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

agilon health is a company that enables physicians to take risk across their Medicare books of business. And presenting today, we have Steve Sell, CEO; we have Tim Bensley, the CFO; Matt Gillmor from Investor Relations is here. I think we'll just jump into the queue.

So I guess when we think about the model that you guys have, I mean, we're actually just kind of talking before this, but there's not a great comp to kind of what you guys do right now. Why the technology aspect of it versus kind of the clinic aspect of it and by enabling existing finish groups versus growing PCP clinics?

Sure. Yes. I mean I think what we're building is really what the market needs and what groups that are out there need. So there's a tremendous demand for a new primary care model that allows physicians who've been in their communities for decades to deal with the challenges of Medicare population that's aging. It's 30% of their practice. It's very challenging for them from an economics perspective. You have payers, whether it's CMS at the national level or national payers who are really pushing for more of a move to value-based care. And so from the very beginning, we saw the opportunity around building a sustainable primary care model with our partners to be really distinctive. How we've done that from a technology perspective, from a partnership perspective, really is intended to build around the strength that fits with each one of our partners, the reputation they have in their geographies, the relationships they have with their senior patients. And we're really investing in things that drive differences, Kevin. So we're not building clinics. We're not spending a lot on an agilon brand out there. Everything is focused on leveraging their existing patients as they turn age 65 and move into Medicare and how do we help them provide better quality and lower cost in a total care relationship. So I think that's really the logic around why we've done it. The success that we're seeing is really a fact that those macro factors have only accelerated in the last 5 years. Payers are looking for it much more. The pain that these groups are facing from an economic perspective with the aging population has grown really pretty dramatically. And then the success that our groups are seeing literally any medical group in the country can look at an agilon partner that sits across our network of 23 partners in 12 states and find a group that looks like them. And so we give them a 5-year pro forma of here's what this could look like. And they cannot just believe that based on the data that's there, but actually look at a group that looks like them and what their experience has been. So the combination of those things is really driving an incredible step in growth and in terms of performance.

And Kevin, we have been talking about that before I walked up at your opening comment about, there isn't really necessarily another easy comp out there to us what we're doing, that our model is pretty unique. And one of the things that Steve talked about, of course, this idea of these long-term partnerships, the economic model that we bring and the alignment that drives with our physicians that really creates that opportunity for us to pretty rapidly grow members at the same time that we're growing margin. And I think that really was born true in our results that we just put up in Q1 is part of it. But I don't let that comment go by ever without making this next comment. The capital efficiency of our model is phenomenally different than I think than anything else that is out there. We're not out there investing in member acquisition, marketing costs. We're not investing in building a clinic. We do invest pretty nicely with our partners to help drive growth and capabilities. But the capital efficiency of our model is really tremendous. And so the return of that we get on those investments is also really strong. And I think that's another huge differentiator.

Yes. So how do you think about the growth algorithm for agilon when you think about MA growth, capitation growth, and new contracts? And how should we think about the long-term growth here?

Well, I think the success that we're seeing the acceleration in growth that we're seeing is a function of we grow in two ways. We enter new markets where we like to be first in terms of moving that market to risk, build around a scaled partner who's really well respected within that group, enter this 20-year exclusive joint venture, which is a true partnership. And then they're the vehicle that we're going to build around for the long term in that community. And so we've just gone from 8 to 12 states. We've just added 7 new partners. And so that side of it is going very well for the reasons that I mentioned, the macro forces and the proof of the success that we've had. And then the other side is the same geography growth rate, which is going in the mid-teens pretty consistently. And there's two sides to that. There's the organic growth within Medicare Advantage running about 8% nationally. And we continue to gain our fair share with the existing patients that sit within that practice and roll over. And then the place we're seeing a real acceleration is other physicians within those communities that we've entered, choosing to join into that group or into the agilon platform. And so we've got 1% of the primary care physicians in the country, which has got over 2,000. There's about 200,000 primary care physicians. But when we look at those two sides of growth and the opportunity, there's just tremendous runway and momentum both for new markets, new partners, and the same geography. That's helpful.

