Q3 2022 Cano Health Inc Earnings Call
So really prognosis gosh, that's a result of various factors, including but not limited to risks and uncertainties discussed in our SEC filings, we do not undertake or intend to update any forward looking statements. After this call as a result of new information.
During this call. We will also discuss non-GAAP financial measures. The non-GAAP financial measures. We will discuss today are not prepared in accordance with GAAP. A reconciliation of the GAAP and non-GAAP result is provided in today's press release and on the Investor Relations section of our website and with that I'll turn the call over to Dr. Mai Le Fernandez, Chairman and CEO of channel.
Please go ahead.
Thank you and welcome to the call.
We appreciate your joining us today.
The majority of our prepared remarks will focus on the quarterly results and our expectations going forward. However, I'd be remiss if I did not take this time to acknowledge the impact of Hurricanes Fiona.
Convenient, Puerto Rico, and Florida chemical.
I have a strong presence as you know.
When these events occur we feel the impact and rebuild right alongside our committed.
Really proud of the continental family and its resiliency determination and urgency to help people in need in communities, where we operate within days after hurricane Irma made landfall our teams delivered a central items conducted mobile health exams and supported the most effective communities in southwest Florida.
All medical centers, except for two who are open and operating under normal conditions. Shortly after the hurricane.
Rest of the management team and I are extremely grateful for the commitment those in our organization display every day.
Now on to the third quarter results.
<unk> continued to achieve steady organic growth in Q3 total membership grew four 6% from second quarter to approximately 295000 members an increase of 40% year over year.
Revenue came in at $665 million, and adjusted EBITDA of $42 5 million growing 33% and 200%.
Approximately respectively year over year growth in new members continues to be robust and importantly, we demonstrated ongoing medical cost ratio and adjusted EBITDA margin.
These results are notable achievements during our high growth space of our company and a sign of our focus on profitability.
Demand for primary care services at our medical centers is higher.
And this momentum provides long term value creation opportunity. However, this sizable organic growth creates a headwind to current calendar year revenues and profitability.
Potato revenues per member per month, or <unk> was lower than expected declining nearly 9% from the second quarter of 2022. This was primarily due to revenue pressures from new members, who came in a lower revenue PSTN. We expect the revenue fee NPM to normalize in future periods in line with the existing member base.
Patients are integrated into Cardinal health to National care platform.
This was particularly true in Medicare advantage, which faced a topline quarter over quarter <unk> headwind of approximately $30 million.
The significant driver of the shortfall has been lower calendar year revenue from new patients with lower Medicare risk adjustment for MRA scores.
Since June one 2021, we have added a net of 50000 Medicare advantage patients toward national care platform growing from 79000 patients to our current 128000 patients. However, our new members came in at a lower <unk> than expected, which decreased our consolidated <unk> PFS OS.
<unk> the lag in reimbursements for these members is a headwind to the current year, but we expect to see incremental risk adjustment and higher revenue <unk> for these members beginning in January 2023.
Medicare direct contracting or ACO reach also experienced lower <unk> revenue <unk> and was negatively impacted by approximately $18 million in the third quarter of 2002, reflecting potential benchmark reductions by the center for Medicare and Medicaid innovation or CMI.
While we have had robust growth in this new service line, the intra year rate adjustments from CMI will impact our projections there.
<unk> is profitable for us today, and it provides us with the opportunity to measurably improve outcomes for tens of millions of Medicare beneficiaries that are not on Medicare advantage. Nevertheless, I believe it's appropriate to optimize the network to improve margins I will discuss this more in a moment.
Even with our sustained growth over the last two years, which has seen us expand from three states plus Puerto Rico to nine states plus Puerto Rico, we have achieved consistent operating metrics.
Our total hospital and emergency room admissions per thousand generic dispensing rates and patient engagement metrics continued to perform very well contributing to a decrease in third party medical cost <unk> versus the second quarter of 2022.
This demonstrates the portability and effectiveness of our population health management programs, which operate most efficiently with scale and density.
As I've discussed before our strategy has been to build scale and density to serve the most patients in the shortest amount of time with the best clinical and financial results over the course of 2022, we have added critical capacity that will enhance value in the coming years. However, the revenue headwinds, resulting from new membership growth has slowed.
