Q3 2023 agilon Health inc Earnings Call
Hello, everyone and welcome to the ocular health bad quarter 2023 earnings Conference call. My name is Carla and I Hope your operator for today's call.
Today's call will include a Q&A session. If you wish to register a question. Please press star followed by one type of thank you Pat.
Sure. Thank you a question at any point, Please press star followed by Jay.
I will now hand, you over to your Hi, Matthew Gilmore, Vice President of Investor Relations Matthew.
Matthew Please go ahead.
Thanks, operator, good afternoon, and welcome to the call with me is our CEO, Steve <unk> and our CFO, Tim Bensley before we begin wed like to remind you that our remarks and responses to questions may include forward looking statements.
Actual results may differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward looking statements. Additionally, certain financial measures. We will discuss in this call are non-GAAP measures we built.
Leave that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and form 8-K.
Following prepared remarks from Steve and Tim will conduct a Q&A session. During the Q&A session. We would ask everyone to please limit themselves to one question. So we can get through as many questions as possible with that I'll turn things over to Steve.
Thanks, Matt Good evening, and thank you for joining us.
<unk> across our business remains strong and we are making rapid progress against our vision to transform healthcare in 100, plus communities by empowering primary care doctors.
As an indicator of our success. This year, we are on track to reinvest more than $250 million into local primary care based on the high quality cost effective care being delivered by our partners.
These results are enabling our partner groups to expand access to preventative services improve quality outcomes and drive value for the communities they serve.
I want to thank my agile on colleagues and our partners for their trust in each other and their belief and support network that is shaping a better healthcare system for our country.
Before discussing our performance for the quarter.
I wanted to take a few moments to highlight our decision to sell our Hawaii business.
As we have discussed with you Hawaii operates very differently compared to our core partner markets in the Continental U S.
In our core partner markets, we leverage a common operating structure. This operating structure is centered around a long term joint venture with a scaled physician group.
And non delegated multi payer relationships with health plans and CMS.
The key differences in hot Hawaii's operations, namely the lack of a joint venture partnership with a large physician group.
Much smaller senior patient physician panel size.
And Hawaii is delegated MSL infrastructure made our Hawaii business increasingly less strategic to agile one and created a drag on our financial results.
We are pleased to transition mdx, Hawaii to a new owner that is better positioned to invest into the business and optimize its delegated infrastructure, which should benefit patients and the community at large.
The sale of Hawaii will enhance our ability to focus even more specifically on our partner market.
At a point in time, when we are driving increasing success across our pcp's entire senior panel.
This quarter and going forward.
You'll hear us consistently highlight the power and importance of our integrated senior business across Medicare advantage and the traditional Medicare populations.
Our ability to generate successful outcomes for patients <unk> and the system in a multi payer full risk model is increasingly unique our focus on this opportunity will pay dividends in the years to come.
Turning now to the quarter partner market performance was again extremely strong across both MAA and ACO reach all of our key financial metrics were generally in line or above our guidance ranges, especially on an underlying basis.
Our results continue to demonstrate the unique power of our model to inflect profitability, while driving significant growth.
During the quarter, our total membership on the platform increased 43% to 508000 members and revenues increased 75% to $1 2 billion.
This was above our guidance and was supported by the successful onboarding of new PCP and faster pull through of members, particularly in new markets.
Adjusted for the sale of Mdx, Hawaii, our partner market growth was even stronger with total membership up 49% and revenue up 85%.
Even with our faster membership growth adjusted EBITDA continues to inflect higher increasing more than $20 million year over year to a loss of $6 million for the quarter.
This was in line with our outlook and supported by strong medical margin gains in our partner markets across EMEA and reach adjusted for Hawaii, Our partner market EBITDA was positive $6 million for the quarter well above our outlook and it was even stronger on an underlying basis as our results included some.
Net negative development from 2022.
Our combined medical margin across MA partner markets and reach was strong in the quarter with MA generating $111 million and reach generating $55 million. These results demonstrate the power of our PCP focusing on the most complex patients across their entire.
Senior panel with differentiated information and care team resources.
As an example, our year to plus partner markets in MAA and reach both generated over $130 per member per month in medical margins year to date.
Think about the value delivery to our PCB partners and the health system. When we generate this magnitude of savings across an average panel size of 400 to 500 senior patients.
From a guidance perspective, we have raised our membership revenue and adjusted EBITDA outlook for 2023. This was supported by the growth and margin progression in our MA partner markets, including reach and the sale of Mdx Hawaii.
We also plan to maintain a more conservative reserving approach as we exit 2023, and this is intentionally reflected in our medical margin outlook for MAA and will support our future performance in 2024.
Our ability to execute against our adjusted EBITDA targets during 2023.
And enhance our visibility to 2024 continues to reflect the strength and durability of our model is.
As I have discussed with you previously the key differences in our model are driving differentiated clinical and financial performance.
Unlike the traditional fee for service system, which predominates across healthcare all patients in our model have a fully aligned or attributed relationship with their primary care Doctor.