Now I just going to say, Steve, and this is another thing that we always talk about in our model is because we have these partnerships at scale with these primary care physician groups, we also have pretty good visibility into one big component of that growth. So when Steve talks about same geography growth, the big part of the same geography growth is either existing members in our existing patients on the panels of our PCPs, deciding to move from fee-for-service into MA, primarily happen to an AEP process. And of course, we see that. But the other thing is just people aging in during the year. And those are patients that are currently seeing our physicians that are on their panel. They know these people and they're aging into it. When you look at our existing markets, we have something like 165,000 patients that are currently on our physician's panels that are going to age into Medicare in the next 5 years. And we know who they are. So we have visibility to that. I think there's something like another 100,000 that have already passed 65 and just haven't selected to move into Medicare yet, so we call them kind of extended agents. So that's 250,000 to 300,000 members that are on our physicians panels right now that we have visibility to. So our ability to have not only say, hey, we can drive that mid-teens kind of same geography growth or visibility to a big component there is just endemic in our model.

Yes. Actually, going to build the next I think capital efficiency dynamic is pretty compelling. And then we've seen agilon has performed quarter-to-quarter during COVID much more consistently than a lot of the peers who are doing similar things with the one clinic model. So maybe just expand a little bit more about maybe the visibility you have also from a cost perspective or coating perspective from the way that you've built your model or brand.

Yes, I'll start and Tim can jump in. I mean I think one of the real differentiators in our model is in the high-touch nature between the primary care physician and the patient. Our patients have been with our doctors for a decade or more, and they'll be with them typically for another decade. And so we understand those groups very well. As we bring them on board, we have great visibility from a cost perspective because we've got that experience with them. We take a 12-month implementation period, which I think is distinctive. And the key is to make sure that we hit day one, year one with a very clear idea around their burden of illness, which is both important on the revenue side and from a care management perspective. And so that visibility and that continuity is a big differentiator. In COVID, what we were able to maintain was the touch points with these senior patients. More of it was done via telemedicine that had been done historically. But our experience scores with patients actually went up during COVID. They said they felt cared for. They had a relationship. And I think that translated into more predictably from a cost perspective, we didn't see a big movement on the revenue side in terms of RAF because we were able to maintain those touch points. And we're also not seeing a huge step-up in terms of pent-up demand because we were able to maintain that touch and make sure there wasn't a huge amount of deferred issues.

Kevin, do you want me to touch on the actual the capital efficiency part of that.

Yes, sure.

There's really, if you think about the two ways that we grow, we bring new markets like we just brought 60 markets live in January that were in implementation last year that are about 52,000 members that were reported in Q1. So that's one big way we've grown and the other way is the same geography growth. The cost for us to bring a new market on is essentially all of our costs for us, if you want to call it that, acquiring a new member. And for us, all of that is essentially the investment we make during that almost full year of implementation that we have before market goes live and we take full risk and start generating revenue. That cost to us is only about $400 to 500 I'd say, market to market per member. When you think about the medical margin that we generate, even in the early years of lower medical margin PMPM rates over the first year and year half, we're paying that $400 back within a year to two years, usually closure to a year than 2 years. So the cost to acquire members, the cost to get that up and running on a per member basis, just phenomenally low and immediately paid back. The other way that we grow in same geography growth, I mean, that does not really cost us a lot of money at all. The way that we essentially support that growth is through some capital support that we can give to our partners that help them bring more physician groups or more physicians underneath the tent. And all of that comes in at even a lower cost than that $400. So across the board, our cost to acquire a member in any one year, and we went through the detailed economics and full at our investor conference in March is like on average, 400. It was actually a little bit less than that last year. So if you think about our ability to grow as fast as we have, and we're only spending like $400 a member to do that, the sort of lifetime value to contact economics have you want to look at that are almost like ridiculously positive. So that's really not an issue for our model. I mean that would be very different, obviously, for other models.