Calendar year earnings growth.
As a result, we are prudently lowering our outlook for full year revenue to the range of $2 7 billion to $2 75 billion and full year adjusted EBITDA to approximately $150 million to $160 million, our new full year adjusted EBITDA guidance still represents a significant improvement over last year and includes the neck.
<unk> impact of investments, we have made throughout 2022, and our tuck in medical centers, Brian will walk you through the specifics of our guidance shortly.
In light of current market environment, and consistent with our goals of long term profitable growth. We took five key steps during the quarter to make enhancements to our operating plan. Our near term goal is to accelerate our path to free cash flow positivity and gain greater leverage from our existing assets.
We have already begun to optimize our provider network by selectively trimming underperforming affiliates or Medicare advantage and Medicaid service lines. This optimization will allow us to earn higher margins and share more outside with our better performing providers we.
We expect the margin profile to improve alongside a reduction service cost to support them.
Second with the medical centers, we have added and will still add in 2022, we have significant capacity for continued growth the medical centers.
<unk> added over the prior 18 months have created significant untapped capacity.
Our medical center membership can more than double with a single additional exam room. Consequently, we are delayed in some cases cancelled plans for de Novo some tucking in medical centers, which lowers our expected medical center count for year end again, we view this as a prudent step to enhancing our operating leverage and improving our cash flow in the current market environment.
Third to improve overall performance in our ACO of each business, we have deactivated underperforming providers for 2023 as a result, we now expect ACO breach membership will begin 2023 at approximately 70000 members.
We have made important adjustments to payer contracts to improve profitability and cash flow by leveraging our differentiated care platform in key markets. Finally, we will consolidate certain operations and optimize our total cost structure.
Although it's too early to give guidance for 2023 in detail. It's important for you to know that we have already begun to prioritize cash flow and self funded growth, which is essential in the current market environment, given our organic membership growth and the capacity available at our medical centers, we plan to grow without the need for additional investment while leveraging our capital light affiliate model.
To supplement profitable growth as always we remain committed to enhancing long term value for our shareholders I want to take a moment.
Want to discuss our fundamental value creation.
Accountable health fundamental value is created as we help more patients with longer and healthier lives, although revenue from new patients lags related to payment mechanism we have.
<unk> built a great deal of fundamental value, serving more patients than ever while improving clinical outcomes and financial performance.
Fortunately this value accrues, not just to us but to share relationship with our providers and payers.
Also fuels greater innovation and value based care I'm proud of the economic and societal benefits that we're bringing to communities around the country, particularly.
To those who are underserved as.
As we all know primary care is essential and stairs further there is increasing demand for primary care because it's the bedrock of the health care system.
That has the strongest presence in this critical area, we will be rewarded by the marketplace kind of help us built somewhat of China's primary care assets in key markets around the country and operates a proven population health platform measurably improves care, while decreasing medical costs across service lines modest appear and geographies.
Value based care remains highly desirable and one of the most effective structures to improve the health care system and we are confident that kind of help will remain at the forefront of this paradigm shift providing better access quality and wellness to the communities. We serve now I'll turn the call over to our CFO Bryan copies will walk you through our financial result.
And guidance.
Thank you Marla and thanks, everyone for joining us today.
Total membership increased 40% year over year to approximately 295000 members in the third quarter.
This represents an increase of approximately 84000 members from the third quarter of 2021.
In the third quarter, 44% of our members, where Medicare advantage, 13%, where Medicare DCE, 25%, where Medicaid and 18% were eight acre.
Total revenue for the quarter was approximately $665 million up from approximately $499 million, a year ago, but down compared to $689 million in second quarter <unk>.
Total capitation revenue was approximately $626 million third quarter of 2022 down from approximately $655 million in the second quarter of 2022.
This 5% sequential decrease was primarily driven by lower than expected capital revenue MTM from new patients.
Our Medicare <unk> in the quarter was $1148 compared to $1238 in the second quarter of 2022 and reflects the impact of new patients and the change in the BCE benchmark.
Additional information about our membership mix and our <unk> is available in our press release and updated financial supplement slides posted this evening on our website.
Our MCR in the third quarter was 78, 2% compared to 85% in the third quarter of 2021% as lower third party medical cost <unk> more than offset the decline in <unk> revenue pm TM.
