Q3 2023 Cano Health Inc Earnings Call

Good afternoon, and welcome to <unk> Health third 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 are Mark Ken kind of helps Chief Executive Officer, and a Lotta Yokel Cano health interim Chief Financial Officer.

The Cano Health press release webcast link Q3, 'twenty twenty-three Form 10-Q, and other related materials are available on the Investor Relations section of Cano Health website.

As a reminder, this call contains forward looking statements regarding future events and financial performance Investor.

Investors are cautioned not to unduly rely on forward looking statements and such statements should not be read 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 of 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 SEC 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 may be required by law.

During the call. We will also discuss certain financial measures that are not prepared in accordance with GAAP such as adjusted EBITDA.

A reconciliation of these non-GAAP results to their most directly comparable 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 Ken C. E O of kind of health. Please go ahead.

Thank you and good evening everyone.

I appreciate you joining us this evening Tahira.

Tahira how as of today I don't know has achieved major changes towards operating structure that are designed to allow us to operate more efficiently and realize the embedded value.

Thanks.

At the same time care management teams and physicians have partnered in new ways to implement critical enhancement that will improve health outcomes and lower medical costs.

We have several initiatives already underway.

It will help you understand the scope and initial size of what we plan to achieve.

We are encouraged by the progress our team has made in a short window of time.

Our third quarter results reflect the improved performance and stability of our core Medicare advantage business.

Due to the operational enhancements and third party medical cost initiatives, we implemented midway through this year.

Among our Medicare advantage populations and the core we saw lower inflation and pharmacy cost per member per month.

And we expect to demonstrate progress on these and other medical costs.

Wide range of initiatives.

Since our last earnings call, we have successfully executed a number of objectives aligned with our strategy to focus on Medicare advantage, and Florida, and our ACO reach service line.

These actions have simplified our business and organizational structure reduce cost in the near term and also created significant opportunities for the organization to realize the inherent profitability embedded within our assets over the long term.

First on September 22023.

We sold substantially all of our assets in Texas, and Nevada to central and.

In a transaction with a total value of Tucano of approximately $66 7 million.

Which consisted of approximately $35 4 million in cash paid at closing.

Plus the release of certain liabilities owned by Cardinal Health.

This transaction was a necessary step to improve our liquidity position, which allowed us to repay our revolving line of credit by quarter end.

And simplify our organizational structure and administrative overhead.

This transaction accounted for substantially all of our assets in Texas, and Nevada markets.

Second as of today, we have exited markets in California, New Mexico, and Illinois, which came with meaningful expense reductions and efficiencies.

And we remain on track to exit Puerto Rico by the beginning of 2024.

As a reminder, the decision to exit Puerto Rico impacts approximately 8000 members in our affiliate operations and we expect this exit will favorably impact consolidated Medicare advantage margin.

Together these actions put us on a path to begin 2024 with a much cleaner slate focused primarily on Medicare advantage in Florida, and the ACO reach service line.

And to help you understand the drag these non Florida markets had on our operations.

September 2023 year to date these markets accounted for only approximately $130 million of revenue.

$43 million of adjusted EBITDA losses.

Primarily due to direct patient selling general and administrative expense that burden in these markets.

Aside from alleviating the heavy operating expenses and sub optimal margins in these geographies.

We believe these actions will reduce the administrative burden and complexity of our organization and eliminate redundant functions across markets, where the economics didn't make sense.

Third we implemented a restructuring plan designed to streamline and simplify the company's operations.

To improve efficiency and reduce costs.

This included reductions to our workforce of approximately 21%.

Proximately half of which were related to organization restructuring connected to the market exits I mentioned previously.

While these decisions were difficult we <unk>.

Recognize that the company's historical cost structure did not align with our current objectives of improving economics and accelerating our path to positive free cash flow.

We believe that in total our workforce reductions will yield approximately $65 million of annual cost reduction.

Beginning in the third quarter of 2023 and.

And through the end of 2024.

This is approximately $15 million higher than when we embarked on this initiative and we continue to find opportunities to meaningfully reduce our operating expenses and cash used in operations.

These structural initiatives are critical to refocusing our business, our Medicare advantage in Florida, and ACO reach such that we can quickly test and implement new care management initiatives designed to improve health outcomes and lower third party medical costs.

In addition to major changes in our cost structure, we have realigned our clinical operations. So that our physicians and care management teams are partnering in new ways to improve the health care outcomes of our patients and lower medical costs.

