Q4 2022 Cano Health Inc Earnings Call
Speaker 1: The.
Speaker 1: I.
Speaker 2: Good afternoon and welcome to Tanno Health's fourth quarter 2022 earnings call.
Speaker 2: Please be advised that today's conference is being recorded.
Speaker 2: Hosting today's call are Dr. Marlo Hernandez, Chairman and Chief Executive Officer, and Brian Coppi, Chief Financial Officer. The Kenno Health press release, webcast link, and other related materials are available on the Investor Relations section of Kenno Health's website.
Speaker 2: As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the 2020-2023 fiscal year. Investors are cautioned not to unduly rely on forward-looking statements and such statements should not be read or understood as a guarantee of future performance or results.
Speaker 2: We intend these forward-looking statements to be covered by the Safe Harbour provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.
Speaker 2: We caution you that the forward-looking statements reflect our best judgement as of today based on factors that are currently known to us, and such statements are subject to risks, uncertainties and assumptions that could cause actual future events or results to differ materially from those discussed as a result of various activities.
Speaker 2: this may be required by law.
Speaker 2: During the call, we will also discuss non-GAAP financial measures.
Speaker 2: The non-GAAP financial measures we will discuss today are not prepared in accordance with GAAP.
Speaker 2: A reconciliation of the GAAP and non-GAAP results is provided in today's press release and on the investor relations section of our website.
Speaker 2: With that, I'll turn the call over to Dr. Marlowe Hernandez, Chairman and Chief Executive Officer of Cannell Health. Please go ahead, sir.
Speaker 2: With that, I'll turn the call over to Dr. Marlowe Hernandez, Chairman and Chief Executive Officer of Cannell House. Please go ahead, sir. Thank you and welcome to the call.
Speaker 3: We appreciate you joining us today. 2022 was an important growth year for Canal Health. Our total membership reached nearly 310,000 members, growing 36% from the prior year.
Speaker 3: We achieved full year revenue of over 2.7 billion and adjusted EBITDA of approximately 153 million all while growing in new markets and service lines.
Speaker 3: and most importantly, providing our patients with excellent clinical care that measurably improve their outcomes. We continued on our journey to be one of the nation's leading primary care providers.
Speaker 3: During 2022, we opened 24 de novo medical centers and added another 18 centers on a net basis through acquisitions in existing markets. We ended the year with 172 medical centers in Florida, Texas, Nevada, Illinois, New Mexico, California, and Puerto Rico.
Speaker 3: Our Medicare membership grew to just under 180,000 members, a 42% year-over-year increase.
Speaker 3: At the same time, counter-health maintained its clinical excellence in high-service standards, which continued to improve patient outcomes.
Speaker 3: Our full year of medical cost ratio or MCR was 79.1%.
Speaker 3: excluding the Medicare Direct Contracting Program, now called ACO REACH, our full year MCR was 75.1%.
Speaker 3: A significant improvement from 79.7% in the prior year. Our admissions for a thousand members or APTs were approximately 7% lower in 2022 compared to 2021. Our ability to keep patients healthy and out of the hospital is an important component of our model of care.
Speaker 3: which emphasizes frequent primary care visits and member engagement. When you combine our clinical outcomes with the growth in membership, we generated considerable value for our payer partners and all stakeholders. We have great momentum in our business. However, 2022 was not without its challenges.
Speaker 3: The organization's rapid growth pressure revenue on a per-membral basis, particularly in our Medicare Advantage business. Factors negatively impacting Medicare Advantage revenue in 2022 included new members with lower than expected first year revenue per month or PMPM.
Speaker 3: growth in geographies with lower revenue PMPM, and a higher percentage of non-risk members with a lower PMPM. Importantly, our medical center member disenrollment rates were comparable to prior years.
Speaker 3: Consequently, lower than expected Medicare advantage revenue, negatively impacted or operating performance and our cash flow.
Speaker 3: And as a result, liquidity was not at the level needed to fund the growth we had planned for 2023, and we took decisive actions at the end of 2022 and into 2023 that have and will continue to improve cash flow and liquidity. We made the decision to dial back the addition of the NOAA Medical Center in 2023.
Speaker 3: which is expected to reduce cash used for capital expenditures by approximately 35 million. The 13 denomals we plan to add this year are medical centers that are generally completed at the end of 2022 and require limited capital investment in 2023. We are also merging eight smaller medical centers into nearby larger existing centers to improve center level economics.
Speaker 3: for an expected total of 177 medical centers at the end of 2023 compared to 172 at the end of 2022. In addition, we reduced our headcount, aligning to our revised growth plans, implemented tighter spending controls and negotiate better contracts with our vendors. These actions are projected to generate approximately 70 million in annual S-GNA cost reductions for 2023. We also terminated underperforming affiliate positions.
