Q2 2023 Cano Health Inc Earnings Call
Good afternoon, and welcome to panel Health second quarter 2023 earnings call. Currently all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded.
Joining us on today's call will be Mark <unk> interim Chief Executive Officer, and Brian Coffey Chief Financial Officer.
They cannot help press release webcast link and other related materials are available on the Investor Relations section of Kendall helps website.
As a reminder, this call contains forward looking statements regarding future events and financial performance.
<unk> 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. We intend. These forward looking statements to be covered by the safe Harbor provisions for forward looking statements contained in section 27, a of the Securities Act and section 21 E.
And the Securities Exchange Act, we caution you that the forward looking statements reflect our best judgment 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 factors.
Including but not limited to risks and uncertainties discussed in our S. E C filings.
We do not undertake or intend to update any forward looking statements. After this call or as a result of new information, except as maybe required by law.
During the call. We will also discuss certain financial measures that are not prepared in accordance with GAAP. 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 with that I'll turn the call over to Mark <unk> interim CEO of Kendall Health. Please go ahead.
Thank you and good evening everyone.
I appreciate you joining us to hear how Cano health is turning the page to create a sustainable business for all our stakeholders.
We are accelerating our strategy to enhance operational efficiency and executing our plan to improve the management of our medical costs to realize the embedded value within our business.
Since becoming interim CEO in June .
I have worked with the team to conduct a thorough review of all aspects of our business.
While our mission and vision remains the same the strategy and tactics needed to realize the profitability embedded in our business requires a refreshed approach built on a stronger operational foundation.
By now you may have seen our press release and know that today, we announce cano health is pursuing a comprehensive process to identify and evaluate interest and a sale of the company.
Or all or substantially all of our assets.
We have already been working with advisors and are encouraged with the progress made so far.
And while there is no timetable for the conclusion of this process.
We expect to share more information at a later date and time when necessary.
As a note we will not be commenting further on this process during our Q&A session. After our finished remarks.
This is important for Cardinal health success.
Joining with the right strategic partner is an opportunity to accelerate the value generated from producing favorable health outcomes for our patients and reducing medical costs within our communities.
And the rest of my prepared remarks today I plan to walk through the progress. We have made in just a few short weeks to refocus our strategy on Medicare advantage and ACL reach.
To accelerate decisions and actions designed to support the organization long term success.
I will discuss key dynamics impacting our business.
And how we will address some of these headwinds.
First and foremost our core operating strategy is now focused on providing primary care services for Medicare advantage and ACO reach members.
Our core Florida market.
Through both our medical centers and our affiliated networks.
Our revolving management team has a long and proven track record of operating successful primary care facilities and affiliate networks in Florida that improve health outcomes for Medicare advantage and Medicare ACO reach populations.
The team has a long standing solid relationships with our payer partners.
We are leveraging their experience technical knowledge and relationships to streamline and improve our performance across the enterprise.
We are now implementing a new plan to flatten our operational structure rigor.
Rigorously prioritize projects and our Florida operations to improve the speed and quality of the care we deliver.
And create a smaller brick and mortar footprint to optimize our core Medicare advantage assets.
This new smaller footprint and more focused business required us to realign and reduce the size of our workforce, which.
Which we did just last week.
While it is difficult to see team members.
The reduction was necessary to allow us to align with this new strategy.
We thank those employees, who are leaving us for their dedication and service.
In order to focus on Medicare advantage and ACO reach operations in Florida.
We launched processes to divest certain non core assets.
While we cannot assure investors that a transaction will be consummated.
We have received second round bids to divest the majority of our Florida Medicaid operation.
While valuable the Medicaid business diverted critical physician capacity.
Care management resources within our existing medical centers away from our core Medicare advantage business.
We found it was inefficient for our care management teams to serve both Medicare advantage and Medicaid members, who have very different needs.
We also made important strategic decisions for our markets outside of Florida.
By the fall of 2023, we expect to fully exit our operations in California, New Mexico, and Illinois by selling or closing in those markets.
We began notifying members physicians employees and our payer partners about our decisions over a month ago.
This decision.
Impacts approximately 5000 total members across 17 medical centers.
We also expect to fully exit operations in Puerto Rico by January one 2024.
<unk> currently has approximately 8000 members cared for by our affiliates.
Cardinal Health remains committed to supporting our members as they transition to new providers to ensure they receive the highest possible quality of care.
In addition to exiting operations in those states, we are consolidating medical centers in Texas and Nevada.
While simultaneously evaluating offers allowing us to divest these assets.
The consolidation plan is intended to improve the economics of these markets.
They remain part of Cardinal health or our divested.
We plan to reduce our footprint in Texas, and Nevada by closing about half of our centers in those markets to improve their profitability and cash flow.
With such actions are Texas, and Nevada medical centers will be highly attractive with a capacity to efficiently and effectively serve the growing Medicare advantage population.
Further.
We review taking actions on other non Medicare lines of business and Cano health.
Such as Medicaid behavioral health pharmacy operations and occupational health.
Each of these lines of business is attractive on a standalone basis.
We have received interest from multiple parties for these assets are in engaging in active discussions and of course, we cannot assure investors that any particular transaction will be consummated.
