Q2 2023 CareMax Inc Earnings Call
We had approximately $55 million in cash and $60 million of Undrawn capacity on our delayed draw term loans. We continue to believe that this provides us with sufficient capital to bridge us to sustainable free cash flow by Q4 of 2024 now.
Now turning to some additional highlights from the quarter. We are pleased to report that our Medicare inpatient cost trends have outperformed our internal expectations.
Our rates are inpatient admissions and cost per admissions have been trending down so far this year, a testament to the effectiveness of our integrated care model and managing patient outcomes.
We observed a brief increase in outpatient surgical utilization during this quarter.
However, this appears to have normalized and utilization trends are now back in line with expectations.
Moreover, we have also successfully reduced our external specialty leakage by 10% this year compared to last year.
This achievement is a direct result of our efforts to manage more specialists volume in house, effectively reducing unnecessary utilization and mitigating cost increases in outpatient surgical costs with lower external specialty fee for service volume.
We believe that our ability to effectively manage inpatient utilization and efficiently control specialty cost through our high touch integrated care model positions us well to excel in varying market conditions and continue delivering strong results.
On the operational side, we continue to deliver solid performance at our centers and remain focused on ensuring our members have access to consistent high quality care year to date, we have seen 85% of our Medicare members.
We are particularly proud of our de Novo expansion beyond our core South Florida market and now have over 4000 Medicare advantage patients across our 17 centers in New York, Memphis, Houston, and the space Coast of Florida. We have further expanded our contracted specialty services in New York, adding optometry to existing.
Services like dental cardiology, and podiatry, we believe that these offerings will be highly attractive to seniors and will serve as a key point of differentiation from others in the market. Additionally.
Additionally, we have expanded into behavioral health services in Memphis further enhancing the comprehensive care, we provide to our members.
Now turning to our <unk> expansion, we believe the integration of steward is progressing well and we are confident in achieving our membership growth targets that were discussed at our Investor day in March.
We have more than doubled our active Medicare value based care contracts since completing the acquisition with more contracts expected to become active over the next year.
We believe this expanded base enables us to execute our strategy of transitioning fee for service panels to value based care and also provides the opportunity to add additional members through our organic growth channels to promote seamless operations and high quality care, we are actively supporting our providers with risk adjust.
And quality resources, which covers over 70% of our patients.
Additionally, we are diligently preparing over 100 practices across the portfolio for AEP with sales and broker support.
And our commitment to improve patient outcomes. We recently launched a Medicare advantage clinical liaison program through this initiative, we're collaborating with Medicare advantage payers to facilitate coordinated care between payors.
<unk> and patients. This program aims to further elevate the level of care our members receive while promoting greater partnership among all stakeholders involved in their health care journey.
As I've shared with you on previous conference calls, we have been diligently working on enhancing our data infrastructure capabilities and implementing care optimized in the most efficient way.
We recognize the potential and harnessing the vast amount of data we receive daily to drive significant improvements in financial clinical and operational aspects of our organization, especially given the rapid growth we've been experiencing.
While our new infrastructure continues to evolve we have already implemented systems and processes that utilize sophisticated data ingestion cleansing and validation methods. This is designed to provide a high level of data accuracy to drive insights and operational efficiencies ultimately leading to better results for our payer.
<unk>.
To wrap up we are very encouraged by our underlying performance in the first half of the year and the progress we are making integrating our MSL providers into the <unk> platform.
Our core centers and underlying <unk> are performing well and we believe we have a line of sight into achieving our near term and long term membership and financial targets.
Since founding care, Max and growing it to where we are today, we remain dedicated to creating a more sustainable health care delivery system through disciplined growth in a capital efficient manner. We believe our unique and deliberate approach to growth will ultimately deliver the best returns for our shareholders.
With that I'll now turn things over to Kevin to provide more details on our financial performance in the second quarter.
Thanks, Carlos and good morning, despite the prior year development in our second quarter results. We continue to feel good about our progress in building a nationally scaled platform so that high quality care for hundreds of thousands of seniors.
Since the <unk> acquisition, we have added over 40, MSR risk contracts and continue to have an active pipeline of payers and providers eager to align themselves Caremark's. These.
These contracts have begun contributing meaningful capital use of cash flows for us to invest in our medical management capabilities and we believe our MSL MMA contracts in aggregate are accretive so medical margin.