Speaker 3: and renegotiated payer agreements to improve our medical cost ratio, resulting in expected benefit of approximately 20 million. Collectively, these initiatives put us on a path to meaningfully improve cash from operations as we move through this year and into 2024. That said, we will continue to evolve our organization to create sustainable growth for our patients, employees,
Speaker 3: better health outcomes for our patients is achieved when we optimize our financial performance to fulfill our mission in ever greater ways.
Speaker 3: In 2023, our financial objectives are to capitalize the business to unlock embedded profitability by increasing capacity utilization at existing medical centers and three optimize our value-based platform to further improve the balance sheet and cash from operations.
Speaker 3: We made a significant step toward a first objective by closing our recently announced 150 million term loan with diameter capital partners and Ruby Confounders.
Speaker 3: This financing provides liquidity to strengthen and grow our operations.
Speaker 3: As we discussed in the past, scale and density are critically important to our operational success. In 2022, we built significant scale intensity, particularly in our home state of Florida, where we have a leading position in value-based care. We have the ability.
Speaker 3: significant profitability.
Speaker 3: Moreover, we are committed to reviewing all aspects of our platform to further improve cash flow and liquidity. This is part of our focus on capital management by better allocating resources. Our scorecard for success this year will be a simplified and more efficient operating model with improved cash from operations and a stronger balance sheet. It will be a simplified and more efficient operating model with improved cash flow and liquidity.
Speaker 3: As we continue to execute on these objectives, we expect our results to better reflect the strong fundamentals of our value-based platform. Lastly, I want to take this opportunity to thank our associates for their commitment to our mission and vision. It is doing challenging times when the character of the team is revealed and our team rose to the occasion.
Speaker 3: In addition to measurably improving the quality of care, our team's cultural ability to find solutions in difficult situations differentiated us in 2022 and defines us as a company. With that, I'll turn the call over to Brian Copy or CFO who will walk you through our 2022 financial results and guidance for 2023.
Speaker 4: Thank you, Marlo, and thanks everyone for joining us today. Before I get started today, I'd like to let you know that we will file an extension for 2022-10K. We expect our 10K to be filed on or about March 10th.
Speaker 4: Given our team's efforts to reach an agreement on a new term loan and close that transaction, we required more time to finalize the related information in the Form 10K. As a result, all financial information presented today is subject to completion of the audit of the company's financial statements and filing of the 10K.
Speaker 4: Total membership increased 36% year-over-year to approximately 310,000 members in the fourth quarter. This represents an increase of approximately 83,000 members from the fourth quarter of 2021.
Speaker 4: At the end of 2022, 45% of our members were Medicare Advantage, 13% were Medicare DCE.
Speaker 4: 25% were Medicaid and 17% were ACA. I would also like to highlight that in December of 2022, we completed an acquisition that included nine medical centers and an MSO business in Florida for initial consideration of approximately $31 million in equity.
Speaker 4: and $1 million in cash with future cash earn out payments based on achieving certain measures. This acquisition added approximately 7,400 Medicare Advantage members. Total revenue for the quarter was approximately $680 million up from approximately $492 million a year ago.
Speaker 4: and $665 million in the third quarter. Total capitated revenue in the quarter was approximately $651 million in line with our expectations. In the quarter, Medicare Advantage PMPM was $1,084 down 4% sequentially due to the increased mix of new membership.
Speaker 4: Fourth quarter Medicare DCE PMPM was $1,374 up 13% sequentially based on the latest Medicare DCE benchmark data.
Speaker 4: Additional information about our membership mix and our PMPM is available in our press release and updated financial supplement posted this evening on our website.
Speaker 4: Our medical cost ratio, our MCR in the fourth quarter was 76.1% compared to 78.1% in the fourth quarter of 2021.
Speaker 4: While the full year 2022 MCR was 79.1% compared to 80.5% in 2021.
Speaker 4: The year-over-year improvements in the quarter and full year were driven primarily by lower MCRs in our non-DCE service lines. As we have said on prior calls, Medicare DCE has a higher MCR than our capitated revenue. So the increasing mix of Medicare DCE members increases our total MCR.
Speaker 4: Excluding Medicare DCE, our MCR was approximately 71.7% in the fourth quarter of 2022 compared to approximately 77.7% in the fourth quarter of 2021, while the full year 2022 MCR, excluding DCE, was approximately 75.1% versus approximately 79.7% in 2021.
