Q3 2024 agilon health Inc Earnings Call
of B.A. Luru. So, you.
Thank you. Thank you. Thank you.
Speaker Change: Good afternoon, and thank you for joining the Agilent Health 3rd Quarter 2024 Earnings Conference Call. My name is Kate, and I will be the moderator for today's call. At this time, all lines are in a listen-only mode and will be until the question-and-answer portion of the call. If you would like to queue up for a question, you may do so by pressing star followed by a 1 on your telephone keypad. I would now like to turn the call over to Leland Thomas with Agilent Health. Leland, you may proceed.
Leland Thomas: Thank you, Operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell, and our CFO, Jeff Schwaneke.
Following our prepared remarks, we will conduct a Q&A session.
Leland Thomas: Before we begin, I'd 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.
Leland Thomas: These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements.
Leland Thomas: Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures.
Leland Thomas: We believe 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.
Speaker Change: A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release in Form 8K filed with the SEC. And with that, let me turn things over to Steve.
Thanks Leland, good afternoon, and thank you for joining us.
Steve Sell: On today's call, I would like to walk you through the following. One, an overview of our third quarter financial results and updated 2024 guidance.
Steve Sell: to the key actions we are taking to drive improved profitability, improve execution, and further strengthen our business.
Steve Sell: Three, despite the challenges of the last year, the underlying strength of our core business fundamentals and demand from payers and physicians.
Steve Sell: And four, the factors impacting our jumping off point for 2025, including an improved business mix exiting 2024.
Before I dive in, let me provide some context.
Steve Sell: We are clearly disappointed with the results we are sharing today and expect to drive meaningful improvement in the future.
Steve Sell: But we believe our core business is strong, and we are taking the necessary actions to continue to strengthen the platform, improve execution, and manage through a challenging environment.
Steve Sell: against the backdrop of long-term demand for improved cost and quality performance led by primary care doctors.
Steve Sell: Our Q3 report and updated guide reflect additional information from our payers and a new perspective from our new CFO with the goal of capturing known risks and providing a solid foundation from which to build.
Steve Sell: Against this backdrop, we believe in the value proposition for our network and platform to be a sustainable performance vehicle for physicians and payers in full risk value-based care.
Steve Sell: Pursuing this long-term vision has required some tough near-term decisions to exit selected partnerships and narrow the footprint of health plans we will work with in 2025.
Steve Sell: Our positioning for long-term sustainability includes a current cash position and cash flow management levers intended to allow us to weather the storm even as we take actions to accelerate the path to profitability and positive cash flow.
Steve Sell: Finally, we see recent events like an increased set of STARS cut points that raise the bar on the importance of quality performance and another reduction in the physician fee schedule that pressures doctor practices.
Steve Sell: as indicators that the move to value will only increase in the coming years.
Now turning to our third quarter results.
Steve Sell: MA membership continued its growth trend, increasing 37% year-over-year to 525,000 members, driven by stronger-than-expected same-geography growth in the continued expansion of our new partner class.
Steve Sell: Total revenue grew 28% to $1.45 billion, albeit a lower-than-forecasted premium yield.
Steve Sell: We are raising our full-year membership guidance from 519,000 to 527,000 members and increasing our full-year revenue guidance from $6.025 billion to $6.057 billion.
Steve Sell: And, I will provide you with the projected end-of-year impact on membership and revenue from the decision to exit selected partnerships and payer contracts.
Steve Sell: Third quarter medical margin was a loss of 58 million dollars or minus 36 dollars per member per month, which was below our expectations due to three factors.
Steve Sell: Prior period revenue settlements with payers, primarily tied to risk adjustment in Part D.
A reduction in expected 2024 revenue from lower-than-projected risk adjustments.
and higher than forecasted medical expenses.
Steve Sell: Our reported Q3 medical costs reflect an updated view on trend and seasonality across the year, with Q1 developing more favorably, unfavorable development from Q2, and an increased Q3 cost trend estimate.
Steve Sell: We continue to take a prudent posture on in-quarter cost trends until our leading indicator census data indicates otherwise.
Steve Sell: In terms of medical margin guidance, we are lowering our 2024 Medical Margin Guide to $225 million compared to our previous guidance at the low end of the $400 to $450 million range.
Steve Sell: Of note, we have recognized approximately $100 million of negative medical margin through the third quarter from 2023 and earlier periods.
Steve Sell: Accordingly, we believe the medical margin step-off point for next year is now about $325 million before the impact of the strategic actions that we are announcing today and other in-process actions.
Steve Sell: Adjusted EBIT debt loss for the third quarter was minus 96 million dollars due to lower MA medical margin.
Steve Sell: For the full year 24, we are lowering our adjusted EBITDA guidance range, reflecting Q3 results and a Q4 forecast of lower risk adjustment revenue and an elevated medical expense environment.
Steve Sell: While the environment is challenging and the results for the current period are disappointing, a deeper look at our performance reveals a strong core business with solid fundamentals.
Steve Sell: an increasingly relevant value proposition and a significant total addressable market in need of a better solution.
We are encouraged by a number of factors.
Steve Sell: First, greater than 80% of our Year 1 Plus partnerships are producing positive market-level MA-adjusted EBITDA on an incurred basis, despite the macro headwind, and producing meaningful distributions to our partner practices.
Steve Sell: Notably, our Class of 2024 is performing at the high end of our typical year one market medical margin range, as these newer partners benefit from platform maturation and network learning.