Before I get into the second quarter results, Let me address a couple of items first we have adopted a change in our reporting of adjusted EBITDA and no longer add back certain compensation costs previously included within business combination integration cost adjustments.
Given effect to this change our 2022 adjusted EBITDA would have been approximately $2 9 million lower than previously reported.
And our first quarter of 2023, adjusted EBITDA would have been approximately $350000 slower.
For the full year 2023, we do not expect these costs to have a material impact on our adjusted EBITDA guidance.
As always please refer to our earnings release and presentation for a reconciliation of GAAP to non-GAAP metrics like adjusted EBITDA, which now reflects this change in historical periods.
Second given the Stewart acquisition in November I will primarily focus on quarter over quarter comparisons of financial figures. Once we found more useful for interpretation and year over year comparisons.
Second quarter total revenue was $224 million growing 30% compared to $173 million in the first quarter.
Medicare risk revenues were $155 million growing 28% from $122 million in Q1.
Recall that Q1, Medicare risk revenues were unfavorably impacted by $27 million of prior year development related to historical membership in one of our MSL plans nor.
Normalized for this matter.
Care risk revenues grew 5% from Q1, driven primarily by favorable trends in patient volume.
Medicaid risk revenues increased 17% from $26 million in Q1 to $30 million in Q2 as favorable development in revenues more than offset the impact of a roughly 10% decline in Medicaid risk membership from regions terminations.
We expect Medicaid membership to continue to decline over the remainder of the year and.
In particular, we observed this enrollments in patients with low premium funding and low utilization driving an increase in blended revenue <unk> and a decrease in medical margin P. NPS.
These dynamics were contemplated in our guidance, although average acuity has normalized faster than we anticipated towards pre COVID-19 levels.
Government revenues increased from $10 million in Q1 to $22 million in Q2.
As a reminder, in government revenues represent accruals are projected MSB and ACO REIT shared savings, which we periodically revise based on updated estimates from our independent actuaries.
We believe our efforts around risk adjustment care management and quality are favorable drivers to shared savings and performance of our 2023 and would expect shared savings rates to be at least as much as those expected performance year 2022.
Finally, other revenue grew 6% from $16 million in Q1 to $17 million in Q2, driven by growth in surpluses under partial risk contracts and accruals are quality incentives.
Medical expense ratio defined as external provider costs divided by Medicare and Medicaid risk revenues was 84, 6% in Q2.
And 84% in the first half impacted by prior year development and Medicare and Medicaid.
First recall that last quarter, we recognized $15 million of unfavorable prior year development from the MSL plan membership and an earlier flu and RSV season in South Florida.
Second as Carlos mentioned this quarter, we recognized $7 million of Medicaid prior year development related to data limitations from a single health plan that was acquired by a national payer.
We have a longstanding relationship with this payer and or an anchor provider for them and the key Florida markets.
Based on our conversations with the payer we believe the health plan underwent system migrations that caused us to be unable to receive adequate data for its membership over a period of time limiting our ability to manage that population as those issues resolved. We received 2022 data that gave rise to the unfavorable development recognized this quarter we have.
Since identified action items to get the performance under this plan back on track and also reached an agreement to improved financial terms of our contract with the payer.
You can follow these moving pieces and the supplemental slides our earnings presentation.
As you can see we believe certain prior year development had a total impact of approximately $21 million on first half adjusted EBITDA and 450 basis points on medical expense ratio.
Remember that is our strategy to elect into full risk MSL Medicare plans that are dollar profitable even if they are running initially at higher <unk>.
We estimate that the mix of NSO contracts in our full risk population and packet MBR by 220 basis points. Additionally, the benefits cards had an estimated incremental impact of about 190 basis points, which we anticipate to impact <unk> through the remainder of the year.
Beneficiaries have the discretion to use these flex cards for a wide range of medical and nonmedical purposes.
The use of benefit cards, and overall higher enhanced supplemental benefits impacts our external provider cost in MBR.
There are different type of expense that we would historically consider part a and b medical utilization.
In response to the enhanced supplemental benefits, we are proactively refining our offerings to align with these changes by closely collaborating with the health plans, we aim to make necessary adjustments that maintain the quality of our services for seniors, while effectively managing the costs related to these supplemental benefits.
