agilon health, inc. (AGL) Earnings Call Transcript & Summary

[Audio Gap] Healthcare Research -- Healthcare Conference. My name is Justin Lake. I cover health care services here at Wolfe. Really pleased this morning to be joined by the team in agilon. We've got CEO, Steve Sell; CFO, Tim Bensley; and IR extraordinaire, Matt Gillmor. We're -- what I thought we'd do here is a couple of things. One, as always, e-mail me with any questions at [email protected], and we'll save some time at the end here for that. But for now, why don't we kick it off, letting Steve give us a kind of a couple of minutes state of the union here coming out of what was a pretty solid 3Q.

Yes. Thanks, Justin. It's great to be here. It's been a great year for us at agilon. We've made really good progress against our vision of transforming health care at the community level and doing that by moving independent physician groups from fee-for-service to risk for their over 65 Medicare population. Results in Q3 and the outlook that we provided on '22, I think, are really strong from a growth and from a margin perspective, really nice progression on both of those. But I thought what I'd do is I'd sort of talk about some of the structural things that we think are really driving some of this and allowing us to just position so well and be successful. If you think about it at the beginning of the year, we talked about this real challenge that independent medical groups and specifically independent primary care was dealing with. 30% to 50% of PCPs are independent, depending upon kind of what source you look at today. And specifically, their Medicare over 65 business, which is about 30% of their panel and 50% of their patient volume, real challenges. Transactional, getting paid per visit, that reimbursement is incredibly low, $100 to $200 per visit, very limited time to deal with their most complex patients, and then real payer pressure in terms of CMS putting pressure on payers and payers in turn, putting pressures on primary care around cost and quality, different incentive models, very fragmented. And at the time, we said, "Hey, we have this really distinctive platform and partnership approach. We can provide a solution and move these groups from fee-for-service to risk and really create a subscription relationship, put them in a total care model in which they can be responsible for the cost and quality and get paid $850 a month and manage that. And we could create time for them and invest resources." And so we've been able to do that. I think as we fast forward today, those structural forces are stronger than they've ever been. This most recent announcement about the Medicare physician fee schedule reductions, that's like pouring gasoline on this acceleration towards value and the challenges that independent physicians have with their Medicare business. And then the success that we've had: 17 markets, 8 geographies, being able to drive medical margin performance, which is not just great for agilon but we're sharing with those physicians. And so they're really transforming what's been a challenging part of their business into the business that catalyzes and transforms their overall practice. And so in Q3, as we talked about incredible results from a growth perspective, we brought on 100,000 patients or members this year between MA and Direct Contracting. Three markets in terms of new geography for January '21, 6 markets for January '22, incredible progress on the class of '23 that we'll announce at our Investor Day coming up. That national network effect is working, same geography growth, 15% year-to-date. We've given low to mid-teens guidance for next year and say that's sustainable. That's a function of more and more physicians joining in locally in the markets that we're in. So I think on the growth side, really well positioned. And then on the margin side, $93 per member per month year-to-date in a sea of volatility with COVID and with the Delta variant, above our expectations, but really emphasizes the power of this patient-physician relationship that's been there, the intensity we brought to it and our ability to manage costs outside of the primary care office. So I mean, I guess, just to wrap at the very beginning here, I think we're incredibly well positioned. I think there are hundreds of communities that need this. I think our track record with a platform and a partnership model that creates the opportunity and allows people to be successful is significant. I think we've got a real first mover advantage when we go into these markets and we flip that switch to move them from fee-for-service to risk, and other docs are recognizing that and then wanting to join in. And I think we just have this real ability to go deep with scale of our partner and the history of our partner to affect these big cost areas, whether it's specialty costs, hospital expenses or end-of-life expenses. So really good start to the year for us.

That's great to hear, Steve. I appreciate you sharing that. And one of the things that jumped out to me during your kind of discussion there was you used the word incredible to describe your '23 pipeline, right? So I'm looking forward to hearing about that, but I think the adjective speaks for itself. So one of the things we think about with your business is, obviously, to your point, it is a competitive business. There are a lot of folks out there that said you do have a fairly unique platform, right, a lot of others in the center model, for instance.

But what are the gating factors to your ability to grow even beyond the metrics you kind of laid out there in terms of this? I think you've done a very good job just to kind of interject there on setting expectations and then meeting or beating them, right? That's something that's important as a new company. But if we think about the potential that, to your point, there's a lot of factors that are driving potential growth in this industry, what are the factors that could -- what are the things that keep you from exceeding that 40,000 member kind of target that you have out there? What would drive you to get to 60,000 or 80,000 given the pipeline?