And through <unk> platform, our PCP partners have the data and resources to proactively impact patient care.
This translates into specific differences in the way health care is utilized and managed and this shows up in our business in very tangible ways.
For example, we continue to have outstanding results in the standardized star ratings measures for 2024 stars the percentage of our membership in four plus star plans will increase modestly to approximately 84%.
However, as most of you know planned level Star ratings also include the performance of non agile one providers for our year to plus partners agile on specific performance is four three stars and increased nicely year over year. This was despite more stringent cut points and relatively.
Flat star ratings industry wide.
We continue to excel in areas like preventative cancer screenings diabetes control and medication adherence our quality results will drive meaningful value to our patients and the healthcare system in the years ahead.
And because of our high member retention <unk> and our physician partners will share in this value over the long term.
Additionally, our ability to drive differentiated cost performance was clearly evident in the recently released ACO reach results for 2022.
This data allows agila to compare our performance against the unmanaged fee for service system as.
As well as other value based care models during 2022, our reach Acos drove nearly 10% savings relative to the Medicare benchmark. This was more than two five times better than the program average and our results included more than 90000 beneficiaries in diverse markets.
<unk> also returned nearly $30 million in guaranteed savings to the Medicare Trust fund last year.
As you can see from our reach results. This quarter are differentiated cost performance has carried into 2023.
Looking forward, we believe our leadership position as the platform and network moving physicians to full risk has grown considerably.
This is a function of the magnitude of savings we are generating across the entire senior panel of a primary care doctor.
Our timing is also important.
His primary care physicians and the broader system increasingly need a scalable solution for multi payer full risk.
This dynamic is driving the ongoing inflection we're seeing from a demand perspective, among both physician groups and health systems.
For the class of 2024, New partners. We now expect 25000, new ACO reach members and we are increasing our expectation from 100 to 110000, New MA members.
At this point in the year, we are nearly complete with our payer contracting cycle, which gives us better visibility into the membership pull through.
We also now have a clear line of sight to a very strong class of 2025 with multiple new partners signed including independent groups and health systems.
Implementation for this class has already begun which should bode well for future performance.
Before turning the call over to Tim I wanted to offer a few comments on 2024.
We remain highly confident in the trajectory of our adjusted EBITDA inflection and expect to share an initial view in early January.
As we have discussed previously we operate in a very forward looking model and our visibility into the key drivers for next year's performance are quite high.
First we have a large and growing class of 2024, new partners with an attractive margin profile that should be meaningfully accretive to adjusted EBITDA.
This is a function of a longer implementation cycle for this class and targeted investments we have made around technology and centralizing key processes.
Next the combined strength of our 2023 run rate margins across our integrated senior business will have key positive implications for 2024.
First our reach performance will carry forward driven by our ability to maintain the cost differential compared to the benchmark.
And second the reserve actions, we have taken in Medicare advantage should reduce the risk of negative claims development next year.
Finally, we remain very confident in our ability to manage the new risk adjustment model starting in 2024, the impact agile on from the <unk> 28 model change is relatively modest and given the limited maturity of our partner markets at senior membership our ability to mitigate this impact is very <unk>.
With that let me turn things over to Tim. Thanks.
Thanks, Steve and good evening, everyone I'll now review highlights from our third quarter results and our updated outlook for 2023.
Starting with our membership for the third quarter total members live on the agile platform increased to approximately 508000, including both Medicare advantage and ACO reach our consolidated Medicare advantage membership increased 58% to 420000 driven.
Driven by the addition of new partner geographies and 9% growth with our same geographies adjusted.
Adjusted for Hawaii, and MA membership in our core partner markets grew 69% to 384000, and our same geography growth was 12%.
Reported revenues increased 75% on a year over year basis to $1 $2 billion during the third quarter year to date revenues increased 73% to $3 5 billion.
Revenue growth was primarily driven by membership gains in new and existing geographies on a per member per month basis, or <unk> third quarter revenue increased 11%.
This was primarily driven by benchmark updates and membership mix, including higher benchmarks in several new markets adjust.
Adjusted for Hawaii revenues increased 85% to $1 $1 billion and revenue <unk> increased 10% during the third quarter.
For MA business medical margin on a reported basis increased 42% year over year to $108 million during the third quarter year to date medical margin increased 67% to $408 million.
While this was below our outlook for the quarter. The difference was primarily driven by performance in Hawaii.
Just for Hawaii medical margins increased 46% year over year to $111 million for the third quarter and was in line with our expectation even with approximately $6 million of net negative development.
On a per member per month basis medical margins across our core partner markets increased by 4% year to date to $119 driven by the maturation of markets and remember cohorts.
For our year to plus partner markets medical margin <unk> increased 17% to $134 on a year to date basis.
Medical MA medical margins for the quarter included a net $8 million of negative development, including $9 million in prior year claims offset by $1 million in prior year revenue $2 million of the net development was attributed to Hawaii and the remaining $6 million was attributed to our core partner markets the negative claims.
