Q3 2022 Oak Street Health Inc Earnings Call
Okay.
Hello, and welcome to today's Oak Street Health third quarter 'twenty to 'twenty two earnings conference call.
My name is Alex and I'll be coordinating your Kohl's thing.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would now like to hand over to our host Sarah Clark head of Investor Relations. The floor is yours. Please go ahead.
Good morning, and thank you for joining US today with me are Mike <unk>, Chief Executive Officer, and Tim Cook Chief Financial Officer.
Please be advised that today's conference call is being recorded at the Oak Street Health Press release webcast link and the other related materials are available on the Investor Relations section of Oak Street Health website.
Today's statements are made as of November eight reflect management's view and expectation at this time and are subject to various risks uncertainties and assumptions.
In addition to historical information certain statements made during today's call are forward looking statements. Please refer to our 2021 annual report on Form 10-K, and other periodic reports filed with the Securities and Exchange Commission, where you'll see a discussion of certain risks uncertainties and other important factors that could cause the company's at.
Actual results to differ materially from these statements.
Certain statements made during this call include non-GAAP financial measures. These non-GAAP financial measures are in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with GAAP.
Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures with that I'll turn the call over to our CEO , Mike <unk> Mike.
Thank you Sir and thank you to everyone for joining us this morning.
Joining me today is Colin this is Eric <unk>, our Chief Financial Officer.
And it seemed to be impressed by the impact that he was making on our patients and the communities. We serve every day their hard work and dedication. These outstanding results from our care model driving 40, Oregon.
For Q3, our performance led to results above the top end of our guidance range for revenue centers high risk patients and adjusted EBITDA.
The two main driver for both our impact on the financial results, our centers generate or the number of at risk patients, we serve and the effectiveness of our care model and improving outcomes and lowering health positions, leading to lower third party medical costs.
For Q3 and year to date 2022, we have achieved strong results from both of these drivers we indiscernible performance in line with the core her expectations, we shared coming into the year.
Our patient experience and the resulting patient engagement enabled both drivers of our model.
Our patient acquisition approach is predicated on educating older adults and a superior patient experience can provide at oaktree.
With wider such as longer visits additional services, such as insurance navigation and easy access generally only found in coffee or to provider groups.
We communicated our differentiated patient experience through our community average model as well as the central marketing channels.
We launched our first meaningful TV brand advertising campaign in Q3.
The theme of the advertising was a differentiated level of patient experience and provider compared with traditional doctor's offices.
We plan to continue and expand upon this campaign in 2023 and beyond.
Okay.
On the care model side, our differentiated patient experience leads to much higher patient engagement, which enables our careful.
Oaktree caring for a patient population that historically has had less access to an engagement with the health care system.
Even facing these headwinds Oaktree drive strong patient engagement for example, using any one of those as a proxy for the level of engagement brokerage, we completed over three times the percentage of annual wellness visits on our patients compared to Medicare overall.
Patients engaged in our model have significantly lower hospitalization rate and better patient health outcomes.
<unk> patient experience allows us to drive significantly higher engagement than the average provider leading to increased impact.
As we've shared in the past we can offer a superior patient experience because of our consistent de novo approach to rebuilding health care.
As we continue to scale, we will continue to invest in our technology data infrastructure and culture, allowing us to further differentiate our experience. We believe this will continue to drive results on patient acquisition and patient engagement, while further differentiating oaktree from 15 primary carriers.
Okay.
In addition to our focus on patient experience, we continue invest in canopy, our technology and data platform to both improve the consistency and scalability of our core model and add additional capabilities to drive better outcomes, such as point of care deficient support for our providers.
Our largest investment in capabilities to date with the acquisition of Rubicon NDA last year.
Integrating the core console approaching our canopy referrals module and has seen a further uptick any consoles.
This both save money and referrals, but just as importantly provide an outstanding a differentiated patient experienced by CVR patient significant time and hassle forgive me I'll provide additional information to help them care for their patients.
What do you think he consoles, we get feedback from special within hours compared to the month. It is often takes for patients to complete visits with specials.
Additionally, leveraging rubicon avoids the cost and hassle for patients as well as the duplicative evaluation testing by specialists.
Okay.
We are pleased with our performance in both the third quarter and year to date.
In the third quarter, we generated record revenue of $545 7 million in the quarter exceeding the high end of our guidance range.
Our revenue growth continues to be driven by organic DTC marketing approach.
This revenue growth combined with expenses in line with our expectations contributing to an adjusted EBITDA loss of $88 3 million for the quarter, which is favorable to the top end of our Q3 guidance.
Our performance for this year continues to be in line with projected center. After 2022 by cohort we shared earlier this year.
We believe our continued performance on these kind of ramps on what is now 167 centers across 21 states demonstrates the effectiveness consistency and scalability of our model and in Russia.
We moved the depth and breadth of our clinical model and the consistent approach to executing will drive differentiated results over the medium and long term and that the business has strong momentum propelling us forward.
Consistent pro forma Columbia Center ramps going forward will create an outstanding financial return on the capital invested in New Center development.
We remain confident in our ability not only to scale our model to continue to invest in our model and technology platform and further differentiate our results from traditional primary care.