Yes. And what you're specifically talking about is new geography growth, patients around those. So just to remind people, we grow in 2 ways. One is we enter these new geographies. We've got 6 that we've been implementing for almost a year now that will go live on January 1. And then we're working on the class of '23 in new geographies. And I think really, Justin, there's -- from an implementation perspective, there's really no constraint around that. We have a separate implementation team. We were able to implement 3 geographies in January. We had 6 in Direct Contracting come on in April of this year. Again, we'll do 6 for January in MA, and 2 of those in MA and DCE. And then of our existing folks, 2 more will add Direct Contracting. So implementation is not really constrained. I think when I use the word incredible, it's really about these structural things that are driving the interest. We cannot have a conversation out there, whether it's a small group or a very -- an end market or a very large group in a new geography without people wanting to understand how they can transform their Medicare business and move it from one that's got all the challenges I talked about into one that can be something to transform their own practice and they can become the leader in their community. So I think we've built our platform and our partnership model to serve diverse geographies. We have metro geographies. We have rural geographies, diverse groups, primary care only, multi-specialty. We have health system physicians in some of our markets that are rolled in underneath this. We have single TIN groups. We have those that are more distributed in areas. And so I think we've been able to successfully do that. And every time we enter one of these new markets, we really effectively grow our TAM. So the outperformance will come from being able to continue to drive the breadth of that, which we've done. That opens up more opportunities for us in terms of '23. Those conversations are extremely active. We know who will be in the class of '23 right now. We have signed letters of intent. We have definitive agreements. We're doing implementations right now. And so I think it's really a function of those things, but the interest is there. There's no constraint on the implementation side. And it is a range of geographies and groups. As we've said, we'll have new states in our '23 class. We'll have existing states in which we add geographies and do that hub and spoke type of build-out that we've done in Ohio, in Texas, in North Carolina and other places. And so it will be a combination of all of those things that I think will drive that. The one area that I'll just remind you, we've talked about this before, is we want to choose our partners really well. And so maybe the only constraint is one that we put on ourselves to say, "Let's build around the right partner in a geography." We do a 20-year exclusive joint venture partnership, and they are going to be the vehicle to grow over that time. And so choosing wisely is really important.

Okay. And that's a good segue to what is the criteria that you use to decide what a good partner is versus one that you'd prioritize lower.

Yes. I mean I think that the diversity of geographies and partners has grown, but we've held really true to a few tenets. They have to be primary care-centric. They can be multi-specialty, but they have to really [ adopt it. ] They have to be extremely well governed, which means a commitment to transparency in terms of performance. They have to have shared economics across the group. And the primary care physicians, in particular, have to really share meaningfully in the surplus that's going to be generated based on cost reduction and just surplus in that market. They need to be a leader. They don't have to be the largest group in that community, but they need to have meaningful scale because we want to enter in a scaled position. And so that leads to groups that are -- in Zanesville, Ohio, Physicians Group of Southeast Ohio (sic) [ Physicians Group of Southeastern Ohio ] has 40% to 50% of the adult primary care capacity in that market. That's not a group that was even on our business development pipeline, but they've done incredibly well there, and they have all of those attributes. And then on the other end of the spectrum, you have somebody like Austin Regional Clinic, who is one of the leader in the Austin market, a multi-specialty group that's been there, but they both have those sort of common denominators. And when you think about that, like I said, there's literally hundreds of these communities with groups that fit that profile that allows us to continue to grow in new markets and new geographies.

Got it. Got it. And one of the things I thought was interesting that you've talked to, especially in a world where some of your peers are seeing volatility quarter-to-quarter, is the closed-loop system that you put in place. I know it's pretty nascent in terms of it's only a few geographies with a few specialties. But one, can you tell us more about it? And then two, can you share with us what are the tipping points where you're able to implement something like this? From a -- is it a market share -- percentage of referrals in the market? What kind of drives that?

