Q4 2023 CareMax Inc Earnings Call

Good morning, and welcome to Coeur Max's fourth quarter 2023 earnings call. Please note. This call is being recorded I.

I would now like to turn the conference call over to Roger Oh, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to <unk> fourth quarter 2023 earnings call I'm.

I'm, Roger Oh, Senior Vice President of Investor Relations and I'm joined today by Carlos to fill out our Chief Executive Officer, and Kevin We're just our Chief Financial Officer.

During the call we will be discussing certain forward looking information.

These forward looking statements are based on assumptions and assessments made by care mattress management in light of their experience and assessment of historical trends current conditions expected future developments and other factors they believed to be appropriate.

Any forward looking statements made during this call are made as of today and cameras undertakes no duty to update or revise such statements whether as a result of new information future events or otherwise.

Important factors that could cause actual results developments and business decisions to differ materially from the forward looking statements are described in the company's filings with the SEC, including the section entitled Risk factors.

In today's remarks by management, we will be discussing certain non-GAAP financial metrics.

A reconciliation of these non-GAAP financial metrics to the most comparable GAAP measures can be found in this morning's earnings press release.

Now I'd like to turn the call over to Carlos.

Good morning, everyone and thank you for joining our call today I will begin by talking about our near term strategy to preserve our earnings power and liquidity given recent trends in this sector.

I will then be discussing the steps we've taken to begin right sizing our business for the current environment afterward, Kevin will discuss our Q4 financials.

Over the course of 2023, we've navigated challenges, including some related to our rapid growth over the past couple of years.

And others affecting our industry overall, we met our membership targets with 111500 Medicare advantage members at the year end and.

And we met our guidance on full year revenue. However, full year adjusted EBITDA was unfavorably impacted by prior year development increased flex card utilization and higher than expected medical utilization.

Additionally, as we noted last quarter some of the unfavorable ability had to do with claims payment patterns, which developed differently from prior years.

In light of these headwinds we have worked with our lenders to receive limited waivers on certain financial covenants contained in our credit facility in the short term.

The cumulative effects of our prior year developments and rising medical expense ratios have lengthened the time in which health plans normally pay us in the fourth quarter, we drew the remaining $60 million of our delayed draw term loans to continue funding our operations all while implementing cost saving initiatives.

Across the organization these actions and others that we are undertaking may help bridge us to our expected MSS deep payment later this year.

In the interim we aim to drive more structural changes operationally financially and strategically that are designed to protect and maximize the long term value of care Max.

I'll discuss these may include strategic options to monetize the value of certain assets and right size the capital structure of the company.

As noted on our third quarter call, we have undergone a comprehensive operational review of the company. We have begun implementing large scale changes with three main goals in mind.

First optimizing our cost structure to give our key stakeholders confidence in our near term liquidity. This includes cost reductions we've already taken that amount to approximately $20 million of annualized cash savings.

Second emphasizing performance and profitability in our existing book of business over growth.

And third exploring strategic options across our lines of business to maximize the value of certain assets. These actions are designed to help position <unk> for long term success as the U S health care system continues its shift towards accountable care.

In the past several months, we have streamlined our workforce, including centralizing functions under key operational leaders overall, we estimate our net payroll reductions are contributing $15 million of annual run rate savings.

We have also acted on opportunities to consolidate our center footprint in South, Florida by tucking smaller sites into larger ones, allowing us to maintain service levels for patients while lowering operating costs.

Since Q3, we have been able to complete six of these consolidations, resulting in fewer but more efficiently run centers.

We believe our center right sizing efforts to date currently translate to approximately $5 million.

<unk> cash savings.

Furthermore, we continue to work on optimizations in multiple functional areas, including transportation shared services.

And facilities, which may contribute additional savings this year.

From a clinical perspective, I am pleased to report that across all care centers, we achieved an aggregate five star quality rating for the third consecutive year showcasing our commitment to the highest quality of care for our patients.

