the it investments in the core which we've made and the economic realities of frozen enrollment across roughly half our business.

While some of these costs are temporary some will be permanent as we believe they are critical to ensuring a highly compliant and effective care delivery model going forward.

The results also serve to crystallize the opportunity and importance of accelerating the development of our payer capabilities to effectively manage total cost of care.

While disappointing we do not believe the results reflect the strategic and operational progress made across the enterprise I will go into detail later in my prepared remarks.

Last quarter I introduced the three key dimensions of our transformational work.

Achieving operational excellence as a provider.

Expanding our core payer capabilities.

It's strictly critical enterprise functions.

Regarding operational excellence as a provider.

We're making meaningful progress across eight core initiatives, which will expand on shortly.

These initiatives are designed to help us earn the right to be released with sanctions and returned to accepting new participants in Sacramento and Colorado, while also providing the blueprint for standardized and scalable based platform.

Regarding our risk bearing payer capabilities. We've concluded the assessment of our current state across the areas of provider network management.

Evidenced based site of care management resources.

Resource management third party tier delivery claims payment and risk score accuracy.

What's more we've already begun to strengthen this core business processes have identified quick wins and developed a robust pipeline of initiatives that we believe will improve quality and lower medical costs.

We've also made large strides in strengthening our enterprise capabilities, and we are adding new talent and performance standards to the organization succeed.

Success in the business starts with great participant care delivered by purpose driven individuals.

To guide in a wide our leaders we've launched a five pillar performance management framework, which defines operational success and clear and measurable key results across the pillars of people service quality growth and financials.

As an example, we're measuring service through a quarterly participant satisfaction score.

In the fourth quarter it was 81%.

We look forward to improving this metric along with others in fiscal year 'twenty three.

We will have implementation work ahead of us, but my leadership team and I will be held to the performance standards This fiscal year.

On the talent front, we've made tremendous progress, adding both leadership and center level caregiving roles the momentum and culture. We are building coupled with the inspiring initiative pace is attracting top caliber talent to innovation.

In August we welcomed Dr. Rich fiber, who joined US as Chief Medical Officer, and this month, Kathy Andreessen assumed the role of Chief people Officer Rich.

Rich brings significant experience focused on optimizing performance across both the provider and payer domains. Kathy brings decades of experience as a CPO from the high growth technology and service industries, where she was instrumental in scaling talent management capabilities.

I would also like to note. The addition of Jim Carlson as our New Board Chairman, Jim brings decades of both public company leadership and board experience and I believe will be instrumental in accelerating our strategy and execution.

To begin today's discussion I would like to start with a regulatory update by market.

Updates on our eight key operational excellence initiatives.

Perspectives on the quarter with a specific focus on the interplay of operating and medical cost and then I will share some concluding thoughts.

On the regulatory front where can.

Continuing our work to resolve the audit findings working closely with CMS and our state partners. Our job is to ensure every requirements fulfilled and every question from the regulators as an answer.

We're making excellent progress systematically released any of the deficiencies that led to the sanctions and as I mentioned earlier proactively making these operational changes broadly across the organization.

We're measuring our progress monthly against a set of jointly developed audit performance measures importantly, we have been in kitchen to build the performance measures into a dynamic dashboard for efficient communication and progress report there.

The regulators are using our performance against these measures to assess our progress and to determine when to begin the audit validation process, which is the final audit step before sanction can be released.

As we said before the actual time of sanction release will ultimately be determined by our regulatory partners.

Starting with Sacramento, we've achieved five consecutive months of target performance against key measures.

CMS and the state have acknowledged our progress and we are working closely to determine the remaining steps before entering the validation process. We don't know the date with sanctions will be released but we are confident we're on the right path.

In Colorado CMS accepted our corrective action plan in April and the Colorado Department of Health care policy and financing accepted our plan in June .

We've taken what we've learned in Sacramento, and we're applying it to Colorado.

And we're very pleased with our progress we are working intensely to satisfy all the requirements as quickly as thoroughly as possible and our performance over the next few months will be critical to reaching the validation stage.

In new Mexico, the audit began in October 2021.

In July we were verbally notified no enrollment sanction would be taken.

There are immediate corrective actions that we must take to remediate all aspects of the audit and are working with CMS and the state all while continuing to enroll participants.

Similarly in San Bernardino. The Ara began in March 2022, we were verbally notified by CMS in August it no enrollment sanction will be taken but again, while continuing to enroll new participants we are implementing immediate corrective actions and working with CMS and the California Department of.

Health care services, and all remaining aspects of the audit.

For our two markets not interactive audit, Pennsylvania, and Virginia. We are currently not aware of planned audits, but if proactively deployed self audits based on our learnings in California, Colorado and New Mexico.

In Florida, we remain on pause in our Tampa and Orlando de Novo centers until we have greater clarity on where current sanctions will be released.

To sum up we believe we've identified the root causes which led to the sanctions and are addressing them wherever they exist.

We're not only making progress across markets under section, but we're also beginning to see some evidence that we're earning back the trust from our government partners.

In May I shared with you that we were focused on eight operational process improvement initiatives to address the root causes of the audit deficiencies, which began in earnest in February .

We believe excellence in these areas will not only reduce future compliance risk, but is also bedrock to repeatable operating playbook.

We communicated that we expected to complete these initiatives by calendar year end and I am pleased to report that we're making strong progress and are largely tracking ahead of schedule.

<unk> as of September one we've made progress along the following dimensions.

Filling critical personnel gaps in each of the centers.

We've reduced the number of critical open positions by approximately 60%.

Physicians nurses and homecare workers continue to be the most challenging areas, but we're making steady headway.

We have also increased our overall FTE head count by approximately 150 over the last six months to approximately 2000, including 300 clinicians.

Standardizing the process of our interdisciplinary care teams, who plan coordinate and deliver care.

We've implemented new processes and tools for these mission critical care teams across all 18 centers. Our focus now is continuous performance monitoring and trade.

Improving the timeliness of scheduled and coordinating care with external providers outside the centers.

Approximately 95% of participants are being scheduled to target Timeframes and backlogs have been largely eliminated we're now optimizing staffing productivity measures and tools.

Improving the efficiency and reliability of transportation for our participants.

Driver open positions have been reduced by approximately 90%. Additionally, transportation is running added.

On time percentage of approximately 80%.

We are also in the process of implementing new scheduling and routing tools, which we believe will improve efficiency and meaningful way.

Standardizing our wound care program across the enterprise.

We secured local in network contracts across all centers and we are finalizing a few national partnerships with the goal to further improve quality and reduce costs in this area.

Reducing documentation outside of EMR.

If completed training and proficiency examinations on how best to utilize the EMR for care documentation across all targeted sectors.

Improving our telephonic response times strengthening our home care network and reliability.

It's taking us longer to achieve our targeted results for these two initiatives due to the reliance on technology enhancements and the inherent challenges of our home care workforce shortage.

In the near term, we have made solid progress through improved processes, resulting in increased productivity within homecare. These open positions are included in our critical hiring initiatives discussed earlier.

We're pleased with our progress in the coming months will be focused on ensuring we have the structure in place to sustain and continuously improve all of these areas.

Now turning to the quarter.

We reported revenue of $172 9 billion.

Which represents a sequential decline of two 5% compared to last quarter.

We ended the quarter, serving approximately 6650 participants.

For the fourth quarter, we reported center level contribution margin of $23 6 million and a corresponding center level contribution margin ratio of 13, 6%.

Which represents a decrease of two 2% sequentially when compared to the third quarter fiscal year 2022 central level contribution margin of $28 million.

To be clear, we're working through a unique transitional period as we return to a sense of normalcy.

Colby, while also navigating the audits.

We're focused on getting participants back into the centers consistent with pre COVID-19 levels, and we're making long term investments to fundamentally transform our ability to execute at scale.

Starting with revenue net census, overall is down approximately 2% sequentially driven by a decline of approximately 6% and sanction markets. The.

The sanctions are Colorado have heavily impacted the overall picture.

Is it represents approximately 47% of our total census, we have invested resources to improve our overall enrollment in non sanction markets to help offset these dynamics. These investments are bearing fruit as we assume gross enrollment increases of 34% and non sanction markets, resulting in net census growth approximately.

3% in these markets over the same period.

As you know most of our rates are contractually determined in factory and healthcare inflation.

Our Medicare rates in fiscal year, 2022, or approximately $3900 per unit.

This represents an increase of four 5% versus fiscal year 2021.

Regarding Medicaid rates, we recently received updated rates for Colorado, Virginia and Pennsylvania.

Bob will provide more detail in a few minutes.

We appreciate that our Medicaid rates are set with some discretion by state agencies and believe the process is intended to address the cost pressures, we are experiencing carrying for our for all participants.

Center level costs were up sequentially impacted center level contribution margin due to increasing head count higher wages for some roles.

We also made staffing investments to address a unique period, where participants are returning to our centers, causing stress on our organization to provide care and fully reopened centers. While also covering the needs of many participants who are uncomfortable returning to purse.

We have invested meaningfully in our centers as noted earlier, but believe strongly in the ROI of this approach both in terms of long term compliance and reduce provider costs, including inpatient and post acute stays in long term care born from optimal center staffing.

Separately.

We also continue to observe elevated external provider cost on a sequential basis overall external provider costs were lower by approximately $4 5 million due to lower census, and a decrease of $90 <unk>, but remain above historical levels.

As we dug further into the data we've learned a lot more about our cost of new a quarter ago.

As with most healthcare cost trends the drivers are multifaceted and include lower average daily attendance in our centers due to COVID-19.