Development. This quarter was almost entirely isolated to system issues with a single payer related to supplemental benefit costs. As we discussed last quarter, we are making focused investments to improve our visibility into data gaps with payors.
Excluding the year to date development, Emma medical margins would've been approximately $125 <unk> and our partner markets and $143 <unk> and our year to plus partner markets. We think this is an important metric as it better reflects the year to date run rate performance of our MA business in light of the sale of Mdx Hawaii.
And the actions we have taken to minimize the risk of negative development in 2024.
For ACO reach business, we continue to be very encouraged with the performance, which again outperformed our guidance. This quarter reached generated $55 million of medical margin in the quarter and $117 million year to date, which is a two fold increase from last year. Additionally.
Additionally, on a per member per month basis reached profitability. This year is roughly comparable to the year two plus in may partner markets.
This level of performance is encouraging and underscores the power of our multi payer full risk platform.
While reach does not consolidated in our financial results. We do think it is relevant to think about our medical margin performance on a combined basis across our MA partner markets and reach.
This is because our combined EMEA and reach performance is what drives our key profitability metric adjusted EBITDA.
For 2023, our combined medical margins for MA partners and reach are consistent with our original guidance expectations as Steve mentioned this sets a strong foundation for performance in 2024.
Our adjusted EBITDA on a reported basis was negative $6 million in the quarter compared to negative $26 million last year on a year to date basis, adjusted EBITDA was positive $28 million compared to negative $20 million last year.
As a reminder, adjusted EBITDA includes geography entry costs, primarily associated with new partners that will generate revenue in 2024.
The year over year gain in adjusted EBITDA reflects the increase to our medical margins of growth across both MAA and reach as well as platform support leverage partially offset by performance in Hawaii and the net negative development, excluding Hawaii, our adjusted EBITDA would have been positive $6 million for the quarter and $42 million on a year.
Year to date basis.
From a utilization standpoint composite utilization across MAA and reach was generally in line with expectations for MA. We did observe an increase in utilization during may and early June which resulted in some in period development that we recognized during the third quarter.
This was contemplated in our guidance and trends moderated back towards normalized levels. During the third quarter for reach utilization during the first half of 2023 developed favorably relative to our expectation as a reminder, our results and reach better reflect our real time performance against the unmanaged fee for service system because of how the benchmark Mccann.
Next work.
Turning now to our outlook for full year 2023. Please note that our updated guidance excludes mdx, Hawaii for the full year, we have raised and narrowed our adjusted EBITDA outlook to a range of $16 million to $18 million from our prior range of zero to $23 million. We have also updated our membership and revenue outlook, which are.
Both higher on an underlying basis, excluding mdx Hawaii.
From a medical margin perspective, our revised outlook is $455 million to $470 million and is approximately $50 million lower than our prior range. This reflects two factors first the removal of Hawaii represents about $20 million of this change second one of our primary goals is to exit 2023 with.
<unk> conservative reserving posture and MAA in light of this we continue to proactively refine our model to account for utilization trends as well as any potential blind spots with health plans. We have assumed utilization will not moderate any further from recent levels, which accounts for $30 million of the change to our MA medical margins. We think this is a prudent approach.
And as a form by our decision to maintain a more conservative reserving posture. We are pleased to make these decisions, which provide a strong foundation for future performance, while still modestly raising our adjusted EBITDA guidance full details on our fourth quarter and full year guidance can be found in the earnings press release with that let me turn the call back to Steve for some brief.
Closing comments, yes, thanks, Tim before opening up the lines I want to emphasize three key points first the sale of our Hawaii business enhances our ability to focus even more specifically on our differentiated core partner business and positions us for continued success in 'twenty four and beyond.
Second our leadership position as the platform and network moving physicians to full risk has grown considerably and you can see it in the clinical and financial results, we are driving and and the accelerating demand from physicians and independent groups and health systems and third with access to better data <unk>.
Forces and incentives are primary care doctors are actively managing the way healthcare is utilized across their entire senior panel, which is yielding meaningfully better outcomes for doctors patients and Adam with that we are now ready to take your questions.
Thank you if you'd like to ask a question today you may do so.
Are they buy one tenant thank you Pat.
Your question. Please ensure your supply.
Okay.
Your question Please press star.
We will now take our first question comes from Lisa Gill from J P. Morgan.
Your line is now open. Please go ahead.
Hi, Thanks, very much and congratulations on the sale of Hawaii, Although I was looking forward to doing.
Our site tour, Steve So I guess that's off the table.
Please.
Wanted to just follow up on the medical cost side too.
Can you talked about system issue with a single payer data gaps with that payer if I remember last quarter, you also talked about increasing reserves to try to.
Account for some of this going into the back half of the year and then we thought that the prior period development here in this quarter can you just talk about where you are on that data gap. The systems issue do you feel like that's one fully behind you and then secondly.
When talking about utilization you said in line you saw a little bit of a bump in may and June.
We saw with some of the Medicare advantage players in the most recent quarter is that.