Our exit from California, New Mexico, Illinois, and Puerto Rico, coupled with the consolidations in Texas, and Nevada, and the potential divestiture of Medicaid will allow the organization to be laser focused on delivering high quality high access.
Hi member engagement for our Medicare advantage and ACO reach members.
Now moving on to the current business environment and the trends we are seeing.
Okay.
First and foremost we.
We are in the care management business there.
The quality of care that we deliver remains market, leading and a source of pride for all of us.
Unfortunately, we have had several emerging process issues that have affected our ability to project our performance.
However, these issues can and are being remedied.
In our core Medicare advantage business <unk> revenue in the second quarter of 2023 was well below our expectation.
This was primarily due to a shortfall in the Medicare risk adjustment revenue or <unk>.
Collected versus what was expected and accrued for in prior periods.
Okay.
As the second quarter of 2023 close we received a quarterly service funds from our health plan partners.
Which reflected their reconciliations of the actual and estimated MRA revenue from CMS for our members.
These reconciliations resulted in a reduction to our final 2022 and mid year 2023 estimates during the second quarter.
Upon stepping into the Chief strategy officer role in April of 2023, I asked our team to perform a cross functional review and audit of our clinical documentation billing and coding and estimation methodologies.
And to suggest ways to enhance our practices.
I'll review found that while our clinical documentation billing and coding followed nearly all internal policies.
We have clear opportunities to implement simpler scalable and more effective protocols designed to enhance our performance.
The largest GAAP, we found was attributable to back end processes and the ways that data from those processes inform our MRA estimates.
The prior processes were overly manual and our back testing analysis demonstrated that they provided limited predictive power.
During my time at Humana and during my time operating independent value based care primary facilities and the hospital I learned that the value based care models succeeds the best when physicians have every tool necessary to make informed decisions.
And so to enhance our data capture.
This quarter, we quickly began revising our approach to limit data variability and to ensure we close gaps and real time data reporting.
I believe our estimates going forward will reflect a more accurate view of these MRA projections.
That will result in a higher realized and appropriate MRA revenue.
We were also impacted by higher utilization than expected in the quarter.
This was primarily due to the utilization of health plan supplemental benefits, such as OTC flex cards, and higher utilization across outpatient and pharmacy services.
As you'll recall from our first quarter earnings call. We received information from payers about higher utilization of OTC flex cards very late in the quarter.
Prior to receiving actual card utilization data, we assumed that the trend would be in line with historical patterns.
The new payer information made it clear that in the second quarter.
Utilization of the cards was significantly higher than in prior years.
And in several cases, we realize that service fund OTC flex card impacts in 2023, which were not present in 2022.
Moreover, health plan data received in the second quarter of 2023 included retroactive adjustments for OTC Flex card claims dating back to January one of 2023.
As a result, not only do we experienced higher OTC flex card utilization in the second quarter of 2023.
But we also received unfavorable prior period development from the first quarter of 2023.
These OTC flex car to became more prevalent in the 'twenty two 'twenty three annual enrollment period, among health plans, particularly in Florida.
While they provide an enhanced benefit for our members.
At risk value based providers like Cano health are unable to influence or manage these costs.
Which we recognized in our third party medical costs.
Given these unstainable unsustainable burden OTC flex darts placed on our third party medical costs, we are intensely negotiating with several payers to mitigate these costs in 2023.
And making reduced OTC flex card caused a top priority and our negotiations for 2024.
In the second quarter of 2023, we also saw higher than expected utilization.
Firstly attributed attributable pent up demand for outpatient procedures.
Pharmacy utilization was also higher than expected in the quarter.
And remained elevated due to higher branded drug costs.
Primarily related to certain diabetes medication.
We expect this to continue in the second half of 2023 and are closely monitoring the claims data we received.
To mitigate these costs, we have a number of action items that are underway and I will discuss these momentarily.
Clearly these headwinds.
It's imperative that we position ourselves to better facilitate manage and influence care delivery and our medical centers and affiliate networks.
Focusing on Medicare advantage and ACO reach provides cano health with the opportunity to rebuild its foundation.
In a market, we understand very well.
It also allows us to implement and scale critical operational changes across our footprint, giving us greater leverage over time.
Now let me highlight a few actions we've already taken to simplify our operations and refocus our core capabilities.
First we are successfully right sized our payer agreements to reflect the size scale and impact of our organization to position Cardinal health as a true partner with our payers.
Actions taken include developing broader master agreements with payers to replace multiple complex agreements with the same payer.
This is intended to allow us to manage our payer relationships to more effectively.
And to yield the best economic impact for our enterprise not just in a particular region or for a single plan.
Second we are using our scale to negotiate with specialists in hospital systems, which should enable us to reduce our third party medical costs and support our ability to focus on improving the overall health outcomes of our patients.
Third as part of our restructuring our Cardinal at home program relaunched with a renewed focus on increasing engagement with high risk patient.
The goal is to improve our delivery of primary care in the home setting to avoid costly ER visits and hospital admissions.
We previously mentioned that this program can generate a 5% to 10% reduction in preventable ER visits and increase our ability to treat high risk patients.
Side of the hospital.