Prolonged staff vacancies turnover and productivity loss during the audit periods.

And fewer new participants entering the risk pool, and the decommissioning of participants post COVID-19.

Let me spend a couple of minutes on each.

Average daily attendance.

Patients are sooner based model for good reason, our ability to engage daily with our participants and proactively manage early warning signals as impaired we participants do not come into the center.

While COVID-19 subside in the fourth fiscal quarter participant fear and concern are returning to the center did not.

This had a negative impact on our external provider costs.

Can't quantify with precision, but believe it was a factor.

To address this we quickly actually a dedicated initiatives focused on increasing daily attendance, which in the last three months has improved by approximately 50% from when we began a focused effort in may.

We believe getting participants back in the centers will improve our ability to manage these costs.

Staffing turnover and lost productivity.

A critical factor in optimizing care efficiency, including the total cost of care is the focused attention of our frontline caregivers two competing factors have created challenges. The first involves caregiver staffing turnover and vacancy.

This is a challenge all provider organizations face.

The second involves the significant time and energy devoted to audit remediation, which we estimate is occupying approximately 15% of our caregivers time and approximately 30% of sicker focus leadership time, thus requiring incremental temporary staffing to compensate.

As we stabilize our staffing in the Mercury audits, we expect these temporary cost to gradually reduce.

Risk pool in each initiative.

Enrolling new participants is critical to maintaining a balanced risk pool.

Cause we have been unable to enroll younger healthier community based participants we have not been able to offset the cost of longer tenure participants.

To better understand these dynamics, we engaged a third party to review the specific impact of Covid on our business.

Among other findings the percentage of our participants in the first two years of their innovation tenure decreased from 46% pre COVID-19 to 41% when comparing participants from first quarter 2022 with fourth quarter 2019.

Which skewed our risk pool towards longer tenure Frailer participants.

Further we have also confirmed after COVID-19 diagnosis are participants often experience higher cost over pre COVID-19 levels. The analysis referenced earlier indicated that participant expense was approximately 88% higher on average in the calendar year post Covid diagnosis. This is.

With emerging medical literature that people are more susceptible to a range of other conditions post COVID-19.

In many cases is the condition of our participants has led to higher rates of long term care placement.

Like other risk bearing government program Payors.

Capabilities to improve quality and lower medical cost trends are a core part of the operating model and a key reason why government payers are increasingly working with private companies as I referenced in the last call. These capabilities exist within the innovation today, but their effectiveness is mixed we weren't prepared to handle such a multifaceted set of trends.

Drivers once because we've got our arms around the drivers we've developed a set of initiatives that we call critical value initiatives, where <unk> to mitigate the cost trends in key service categories like inpatient assisted living.

Yes.

For example, we've begun to action initiatives to reduce unnecessary readmissions within 30 days ensure care is delivered in the most appropriate site of care and that our risk scores reflect the acuity of the populations we serve.

Additionally, the largely untapped advantage that pace organizations have over traditional managed care organizations is that we're also delivering the care and approximately one third of the total cost of tear occurs within our four walls.

While admittedly need to start with the basics, we believe it matured we can generate a meaningful reduction annual medical costs.

Taken together the results of the fourth quarter reflect continuous investment in the business.

Remember, we're making material investments in the centers because we firmly believe in the power of the center based paced model to keep participants at a higher cost settings. It may cost more to operate our pace centers going forward than it has in the past, but we're building capabilities that will enable us to better manage external provider cost, which we believe will allow us.

To maintain the attractive long term margin profile.

And with that I'll turn it over to Barb to review the quarter in detail.

Thank you Patrick.

I will provide some highlights from our fourth quarter and fiscal year end financial performance for 2022.

An update on Medicare and Medicaid rates for fiscal year, 2023, and some insights into the trends we are seeing as we head into the new fiscal year.

As with our previous earnings calls I will refer to sequential comparisons relative to the third quarter in order to provide a more meaningful picture of our performance.

We ended the fourth quarter and fiscal year 2022, with 18 centers in a census of just over 6650 participants as of June 32022.

Compared to the prior year. This represents an ending census decrease of two 8% comp.

Compared to the fiscal third quarter census declined four 4%.

We recorded over 83800 member months in fiscal year, 2022, or three 9% increase compared to the prior year after including the Sacramento census, which was not consolidated until the second half of fiscal year 2021.

Revenue grew nine 5% to $698 6 million for fiscal year 2022.

Primarily driven by member months growth and a mid single digit increase in both Medicare and Medicaid rates.

Medicaid rates in fiscal year 2022 include a temporary rate increase from the American Rescue plan Act or ARPA in Colorado and Virginia.

Fourth quarter revenue decreased by two 5% to $172 9 million compared to the previous quarter, primarily due to decreased member months as a result of the ongoing enrollment sanctions in Colorado in Sacramento.

External provider costs for the full year were $383 million.

23, 8% higher than the prior year and $98 $7 million for the fourth quarter, a decrease of four 4% compared to the fiscal third quarter of 2022.

The year over year increase was primarily due to an increase in member months, coupled with higher cost per participant.

The cost per participant drivers include.

One the lingering effects of Covid from the third quarter Caf inpatient costs elevated associated with higher acuity and drove greater post acute care utilization.

To increase housing utilization in assisted living and nursing facilities.

Three increased permanent housing rates as mandated by certain states.

As we mentioned on the last call. This includes the ARPA funded public policy adjustment in Colorado that increased assisted living rates by more than 30% effective January one 2022.

And for increased outpatient and specialist care expenses in part as a result of our participants seeking health care services that were delayed during the onset of the pandemic in fiscal year 2021.

During the quarter external provider cost declined four 4% from the fiscal third quarter of 2022 due to a decline in post acute utilization as the impact of increased utilization in the third quarter, particularly from Covid began to subside.

Our cost of care, excluding depreciation and amortization of $182 million was $16, 7% higher year over year drill.

Driven by an increase in member months and the overall cost per participant.

The primary cost drivers include.

Increased head count as we continue to make progress filling vacancies, adding approximately 150, new employees over the last six months.

Higher wage rates and temporary labor associated with the ongoing competitive labor market.

The financial impact on operations as a result of all centers being opened for a full year.

And preopening losses associated with new de Novo locations.

Sequentially cost of care increased nine 5% to $55 million due to increased head count as we continue to fill vacancies and increased labor costs associated with ongoing audit remediation and compliance efforts some of which will be temporary in nature.

Central level contribution margin, which we define as revenue less external provider costs and cost of care, excluding depreciation and amortization was $135 $4 million for the fiscal year ended June 32022.

Compared to $174 1 million in the prior year.

For the fiscal fourth quarter, we reported a center level contribution margin of $23 6 million compared.

Compared to $28 million in the fiscal third quarter of 2022.

Sales and marketing expense was $24 $2 million for the fiscal year ended June 32022, increasing eight 8% year over year, primarily due to an increase in head count and costs associated with organizational realignment.

For the fourth quarter sales and marketing expense of $5 $1 million decreased approximately $1 1 million or 17, 2% compared to the third quarter, primarily due to lower marketing spend as a result of the sanctions.

Corporate general and administrative expense was $101 7 million for fiscal year ended June 32022, a decrease of 23, 2% year over year.

The full year decrease is primarily due to $58 $5 million in fees incurred during fiscal year 2021, as a result of the apex transaction.

Offsetting the decrease related to the apex transaction included.

An increase in head count to bolster our organizational capabilities.

Costs associated with organizational realignment and full year financial costs associated with regulatory requirements of being a publicly traded company.

These increases in expense are partially offset by lower bad debt expense compared to fiscal year 2021.

For the fourth quarter, corporate general and administrative expense increased 11% to $27 $4 million.

The increase over the third quarter was primarily due to costs associated with third party consultants to develop and implement our eight core provider initiatives.

Yes, our risk bearing payer capabilities and to strengthen our enterprise capabilities that Patrick touched on previously as well as increased legal costs.

Net loss for the fiscal year ended June 32022 was $8 million compared to prior fiscal year net loss of $44 $7 million.

For the fourth quarter, we reported a net loss of $13 $5 million.

For the fiscal year ended June 32022, we reported an earnings per share loss of five.

Both basic and diluted.

Our basic and fully diluted weighted average share count for fiscal year 2022, with $135 million 519970 shares.

Adjusted EBITDA, which we calculate by adding interest taxes, depreciation and amortization and.

And one time adjustments for transaction and offering related costs.

And other nonrecurring or exceptional cost to net income.

With $34 $3 million for the fiscal year ended June 32022.

Compared to $85 3 million in fiscal year 2021.

Adjusted EBITDA for the fiscal fourth quarter was negative $6 million.

Impaired to a positive $1 $9 million in the fiscal third quarter of 2022.

Adjusted EBITDA margin for the fiscal year ended June 32022, with four 9% compared to 13, 4% in the prior year.

For the fiscal fourth quarter, we reported an adjusted EBITDA margin of negative 4% compared to positive one 1% in the third quarter of 2022.

The decrease to adjusted EBITDA compared to the third quarter was due to elevated inpatient costs as a result of higher acuity increased housing costs.

Additional costs associated with audit remediation and compliance efforts.

Higher cost of care due to a competitive labor market and increased head count.

De Novo center losses, which we define as net losses related to Preopening and startup ramp through the first 24 months of de Novo operations were $2 3 million for the fourth quarter, primarily related to our Tampa and Orlando centers in Florida.

As Patrick mentioned, we are committed to CMS and the agency for healthcare administration or Orca that we have proactively paused the remaining steps in the expansion process to allow us to focus exclusively on resolving our active audit issues before proceeding in Florida.