Excluding DCE, our MCR was approximately 73% in the quarter versus 79, 3% in the third quarter of 2021.
We still expect the full year DCE MCR to be approximately 93%.
For 2022, we are increasing our full year MCR guidance to 79, 5% to 85% an increase from our prior guidance range of 78% to 79%.
In the fourth quarter, we largely expect third party medical cost P. M. P M to stay flat compared to the third quarter of 2022.
We expect to see a lower capitation revenue <unk> for newer patients.
We're also assuming utilization trends will remain stable with current levels and expect the impact from COVID-19 to be immaterial in the fourth quarter.
We're also closely monitoring trends in seasonal flu and although it's still early we haven't seen anything to suggest an unusual impact this flu season.
Direct patient expense in the third quarter of 2022 was nine 6% of revenue.
This was above the second quarter of seven 6% and includes incremental costs related to de Novo's <unk>.
This metric was in line with our expectations for the quarter.
SG&A expense in the third quarter of 2022 was 16, 8% of revenue are approximately 15, 1% excluding stock compensation.
The third quarter included the impact of a onetime fee related to a professional services agreement. In addition to the expected costs related to supporting new medical centers brought online during the third quarter and preparation for open enrollment.
SG&A expenses incurred in the third quarter related to hurricane in were de Minimis and we expect any repair cost that occur in the fourth quarter should be immaterial as well.
Okay.
Adjusted EBIT in the quarter was $42 5 million up from $13 6 million a year ago.
Reducing an adjusted EBITDA margin of six 4%.
The third quarter adjusted EBITDA included higher add backs related to know the losses as we brought 90 notebook online during the quarter.
Now, let me turn to our cash flow and liquidity.
We ended the third quarter was about $24 million in cash total debt at the end of the third quarter was $937 million and includes current and long term debt capital leases and payments due to sellers.
And our total net debt defined as total debt less cash was $913 million as of September 30.
Through the third quarter of 2022 year to date cash used in operating activities was $84 million meeting our operating cash flow in the third quarter was about neutral.
For the full year of 2022, we now expect cash used in operating activities will be in the range of $130 million to $140 million.
We are focused on strengthening our balance sheet and as Mario mentioned, our priority is improving cash flow and margins.
We ended the quarter with 151 medical centers as of November 9th we have 162 medical centers and anticipate to end the year at 170.
The lower count compared to our prior guidance reflects it.
Fewer de novo's and tuck in acquisitions, given our focus on cash flow improvement.
This reduction will yield slightly lower capital expenditures in the fourth quarter of this year and reduced cash use of cash in 2023.
Now, let me summarize our 2022 outlook since our last call in August .
We still expect membership for 2020 to be in the range of 300 to 305000.
Total revenue is expected to be approximately $2 7 billion to $2 75 billion. This is approximately 5% lower than the midpoint of our prior guidance and reflects lower capitation revenue pm TM.
For the full year 2022, we expect our MCR will be in the range of 79, 5% to 85% primarily due to the top line revenue pressure marleau and I previously discussed.
The second half of 2022 is still expected to be lower than the total MCR in the first half of the year and will include normal seasonality and medical cost and cost recoveries.
We expect to operate 170 medical centers by the end of 2022, and our adjusted EBITDA is expected to be in the range of $150 million to $160 million down from the prior estimate of approximately 200.
Given the magnitude let me walk through some of the items driving this change.
Revenue is expected to be lower by approximately $150 million compared to the midpoint of our prior guidance and is offset by favorable third party medical cost of approximately $85 million.
These net to an adjusted EBITDA headwind of approximately $65 million, which is expected to be partially offset by favorable SG&A and direct patient expense.
Additionally, we expect interest expense of approximately $60 million stock based compensation expense of approximately $60 million and de novo losses of approximately $85 million.
As well as capital expenditures of approximately $55 million.
On our fourth quarter call, we will provide guidance on our expectations for 2023.
We believe this year should set a strong foundation for robust organic growth in 2023, particularly as new members integrate into Canada helped nationwide care platform.
As Martin mentioned, our focus is on prioritizing free cash flow and earnings contribution overgrowth.