Steve Sell: We see high demand from payers and partners reflected in our consistent quarterly additions of new doctors and members, and our class of 2025 should add approximately 45,000 members.
Thank you.
Steve Sell: The recently released S.T.A.R.S. scores for 2025 reinforce our value to payers.
Steve Sell: as every partner minus one on the platform in measurement year 2023 scored above the critical four-star threshold, and a majority of our partners were above 4.25 stars.
Steve Sell: Our ACO REACH results show our network as a top performer in terms of quality and meaningful growth savings to CMS, driven by an overall cost trend nearly 300 basis points better than the benchmark average.
Steve Sell: Despite these strengths, we have areas of exposure to factors like Part D and supplemental benefit risk.
Steve Sell: And we have a small subset of partnerships in need of meaningful improvement.
Steve Sell: With this assessment, and against the backdrop of a challenging environment, we are announcing the following actions in process.
Steve Sell: One, to exit two partnerships and approximate 10% of our payer contracts.
Steve Sell: Two, to reduce the beta on elements outside our control by narrowing our 2025 exposure to Part D risk. And three, to delay the onboarding of one class of 2025 physician partner, given local payer dynamics.
Steve Sell: First, across a network of 26 partnerships, and a year-end projected 527,000 MA members and 128,000 REACH members.
Steve Sell: We have mutually decided to exit two partnerships experiencing substantial adjusted EBITDA losses in 2024.
Steve Sell: In addition to the payer contracts associated with the exited partnerships, we will also be non-renewing several unprofitable payer contracts in continuing partnerships.
Steve Sell: These actions will reduce our projected end-of-year 2024 membership by roughly 45,000 to 75,000 members.
Steve Sell: and our annualized revenue by approximately $470 million to $785 million.
Steve Sell: We are working to exit each of these contracts as of December 31, 2024, although a few of them may continue through 2025.
Steve Sell: These were not easy decisions, but in this challenging environment, we concluded these partnerships would take too long to reach profitability, and we needed to consider the health and future success of the broader network.
Steve Sell: As always, these decisions were made in close collaboration with our physician partners.
Steve Sell: Second, against our long-term goal of reducing the beta in our business.
Steve Sell: We now expect for 2025, more than 50% of our membership will have some type of risk mitigation for Part D through carve-outs, corridor, or other risk mitigation strategies.
Steve Sell: Our recent discussions reinforce the unique value levers that Agilent's network brings payers in terms of quality scores above and Part C medical trends below their broader fee-for-service network.
Steve Sell: With the evolving environment, we believe that how we manage Part D risk in partnership with our payers is a critical decision.
Steve Sell: Third, in close collaboration with a 2025 physician partner, the decision was made to delay the onboarding of this group until financial data exchange with three regional payers in that market improved.
Steve Sell: We will continue to work closely with this partner and the regional payers to monitor the local dynamics and reassess inclusion in our 2026 partnership class.
Steve Sell: The net effect of these actions is that we have improved our baseline market mix exiting 2024, both in terms of run rate and reduced beta, which should yield a stronger jumping-off point for 2025.
Steve Sell: As indicated earlier, we believe the membership step-off for 2025 will be 452,000 to 482,000 MA members before the addition of 45,000 MA members from the Class of 2025.
Steve Sell: And, based on our revised guidance, the medical margin step-off point for next year is now about $325 million before the key actions I have described.
Steve Sell: The investor materials on our website provide more information on the impact of these actions on membership, revenue, and our market mix, and we will be dimensioning the expected margin lift in more detail early next year.
Steve Sell: In addition to these actions, we see a series of factors and execution opportunities that will impact our 25 performance.
Steve Sell: These include repricing 40% of our membership for a January 2025 renewal.
Steve Sell: Across multiple markets and payers, we are seeing an improved percentage of premium economic terms, as well as additional incentive dollars tied to our partners' quality performance.
Okay.
Steve Sell: Pay or bid information. We have received updated pay or bid information for 90 plus percent of our membership.
Steve Sell: Well, each bid varies by market and payer. The composite indicates these bids will be a blended tailwind for next year.
Improved Burden of Illness Assessment
Steve Sell: We see a clear execution opportunity for improvement among our internal teams, partners, and payers to ensure that the verified burden of illness or risk adjustment is appropriately reflective of the acuity mix of our population.
Steve Sell: This work involves tight integration with our partners electronic medical records, the identification of new complex conditions,
Steve Sell: A thorough physician and care team review, and a tight payer data exchange and feedback loop.
Steve Sell: Our expanded payer data pipeline will be instrumental in strengthening our collective performance.
improved PCP engagement.
Steve Sell: The key performance driver for the Class of 2024 is seen in the tight grouping of their primary care doctors across our partnerships, translating into improved medical cost, quality, and assessed burden of illness performance.
Steve Sell: The expansion of our quarterly active panel management reviews to 20-plus markets, reinforced by an expanded team of regional medical directors, should be a tailwind heading into next year.
Steve Sell: Data visibility, both in terms of leading indicators and detailed member-level revenue and cost information, is such an important lever in our execution of a multi-payer, market-based strategy.
In 2024, we have made meaningful progress on both fronts.
Steve Sell: with 85 plus percent of total members in our financial data pipeline with a detailed member view and 80 plus percent of members with payer census data that provides us a two-week lag view on inpatient utilization.
Speaker Change: In closing, and before I turn it over to Jeff, I want to reiterate that the value of our business model remains strong with both physicians and payers.