In addition, we feel confident in the ability of our care processes to drive year over year improvement in our centers medical expense ratio.

While 2023 medical expenses grew at a rapid rate due to increased medical and benefit card utilization, we believe our care management initiatives and changes in payers benefit designs may contribute to a deceleration in medical expense growth in 2024 compared to 2023.

As a reminder, our consolidated MCR may remain elevated due to new MSR Medicare plans converting to full risk.

As discussed on our prior call we have taken what we believe to be a prudent approach toward adding new contracts and our MSL. We ended 2023 with over 75000 members and are focused on helping our affiliate providers optimizing value based care savings in their existing panels.

We plan on taking increased risk in most of our contracts in 2024, including certain contracts moving to full risk for.

Full risk lives now represented about 35% of our Msos population up from 15% in 2023.

Based on our current projections, we believe our NSO has the ability to achieve similar or better <unk> medical margins compared to 2023.

And our government Acos medical expenditures continued to develop favorably compared to national and regional trends, which we believe reflect our team's success in managing the underlying expense trends for the MSP and ACO reach populations. We are optimistic that the investments. We've made may lead to a similar or better savings rate in 2020.

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Now, let me give some highlights on the embedded value. We believe we have built in our de Novo and <unk> assets are de Novo centers are now serving over 6000 Medicare patients under <unk> at risk and fee for service contracts and are also seeing Medicaid and commercial patients.

We believe we have established a critical mass of operations in dense underserved communities within New York City in Memphis, Tennessee.

We have done so while keeping de novo losses within our guided budgets in both 2022 and 2023.

We believe our work in the past two years has laid the foundation for the de Novo centers to achieve attractive margins and maturity. Nonetheless, the reallocation of resources towards clinical performance at our core centers and MSL until delaying breaking even at the de novo's compared to our original plan.

In recent months, we have had conversations with growth minded parties that see strategic value in our de novo's. While early we believe these discussions may potentially enable us to monetize the platform. We have built in new markets mitigate the impact of de Novo losses are realized other financial benefits with these centers.

And our <unk>. So we believe we have accomplished our key one year goals convert traditional fee for service contracts into value based care agreements with a glide path to full risk incorporate our tech enabled workflows to manage complex populations at scale and foster physician engagement in a way that maximizes their potential earnings and improves.

Patient outcomes.

With over 170000 senior lives across MSP ACO reach in Medicare advantage, we estimate our NSO is now accountable for over $2 billion of annual health expenditures.

In 2023, we believe we have approximately doubled the shared savings under our government ACO as compared to 2021, and we believe our operating plan can further drive the savings percentage rate to high single digits or better.

In our MA book Carmax has successfully contracted with most of the leading regional health plans in their respective markets introducing new opportunities for our affiliate providers to participate in savings.

We continued to deepen these partnerships and explore new ones with payers aligned with our measured approach towards taking risk in summary, given the recent industry trends, we expect 2020 for it to be a transition year towards more balanced levels of reimbursements and expenditures and continuation of the process begun last year, we plan to work towards further opt.

<unk> our business for things, we can control to help preserve liquidity and position our business to achieve our longer term goals.

Kevin will now take you through our financial results.

Thanks, Carlos and good morning.

Discussed on our third quarter call since 2021, we have grown rapidly in membership.

Holiday This health plan contracts still acquisition.

And added a significant number of new contracts.

Our fourth quarter results reflect additional prior year development our <unk>.

Primarily related to updated data arising from these integrations.

We have established a regular cadence of service on reporting with most payers and continue to refine our data flows to mitigate these types of impacts in the future.

In the fourth quarter revenues and adjusted EBIT were negatively impacted by a combination of prior year development.

Increased medical and flex card utilization.

And a provision for adverse deviation.

Which we treat as an explicit reserve separate from BYD.

As a reminder, we do not add back prior year developments, our reserves to adjusted EBIT.

But disclose them to provide color on the end year performance of our business.

Additionally, Q4, GAAP net income was impacted by $369 million of non cash goodwill impairment.