Now I'll turn it over to Tim to cover some more of the details regarding our financial performance in the second quarter.
Thank you, Mike and good morning, as Mike shared we were pleased with our third quarter as we delivered results above the high end of guidance for all metrics.
In terms of membership are at risk patient base. The key driver of our financial performance grew by 340% to 145000 patients driven by our BDC marketing model and growth in the number of our centers.
At the end of the third quarter, we operated a 161 centers.
An increase of 51 centers are 46% versus 110 centers. We operated at the end of the third quarter of 2021.
<unk> revenue of $537 $9 million grew 43% year over year, driven primarily by our group by growth in our at risk patient base.
<unk> revenue in the third quarter of 2022 included a $5 $9 million reduction related to prior periods due to matters relating to the direct contracting program specifically the retrospective adjustments made by CMS and the retroactive removal of a small number of patients. Following a review of our patient panel adjusting.
Adjusting for prior period impacts in 2022, and 2021 third quarter Carpathia revenue grew 51% year over year.
For the quarter.
Total reported revenue grew 40% year over year to $545 $7 million.
Total revenue adjusted for prior period changes grew 48%.
Our medical claims expense for the third quarter of 2022 was $427 $4 million.
Representing growth of 38% compared to prior year.
Medical claims expense in the third quarter of 2022 included a favorable $12 $8 million reduction in prior period medical claims expense due to 2022 cost developing more feed favorably versus our estimates and the aforementioned direct contracting patient retroactivity.
When adjusting for prior period changes in the third quarter of 2022, and 2021 medical claims expense grew 47% year over year in the third quarter, approximately 400 basis points lower than our comparable catheter COVID-19 revenue growth.
Our cost of care, excluding depreciation and amortization.
It was $113 $6 million from the third quarter, an increase of 49% versus the prior year driven by growth in the number of centers. We operate in a number of team members supporting our significantly larger patient base.
Sales and marketing expense was $44 1 million during the third quarter, representing an increase of 45% year over year as we continued to invest in this area to support patient growth and a much larger footprint of centers.
Corporate general and administrative expense was $81 7 million in the third quarter, an increase of 6% year over year.
As a reminder, this line item includes the majority of our stock based compensation, which is inflated due to the treatment of our pre IPO management equity plan with our second anniversary as a public company.
There has been a step down in their pre IPO equity plan and stock based compensation, resulting in 20% declined for total stock based compensation relative to the third quarter of last year.
Looking ahead, we expect to see another material step down in Q3 of 2023, when the bulk of the remaining pre IPO equity awards vest when we expect normalized stock based compensation from Q4 2023 forward.
When factoring in the prior period changes to revenue, we improved our corporate general and administrative expense excluding stock based compensation as a percent of total revenue by approximately 90 basis points in Q3 2022 compared to Q3 of 2021, continuing our continuing our expected trend of declining corporate costs as a percent of revenue.
I will now discuss three non-GAAP financial metrics, we find useful in evaluating our financial performance.
<unk> contribution, which we define as complicated revenue was medical claims expense grew 65% year over year to $110 5 million during the third quarter, excluding the impact of prior period revenue and medical cost patient contribution grew approximately 70% year over year.
Platform contribution, which we define as total revenue less some medical claims expense and cost of care, excluding depreciation and amortization and stock based compensation was $6 million, an increase of 94% year over year.
As an individual center matures, we would expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers as well as improving our per patient economics over time.
Okay.
Adjusted EBITDA, which we calculate by adding depreciation and amortization transaction and operating related costs onetime litigation costs and stock based compensation, but excluding other income to net loss.
It was a loss of $88 $3 million in the third quarter of 2022 compared to a loss of $64 4 million in the third quarter of 2021.
Moving to cash flow and our balance sheet.
We paid out the Rubicon MD contingent earn out as all the performance milestones were achieved.
And again.
The <unk> contingent consideration was awarded in a cash and stock combination with $27 $5 million paid in cash and approximately $1 2 million shares 40, $32 5 million issued to certain sellers of Rubicon MD during the quarter.
As we shared last quarter, we expect that over the course of the year that our adjusted EBITDA loss will approximate our uses of operating cash flow and while those figures diverged in the first half of the year due to working capital seasonality, we expect them to converge over the second half of the year.
In Q3 cash used for operating activities was $33 9 million, which.
Which included approximately $6 million.
Related to the Rubicon <unk> earn out compared to EBITDA loss in the quarter of $88 3 million.
For the nine months ended September 30, cash used by operating activities was $213 $3 million and our capital expenditures were $67 6 million.
Both in line with our expectations.
Okay.
Additionally, at the end of the third quarter, we entered into a loan agreement, providing us with the $300 million of new debt capital, which we can draw on tranches over time.
We were required to draw $75 million that closing of the loan. This debt raise was important as with our cash on hand, and the capital available to US via this loan we are confident that we have sufficient capital to execute our growth plan of 30 to 40, new centers in 2023, and 2024, you will not need to raise incremental equity capital between now and when we are profitable.
In total we finished the third quarter with significant liquidity in the business as of September 30, we held approximately $543 million in unrestricted cash and marketable securities and an incremental $225 million of availability under our loan agreement.