Speaker 4: Direct patient expense in the fourth quarter of 2022 was 11.4% of total revenue. This was above the third quarter of 9.6% and reflects higher performance related payments to affiliates, which was due to favorable performance.
Speaker 4: S-GNA expense in the fourth quarter of 2022 was approximately $108 million down from approximately $112 million in the third quarter.
Speaker 4: SGNA was 15.8% of total revenue in the quarter compared to 19% in the fourth quarter of 2021 and 16.8% in the third quarter of 2022.
Speaker 4: We expect further improvements in our S-GNA ratio in 2023 as we realize the full impact of operating efficiencies from actions taken in the fourth quarter of 2022 and early 2023.
Speaker 4: As Marlo mentioned, these actions include a reduction of headcount to align with our revised plans for growth, implementation of tighter controls on spending, and better contract terms with our vendors. As one contractor, only done so when anyillion jobs are incarnated, enterprises currently
Speaker 4: The impact of these items is projected to generate approximately $70 million in cost reductions in 2023, which are offset by costs associated with the growth in our operations during 2022 and 2023.
Speaker 4: Adjusted EBITDA in the quarter was $35.7 million, up from $11.1 million a year ago. The fourth quarter adjusted EBITDA included a lower add-back for de novo losses, reflecting the roll-off of de novos that have been open for more than one year.
Speaker 4: Now let me turn to our cash flow in liquidity.
Speaker 4: We ended the fourth quarter with about $27 million in cash. Total debt at the end of the fourth quarter was approximately $1 billion, and included current and long-term debt, capital leases and payments due to-
Speaker 4: and payments due to sellers. Our total net debt defined as total debt less cash was $987 million as of December 31st.
Speaker 4: Cash use and operating activities was approximately $146 million for the full year and approximately $62 million in the fourth quarter. The fourth quarter use of cash was primarily due to higher working capital requirements related to higher accounts receivable. At the end of 2022, we drew $84 million.
Speaker 5: shortly.
Speaker 4: Earlier this week, we announced the closing of a $150 million term loan with Diamerita Capital Partners and Rubicon Founders.
Speaker 4: We intend to use the net proceeds of approximately $140 million from the transaction for general corporate purposes.
Speaker 4: including the repayment of outstanding amounts on our revolving credit facility. Importantly, in 2023, we intend to pay the interest on the term loan in kind instead of cash.
Speaker 4: Details on the 2023 term loan are provided in the 8K filed on Monday, February 27th.
Speaker 4: This financing provides cano health with the capital needed to optimize our existing capacity and unlock the embedded profitability within our medical centers. Now let me touch on our outlook for 2023 and the strategic changes we are making to improve cash flow and profitability. We are focused on leveraging our market leading scale and density.
Speaker 4: particularly in Florida. Growing membership will increase capacity utilization at the existing centers, which we expect to improve margins.
Speaker 4: 2023 year-end total membership is expected to be in the range of 375,000 to 385,000 members.
Speaker 4: We expect Medicare Advantage membership to grow 7% to 9% year-over-year.
Speaker 4: We expect Medicare DCE or ACO Reach membership to increase approximately 55% year-over-year.
Speaker 4: We receive most of our new ACL reach membership in January of each year from CMS claims based alignment.
Speaker 4: On January 1st, we had approximately 68,000 ACL reach members. We expect this membership to decline slowly throughout the year due to natural attrition, and in the year approximately 10% lower than January 2023.
Speaker 4: We expect Medicaid membership to be flat in 2023 as redeterminations are expected to offset underlying growth. We expect ACA membership to increase approximately 70% year over year.
Speaker 4: Note that we had approximately 80,000 ACA members in January 2023 due to expanded relationships with ACA payers.
Speaker 4: that we had approximately 80,000 ACA members in January 2023, due to expanded relationships with ACA payers. We expect modest increases throughout the year.
Speaker 4: Total revenue is expected to be in the range of 3.1 billion to 3.25 billion, which represents growth of approximately 16% at the midpoint.
Speaker 4: We expect Medicare Advantage revenue to be flat year-over-year as membership increases are largely offset by a 10% to 15% decline in full-year Medicare Advantage or MAPM.
Speaker 4: We expect the MAPMPM in the first quarter of 2023 to be generally in line with the MAPMPM in the fourth quarter of 2022, and decline sequentially throughout the year as we add more new members who start with a lower PMPM.
Speaker 4: During 2023, we expect to have a higher proportion of non-risk MA members compared to 2022. In 2022, non-risk members represented approximately 5% of total MA members. In 2023, we expect non-risk members to represent approximately 10% of the MA members.
Speaker 4: of total MA members. Non-risk members have a lower PMPM than at-risk members.