The initiatives, we outlined our focus on improving profitability by generating greater leverage from our existing asset base.
And we expect these initiatives to generate progress in improving our liquidity position and earnings profile.
With that I will ask the operator to open the call to your questions.
Thank you and if you would like to ask a question. Thank you all by pressing star one.
First question will come from Linda <unk> with the Caribbean.
Hi, guys. Thanks for the question.
Hi, Thanks for the question. This is Andrew on for Joel Indra.
Just curious on the the revenue <unk> impact I mean, youre, saying thats focused on new members.
Are you seeing higher than expected churn and industrial mix of new members is higher than you would have anticipated or is it just actually lower revenue <unk> from new members driving the shortfall in the quarter.
And is any of this dynamic coming from any of your new new markets.
Yes.
This is marcelo.
No.
Half.
Stable of churn and.
As I mentioned in my prepared remarks, the excellent patient engagement NPS scores quality metrics, all operating metrics performed very well for us. This is lower than expected revenue for new members and we've had significant new membership growth.
As you recall last year, we had a revenue lag.
<unk> $122 million in MRI.
Yes.
Received that amount.
On track to receive slightly more $125 million. This year, therefore existing members are performing.
Performing as expected.
Lower <unk> are coming from the impact of new members.
And the.
The consolidated <unk>.
<unk> has thus been diluted until it is re rated as you know with the documentation and care management.
<unk> with a value based platform.
Our own.
The reasons.
Our multi factorial.
And it may include the 2021.
Impact from Covid, and a corresponding lower encountered rates in underserved communities, where we have most of our members.
There are also reasons that are outside.
The new membership in.
And does.
Impact more broadly such as sequestration.
You know starting earlier this year and the DCE benchmark.
Potential adjustment.
That.
We have done.
Over the course of the year first and second quarters, but we felt it was prudent to further adjust base.
Based on.
A question specific data that we have received.
Alright, thank you.
Okay.
Our next question will come from Andrew Mok with UBS.
Please go ahead. Good afternoon I just wanted to follow up on Eduardo question.
Bill a little confused about the sources of MLR pressure. So you called out Medicare advantage in your prepared remarks is that all MA members in clinics that you own.
So what I am talking Medicare advantage I'm talking broadly for our own medical centers as well as our.
Affiliates and as you know for direct contracting Medicare service line.
Service at our medical sensors, but also through our affiliates.
Therefore, Andrew it's for boats.
So it's for both of the pressure is more broad across like the clinic and the affiliate business. I guess, if you are trying to if we're trying to bridge. The revised guidance is it falling mostly on the in center business or the one center business or the affiliate business.
So it's both and of course, we know we have a larger Medicare advantage footprint.
Our medical centers and a larger DCE Medicare service line for our affiliates.
Therefore, it depends on the service line.
But.
Is impacting both.
Okay, and then I'm still a little confused why year, one revenue is coming in so much lower than expected due.
These members not have the risk scores that you expected and I'm. Just wondering what were you expecting it seems like it would be prudent to assume maybe a one or lower for all new members. So how are you seeing this much of a delta in year one members.
We have seen a lower delta compared to 2021.
And in total net funding and as you know Andrew benchmark adjustments upward for Medicare advantage as an example from 2021% to 2022.
And yet.
We are seeing lower overall.
And then for DTE.
These are.
Changes.
That are in <unk> <unk>.
Control complex calculations won't be finalized into some point next year, but we've got to make that.
Prudent.
<unk> as to where ultimately revenue will land.
Okay.
Got it Okay and are you able to share how many new members you have.
It seems like.
It can't be by my estimate, it's probably not more than 10% of your total membership so.
Can you help us understand the magnitude of this bucket of new members that you're experiencing issues with.
Yes, so we don't specifically disclose that new members, but.
You can see the kind of.
Net growth rates that we have.
As well as what is the natural attrition and then.
So it's going to be larger than the next.
So yes, it's having.
And impact.
That is diluting our consolidated <unk>.
200, a month.
That is lower than our forecast and we have.
Made that adjustment.
And and flowed that through to the end of this year.
Got it and then on the.
New members to the system are you seeing are.
Are you seeing similar patterns of new members to your system and churned members.
So our retention rates engagement scores net promoter all of them performing very well and consistent with our historical.