Simultaneously our member engagement teams have increased contact with high risk patients to control adverse medical outcomes.
For example in the first half of 2022, we engaged with approximately 800 high cost members.
In the first half of 2023 as part of the actions action plans that have been implemented we are engaged with nearly 49000 high cost members.
Clearly this level of engagement will have multiple benefits for the organization, including the recognition of higher MRA scores.
And lower medical costs, as we engage and manage these members and better member engagement and better increased member satisfaction.
Fourth we are making operating enhancements to improve our insight into and influence over our medical costs moving forward.
This includes reorganizing certain functional areas and adding new physicians to strengthen core capabilities.
To that end, we have added a leader of value based care optimization, who is responsible for evaluating the various patient touch points, along the patient care continuum to ensure that our physicians specialists pharmacy services condo at home and care management teams.
Our all seamlessly connected.
In addition, we are implementing several new predictive services to improve our ability to provide proactive reporting and analysis of value based care.
Utilizing integrated data about our carrot touch points will ensure that we have the means to quickly assess and identify gaps in care, while caring for our patients.
Fifth.
We have thoroughly reviewed and strategically aligned our referral networks to ensure that we have the right referral partnerships with a focus on patient health outcomes and offering the right care in the right setting at the right time.
Six we have a number of initiatives to identify and leverage our patient population data to determine where generic alternatives represent the greatest opportunity.
This includes identifying whether prescriptions are prescribed prescribed by our own Cano health physicians or originate with outside specialists.
This insight will help us make quick and appropriate actions to reduce our pharmacy costs without sacrificing the quality of care or efficacy of medications prescribed.
And finally, we.
We remain committed to operating as efficiently as possible and reducing our SG&A expense.
As I mentioned to adapt to new business footprint, we made the difficult decision to realign and modify the size of our workforce to improve our cost structure.
It goes without saying that these initiatives are critical for our success and for our future as a value based care company.
Redirecting Cano health strategy to focus on the highly profitable and scalable, Florida Medicare advantage market.
And the capital light ACO reached business.
I'll put cardinal health on a path towards improving our profitability and cash flow.
There is still a significant amount of operational work to be done and our medical centers and our corporate functions.
But we are encouraged.
By the potential and the great progress we've seen so far.
Systems initiatives partnerships and relationships all need to work and communicate in unison to maximize value from each decision we make.
In the coming months, our organization will demonstrate its focused on optimizing our operations to generate greater efficiency build better relationships with our payors and improve health outcomes for our Medicare advantage and ACO reach members to ensure the organization long term success.
Yes.
And now I'll turn the call over to Brian Coffee, our Chief Financial Officer to take you through the financials.
Thank you Mark and thanks, everyone for joining us today.
It certainly has been a challenging and disappointing quarter for us and our various stakeholders.
We are working relentlessly to execute the initiatives Mark has laid out and to accelerate the organization's path to significantly improve financial performance.
Starting with the results of the quarter.
Total membership increased 35% year over year to approximately 381000 members in the second quarter of 2023.
This represents an increase of approximately 100000 members from the second quarter of 2022.
Total Medicare advantage membership grew approximately 14% versus the prior year, but was about flat sequentially as continued membership growth in our medical centers was partly offset by planned terminations of our affiliates.
Membership also declined sequentially in ACA, and Medicaid, which were impacted by contractual changes and re determinations respectively.
Total revenue for the second quarter of 2023 was approximately $767 million up from approximately $689 million a year ago.
Total capital revenue in the quarter was approximately $743 million, an increase from $655 million in the second quarter of 2022.
However, in the second quarter of 2023 capital revenue was lower than expected, primarily driven by Medicare risk adjustment, our MRI revenue, which is approximately $58 million lower than previously estimated in our most recent full year 2023 guidance.
This lower MRI revenue reflects our updated view of the final 2022 and mid year 2023, MRI revenue estimates.
Of the approximate $58 million shortfall versus our expectations approximately $44 million was out of period or related to services provided in 2022, and the first quarter of 2023.
The Medicare advantage revenue <unk> was $127 in the second quarter of 2023 down 13% sequentially from the first quarter of 2023, primarily driven by the lower than expected MRI revenue.
The Medicare ACO reach revenue P. M. P. M was $1309 down 12% sequentially from the first quarter of 2023.
Also lower than expected and was primarily driven by revised benchmark data we received from CMS related to the 2022 and 2023 performance years.
Additional information about our membership mix and R. P. M. P. M is available in our second quarter earnings release, and second quarter financial supplement posted on our website.
Our medical cost ratio or MCR in the second quarter of 2023 was 103, 5% compared to 82, 6% in the second quarter of 2022.
Excluding ACO reached the MCR was approximately 108, 6% in the second quarter of 2023 compared to approximately 1981, 8% in the second quarter of 2022.
This increase was primarily driven by an increase in our Medicare advantage MCR.
Year over year increase in the MCR was primarily driven by lower capitation revenue due to the reduction in MRI revenue discussed previously.
And higher third party medical costs due to higher utilization and higher costs associated with OTC Flex cards offered by our health plan partners.
The higher utilization contributed to unfavorable prior period development of third party medical costs during the quarter of approximately $44 million.