Turning to our balance sheet.

We ended the quarter with $184 $4 million in cash and cash equivalents and had $86 4 million and total debt on the balance sheet representing debt under our senior secured term loan convertible term loan plus capital leases and other commitments.

For the fiscal year ended June 32022, we had $38 2 million of capital expenditures.

Finally, while we have been making progress on our remediation efforts associated with the sanctions the inherent.

Uncertainty and open timeline around sanction release prevents us from providing forward looking guidance for fiscal year 2023.

That said, we do want to provide some additional visibility around the following areas, where we are able.

First regarding sensus.

We are continuing to enroll new participants in our non sanction centers, resulting in net asset growth in the low single digits and expect those trends to continue into fiscal year 2023.

As a reminder, we lose approximately 2% of our sensor sensors on a monthly basis, primarily driven by involuntary dis enrollment.

While the majority of reminder, we lose approximately 2% of our sensor sensors on a monthly basis, primarily driven by involuntary dis enrollment.

While the majority of these losses, our involuntary we have repurposed our sales teams in sanction markets to focus on retention efforts to reduce voluntary.

Regarding revenue.

As you know our rates are contractually determined and are based on costs for pace or comparable population.

Our Medicare rates are based on county rates is determined each calendar year by CNS, coupled with prospective risk score adjustments made by CMS in January and July .

When converted to a fiscal year basis, Medicare rates increased four 5% in fiscal year 'twenty two over fiscal year 'twenty one.

For fiscal year 2023, we are expecting a combined net mid single digit rate increase comprised of the following.

A low single digit Medicare part C increase partially as a result of sequestration fully resuming in July .

Our mid single digit Medicare part D increase.

And for Medicaid a mid single digit rate increase inclusive of 10% in Colorado, which includes go forward funding effective July one that offsets the increase in assisted living facility rates that went into effect in January .

5% in Virginia.

<unk>, 3% in Pennsylvania effective January .

No rate increase in fiscal year 2023 in new Mexico, and as previously disclosed a mid single digit rate decrease in California effective January one 2022.

Next.

An external provider cost perspective.

We expect external provider costs to remain elevated compared to historical levels in part due to the post COVID-19 acuity effect on our participants although tapering in the near term relative to the second half of fiscal year 2022.

For our cost of care, we expect cost pressures to also remain elevated as we continue to work through audit remediation and add to our workforce how.

However, we do anticipate that these costs will begin to moderate as our new Mexico and San Bernardino centers receive corrective action plans from their respective audit without enrollment sanction.

Regarding corporate DNA.

We are continuing to evaluate the organization to optimize the business and refine our payer capability roadmap as Patrick indicated earlier, we are focused on eight key provider operational excellence initiatives and building up our payer capabilities.

Going forward, we want to ensure that we have the structure in place to sustain and continuously improve the ongoing effectiveness of these initiatives.

Regarding sales and marketing.

We continue to make prudent decisions as we balanced staff retention with our need and desire to grow only after our remediation efforts are complete with.

With new leadership in place, we are making investments in our sales and marketing capabilities, while closely managing our cost structure and we will utilize our sales teams non sanction market participant outreach and voluntary dis enrollment mitigation in the near term.

We believe the recent financial results reflect a transitory period for the business influenced by several factors, including our participant profile audit remediation efforts and labor market dynamics.

As Patrick stated some of the costs reflected in our quarterly results will be temporary while some will be permanent.

We believe that all of the investments we are making into the core of our business coupled with the development of our payer capabilities will help us to effectively manage total cost of care, while simultaneously working to ensure we have a highly compliant and effective care delivery model for the future.

I will now turn the call back to Patrick for his concluding thoughts Patrick.

Thank you Barbara.

Ongoing commitment to all stakeholders continues to be doing everything in our power to proactively strengthen our operations organization wide.

Order to earn the right to be released from sanctions to avoid future issues and to be sustainably high performing paced provider able to serve participants for years to come even in more locations across the country.

While im pleased with our strategic and operational progress over the last three months and a correspondingly disappointed with the quarter financially but remain resolute.

I'm confident that we're on the right path are working hard on it across the organization and are making bonafide progress on all of the important fronts.

Particularly pleased with our great team, including our New center based and enterprise leaders as with all significant transformations solid outcomes are always preceded by a compelling strategy laser focus effective execution and the team with the right attitude and perseverance It may take time.

Thanks to the efforts and support of our internal team and partners my conviction that we will succeed grows everyday.

Operator with that we can now open the line for Q&A.

Thank you.

As a reminder to ask a question you need to press Star one one on your telephone please standby, while we compile the Q&A roster.

And our first question comes from the line of Jason Cazorla from Citi. Your line is open.

Great Hey, guys. Thanks for taking my questions.

Just on the census front the breakdown.

Excuse me, 6% decline in sanction markets versus the 3% call. It in that growth in non fiction markets. If I heard that right was definitely helpful and you highlighted investing in resources in those non sanction markets. The gross answer so maybe in that context can you just delve a little bit deeper into the investments in those non sanction markets and if those investments can be.

Made in sanction markets once those are lifted as well as what kind of capacity you have in those non sanctioned centers that continue to grow at that level and then if we should think about that 2% level of sequential decline in a steady state environment until the audits are remedy or any color around forward census trends.

That we should consider would be helpful. Thanks.

Well. Thank you Jason Great question to get Us started.

Start with some of the investments we've made.

Our non <unk> markets to heal.

Drive growth, while we're under sanctions and a couple of our key buckets first I'd point to is we've been very selective in adding a few sales leaders to the organization.

<unk>.

<unk> sales and marketing officer long track record of driving growth senior programs.

<unk>.

He's done a great job of really sizing up the sales organization, and making changes where appropriate as well as building a much stronger accountability model.

As it relates to making sure.

We're out in the market and we're doing everything we can to make seniors in the community aware of pace.

Also made a number of investments in our CRM system, which is.

<unk> helps with capability helps with throughput.

The acceleration of sales activity from building awareness all the way through to enrollment and I'm also really excited about the work that our sales teams doing now with our clinical leaders to make sure that we are very focused on.

We're making sure that every individual that joins <unk> as a good fit for the program. So.

A lot of great work in a lot of great investment.

In that area I think these are investments that we have also started to make and apply to.

Other markets, so while we're still under sanctioned and Colorado in Sacramento, We still begin to rollout these changes.

<unk> <unk>.

Ensure that once the sanctions are lifted we're really committed to as fast ramp up back to historical levels of productivity.

Then we have seen in the past so there is.

Very focused effort to get to ramming speed so to speak.

For sanction markets. Once they are released from presentation. So let me ask barb to comment as well hi, Jason It's barb. So a couple of things if I make sure I caught all your questions, but if I didn't please let me know.

So I think one of your questions was around the dis enrollment rate.

And.

And maybe just reading between the lines does that differ between the sanction and non sanctioned.

<unk> then it doesn't.

At 2% on average 2% per month on average is just pretty typical.

Across all of our all of our centers, regardless of Iran sanction or not.

And then I think your second part of your question was a little bit about capacity in our centers.

And so generally speaking we are we have said for since we went public that we do have capacity in our existing centers. So part of our growth strategy is around that organic growth and we do have capacity in our existing centers kind of ranges.

Depending on the center in the side, but generally we've got about 50, 50% capacity across the enterprise.

Order to grow so we do have a lot of organic growth capacity.

Got it and then just really quickly on a follow up there just the.

The 2% level of sequential decline in aggregate is that is that a fair way to think about the steady state kind of.

Declines until we kind of get on the other side of these.

Thanks, guys at this point or are there other nuances that we should be thinking about just as we think about the go forward.

Yes, I think it's in that range, it's in that range two to a little bit more neutral. So I think just to really bifurcate, what's going on right is that we have natural dis enrollment in every center and then about half of our business, we're not enrolling new participants, but we are growing and the other half of March.

So you know I think Patrick referred to those you know we kind of refer to those low single digit kind of increases net net.

So it's kind of in that in that range going forward.

Got it okay. That's extremely helpful. Thank you and then just as my follow up here just on your balance sheet cash cash position, maybe just to start it looks like capex spending in the fourth quarter almost doubled compared to what you've done in the previous nine months, leading up to the fourth quarter. So maybe just to start where was that capex allocated it was it generally just related to the audit remediation.

<unk> or was that for other areas and then just as a follow up you know obviously your remediation is at top of mind, but you're hanging out right now with over $180 million of cash only about $86 million debt on the balance sheet.

Are there ways, you can leverage that cost position for investments or otherwise or will you be taking more of a wait and see approach perhaps until the audits are completely.

Remedied at this point just any color on spending priorities, just given you're a pretty hefty cash position and the audit remediation considerations. So anything there would be helpful. Thanks, Yeah sure. So one thing on the de Novo is just to clarify I used the wrong proposition. So the two seven should have been through the fourth quarter not in the fourth quarter.

So that $2 7 million related to de Novo.

But one of the Premier League.

Almost no primarily in Tampa and Orlando. So that's that's where the investments are being made.

In terms of the cash position you're right. We're fortunate we have a fair bit of cash on the balance sheet.

Always looking to optimize how we invest that and we definitely are looking at ways, how to optimize that investment, but I think in terms of what we do long term. It is a little bit more of that wait and see we're really really trying to be focused on investing in the business and stabilizing the business that we can turn around and grow and so.

It is a little bit more of that wait and see in terms of the cash approach.

Okay. Thanks.

Thank you one moment for our next question.

Our next question comes from the line of Sarah James from Barclays. Your line is open.

Thank you.