In the fourth quarter adjusted EBITDA was impacted in part by approximately $21 billion of net unfavorable <unk>.

Over half was related to updated historical data from two MSL Medicare plans, while the remainder was due to final sweep accruals related to our membership in our centers.

We also booked $15 million of reserves for adverse deviation and are intended to absorb potential future unexpected changes in revenues are external provider costs.

For the full year 2023, adjusted EBITDA was negative $63 million, including unfavorable impacts of 42 million of total <unk>.

$15 million of reserves for adverse deviation.

This also includes $23 million of de Novo losses.

Were slightly favorable to our guidance of approximately $25 million in losses.

Reported a 2023 revenue of $751 million, including $45 million of headwinds from <unk> and $5 million from reserves, putting us towards the lower end of our latest guidance range.

Total medical expense ratio in 2023 with 91, 5% and includes approximately 780 basis points from <unk> and reserves.

And Thats, all members, which have higher <unk> than our center members at 450 basis points of impact.

In addition, we estimate year over year increases in benefit card expenses.

Well have about 400 basis points of unfavorable <unk> and then they are.

Finally, NAR was further impacted by Medicaid Redetermination, which has caused the average Medicaid acuity to normalized faster than expected.

Higher pre COVID-19 levels.

To share some recent trends within our center population we.

We saw elevated hospitalizations in December continued into January.

Typically the height of the flu season in South Florida.

However in patient admissions had shorter average lengths of stay and January deep visits also moderated lots of luck.

While early we are cautiously optimistic the seasonal peak is behind us and continue to ramp our clinical programs and better manage avoidable admissions.

Looking back our challenges in 2023 had been more about the things we have less control over.

Only the timeliness adequacy and accuracy of data from newer health plan contracts Medicaid Redetermination.

<unk> utilization.

In particular, we believe the impact of flex card exceeded $30 million of medical expenses in 2023, nearly tripling from 2022.

While these benefits are likely to stay in some form but do not expect them to increase at the rate they've grown in the past two years.

And we have developed plans designed to mitigate duplicative costs at our centers and look closely review our service funds for potentially improper flex card expenses.

More generally in these developments have reaffirmed to us the importance of strong relationship and our business.

With our legacy health plans.

We have a good history of alignment and a common view towards the long term benefit of our high touch model.

With our new payer partners, we couldnt be more excited to embark on that finger.

With any partner our efforts are most successful when our payors equip us with the right data tools and access and share in the upfront investments needed to manage risk.

Along those lines, we expect some of the structural changes Carlos mentioned by Intel Refocusing resources on payers most aligned with our strategy.

We have done a significant amount of analysis to understand the unit economics of each health plan contracts.

As you might imagine some are more favorable than others, we plan to thoughtfully consider actions or the cost to manage our plan outweigh the financial benefits to the company.

Because the outcome of these processes is uncertain we.

We believe it is premature to give precise guidance for 2024.

In aggregate our plan is designed to put carmax on better footing in 2025, which we think Walmart favourable inflection point in revenue and adjusted EBITDA.

We believe headwinds in 2024 regional benchmarks for all markets will abate or even split tailwind next year.

And we believe 2024 star ratings for our core plans following net improvement compared to 2023, which should favorably impact revenues in 2025.

As Carlos mentioned, we drew the remaining $60 million of <unk> in Q4 and ended the year with approximately $66 million of cash.

Ahead, we are in active strategic discussions to maximize the value of certain assets, which may help generates fargo's liquidity Brexit the company to the Msft payment later this year and to 2025.

In closing the management team Carlos and I are deeply appreciative of our team members for their steadfast support and shared vision towards accountable care.

We are committed to taking the actions, we believe necessary to reposition caremark for future success.

Forward to connecting with you and updating you on our future developments.

Okay.

Thank you. This concludes today's conference call. We thank you for joining and you may now disconnect.

Please wait the conference will begin shortly.

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Yes.

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Thanks.

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