In the quarter, they they actually saw higher costs and we're projecting even beyond may and June.
I wanted to largest players talked about some COVID-19 hospitalizations that they saw towards the end of the September quarter. So just wanted to really understand.
But you saw what your expectations were and if you have anything on the COVID-19 side or if you've seen anything on the COVID-19 side.
So Lisa I'll start and Tim can chime in.
Think I'll start with the raised EBITDA guide on the year because of the strong overall performance across M&A and reach across nearly 500000 senior patients and that really sets a strong foundation for for 'twenty four from a utilization perspective composite.
<unk> was in line with our overall expectations as Kevin kind of outlined we did see a step up in Q2 utilization in MAA and reach.
The MAA was within our guide reach actually developed favorably relative to sort of what our expectation was around that intra period in Q3, we've seen.
A deceleration in our guide makes an assumption on utilization that will be flat through.
Through the end of the year and Thats reflected in the.
The reserve posture that Tim talked about in terms of an extra $30 million, but Tim you want to talk about yet Lisa just a couple of things specifically to your question first of all on the prior period development I think we have made a lot of progress this year and partnering with.
With the payers out there to try to close some of these gaps.
Essentially some of these information issues are caused by just the complexity of our model and Thats also it's also a feature of the model right. We've got over 30 payers over 100 payer contract combinations in our markets, but having said that I think we've made good progress the issue in this quarter was.
Barry a very specific issue with just one payer hopefully that was a lingering issue that we've now figured out where the gap was and should be okay with that going forward.
In terms of the utilization trend.
Remember last quarter, when we talked about this we said hey, we haven't seen the spike up yet we didn't have enough information from may or June two to really to really see what some of the payers. We are referring to we did want to make sure that we had cover the possibility that there would be some higher utilization and our guidance going forward as it turned out as we just reported we did see some increase.
Utilization EMEA, although it was greatly started to moderate in June and as we've seen so far continued to moderate in early in early Q3 as well.
I'm not completely surprised by that compared to some of the comments that are made from some of the big payers I mean, I think our model and even some of them have said should be performing better than the average out there. So the.
The fact that we saw a spike up in some moderation down is probably just a factor also of the strength of our model on Covid specifically.
We're actually seeing.
If you go back to last year, which is might want to think about that is the first really sort of post big Covid year, we did actually see some seasonality with COVID-19 starting to spike up last year and kind of the August and September time frame in terms of utilization. We did see some of that again this year, although actually lower spike up in Covid this year than even what we saw last year and the overall.
The magnitude of the hospitalization from Covid in terms of a spike up versus the baseline is not really.
Material and not causing any material change in our medical margin performance of our medical margin outlook.
Great. Thank you.
Thanks Lisa.
Yeah.
Yeah.
Thank you Lisa we will now take our next question from Justin Lake from Wolfe Research Justin Your line is now open. Please go ahead.
Thanks appreciate the time I wanted to start off I've got a couple of questions, but wanted to start off on the recent performance. So you said it was $55 million of medical margin give or take care of your medical margin in the quarter.
Expected to be in the original guide.
Yes, Justin just real quick before we can obviously talk a lot about the performance of reach was really positive continue to be really positive in the quarter as it had kind of a year to date, so far but the $55 million of medical margin that we've talked about <unk> is not part of our consolidated results. So the $108 million of medical margin that we run.
Which does include Hawaii. In addition to that if you look at the footnotes showing the unconsolidated ACO reach entities, we had $55 million there.
And about $18 million of EBITDAR flow through from the line.
Yes.
Apologize if.
If I can do is correct alright.
Yes, if I could just add to that Justin I mean, I think we're driving really strong medical margin performance across the entire.
Physician panel across both reach and MAA and so the $55 million that Tim talked about is driven by beating that national benchmark by more than 300 basis points.
In my remarks, I talked about the 22 results youre seeing that in 'twenty three but the same things that are driving success and reach are driving success in the MAA and our partner market medical margins came in at $111 million in MMA, which is sort of in our guide and when you adjust for that PPD, It's actually at the high end of our guide and I.
It's just a function of this model that we've got around high touch and our ability to drive better access cost and quality outcomes.
That's what I would highlight the ACO reach population has been more traditionally an unmanaged population. So there is a big opportunity for US there were tended to be even as we move through this year. We have very good current data from CMS on our on our members and we tended to be a little bit conservative. So we actually saw.
Even positive development as we moved into Q3, we had guided about a $12 million EBITDA flow through.
For ACO reach we ended up with some positive development flowing through from the previous quarter $18 million.
Overall.
So far during the year.
The way you make money on ACO reach is the way you perform well on ACO reaches essentially you just outperformed the Medicare fee for service referenced population on cost performance and we are outperforming that on a year to date basis by over 300 basis points. So the model really is starting to prove to be very valuable on the on the ACO side.
And then just on what was your real question sorry.
Well the other question I was going to ask on ACO rates and again I could be it's been a long couple of days I might be off again, but my recollection of the Investor day.