It sounds like you guys are having a lot of productive conversations with regulators at the state and federal level and I'm wondering if they're giving you a sense.

What went on how much of it was really across the industry and COVID-19 versus what was.

Company specific.

Well. Thank you Sarah this is Patrick.

Our conversations with <unk>.

Our regulators both CMS and the states are very focused on innovation and very focused on.

We're doing well.

We are collaborating on too.

Address the deficiencies identified in the audit the notion of what's happening in the broader industry related to peace and impact of Covid.

Racing related to similar deficiencies is just not a conversation that we're focused on we've really stayed.

Focused on our own work with with.

With regulators and are really pleased as you say is really pleased with the progress that our teams are making.

Can't say enough about the collaboration that we're getting from our regulators.

Okay.

And then it sounds like you guys are making a number of changes that are going to have a long term impact.

There are some on the staffing and wage side.

Got it.

That could be a longer term.

But then it sounds like there's a lot of efficiency and cost of care initiatives that can be a tailwind how do you think about your long term margin evolving.

Maybe I'll start with you tomorrow.

I think we still hold a lot of confidence that we can achieve a very attractive margin profile.

For the company going forward.

As we discussed before our.

Central level cost.

Our.

<unk> percentage of our total cost.

Our external provider costs.

So the notion is.

Yes, it may require.

More investment.

Centers that we've made in the past, but we feel very confident that there is a significant opportunity for us to get.

Our Hawaii from those investments might doing.

Much better job.

Or managing our external provider costs and so we feel.

Very confident that that's a formula that we can execute on and we're already starting to see some wonderful progress on as part of our teams or do you think you'd like to add.

No I think just to somewhat Patrick.

I think Sarah that.

We did have some we've had some headwinds in FY 'twenty two really related to some.

Covid expense.

Labor market challenges no different than the broader industry and so we're really focused.

Just on these other initiatives the payer initiatives and the operational initiatives too.

To turn the tide here in Q to be accretive to our overall margin profile going forward.

Early to tell where we've really been in the assessment phase in the planning phase if you will and we're moving into the execution phase So little early to tell.

That will.

How much of that will have an impact on our margin.

Our margin.

Okay and last question is just on the contract Labor you guys talked about could.

Could you give us an idea of what percent of your clinical staff is contract labor now versus pre Covid and.

Is there any way to size.

Is that the dollar impact from that.

I'll make some just real high level estimation, so I think that.

We don't think that it's any higher now than I think it was previously I mean, I think it's just proportional to the overall labor market I.

I think as a percent, it's probably about <unk>.

Under 10% of our overall.

Forest.

I think it's just one it's one component obviously, its a more expensive component and we obviously use that to.

To backfill into places for critical roles.

Great. Thank you.

Thank you.

For next question.

Our next question comes from the line of Jamie <unk> from Goldman Sachs. Your line is open.

Hey, good afternoon, I was hoping we could start with.

With Sacramento in some of your comments there.

First the five months of being on target with with performance, what specifically are you tracking there.

Maybe seeing incremental color you can give on what does.

The metrics, you're tracking and how the key ones are.

Sarah versus your targets.

Sure. Thank you Jamie I.

I would start with my opening remarks that we are using a set of measures that we jointly developed with CMS and our state partners.

The sorts of things that you would see in those measures are things related to ensuring service orders are scheduled and provided timely.

Participants are caregiver requests.

Our identified appropriately documented.

Theres measures related to care plan.

Timeliness.

And.

Completion.

There's measures related to.

The frequency of our assessments.

With our care plan development with our members.

And then things related to just the responsiveness of our interdisciplinary team overall sorts a variety of measures.

We jointly developed with our regulatory partners that really have formed the foundation for understanding our progress in a common language.

Between innovation partners and <unk>.

You mentioned in Sacramento in particular.

We've had some very strong and consistent performance.

Over the last several months and that progress is being acknowledged by our regulatory partners.

We're in close conversations to determine what are the next steps necessary to get through the validation phase, which is the final phase before sanctions can be released with the timing of that as we've said many times still resides with the regulators.

Okay. Thanks for that.

One other quick one just on the comments related to higher costs associated with longer tenure patients on the platform.

Yeah.

My sense is that the revenue associated with those patients is also higher so just can you talk to what the margin profile there.

Patient contribution profiles patient looks.

First couple of years on the platform versus.

<unk>.

Our more tenured on the platform any any color on that would be great.

Yes, Hey, Jamie its mark.

So just.

Some general color on it. So so really this is this is really nothing different.

And then.

Analyze them over time.

Yeah that is.

It depends age in their program they become more.

Our services and often are in a different higher cost setting so.

That's really what we're referring to.

I think without putting any numbers to it I think you get the concept that those higher cost settings, obviously are.

Our margin on those.

Because of that now to your point about do we get more revenue related to that to some degree on.

On the Medicare aspect there risk scores are increasing so to some degree we get more revenue, but on the Medicaid aspect, which really pays for those alpha sniff costs not necessarily risk adjusted.

It's not risk adjusted so so we get some revenue to some degree, but but not commensurate with necessarily the needs of that population.

Okay. Thank you for the color.

Thank you.

And one more for our last question.

Our last question comes from the line of Matt <unk> Mohmand from William Blair. Your line is open.

Hi, Thank you so much for taking my question I was just kidding.

One is we're curious about the impact of inflation on your cost, particularly related to fuel and transportation and I know that you said the 2023.

But going forward would you have been placing remains elevated is there any room for you to negotiate rate or to work with CMS to keep inflation into account.

Well thank you for the question.

This is an important part of our discussions with <unk>.

Our state partners.

Actually throughout the year.

Certainly as we're in the midst of reached city cycle is to ensure that the discretion that states have to address.

Cost that we're experiencing inflationary cost as you referred to.

As a critical part of all of those conversation, it's still being pushed very hard for us.

Colorado was probably a good example of very successful discussions with our partners on what's driving or cost.

But with that let me ask Barb to punctuate, Yeah, and I think in addition to what Patrik just said.

Said.

Some of the things that the states have actually done in certain states. We've received those ARPA funds and in fact that is meant to help us cover those inflationary costs, whether it's wage rates or whatever it might be the states have some discretion on how they allocate those funds, but we have received ARPA funds from both.

From a number of states, Colorado in particular that Patrick was just referring to.

Really fold that into our rates effective July so I think that's that's one of the ways. We can cover it I might just add one closing thought on that is that it's important to recognize there can be some lag between when we're experiencing those costs and reporting those cost and when theyre actually recognized in our rates. So sometimes we would have.

Tight matching between inflation and the state's rates. So just wanted to add that as well.

Great. Thank you so much I'll say, perhaps that dialed in for Matt.

One other quick question I know you said you voluntarily pause progress on your centers in Florida, but I was curious if you are when you decided to continue pursuing de novo.

Will you try to regain approval in states, such as Indiana, California, and Kentucky that you previously had plan to you or are you going to pursue new state.

Well I'd like to separate those into different buckets.

<unk> been an existing state I would just reinforce there are several markets in California are very attractive to us.

We've made inroads in progress and the handful of markets and when we're in a position to be released from sanctions will certainly be pushing.

To move quickly on opportunities that may exist still work to do but we will certainly do.

Treat California's Martin this is looking to accomplish with <unk>.

<unk> type services, and we're going to be great partners.

Sure.

Kentucky, and Indiana, where also a bit.

Kentucky is a market we've actually already invest.

<unk> invested in the center, there and we're beginning to see.

Think through what are our options and what is the timing, Kentucky, but still a very attractive space for us.

Ms in Indiana is another market.

We certainly attractive, but we've not made.

Final decisions about how to proceed.

Indiana, and we're working through that as we speak now, but very much interested in de Novo expansion. When the time is right and we feel confident we have the support of.

Our regulatory partners.

Great. Thank you so much.

Thank you.

Now I'd like to turn the call back over to Patrick Blair for any closing remarks.

Well, thank you very much operator, and before we close I just wanted to take a minute to just reinforce how much we've accomplished as an organization over the last seven to nine months.

Just extraordinarily proud of our team and their unwavering commitment to the company that continues today.

I believe our future is very bright and the path forward is clear.

It's our commitment to continue to bring clarity during this transitional period to all of our stakeholders as we have relevant updates to share.

And with that I'll close and thank everyone for their continued interest and innovate have a good evening.

Yes.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

[music].

[music].

[music].

Good day, and thank you for sending by walking through the innovation fourth quarter 2022 earnings conference call at this time, all participants Oh listen mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you need to press star one one on your telephone.

Please be advised that today's conference is being recorded I would now.

And the conference over to your Speaker today, Ryan Kubota director of Investor Relations. Please go ahead.

Thank you operator, good afternoon, and thank you all for joining innovators fiscal 2022 fourth quarter earnings call with.

With me today is Patrick Blair, President and CEO embarked with Trs CFO .

Dr. Rich Fifer Chief Medical Officer will also be joining the Q&A portion of the call.

Today after the market close we issued a press release containing detailed information on our quarterly and annual results.

You may access the release on our company website.

<unk> Dot com.

For those listening to the rebroadcast of this presentation.

We remind you that the remarks made herein are as of today Tuesday September 13th 2022.

<unk> not been updated subsequent to the initial earnings call.

During this call we will refer to certain non-GAAP measures.

Reconciliation of these measures with the most directly comparable GAAP measures can be found in our fiscal fourth quarter 2022 press release, which is posted on the Investor Relations section of our website.

We will also be making forward looking statements.

Including statements related to our remediation measures, including scaling our capabilities as a provider.

Pending up here capabilities.

<unk>, our enterprise functions future.