Yes. I mean -- sure, I can provide context on that. And maybe just to back up. So what we talked about on our call was this ability to have a closed-loop system. In that case, we were talking about specialty referrals. And so the ability for the primary care physician to know when the appointment was made, know when the visit actually occurred and then to get that information back into the EMR so that they have that visibility, right, the primary care physician as the quarterback. I guess my first point is closed loop extends not just to specialty referral. The technology and the capability and the connectivity really extends to care just outside of the primary care office. So it can be facility-based care with hospitalists. Obviously, they're specialists there. It can even extend to our end-of-life care. And so we have this focus, Justin, on looking at these big cost lever areas for that over 65 population in which we can really influence the outcome, and there's a few things we look for. One, a tight primary care patient-physician relationship so you can make that referral in specialties or you can have that conversation with someone at end of life about the options, therefore, difficult conversation. But it really starts around that tight patient-physician relation. Two is, can we use process and technology to systematically improve the outcome? Can we get patients to top-tier cardiologists, right, or top-tier orthopods, as an example? We're doing it across a series of specialties. Or can we get people to a trusted hospice organization around end of life? Three is scale, right? The scale that we have in our communities allows us to have that impact with the specialists outside the primary care office. In some cases, those specialists are through multi-specialty groups to work with. Other times, they're not. Or to have a really trusted tight relationship with a hospice organization on end of life that, that primary care doctor can feel really good about. And then we look at areas where we can differentially invest and have a meaningful outcome. And so in both those examples, especially referral and palliative, we've really moved from an old process in which the primary care doctor didn't really know a lot about what was going on, no insights to kind of cost and quality. No idea if the patient was going to see the specialists. The sicker patients weren't prioritizing the top tier -- high-value specialists were not being rewarded. And we've been able to create a new process in which we have data insights that tiers those folks. The downstream cost difference between a top tier and a bottom tier could be 3 to 4x. We've created a referral council with primary care doctors that really gets them comfortable around that tiering. And we've created a centralized referral, which is a big part of the throughput, to make sure that, that referral actually gets to that top tier piece. And then the closed loop, like the technology allows us to prioritize referrals, confirm the scheduling and then loop it back. And so the examples that we've talked about are -- like the Akron cardiology example, we started at 39%. We're now consistently over 70% of referrals going to those top-tier cardiologists. The savings on that can be as much as $100 per member per month. And there's a long-term relationship with that cardiologist. So that's something that's going to continue and is pretty meaningful in terms of cost and quality. And we've been able to set that up in a variety of markets right now, Justin. So we're in 5 markets right now at different stages. We're across 5 specialties and end of life in terms of where we're using that closed loop system to some extent. The idea is that we're going to roll this across our network. But 100% of the specialist referrals, once we've got it set up in the cardiology example I talked about, 100% of palliative should close through that. So it should, on the front side, go through and then the loop should come back. And the idea is just the visibility is better, and that allows you to have better predictability around what those costs will look like.

Got it. So the -- and this is something that I think is interesting from the perspective of the -- the question I get all the time is which model is better, right? And I say, look, I think that's TBD, right? The center model versus the physician management model, and they both have pluses and minuses. But one of the things that I think is underappreciated about your model is the scale benefits that you get by partnering with very large physician groups, especially in these -- I don't want to call them second-tier, not that they're second-tier markets, but they're not New York City, right? So if you're dealing with a very large physician group in Syracuse, New York or Akron, Ohio, right, they're not your huge markets such that you're going to have 5% share as a big group. You might have 30% share as a big group, right? Like you do -- I think you do in Akron. So my point being that -- I know that some of the center businesses, there's a little disappointment in the second quarter where they were telling people, look, we had a script down, and we don't know whether the person even went to the doctor or went to the cardiologist until we get the bill from the claim from the payer, right, which is months later. So I want to make sure I understand what you're doing here, which sounds to me like, I think in the press release on this, you had talked about there's some IT that effectively sits in the physician workflow. So a cardiologist there, to be in that referral network, they have to put this system in their workflow where they're -- you're seeing when the patient gets scheduled, when they're seen and you're seeing the clinical information and what the referrals are from there back into your workflow on almost a real-time basis. Is it that strong a system? Or is it got to get there from here?