For these reasons, we are encouraged that underlying utilization in our core centers remains within the band of historical targets.
I will now discuss what this means for EBITDA.
Adjusted EBITDA was $7 million in the second quarter and $6 6 million in the first half.
Adjusted EBITDA was burdened by $6 million of de Novo Preopening cost and post opening losses in each of Q1 and Q2 and.
And the $21 million of prior year development in the first half.
While there are some sequential headwinds compared to the first half such as ongoing impact of Medicaid Redetermination.
We believe there are still mechanical drivers are favorable back half seasonality, such as pharmacy limitations and more patients and in stop loss in <unk>.
Will allow us to meet the midpoint of our guidance range, despite the $21 million of prior year developments.
At this time, we have conservatively assumed our base case claims experience for the remainder of the year to be similar to the first half, including another early flu season, and the winter that may or may not occur and consistent utilization of benefit cards among our population.
In addition, we have maintained a disciplined pace of investing in our de Novo centers and continue to expect preopening cost and post opening losses to be about $25 million for the year.
On revenue due to our early election, a full risk in certain MSL plans, we are raising guidance to $750 to $800 million for the year from $700 million to $750 million.
We've more than doubled our revenue base over the past two years and believe we are well on our way to executing on our estimated $3 billion of embedded premium under management.
Cash used in operating activities was $24 million in the second quarter flat compared to Q1, despite higher cash interest and ramping investments across our consolidated business.
As a reminder, we typically expect cash flow from Medicare risk contracts to improve in the second half compared to the first half due to the mid year and final sweeps.
In addition, we expect to receive proceeds from MSP shared savings later in the year.
Also of which will go towards repayment of the art facility entered into at the time of the Stewart acquisition.
We ended June with $55 million in cash and equivalents, which includes our draw of the remaining $35 million of our original <unk> in April .
The upside 60 million <unk>, we secured in the first quarter remains fully undrawn or.
Our leverage ratio as of the second quarter was comfortably within covenants and we expect to be able to draw that additional detail to fund our cash needs to the fourth quarter of 2024.
When we will be able to keep the full proceeds of the 2023 government program shared savings.
Despite the headwinds in our reported results we remain confident in our liquidity outlook and excited to unlock the earnings potential and our portfolio of contracts.
Operator, we are ready for questions.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.
Yes.
Your first question comes from the line of Andrew Mok of UBS. Your line is open.
Hi, Good morning, first I just wanted to flush out the underlying drivers of Medicaid <unk> in the quarter that you called out can you help us understand whether this was related to the Medicaid Redetermination is in any way and how is this experience impacting your forward view on.
Pricing and utilization.
Hi, Andrew.
Yes.
The prior year development of $7 million that we reference here has nothing to do with the Redetermination. This is strictly isolated to one health plan.
Our we have some some data issues, we are seeing that the redetermination are kicking in we lost about 10% of our Medicaid full risk population during the quarter.
We baked in those.
Those higher <unk> that we've seen now related to prior year development into our forward looking.
<unk> forecast.
And so all of that has been taken into consideration and as part of our of our guidance of 25 to 35.
Yes.
It was really a migration of data was an acquisition of a of a.
Health plan by a national payer in that data migration.
Just cause some some some issues with the data. So then when we got the.
The more credible and more accurate or more real time data.
Reflected in that in that for that period of time, whether we're migrating that data.
Got it Okay, and then I think in your prepared remarks, you mentioned that Medicare outpatient utilization has started to moderate can you go into a little bit more detail on what youre seeing there and over what time period very firm here. When you say outpatient trends picked up and pick them I think there is a pretty meaningful delay in the claims data that you see.
Yeah, Andrew So we did look into that we do have a little bit of a delay in the claims data. We're typically about 30 days behind the health plan.
When they see the information the uptake that we're seeing really happened towards the end of March.
We do have a little bit of a delay from getting health plan information. However, we do have real time information on a referral patterns and are able to look at that information to determine whether we anticipate spikes in outpatient care.
Yeah.
Your next question comes from the line of Brian <unk> of Jefferies. Your line is open.
Hi, Good morning, you've got <unk> on for Brian . Thank you for taking my question. So first going back to the <unk> discussion Kevin. Thank you for the detail on op moving pieces that impacted the higher.