We're a multi-payer model moving the entire Medicare managed book [ risk ]. Churn is really low. The retention we have is north of 90%. And so we're hanging on to these patients.

So if you take that into account and say you are holding on to a member for even 10 years on average, that our LTV to CAC on these things are 15-plus to 1. I mean it's just a phenomenal payback. But it's almost like it doesn't even matter to quote those numbers what it really means is we just don't need a huge amount of capital for us to deliver our growth plan over the next 5 to 10 years, and we can grow in a very capital-light capital-efficient way.

I would say the retention that Matt talked about is a huge differentiator. So I ran a payer for 2 decades. The best retention I ever saw was in a staff model with Kaiser in California, which was 80% retention. What he just told you is we're running in the low 90s. Now running 95% to 96% is the best you can ever do because of by definition, the senior population, you're going to have roughly 4% pass away a year. And so a subscription model across a 20-year partnership with physicians that are going to be in average in the practice for 13 years is with that sticky member relationship is just incredibly compelling. And so that's why we feel so comfortable about the visibility and the predictability as we look out years because we've got years now of experience with that, tracking at that retention level and the growth in margin.

And I was talking maybe focusing on the cost side of the LTV to CAC, but the LTV side, the lifetime value of those members, the fact that we have this sticky relationship, and these are patients that have been seeing these doctors pre becoming a senior most likely and under the continual care may not just significantly helps to drive the overall outcomes and the cost down for those patients. So the other side of it or what's happening to the cost for those patients and more positive outcomes is a big part of the model as well and a big part of that equation?

Yes, that's helpful. I mean you guys have already talked about the 2023 pipeline. You've been strong. So we now talking about 2024 , so any initial thoughts or comments on kind of how 2024 is looking?

Well, the 24 pipeline is really robust. The success that we've had with 23 and the diversity of the types of groups, including our first health system, which is very visible, main Health incredibly well respected, has only sort of increased the interest in partnering with agilon. We have primary care only multispecialty scaled networks like IPAs and health systems all interested. And we think of it as a funnel. The top of the funnel is more full at this point in the year than we've ever seen it. And it's across that diversity and existing states, new states. So I think that's very encouraging. We always say we have to choose the partner wisely, make sure they fit those criteria that we talk about in terms of really well governed, primary care-centric, commitment to transparency, having that critical scale. And we need to choose well because we're going to build around them for the next two decades, but it's as encouraging as it's been.

So that point about picking the right partner, like do you actually get situations where you have two partners in the marketplace who both want to work with you and you actually see it between one of the other order you're saying, do you have finite resources, you can only do x number, and so you have to prioritize.

So in the same geography, we have had a couple of partners where we've gone live with both of them in one integrated entity and another in which we set up sort of two partnership relationships with them side by side. So we do have that. So yes, we do have that. Akron is a great example of how that happen kind. So Akron Pioneer, one of our best performing groups came on in year two, primary care only group. There was another group in town called Community that they are basically one and two very well-run groups, community had never had a partnership and said, we're not ready for this right now. They've come on board as of January 1 this year, really based on what they saw happen with Pioneer. A Pioneer is transformed; they've grown 30%, 35% a year. They've seen an increase in PCP economics based on surplus of 100-plus percent. They are at such a scale position. They actually have at the local hospital where they admit most of their patients, they actually now have their own wing, where if you're a patient, you go in there, everyone who's seeing you either works for Pioneer or as an agent of pioneer. And that's a function of scale, but community said, "Wow, we need to get on that," and so they've joined this year.

And so when you say talk about picking the right partner, like how often does a physician group approach you and you say, you know what? No, versus.

Well, so we have said not right now. Here are things that we want to work on. A big part of it is kind of governance model and how they're committed around that. We would probably not work with a group in which the ownership of the group is concentrated in a few physicians within the group. We want much more sort of distributed. The idea is that the individual physicians' economics are driven based on how the group works, and you want this to be a team-based sport. So there's a lot of peer-to-peer reviews and other things that you want going on to stimulate improvement and understand what best practices are, that only works if they really have a commitment to distributing the economics across.