Speaker Change: and we continue to be confident in the progress we are making to enable primary care doctors in this volatile macro environment.
Speaker Change: We have made important decisions that strengthen our business, and we believe this will support near and long-term performance and the path to profitability as the macro environment improves. With that, let me turn the call over to Jeff.
Jeff Schwaneke: Thanks, Steve. Good evening. I'll start by reviewing our overall financial performance, review highlights from our third quarter results, and discuss our guidance for the full year 2024 while framing our thoughts on 2025.
Jeff Schwaneke: Now that I have been here for almost four months, I've had the opportunity to complete a comprehensive review of our organization, gaining valuable insights and observations into the business model and identifying areas in need of improvement.
Jeff Schwaneke: These findings, in addition to the most recent data we've received detailing our performance and risk adjustment, prior period development, and the impact of the COVID-19 pandemic.
Jeff Schwaneke: and Hire Continued Utilization have changed our view for the third quarter of 2024 and the full year.
Jeff Schwaneke: As a result, we have recorded significant adjustments during the third quarter and accordingly have made revisions to our full year 2024 expectations.
Speaker Change: As Steve highlighted, the demand for the value we create for our payer and provider partners has never been higher. We have proven the business model drives higher quality health care and lower overall costs even in a challenging macro environment. However, it is not without challenges.
Speaker Change: We continue to improve our back-end process and invest in data timeliness and quality that will drive better visibility on our performance.
Speaker Change: We believe these improvements, in combination with contracting changes surrounding Part D, will enhance our ability to reduce volatility around risk adjustment, Part D, and medical costs.
Speaker Change: When excluding prior period development for 2023 and prior dates of service, we believe 2024 represents a solid foundation to grow the top and bottom line heading into 2025.
Now for the financial details from the quarter.
Speaker Change: Medicare Advantage membership was approximately 525,000 members at the end of the third quarter, representing a year-over-year increase of 37%.
Speaker Change: Year-over-year growth was driven by membership class of 2024 with strong same-geography growth.
Speaker Change: Total revenues increased 28% on a year-over-year basis to $1.45 billion during the third quarter.
Speaker Change: Year-to-date revenues increased 39% to $4.53 billion. This growth was primarily driven by the Class of 2024 markets and solid organic growth in our existing classes.
Speaker Change: Third quarter medical service expense increased to 1.51 billion dollars compared to 1.02 billion last year. The 47% growth compared to last year was driven by the expansion of the 2024 class and higher utilization compared to the third quarter of last year.
Speaker Change: Our first quarter 2024 cost trend estimate is now 7.4%, down from the 8.2% that we reported last quarter.
Speaker Change: Our second quarter 2024 trend assumption increased to 8.2% versus our previous assumption of 7.3%.
Speaker Change: Our third quarter 2024 cost trend assumption is now 9.1% versus our initial assumption of 6%, recognizing that we don't have substantial paid claims data for Q3.
Speaker Change: Given the utilization environment we have seen this year, we have assumed higher costs for the fourth quarter and increased our cost assumptions by an incremental $25 million relative to our prior expectations.
Speaker Change: We now expect the fourth quarter cost trends to be 5.2% off a high cost quarter last year.
Speaker Change: Medical margin for the third quarter was a loss of $58 million compared to positive medical margin of $111 million in 2023.
Speaker Change: As mentioned earlier, medical margin was below our guidance range as a result of several items.
Speaker Change: First, we lowered our year-to-date revenues by $65 million, driven by lower-than-expected risk adjustment performance for 2024. This is based on mid-year risk adjustment information we received from our payer partners during the third quarter.
Speaker Change: Second, we recognize $60 million of unfavorable prior period development related to 2023 and prior dates of service, driven primarily by updated statement data regarding Part D costs and final risk adjustment information for 2023.
Speaker Change: And lastly, we recorded additional medical expense of $25 million during the quarter driven by the continuation of elevated current year medical costs.
Speaker Change: Platform support costs were $42 million and consistent with the third quarter of 2023 and the second quarter of 2024 and represent about 3% of revenues in line with our target for the year.
Speaker Change: Geography entry costs were down 60% at $7 million, compared to $18 million in 2023. Geography entry costs favorability was driven by continued diligence on operating expenses
Speaker Change: Lower capital support funding needs and a delay of a market expansion from 2025 to 2026.
Speaker Change: Third quarter adjusted EBITDA of negative 96 million compared to positive 6 million in 2023 is attributable to trends previously discussed weighing on medical margin.
Speaker Change: ACO model entities continue to perform well and our quarter-end membership was 132,000 which is slightly ahead of our expectations.
Speaker Change: ACO model adjusted EBITDA was $12 million versus $18 million in the third quarter of 2023. The year-over-year decline was driven by higher utilization experienced in the third quarter this year relative to the increased revenue.
Turning to our balance sheet and cash flow.
Speaker Change: Agilent ended the quarter with cash in marketable securities of $399 million and another $113 million of off-balance sheet cash held by our ACO model entities.
Speaker Change: As a reminder, cash held by ACO model entities will fluctuate based on inflows and outflows related to operations of the program. This cash includes unsettled payments, which are expected to occur in the fourth quarter of this year.
Speaker Change: We used $9 million of cash during the third quarter, consistent with our expectations, reflecting the seasonality of our annual wellness visits and distributions to physician partners and settlements with payers.
Speaker Change: This is driven by the increase in prior period development we recognized this quarter, which has an in-year cash flow impact. As we have discussed previously, our cash flow from operations improves during the second half of the year as we settle with payers for performance from the prior year.