And as it relates to the remainder of the year, we have to assume.
The sequential decline.
As would be customary because of the natural attrition of members as well as further impacts from new members until we have that re rating Jan one next year and then as a result of that step up are able through.
Realized for those new members, a higher PMT and <unk>.
Got it okay. Thank you.
First.
Our next question comes from Adam <unk> with Bank of America.
Please go ahead.
Hey, Thanks for the question.
Last quarter, you said, you saw higher acuity and utilization on new membership due to hospital admissions outpatient and branded medications.
But now I think youre, saying youre seeing medical cost favorability. So is that all subsided back towards the expected trend line is there anything else that remains elevated.
Yes, so as expected our medical costs have gone down and we're really happy to see that.
In fact gone down.
That too.
Levels that.
We expect as members are managed and our care platform.
And.
Given our admissions per thousand our generic dispensing rates.
And all of those let me call them.
<unk>.
Metrics that continue to perform very well the cost of care.
Is down and down quite significantly.
Unfortunately as.
The mid year reconciliations are completed.
And you see the.
The risk scores for for this year.
And net funding related to new patients that is dragging down the overall funding rate that goes beyond the cost improvements and that is the intra year pressure that we're seeing.
And then if we could talk about cash I think I missed some of the moving pieces.
In your prepared remarks, but where does the current guidance assume cash I guess inclusive of any extra liquidity ends up for the year I want to make sure.
Modeling and understanding this correctly, because just the cash and cash equivalents $24 million and I think the cash flow from operation guidance implies negative $50 million next quarter. So I just wanted to make sure I have a handle on it.
Yes, we haven't put a specific ending balance, but certainly as we think about where we're going to end the year will be in a net borrowing position, but as Manuel discussed.
<unk>.
Series of operating improvements that we're implementing that is going to support and enhance.
Some additional cash and operating earnings.
Potential within the operations.
Things that we talked about operating our affiliate network utilization utilizing our capacity to support the growth.
Improving the overall BCE by activating some of those underperforming providers.
Some enhancements to our payer contracts or better economics.
And then certainly consolidating and optimizing our cost structure are going to help improve the overall outlook for that.
And.
On that net borrowing position.
What exactly.
The mechanism for that.
Like a revolver.
Just curious like how much room, you have on that and what the terms are.
Yeah, that's right I mean, we have.
Large capacity revolver that we have access to subordinate fluctuations in our working capital so well.
We'll leverage that as needed.
Okay, Great and then my last question.
Previously, we're targeting free cash flow breakeven next year.
And a lot of the dynamics you were describing like lower risk scores this year and potentially higher utilization on new patients. This year should all normalized by 2023, alongside the fact that youre growing slower so.
Is there any reason why we shouldnt expect free cash flow breakeven next year.
Yes, I mean, right now, we're not providing any 2023 guidance or outlook.
We're committed to improving our cash flow and liquidity as we turn into next year and I think you hit it we do expect.
These adjustments to normalize as we move into next year, which will which will support our performance but.
As of now we're not providing any 2023.
Look, we'll certainly provide that in greater detail and full detail on our fourth quarter earnings call.
Got it thank you.
Our next question will come from Gary.
Alan.
Please go ahead.
Okay.
Hi, good afternoon.
Just maybe continuing in that vein of talking about <unk>.
'twenty three are pushing for a little bit of color.
Can you can you say at this point, if youll open any de novo's in 'twenty three.
Yes, Gary Barlow.
We've got.
A great deal of untapped capacity as I said in my prepared remarks.
And we can easily double.
Our membership without an additional exam room and additional square foot.
The priority for us in the current environment is two <unk>.
<unk>.
Cash generation.
Earnings growth.
We've got the assets that we can leverage for that.
We will.
Opportunistically as necessary.
Look at.
Building additional scale and density, which you know is.
Always been part of our strategy.
And the current market environment, our focus for the time being.
Is that accelerated path to free cash flows and earnings growth.
And I know youre, not providing 23 guidance, but given the initiatives you laid out I mean should our expectation be that EBITDA grows next year.
So we will give you the specifics on 2023 for Q4.
But.
Certainly.
The emphasis is on EBITDA earnings and cash flow.
And we will get.
I'll get back to you with.