I also want to provide an update on two key trends from 2021 and their impact on our 2022 results COVID-19 costs and new patient economics.
First COVID-19 continues to impact their medical costs, and we remain cautious on expectations for the remainder of the year given the surge as we experienced in the fourth quarters of both 2020 and 2021 as.
As well as the recent headlines around new variance and the flu.
Year to date, we estimate that Covid represented $21 million of medical claims expense.
Regarding new patient economics for those patients who are new to Oak Street in 2022 performance to date is in line with expectations. We shared at the beginning of the year, which were better relative to what we experienced in 2021, but not back to the level, we experienced pre pandemic.
Note that for patients who were new to Oak Street in 2021, we are generating historically normal profitability on that cohort of patients in 2022. Despite the headwinds we experienced from them last year, which speaks to the efficacy of our care model and the degree to which we engage patients relative to the market at large.
Moving along to our financial outlook for the remainder of the year.
We are increasing our full year guidance for at risk patients to 157 to 159000 patients in.
And are raising our total revenue range to 215 to $2 <unk> 5 billion.
Our full year expectation for centers remains at 169.
We are raising and significantly narrowing our adjusted EBITDA range.
So between a loss of $292 $5 million and a loss of $287 5 million.
We remain confident in the underlying trend we are seeing in the business and committed to providing exceptional care for our patients and with that we will now open the call to questions operator.
Thank you and if you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press the pound cake.
Please note that today's call will end at the top of the hour to provide the greatest opportunity for participation. Please limit yourself to one question.
Please re enter the queue. If you have further questions. Thank you.
Our first question today comes from Lisa Gill from Jpmorgan. Your line is open.
Alright, thanks, very much and thanks for all the detail.
I just want to go back to your comment around Covid cost and utilization trends for the fourth quarter. So can you just talk about what's implied in the fourth quarter guidance around COVID-19 flu et cetera, maybe just call. It respiratory at this point and anything else that you would call out on utilization and then just as a follow up are there any other D C.
Direct contracting members that you.
<unk> will roll off in the into the fourth quarter, maybe just help us to understand a little bit.
The fact that you were proactive and your thoughts that perhaps they wouldn't meet the criteria from CMS perspective, just to understand that a little bit better.
Good morning, Lisa. Thanks, This is Tim.
For Q4 <unk>.
Utilization and cost estimates for COVID-19 or to your point respiratory illnesses I'd say, our expectations are experiences consistent with our experience year to date as well as some some element of conservatism just given historical experience as I mentioned in Q4, obviously, there's a lot to learn we have about five weeks of data, which is pretty inconclusive.
But supportive at this point and we'll see how the remainder of the quarter evolves.
Regarding direct contracting.
We will continue to evaluate the panel.
Part of it is where we sit at certain points in the year right. We still have time over the course of the year to evaluate where we think that that patient count will end up and ensure that if there are reasons why we think patients my dropped to proactively.
Mitigate those reasons and so we will continue to do that.
But at this point.
We wanted to make sure that we're being.
Proactive about managing this particular risks the reality is that in Medicare advantage. The patient decides to leave oak streets that patient needs to call. It a health plan, making proactive making a decision to call. The health plan proactively changed their doctor and what happens from that point on is prospectively that patient moves off Oak Street rosters.
Direct contracting is different.
Next year CMS will look at our patient payout for 2022 and May make a determination that certain patients shouldnt have been including a roster. Despite the fact that CMS paid us for.
Those patients during 2022 and will retroactively dropped those patients for all of 2022.
Ultimately given the relative size of our direct contracting population it isn't that impactful from an EBITDA perspective, but obviously creates choppiness and we wanted to do it we could to make sure. We're keeping that ahead of us as we continue to learn more about the direct contracting program.
Our next question comes from Ryan Daniels from William Blair. Your line is open.
Yes.
Hey, guys. Thanks for taking the questions Mike I wanted to ask you about the programs for the all inclusive care for the elderly I noticed that Illinois, expanding it looks like you guys are participating in that so.
Can you go into a little bit more detail about that opportunity number one and then number two will that be offered out of an existing Oak Street health center or is it going to be a totally new asset base. Thanks.
Yes. Thanks I appreciate the question.
I mean for those of you who are less.
Familiar with the pace program.
I look at it as almost an extension of what we do at Oak Street health for some of our.
Most vulnerable and highest need patience and we.
We look at it as a natural extension of what we do and there is a way to get a lot more resources for those patients and help us care for them. So we're very excited when Illinois decided to get to offer the pace program. Because we think it can be a really valuable offering for our patients and so.
There is some pretty specific rules around pace of what you need to provide so we'll need at least one dedicated pay center.
But we can also offer care out of our current guidance as satellite based centers. So I think it will be a really great complement to what we're doing allow us to leverage our current centers and.
And frankly for a lot of our patients who really can benefit from pay for them to get them a lot more resources and that can drive better better clinical outcomes to them. Most importantly, but also a better financial result, so we think it's a great a great kind of complement its energy opportunity. We're really really excited me part of the program will though.
It's a relatively.
Slow rollout programs I don't expect to have a huge impact in the near term.