Well, it's in the places where we've rolled it out around the specialties and around palliative is that strong. It's -- the scale point that you make is when you have 30% to 50% of the adult primary care capacity and you have partners that have a really large commercial business as well as a Medicare business, specialists take that very seriously. They want referrals. So they want to participate in whatever is going to generate that. And then there's just this -- the closed loop that comes back that allows us to have that information. The EHR or EMR point that you make is it is integrated into that workflow. So it's there for that primary care physician. But I'll also call out that we co-locate with the primary care doctor, and we have this centralized referral unit. It used to be the primary care doctor was kind of doing it on their own or an office manager was on their own. This goes from, "Hey, I want to refer to Dr. Gilmore who's a top-tier cardiologist," to a centralized referral unit to leverage the technology, but also just the process to make sure that you end up getting that appointment. There are many times in which everything is well intended in health care and you don't end up at that desired point of care. And so getting to Dr. Gilmore within his group as a top cardiologist is really an important part of that. And so I think it is the way you laid it out. I think the scale is important. I think the technology, the integration, I think the process side of this is really important. And then I think we are learning all the time. So we constantly are refining this, Justin. We're getting feedback from the specialty side of this that is really helpful. The last thing I'll say is it's not punitive. You can have someone who is not -- is in a lower tier, and you can have an active dialogue with them around, "Here are the things that can allow you to get into the top tier. Stop using a certain facility that charges fees or doing unnecessary tests." So that is really the nature of what's driving it and, I think, why we're excited about it. And it does translate into this predictability. I think we have the visibility. I think we have the predictability that helps with that. I guess just the only other thing I would say is there's lots of differences, and we purposely chose our partner and platform approach for a reason. But the other area where I think there's been volatility is new patients coming on. We talked about our growth at the beginning. When you're growing nearly 50% a year and -- the ability to bring on those new patients where you have a very good idea where the revenue and where the cost is going to be, the fact that we do a 12-month implementation, the fact that these patients have been part of this practice for a long time really allows us, I think, better performance. In our year 1, markets are performing very well, where we expected or better than what they expect. We're not seeing this big beta within that. And so I think the visibility and the predictability extends to that implementation and new patients coming on as well as when you deal with these high-cost areas like specialty or palliative.

Got it. Got it. So as you're looking at this, maybe is there a way that you can share with folks in terms of like is there a target for 2022 in terms of the amount of your medical costs running through -- outside of the physician groups that would run through a closed-loop system.

Well -- so just specialty cost and exam, 45% to 55% of costs are specialists, right? The plan is -- I don't know if we get there all the way in '22, Justin, across the network everywhere. But the plan is to get this across the network, to have the vast majority of specialty costs running through and to be able to get 100% of those referrals, like I talked about, moving through that. So we're in the 5 that we've talked about. We're working across the specialties. The palliative is in a couple of markets, and we're working our way up. But the desire is to ultimately get those really big cost areas that are outside the primary care office looped in and fed back so the primary care physician and the team around them can actually be the quarterback that we talked about.

Got it. Got it. Maybe a question for Tim. Tim, I know you're going to give us some color on how the different groups, right, the vintage here, so to speak, are performing relative to your targets in terms of maturation economically with the -- I think it's with the fourth quarter call potentially. So maybe you could give us a little bit of a preview in terms of specifically what do you think you'll be able to share with investors in terms of the framework there.

Yes. No, absolutely. I mean our intention as we come in and wrap up the fourth quarter and have a full year under our belt that we reported is to really share back out a couple of important use of information. One will be let's go back, kind of like what we did when we originally did the IPO, and discuss what -- kind of look under the hood a little bit and understand how is medical margin maturing across cohorts and across markets. Right now, if you look at our performance, we're pretty pleased with what's happening, obviously, with overall medical margin performance, including the dilution from new members. We talked about that $93 that we put up year-to-date so far this year is a nice improvement. Skip over 2020, obviously, [ windated ] by COVID. But versus our 2019 baseline, a really nice improvement over the 2019 number. And we'll come in and say, "Okay, how is that happening basically for across individual, vintage cohorts in some of our key markets as well as how does that look across key market vintages, markets that will have been at there for 4 years, 3 years, 2 years? One of the things that's interesting, just to give you a little bit of a preview, is we are seeing kind of an acceleration of medical margin maturity in some of our markets. We've got some really good cohort performance in some of our more older markets where we're already seeing some of these older vintages getting to in excess of that $150 to $200 medical margin PMPM that we're looking for, for a mature market. But we're also seeing even some of our, say, 2-year markets starting to get to that level already. So I think we'll have a lot to share about when you look at that vintage cohort level, how are we doing in terms of progressing to those targets of, say, $150 to $200 medical margin PMPMs.

Got it. Got it. And you talked about not only some of the new groups joining DC, Direct Contracting, but some of the existing groups joining. So I know you guys again want to underpromise and overdeliver. So you've been pretty cautious on that. You've outperformed year-to-date. I think you said it was going to be breakeven. I think year-to-date, you said $4 million in profit, but you're still expecting it to be overall breakeven for the year?