Speaker 4: The higher mix of non-risk is due to growth in non-Florida markets and the impact of our December 2022 acquisition, which added about 7,400 members, the significant majority of which are currently non-risk.
Speaker 4: We anticipate converting this membership to risk over time as we integrate this acquisition into our business. We do not expect material differences in the full year revenue PM-PM for our ACL reach, Medicaid or ACA service lines compared to full year 2022.
Speaker 4: Turning now to MCR, we expect the full year 2023 total MCR to be in the range of 81% to 82%.
Speaker 4: In 2022, we recorded a reduction in third-party medical costs of approximately $44 million related to claims assigned to a third party. We do not expect this reduction to continue in 2023. Excluding this benefit, the normalized 2022 MCR was approximately 81%. Moreover, as in previous years, the MCR was not a
Speaker 4: We expect MCR to be materially better in the second half compared to the first half of the year. The higher 2023 MCR guidance versus normalized 2022 MCR is primarily given by a higher mix of ACO reach members, which typically have a higher MCR than our other service lines. The full year 2023 ACO reach MCR is expected to be approximately 93%.
Speaker 4: compared to approximately 91% in 2022. Moving to adjusted EBITDA, as you know, we have been adding back de novo losses as part of our adjusted EBITDA calculation.
Speaker 4: This adjustment was helpful to management in evaluating the business when we were rapidly building out our center footprint, particularly in new markets where new medical centers ramp more slowly.
Speaker 4: Given our current strategy to significantly reduce the number of denovos, ads, we have revised our definition of a justity but a to no longer add back to novel losses.
Speaker 4: which makes it more comparable to cash earnings. This is the only change we have made to the adjusted EBITA calculation. Please see our earnings release and financial supplement posted to our website this evening for more information about this change.
Speaker 4: Excluding Denovoloss Advax, we now expect our newly modified full-year 2023 adjusted EBITDA to be in the range of $75 to $85 million. By comparison, had we excluded Denovoloss Advax in 2022,
Speaker 4: The full year 2022 adjusted EBITDA would have been approximately $74 million using the new definition of adjusted EBITDA. And as a reminder, 2022 results include the reduction of third-party medical costs of $44 million that we do not expect to continue in 2023.
Speaker 4: Additionally, we expect 2023 interest expense to be approximately $100 million, which includes approximately $90 million of cash interest and approximately $10 million of non-cash interest related to the 2023 term loan. Stock-based compensation in 2023 is expected to be approximately $50 million.
Speaker 4: approximately $15 million in 2023 compared to approximately $50 million in 2020 to reflecting fewer additional denobos in 2023. In 2023, we expect cash used in operating activities will be in the range of $70 million to $80 million.
Speaker 4: compared to 2022 cash used in operating activities of $146 million, a projected $71 million improvement at the midpoint. As Marlo mentioned, a key objective for 2023 is to optimize our value-based platform with the goal of improving the balance sheet and cash from operations.
Speaker 4: As you know, our non-floor to medical centers are generating losses. In 2023, we expect non-floor to medical centers to generate approximately $100 million in revenue and approximately $40 million of adjusted EBITDA losses excluding corporate expenses.
Speaker 4: compared to approximately $70 million of revenue and $60 million that adjusted EBITDA losses excluding corporate expenses in 2022. Note, we are using adjusted EBITDA under our newly modified definition for both periods. While we have made progress towards achieving profitability for these centers,
Speaker 4: We are committed to accelerating the company's path towards positive free cash flow. In conclusion, during 2023, we expect to continue to generate solid revenue growth. We are taking important steps to improve our cost structure and unlock embedded profitability within our medical centers to mean our goals of improving adjusted EBITDA and cash flow.
Speaker 2: and maximizing long-term value for our shareholders. With that, I will ask the operator to open the call to your questions. At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you.
Speaker 6: detail, Brian , so I have to pick and choose where I want to ask. But maybe let me just start with liquidity, so make sure I have this correct. So $27 million of cash, there's another $21 million available on the revolver, and we have 150 million term loans just closed. So-
Speaker 6: That's a hundred and ninety eight million basically available to set up against the cash from ops guide use game That's right
Speaker 6: The 198 million basically available that set up against the cash from Ops Guide use gate. That's right. Based in the floor quarter.
Speaker 6: Okay. One other question I would ask. How are you looking at the 2024 Advanced Notice and that risk score model change obviously the way they're moving the weightings around on the...
Speaker 6: HCCs and removing some of the diagnosis codes, there's some underlying current that some providers would be impacted more than the, or in some plans, more than the 3% that CMS sizes for that risk score. Hedwin, do you have a thought on that yet?