Speaker Change: Additionally, given the lower expectations for 2024 performance, we have updated our 2025 cash usage to approximately $110 million.
Speaker Change: We expect to end the year with approximately $365 million of cash on the balance sheet, inclusive of the off-balance sheet cash associated with the ACO model entities.
Speaker Change: We continue to believe we have adequate capital on the balance sheet to achieve break-even cash flow, which we now expect to occur in 2027.
Speaker Change: Turning now to our updated outlook for the full year of 2024. We have raised our MA membership guidance range to 527,000 members from 519,000 members at the midpoint, recognizing our growth through the third quarter.
Speaker Change: We have increased the midpoint of our total revenue guidance range by $32 million, which reflects lower risk adjustment offset by incremental membership for the year.
Speaker Change: Given the previously discussed 3rd quarter 2024 medical margin headwinds and our updated 4th quarter 2024 assumptions,
We are lowering our full year 2024 medical margin midpoint.
Speaker Change: to $225 million compared to our previous guidance of the low end of $400 million to $450 million.
Speaker Change: Additionally, we are lowering our adjusted EBITDA guidance range to a negative $135 million to a negative $155 million.
Speaker Change: As we have demonstrated, we continue to make the appropriate adjustments necessary to improve profitability, which in the past has included exiting markets, renegotiating unfavorable contracts, and optimizing operating costs.
Speaker Change: As we begin to think about 2025, when you exclude roughly $100 million of unfavorable development from prior years, we believe the 2025 step-off point for medical margin is around $325 million.
Speaker Change: This is before the impact of any of the measures we are taking to improve profitability, including the anticipated exit of two unprofitable partnerships and underperforming contracts, reduction in Part D exposure, and other strategic actions.
Speaker Change: Given the actions we are taking in 2024, we want to emphasize that 2025 will likely represent a turning point for the company.
Steve Sell: With that, let me turn it back to Steve for some closing comments.
Steve Sell: Thanks Jeff. In summary, we readily acknowledge that 2024 has not unfolded as we expected.
And we are taking the necessary steps to address that.
Steve Sell: We believe that the decisive actions we have taken this quarter, coupled with the continued execution of our Targeted Action Plan, will result in improved performance versus our 2024 jumping-off point.
Steve Sell: We look forward to updating you as these actions are finalized over the next few quarters.
With that, let's turn to Q&A.
Speaker Change: We will now begin the question and answer session. If you would like to queue up for a question, you may do so by pressing star followed by A1 on your telephone keypad. If for any reason you would like to remove your question, you may do so by pressing star followed by A2.
Speaker Change: As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Again, to ask a question, it is star followed by a one on your telephone keypad. In the interest of time, we do ask that everybody limits themselves to one question.
Speaker Change: The first question will come from the line of Lisa Gill with J.P. Morgan. Lisa, your line is now open.
Lisa Gill: Thanks very much. And thanks for all the details. Steve, I just want to go back to some of your comments on talking about 25. You talked about repricing 40% of your book of business. You talked about an improvement in the renewal percentage as well as incentives. Can you give us an idea, like,
Lisa Gill: Across the 40% and how do we think about the other 60% is it that there wasn't an issue with the other 60% or this is all that you are able to negotiate as we think about 'twenty five.
Lisa Gill: What that looks like across the 40% and how do I think about the other 60%? Is it that there wasn't an issue with the other 60% or, you know, this is all that you were able to negotiate as we think about 25?
Speaker Change: Yes. Thanks, Thanks for the question Lisa So.
Speaker Change: I think we feel very good about the progress we've made with payers since our last call a quarter ago.
Speaker Change: The repricing that you're specifically asking about was for the 40% of the membership and the booked it was up for renewal. So that's the significance of the 40% I think what we're seeing is not only improved economic or percentage of premium terms, but increasingly because of the importance of quality.
Speaker Change: A upside incentive for better quality performance and I shared with you the strength that we saw in the.
Speaker Change: Recently released stars results, so our value proposition to payers is reflected within that.
Speaker Change: The other piece is part D that expands across more than just that 40% of membership and as I said, we've got multiple negotiations that have progressed pretty far at this point, we're saying at least 50% or more will have some sort of mitigation on part D risk whether.
Speaker Change: That's a carve out a corridor or some other arrangements.
Speaker Change: One other area I will just call out is in this environment that we're in and given the value prop that we have to our payers. We are seeing the ability to have year, one alternative economic arrangements for our year one partners as they come on with no downside a cure.
Speaker Change: <unk> feed that then is a glide path into a risk arrangement once we've been able to get all of the data that we need with these local payers, which has become such a critical aspect of success in our model. So that's that's the flavor on the negotiations the other pieces the payor.
Bids that have been received Lisa we've got 90 plus percent of our membership in very detailed bids and well we're not giving an overall dimension of that we are saying that's going to be a favorable tailwind for us and it varies pretty dramatically based on market and based on payer.
Speaker Change: The next question will come from the line of Justin Lake with Wolfe Research Justin Your line is now open.
Speaker Change: Thanks.
Speaker Change: First question I wanted to ask is.
Jeff Schwaneke: Jeff first of all welcome I appreciate all the detail here.
Jeff Schwaneke:
Jeff Schwaneke: On the trend numbers you gave us.
Speaker Change: By hyper correctly, you had you said the trend is 10% in the third quarter and Youre, assuming 5% in the fourth quarter is that right.