<unk> future growth prospects.

Status of current and future regulatory actions and other expectations.

Listeners are cautioned that all of our forward looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations.

We advise listeners to review the risk factors discussed in our Form 10-K annual report for fiscal year 2022, and our subsequent reports filed with the SEC.

After the completion of our prepared remarks, we will open the call for questions I will now turn the call over to our President and CEO Patrick Blair.

Patrick.

Good afternoon. Thank you Ryan and thank you everyone for joining us. This afternoon I want to start by expressing my continued appreciation for our innovation employees across the country for everything they're doing to support our participants each other and our business during these challenging times.

Our federal and state partners for their ongoing collaboration and support and to our shareholders for their ongoing interest in the company.

This quarter represents a continuation of the transformational journey and innovate.

I remain confident that we're pursuing the right foundational actions to keep the business strong and healthy while navigating this difficult moment.

Our primary focus continues to be resolving the issues that led to the enrollment sanctions in Sacramento in Colorado.

<unk> includes following the receipt of our regulators ensuring they are completely satisfied with our improvements, we're making and the quality of healthcare delivery.

We're tackling these opportunities across every innovative center, whether in the audit process or not.

I'm genuinely encouraged by our progress in the last 90 days by some measures. We are at even ahead of our expected timeline for near term operational improvements and medium term capability development.

The financial results for the quarter highlight needed investments in the core, which we've made and the economic realities of frozen and enrollment across roughly half our business.

While some of these costs are temporary some will be permanent as we believe they are critical to ensuring a highly compliant and effective care delivery model going forward.

The results also served to crystallize the opportunity and importance of accelerating the development of our payer capabilities to effectively manage total cost of care.

While disappointing we do not believe the results reflect the strategic and operational progress made across the enterprise.

We'll go into detail later in my prepared remarks.

Last quarter I introduced the three key dimensions of our transformational work.

Achieving operational excellence as a provider.

Expanding our core payer capabilities.

It's strengthening critical enterprise functions.

Regarding operational excellence as a provider.

We're making meaningful progress across eight core initiatives, which will expand on shortly.

These initiatives are designed to help us earn the right to be released with sanctions and returned to accepting new participants in Sacramento in Colorado, while also providing the blueprint for standardized and scalable based platform.

Regarding our risk bearing payer capabilities. We've concluded the assessment of our current state across the areas of provider network management.

Evidenced based site of care management resources.

Resource management third party care delivery claims payment and risk score accuracy.

What's more we've already begun to strengthen this core business processes have identified quick wins and developed a robust pipeline of initiatives that we believe will improve quality and lower medical costs.

We've also made large strides in strengthening our enterprise capabilities, and we are adding new talent and performance standards to the organization succeed.

The success of the business starts with great participant care delivered by purpose driven individuals.

To guide and align our leaders we've launched a five pillar performance management framework, which defines operational success and a clear and measurable key results across the pillars of people service quality growth and financials.

As an example, where measurement service through a quarterly participant satisfaction score.

In the fourth quarter it was 81%.

We look forward to improving this metric along with others in fiscal year 'twenty three.

We will have implementation work ahead of us, but my leadership team and I will be held to that performance standards. This fiscal year.

On the talent front, we've made tremendous progress, adding both leadership and center level caregiving roles the momentum and culture. We are building coupled with the inspiring initiative pace is attracting top caliber tailored to innovation.

In August we welcomed Dr. Rich fiber, who joined US as Chief Medical Officer, and this month, Kathy Andreessen assumed the role of Chief people Officer Rich.

Rich brings significant experience focused on optimizing performance across both the provider and payer domains. Kathy brings decades of experience as a CPO from the high growth technology and service industries, where she was instrumental in scaling talent management capabilities.

I would also like to note. The addition of Jim Carlson as our New Board Chairman, Jim brings decades of both public company leadership and board experience and I believe will be instrumental in accelerating our strategy and execution.

To begin today's discussion I would like to start with a regulatory update by market.

Updates on our key operational excellence initiatives.

Perspectives on the quarter with a specific focus on the interplay of operating and medical cost and then I will share some concluding thoughts.

On the regulatory front, we're continuing our work to resolve the audit findings working closely with CMS and our state partners. Our job is to ensure every requirements fulfilled and every question from the regulators has answered.

We're making excellent progress systematically remediated the deficiencies that led to the sanctions and as I mentioned earlier proactively making these operational changes broadly across the organization.

We're measuring our progress monthly against a set of jointly developed audit performance measures importantly, we have been in kitchen to build the performance measures into a dynamic dashboard for efficient communication and progress report there.

The regulators are using our performance against these measures to assess our progress and to determine when to begin the audit validation process, which is the final audit step before sanction can be released.

As we've said before the actual time of sanction release will ultimately be determined by our regulatory partners.

Starting with Sacramento, we've achieved five consecutive months of target performance against key measures.

CMS and the state have acknowledged our progress and we are working closely to determine the remaining steps before entering the validation process. We don't know the date with sanctions will be released but we are confident we're on the right path.

In Colorado CMS accepted our corrective action plan in April and the Colorado Department of Health care policy and financing accepted our plan in June .

We've taken what we've learned in Sacramento, and we're applying it to Colorado and.

And we're very pleased with our progress we are working intensely to satisfy all the requirements as quickly and as thoroughly as possible and our performance over the next few months will be critical to reaching the validation stage.

In new Mexico, the audit began in October 2021.

In July we were verbally notified no enrollment sanction will be taken.

There are immediate corrective actions that we must take to remediate all aspects of the audit and are working with CMS and the states all while continuing to enroll participants.

Similarly.

In San Bernardino. The Ara began in March 2022, we were verbally notified by CMS in August no enrollment sanction will be taken but again, while continuing to enroll new participants.

We are implementing immediate corrective actions and working with CMS and the California Department of Health care services, and all remaining aspects of the audit.

For our two markets not interactive audit, Pennsylvania, and Virginia. We are currently not aware of planned audits, but have proactively deployed self audits based on our learnings in California, Colorado and New Mexico.

In Florida, we remain on pause in our Tampa and Orlando de Novo centers until we have greater clarity on where current sanctions will be released.

To sum up we believe we've identified the root causes which led to the sanctions and are addressing them wherever they exist.

We're not only making progress across markets under section, but we're also beginning to see some evidence that we're earning back the trust from our government partners.

In May I shared with you that we were focused on eight operational process improvement initiatives to address the root causes of the audit deficiencies, which began in earnest in February .

We believe excellence in these areas will not only reduce future compliance risk, but is also bedrock to our repeatable operating playbook.

We communicated that we expected to complete these initiatives by calendar year end and I am pleased to report that we're making strong progress and are largely tracking ahead of schedule.

Specifically as of September one we've made progress along the following dimensions.

Filling critical personnel gaps in each of the centers.

We've reduced the number of critical open positions by approximately 60% position.

Physicians nurses and homecare workers continue to be the most challenging areas, but were making steady headway.

We have also increased our overall FTE head count by approximately 150 over the last six months to approximately 2000, including 3500 clinicians.

Standardizing the process of our interdisciplinary care teams, who plan coordinate and deliver care.

We've implemented new processes and tools for these mission critical care teams across all 18 centers. Our focus now is continuous performance monitoring and trade.

Improving the timeliness of scheduled and coordinating care with external providers outside the centers.

Approximately 95% of participants are being scheduled to hit target Timeframes and backlogs have been largely eliminated we're now optimizing staffing productivity measures and tools.

Improving the efficiency and reliability of transportation for our participants.

Driver open positions have been reduced by approximately 90%. Additionally, transportation is running at.

On time percentage of approximately 80%.

We are also in the process of implementing new scheduling and routing tools, which we believe will improve efficiency and meaningful way.

Standardizing our wound care program across the enterprise.

We secured local in network contracts across all centers and we are finalizing a few national partnerships with the goal to further improve quality and reduce costs in this area.

Reducing documentation outside of the EMR.

We've completed training and proficiency examinations on how best to utilize the EMR for care documentation across all targeted centers.

Improving our telephonic response times and strengthening our home care network and reliability.

It's taking us longer to achieve our targeted results for these two initiatives due to the reliance on technology enhancements and the inherent challenges of our home care workforce shortage.

In the near term, we've made solid progress through improved processes, resulting in increased productivity within homecare. These open positions are included in our critical hiring initiatives discussed earlier.

We're pleased with our progress in the coming months will be focused on ensuring we have the structure in place to sustain and continuous improvement in all of these areas.

Now turning to the quarter.

We reported revenue of $172 9 billion.

Which represents a sequential decline of two 5% compared to last quarter.

We ended the quarter, serving approximately 6650 participants.

For the fourth quarter, we reported center level contribution margin of $23 6 million and a corresponding center level contribution margin ratio of 13, 6%.

Which represents a decrease of two 2% sequentially when compared to the third quarter fiscal year 2022, senior level contribution margin of $28 million.

To be clear, we're working through unique transitional period, as we return to a sense of normalcy in the heights of Covid, while also navigating the audits.

We're focused on getting participants back into the centers consistent with pre COVID-19 levels, and we're making long term investments to fundamentally transform our ability to execute at scale.

Starting with revenue net census, overall is down approximately 2% sequentially driven by a decline of approximately 6% and sanction markets. The.

The sanctions in Colorado have heavily impacted the overall picture.

Is it represents approximately 47% of our total census, we've invested resources to improve our overall enrollment in non sanction markets to help offset these dynamics. These investments are bearing fruit as we assumed gross enrollment increases of 34% and non sanction markets, resulting in net census growth of approximately.

3% of these markets over the same period.