We saw this quarter I'm, just curious I know that you had called out the PID and triggering.
The switch to full risk has a few reasons I'm not sure. If I missed this did you call out any contribution from that higher outpatient utilization like how much of that.
Contribute to the uptick in.
I mean, our this quarter.
So as you know, we actually didn't we didn't call that out specifically.
It's hard to isolate one or two periods on the outpatient.
And look at that.
Kind of a recurring what we've seen is that.
The utilization has come back to normal.
Always ebbs and flows within the data and there is a seasonality component to the utilization.
What we Havent anticipated is this maybe just a little bit of a pull forward of utilization that we would typically see in the third quarter, which is why from our standpoint, a little bit of a blip on the outpatient side and kind of coming back to normal I think it's important also to note that inpatient trends are significantly favorable over our.
In anticipation or anticipated utilization.
Cost per admins are in line with historical so I think as you think about the costly or events that would happen.
Those events are being managed very well in the outpatient side is one of those ones, where you do have these new seasonality components to kind of flow through the year.
Great. That's really helpful. And then kind of shifting to MA risk base revenues saw that you added an additional 7000, new members and roughly 2500 full risk it'd be helpful. If you could provide some more granular detail on how the PMT EMS are trending and full risk versus the other value based bucket just want to check my math I'm seeing.
For SPN PM stepped up quite a bit sequentially. So I just want to make sure I have that right. So if you can provide any color that would be helpful.
Yes, absolutely we did see.
An uptick in the full risk premiums this year.
Some of that does have to do with obviously, our we talked about the impacts of Covid had on our ability to adequately document the acuity of the population. So we are seeing those tailwind impacting the other component really is around the supplemental benefits.
And the bid to the health plans pushed through just the base premiums were seeing increase to kind of cover some of these additional gift cards as well.
Thank you.
Your next question comes from the line of Julian dressing of true Securities. Your line is open.
Hey, guys. This is eduardo on for Joel Indra.
Just around all in all the talk around.
Potential pent up demand utilization, just curious to see if youre seeing what youre seeing in your Florida market and in your Stewart market, if there's any major differences to call out.
No I don't know that we've seen a.
A huge pent up demand I do think that we saw that uptick in utilization that we called out here in this call that we've since seen.
Nor normalized.
Cross and we expect it to stay normalized.
Throughout the throughout the next quarter.
And that could just be some seasonality changes and if you'll remember we did have some seasonal changes.
On our RSV and flu season in the last quarter typically recognized in the Q in Q1, we generally saw that utilization.
In Q3 Q4 of last year, so some some potential kind of seasonal changes in some of the trends.
Some of these different dynamics that are going on.
Okay, and I guess, just second half your second half revenue outlook implies a bit of a moderation from the Q2 run rate.
While you continue to expect to add more Medicare lives throughout the end of the year can you just explain with the moderation of revenue relates to.
Sure Yes.
Hey, Eduardo as Kevin Yes, so as we look at Theres a few items that are impacting that there is yes, we're adding 20.
<unk> thousand 500, or so patients throughout the end of the year.
Maybe even a little more.
Typically the second half of the year, the <unk> trend down.
Just because of.
You are more acute patients are expiring, you're typically bringing on new to Medicare patients, which tend to be healthier patients that may not necessarily have adequate documentation from our coatings standpoint, so the premiums tend to trend down from a <unk> standpoint.
Those for the Medicare risk population somewhat neutralized, maybe a slight negative trend I think the bigger factors are really around on the MSP side, where the patient.
You fill the bucket kind of at the beginning of the year and then there is a selection of our patients again expire or are they select our MA plans.
Those tend to trickle down so we do expect MSP membership to wind down a little bit and then in addition to that the Medicaid Redetermination. So we are expecting membership to continue to decline there.
Those are somewhat lower premium patients they tend to be the tanner patients.
But we do anticipate that that membership near the combination of that with the MSP to contribute too.
Less of a.
Our revenue for the second half.
It is important to note that this is normal course of business to do that.
The history of managed care right as you think about how MSB works and how Youre bucket is refilled at the end of the year.
Do that attribution formula that CMS uses and then again on the Medicare advantage side is all of the members that are that you are starting the year with have all been key.