Speaker Change: No. What we said Justin was we originally assumed 6% in the third quarter, which is now a little over 991. So Q3 went from 6% to 91 Q4 five two.
Speaker Change: And you have to remember.
Speaker Change: Certainly yes.
Speaker Change: That was based off a high step high step off last year right.
Speaker Change: Yes, so that's what I was going to ask is there any way given that we don't have visibility to that step off can you maybe share a P. MTM.
Speaker Change: Number with us in the third quarter versus what Youre, assuming in the fourth quarter.
Speaker Change: Yes.
Speaker Change: The fourth quarter, something like that yes.
Speaker Change: Yes, yes, I would tell you the fourth quarter is we use we use history for this right. So we went back several years looking at how the fourth quarter plays out compared to all the other quarters Q1, two three the fourth quarter will be the highest quarter of the year. So we've got the <unk> recorded up I would say roughly 7%.
Speaker Change: <unk> higher than Q1, and 3% higher than.
Speaker Change: And then Q3 I believe yes, roughly 3% higher than Q3. So so generally we've looked at historical seasonality and.
Speaker Change: That's what we have in the forecast and obviously, we add $1 $25 million.
Speaker Change: To that number.
Speaker Change: Okay.
Speaker Change: I'd love to get an update on with CMS is assuming for fee for service trend can you give us that number from wood at CMS using for the <unk>.
Speaker Change: ACO trend for 2024 at the moment.
Speaker Change: Yes.
Speaker Change: Have that number off the top of my head Justin.
Speaker Change: Get back to you.
Speaker Change: Thank you.
Speaker Change: The next question will come from the line of Adam Ron with Bank of America. Adam Your line is now open.
Adam Ron: Hey, Thanks for the question.
Adam Ron: So sorry, if I could have stitch them together from your comments, but there were a lot of numbers and we want to make sure I got that so what is the amount of cash you expect to end 2024 with.
Speaker Change: And then if adjusted EBITDA this year going to be 100 negative negative $145 million does that mean next year's cash burn should be roughly equal to that.
Speaker Change: Then on the ACO reach cash do you have to exit ACO reach to get that cash in exiting also be cash Greg.
Greg: No just just a couple of things. So I'll just go through the numbers that we quoted so number one we said we're going to end the year at roughly 365 million that includes the ACO cash.
Greg: Now you see you see the 110 in the script, but in reality after we make those payments in the fourth quarter ACO cash is roughly about $35 million. So the 365, we end the year includes about $35 million of ACO cash. The other thing that we indicated is it based on this year's performance next year.
Greg: We think our cash usage is going to be $110 million.
Greg: So we originally had $25 million now the update that's $110 million of cash burn.
Greg: To your last question you do not have to get out of the program to get the cash there are mechanisms that we have we're effectively we're charging an administrative fee to the acos that monetize that cash.
Greg: Okay.
Speaker Change: Adam the only thing I would add on it.
Speaker Change: Yes.
Greg: I was just going to say I think we sit in a strong cash position and part of the actions. We're taking today are intended to really accelerate our path to profitability and cash flow positive and obviously impact the cash needs on a go forward.
Speaker Change: Yeah and around that if you could quantify a few things so.
Speaker Change: So you mentioned that in.
Speaker Change: In 2025 on 90% of your member Youre seeing a net tailwind from the bids that you saw from payers. So im wondering if theres any number you could give us maybe like a amount of supplemental benefit you think would flow through.
Speaker Change: That you would get and then the second piece is.
Speaker Change: In the slides that you posted there is a bar that shows.
Speaker Change: The size that you have.
Speaker Change: Representing the contracts, we expect to exit and it looks like it's around $20 million.
Speaker Change: Hi, balling it if that's the right way to think about it. Thanks.
Speaker Change: So Adam Thanks for the questions on the <unk>.
Speaker Change: Hey, your bids I think what we're comfortable sharing as we've got them for 90 plus percent of our membership and that is a net tailwind for next year at a composite basis and we're not we're not dimension beyond that in.
Speaker Change: In terms of the two partnerships that we're leaving and the impact on the membership and revenue we do dimension that from a margin perspective, what I said in my prepared remarks is we will share that with you early next year as we finalized <unk> 24, and we finalize all of that so we are not giving you a number on.
Speaker Change: And that today, but calling out that it will obviously be a positive.
Speaker Change: Yes, I think just real quickly I mean, obviously, we wouldn't be taking those actions if it wasn't meaningful so it's meaningful but I wouldn't use that bar is some representation of of the amount.
The next question will come from the line of George Hill with Deutsche Bank. George Your line is now open.
Speaker Change: Yes.
Speaker Change: Good morning, kind of a follow up as it relates to the $325 million jumping off point for medical margin I guess.
Steve Sell: Steve is the right way to think about that is that that's.
Speaker Change: The baseline.
Speaker Change: For 2025.
Expectations, and then that would basically imply that the business is going to be kind of breakeven.
Speaker Change: I should say the expectation that the business might be breakeven to modestly negative on a reported basis in 2025, and I guess I would ask a little bit more about like can you tell US you talked about like the like the I'll call. It the membership erosion.
Speaker Change: The medical management dollar erosion kind of what are some of the other assumption that kind of underline are underpinned that $325 million step off.
Like the way I'm looking at is thinking about it as like the step off for 25.
Speaker Change: Tell me, if you're not even thinking about that.
Speaker Change: Okay.
Speaker Change: Months.