Our next question comes from Gary Taylor from Cowen Your line is open.
Hi, good morning.
Two quick ones one could you just touch on the CH W acquisition, a little bit just.
Exactly.
That is in the motivation for that one.
Yes. It is.
Senior focused primary care group in Washington Heights in New York City and.
I think the simplest way to say that they were a group that started a couple of years ago. I think had a very similar approach to what we're doing and Oak Street health and start with one center in.
Sort of a.
A meaningful patient population, but I think as they were working on a model realize just the complexity of actually getting to be a risk taking provider group.
The costs associated with scaling that type of model.
And I think realize they can provide a better.
Care quality and do it faster than that.
Higher degree of success that they joined up with Oak Street versus trying to do it on their own so from our standpoint as a great opportunity to it.
Take something over that center based senior focused most importantly, a great cultural fit between the team there and our teams. So it really felt that it'd be kind of a essentially a way to kind of get a center that was a little further along on the maturation curve.
We love those types of opportunities, we did something similar in Philadelphia, a couple of years ago.
But.
There is not many out there that kind of fit that criteria would be senior focused center based and had that strong strong culture fit with what we do so we will selectively look at this type of opportunity to come up with one center, it's relatively small, but it's a nice way to kind of accelerate the patient ramp if we can find them.
We now turn to Justin Lake from Wolfe Research Your line is open.
Thanks, a couple of things one can you.
Congrats on the revolver I think it makes a lot of sense I just want to make sure I'm understanding it.
From a financial perspective in that.
Previously you had said 30% to 40 centers and you think you can get to breakeven and self financing by 2025, and therefore don't need to raise capital.
Has something changed that you need the revolver now or is this just insurance and then secondly.
Last year I think it was at the JP Morgan Conference you gave US an overview when you kind of talk through maturity curve gave us an update on how the deferred.
Vintages were performing can we expect something similar.
At JP Morgan will be the timing on that.
Okay.
Hey, Justin Good morning, it's Tim.
Thanks for the question so on the debt deal now from our perspective.
The term loan now as more just a function of prudence and good corporate housekeeping from our perspective.
Our expectations haven't necessarily changed we felt as though particularly the volatility in the market and the uncertainty that it was better to have it than not.
So thats just.
Response to the detail regarding the Rams, yes, I mean to your point, we did share.
Our expectation for our cohort level performance in 2022 and January .
Our guidance for 2022 was based upon those ramps just simply the sum product of the profitability of each cohort multiplied by the number of centers in each cohort.
And given our performance.
<unk>, thus far were tracking well against those cohorts and our expectation would be that in January we update folks on performance early earlier results for performance in 2022 against the 2022 targets as well as our expectations for 2023.
Our next question comes from Jessica <unk> from Piper Sandler Your line is open.
Thanks for taking the question.
I was hoping you could give us some detail about the nurse practitioner Fellowship program you guys launched in September .
The receptivity been like and just how scale does the program today and maybe the plan for future growth.
Okay.
So I appreciate the question this is Mike.
It's a program where we're incredibly excited about because one thing we've identified is a huge interest in nurse practitioners, especially new grad nurse practitioners in the Oak Street model and practicing in value based care and practicing a team based care and being able to make the impact on our patient population that we do.
But I think one of the big differences between nurse practitioners and doctors is nurse practitioners physician, you'll have residency and so they've.
And a nurse for a period of time go to NV School, and then come right back out and see patients and if youre in a more of a.
Urgent care or that type of that type of places what youre seeing is not that difficult and you can.
We need a lot of extra training, but obviously our patient population is very different that is complex.
That's a number of challenges and so.
It can be hard for a new grad nurse practitioner to come and Oak Street, and I'd kind of hit the ground running and so to bridge that gap.
We're actually partner I believe with the University of Michigan.
I've created kind of a.
Similar to what I guess, providing you with residency of more of a rotational program to give people extra support give people extra guidance give people extra mentorship.
That helped them get a lot of rats on our patient population and so really be able to extend.
<unk> kind of hiring practices and our development practices.
New new Grad students. So we're pretty excited about.
Both the programme now, but also what the implications for the future and continue to build the best that's provider team in health care.
We now turn to John Ransom from Raymond James Your line is open.
<unk>.
Okay.
Hey, good morning.
Just a couple ones for me.
You mentioned last night that you paid the earn out on the Rubicon deal this quarter could.
Could you just kind of give us a high level.
Review of how that deal has gone relative to your expectations and in particular are they giving you insight into real time cost.
That you didn't have a year ago and I have a follow up thanks.
Yes, I appreciate the question.
I think it's going very well compared to our expectations I think the whole.
Thesis behind the Rubicon acquisition was that so much of the special of spend out there is not needed right. It's redoing work.
Were you really just want a second opinion you really just wanted to double check that you are managing these complex patients in complex conditions correctly as a primary care doctor and Youre only mechanism to do that in any kind of traditional fee for service medicine is to send them to a specialist where.