Yes. On the call, you guys talked about kind of year two economics and the ramp-up and there was pretty strong, I guess, up 30%. What's driving that? And I guess, what you're trying to think about how replicatable that type of us and how do we think about the year three or four from there?

Yes. I mean so what we talked about was about 160,000, the 250,000 sit within that year two plus set of cohorts, and they improved from $109 PMPM a year ago to $143. So pretty significant improvement within that period of time and that includes the 36,000 that just joined last year. And so they're obviously well below that level. So they're dilutive within that, and it includes the same geography growth that Tim talked about. But even with that dilution, you're seeing that overall growth. If you look at the cost areas where it is you see it in inpatient spend, you see it in specialty costs coming down dramatically, readmission rates down pretty significantly and then post-acute, what's happening in terms of total cost and experience after discharge from the hospital. But what we've got now is enough reference points that we can say what is driving that because we have pretty consistent applications on specialty referral or palliative care across the network. The biggest differentiator is the quality upfront in terms of the primary care relationship that aligned PCP we talked about and the touch points they have, particularly their most complex patients. If they do that really well, they have a care team around them that's following up with them regularly. They're following up within two days post discharge from the hospital versus the norm used to be about a week for us. It has a dramatic impact on the cost areas that I just talked about, but it really goes back to that high-touch relationship between the physician and patient and making sure they have the data they need and they have the team around them that gives them the time to spend with those most complex patients.

All those things, Steve, that you're talking about that just allow us to execute on what we think is just one of the absolutely fundamental if you want to call it, headlines of our model, which is we can grow members at a pretty rapid flip at the same time that we're growing margins. And of course, we already said the third part, we can do that capital efficiently. But those numbers from now we have real proof points, right? Those numbers from Q1 are just a direct factual proof point of that, that we could take those 160,000 members that are partnership markets that have been on the market for at least a year, they absorbed 14% same geography growth, which is dilutive in the short term, and yet at the same time, we're able to have that overall medical margin blended improvement from what did we say, $109 up to $143 year-over-quarter. I think the cohort data that we showed that you were referring to, Kevin, at the Investor Day in March showed the same thing we're now seeing. We've now got enough years in some of these markets to show hey, that idea that we can grow members at a rapid clip at the same time that we're growing margins is proving out for all the underlying operational reasons that are drivers that Steve was just talking about.

I guess from the outside, looking at sometimes it's harder to segregate like what was COVID and how that's impacted the numbers. So I mean, like the things you said don't speak to correlated, but any way to kind of...

I think it's pretty easy. That's another nice thing about the Q1 results now that we just reported last week is that there's really pretty neutral year-over-year COVID overlap. Okay. So our COVID as a percentage of our costs in both the first quarter of last year and the first quarter this was about 2%. So there's not really a part of that increase is because you're overlapping high COVID cost or the other way around that you had big COVID suppression that we didn't have last year. So I think this quarter is a pretty clean example. So that 148 over 109 progression is a pretty apples-to-apples.

Okay. And then we've is a question I always ask you. I think you was interrupted the wrong way. So basically, the question ends up being this model, everything that you're doing right now, the acceleration and the physician engagement, it makes so much sense to me because it's working. But I almost wonder as we think about that growth algorithm for the next 5 years, I think it's going to be higher than what you're talking about. The problem which is pretty high, the problem I see is like what's the growth algorithm in year 6 through 10? Because it feels to me like every physician is going to even certainly the large ones that you target, right, are going to be sophisticated enough to have this type of model in place, I would think over some point of the next year. So how do you extend that growth after that?