As you know most of our rates are contractually determined and factor in healthcare inflation.

Our Medicare rates in fiscal year, 2022, or approximately $3900 per year.

This represents an increase of four 5% versus fiscal year 2021.

Regarding Medicaid rates, we recently received updated rates for Colorado, Virginia and Pennsylvania.

Bob will provide more detail a few minutes.

We appreciate that our Medicaid rates are set with some discretion by state agencies and believe the process is intended to address the cost pressures, we've experienced carrying for our free all participants.

Center level costs were up sequentially impacting center level contribution margin due to increasing head count higher wages for some roles.

We also made staffing investments to address a unique period, where participants are returning to our centers, causing stress solar organization to provide care and fully reopened centers. While also covering the needs of many participants who are uncomfortable returning it.

We have invested meaningfully in our centers as noted earlier, but believe strongly in the ROI of this approach both in terms of long term compliance and reduce provider cost, including inpatient and post acute stays in long term care born from optimal center staffing.

Separately.

We also continue to observe elevated external provider cost on a sequential basis overall external provider costs were lower by approximately $4 5 million due to lower census, and a decrease of $90 <unk>, but remain above historical levels.

As we dug further into the data we've learned a lot more about our cost of new a quarter ago.

As with most healthcare cost trends the drivers are multifaceted and include lower average daily attendance in our centers due to COVID-19.

Prolong staff vacancies turnover and productivity loss during the audit periods.

And fewer new participants entering the risk pool, and the decommissioning of participants post COVID-19.

Spend a couple of minutes on each.

Average daily attendance.

Patients are sooner based model for good reason, our ability to engage daily with our participants and proactively manage early warning signals as impaired when participants do not come into the center.

While COVID-19 subside in the fourth fiscal quarter participant fear and concern are returning to the center did not.

This had a negative impact on our external provider costs.

We can't quantify with precision, but believe it was a factor.

To address this we quickly actually a dedicated initiatives focused on increasing daily attendance, which in the last three months has improved by approximately 50% from when we began a focused effort in may.

We believe getting participants back in the centers will improve our ability to manage these costs.

Staffing turnover and loss productivity.

A critical factor in optimizing care efficiency, including the total cost of care is the focused attention of our frontline caregivers two competing factors have created challenges first involves caregiver staffing turnover and vacancies. This is a challenge all provider organizations face.

The second involves the significant time and energy devoted to audit remediation, which we estimate is occupying approximately 15% of our caregivers time and approximately 30% of sicker focused leadership time, thus requiring incremental temporary staffing to compensate.

As we stabilize our staffing and emerge from the audits, we expect these temporary cost to gradually reduce.

Risk pool, and each initiative enrolls.

Enrolling new participants is critical to maintaining a balanced risk pool.

Cause we have been unable to enroll younger healthier community based participants we have not been able to offset the cost of longer tenure participants.

To better understand these dynamics, we engaged a third party to review the specific impact of Covid on our business.

Among the findings the percentage of our participants in the first two years of their innovation tenure decreased from 46% pre company to 41% when comparing participants from first quarter 2022 with fourth quarter 2019.

Which skewed our risk pool towards longer tenure Frailer participants.

Further we have also confirmed after COVID-19 diagnosis are participants often experienced higher cost over pre COVID-19 levels. The analysis referenced earlier indicated that participant expense was approximately 88% higher on average in the calendar year post Covid diagnosis. This is.

With emerging medical literature that people are more susceptible to a range of other conditions post COVID-19.

In many cases is the condition of our participants has led to higher rates of long term care placement.

Like other risk bearing government program Payors.

Capabilities to improve quality and lower medical cost trends were a core part of the operating model and a key reason why government payers are increasingly working with private companies as I referenced in the last call. These capabilities exist within the innovate today, but their effectiveness is mixed we were prepared to handle such a multifaceted set of trend.

Drivers of once since we got our arms around the drivers we've developed a set of initiatives that we call clinical value initiatives or <unk> to mitigate the cost trends in key service categories like inpatient assisted living.

Yes.

For example, we've begun to action initiatives to reduce unnecessary readmissions within 30 days ensure care is delivered in the most appropriate site of care and that our risk scores reflect the acuity of the populations we serve.

Additionally, the largely untapped advantage that pace organizations have over traditional managed care organizations is that we're also delivering the care and approximately one third of the total cost of tear occurs within our four walls.

While admittedly to start with the basics, we believe at maturity, we can generate a meaningful reduction annual medical cost.

Taken together the results of the fourth quarter reflect continuous investment in the business.

Remember, we're making material investments in the centers because we firmly believe in the power of the center based paced model to keep participants out of higher cost settings.

They cost more to operate our pace centers going forward than it has in the past, but we're building capabilities that will enable us to better manage external provider cost, which we believe will allow us to maintain the attractive long term margin profile.

And with that I'll turn it over to Barb to review the quarter in detail.

Thank you Patrick.

I will provide some highlights from our fourth quarter and fiscal year end financial performance for 2022.

An update on Medicare and Medicaid rates for fiscal year, 2023, and some insights into the trends we are seeing as we head into the new fiscal year.

As with our previous earnings call I will refer to sequential comparisons relative to the third quarter in order to provide a more meaningful picture of our performance.

We ended the fourth quarter and fiscal year 2022, with 18 centers in a census of just over 6650 participants as of June 32022.

Compared to the prior year. This represents an ending census decrease of two 8% comp.

Compared to the fiscal third quarter census declined four 4%.

We recorded over 82800 member months in fiscal year, 2022, or three 9% increase compared to the prior year after including the Sacramento census, which was not consolidated until the second half of fiscal year 2021.

Revenue grew nine 5% to $698 6 million.

Fiscal year 2022.

Primarily driven by member months growth and a mid single digit increase in both Medicare and Medicaid rates.

Medicaid rates in fiscal year 2022 include a temporary rate increase from the American Rescue plan Act or ARPA in Colorado and Virginia.

Fourth quarter revenue decreased by two 5% to $172 9 million compared to the previous quarter, primarily due to decreased member months as a result of the ongoing enrollment sanctions in Colorado in Sacramento.

External provider costs for the full year were $383 million.

23, 8% higher than the prior year and $98 7 million for the fourth quarter, a decrease of four 4% compared to the fiscal third quarter of 2022.

The year over year increase was primarily due to an increase in member months, coupled with higher cost per participant.

The cost per participant drivers include one.

One the lingering effects of Covid from the third quarter Caf inpatient costs elevated associated with higher acuity and drove greater post acute care utilization.

To increase housing utilization in assisted living and nursing facilities.

Three increased permanent housing rates as mandated by certain states.

As we mentioned on the last call. This includes the ARPA funded public policy adjustment in Colorado that increased assisted living rates by more than 30% effective January one 2022.

And for increased outpatient and specialist care expenses in part as a result of our participants seeking health care services that were delayed during the onset of the pandemic in fiscal year 2021.

During the quarter external provider cost declined four 4% from the fiscal third quarter of 2022 due to a decline in post acute utilization as the impact of increased utilization in the third quarter, particularly from Covid began to subside.

Our cost of care, excluding depreciation and amortization of $182 million was 16, 7% higher year over year drill.

Driven by an increase in member months and the overall cost per participant.

The primary cost drivers include <unk>.

Increased head count as we continue to make progress filling vacancies, adding approximately 150, new employees over the last six months.

Higher wage rates and temporary labor associated with the ongoing competitive labor market.

The financial impact on operations as a result of all centers being opened for a full year.

Preopening losses associated with new de Novo locations.

Sequentially cost of care increased nine 5% to $55 million due to increased head count as we continue to fill vacancies and increased labor costs associated with ongoing audit remediation and compliance efforts some of which will be temporary in nature.

Central level contribution margin, which we define as revenue less external provider costs and cost of care, excluding depreciation and amortization was $135 $4 million for the fiscal year ended June 32022 compared to $174 one.

In the prior year.

For the fiscal fourth quarter, we reported a center level contribution margin of $23 6 million compared to $28 million in the fiscal third quarter of 2022.

Sales and marketing expense was $24 2 million for the fiscal year ended June 32022, increasing eight 8% year over year, primarily due to an increase in head count and costs associated with organizational realignment.

For the fourth quarter sales and marketing expense of $5 $1 million decreased approximately $1 1 million or 17, 2% compared to the third quarter, primarily due to lower marketing spend as a result of the sanctions.

Corporate general and administrative expense was $101 7 million for fiscal year ended June 32022.

Decrease of 23, 2% year over year.

The full year decrease is primarily due to $58 $5 million in fees incurred during fiscal year 2021, as a result of the apex transaction.

Offsetting the decrease related to the apex transaction included in.

An increase in head count to bolster our organizational capabilities.

Costs associated with organizational realignment and full year financial cost associated with regulatory requirements of being a publicly traded company.

These increases in expense are partially offset by lower bad debt expense compared to fiscal year 2021.

For the fourth quarter, corporate general and administrative expense increased 11% to $27 4 million.

The increase over the third quarter was primarily due to costs associated with third party consultants to.

To develop and implement our eight core provider initiatives.

Seth our risk bearing payer capabilities and to strengthen our enterprise capabilities that Patrick touched on previously as well as increased legal costs.

Net loss for the fiscal year ended June 32022 was $8 million compared to prior fiscal year net loss of $44 $7 million.

For the fourth quarter, we reported a net loss of $13 5 million.

For the fiscal year ended June 32022, we reported an earnings per share loss of five <unk>.

Basic and diluted.

Our basic and fully diluted weighted average share count for fiscal year 2022, with $135 million 519970 shares.