From a patient perspective, they have to make a new appointment as soon as six months to get an appointment they got to get to the Doctor's office Theres lot specialist, that's usually less convenient they've got to wait in the exam room. They got to do a whole battery of testing and redo those things et cetera, et cetera et cetera. So it's both high cost and poor experience and really if you wanted a second opinion on a lot on a lot of surfaces. So it's not all but it's been a meaningful portion.
<unk> are a perfect way to do that I think will be identified as one of the barriers they are happening more presently assess it.
A lot of administrative work and hard for primary care docs actually can actually get the console right.
There's only so much.
Heres the guidelines when you have to go into a new portal re type information et cetera et cetera. So we felt to really get the full benefit of <unk> in the patient experience and medical cost impact, we really need to integrate it into our core technology platform and that's why we decided to make the acquisition. So as I mentioned I think in my script.
We just finished the kind of.
Phase one integration work. We're now it's just part of our referrals module, there's no theres no extra portals et cetera.
And as expected, we're seeing a really strong uptick in the.
The amount of.
E console being used.
We believe both will save direct specialist cost because a lot of the countless will avoid having to send them to a specialist for the second opinion, but more importantly, I think will create a great patient experience where within hours. We can get the results back from specialist versus what takes opex.
Once again, you see a specialist.
And just as importantly, it's a really great resource for our providers to get extra information on how to manage some of their toughest patients. So.
So so far we feel great about the results.
It's been a process as we've talked about.
Driving integration over the course of the year and so kind of the number of your consults as it has gone up as the years progress and continues to trend up month.
<unk> over months.
So.
We don't obviously have claims for the near term periods. Two compares to the way, we actually kind of validate that the cost savings. We check okay console happens is there ever a specialist claimant and validate that it actually is reducing costs.
We know it does in the early days of Q1 Q2, although on a much smaller volume console and so we have a we have a lot of confidence that it's going to drive results.
Q4, and really most importantly next year and beyond at Oaktree.
We announcements of Elizabeth Anderson from Evercore. Your line is open.
And Elizabeth Your line is now open.
We move on to Sandy Draper from Guggenheim. Your line is open.
Thanks, very much and good morning.
A question, but I'm just looking at the patient growth one thing that jumped out sort of over the last three quarters, you've had really strong growth on the fee for service side. It seems to me that's a potential feeder source.
Moving people into the at risk population I'm just trying to.
Love some color on how you can market to those people why someone who comes on and fee for service would not switchover to at risk in and obviously mid year. Some of those may not but is it reasonable to think that the majority of those move into an at risk.
Model at the beginning of next year, just trying to see how much of a leading indicator of that is to grow towards the at risk patients.
Yes, I appreciate the question I think youre thinking about correctly as that population being a theater.
I want to point, there's always kind of call it structural percentage of patients who can't be at risk and there is a couple of reasons for that.
One on direct contracting as we've talked about there's a fair amount of people who are on traditional Medicare that are seeing Oak Street health have actually filled out the voluntary alignment form. They want you joined Oaktree got the PCP, but as of today.
If you were going to a primary care doctor in the past two was part of our part of a health system that was part of the Medicare shared savings program.
That would trump that backward looking.
Visiting our primary care doctors about MSP would Trump forward looking your patient decision to join Oak Street, which.
Again, it's probably how I would do it if items 19, but that is how the rules work today.
So because of that you have to wait till the patient because claims line with city, coupled with take will take two years.
And so we do see some set of people who are patients who are kind of fee for service who want to be part of direct contracting is just they are waiting to get through and obviously, we don't differentiate the care that's not a patient decision right. It's just it is what it is.
There's another subset of people that.
Don't have full Medicare part B. So they are not eligible for for a contract being retro <unk> Medicare kind of saying you're not huge buckets, but theyre bucket that does not really much we can do about the move to risk.
There are situations, where people have completed this with Oak Street health and we're just waiting for them to flow through again. This is a big one for direct contracting where someone sees us today. It fills out the voluntary alignment form they won't go to risk until January when we report Q4 results that's going to be a person who is listed as fee for service, but to your point that that is a great example of the feed our growth right there.
Flow through to risk contracts.
Similar to some of our new markets.
When we go to new markets, because we don't have risk day, one we have risk kind of the first January one initial usually an administrative thing theres only.
Hudson patients its really not worth all the processes that go to risk. So we build the population first and those contracts flipped. So so so I think I think.
I have a number of reasons why we have patients who are not at risk, but I do think that over time. The majority of the people eventually flow to risk, although obviously there'll be new ones that come in that are not at risk right and then there'll be some smaller portion of that just kind of structurally always not at risk.
As a reminder to provide the greatest opportunity for participation. Please limit yourself to one question. Please reenter the queue. If you have any further questions.
We now turn to Richard close from Canaccord Genuity. Your line is open.
Richard Your line is now open.
We now turn to Kevin Fischbeck from Bank of America. Your line is open.
Hey, Thanks, This is Adam on for Kevin Fischbeck.
If I understood correctly, I think youre, saying, new patient economics are still hovering between 2019 and 2021 level.
But I thought that that was the main swing factor into the unit economic range that was the basis for 2022 guidance. So if that's not coming in better than than what is giving you confidence to raise the range.
And if I'm understanding that correctly, what do we need to see to get back to 2019 levels is it better risk coding lower year, one utilization is it patient capacity any color would be appreciated.