Primarily related to medical service utilization of approximately $26 million and OTC flex cards of $18 million.
The higher utilization of OTC flex cards occurred across nearly all our health plan partners.
In the first quarter of 2023 cannot health recognized approximately $13 million of OTC flex card costs.
While the second quarter of 2023 recognized approximately $51 million of which approximately $18 million was unfavorable prior period development from the first quarter of 2023.
What we see now is the aggregate cost from these OTC flex cards was approximately $33 million per quarter in the first half of 2023.
This compares to approximately $12 million per quarter in the first half of 2022.
As a result, greater use of OTC flex cards by our Medicare advantage members is projected to add $84 million of third party medical costs in the full year 2023 compared to the full year 2022.
Direct patient expense in the second quarter of 2023 was seven 4% of our total revenue.
Below the seven 6% in the second quarter of 2022.
SG&A expense in the second quarter of 2023 was approximately $99 million.
Down approximately $6 million compared to the second quarter of 2022.
The total SG&A expense as a percentage of revenue was approximately 13%, which was above our expectations, primarily due to lower capital revenue and headwinds to our cost reduction initiatives related to higher professional and legal fees.
Net loss in the second quarter of 2023 was approximately $271 million compared to a net loss of approximately $15 million in the prior year.
Primarily driven by a higher operating loss the change in fair value of warrant liabilities and higher interest expense.
Operating results in the second quarter of 2023 also included a $62 million increase in the reserve within other long term assets on our balance sheet, resulting from the full write down of MSP recovery class a common stock.
Adjusted EBITDA in the second quarter of 2023 was negative approximately $150 million compared to positive approximately $10 million in the prior year.
This was primarily driven by higher medical costs and lower MRA revenue as I previously described.
It's important to note that we recognized $88 million from two large out of period items that are not expected to recur in the back half of the year too.
To summarize the $88 million of out of period items first.
<unk> revenue was $58 million lower than expected and included $44 million unfavorable out of period adjustment for lower MRI revenue, while approximately $14 million is.
As expected to recur in each the third and fourth quarter of 2023.
Second as I mentioned previously there was $44 million of unfavorable prior period development related to utilization of third party medical services and OTC Flex cards.
We are withdrawing our full year.
2023 guidance provided on May nine 2023, as our management team continues to evaluate strategic interest assessed the divestiture of noncore assets and accelerate changes to <unk> operating structure.
These factors are dynamic and outcomes vary widely.
While we expect to continue to provide you with updates to our outlook as warranted. However.
However, there are some factors to consider as you think about the remainder of the year.
First as I mentioned, we recognized $88 million of out of period items and unfavorable prior period development in the second quarter of 2023.
As such this amount is not expected to recur in future periods.
Second we still expect our financial performance to improve in the second half of 2023, despite higher utilization of OTC flex cards and medical services through the end of the year.
The improvements in the second half of the year, driven by operational activities, which Marc highlighted benefits from third party medical cost recoveries, such as stop loss and part D rebates and traditional seasonality, which typically benefit results in the second half of the year.
Third we recently made the decision to reduce our workforce by approximately 700 people or 17% during the quarter.
About 20% of these reductions are due to exist due to exiting operations in California, New Mexico and Illinois.
With another 20% due to consolidations in Texas, and Nevada, and the remainder attributable to other operational functions.
These actions are expected to yield approximately $50 million of annualized cost reduction initiatives beginning in the third quarter of 2023 and through the end of 2024, partially offset by an approximate $4 million restructuring charge that we expect to record in the third quarter of 2023.
Fourth we currently expect to reduce our medical center footprint.
From a 169 as of June 32023 to approximately 136 medical centers by year end.
After our market exits and consolidations are completed.
The remaining centers will include approximately 123 centers in Florida, and 13 centers in Texas and Nevada.
It is important to note there are approximately 23 centers in Florida predominantly related to our Medicaid operations.
Fifth the California, New Mexico, and Illinois markets, we're exiting have year to date adjusted EBITDA losses of approximately $14 million as of June 32023.
For these markets there will be costs remaining for 2024, which are primarily related to certain leases that we have yet to sublease or fully exit of approximately $7 million.
In regard to Puerto Rico, which we are exiting effective January one 2020 for the year to date adjusted EBITDA losses were approximately $9 million.
Now, let me turn to our cash flow and liquidity.
At the end of the second quarter of 2023 cash used in operating activities was approximately $45 million year to date and was primarily due to unfavorable operating results.
Cash used in operations was also impacted by the change in working capital, which reflects lower accounts receivables, including lower estimates for MRI revenue compared to prior periods.
We ended the second quarter of 2023 with approximately $15 million in unrestricted cash and $110 million of capacity remaining in our revolving credit facility, providing us with approximately 125.
Total liquidity at such time.
However for the test period ended June 32023, the company was not in compliance with its financial maintenance Covenant under the sidecar credit agreement, which relates to the 2023 term loan. We closed earlier this year and requires our first lien net leverage ratio to be tested quarterly.
At such date, the company's first lien net leverage ratio exceeded the maximum limit of five eight to one primarily due to the lower cap at a capitation revenue and higher third party medical costs.