Specifics.
Yes.
Was asked on a previous question and just remind just understanding the dynamics.
Our business in the.
The.
Normalization.
And.
Funding rates or revenue per member as well as natural maturation in drilling capacity.
That.
Results and.
Significant.
Degree of earnings contribution beyond fixed cost you can.
You have an idea there.
Two.
We're thinking about 'twenty three in.
We would expect nevertheless, I want to get back to you.
<unk>.
Details.
Not only associated about.
<unk>.
Operating initiatives we described.
But also.
As to.
What we can expect as it relates.
To growth.
And the specific markets and service lines.
We operate.
Needless to say as Brian and I both mentioned.
We're committed to.
Robust self funded growth and the emphasis today.
Is to accelerate the path to cash flow and get greater earnings Overgrowth of course, we have a significant <unk>.
Capacity with embedded.
Additional.
And EBITDA generation that we will leverage what we see.
Today.
Bye.
<unk>.
Investments, we have made throughout 'twenty two positions us very well.
For short and long term value creation.
Can I just get in one more maybe maybe this might help to bridge Andrew's question, a little bit but.
When we when we look at the per member per month for MAA for Medicaid for DTE, even for HCA, all down a fair amount sequentially. It certainly.
It looks like it's more than just this quarter. It looks like it's sort of truing up the year for the right place and I guess I just wanted to understand if that's correct and if so does that mean.
<unk> the <unk> <unk>.
Remember per months would be a little bit.
Higher or is this.
The run rate on those <unk>.
<unk> for <unk>.
Yes, I mean first I'd take the DC for example, the way they do it.
It is.
For the most part of year to date catch up so some of that is catching up for the full year.
So thats going to <unk>.
Impact.
The quarter, a little disproportionately then.
You're thinking about the run rate so that's going to help and then as far as <unk>.
The rest of the business is.
We'll continue to monitor it and I think you can kind of get there based on the MCR projections and the overall revenue guidance will put you where you need to be.
Okay. Thanks.
Our next question will come from Brian <unk> with Jefferies.
Please go ahead.
Hey, good afternoon.
Just.
Circling back on the guidance as I think about the guidance adjustment for Q for the year and the Miss that you had for the quarter I mean, I know there is typical seasonality from Q3 to Q4, but is there a worsening in the business that youre baking in or that we should be thinking about maybe that carries over into next year as well as we think about your <unk>.
Look for next year like what is it that drives seemingly a worsening outcome or outlook for Q4 versus Q3 other than seasonality.
Yes so.
Categorically no worsening on the business.
Fundamentally.
As I mentioned from an operating perspective.
And serving in more members, helping them live longer healthier lives.
While achieving.
Greater.
<unk>.
As a result of those clinical outcomes improvement.
None of that has changed it has only strengthened.
This year as.
We have been discussing.
<unk>.
As a result of the latest reconciliation.
We were surprised to see the.
Lower.
Revenue rates for new patients.
And then too.
And lesser extent, although we have been doing some adjustments you have like the DTE.
The benchmark adjustment in overall for everyone the impact of sequestration.
But.
What.
We are seeing.
Now as.
Typical intra year.
Performance in which you will see on the revenue side.
<unk>.
Funding declines because of the natural attrition and the impact from new members, which saw a lot more of that than anticipated.
And as Brian mentioned still expecting.
A better <unk>.
Half medical cost ratio.
<unk>.
The first half and you can.
Understand by our our guidance what we're seeing in terms of the of the fourth quarter, even as we were.
We bring in additional medical centers online make additional investments in tucking medical centers and.
And lapsed some sensors that from last year, we no longer add back yet continue to ramp up and new and existing markets.
This has been a year.
We have.
Built scale and density.
Where.
We have brought online.
Marketable medical centers that are positioning us very well for.
For 'twenty, three and beyond two to serve the large and growing demand for primary care and our.
Recurring revenue model.
As a.
Funded by governments.
<unk>.
Something that.
The market.
Is demanding.
And ever increasing levels.
So.
Long way of saying that.
The.
Business and operations.
Every single metric in that.
That includes the comparison too.
But last year and last quarter.
<unk>.
The industry as a whole is performing very well from a forecasting perspective, we have lower.