Hi, Adam it's Tim.
So for 2022 guidance, if you recall we had a.
A range of outcomes, we provided in January the high end of which was assuming we got back to 2019 levels of new patient economics, and there were no COVID-19 costs, we ever thought that that range was necessarily relevant for 2022, because when we provided that in January obviously, the omicron surge was underway and we werent, we didnt expect.
<unk>, new patient economics to swing back.
That quickly so our guidance for the year was predicated upon the low end of that that range of outcomes provided in January to about the mid point. So as we think about performance for the year.
For 2022 us coming in at the high end of guidance that would be at about the midpoint of that.
Of those center economic ramps that we provided in January and so it would make sense that if patient economics or somewhere in between 2019 and 2021 levels that would be in line with the midpoint of that range.
So.
That is Angela.
I'm sorry, what was your other question.
Yeah.
Thank you Scott.
We now turn to Elizabeth Anderson from Evercore. Your line is open.
Hi, there. Thanks, Tavis is Samir Patel speaking from Elizabeth Anderson.
Wondering just sort of on the same framework for Q4 rest of fiscal.
Fiscal year 2022.
Do you have any color you can provide on MLR and Directionally, which way this is going to be going and then the puts and takes related to it.
Yes, so we do not guide on MLR. So.
I can provide any any input on where we think MLR will be for Q4 as we discussed a number of factors that affect MLR in our business that are different than what you might see in the market more broadly at least within MA plans, right, where new patients, which are a large portion of our total patient mix are going to increase MLR. So the extent that we.
We are outperforming on new patients, we'd expect MLR to be higher than expectations and so I think the market turns of what will get each of these metrics.
On a siloed basis and the reality is there's interplay. So we don't talk about MLR I'd say look at stepping back for a moment.
Medical costs are the single largest expense line item on the P&L and for us to now be.
Centered on the high end of our prior.
Guidance range for full year EBITDA, you cannot be there without having MLR medical cost results generally speaking in line with your expectations right. It's very hard to offset headwinds on MLR through expense management, just given the relative size of each of those buckets. So from our perspective.
We're in line with where we were where we thought we'd be for the year, which are which is great, but beyond that and I can provide any specifics on where we think MLR will be for Q4.
Our next question comes from Andrew Mok from UBS. Your line is open.
Hi, Good morning question on the MMA Star scores given some of the recent volatility for the 2020 for plan year I understand that the impact is ultimately based on county level of contract exposure and plan benefit design, but can you help us help help us understand how this works mechanically.
Starting point for your capitation contracts with plans include rebate revenues such that if a contract declines in star scores that lower rebate revenue that flows through to the clinic. Thanks.
Yes, I think it's a bit more complicated than just sneaking through star scores go down revenue goes down and that flows to Oak Street, because I think there is a big portion of that and I think governor on our economics, which is the plan bid.
So oftentimes when there is higher star scores are higher revenues plans will reinvest those dollars into a better more compelling benefit offering more supplemental benefits and so yes. There is more revenue to Oak Street. When that happens is also more cost to Oak Street, because obviously, there's cost to the supplemental benefits as well and the reverse is true.
So we're we're somewhat.
Buffer and insulated from kind of rate changes and in this case.
<unk> performance changes because oftentimes there is adjustments to the benefits and those adjustments can be reductions and the benefits or just a lack of an increase in the benefits that would have happened otherwise and so we get the question on both sides.
Oftentimes you know 20 point youre going to be a great rate year.
It can be a wonderful year for Oaktree and the answer is no.
It will mean revenue will be higher, but so will cost because the final bid more aggressively and in the future and we have a bad rate year the obsolete.
It won't be aggressive growth of benefits likely because of that and therefore, it'll it'll kind of buffer out and so I think the same thing will happen with the star scores so to that extent so when these changes happen.
It has.
Much more limited impact on the bottom line of Oaktree been kind of a top line of the plant.
Our next question comes from Michael Hall from Morgan Stanley . Your line is open.
Hey, good morning. This is <unk> on for Michael.
I just wanted to look at the AARP partnership are there any updates or visibility on the membership growth associated with this and in the future will there be a way for us to kind of track that membership contribution that comes from that partnership. Thank you.
Yes, I appreciate the question, we don't break out membership by channel.
Don't expect to do that into the future.
Sure.
The AEP apart one is we talked about we're very excited about.
Because the AARP Brandon this is the most trusted brand name for older adults. They have an incredible reach in that organization.
So as we continue to go forward and kind of activate more and more pieces of AARP.
Again, we just got increasingly excited about about the opportunity there and I think it is something that is very differentiating.
<unk>.
Only in an exclusive group too.
To be able to from a provider standpoint to leverage the AARP name and so I'd say, we think we can get a long term built in advantage and with the conversations we've had with AARP.
Leadership, I think they share our excitement I think theyre really.
Excited about jokes jump mission and excited about kind of helping more and more AARP members and leveraging their incredible reach.
To further educate people about the importance of primary care and preventative medicine in what we do here at Oak Street. So.
Again, we're in the early days I think early innings of this partnership so to speak.