We have successfully negotiated with our creditors and on August 10, 2023. The company has obtained a waiver and amendment of the sidecar agreement through September 32024.
The company's current liquidity as of August nine 2023 was approximately $101 million, which consists of unrestricted cash and reflects the full draw of the credit Suisse revolving line of credit.
Our expectation that having secured the 2023 Sidecar amendment, we will repay a significant portion of the <unk> revolving line of credit.
The full draw was prudent capital management, while we negotiated the sidecar agreement.
Furthermore, as the company achieves its various divestiture our objectives.
The immediate use of those proceeds will be to repay the revolving line of credit and then within 18 months. The intent is to use the net proceeds to reinvest back into the business with the balance being used to repay debt.
Given the operational headwinds, we're facing in 2023, and the fact that the company's current liquidity is not expected to be sufficient to cover our operating investing and financing uses for the next 12 months management has concluded that there is substantial doubt about <unk> ability to continue as a going concern within one year.
That is why the company is pursuing a comprehensive process to identify and evaluate interest and a sale of the company are all or substantially all of its assets.
While pursuing multiple initiatives to streamline and simplify the organization to improve efficiency and reduce costs.
These initiatives accelerate our shift to focus on our core assets in Florida to improve profitability and cash flow.
And we expect our focus on Medicare advantage and ACO reach to result in more efficient operations and lower medical costs.
<unk> R patients lived their healthiest lives.
In conclusion, the company is committed to strengthening our financial footing and implementing our operational and strategic initiatives to improve patient health and deliver for stakeholders.
Now I would like to turn it back to Mark for a few closing comments.
Thanks, Brian .
In conclusion as Brian I have just walked through the company is committed to strengthening its financial footing.
And implementing operational and strategic initiatives to improve patient health and deliver value for our stakeholders.
As discussed the company is working with its financial advisors to evaluate and develop the inbound inquiries, we have already received as well as to engage with other potential buyers.
We have a good company.
And a strong plan to address the headwinds facing the company.
And there is and we believe will continue to be strong interest in this company.
As you would expect we will not get further into the details of our strategic review process.
But we are laser focused on achieving a value maximizing transaction for our stakeholders.
And we expect that our current liquidity.
And available options are sufficient to complete such a process.
With that in mind, we ask that you focus your questions on the substance of our second quarter 2023 financial results.
And so.
I will ask now the operator to open the call to your questions operator.
Operator.
Your first question comes from the line of a J Rice with credit Suisse. Please go ahead.
Hi, everybody. Thanks for all the detail first of all on the liquidity comment you.
Does it August 90 out of $101 million of.
Liquidity, you had fully drawn down on the.
Our credit line at that point, you got the waiver the next day.
You expect to pay that credit line, which I guess is about $110 million.
Substantively back by end of September would that amount of money still be completely available to you or that limit $101 million to some lower amount once you pay that back.
Yeah, No that's right.
The revolver revolving line of credit is still available and we'll access it as needed and now that we've kind of cleared certain hurdles, we will repay that back end.
Use that as needed throughout the quarter.
And I think you said you were negotiated.
Sure.
Sidebar agreement through September 30.
Then revert out of compliance again post September 30th or will you be still okay.
Now you're talking about September 32024.
Got it.
I would answer your question.
I had the September .
24 that you.
<unk> extended.
Yes, alright, okay. That's good just one other area to ask question about so the stop loss agreements have traditionally built up to the point where in the back half of the year. They gave you. Some help obviously with where you guys are running year to date I would assume.
That that would be a factor in thinking about the back half the dose stop loss agreements might be kicking in quicker and have you factored that into your thinking about the back half and obviously, there's some prior period adjustments, you're making do you have the ability to go back and say hey that should have triggered some of these stop losses coverage.
From prior periods and we should have some recovery there and if you've been able to do that any sense of the size of that.
Yes, it's a great question and that's part of the assessment that we're doing given the higher first half utilization youre right youre going to expect a certain level of increased stop loss.
On that.
That is factoring into the comment that yes, we not only will have.
The traditional.
Recoveries from stop loss.
Third primary fourth quarters.
Now, we would expect that number to be little bit higher than its historically been.
Not providing specific guidance on that but youre right on in thinking and that's part of.
How we're thinking about it too and as we look forward, we're not being.
Taken any of those items.
In advance we are not going to pull those if that information that those recoveries forward, we're going to let them play out as they happen in the back half of the year.
Okay. Thanks, a lot.
Your next question comes from the line of Josh Raskin with Nephron Research. Please go ahead.
Hi, Thanks, I have got a couple so I'll apologize upfront, but just first just on membership how many members do you have left do you expect in the centers that you have left so Nevada, Texas and Florida. That's the first part of the membership question and then how many are core Medicare advantage or reach in Florida.
No.
I would say a majority I'll start with the ACO reach a majority of the members.
Youll reach are in Florida.
That's pretty standard and then from a membership perspective.
When we say there is in total there's about 5000 members in California, New Mexico and Illinois.
That we're exiting.
Okay. So you can figure out the best and then I know we've gone through this before because you've had the issue in prior years, but can you just remind us the process on a recording risk adjusters for MA lives and how you record the revenue seemingly before confirmation from CMS or even your health plan partners are you, giving data to your health plan.