Speaker Change: Yes, real quick Georgia, it's pretty simple effectively what were saying is if you take our 2020 for performance and you back out all the prior period development, that's really for 2023 data service at.
Speaker Change: If you back out the $100 million, that's kind of what I would call a run rate exiting 'twenty four meaning that's what the business is performing on an incurred basis exiting <unk>.
Speaker Change: 2024.
Speaker Change: Yes, so and this is yes. This is before I think the actions that obviously, Steve mentioned, so the exits and other things that we're doing so we're just trying to give you. Some context, if you take the out of period things out thats kind of the baseline.
Speaker Change: And your second question Restate that second question I was clear on the second part of your question George well I guess the second question is if we think of the $3 25.
Speaker Change: The $3 25 is kind of the I'll call it the normalized or the adjusted adjusted medical margin for 2024 I guess.
Speaker Change: Think about that number I know you guys haven't given the full 2020, you guys haven't given preliminary 2020 guidance, yet I guess I would just add from where you sit right now what are the big moving pieces.
Speaker Change: That you see as it relates to your visibility to 'twenty five.
Speaker Change: Yes.
Speaker Change: I tried to call that out a little bit in my script, George So I think you've got that revised step off run rate of $3 25, we've got the impact from from the exit of these partnerships that Adam just talked about that we're going to give you an update on early next year as we finalize that we've got a whole host of.
Speaker Change: Payer activities I would call it the repricing percentage of premium quality incentives.
Speaker Change: The part D. Obviously that that will be an update for next year, both from a revenue and a cost perspective, as we have a greater percentage of folks that have a mitigated impact from that.
Speaker Change: And then the pay your bids that Adam also asked about so those are significant.
Speaker Change: There is the improvement year over year.
Speaker Change: I think we think our improvement will be roughly in line with what we saw in 'twenty four.
Speaker Change: Stars.
Speaker Change: Beyond the incentives that I talked about we will have roughly the same amount of members enforced our plus plans and then obviously, there's a utilization assumption that.
Jeff Schwaneke: We'll talk about more as we get closer to two to 2025, but those would be I think kind of the puts and takes Jeff would you add anything to that yes.
Jeff Schwaneke: Yes no.
Jeff Schwaneke: I think that covers it.
Jeff Schwaneke: I think that covers it.
Jeff Schwaneke: Okay.
Jeff Schwaneke: Thank you.
Speaker Change: The next question will come from the line of Elizabeth Anderson with Evercore.
Speaker Change: Your line is now open.
Hi, guys. This is Sameer Entre Elizabeth Anderson.
Speaker Change: I just wanted to ask about the mid year risk adjustment impact was there anything different that caused that this year versus prior years. It seems like it's something relatively new at least to this degree. So what maybe if you could provide a little bit more color on what's what's driving that was that presumably it wasn't like the outage with change, but just trying to understand what it was.
Speaker Change: Yes, Sameer. Thanks for the question I mean, I think our headline is we see this as a clear execution opportunity for improvement between our team and our partners and our payers.
Speaker Change: We've kind of diagnosed that gap in dimension data out.
Speaker Change: In 2024.
Speaker Change: Page 24 basis, it's $100 million between the $65 million, we've shared this quarter in the 36 that we shared last quarter.
Speaker Change: You are right. This has been a historical area of strength in which our revenue is restated favorably relative to what we've guided.
Speaker Change: In 24, we had raised our expectation relative to prior years that was based on a tremendous amount of activity that we had at the end of 'twenty three and what we found is our ultimate adoption and capture through our physician partners and our payers was lower than that and so we see that as clear work in <unk>.
Speaker Change: Front of Us and the good news is this is an annual cycle. We have the same patient base that has those same conditions and there is the ability to assess and capture those for the coming year and as I said for 25, I think we think our improvement will be in line with our 24 list for 2006, we see a larger opportunity based.
Speaker Change: The work that we're doing but Jeff will do that yes, I mean, I think if you just go back to like Steve mentioned, we did a lot of work in 'twenty three.
Speaker Change: Work produced a lot of great DIY lift we thought that was going to translate on a one to one basis.
Speaker Change: And ultimately it didn't we found some gaps we're closing those gaps.
Speaker Change: We're late in the year, obviously, so the impact on 25 will be minimal, but as we look to 'twenty six.
Speaker Change: We'd really look for a step up at that point.
Speaker Change: Thank you.
Speaker Change: The next question will come from the line of Ryan Lyngstad with TD Cohen Ryan Your line is now open.
Speaker Change: Hi, Thank you on the partnership exits understanding you're exiting two but it looks like there is still three.
Speaker Change: That would be.
Speaker Change: Unprofitable I guess, what's the I guess.
Speaker Change: What's the thought of keeping those three and if the trajectory of your profitability doesn't sort of change in the next maybe six to 12 months would you consider further action on those particular partnerships. Thanks.
Speaker Change: Yes, Ryan Thanks for the question I mean, I think we feel like we have a very strong network.
Speaker Change: To your point, we've got 26 partnerships 655000 senior patients across reach an MAA weakness really decided to exit two of those in the attachment. We show you that five of those 26.
Speaker Change: We are not yet profitable at that market level on an EBITDA basis, I think the difference between the two and the other three is the magnitude of loss that sits within those two.
Speaker Change: And the timeframe that it would take to return those two partnerships to profitability and Thats based on a mutual dialogue in the payer dynamic within within those markets that are part of that those three are much closer we see several of those getting to profitability in 2025 <unk>.