So you'll ask me, but baseball game in any of the things I would say I'd say, we're still in the first thing on this one.
But we're incredibly excited as this game progresses to see the impact is going to make I think it can be a really true differentiator in the medium term.
Okay.
We now turn to David Larsen from <unk>. Your line is open.
Hey can you. Please provide your thoughts on the announcement yesterday, we're village M D.
These acquiring summit health and your thoughts on the Walgreens investment into the space what impact will that have on you if if any.
And it seems like Cvs is interested in the primary care space and then just quickly I think in the Jpmorgan deck from last year, you highlighted that there were 19 centers.
We're in a year six plus vintage range without a platform contribution of around $6 million to $7 million box for 2022.
How is that sort of cohort or vintage range trending relative to expectations. Thanks very much.
Yeah I appreciate the questions.
On the first one regarding the acquisition.
I think that really highlights a couple of things one is just the.
The market size and market opportunity for primary care again, you have.
Okay.
I'll read this that's probably more than I have.
<unk> acquisition and a group that.
Essentially urgent care centers in New York City, and a large multi specialty group in New Jersey.
It really it really in one market.
And we're in New York City today, it's been a phenomenal growth market for us over the last couple of years, we just got involved and I think were just.
Jimmy I forgot what will grow in Europe from a center perspective and patient perspective.
And so again I think we actually coexist quite well with them I don't I don't look at them as competitive at all.
Today, So again I think that just highlights kind of the number of different.
Primary care offerings in.
The size of the market and I think the fact that youre seeing more interest in M&A side, I think I think.
More and more organizations are coming to something we would totally agree with which is.
The key to addressing the cost and quality of channels. You are in healthcare is through primary care.
Innovative primary care assets can really drive a huge on a value to the system.
So again, we totally agree with that I need just highlights the size of the market here in the kind of there's so many different approaches to leverage in primary care.
To your second question.
As Tim said earlier I think on this call we will.
We will share updates on how we're doing by vintage in January and as well as kind of expectations for 2023, but I think you should strongly imply based on the fact that we're kind of hitting our quarterly numbers and slightly raised our range that our cohorts are progressing as we described in progressing so I think that would be a very fair assumption.
But those 19 are kind of in the range, we've talked about and I think thats one of the things that is making us incredibly.
Confident in the trajectory of the business as we're seeing what we hope to a trend. How this year is kind of getting to a more normalized period, it's trending that way.
We're seeing really strong performance and it's been a.
It's been a tough operating year and with all the things behind the economy and health care and despite that our teams have just done an incredible job driving incredible results across all vintage and the new vintages are going well.
When they are going well.
So again, we're excited to share the results, but I think you should imply from the results today and guidance that it's going well.
We now turn to Jamie Paas from Goldman Sachs. Your line is open.
Hey, good morning, guys, you've been 17 centers in the quarter, that's a 12% sequential.
Grill, So clearly had an impact on the P&L.
I'm trying to understand that a little bit first on patient growth how much of that came from new centers I imagine they're slow in the early days and so most of the growth is attributable to earlier sensors. If you can comment on that and then on cost of care same type of question. Just if you can remind us what the first few months of <unk>.
Cost of care center level costs look like.
Floor for data centers, if we bridge from <unk> to <unk> is that the difference and then lastly, just on direct contracting Ive always described it as higher revenue higher costs, but similar margin contribution is that still the right framework to be thinking about direct contracting sauce ACO reach going into next year. Thank you.
Yes. This is Mike <unk> on the growth front I would think about especially on the growth side New center adds.
Other than the small handful of tenants. We have that are basically fall. Our concern has grown at a similar amount per month every year.
Theres not theres not like a.
A slower or much faster ramp for new centers are generally pretty consistent from kind of your first couple of months to a couple of years in kind of a number of patients youre, adding per center per day.
So I'll just kind of look at it more proportionately on the growth front.
On cost of care I mean, yes, the more centers you opened up in any given period the higher the cost of care by definition, because you know people working at those centers.
Generally constant carries less at a newer center because you don't hire all six care teams.
Day, one right you hire you higher one in the first month of your iron only one month or two and et cetera et cetera.
So you do ramp cost of care over time.
With centers, so that wouldn't be totally proportionately less cost of care.
For new centers and I think your frame of reference on direct contracting is correct Directionally I think we see kind of when you adjusted for patient tenure I think you see similar dollar contributions are relatively similar for direct contracts due for Eni.
Jamie This is Tim one thing I'd add is that to the extent that we have more centers in a period than otherwise expected that would lead to greater losses in the period all else equal just given the fact that obviously new centers are going to.
We're going to invest in those centers are the first couple of years to get to the breakeven. So more centers all else equal would be a greater loss just just to make sure that was clear.
Our next question comes from Craig Jones from Stifel. Your line is open.
Alright, thank you.
Wanted to ask around the new debt. It looked like there was a covenant in there around trailing 12 months' contribution margin at certain levels.
Once you John uncertainty now so I was wondering if you could give us what that would be at 800 200 are fully drawn.
And then if you do end up having to draw that.
Over $100 million would make it more likely you would slow your growth closer to 30 as you would have to be more focused on profitability.