You guys actually kind of titrated lower your expectations for ACO, Richard I think I was looking at it you would expect that I think of 2026.
Am I, recalling the number right $35 million.
Alright, I'll portability.
Okay. So.
It sounded like you had kind of gotten more.
Conservative or.
Some.
Thought process there unlike here.
Let's take that number down a bit but.
Six months later, you are running at that run rate already looks like is that a number that you think we should be we should be looking at differently then.
From the about per day.
Are you thinking about that business.
Yes, absolutely I mean are emphasizing the power across the entire senior panel is hopefully one of the big takeaways that youre going to have the way the mechanics and the ACO reach model work is you carry forward your performance and you need to beat that that underlying benchmark, which we would expect we're going to do again next year.
And so I think we feel like we're going to have much stronger performance going forward, we've already seen it. This this year to date.
We have much more valuable and readily available and consistent information, which is giving us high confidence in that.
Got it alright, I'll jump back in the queue. Thanks, guys.
Thanks.
Thank you Jeff that we will now take our next question from Stephen Baxter from Wells Fargo.
Your line is now open. Please go ahead.
Yes, hi, thanks.
Wanted to try to clarify the discussion a little bit on the revision for the medical margin guidance. So I think.
Following you that youre, saying, a $20 million of the lower $50 to $55 million revision on medical margins related to pull in Hawaii. So I guess that leaves you know call. It the 30 for the continuing partner market.
Just trying to understand kind of the 30 in the context of the quarter. You just had it does look like including I guess on the strip out the Hawaii results out of the quarter. It doesn't really look like you were kind of off your medical margin guidance that you provided for the third quarter. So just trying to understand why why you'd have $30 million lower medical margin on a core basis in the quarter.
<unk> was relatively in line X, Hawaii kind of implies that it's primarily related to the fourth quarter, just trying to correct my understanding of that hopefully that makes sense.
Sure Stephen Thanks for the question I mean, I think a key goal for us was too.
Raise and be adjusted EBITDA in the year, we were able to do that based on the strong performance of costs reach.
And across MMA to your point in those partner markets. They were very strong. The second goal was to really put ourselves in a position from a reserving standpoint, and which we could significantly mitigate the chance of any negative development in into 2024, and so I think that coupled with this.
Utilization outlook, which we think is prudent that the deceleration we're seeing in Q3 will not necessarily continue thats, what puts that $30 million on top of the $20 million you can take out for a Hawaii. So that's really the logic around it yet.
Yes, I think Thats right I mean, we as we closed Q3, if you put the prior period development Aside and you take the Hawaii, which was did performed below our expectations for the quarter out of it our overall medical margin pm TM.
Did perform well.
Well within the range that we had that we had guided to so we were very happy with that on.
On the other hand, it was a combination of higher revenue as we synced up our final yoga, while the mid years in and synced up our final.
Our the next round of our rough estimates for the year as well as some higher medical expenses that flowed through from that May and early June spike that we saw so we just looked at the rest of the year and said Hey, if we just assume that there's not really any further moderation and we want to continue to make sure that we minimize the possibility of any prior period development bleeding over into 'twenty.
24, Thats, an additional $30 million of just medical expense versus what we had in our previous guidance.
And we were able to do all of that would be.
In addition, with the strength of the ACO reach business.
And the other actions that we just identified.
We're on top of that and.
In a position to essentially slightly increase our overall adjusted EBITDA guidance for the year.
Thank you alright, thanks Steven.
So my question.
Hi, Thank you we will now take our next question from Gary Taylor from Cowen Gary. Your line is now open. Please go ahead.
Thanks, I had a couple of questions. The first one just on Hawaii why was that.
I'm talking at the EBITDA line, if I wrote it down correctly.
But why was that and 11.
Drag.
In the third quarter when I think in the first half it was only a $2 5 million dollar drag like and all those sort of metrics on Hawaii got quite a bit worse in the third quarter.
Yes, I mean generally speaking as we move through the year there is a seasonal.
Seasonally our medical margin does dropdown in Hawaii, and particularly that drive some pretty big deleverage because it is a.
Because of the delegated model, we have a higher cost basis, there and so in the third quarter.
Without any acceleration of medical margin you would see.
Bigger and bigger drag on EBITDA as we move through and your math is correct.
The absolute drag of Hawaii in the quarter. It was about $12 million of the EBITDA line.
Got it so its normal seasonality.
The second one was I guess.
Im kind of probably not the only ones struggling a little bit with.
The negative QAD that keeps showing up.
Also that you've been building.
Reserves.
But net net how do we how do we think about carrying into the day. The <unk> says the prior the prior year's cohort medical margin wasn't as good as you originally thought the boosting of reserves says this year medical margin.
Will it be.
Hi.
How do we think about carrying that in over the next couple of years like how does this development reserve building.
Impact how youre thinking about modeling.
The cohorts.
Medical margin development.
I can start Tim you can jump in I mean, Gary I think the thought process is we've been building this year to remove the issue for next year and so this year, we have the impact of the negative PPD in our results. We also have the impact.