Adjusted EBITDA, which we calculate by adding interest taxes depreciation and amortization.

And one time adjustments for transaction and offering related costs.

And other nonrecurring or exceptional cost to net income with.

With $34 $3 million for the fiscal year ended June 32022.

Compared to $85 3 million in fiscal year 2021.

Adjusted EBITDA for the fiscal fourth quarter was negative $6 million compared to a positive $1 $9 million in the fiscal third quarter of 2022.

Adjusted EBITDA margin for the fiscal year ended June 32022, with four 9% compared to 13, 4% in the prior year for.

For the fiscal fourth quarter, we reported an adjusted EBITDA margin of negative <unk>, 4% compared to a positive one 1% in the third quarter of 2022.

The decrease to adjusted EBITDA compared to the third quarter was due to elevated inpatient costs as a result of higher acuity increased housing costs additional costs associated with audit remediation and compliance efforts.

Higher cost of care due to a competitive labor market and increased head count.

De Novo center losses, which we define as net losses related to Preopening and startup ramp through the first 24 months of de Novo operations were $2 3 million for the fourth quarter, primarily related to our Tampa and Orlando centers in Florida.

As Patrick mentioned, we are committed to CMS and the agency for healthcare administration or Orca.

We have proactively pause the remaining steps in the expansion process to allow us to focus exclusively on resolving our active audit issues before proceeding in Florida.

Turning to our balance sheet.

We ended the quarter with $184 $4 million in cash and cash equivalents and had $86 4 million and total debt on the balance sheet representing debt under our senior secured term loan convertible term loan plus capital leases and other commitments.

For the fiscal year ended June 32022, we had $38 2 million of capital expenditures.

Finally, while we have been making progress on our remediation efforts associated with the sanctions the inherent.

With uncertainty in open timeline around sanction release prevents us from providing forward looking guidance for fiscal year 2023.

That said, we do want to provide some additional visibility around the following areas, where we are able.

First regarding sensus.

We are continuing to enroll new participants in our non thanks in centers, resulting in net asset growth in the low single digits and expect those trends to continue into fiscal year 2023.

As a reminder, we lose approximately 2% of our center sets us on a monthly basis, primarily driven by involuntary dis enrollment.

While the majority reminder, we lose approximately 2% of our sensor sensors on a monthly basis, primarily driven by involuntary dis enrollment.

While the majority of these losses, our involuntary we have repurposed our sales teams in sanction markets to focus on retention efforts to reduce voluntary.

Regarding revenue.

As you know our rates are contractually determined and are based on costs for pace or comparable population.

Our Medicare rates are based on county rates is determined each calendar year by CMS.

Coupled with prospective risk score adjustments made by CMS in January and July .

When converted to a fiscal year basis, Medicare rates increased four 5% in fiscal year 'twenty two over fiscal year 'twenty one.

For fiscal year 2023, we are expecting a combined net mid single digit rate increase comprised of the following.

A low single digit Medicare part C increased partially as a result of sequestration fully resuming in July .

Our mid single digit Medicare part D increase.

And for Medicaid a mid single digit rate increase inclusive of 10% in Colorado, which includes go forward funding effective July one that offsets the increase in assisted living facility rates that went into effect in January .

5% in Virginia, 3% in Pennsylvania effective January <unk>.

No rate increase in fiscal year 2023 in new Mexico, and as previously disclosed a mid single digit rate decrease in California effective January one 2022.

Next.

An external provider cost perspective.

We expect external provider costs to remain elevated compared to historical levels in part due to the post COVID-19 acuity effect on our participants although tapering in the near term relative to the second half of fiscal year 2022.

For our cost of care, we expect cost pressures to also remain elevated as we continue to work through audit remediation and add to our workforce.

However, we do anticipate that these costs will begin to moderate as our new Mexico and San Bernardino centers receive corrective action plans from their respective audits without enrollment sanction.

Regarding corporate DNA.

We are continuing to evaluate the organization to optimize the business and refine our payer capability roadmap as Patrick indicated earlier, we are focused on eight key provider operational excellence initiatives and building up our payer capabilities.

Going forward, we want to ensure that we have the structure in place to sustain and continuously improve the ongoing effectiveness of these initiatives.

Regarding sales and marketing.

We continue to make prudent decisions as we balanced staff retention with our need and desire to grow only after our remediation efforts are complete with.

With new leadership in place, we are making investments in our sales and marketing capability, while closely managing our cost structure and we will utilize our sales teams non sanctioned markets for participant outreach and voluntary dis enrollment mitigation in the near term.

We believe the recent financial results reflect a transitory period for the business influenced by several factors, including our participant profile audit remediation efforts and labor market dynamics.

As Patrick stated some of the costs reflected in our quarterly results will be temporary while some will be permanent.

We believe that all of the investments we are making into the core of our business coupled with the development of our payer capabilities will help us to effectively manage total cost of care, while simultaneously working to ensure we have a highly compliant and effective care delivery model for the future.

I will now turn the call back to Patrick for his concluding thoughts Patrick.

Thank you Barbara.

Ongoing commitment to all stakeholders continues to be doing everything in our power to proactively strengthen our operations organization wide.

Order to earn the right to be released from sanctions to avoid future issues and to be a sustainably high performing paced provider able to serve participants for years to come even in more locations across the country.

While im pleased with our strategic and operational progress over the last three months of correspondingly disappointed with the quarter financially but remain resolute.

I'm confident that we're on the right path are working hard on it across the organization and are making bonafide progress on all of the important fronts.

Particularly pleased with our great team, including our New center based and enterprise leaders.

As with all significant transformations solid outcomes are always preceded by a compelling strategy laser focus effective execution and the team with the right attitude and perseverance. It may take time, but thanks to the efforts and support of our internal team and partners my conviction that we will succeed grows everyday.

Operator with that we can now open the line for Q&A.

Thank you.

As a reminder to ask a question you May press Star one one on your telephone please standby, while we compile the Q&A roster.

And our first question comes from the line of Jason Cazorla from Citi. Your line is open.

Great.

Guys. Thanks for taking my questions.

Just on a census front and then you have a breakdown of the.

Excuse me, 6% decline in sanction market versus the 3% call. It in that growth in non fiction markets. If I heard that right was definitely helpful and you highlighted investing in resources in those non sanction markets. The gross answer so maybe in that context can you just delve a little bit deeper into the investments in those non sanction markets and if those investments can be.

Made in sanction markets once those are lifted as well as what kind of capacity you have in those non sanctioned centers that continue to grow at that level and then if we should think about that 2% level of sequential decline in a steady state environment until the audits are remedy or any color around forward census trends.

That we should consider would be helpful. Thanks.

Well. Thank you Jason Great question to get Us started.

I'll start with some of the investments we've made.

Our non <unk> markets to heal.

Drive growth, while we're intersections and a couple of our key markets.

First I'd point to is we've been very selective in adding a few sales leaders to the organization and the new.

Chief sales and marketing officer long track record of driving growth.

<unk>.

Dan.

He's done a great job of really sizing up the sales organization.

Making changes where appropriate as well as building a much stronger accountability model is.

As it relates to making sure we're out in the market and we're doing everything we plan to make seniors in the community aware of pace.

We've also made a number of investments in our CRM system, which again helps with capability helps with throughput.

The acceleration of sales activity from building awareness all the way through to enrollment and I'm also really excited about the work that our sales team is doing now with our clinical leaders to make sure that we are very focused on.

Sure that every individual that joins <unk> as a good fit for the program. So a lot of great work in a lot of great investment.

In that area I think these are investments that we've also started to make and apply to.

Other markets, so while we're still under sanctioned and Colorado, Sacramento, we still begin to roll out these changes.

And.

Ensure that once the sanctions are lifted we're really committed to as fast ramp up back to historical levels of productivity.

Than we've seen in the past so there is.

Very focused effort to get to ramming speed so to speak.

For sanction markets. Once they are released from completions. So let me ask Bob to comment as well, yes, hi, Jason It's barb. So a couple of things if I make sure I caught all your questions, but if I didn't please let me know.

One of your questions was around the dis enrollment rates.

And.

And maybe just reading between the lines does that differ between the sanction and non sanctioned.

Locations and it doesn't so that 2% on average 2% per month on average is just pretty typical across all of our all of our centers, regardless, if iran sanction or not.

And then I think your second part of your question was a little bit about capacity in our centers.

And so generally speaking we are we have said for since we went public that we do have capacity in our existing centers. So part of our growth strategy is around that organic growth and we do have capacity in our existing centers.

End of ranges.

Depending on the center and the size, but generally we've got about 50, 50% capacity across the enterprise in order to grow. So we do have a lot of organic growth capacity.

Got it and then just really quickly on a follow up there just.

The 2% level of sequential decline in aggregate is that is that a fair way to think about the steady state kind of <expletive>.

Declines until we kind of get on the other side of these.

Thanks, guys at this point or are there other nuances that we should be thinking about just as we think about the go forward.

Yes, I think it's in that range, it's in that range two to a little bit more neutral. So I think just to really bifurcate, what's going on right is that we have natural dis enrollment in every center and in about half of our business, we're not enrolling new participants, but we are growing and the other half.

Our business. So I think Patrick referred to those we can refer to those low single digit kind of increases net net.

So it's kind of in that in that range going forward.

Got it okay. That's extremely helpful. Thank you and then just as my follow up here just on your balance sheet cash cash position, maybe just to start it looks like capex spending in the fourth quarter almost doubled compared to what you've done in the previous nine months, leading up to the fourth quarter. So maybe just to start where was that capex allocated it was it generally just related to the audit remediation.