Speaker 3: Marlon, you want to take that? Let me take that, Gary. And I apologize to you and the rest of the audience. I'm just getting over a cold, so my voice is a bit hoarse. But please feel free to ask again if I'm not clear. So on the rate notice, this is something we've been looking at. And I feel it's OrcLaren in Silhouette wtol 8 THANKS –
Speaker 3: it's too early to really give you anything definitive. First the rates are not finalized, but as we look into our data, we've looked at large represented sample of our data from 2022 working with our market leaders and payers. We found that some of our members had a lower score, some members have a higher score net net.
Speaker 3: in the absence of changes or mitigating factors, it may have a potential of a 2% headwind on our MRA scores, which is highly correlated to MA revenue, PMPM. Important to note that mitigating factors to that roughly 2% headwind include changes to the payer bids.
Speaker 3: the payer mix itself, what happens ultimately with the star ratings and that is also going to be embedded within our own payer mix. The growth in our MA population, provide a risk share type of offsets.
Speaker 3: and wrist-trend among or specifically MRA wrist-trend among other operating type of adjustments. So there's a lot that would go into answering the question once those...
Speaker 3: rates are finalized. Direct answer is if you just look at the MRA component by itself, which should not be looked at in a vacuum, you're looking at a potential 2% headwind. We also have the benefit of starting from a...
Speaker 3: much lower place than many others. And as you can see, we're taking a very cautious view as to our revenue rates p-m-p-m this year with the impact of new membership and new geographies. Therefore,
Speaker 6: don't expect at this point material impact. I appreciate that's helpful. I was just reading recently the American Physicians Group at Senate Letter to CMS saying that the risk or model change could disproportionately impact.
Speaker 6: population, minority populations and populations of color just because of some of the diagnosis codes they're pulling out of that and given your larger Hispanic population I guess it kind of flies, it's good news it sort of flies against what they're saying so I appreciate the okay let me expand on that in
Speaker 3: Part of the reason is that there were significantly changes to diabetes codes and those rates are quite high in underserved population and minority populations. At the same time, you have adjustments to the normalization factor, as you know, and adjustments to CHF, chronic kidney disease.
Speaker 3: and other codes. And it does really depend on the specific provider population and where scores are at and which specific codes are utilized. But yes, in...
Speaker 3: in populations that are hyper specific to a particular diagnosis code, which is more common in minority populations, it may have indeed a disproportionate impact.
Speaker 6: That's it. I think just to your point, I appreciate the thought. I mean, if your population, the risk or alone, the 2% headwind, it's not just...
Speaker 6: An issue for you. It's an issue for the plans that you're contracting with that they need to find a way to Potentially offset that with their bid and benefit package I Appreciate the comment. Okay. Thank you very much
Speaker 2: Your next question is from the line of J. Landra Singh with Truist Securities. Your line is open.
Speaker 7: Thank you and thanks for taking my questions. My first question, I know there are few moving parts here when comparing 20, 23 EBD out to look versus 22. So it will be great if you can spend some time on your expectations around the margin and MLR trends on the MA lives you have brought on board over the last couple of years.
Speaker 3: going down year over year. The only reason that it's comparable is that we have on a consolidated basis a higher proportion of DCE members which naturally have a higher MCR. As I mentioned in my prepared remarks, we are seeing lower utilization. So our admissions per thousand
Speaker 3: expansion or improvement in underwriting margin. Brian and I talked about the operating adjustments that we made to gain further leverage on the business. The SGNA as an example to drive more earnings and cash.
Speaker 3: So when you look at our new definition of adjusted EBITDA, which does not add back the noble losses and is more of that proxy for cash, you are seeing improvement year over year. And when you take out...
Speaker 3: a potentially non-recurring reduction and third party claims, which is $44 million, that gets you to about a $30 million comparable adjusted even that versus the $80 million that we're guiding at the midpoint so you can see there.
Speaker 3: the material improvement in year to year. And we're integrating as significant number of new members as you know, recently knew over the past 12 to 18 months, proud of the team, and how they were able to...
Speaker 3: find the different action items to improve the operations and start re-engineering the company for cash generation. You know, in 2022 we got less contribution.
Speaker 3: margin than expected for our members and at the same time had an inflationary environment and higher interest rates and our team quickly put their head down and while continuing to serve.
Speaker 3: a much higher than expected number of total members, also expanded margins, and we're continuing that momentum into 2023.
Speaker 7: with great clinical care and also operating efficiencies. Okay, that's that's helpful. Let's one quick follow up. You know, you, you, you were talked about, you know, non-floor medical centers, if you did a loss, improving there. Any color like how would you describe the trends there when compared with your internal expectations? And when you return to adding the nervous in future, should we expect any changes to your approach?