No, I think what we're saying now is...

[indiscernible] quarter?

Yes. No, that's a great question, Justin. I think what we're saying now is we have performed better than we thought we're going to, and most of that incremental performance is because we're seeing better underlying claims performance than we originally expected. And that's great. I mean we've got these folks on the same platform. We're essentially managing one Medicare platform between MA and DC in these markets, 6 today, it will be 10 starting next year, and that's having a positive impact. Right now, we have booked about $4 million of positive EBITDA year-to-date through the first 2 quarters. That, by the way, does include some recognition that we're going to have potentially some retro trend adjustment that Steve talked about earlier. So we've incorporated some of that into our numbers. You do see kind of a normal degradation in margin as you move through the year. And right now, we're saying probably the fourth quarter, we would expect to come in around breakeven. And so that would result in an overall positive contribution to the full year from Direct Contracting.

Got it. And as this business becomes -- visibility improves, more of your physician partners start to participate -- I know at the moment, you don't consolidate this business. I think last week, when you talked, there might have been some discussion of the potential to do that. What would you need to do and what might be the time frame to be able to consolidate this business.

Yes. I mean I can't predict exactly when that might happen. I mean this is still a really new program. We haven't even been through one full cycle with CMMI on this yet. And as Steve talked about, there's still some pretty big unknowns out there around exactly how some of the -- how CMMI will apply some of these items like the potential for a retro trend adjustment, which we won't even know about until next summer. So we're very optimistic about the program. It's a huge part of our growth. It helps us really get scale with our positions in managing this MA population on -- all on one platform. But we're not contemplating this, switching from the way we're accounting now on a net basis to go into full consolidation anytime in the near future, certainly not something for 2022 or 2023.

And Justin, I would just add. I mean I think we're really encouraged with Direct Contracting, right? Revenue, a little bit better, but there's kind of a natural limit on that. But really on the claims side and as we said on our Q3 call, the partners that are in are seeing this value of running one single line of business. There's no leverage point on G&A that Tim talked about. But the bigger impact, I think, is on the claims piece of one process, taking out variability, consistent for the front-office staff and the physician and the team and then the downstream effect in terms of the ability -- Direct Contracting was able to take advantage of that day 1 when it went live. And so next -- in January, we'll have 10 of 17 geographies with Direct Contracting MA. As we move to '23, we expect that number will go up. Again, there's just increasing interest and recognition back to this building a Medicare line of business. Physician groups are getting it. And so I think there's all of those benefits. We just have to go through the cycle that Tim talked about to really understand it, see where it lands, but we are more optimistic every time we look at it and the way we're performing.

Hey, Steve, just real quick. The other thing worth adding because we talk about Direct Contracting and the margin contribution for it over time, we do think it's still going to be a little bit below what MA can contribute. But the flip side of that is, it is a very efficient acquisition model for us, right? It doesn't cost us a lot of investment to bring these Direct Contracting members onto the platform. And what -- clearly, less investment even compared to the very, very good capital efficient model we have for MA. And secondly, once we get them on the platform, of course, they're helping to leverage the overall cost of the platform that we put in place. So they drive some other economic benefits as well.

That's good to hear. Yes. I do have one question, of course, we can't let you get away without. Unfortunately, one of your competitors or peers, I should say, got an unfortunate request for some information from the DOJ. I know you guys had vetted this last week, so I don't need to go through it at all. I just want to make sure there's no updates there. You haven't heard of yourselves or anybody else getting anything there?

No, we haven't. And I think -- we don't know what that's about, Justin. So we have not received anything on that. But I think differences in the models are important to call out, right? We are focused on patients who have an existing relationship with our physician partners and really cultivating that. We're about educating the patients and we do use brokers, but it's really around this education of the different payer options, and we're not paying brokers for leads. And then I think the other element was on transportation, and we're not providing transportation right now nor our partners as part of that. The only place you might have a transportation situation as if a senior has a benefit through a payer and they've chosen that through the selection process, and then our care management team could be coordinating with the payer on that to get them those transportation services.

That's what I expected to hear, guys. Really appreciate the time today. Enjoy -- if I don't talk to you, enjoy a great Thanksgiving, and thanks to everybody. We'll be back in a few minutes with HCA.

All right. Thanks, Justin. Appreciate it.

Thanks.