<unk> from from new members that will be rate come next year and given the dynamics of our business.
The.
Continued growth of our existing centers.
We are very well positioned for 2023 and beyond.
Got it and then I guess for Marler, Brian is the cash balances decline rate with the cash burn.
Is there a concern within the management team.
I'm not sure this is rational but.
Is there risk bearing entities do your clients plan clients bring.
Can you bring that up as an area of possible concern that you have a fairly tight cash position at this point.
No.
Most people understand it.
Our customers and our payers understand the.
Dynamics of the market and the payment cycle the revenue cycle process.
<unk>.
There is this lagging.
The revenue receipts versus the services incurred so generally they understand these.
Call, it seasonal or year to year fluctuations, particularly in a.
A business like ours thats growing very rapidly.
Alright got it thank you.
Our next question will come from Jason <unk> with Citibank.
Please go ahead.
Yeah, great. Thanks, Good afternoon, I'm, just going to ask a question from the line of questioning I just heard before but you've grown membership pretty significantly in 'twenty two but you also had hefty membership growth in 'twenty. One maybe can you just talk about the risk adjustment capture and you've got this year on the new.
New members that came on in 'twenty, one and then if that could help inform how you think about risk adjustment capture on this 2022, new member population I guess for 2023. So just how historical can can imply for next year and making up these <unk>.
EBITDA pressures.
Yes.
That's it.
An interesting question.
The right way to look at it because second half of a given year.
Yes.
Opportunity to get the clinical encounters required.
In order to have the right risk adjustment and we had a very significant growth at the end of 2021.
Also coinciding with the.
Covid Spike Omicron wave and.
You're having and counter is and we've got excellent patient engagement scores, but there is.
Still work to do there.
We can.
Those patients are fully integrated into our platform and care management programs.
So that's why I highlighted in my remarks.
The net of new patients a 50 plus thousand.
In Medicare advantage through June of 2021 and.
And while new patients this year.
Certainly.
Put.
Significant.
Pressure coming at a lower <unk> you do have some additional opportunity.
In second half of 'twenty, one new patients new centers bolted on.
Patients from and from acquisitions.
We did.
In the summer of 'twenty one so.
So yes, we've got a lot of.
A tailwind.
Going into 'twenty.
Okay.
Okay.
And then just as a follow up I guess Marlin going back to your five stops I'm looking to second half performance here.
Interesting on the payer contract adjustments just can you give us a flavor of what youre looking at there.
Sustainability of those adjustments and what you are hoping and expecting to achieve out of those follow on a run rate basis that'd be helpful.
Sure well.
We need to have.
To the right.
<unk> funding the right incentives.
The right.
The components next year.
In any contract where we.
We are.
Fairly.
Compensated.
For the quality of care that we provide members we've got.
Scale and density in key markets.
Combined with the unique delivery system.
Ed has proven performance.
Whether at medical centers, or our affiliates, whether Medicare or Medicaid or HCA.
In various geographies.
And.
That is something that.
We work with our payer.
Partners on because we.
We provide.
A.
Measurable.
Quality benefit.
Literal quality stars benefit.
As growth significantly beyond the market and the utilization management.
The risk management.
That.
Everyone is looking for so those three factors are trifecta.
What we are known for.
<unk>.
It's a scarce across.
The country, particularly.
Those which can do it.
Across service lines or across models of care.
And those who can do it for underserved communities.
Yes, so about.
Having the right contracts in place.
Sure.
The wins are created.
Okay, sorry, just quickly to follow up on that is there a big disparity between high performing type of contracts that you feel are.
Good at this point versus those that really need attention is there a large disparity or is it.
Working around those and pushing our value just trying to understand from that perspective.
Yeah.
We continue to evaluate our payer partners.
The associated contracts and capabilities.
And it can vary market by market and even with the same payer.
And that is part.
Part of.
What we do in the ordinary course of business, but given the market environment.
We prioritize.
Those.
Changes.
Alongside the other initiatives that I discussed.
Okay, great. Thanks.
And our next question will come from Josh Raskin with NASCAR in research.
Please go ahead Sir.
So I'm just trying to understand the mechanics here right, so last quarter, where new members coming in at higher costs and then this quarter. These new members are coming in at lower revenues I'm. Assuming these are the same human beings. So that's the first question and second is what was the catalyst for the revenue recognition of revenue reduction I should say what inform.