<unk> or is it for other areas and then just as a follow up obviously your remediation.

Top of mind, but you're hanging out right now with over $180 million of cash only about $86 million debt on the balance sheet.

Are there ways, you can leverage that cost position for investments or otherwise or will you be taking more of a wait and see approach perhaps until the audits are completely.

Remedied at this point just any color on spending priorities, just given you're a pretty hefty cash position and the audit remediation considerations. So anything there would be helpful. Thanks, Yeah sure. So one thing on the de Novo is just to clarify.

He's wrong proposition so the $2 seven should have been through the fourth quarter not in the fourth quarter.

So that $2 7 million related to de Novo.

We're not really ready to move to no primarily in Tampa and Orlando. So that's that's where the investments are being made.

In terms of the cash position, yes, you're right. We're fortunate we have a fair bit of cash on the balance sheet.

Always looking to optimize how we invest that and we definitely are looking at ways, how to optimize that investment, but I think in terms of.

What we do long term it is a little bit more of that wait and see we're really really trying to be focused on investing in the business and stabilizing the business that we can turn around and grow and so it.

It is a little bit more of that wait and see in terms of the cash approach.

Okay. Thanks.

Thank you one moment for our next question.

Our next question comes from the line of Sarah James from Barclays. Your line is open.

Thank you.

It sounds like you guys are having a lot of productive conversations with regulators at the state and federal level and I'm wondering if they're giving you a sense.

What went on how much of it was really across the industry and COVID-19.

Versus what was.

Company specific.

Well. Thank you Sarah this is Patrick.

Our conversations with <unk>.

<unk> leaders, both CMS and the states are very focused on innovation and very focused on.

We're doing well.

We're collaborating on too.

Address the deficiencies identified in the audit the notion of what's happening in the broader industry related to pace and the impact of Covid.

Are you seeing related to similar deficiencies is just not a conversation that we're focused on we've really stayed.

Focused on our own work with with.

With regulators and are really pleased as you say is really pleased with the progress that our teams are making.

Can't say enough about the collaboration that we're getting from our regulators.

Great.

And then it sounds like you guys are making a number of changes that are going to have a long term impact.

There are some on the staffing and wage side.

Hi.

That that could be a longer term headwind, but then it sounds like there's a lot of.

<unk> and cost of care initiatives that can be a tailwind how do you think about your long term margin evolving.

Maybe I'll start with you tomorrow.

I think we still hold a lot of confidence that we can achieve a very attractive margin profile.

For the company going forward.

As we've discussed before our center level cost.

Or a smaller percentage of our total costs.

Our external provider costs.

The notion is.

It may require.

More investment.

Centers that we've made in the past, but we feel very confident that there is a significant opportunity for us too.

Or why from those investments might be.

Much better job.

Managing our external provider costs and so we feel.

Very confident that that's a formula that we can execute on and we're already starting to see some wonderful progress on as part of our teams or do you think you'd like to head.

No I think just to somewhat Patrick.

I think Sarah that.

We did have some we've had some headwinds in FY 'twenty two really related to some.

Covid expense.

This next time labor market challenges no different than the broader industry and so we're really focused focused on these other initiatives the payer initiatives.

The operational initiatives.

Two.

To turn the tide Marin too to be accretive to our overall margin profile going forward. So little early to tell where we've really been in the assessment phase in the planning phase if you will and we're moving into the execution phase So little early to tell.

That will.

Quantify how much of that will have an impact on our margins.

Our margin.

Okay and last question is just on the contract Labor you guys talked about could.

Could you give us an idea of what percent of your clinical staff is contract labor now versus pre Covid and.

Is there any way to size.

Is that the dollar impact from that.

I'll make some just real high level estimation, so I think that.

We don't think that it's any higher now than I think it was previously I mean, I think it's just proportional to the overall labor market I.

I think as a percent, it's probably about <unk>.

Under 10% of our overall.

Horst.

I think it's just one it's one component obviously is a more expensive component and we obviously use that to.

To backfill into places for critical roles.

Great. Thank you.

Thank you.

Our next question.

Our next question comes from the line of Jamie <unk> from Goldman Sachs. Your line is open.

Hey, good afternoon, I was hoping we could start with.

With Sacramento in some of your comments there.

The five months of being on target with performance, what specifically are you tracking there and maybe some incremental color you can give on what does.

The metrics, you're tracking and how the key ones are.

Sarah and versus your targets.

Sure. Thank you Jamie I would start with my opening remarks that we are using a set of measures that we jointly developed with CMS and our state partners.

Sorts of things that you would see in those measures are things related to ensuring service orders are scheduled.

Provided timely.

Participants are caregiver requests.

Or identified appropriately documented.

Theres measures related to care plan.

Mrs.

In completion.

There's measures related to the.

The frequency of our assessments.

With our care plan development with our members.

And then things related to just the responsiveness of our interdisciplinary team and all sorts of variety of measures.

We jointly developed with our regulatory partners.

We have formed the foundation for understanding our progress you have a common language.

We innovate.

Partners and.

You mentioned in Sacramento in particular.

We've had some very strong and consistent performance over.

Over the last several months.

And that progress is being acknowledged by our regulatory partners.

We're in close conversations to determine what are the next steps necessary to ensure the validation phase which is the final phase before sanctions can be released with the timing of that as we've said many times still resides with the regulators.

Okay. Thanks for that.

One other quick one just on the comments related to higher costs associated with longer tenure patients on the platform.

My sense is that the revenue associated with those patients is also higher. So just can you talk to what the margin profile or patient contribution profiles patient looks.

First couple of years on the platform versus as they are.

Our more tenured on the platform any any color on that would be great.

Hey, Jamie its mark.

So just.

Some general color on it. So so really this is this is really nothing different.

Then analyzed.

Analyze overtime.

Yeah that is.

Age in their program they become more.

Our services and often are in a different higher cost setting so that's.

That's really what we're referring to.

I think without putting any numbers to it I think you get the concept that those higher cost settings, obviously are.

Erode our margin on those.

Because of that now to your point about do we get more revenue related to that to some degree.

On the Medicare aspect there risk scores are increasing so to some degree we get more revenue, but on the Medicaid aspect, which really pays for those alpha sniff cost that's not necessarily risk adjusted and in fact, it's not risk adjusted so so we get some revenue to some degree, but but not commensurate with necessarily the needs of that population.

Okay. Thank you for the color.

Thank you.

And one last question.

Our last question comes from the line of Matt <unk> Mohmand from William Blair. Your line is open.

Hi, Thank you so much for taking my question I was just two things.

One is we're curious about the impact of inflation on your cost, particularly related to fuel and transportation and I know that you said the 2023 read pretty much set but going forward would you have been placing remains elevated is there any room for you to negotiate rate or to work with CMS.

CMS to keep inflation into account.

Well. Thank you for the question. So this is an.

An important part of our discussions with <unk>.

Our state partners.

Actually throughout the year.

Certainly as we're in the midst of resetting cycle is to ensure that the discretion that states have to address the cost that we're experiencing inflationary costs as you referred to.

As a critical part of all of those conversation, it's something pushed very hard for us.

Colorado was probably a good example of very successful discussions with our partners on what's driving or cost.

But with that let me ask Barb to punctuate, Yeah, and I think in addition to what Patrik just said.

<unk>.

Some of the things that the states have actually done in certain states. We've received those ARPA funds and in fact that is meant to help us cover those inflationary costs, whether it's wage rates or whatever it might be the states have some discretion on how they allocate those funds, but we have received ARPA funds from both.

A number of states, Colorado in particular that Patrick was just referring to.

So all of that into our rates effective July so I think that's that's one of the ways. We cover it I might just add one closing thought on that is that it's important to recognize there can be some lag.

When we're experiencing those costs you reporting those cost and when they're actually recognized in our rates. So sometimes we will have a tight matching between or inflation.

States rates, so just wanted to add that as well.

Great. Thank you so much I'll say, perhaps then dialed in for Matt.

One other quick question I know you said that you voluntarily pause progress on your centers in Florida, but I was curious if you are when you decided to continue pursuing de novo's.

Will you try to regain approval in states, such as Indiana, California, and Kentucky that you previously had plan to you or are you going to pursue these days.

Well, let's separate those into different buckets, Youll, California, being an existing state I would just reinforce there are several markets in California that are very attractive to us and we've made inroads in progress and the handful of markets and when we're in a position to be released from sanctions will certainly be pushing.

To move quickly on opportunities that may exist still work to do but we will certainly grow.

Treat California's probably really want to look.

To accomplish with long term care type services will be three partner to them.

Kentucky, and Indiana, where also a bit.

Kentucky is a market we've actually already.

Invested in a suit to bear.

We're beginning to see.

Think through what are our options and what is the timing, Kentucky, but still a very attractive for us.

And in Indiana is another market.

We certainly attractive, but we've not made.

Final decisions about how to proceed.

Indiana, and we're working through that as we speak now.

Very much interested in de Novo expansion when the time is right. When we feel confident we have the support.

Our regulatory partners.

Great. Thank you so much.

Thank you.

Now I'd like to turn the call back over to Patrick Blair for any closing remarks.

Well, thank you very much operator, and before we close I just wanted to take a minute to just reinforce how much we've accomplished as an organization over the last seven to nine months I'm.

Just extraordinarily proud of our team and their unwavering commitment to the company that continues today.

And believe our future is very bright and the path forward is clear.

It's our commitment to continue to bring.

Clarity during this transitional period to all of our stakeholders as we have relevant updates to share.

And with that I'll close and thank everyone for their continued interest and innovate have a good evening.

Yes.

And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.