Speaker 4: As you know, all fits in with our scale and density strategy that we've had in those markets. And as you added more centers, you're going to get that leverage. And, you know, I would say.
Speaker 4: As we would expect, those markets will continue to improve as we add more members to those existing centers. Since we're not really going to be adding additional medical centers in those existing markets, that new membership all funnels into the current medical centers we have there. We would expect them to continue on that trajectory into.
Speaker 4: 24 and beyond. You know, and I think what's proving out is the markets we've selected are really strong markets for growth opportunities and the assets that we built there are really good assets that have good growth potential. Great. Thanks a lot. Your next question is from line of Andrew Mock with UBS. Your line is open. Hi, do you think?
Speaker 8: Question for Brian , just wanted to follow up on the 2023 guidance. Your EBITDA guidance is flat to up $10 million for 2023, but I think you called out $70 million or so of SG&A cost reductions. So, of course, we're getting $70 million better. Can you help us understand what the offsets are in the 2023 guide to hold EBITDA relatively flat? I'm starting to have kind of trouble gets to this decision experience now as I think of the Fourier budgets and what gere we are dealing with here, and we do reduce observing practices year over year that and absorb. It's also lower rents with obsolete companies. So, you know, when we see obsolete businesses price expanding, they tend to remain in the ?? anyway.
Speaker 4: Yeah, I think there's a number of puts and takes in there. On the SG&A side, it's important to know the way I look at it is really more from the higher level, which is SG&A as a percentage of revenue, which is going to significantly improve from 22-23. As you can imagine, we built a significant number of medical centers in 2022, and they were not all at the beginning in January . In fact, most are in the back half and even in the third quarter. So we've staffed them up and now you have the annualization effect of those.
Speaker 4: costs for those centers. So that will, while we've made great progress in reducing our cost basis around the expenses that we have, we have the just the annualization effect of that ramp that we did in 2022 that now is coming into 23. So that really offsets a lot of those savings. So,
The nice part about it is we are seeing significant SGA as a percentage of revenue improvement. So we are getting that leverage as we optimized our workforce and our staffing levels across the organization. So that's from the SGA side. And then I think you kind of take a look at some of the other initiatives that we have in the underwriting margin side. Marlowe talked about not only have we executed a number of, uh, called payer and, uh,
pay our action items, we still believe we have more to go. And we will talk about those as we go through the year to generate additional improvements. Got it. Can you provide the de novo loss number that you are expecting for 2023? Yeah, it is roughly, I think we have $45 million or so for 2023. Versus 79 million. Versus 79 million in 2022. Got it. Okay. So, as a forward guide, I think it would be helpful to hear one last time, maybe the postmortem on what exactly went wrong in 2022 with respect to the lower revenue yield.
on your members and what changes you made in operations to give you confidence in projecting this forward. Thanks. Yeah, let me take that Andrew. So the PMPM surprises negatively because of less revenue per new patients than we had historically seen in new and existing markets. We also had more non-risk.
patients and as a result of those factors which Brian described, we're taking a more cautious outlook into this year. What...
Also compounded the issue was the rapid rise in inflations and interest rates, which as a result of us serving more patients anticipated in total, which also was a positive surprise, but we have to definitely make the investments that our patients expect.
from us in our differentiated care delivery. But then you have the inflationary type cost and the higher interest expense that we have to burn. We moved decisively to make operating adjustments that
moved to reduce headcount, aligning it with growth. We renegotiated payer agreements, affiliate agreements. We optimized our affiliate network. That improved the underwriting margin. We have also reduced our capital expenditures. And that's a... Secondly, our
And the three items I'd describe for 23 is why I'm so confident and so excited about this year. So we had a growth that outstretched our liquidity to support it.
Therefore, we capitalize the business and have more roughly double of the liquidity required for this year's growth and operations. We continue to optimize our operations and there's further work to do there to gain
That the scarcity of primary care and the long-term fundamentals and this year is going to start to unlock the value that we have intrinsically built over the last couple of years in particular.
Okay, and lastly, maybe can you provide more detail on the Goodwill impairment charge of 323 million? There wasn't a lot of detail or disclosure around that, which assets specifically did the write down relate to?
Yeah, I mean, I would say we take a broad look at the overall organization, but the way to think about it is the test is a fair value test and is heavily determined by stock price. Our stock. Our stock.
price, unfortunately, decline from September when we would normally do this to December , require an additional goodwill test to be formed at the end of the year. So, the $323 million just essentially represents the excess of that carrying value over the fair value, but it's really a broad look of the enterprise.