Or is it fairly easy covenant to achieve even at 40 centers.
Hi, Greg This is Tim.
The covenants set assuming 40 centers so.
The simple answer is no.
No we wouldn't have necessarily adjust our center pace, depending upon how much of the loan we drew or ultimately draw. We are not we did not disclose what those covenant levels are set out.
Okay.
Our next question comes from John Ransom from Raymond James Your line is open.
Hey back and back in the queue.
So my second question is.
Last year, you guys had the issue of course with.
Delayed visibility into medical cost just given the delay.
At the payer level. So I'm, just wondering a year down the road kind of how youre thinking about that issue.
If you knew.
X percent of what you needed to know a year ago. This year or is it just one of the structural issues that you just sort of have to cover with getting bigger and more actuarially predictable and just kind of brute force reserves.
Yeah. John appreciate the question I think we've actually been almost 18 months since since the kind of.
Late Q1 early Q2 challenges in 2021 time flies and even front I guess.
But I think that when we look back at that period I think it really was absolutely an anomaly was the biggest the biggest challenge there. We've obviously have full run out now and have full visibility into it and as we've discussed.
When the vaccines came back people went back to specialists.
Much higher numbers than they've ever done before and it was not just it was actually the percentage of referrals that got completed with just much much higher and when we both Q2 2020 I think we.
Prudently decided to.
Assume those trends would continue throughout the year.
We ended up not continuing throughout the year and end up being a two month issue and actually probably.
<unk>.
We ended up performing better than we expected or we shared kind of in a result in hindsight, we could have kept our our earnings range. The same and not made changes, but I think that felt like the right decision at the time so.
And the more of the further we get away from that the further I think it really was a kind of a onetime issue delivered by the unwind of the pandemic because since then it's been a really strong I think.
Timna and teams credit I think they did a lot of work also to upgrade our capabilities our predictive capabilities the different data points that go into our I mean, our modeling. So I think we are much better than we were then also we also have a much bigger patient base than we did then also which helps and that will continue to grow and help more and more I think.
We tried to be very prudent in how we book R.
Our.
Nearing quarter, so as you've probably seen we produce met costs last.
Three or four quarters from prior periods as we kind of prudently book and so again I think that.
A number a number of things that we've done to improve.
But I think the root cause issue again looking back knowing what we know today with very much of a kind of a one off.
Behavior change in a very dramatic way by patients that has not been reviewed and I don't I don't we expect will happen again.
We have a follow up from Sandy Draper from Guggenheim. Your line is open.
Thanks, very much for taking my follow up pretty quick I think.
Could you just comment on I know you said this year operating cash flow sort of aligning with EBITDA.
Is that a good sort of long term way to think about the model or is that going to trend back one way or the other that would just be helpful to get your thoughts on that thanks.
Yes, it's Tim.
Generally speaking that is the right way of thinking about it again give or take a little bit right, but.
Roughly speaking Asia approximate I think if you look back historically speaking you will you will see that trend again on an annualized on an annual basis, and we expect that going forward.
Okay.
As a reminder to ask any further questions. Please press star one on your telephone keypad now.
We now turn to Jessica <unk> from Piper Sandler Your line is open.
Hi, Thanks for taking the follow up can you describe white oak streets rollout during AEP and then kind of what are your priorities during that time in terms of patient retention.
Great. Thanks.
Yes, Thanks, Jess I think I think ADP, it's a very different period for Oak Street, and frankly less important period for Oak Street, then it would be for our plan.
Because we're adding patients throughout the year, because they're picking us as their primary care provider and Theres no theres no implications on the open enrollment there.
We do see a little higher growth in the AEP period, because people are being activated to think about health care systems because of all the advertising thing happening in the Medicare advantage front.
Oftentimes we will.
Partner with and coordinate with insurance advisors, who are signing people up for plans, we need primary care doctors so.
Again, there's a little bit of a lift through the period, but it's not.
It's not the kind of this outlier period of growth I guess for health plan works out to Europe .
And look one of the things we do all year round not just during AEP, but certainly during AEP is we want to make sure that.
<unk> patients are on the right plan for them and leveraging the benefits appropriately and when we find that there's a lot of supplemental benefits and formulary rules and things of that nature of that.
Relatively complex. So we have we have.
Resource in all of our centers, we call our patient relationship manager.
Essentially what that what the PRN, we call them does is they help.
There are many roles to help our patients navigate all things insurance right and so making sure that our providers understand a formulary so to patients, making sure that people who have a benefit around.
Certainly self metals or certain activities are leveraging that if theyre interested et cetera, and we find that one is most importantly, a great benefit for our patients but number two if they are using those things.
<unk> two to better attention for the health plans as well as an ancillary benefit. So we do that all year round, but obviously AEP as an increase in importance.
I'll say on this is I think one of the advantages of being a multi payer platform. It.
Patients if there is a better plant operating can switch plan offerings and stay with Oak Street health and so.
As the M&A market has been more and more competitive last couple of years has been more and more dollars flowing into marketing.
We've been able to navigate that well in large part because of our true multi payer nature.
This concludes our Q&A and today's conference call, we'd like to thank you for your participation you may now disconnect your lines.
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