We are encouraged by the opportunities our care management teams have identified and implemented to reduce third party medical costs in 2024.

Based on what we have identified to date, we are targeting over $100 million.

In annualized third party medical cost reductions.

By the end of 2024 through medical cost initiatives and optimization of our Medicare advantage offering.

Operations.

These initiatives are critical to begin rebuilding and long term value and our 122 staff model.

Model medical centers in Florida, and our MSL providers in 2024.

Yes.

We believe these initiatives can be achieved in 2024 and they are just the first round of medical cost management programs. Our teams have identified.

Based on our confidence level, where we sit today.

We are striving for more as we continue to optimize our care management model.

Let me give some additional color on how these initiatives are playing out.

First we focused on stronger patient engagement programs and improving our patient retention.

The marginal profitability for retaining patients we see regularly drives long term value through enhanced risk score demographics and lower medical costs.

We've identified that one third of our dis enrollments relate to basic scheduling challenges and as a result, we decentralized our call center and clinic administrative functions to ensure providers and staff and the medical centers.

A direct line of communication with their patients and are empowered to engage with them directly.

Second we are enhancing our arrangements with specialty networks to reduce leakage.

Avoid paying twice for common procedure.

One for fixed capitation, and then again for out of network referrals.

We have already expanded in house services to minimize high cost procedures performed out of network like X rays and ultrasound.

And enhanced our best practices and training procedures for physicians.

In several settings, we have begun cross training operational associates across multiple specialties to leverage our in house versatility.

These services and practice we.

We will create greater accountability optimize our out of network referral and uphold our commitment to quality care.

Third we plan to optimize the use of generic medications and capture more value for our patients and payer partners by reducing the use of high cost branded medications where possible.

The complexity that results from navigating many different health plans and their respective formularies.

I've, often pushed physicians to prescribe high cost branded medications.

Now on our clinical operations teams have a number of work streams in place to ensure patients and physicians have the opportunity and awareness to use more cost effective medications.

Our initial scope of brand versus generic optimization includes only the most frequently prescribed branded medications that are very addressable and higher volumes.

And finally, reducing high cost emergency room visits and hospital admission.

And that very achievable task rooted in operational and behavioral changes.

This begins with better engagement with high risk members and we have expanded the capacity and functions of our urgency line and real reallocated resources and capacity to accommodate work and emergencies.

This is heavily tied to how effectively we engage with our patients and our operations teams have tools and metrics to evaluate their own effectiveness when it comes to managing patient population.

As mentioned, we are targeting over $100 million from these actions.

And we are confident these initiatives will drive meaningful improvement.

<unk> operating results and a meaningful inflection in our cash from operations by the end of 2024.

While we have already taken many of these actions it will take approximately four to six months before we fully realize the cash flow benefit.

We are confident the roadmap and direction among our clinical teams is much clearer than in prior years.

We have disclosed and then clear we're pursuing potential opportunities to sell our Medicaid operations in Florida.

Pharmacy assets and other specialty practices or as appropriate substantially all of the companys assets in order to enhance liquidity and realize critical stakeholder value.

I want to emphasize that these potential steps are completely compatible.

With our intense focus on realizing the benefits from these medical initiatives and further lowering our cost structure.

Not only is this what our stakeholders want in order to realize embedded value in the business.

But it is also what is right for our patients.

I am confident in the embedded value within our company.

And I want to stress that we continue to manage the business for long term success.

We are developing a disciplined operating culture that we will maintain into the future.

Our purpose mission and objectives are aligned with the same operating milestone that our stakeholders desire and we have a rigorous operating plan in place to achieve them.

We remain committed to this focused approach, which benefits all stakeholders and enhances our ability to execute strategically.

Clinically and financially.

Before I finish my remarks, I'd like to note that the recent appointment of <unk> Gill as our interim Chief Financial Officer.

<unk> has had over 30 years of comprehensive experience in the health care industry.

Recently served in leadership roles outside of Cardinal Health.

Oversaw finance and accounting functions management service organization operations and.

In other key finance leadership roles at other major health care companies.

I have no doubt his financial expertise within the healthcare sector will help us execute our strategies and reduced complexity.

And to ensure balance sheet stabilization at Cardinal health.

With that I will turn the call over to <unk> to take you through the financials.

Thank you Mark along with the rest of the leadership team I am energized by the steps we have taken to date and committed to a path forward that is designed to unlock embedded value of our stakeholders.