Flow through your system have captured that acuity of that membership and as you bring on those new members should that they lose a little bit of that risk or so you bring down that so to all of this.
That we experienced towards the second half of the year, It's just normal course.
We consider.
Value based care.
Okay. Thank you.
Your next question comes from the line of just get to Sun of Piper Sandler Your line is open.
Hi, guys. Thank you for taking my questions I appreciate it.
So I was just hoping maybe on that prior year development for the Medicaid contract.
But can you kind of I guess, just what changes were made to that contracts are the economics of that contract that kind of justify the contracts persistence. Despite.
Materiality of the prior year development that would be my first question.
Yes, I think I'll just start with this is a relationship we've had for a very long time, it's a very strong partner of ours and so there were some changes made we manage a lot of different lines of business for them.
Medicaid and Medicare. So we took a look at all of the different contracts that we had.
And we're able to make significant material changes that we believe.
Improves.
Our run rate moving forward and kind of helped us kind.
Through that through that issue. So I think where we landed ultimately is more favorable in the long term for the business.
Across all lines of business.
Okay got it and so then maybe can you just help us understand what is kind of a normal life.
Medicaid.
MBR and then what is your expectation in the back half of the year and kind of heading.
For 2024, if there is one for Jay.
Impact adverse impact that redetermination is on that normalized MBR.
Hey, Jessica it's Kevin Yes, so we do anticipate <unk> to increase.
In the back half the premium the actual premium <unk> for the blended population should increase.
What we've seen kind of since the pag started as the.
The TANF population tends to be a lower premium population is what caused the increase in membership if you will which diluted down our revenue <unk>.
And so now that that population has to go through the Redetermination component of it theres going to be tranches of the population that are just going to not be eligible for Medicaid anymore. So the <unk> will the <unk>.
Premium <unk> will definitely increase it'll blend back up to what kind of pre COVID-19 levels.
What we would anticipate.
<unk>, we would anticipate those also to increase.
Medical margin I would say is going to decline it won't be a significant decline because of the fact that these are higher premium patients.
Despite the fact that they have higher <unk>.
I'm sorry, the platform contribution of <unk> from a margin standpoint would deteriorate, but just a little bit. So I think as we look at it.
And you call it.
70, mid <unk> range, we would anticipate that to go back to kind of pre COVID-19 levels, which would be closer to that 80 80 mid mid to low 80 range.
Got it and that happens over the back half of 'twenty, three or or heading into 'twenty. Four and then just my last question would be.
With respect to kind of the heat in the summer and I'm curious, if you're seeing any incremental kind of E. R utilization or inpatient expenses related to that heat wave, especially in south Florida.
Yeah.
Sure.
Yes, just to answer your last question, Yes are the first part of your last question.
The back half of the year is when we anticipate those redetermination that's kicking in.
We haven't seen anything from a utilization standpoint on the ER side or an uptick in the euro specifically related to the heat wave.
<unk>.
It's one of the things that we constantly are looking at we do get live data feeds from.
From the E&S, which is the event notification system here.
And we do get that information once the patient kind of hits the EUR. So we're able to track them through.
Those seem to have stabilized or somewhat normal so nothing to report are expected at this point.
Yes, I think if youre going to the only issue that we see really in the South Florida market.
It's more on the flex cards right the supplemental benefits not on not on the utilization side.
And some of the things that we're doing to mitigate that as you know we're working you know we do have certain enhanced benefit that some of our medical centers that have been.
Enjoying some of those services and we're working with the health plans now and potentially now that they have access to that using those flat cards potentially just using those flex cards to either acquire or purchase of services or remove them from the centers, if they're already receiving it through the flex card. So there there's a lot of different things that we can do.
To mitigate that moving forward as the.
We don't we don't know that the.
We think the flex cards are here to stay and we've talked to several health plans in and there may be some some changes.
And those benefits, but ultimately we believe that there.
Various ways, where we can mitigate that moving forward.
In fact the company.
Much more favorably.
Again, if you would like to ask a question Press Star then the number one and your telephone keypad. Your next question comes from the line of Joshua Raskin of Nephron Research. Your line is open.
Alright, Thanks, I think I'm gonna stay on that topic actually Carlos.