Yes. I mean I think macro level, we've got 1% of the primary care physicians in the country. So there's a tremendous amount of run rate. We're in 12 states, right? So there's many more states in which it's 100% fee-for-service, and there are scale groups that are out there. There are hundreds, if not thousands of communities with that same sort of mercotype. And so I think we are seeing the acceleration that you talked about, right? So we added 600 primary care physicians here for January 1 of this year, it put us over 2,000, obviously, an acceleration. If you kept at that rate or more, what are you talking about, 3,000, 4,000, 5,000 primary care physicians over the next 5 years, that still puts you at 6,000, 7,000 against a total of 200,000 that's out there. And I will say, Kevin, I think we uniquely create this opportunity in communities. You go in and the health plans are not built for risk. Majority of our health plans have never done it before. And the groups are not equipped to do that. And so I think we will continue to be that go-to source for that. I think adding new states gives us a huge infill opportunity in the out years, adding these four states, we will go and mine those states for the next five to ten years in terms of new communities and in terms of other physicians that join. So I think it will be lumpy, but I don't worry about 2030, 2035, what that long-term growth opportunity looks like. And it doesn't rub me the wrong way, by the way.

So I guess when we think about your model because you're unique in that you have a solution for the Medicare business. I think your analysts talked a lot about how Medicare isn't really profitable positions. So you got a solution for the fastest-growing part of their panel, which hasn't historically been terribly profitable, but there are other companies that are helping physicians engage I care also helps you on the commercial side. So do you believe that not having a whole wrap around all payers? Is there any way disadvantage to you? Or why would someone choose your model versus another one that might [indiscernible]?

I mean I think the reason these scale groups are choosing us is for what we've talked about. The macro forces that challenges within Medicare, economically, capacity-wise, etcetera, and then the success it's seeing here. To be able to take your least profitable part of your practice and actually the one that is threatening your survival and turn it into this tremendous asset that really allows you to invest and create a new primary care model, I think, is pretty priceless for these groups. And so that's what, I think, drives it. But it doesn't mean that commercial is not super important to our model and that our groups don't dramatically see improvement in part from that commercial business. Commercial, well, it doesn't directly run through the partnership, indirectly has a massive impact. One is scale. So our groups have 20%, 25%, 30%, 35% of the adult primary care capacity in their communities. They're typically 70% commercial, 30% Medicare, but when we look at things like specialty cost referral around cardiology, oncology, ophthalmology retinal drugs, etcetera. If you're an ophthalmologist, and we're asking you to substitute drug A versus drug B, and you have a scaled group, that scale has a major impact. They're going to take the call, they're going to make that adjustment in terms of that. And so commercial is important for scale. And then the second piece is what Tim talked about is the efficiency of the growth. So commercial is super important within that right now. Our groups are typically doing very well on the commercial side. And so right now, our plan is to keep going after that massive Medicare TAM, keep entering the 20-year exclusive joint ventures at other physicians and other parts of the state around it.

So you're not hearing from your partners if they want...

We're not.

What about Medicaid, that feels like the risk might make sense or can [indiscernible].

I have a lot of experience in Medicaid, right? So I mean I ran the biggest Medicaid plan in California for a long time. I don't think that's an area of focus right now. I mean it's different from a network perspective, different from a population perspective over time. Certainly, duals an area that we see more D-SNP is an area that we see more. So as those cross over, I think that would be sort of that logical growth point.

And you're somewhat unique disruptors in that you're basically profitable now and you've got $1 billion of cash on the balance sheet. So there's not really a funding issue to worry about. So what do you do with that much cash? Where is neurological acquisition.

Well, I mean, as we said on the earnings, we really like having dry powder, particularly in this area of volatility. We are very close to generating positive cash. So that's not really a drain on it. There's the two areas that we talk about. The best use of our capital is putting our groups in a position to grow and be that aggregator within their communities, and we are aggressively pushing on that. The second side of that is capabilities that can really help us reduce cost, particularly in the communities where we have scale. And so as you think about post-acute, things within the home, as you think about the major cost categories, cardiology, oncology, GI. I think there are tremendous opportunities for us to really leverage that and get after those costs. But as we look at that today, that's not going to approach the majority of the capital that we've got. And I just come back to, again, I think we like having the dry powder.

Excellent. I think that's all we have time for. Thank you very much.

Great. Thanks, Kevin.

Thanks, Kevin.