<unk> of.
The build which is there to try and put us in a position where we don't have it going forward for next year. So I think you step off with a very strong run rate across reach and an MAA I think we have a plan to not have PPD recurring which we've had in the last couple of years, so that that should really help as we as we do that.
And then we have a really strong class coming in to our 24 that we just told you is larger than we had previously told you and the performance of that last we expect to be at the very high end of our typical margin range and so all of those things I think as you look towards 24.
Are real positives for us and Thats been our goal our goal has been to deliver on the EBITDA for this year and to try and take this issue around negative PPD off the table and we've had the ability to do that because of the strong performance.
Okay.
Thank you Gary we will now take our next question from Garen. This Yang from Jefferies Securities.
Karen Your line is now open. Please go ahead.
Okay. Thank you and thanks for taking my questions. One quick clarification, if you're willing to share who was the buyer for OIS. It wasn't a related party and then my main question is on the topic of utilization trends.
We had a partners humana talked about recently about having higher MLR from their book of business, which I believe is like almost more than half of your membership curious what the USDA in terms of utilizing trends among PPO members versus HMO members and one more kind of same topic like some payers have talked about all things.
Cause an OTC benefits as they view this as an advantage next year, how have been your discussion with them about getting reimbursed for the pressure that you are effectively taking on for them.
So that's three questions in one.
So the buyer is an experienced California based organization Thats really strong in delegated model services, So really strong and claims very strong in customer service and we think they are a great match with Mdx, Hawaii. So so that's the first point in terms of our PPO XP.
<unk>, we've talked about this before we are probably the largest risk based player in terms of PPO in the country. Our PPO business is just over 50% of our membership. It's also the fastest growing component in our PPO business is performance is in line with our.
Our HMO business and I think the reason for that is the differences in our model.
Large payer with a broad network versus our high touch PCB patient model, which has the ability to guide that that patient on where theyre going to go for specialty care at our Investor day, we shared over 90% of specialty referrals come through that primary care physician even in a PPA.
Model that is allowing us to really deliver cost effective care.
And so our PPO experience is very strong and then just on the I think your question is on the flex card side, our conversations with folks is that on an aggregate basis, we're probably seeing a reduction in those year over year in terms of the total dollars across our population that will be will be out on those.
Thank you.
Thank you Jan Linda Our next question comes from George Hill from Deutsche Bank. Your line is now open. Please go ahead.
Good evening, guys and thanks for taking the question might be is actually pretty similar to your lenders that I wanted to ask a higher level than I know, they're kind of going into the back half of the year. We were looking at a lot of the Medicare advantage empty <unk> to <unk>.
Ratchet back on benefit design, given the kind of the pro rate environment for 2000 and for the changes to the risk model, but it looks like most of them preserved benefits.
<unk> kind of a tough rate environment I was wondering if you could.
Communicated that the negative rate environment would flow through to the risk bearing providers. So I guess, maybe just walk us through at a high level. How you guys are thinking about what looks like a preservation of benefits in what looks like a tougher revenue environment and just kind of how youre thinking about that with respect to medical margin EBITDA margin.
Yes, so I mean, George I think our outlook on 24 is strong for the reasons I talked about strong run rate strong class coming in for 'twenty for being able to manage that new risk adjustment model very well I think our view on aggregate supplemental.
<unk> is that there will be a net pull back on those.
For the for the markets that we're in it's a market by market basis, we don't have a lot of D. SNP.
In our markets and so that's kind of the view and so that that would be neutral to a net tailwind, meaning the supplemental benefit experience from 'twenty three 'twenty four.
But the big drivers are really the step off in the run rate the strong class of 24, and then just our ability to.
Drive kind of medical margin maturation year over year.
George I would add one thing I think when you look at our geographic exposures relative to some of the companies you are referring to we've got a very different geographic exposure in a very different pace.
Patient population that we serve in it.
That's what really drives our our view that the changes that you talked about are very manageable.
<unk>.
Okay I appreciate the color. Thank you.
Thank you George our next question comes from Wang from Leerink partners.
Your line is now open. Please go ahead.
Yes, I've got just two really quick ones, but Steve.
You've talked about the investments you guys are making the fixes blind spots on trend is there any update or anything you can share that gives you confidence that youre seeing some of these gaps begin to.
B improved here and I just wanted to be clear I'm, a little confused here on the guidance here, but I think it was last quarter you guided to a $30 million increase in the reserves within that third quarter range and so are you, saying there is another $30 million now on top of the previously contemplated 30.
Sorry, I'm just think some of us are a little confused.
Yes, so maybe we can start with the guidance I think last time, we talked about a total of $60 million.
In Q3, and what we are saying is there is another 30 in Q4, so that is the.
The combination of those two I think it's and we're able to do that because of the strong overall performance across.
In terms of the investments that we're making I do think we're making progress with our payer partners on the data submission I think it.