Starting with the results of the quarter.

Total membership increased 6% year over year to approximately 312000 members in the third quarter of 2023.

This represents an increase of approximately 18000 members from the third quarter of 2022.

Total Medicare advantage membership grew approximately 2% versus the prior year.

But declined sequentially, primarily due to divestitures of assets in Texas and Nevada.

As well as planned termination of poor performing MSR affiliates.

Membership also declines in HCA in Medicaid, which were impacted by contractual changes and re determination respectfully.

Also as a reminder, this quarter and membership reflects the reduction in members that resulted from the divestitures of assets in Texas, and Nevada of approximately 14500 total members.

Total revenue for the third quarter of 2023 was approximately $788 million.

Up from approximately $665 million a year ago.

Total capitation revenue in the quarter was approximately $770 million, an increase from $626 million in the third quarter of 2022.

The Medicare advantage revenue P. M. P. M was 1115 in the third quarter of 2023, that's up 9% from the second quarter of 2023.

This increase was driven by lower than expected MRA revenue recognized in the second quarter of 2023, which we discussed on our prior earnings call.

Medicare ACO reach revenue P. M. P. M was 1333 up 2% sequentially from the second quarter of 2023.

Additional information about our membership mix R. P M P M.

In our third quarter earnings release, and third quarter fight financial supplement posted on our website.

Our medical cost ratio or MCR in the third quarter of 2023 was 91, 8%.

Compared to 78% in the third quarter of 2022.

Excluding ACO reached the MCR was approximately 89, 7% in the third quarter of 2023 compared to approximately 72% in the third quarter of 2022.

This increase was primarily driven by an increase in our Medicare advantage MCR.

The year over year increase in the MCR was primarily driven by higher third party medical cost in the third quarter of 2023.

This is due to higher utilization higher cost associated with supplemental benefits offered by our health plan partners.

And underperforming <unk> affiliates.

The prior year quarter also included a reduction in third party medical costs due to claims that were sold to a third party.

The third quarter results reflect improved performance and stability in our Medicare advantage business.

This is due to the operational enhancements and third party cost initiatives.

We saw improvement in our Medicare advantage medical cost ratio in the third quarter of 2023 from the second quarter of 2023.

Even though the previous quarter was impacted by unfavorable prior period items, we began to see a lower inpatient and pharmacy cost on a <unk> basis and are in our third quarter third quarter trends.

Meanwhile, utilization of supplemental benefits particular, OTC and flex card continue across nearly all of our health plan partners.

The aggregate cost of these OTC flex cards year to date through September was approximately $104 million.

And that was consistent with the utilization experience, we saw in the first quarter and second.

Direct patient expense in the third quarter of 2023 was eight 3% of our total revenue.

Below the nine nine.

Nine six in the third quarter of 2022.

SG&A expense in the third quarter of 2023 was approximately $81 million down approximately $31 million compared to the third quarter of 2022.

Total SG&A expense as a percent of revenue was approximately 10, 3%.

And reflects our efforts to restructure the operation to streamline and simplify the organization in order to improve the efficiency and reduce cost.

While this included a reduction of 21% of our workforce. We expect these actions will yield approximately $65 million of annualized cost reductions through the end of 2024.

These were difficult but necessary decisions.

We.

And right size, our organization and focus on our core assets.

These are material cost reductions that we have seen significantly improvement in our overall cost structure since the end of 2022.

However, we still believe that theres more opportunities to prudently evaluate.

Expenses across the organization, particularly among our third party vendors to consolidate and align our reduced footprint.

And we will continue to evaluate these opportunities and expect our SG&A expenses, excluding stock compensation as a percentage of revenue to continue to continue to decline through the end of the quarter.

Net loss in the third quarter of 2023 was approximately $492 million compared to the net loss of 112 million in the prior year.

This was primarily driven by a noncash goodwill impairment of $354 million.

And higher operating loss.

Primarily due to high third party medical cost.

A noncash goodwill impairment resulted from a goodwill impairment test performed by a third party specialist.

Which was triggered due to a significant decline in our company stock price in the third quarter.

Adjusted EBITDA in the third quarter of 2023 was a negative $66 million compared to a positive 18 million in the prior year.

We will not be providing guidance for the remaining of 2023 as.

As our management team continues to evaluate strategic interest assess divestitures of non core assets.