Partner, saying this is what we think the mras and this is what we're going to record or is there. Some confirmation from the plan I'm just I'm curious how this is now the second time you guys not by.
A large amount in this process.
Yes, a majority of the MRA change was due to the final 2022 MRI.
So this is when it comes in as the final and this comes from the Health plan. So it's their final reconciliation.
And then now now given that were mid year in the year you start getting your first insights into the mid year 2023, so the prior year the prior adjustments I referenced was.
Due to the final 2022, which we started that in 2022.
So that's why that got pulled forward from prior year, where the mid year.
Starting with the 2023 numbers.
I guess my question is are you looking at a specific membrane, saying, we think there's two specific risk codes that are going to get tripped or we think it's an incremental $600 per member per month, and that's what we start accruing as revenue all based on internal kanno.
Decisions or are you relying on the health plan to say hey, the totality of that member in terms of other sites of care and prescription drugs and all that sort of stuff and the health plan is giving you that data.
Yes, let me jump in here this is mark so.
Historically I'll put it this way it was a very tedious and manual process and as you can imagine that process can be fraught with all kinds of errors.
The new process is one based upon where we are predicting based upon.
The data submissions, we are correlating and corroborating that information with respect to what is received by the health plan and what is received by CMS and then we are then assigning an overall score to that with a probability predictive analysis to it.
So this is what is now in place is a very automated process where prior to.
It was extremely manual and so as you just alluded to in prior periods and in prior years, that's what causes of the Miss.
Being able to predict that going into next year as we approach planning for 2024, we have a much more reliable process and we've already begun testing that and we back tested it and we have successfully been able to do that for the months of May 2023 and successfully.
For the month of June of 2023. So we are very confident of how we move forward. The issue is that all of this transpired in setting this budget in setting this guidance last year in 2022.
That's perfect that's perfect and then just the last one I want to ask about the specific of the comprehensive process of the sale of the company, but I'm curious about the feedback it sounds like you've made notifications and the market of your change in strategy in some of the exited markets et cetera, and then I guess in southern Florida.
I'm curious the feedback from your largest health plans are they worried about care for their patients and continuity have they started to look for alternatives to delegate their members to other valve.
Value based care.
Companies or are they or is that all part of that in.
Inbound strategic interest in sort of creating a catalyst for you.
Yes.
Awesome thing we have great. This is mark again, we have really.
Solid and sound relationships with our health plan payer partners such that they recognize the extreme value and the way in which we wrap ourselves around our patients and our members adds tremendous value in the market. I think you can even there is even then I think the secretary of health and human services within our Nevada market.
Very recently commending us on the care that we provide and so we are very thankful for that recognition.
We work hand in hand with them, especially during this.
I'd say this concerning time, if you will whereby we are exiting markets.
And and divesting and so we're working through the process, where we are selling in many places.
With the buyer in these areas, but the health plans understand and we signaled with them and have been working hand in hand to ensure that their member are patients. There is no lack no gap and the continuity of care and or the level of care in which they are receiving through this process.
So there hasnt been any concerns there and so we've been working very closely with them.
Alright ill leave it there.
Your next question comes from the line of Andrew Mok with UBS. Please go ahead.
Hi, Thanks for the question can you help us understand these flex card benefits a bit more what's the typical dollar spend.
I remember in the spending patterns associated with these cards and how exactly that the accounting treatment work for them one of the expense on your income statement.
You might take the first part of it yeah. So it's really interesting so it and so each health plan. This is mark again, each health plan administers it a bit differently.
And the dollar amount depending upon the plan is also very different and so we are seeing swings.
We're from $250 per month.
Up to $1000 in a quarter.
And so part of the problem with this as you can imagine was that in 2022.
Most of the health plans that did not put that in the service fund.
And so and then in 2023.
There was a few blips.
And what we would call maybe settled data around about the March timeframe, but when youre looking back historically and margin you'd compared to the prior year or maybe this is a blip don't necessarily know what we're seeing but come may of 2023, not only did you see it fully but it retro it all the way.
Back to January and so that caught us very flat footed as you could imagine because there were several plans who did not offer it in 2022, but albeit it fully at an increased rate in 2023 and that is.
And so that's what caused a lot of that noise. So I'll allow Brian to address the yes.
Just add to that.
Comment.
Are payers use a third party vendor.
To reconcile it on their end and then that comes through in the service funds. So we recognize it as it comes through each month within those service lines, which we received from the payers and as Mark said.
A lot of them.
Catching up their activity in the second quarter of service funds that we received and as a result, that's where we we realized at $18 million, what we're calling prior period development on just these flex cards.
So drove drove the significant impact in the quarter of around $33 million, so pretty substantial.
Got it. So this is a supplemental benefit that's essentially priced by the health plan and their bids, but then you wind up taking the risk on it. So I guess, how do you ensure that something like this is priced correctly in the future.
Yes.
You got it right I think Mark mentioned.
This is part of the negotiations that we're undertaking right now for 2024.
And.
Given our market size.
<unk>, our membership scale in certain geographies.
<unk>.
Now knowing fully.
How these things how these plans benefits are rolling through.