Speaker Change: Very close to it so I think it's the magnitude I think it's the timeline.
Speaker Change: And I think it's a combination of things with payers and partners.
Speaker Change: Each one of those differently, but that's the logic behind the two out of the five.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of Stephen Baxter with Wells Fargo. Stephen Your line is now open.
Stephen Baxter: Yeah, Hi, Thanks, just a couple of personal trend I guess first.
Stephen Baxter: What drove the revision to Q2 cost trend and then second I guess can you be a little bit more specific about why you don't think we should be jumping off from Q4 from a trend perspective I guess.
Stephen Baxter: What specifically about Q4, you view as being transient or nonrecurring or I guess said differently like what period of history. Do you think represents a better seasonality pattern doing modeling off of that last year.
Stephen Baxter: Yes.
Stephen Baxter: Quick I mean, obviously, we can we get paid claims data every every quarter every month. So part of the I'd say the recast on the trend data for Q2 is more paid claim data and specifically it looks like the month of May specifically was was higher than we originally anticipated, but we are going from seven 3% to eight.
Stephen Baxter: Two I would I would also combine that however, with Q1, which went from eight 2% to seven four and so in general what I'd say is those those two pretty much offset as far as the fourth quarter.
Stephen Baxter: We wouldn't use the fourth quarter, because the seasonality of the business I mean over the years Q1's, a lot less in Q4, and we haven't given a trend number for 2025, yet so we're.
Stephen Baxter: We're not necessarily saying that.
Speaker Change: We're giving a trend number for 'twenty five.
Speaker Change: I don't know if that answers your question.
Speaker Change: Thank you.
Speaker Change: Next question will come from the line of Andrew Mok with Barclays. Andrew Your line is now open.
Hi, Good evening wanted to follow up on the negative risk adjustment, it's still not clear to me why this came in so much worse than you expected.
Speaker Change: Data issue or a forecasting issue and it sounds like some of the operational changes and investments will take some time to implement would love to get an update there.
Speaker Change: I guess, how do we get comfort that you are properly accruing risk adjustment now so that the tissue doesn't recur next year.
Speaker Change: Yes, yes, so a couple of things number one I think you have to go back and we did all this work and investment in the <unk> program in 2023. The results of that investment were very strong and so that effectively led us to.
Speaker Change: Yes.
Speaker Change: Two a risk adjustment forecast that now looking back.
Speaker Change: We had expectations that higher than what's actually coming in.
Speaker Change: And the reality is is what Steve had mentioned is that there is gaps in the processes that we have identified and we're going to be able to close.
Speaker Change: And so I think thats thats effectively.
Speaker Change: The work that we did didn't translate on a one to one basis to the ultimate.
Speaker Change: Ultimate RAF score.
Speaker Change: So that's the first thing the second thing is this is a I would say this hasnt been a historical problem right. It's typically restated favorably I would call. This an isolated incident, where we invested heavily the year before.
Speaker Change: And then lastly on the confidence I mean that would be one of the reasons why I'd say, we're confident in the 2024 number the second reason.
Speaker Change: The reason is that we we got the midyear data through the payers from the government we've tied to that data.
Speaker Change: We have looked at the history of what we've achieved on our mid year to final wrap lift. So we have that baked into the calculation and then the other thing. We did is we reached out to all of our large payers and ask what their view was on what they have in their forecast for lift between the mid year and the final.
Speaker Change: And so again, our jobs that come up with the best estimate we feel pretty comfortable we've got covered.
Speaker Change: Thank you.
Speaker Change: The next question will come from the line of Jack <unk> with Jefferies. Your line is now open.
Speaker Change: Hey, Thanks for taking my question.
Speaker Change: Fairly simple one.
Speaker Change: Looking back.
Speaker Change: You don't want to put all the moving pieces the other $2025 you're still sort of.
Speaker Change: Figuring it out, but if you try to isolate part D and maybe if you look back to 2023.
Speaker Change: Do you have maybe a sense of magnitude or <unk>.
Speaker Change: Best case, an actual number, but but if not sort of a general sense of magnitude on how much.
Speaker Change: Part D is weighing down on med margin and on an EBITDA. Thanks.
Yes Jack.
Speaker Change: So it is a negative impact we're not dimensioning that today I think there is two issues, we see with D. One is the underlying performance, but the other issue is just the lag the amount of time it takes to close out part D from the prior year and the visibility that we have.
Speaker Change: Around that which is leading us to.
Speaker Change: This goal with all of our payer partners to really mitigate our exposure to that whether that's through this carve out or a corridor or other mechanisms and that's important I mean as I said in my remarks, how we deal with part D risk.
Speaker Change: Is very important to our payer partners.
Speaker Change: Many of them say, hey, the primary care physician does have some role within it but they agree with us that our ability to control all of it and more importantly, the ability to see the information we need to accurately forecast that is challenging and so that's the construct under which particularly as we step into IRA and the <unk>.
Speaker Change: Dollars increase.
Speaker Change: To mitigate more of our membership against that and then for the balance just like with everything else, we're going to forecast it very very cautiously.
Speaker Change: Thank you the.
Speaker Change: Your next question will come from the line of Michael <unk> with Baird. Michael Your line is now open.
Speaker Change: Alright, thank you.
Speaker Change: So I understand your initiatives in play to improve your data visibility, but in terms of fully closing the claims lag proving peer data exchange that I was wondering if you could talk more about whether there is a potential pathway for claims delegation it seems to me that could or.