These factors are dynamic and timing can vary.

However, there are some positive factors to consider as you contemplate the fourth quarter.

First we expect financial performance to continue and improve in the first and the fourth quarter of 2023.

The improvement in the fourth quarter are primarily driven by the benefits of third party medical cost recoveries.

Such as stop loss part D rebates.

Continue improvement in medical utilization and traditional traditional seasonality of lower medical cost in the fourth quarter of each year.

Second as Mark noted, we recently reduced our workforce and expect to realize reduction from these organizational changes this year into the next.

Finally, following our sale of substantially all of our assets in Texas, and Nevada, The center well, a humana subsidiary and as of November three 2023, we contemplated our exit from the California, New Mexico, and Illinois market.

Our current medical center footprint stands at 126 as of November 19, 2023.

Following the divestitures and market exits even with a large majority of medical centers located in Florida, We continue to assess our footprint to seek favorable economics in the areas. We are located.

As we have mentioned on the second quarter call. This includes approximately 23 centers in Florida predominantly related to our Medicaid operations.

Now, let me turn to our cash flow and liquidity.

In the third quarter of 2023 cash used in operating activity was approximately $40 million and was primarily due to unfavorable operating results.

We ended the third quarter of 2023 with approximately $27 million in unrestricted cash and $33 million of net cash proceeds from the sale of our Texas and Nevada operations.

This will enable the company to repay a portion of the revolving line of credit under the credit Suisse credit arrangement.

Such that the financial maintenance Covenant of this facility was not applicable for testing period ending September 32023.

The company's current liquidity as of November nine 2023 is approximately $53 million.

Which consist of unrestricted cash and reflects a full draw of the credit Suisse revolving line of credit.

As we mentioned last quarter the immediate use of proceeds from potential asset divestitures would be used to replay 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.

Consistent with our view at the end of the second quarter, we do not expect the company's current liquidity to be sufficient to cover our operating investing and financing needs over the next 12 months.

I would direct you to the disclosures we provided in our third quarter 10-Q filing.

And note.

That we have underway and have an opportunity to move forward with numerous actions to mitigate this risk. They include pursuing interest in a sale of the company.

Or all or substantially all of its assets.

Finding short or long term financing options with our current creditors.

Executing new patient engagement and care management protocols that will reduce third party medical cost.

And putting in place additional cost initiatives to enhance productivity.

<unk> is committed to meeting the needs of our patients while taking actions designed to strengthen our financial footing.

And putting us in a position to implement the operational and strategic initiatives required to improve patient health and deliver value for all of our stakeholders.

As you've heard today and as you will see in our filing we are actively pursuing a range of initiatives and we will continue to update you on our progress as appropriate.

And finally, I personally like to thank our finance and accounting team members for their diligence and professionalism during these times.

Since I stepped into the interim CFO role.

Our finance and accounting teams have worked across multiple work streams.

And as a result, our developing stronger partnerships and collaboration with operational leaders across the organization.

And with that I will ask the operator to open the call to your questions.

Thank you very much at this time, we will now open the line for your questions. As a reminder, in order to ask a question. Please press star one.

In fairness to those waiting in the queue. We ask that you. Please limit yourself to one question and one follow up question.

Our first question comes from Joanne dressing with tourists Securities. Please go ahead.

Hi, guys. This is eduardo on for Joel Indra.

Thanks for the question.

<unk> seen lower inpatient and pharmacy costs, others are calling out higher outpatient costs I'm, just curious if youre seeing anything on that side of the business.

We've seen the stable amount of utilization in the outpatient that we've seen all year long.

Okay, and as you think about the $100 million of savings in third party medical cost reductions in 'twenty four.

Does the current utilization environment sort of play into that thought process.

Is that 100 million expected to ramp throughout the year or is it evenly spread.

Yes, we see that ramping throughout the rest of the year and specifically over the next 12 months yes.

Okay and the last one here from me.

I believe you guys receive shares of MSP recovery as part of your receivable settlement earlier in the year.

Cannot still hold those shares or have they been sold.

Yes, we still but we still do have them.

Okay.

Is that a form of liquidity that you can.

But no it's not.

<unk> shared that they are.

Not registered and so with that I'll now.

Thats encumbered the sale.

Got you okay.

Thank you.

Again, if you would like to ask a question. Please press star one.

Seeing no further questions. This will conclude today's conference call. Thank you all for joining US you may now disconnect.

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