Were negotiating hard and.
A number of these payers won't won't be in our lineup so to speak if theres not changes to the to the alcohol reimbursements are are are they service funds that we receive in 2024.
Yes, Scott I'll add a little more color, we really expected the economics in the filings so that it.
To bear themselves out meaning.
You are providing this benefit and so you would actuarially adjust your benefits to account for that.
We are seeing is it hit our service firm, so it's causing an hour has caused us to.
To re negotiate the economics of our agreement and in some places to terminate some plant.
Got it Okay, and then just wanted to follow up on the Medicare risk adjustment. It sounds like you are pinning the issue on a very manual process previously, but when I hear that it sounds like that it would just take longer to arrive at that MRA estimate, but that doesn't necessarily explain why that estimate with sell off so with an underlying issue.
And the data itself or was it a shortcoming in the manual estimation process.
Yes, I think I would say.
The combination of factors that you would you can refer back to kind of how things work.
There are some operational and I would say then it ties into how does that information flow into making the estimate so.
They are both related to the estimates, but the estimate has to be based on kind of your view of the new information that's coming in and is it up to date is at the latest.
Latest scoring our latest MRA related to the engagement of those members and the charges that are being looked at.
And Thats, where theres been a significant.
Look back as to I'll call. It the root cause analysis on some of that information.
Being corrected.
Going forward.
Got it and does that data flow through the Panorama system.
Yes, so it's all.
It's all data enhancements in the information that is being reviewed and reports that are being looked at to make sure that.
As Mark said, there is unison information flow and communication of activity. So all of the various departments are aware of the activities of the members.
Great. Thank you.
Your next question comes from the line of Parker's <unk> with Raymond James. Please go ahead.
Okay.
Hey, Good afternoon. This is Parker on for John Ransom with Raymond James.
I appreciate some of the detail you gave on the non core markets EBIT die year to date I was just hoping you could give some detail or just an update on the.
Maybe the year to date performance from the kind of core, Florida Medicare advantage assets that you plan to maintain.
I'm, just trying to get a sense of hey, what could this business look like if you guys get on.
On the other end of getting shedding some of these noncore assets that you wish to get rid of.
Yes, I mean, I think the easiest way to just kind of take take the is the markets that we talked about.
That underperformance.
And we've talked in the past about.
The rest of the non Florida markets, which would really be the Texas and Nevada.
And then you also have.
Puerto Rico and DC in there, but if you look at Texas and Nevada, there clearly they are pressured this year.
And that is why we are undergoing the consolidation and that's going to help improve that performance and that asset going forward, but clearly when you look at Florida, Florida is the biggest operating.
Market.
As of disproportion of the pressure that we're seeing in the quarter and year to date.
When you think about looking forward.
Lot of those you kind of take those one timers out you look at the improvement on the cost reduction efforts just on the SG&A, but then you get the enhancements from the.
Operational activities around reducing medical costs.
We believe there is substantial upside.
But just the core Florida market core, Florida, Medicare and ACO reach business and Thats really the.
The long term view and.
The structure that we're putting together around how we want to think of this business going forward in terms of our.
Scale density scale density and position within the market, particularly the high value, Florida market, where we continue to believe that that asset alone.
It's going to be highly profitable as we go into 'twenty four and beyond.
Okay, and if I can just get one more follow up I mean, just going back on the one of the prior question delay OTC flex cards, I mean, what kind of leverage do you have in those negotiations, where youre able to kind of insulate yourself from some of the upstream plan design are you just at the whim of whatever kind of remember you get whatever plans.
Certain plan design that they are in.
Are you able to carve out certain areas in certain kind of sites of care that you made that you don't want to be exposed to an outside of the OTC flex card are there other areas that you would wish to kind of insulate yourself from I know you called out higher pharmacy costs, maybe just talk about kind of your ability and your leverage in those negotiations.
Yeah, I'll start a little bit Mark can add any color.
Hit it fully but I would say the supplemental benefits or.
Are being looked at across the board from the payer side as they go into 2024 in general just given the new the new rating the new rates for 2024. So I think all health plan all payers are pulling back on those broadly.
We are doing is having discussions specifically on the ones that we see predominantly in the south Florida market here as well, where we can influence that and find those payers that are reasonable we understand these pay at the supplemental health benefits are attractive to members and we want to work.
<unk> with the payers to grow membership. So it's there is a.
Our mutual beneficial discussion to be had because they need us to help them grow their membership, but we also need them too.
Ensure that it's a.
I'll call it.
Favorable financial terms as we serve those members so thats kind of how we're looking at the supplemental benefits for particular plans that we're negotiating with.
Alright, thanks, so much.
Your next question comes from the line of Gary Taylor with Cowen. Please go ahead.
Hi, good evening, a couple of questions one.
On the revenue.
That you expect to exit.
Medicaid I guess, we know that Medicaid revenue, assuming thats, mostly in Florida, but California, New Mexico, Illinois, Puerto Rico half of Texas, and Nevada can you give us some sense of.
What the revenue annualized revenue is on that block of business that you will look to exit.
Yes, So, Illinois, Youre talking about Illinois, California, New Mexico year to date, maybe.
$910 million of revenue.