Thanks.
Your next question comes from line of Josh Ruskin with Neffron Research. Your line is open. Hi, thanks a good evening. Was there a thought about slowing membership growth to reduce the short-term losses?
Is it more critical in your mind to fill the centers and maybe specifically on DCE where, you know, if you're crewing an MLR of 93, I'm just not sure. Maybe that is still profitable with a low GNA, but just curious on thoughts on membership growth. Yeah, so we have all of this embedded.
capacity which we are growing organically. As you know, Josh, two thirds of our new patients come from other patients, even as we have reduced as part of operating efficiencies, marketing costs we continue to see robust.
enrollment figures at our centers in light of the state of capital markets. It certainly behooves us to moderate our growth expectations. And so the...
focus of this year is one in which we fill the existing capacity. We continue to to harness further operating efficiencies and we improve.
opportunities. But yes, our growth has to be in line with the cost of capital and
For us, the investment being made, the great momentum, the inner business will be very selective and thoughtful as to which additional growth opportunities to attain, our focus this year is growth at the existing market and centers.
Okay, that makes sense. And then, you know, the comment in the press release and then Marla that you mentioned on the call about being committed to reviewing all aspects of your value-based care platform to improve liquidity and cash flow at maximizing shareholder value. I guess simple answer, simple question is...
sort of what does that mean? Are there non-core assets at cano that you see in your view with those comments directed? It's sort of the non-floor to assets or maybe just help us understand a little bit more what that review means. Yeah, so a review is availing ourselves of all of the options.
We've got our goals, which we have clearly defined, and the options of...
of disposition or closing or consolidation of any of our centers or operations, those are all actively being reviewed. We have a relentless focus on improving our internal cash generation further stress.
that it's more of an all-inclusive type common. Brian mentioned in the prepare remarks to give examples of how we're seeing very strong growth and proven trajectory outside of Florida, but those markets are still the ones that are.
using the most cash in those centers or the ones using the most cash. So, require a deeper look than our more established, you know, base business in Florida. But even in that base business in Florida, we are taking a very close look at every medical center, every operating avenue to align.
Can we talk about the renegotiated pay or contracts and give us on any color what specifically changed and you've mentioned some remaining action items and I'm just curious what the term of those contracts typically are in terms of years. And finally, you know, just...
I'm curious how those negotiations typically go in a state like Florida where you have like much more density versus maybe a Nevada where you don't.
Right, well let me answer that last question. First, there's a scarcity of providers like ourselves with the breadth and scope of services at a scaled regional and national level. And so for any payer, even if we are new to a particular market, not SNS sparkling, but SNS very large is coming into a measure for many, many people and also central and national providers from a Music Woo inc. south
They will have a hard time looking for provider organizations that can measure the improved quality ratings that affect heaters that are able to take global cap risk that are able to grow membership because of a differentiated service. The second part to that is the contracts well.
They do range from every green contract to specific term type contracts and year two and so on. It is bespoke, but the terms that are negotiated are the percent of premium or our funding rate. So that is an area that we have made significant improvements.
agreements on marketing and contributions from the payers and 50-50 type campaigns.
more nuanced components to the agreements that affect economics, including what risk levels, which parts of Medicare are included, what's networks, and I don't think we should get into it on the call. But...
That is, from a broad strokes perspective, is what we look at and what we will continue to optimize.
No, that's helpful. Appreciate it. And last quarter, and on this call, you mentioned either optimizing or deactivating affiliate providers, but it looks like at least at the end of the year, you have 1900 providers versus the last exposure of 1500 for the affiliate. So.
Yeah, and we still think about it as growing in 2023 or No, we're growing. Sorry, that's for sure, but but but growing with an eye on profitability and cash flows rather than putting our foot on the meeting the demand.
petal and that includes DCE or ACO reach as an example. We did do a fair amount of trimming, but there were other high-performing providers that we agreed to contract with and we do expect growth in our capped light.
affiliate model, as well as to fill the existing capacity at our medical centers.
model as well as to fill the existing capacity at our medical centers. Okay. Thank you so much.
Your next question is from the line of Justin Lake with Wolf Research. Your line is open. Thanks. How do a couple follow-ups? On the 45 million of the NOVA note losses, can you tell me what the definition of that is? Is that 45 million? Well, it's got everything outside of Florida.
You've built recently or is that just the stuff goes over the last 12 months or what have it? Yeah, no, Justin, that's the way we've always, you know, we report is at the aggregate Denova loss addbacks that's across any Denova that we we've opened and keep mind the definition is losses ramping up to open and then 12 months after open is all part of that number.