And other than the D. C. I mean on the MA side, and then I thought you were booking revenues on a cash basis I thought we had this whole conversion done earlier.
And so I'm just trying to understand the mechanics of what happens here.
Yes, Josh so.
Last quarter, we had seen kind of higher.
Activity that we're driving up MCR, and we expected that our medical cost to come down.
Medical costs came down.
I said last time that.
The early evidence suggested that our IV in our reserves.
Sure.
Perhaps high but we didn't have enough information.
To adjust.
Downward.
As we got to reconcile data.
We got the reconciliations that proved that to be the case and those are the lower.
Cost.
More and more consistent still.
Still higher overall, MCR, but more consistent with what we expected is what we're seeing but then you have at the end of <unk>.
The third quarter.
In August September the mid year reconciliations for for MRA.
Our Medicare risk adjustment.
That is effectively a cash basis as you would call. It once they are there.
But you are getting for the year you have a small amount in final MRA.
But for the most part you have that.
<unk> revenue.
Set in those reconciliations going through October as we were.
We're seeing those.
We're surprised to see that.
The MRI for the entire population.
US reduce remember on the last call. We've got three months of reconcile service funds.
<unk>.
And so now we've got materially more than that.
57 months.
Conciliations and what we have seen in the first three months effectively of the year that we had and all of that reconciliation is.
At a high cost pressure high MCR not you get through the rest of the year.
In addition, all.
Six months.
So new membership and.
The lower <unk>.
Revenues are what.
Is.
Below expectations Costco in line lower revenues is what is causing an intra year pressure and as we know.
<unk> has a mechanism for correction last year, we saw that in the form of as I mentioned approximately $120 million of MRA.
On track to receive more than that this year related to patients last year.
So while we're not going to give.
Specific.
On 23 still to complete the year.
We would.
Would expect.
Similar.
Similar associated.
Just spent.
We are serving.
The patients and also just the entire population and then once we.
Completed those calculations.
Along with our full outlook, we'll share that with you.
Okay got you got you.
How much of the $55 million this year in Capex guidance for the full year is from building out new centers are kind of gross capital discretionary versus <unk>.
You think you need to maintain.
Sure Josh its Brian .
Significant majority of the maintenance Capex is very minimal so when we looked at our Capex. This year you can think of it.
Essentially nearly all of it or a significant majority of it is going to be driven by new new builds.
Expansion of existing centers to create that additional capacity.
The focus of the spending on the Capex is all around primarily enhanced capacity not necessarily just.
Maintenance.
And as we said going into 2023, we have enough capacity that we can continue to grow.
That capex spending.
It will be.
Significantly reduced as a result of that which is part of our overall efforts to improve.
Financial outcomes and improve cash flows as we go into 2023, yes.
Yes, that's what I'm getting at if you're modeling <unk>.
Center growth you're modeling Capex that's down.
You said Michel our debt strategy you would think.
Capex is roughly $50000 per site.
Hey, this is maintenance.
Is maintenance that's correct. Okay got you and then last one I don't know how much you want to say on this one but.
You guys have been public now for a couple of years, it's lots of fits and starts which talks to the nature of the business and the environment do you see it across your peers does it makes sense now just based on where the balance sheet is and the need to borrow funds in the fourth quarter on a short term basis at least does it makes sense to be part of a better funded entities something.
Someone that can more easily easily enable the goals of national primary care to get you sort of back on track for what you were trying to do.
What I would say to that Josh.
We are focused on improving.
Our.
Earnings and accelerating cash flow positivity.
Got a great deal.
Of momentum and tailwind into 2023.
We remain open to opportunities.
Opportunities that.
<unk> allow us to.
Capitalize further on that it makes sense for our shareholders. The focus of our company as I said is.
<unk>.
Accelerating free cash flows.
Adding significantly to the bottom line.
Thanks.
And that will conclude today's question and answer session I would now like to turn the call back to Brian copy for any closing remarks.
Thank you very much I appreciate everyone, taking the time this evening and talk to you soon thank you.
And this will conclude today's conference. Thank you for your participation and you may now disconnect.
[music].