It's really in terms of getting that information from there where we're getting it in a faster way, but the other thing I would tell you is that our reach real time data tells us that we're we're tracking pretty well with that and that we're able to manage things within kind of the range that we expected inpatient continues to be down outpace.
<unk> is up.
But we will take that trade kind of all day long and thats true across MAA and across reach but those investments. We've made in the new data officer. We brought in is making us better for that and we are building reserves. So that we make sure we're adequately reserved if development does come through.
Sorry can I ask just one im sorry Im confused on this point. So does the guidance is it 60 total or is it 90 now.
Yes, so when we came when we came through the second quarter and said Hey, we're going to basically increase our outlook for reserves because we didn't feel like we had clear visibility to some of the increases in utilization that the big payers, we're putting out there. So now we've actually seen that we did see that spike up in may have moderated a lot in June came.
Back down continue to come down in July. So we've now accounted for that and that was part of our increase on a rate basis of $60 million of medical expense that we had forecast are that we had guided through coming out of the second quarter.
And we've accounted for that call now in the in the third quarter results that we just published as we look forward now to the fourth quarter, we have assume that even though the spike in may clearly has moderated down some that we're not going to we're not going to forecast that it's going to moderate any further our guidance doesn't anticipate it's going to moderate any further.
And that would essentially represent an additional $30 million that we put into our.
Medical margin, our medical expense forecast for the second half and is the second reason why our medical margin forecast for MAA has come down so it's an additional $30 million.
Makes this assumption that we don't see any further moderate moderation in claims and puts us we believe in a strong position to now.
Minimize the possibility that there'll be negative development bleeding through in 2023, and we're able to do that at the same time, maintaining and actually slightly raising the midpoint of our overall EBITDA guidance for the year.
Okay. Thanks for the clarification.
Thank you.
We will now take our next question from Adam Ross from Bank of America.
Adam Your line is now open. Please go ahead.
Hey, I've a quick one on cash flow and it seems like adjusted EBITDA is up $50 million year to date year over year.
But cash flow from operations is actually down it looks like.
Working capital usage doubled year over year.
I'm just wondering what's driving that if it's a timing thing if we should expect.
Step up in Q4, and just generally how we should think about EBITDA flow through into cash flow, yes, Adam. Thanks for the question I mean, it's always a timing thing with cash flow our cash flow. When you think about what our final payments on our big payments come in from payers win years are settled up in our surplus is settled up.
Typically do have a lag of when EBITDA is generated versus when we actually see the cash for that so.
The fact that we have a large number of new payers and a large number of new markets. This year.
I think something like 34% of our members are actually from this year are on the M&A side are actually from new from our new markets that just <unk>.
Exacerbate that delay essentially so the.
We always say that the EBITDA that we're generating this year, we would primarily see transitioning into improved cash flow in the in the next year or so.
A little bit in the third quarter. We also have just with the sheer number of new pairs of new markets we have.
A little bit of a timing issue, even when we would normally get some of that settled up and so we've got maybe a little bit less cash payments that came in in Q3 that will come in through the rest of the year, but.
Yes, we always do have a.
Timing disconnect between the EBITDA, we're generating and the cash that we receive for that for that performance.
Okay.
Okay.
Thank you Adam our next question comes from Jamie Katz from Goldman Sachs. Jamie. Your line is now open. Please go ahead.
Hey, Thanks, good afternoon.
First one quick clarification on the $60 million medical margin reduction.
Year to date, how much of that is from changes in utilization patterns that you've seen and how much of that is from Intel.
Installation from future prior period development and then my second question just on membership for next year that 25000 from ACO region.
10000 from M&A you guys have previously said in a higher starting point on medical margin per member per month next year, I think you've given above 60 for that on the M&A side, how should we think about that in light of what you're seeing utilization.
The new reserving policies and similar question on ACO reach just inked to 300 basis point Delta versus the benchmark can hold next year.
Okay.
So maybe I'll take the second one first of all the needed. So I think that we think we're going to be really strong with this class of 2000 and for next year and above that $60 <unk> range.
And our implementation has gone extremely well around that it's part of our investments in technology, it's part of a faster sales cycles, so theres a longer implementation period.
So thats on the MA side on the reach side, we believe our performance is going to carry forward for us it's always in relation to sort of that net the macro.
<unk> utilization across the entire Medicare book overall, but every year, we have been positive relative to that anywhere from 100 to 300 plus basis points. So I think we would <unk>.
Expect for all the reasons, we talked about earlier that that would continue for us on a go forward basis, Yes, just a follow on and then back to the beginning of the question on just to follow up on the question I mean, one of the things that we've talked about it of course reached the revenue benchmark, what we're going to get paid basically moderate within the year based on utilization so.
As long as we continue to do a good job, which we have been doing of outperforming the Medicare fee for service benchmark performance. Then we will continue to drive really good performance on our region as I said this year you were outperforming.
That fee for service population with our with our population by over 300 basis points. So our model is really having a very positive impact you can really see the power of the model on that was previously largely unmanaged population.
In terms of the.
The guidance that we put out for medical expense in the fourth quarter.