I'm curious this utilization of supplemental benefits, if thats trended any differently in <unk> versus <unk> and as you start thinking about that landscape and how it changes for 2024, maybe specifically how are you working with payers and what are the key points that you are trying to get across that you think carmax needs to be successful for next year.
Yeah.
Yes, I think the more difficult part of some of these flex benefits is in the utilization in the way of their use where in the past. These were done on a monthly basis and now there's more flexibility around that usage. So so you do see where some benefits aren't used in Q1 and then I'll.
Of a sudden they're using a cumulative weigh in in Q2. So we did see a little bit of a little bit of that I think the way, we're working with health plans and we have been connecting with all of the major health plans on this is how.
How do we offset some of these folks.
Flex card benefits or potentially bring down some of these supplemental benefits.
The hope things are working in some way or another to offset some of these benefits either through the flex card or through some other mechanism of reduced benefits.
However, as I was mentioning to Jessica I think there's a huge opportunity for us now because.
The way that we delivered our care and our fully integrated centers in these additional benefits that we were offering our members, especially because most of these members are dual eligible in these areas and don't have access to food and meals and many other things is using these flex cards to provide those benefits.
In essence, no longer kind of double paying for a lot of this so these are some of the things that we're exploring internally and with the health plans to mitigate this moving forward and we think there's a there's a much better path forward and we're working aggressively to get that implemented as soon as possible.
Are you noticing a change in tone, obviously, there's some headwinds in 2024 around risk adjustment and the actual level of reimbursement a couple of <unk>.
Our payer partners have some significant star headwinds as well as that is that conversation changing the way or are you looking at things like in a higher percentage of premium cap and other sort of wholesale changes.
Yes in some cases, we've already been able to achieve that rate going forward.
To offset some of those potential <unk>.
Star headwinds I think on the risk adjustment side and the rate letter.
I think we're working with some of these health plans I think that the fact that it's a phased in approach.
The commitment from CMS on <unk>.
On the Medicare advantage book, but it also allows us and the health plans to react to this from a benefit design of plan and that's been kind of the.
The majority of the conversations have been around that and the utilization and the flex cards on how do we plan over the next two to three years to ensure the most minimal minimal impact, but you know as we're thinking about it now and you know that.
Impact is somewhere.
We're thinking about next year at <unk>.
A 5% increase due now probably potentially a 2% increase.
And rates and look I think the other thing that we've done very well as we have grown extensively we've diversified our business I think the biggest impact.
Probably be in some of the South Florida dual population.
But because we have so much concentration now in so many different states, which are not dual eligible through the Stewart acquisition. They come at a very low RAF score.
Think for our organization specifically.
Tremendous amount of upside to capitalize on this on this moment.
Yeah, and then just last one culture.
As we think about the jumping off point for 2020 for should we be thinking about you know mid point of guidance and then added the $21 million negative developments into that 50 ish million range is that the right jumping off point for how we want to think about EBITDA.
Growing or you know whatever pluses or minuses into 2024.
Yes, I think when you think about 2020 for right now we're not we're not changing.
Anything from what we discussed today on Investor Day presentation, we we feel very confident.
And the targets that we put out in the long term guidance look I think when you. When you are growing the way. We grew right. We went from 20000 members to managing over 200000 members in a two year period.
There's going to be a couple of blips, along the way, but our trajectory is incredibly positive and we feel excited about the business and still feel confident in kind of the cases that we laid out on investor day presentation. So.
I think that's it.
I think thats, how we should be thinking about the business moving forward and I'm sure.
There'll be some you know, it's not going to be a straight line up just because there's been so much growth, but overall our performance in the core business continues to be very very strong overall, our performance on the de Novo business, we've already grown to a business that had no members to over 4000 expecting to end the year at 5000 members over 17 Center.
<unk>.
And then obviously the acquisition the MSP.
The opportunity there is already showing potentially more positive performance and then moving forward with all the adjustments and everything that we're implementing.
From our managing value based care is positive. So we're very bullish on the outlook over the next several years for the company.
Thank you there are no further questions at this time I will now turn the call over to Carlos to solo for closing remarks.
Thanks.
Yeah on behalf of the <unk> team, we just want to thank everybody for joining the call today and we look forward to updating you on the progress and have a great day everyone.
Yeah.
This concludes today's conference call you may now disconnect.
Yeah.