And that's most of that's still fee for service, it's not most of it isn't the capitate together some of it is.
Some of it is yes, it's a small portion of it.
Yes, non risk so.
The Puerto Rico losses, similar as the revenue similar on the revenue there.
Puerto Rico has got.
Pretty decent revenue.
Revenues relative we've been in that market for a while we said about 8000 members.
We're up to $35 $40 million of revenue year to date.
Okay.
And then on the <unk>.
MRI revenues 58, such 40 floors out of period some of Thats 22, some of Thats first quarter of 'twenty three do you have.
You have at hand like what it was for first quarter of 'twenty three if we're just trying to.
Somehow build to like a normalized.
First half of 'twenty three.
I'm trying to I would say the way you think about it is kind of.
$14 million a quarter or so is the way the way.
Normalizes out.
Okay from that perspective.
And the $44 million a prior period expense development negative is that is that truly two ideas in prior year related to 'twenty, two or some of that also related to the first quarter.
Significant majority almost all of it is related to first quarter.
The first quarter okay.
And then last one sorry.
Alright, and your EBITDA I am sorry, yes.
I don't mean to cut you off just wanted to like I said, we talked about 18 of that is <unk>. So that's all first quarter and then the balance of 26 of that 44 and most of that is still first quarter as well.
Okay.
And then last one I saw on the EBITDA add back $62 million reserve for other assets. I'm wondering is that does that writing down that MSP receivable or what is that Oh, yes, yes, yes, okay. I was going to look to see what you're looking at but yes.
Youll see that as a call out of line that we called out.
So thats written down to zero.
Apparently.
That's correct that's correct if you think about.
I think you're very familiar with the MSP, but as we looked at it.
A number of unfavorable developments related to MSP since our last earnings call.
We did a complete review of that and.
We used a third party specialist to review that valuation.
Decided to write that down.
Well.
Okay. Thank you.
Thanks Kara.
Good answer.
Your next question comes from the line of Jessica <unk> with Piper Sandler. Please go ahead.
Hi, Thank you guys for the detail and thanks for the question. So I just I think Brian you suggested that you guys expect about $100 million of total 2023 claims expenses related to the OTC card I just wanted to make sure that we got that.
That correctly and that implies about $500 of expense for every single <unk> Army member.
Is that accurate.
Yes, I think I was I think I said around $84 million is the full year impact.
And it varies it varies by plan I'd have to but some of some plans of 500. Some are $2 50 December $3 50.
So it does so if I take your 100 down 84, youre going to get below 500, probably on average so.
It's a very rich benefit for sure.
Okay got it and then I guess the way I understood. It was $84 million of incremental expense in 2023, but that at $84 million of total <unk>.
<unk> and 'twenty three related to these benefits.
Okay. So yes. So if you are looking for the yes, that's right the incremental was.
That let me just make sure but.
Yes, if you look at the expectations for 2023, yes, youre going to be $33 million a quarter. So yes.
Okay. So the 84 is incremental or in total.
Incremental yes.
Yes for me versus what we thought what we thought in 2022.
The 2022 was about $12 million a quarter now we're up to $33 million a quarter.
Got it very helpful.
Okay great.
So that.
Got it that's pretty helpful. And then just in terms of tomorrow in terms of the MSP recovery.
Is that your primary vendor of stop loss insurance and then I guess just.
Given the write down year to date is there any change in the terms or extended your stop loss coverage in 'twenty three relative to 2022, yes.
Yes, no just to be clear I need to be Super clear. They are nothing to do with our stop loss at all.
They were just third date traditionally handle third party.
Recoveries related to <unk>.
Other types of.
Benefits that you may have if there is an accident, whether its workers' comp or some other benefits it's completely separate from our stop loss.
And so then was that $40 million in 2022 related to medical cost or was that below that.
Gross margin line.
Okay.
I just want to make sure we answered properly what can you refer by Blake.
Sure.
It was just the expense benefit related to MSP and did that hit at the medical claims expense line or was that below the gross profit.
Yes, it was the medical expense line.
Got it and then just last question is what.
What do you what do you attribute the kind of inability to scale in California, and New Mexico, Illinois in Puerto Rico, and just what May still confident that you can consolidate in Nevada, and Texas Joseph need in those markets.
I appreciate the questions.
Yes, Thanks Jess.
I would say, it's not a it's not a <unk>.
Function of we don't believe we can scale in those markets.
A determination as to our I'll call it our financial liquidity position that we don't have the luxury of.
Waiting for those centers in those markets to fully mature.
And we had to make the difficult decision to exit those markets now.
Before they can fully mature so thats the way I would view it and Thats. So now ill get to the second half of your question, which was what do we do in Texas, Nevada, well, all we're doing a tax Nevada is.
Consolidating to enhance the profitability of that market to ramp faster because we do believe.
They are on the right trajectory, we're just going to give them a boost and reduce the cost structure.
Consolidate the membership into the I'll call it the <unk>.
Highest return centers that we have there.
Which will then get more members in those centers and that J curve will significantly ramp.
Got it and thanks again.
Thanks.
Ladies and gentlemen that will conclude today's conference call. We thank you all for joining and you may now disconnect.
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