We basically just to reiterate what I said before look at it and said hey, let's kind of take a viewpoint that.
The spike up in May that moderated down somewhat in July somewhat in June and July is not going to moderate down further and based on that we're putting a full another $30 million into our medical expense forecast and therefore.
Medical margin forecast for the fourth quarter.
We think that that.
Puts us in a good position to meet one of our key objectives, which is let's be.
Appropriately reserved to not have any prior period development bleed over into 2024, So I don't really want to divide it into categories as much as I say, we've looked at the expense trend and tried to be appropriately conservative to try to make sure that we're preventing or at least minimizing the possibility of that happening again next year.
Okay.
Ladies and gentlemen, we will now take our next question from Elizabeth Anderson Evercore ISI.
Your line is now open. Please go ahead.
Hi, guys. Thanks, so much for the question. This evening one I was hoping you could speak sort of qualitatively on I know you've talked about how youre doing like additional reserving and.
Et cetera to help sort of manage the utilization as we go into 2020 I think you also mentioned in your prepared remarks that you're also making some qualitative changes on that and I was just wondering how you're sort of thinking about that in terms of the claim management and then secondarily I was just wondering if you could comment a little bit further on the change in trajectory of geographic entry costs.
And how that has sort of trended versus your initial expectations given the large size of the class. Thank you.
So I think Elizabeth on your first one Tim walked through the math.
The reserves.
I think maybe what you're speaking to is we have added a SVP of data solutions.
And we are working much more closely with payer partners to make sure that we're getting data in.
A consistent and more modern ready fashion around that so so we're making progress on that do you want to talk about Geo in Chicago and I was just going to say to add to that I wasn't quite sorry, Elizabeth I wasn't quite sure what the premise of the first question, but if it's along those lines. The other thing I would say is on.
Prior period development is obviously, we did have some key partner Markit prior period development in this quarter that we just reported but the good news is I think we have made a lot of progress across our broad payer platform with improving the quality and the timeliness of information we're getting from them.
And if there's a silver lining in this quarter it was really a very.
Specific limited issue with one payer so hopefully the investments we're making there the investments in more expertise that we brought in is going to really pay some dividends going forward. So we're feeling we're feeling better about that among geographic entry costs were a little bit better in the quarter than what we had forecast.
Trying to make sure that we're.
Since that's a new way that we're essentially reporting our adjusted EBITDA. This year that were a little bit conservative in that number, but we were a little bit better, but I think overall going forward are all in geographic entry cost, we still expect to be in the 400 to $600 range per new member that we're implementing for the.
The next year. So I don't think we're going to see a lot of movement and we'll probably continue to stay within that range.
Thanks, so much.
Thank you Elizabeth our next question comes from Sean Dodge from RBC capital markets.
John Your line is now open. Please go ahead.
Hey, Good afternoon. This is Thomas Keller one for Sean Thanks for taking the question.
Just one on the higher acuity clinical programs.
With these capabilities already fully implemented across your the.
The older cohorts 2018 2019.
I guess during 'twenty two.
And so I guess, what I'm looking to understand kind of your latest thoughts on the upside from the rollout of these capabilities for.
For those cohorts that are already generating medical margin <unk> kind of north of 200.
Yes. Thanks for the question I mean, I think one of the distinctive parts of our model is that we've got these programs around renal around palliative around high risk management that are part of the care team around that PCP, we get much better enrollment rates and much better impact that's how we're able to drive things.
Negative inpatient trends.
To date, we're about.
60% implemented across all of our markets. Our earliest markets do have those rolled out by the end of 'twenty four we will have them across all markets, including the 24 markets. So I think we do believe that there is upside from these clinical programs as we get them more fully rolled out.
Okay. Thanks, I appreciate that.
Thank you John our next question is from John <unk> from Guggenheim.
Your line is now open. Please go ahead.
Hey, guys. Thanks for taking my question just wanted to follow up to the cash flow question from earlier and just given the moving pieces. This year is to help Hawaii larger than normal new class for next year.
The incremental reserves.
Thanks.
Reasonable to expect.
Free cash flow positive next year or is that maybe more realistic for 25 timeline.
Yes, we're still in.
One of the things I said before is we had a very big class come in this year actually that class is performing really well I think that 2020 'twenty 'twenty four is going to be even a stronger performing class, but we're really pleased with the large class we brought in this year and where they're performing.
As all of the incremental EBITDA that we're generating this year kind of flows into next year, that's going to be a big supporter of our ability to generate positive free cash flow. This year. So for now we're still on track to do that obviously, we'll keep you updated as things move through next year, but.
At this point, we're still feeling pretty good about next year being.
And of a transition year into positive free cash flow.
Excellent that's all for me thank you.
Thank you Jack we have no further.
A question and with that I'll hand back.
Steve Steve final remarks.
Thank you everyone. We appreciate your interest in our company and we look forward to updating you on future calls. So we will talk to you soon.
This concludes today's call. Thank you for your participation you may now disconnect your lines.