Speaker Change: Would be that potential ultimate fixed or sort of a panacea tier claim cost trend and risk adjustment data lag issue.
Speaker Change: Excuse me if I wanted to ask is the technology offering you guys have set.
Speaker Change: Set up to handle that or are there other hurdles or any other factors that would keep you from taking on full claims organization. Thank you.
Speaker Change: Yes, Michael Thanks for the question I mean, I spent a lot of years delegating in California to a number of entities that paid claims downstream.
Speaker Change: That is not a model that works in most of the country, nor do most of the payers that we work with have the ability to do that.
Speaker Change: So the alternative is the financial data pipeline that we've been updating you on the ability to get detailed member and claims information that is on a lot. It's on a lag to the payers. It's on a lag to us the big Leap. We've made is this leading indicator data the census data that Jeff referenced that we rely on to <unk>.
Speaker Change: Look our trends within the quarter that gives us on.
Speaker Change: Two day to a two week lag a very good idea about what's happening in the inpatient setting across our network and so thats the big leap that we've made around that we continue to add other data in in terms of HIV data lab data pharmacy data et cetera that gives us a better view.
Speaker Change: Around that but to be successful in these markets, we need to be able to get access to that and as I called out if we can't get certain information from payers.
Speaker Change: We won't be working with them and so that's affected some of the decisions that we've made whether it's exiting contracts with payers or a delay in bringing on a new partner for the class of 2025 that was less of an issue with our partner they were kind of ready to go it was with those payers, we couldnt get that information and we just did not feel comfort.
Speaker Change: Standing it up.
Speaker Change: Thank you.
Speaker Change: Your next question will come from the line of Sean Dodge with RBC, Sean Your line is now open.
Speaker Change: Hey, Good afternoon. This is Thomas Keller one for Sean Thanks for taking the question.
Speaker Change: The circuit was this earlier, but you mentioned an alternative risk terms for your own markets could you go over those in more detail is there something new that's starting in 2025.
Speaker Change: To make sure I understand the distinction.
Speaker Change: Thanks.
Speaker Change: Yes, Thomas Thanks for the question.
Speaker Change: There is something new in 2025, I think that the headline is we provide a lot of value to our payer partners. They really want us to be with them over the long haul in this move to value all of them have aggressive goals about expanding more of their senior members into value and so.
Speaker Change: 25, probably for the majority of that class, we will end up with contracts for the first year.
Speaker Change: Our no downside in a care management fee that gets us set up around our burden of illness work quality work the clinical programs get the right data. So you can underwrite as you move into year, two and beyond and so that is new its a glide path into full <unk>.
Speaker Change: Risk, but it's all part of this stand up in the year and it just allows us a little bit more flex in protection based on what have been some historical data exchange issues that ended up being very challenging when youre, taking full risk.
Speaker Change: Alright, thanks for the distinction.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: As a reminder, if you would like to ask a question you may do so by pressing star followed by a one on your telephone keypad. Your next question will come from the line of Daniel Chris White.
Speaker Change: City.
Speaker Change: Daniel Your line is now open.
Daniel Your: Hi, guys. Thanks for taking my question actually I had a similar question to the last one on the glide path really two questions one more mechanical than second one more big picture on the mechanical side I assume.
Speaker Change: Its glide path.
Speaker Change: Don't reckon.
Speaker Change: Our recognized revenue on a gross basis youre, recognizing that care management fee or maybe a net savings here as revenue and then the bigger picture question is just on the model and if perhaps these challenges may necessitate.
Speaker Change: Moving away from.
Speaker Change: 100% fully capital type of model and entering into.
Speaker Change: More downside protection for you.
Or maybe just upside downside with corridors any change in kind of the overall model away from a 100% capital that you're that you are contemplating in 'twenty five and beyond.
Speaker Change: So I'll, let Jeff answer the accounting question in a second but but Daniel.
Speaker Change: We think about this this is a glide path in the initial year with the idea of moving to full risk over time, I think it's reflective of the challenging environment in which we're in and so there is always the possibility to extend that if we need to across a across a period.
Speaker Change: Of time.
Speaker Change: But I think we feel like full risk value based care delivers the best quality and cost outcomes. It's the place of real value add with our payers, we need to get economics that align with that in terms of percentage of premium we need to get incentives for the value that we bring them like the quality program that I talked about.
<unk>.
Speaker Change: And so that that's sort of the way that we're approaching it and we need to get data because thats one of our biggest hit when we get data and we're able to align with our physician partners. We've demonstrated an ability to perform extremely well on our part D medical trend relative to whatever that local benchmark is that.
Speaker Change: That's the path on how we think about it but in this environment. This seems like a smart glide path as you bring on.
Speaker Change: Did share with you that 80 plus percent of our partnerships are already positive adjusted EBITDA at the market level, even in this challenging environment and we see the opportunity obviously for that to improve.
Daniel Your: Yes, real quick Daniel on the accounting issue Youre Youre right, yes, it depends on the contract terms, but it could be.
Daniel Your: No gross reporting.
Speaker Change: Thank you.
Speaker Change: At this time there are no further questions registered in the queue. So I will turn the call back over to the management team for any additional remarks.
Speaker Change: Great. Thanks to all of you for joining the call. Obviously 24 has not unfolded the way we expected, but I think we feel very good about the actions that we've communicated today and the strength of our core business as we've communicated so thank you and we'll talk to you soon.
Speaker Change: That concludes today's call. Thank you all for your participation and you may now disconnect your lines.