Okay. And the one thing I'd love to, is you take a look back, right? Obviously the adjusted e-bidot numbers very different than what you would have been looking for. And the, one of the ways I'd love to think about it is, just if I think about your business in three pieces, right? Like the core Florida footprint that can know was, you know, when it kind of entered the public market. Yeah. Appreciate you.
You did a couple of big acquisitions, spent about a billion dollars on doctors, medical center, and then university health.
and then everything you built outside of Florida. If you were to break it down to those three pieces, just kind of broad strokes, I'd love to see kind of how you think about that 80, that 80 million dollars would be the dot.
How would that bucket? Yeah, so just it also has the
second year type of costs that are not being added back that are being absorbed by that $80 million number and as you know we've opened a significant number of medical centers relative to that original based business.
in Florida and outside of Florida, and centers typically take a couple of years to break even. Those outside of Florida take a little longer to break even because you don't have the benefit of the scale and density. We see...
growth across all three of the buckets that you mentioned in terms of the acquisitions, regional-based business, and denobles in flora and outside of florida. We do see
improvement in the important components of those businesses. And I highlighted and Brian did as well, the improvement in the underwriting margins, which you can see in the consolidated business. When you can also see the SG&A improvement and.
that current cost structures from 2022 required us to make adjustments. We are relatively unique among our peers in terms of how we generate cash with medical center business and particularly so much of our medical centers.
among our centers. And so we have now gotten the runway to unlock that profitability. We continue to optimize the operation. We have great overall momentum and are reviewing the different additional
options that I described to further improve cash loan liquidity as we do have highly creative opportunities in front of us but we are taking a rather cautious
look at how we deploy cash. We wanna ensure that we get to our stated goal of free cash positivity and then drive.
additional growth from that point. Okay, thanks for all the call.
Your final question comes from the line of AJ Rice with Credit Suisse. Your line is open.
Hi everybody, thanks. I wondered if I could maybe just make sure we tie the knot completely around the new financing and what that gives you. I know in the last few years there's been quite a swing in the working capital demand or needs, I guess, in for a year.
When you look at that 7080 million of cash usage, I wonder how much
Is there a maximum point of drawdown on some of your availability? It's higher than what might be implied by that 7 to 80. When you look at it, it sounds like you're trying taking a lot of steps to minimize volatility in your working capital, but I wondered if you've looked at that and if you have any color on it. And I wondered also whether there was any covenant terms in the... ...in the...
new financing or your existing financing that are particularly, you know, Acting is any kind of constraint on the business going forward that you're particularly focused on in other words How much leeway to move forward operationally to any covenant terms that are on these deals leave you with
Yeah, so I think I understand where you go. I think the way we're looking at it is we have, depending on whether you look at with fourth quarter or where we just talked about in the February , $180 million of liquidity to execute on the goals that model laid out in a very thoughtful and deliberate way.
So, you know, this is the nice part about the additional financing that we just received. You know, and it's really okay.
The components within the agreement are very similar to the existing term loan covenant agreements that we have. And you know, we there is a maximum limit within the covenant, but it's important to note that the
definition are the calculation of that credit adjusted EBITDA is different and more liberal than you can get right off our financial statements. But as we look at it and we look at the projections, we expect to have sufficient headroom in our leverage ratio given where we are now.
Okay. Obviously the last number of months, a lot of stuff is played out in the public domain and you guys probably would have preferred to be out of the public eyesight as much as you were. I wondered, and maybe there's nothing to talk about here, but I at least gave you a chance to comment on it.
you've had what have you done to sort of reassure key constituents that you know you're on track and everything's good.
Well, I would say as a relates to patients, we're serving more patients than ever, and far ahead of our expectations. We continue to have the same contracts with all the major national prayers and going very significantly. So ultimately.
It comes down to the differentiators of our business, which is our ability to serve the underserved, to have scale and density in key markets in those key areas. And the...
versus the first half. I think that's the whole book, but maybe it's MA specifically. Is that related to your reinsurance or is there something else you're calling out when you think about that?
Yeah, no, I think you're right. We're expecting that the seasonal, you know, first quarter to fourth quarter pattern that we would normally expect. You know, there's a number of factors in there, but generally you're going to see starting off at the high end and improving throughout the year. And you know, so it's very consistent with what we've seen in the past. And you know, it's very consistent with what we've seen in the past.
All right, thanks a lot. Thank you. And thanks everyone for joining and we're here for any additional follow-up questions. And thank you and have a good evening. Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.
And presenters were clear. Thank you. You're welcome, sir. Have a great evening.