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

Good morning, everyone. Welcome to day 3 of our William Blair Growth Stock Conference. Great to have -- I've said this before, but all of you back in person today. Great to see a nice crowd this morning and very excited to have our team from agilon health here. Steven Sell, who's to my left is the company's CEO; and Tim Bensley is Chief Financial Officer, to his left. Also in the second row, we've got Matt Gillmor, who runs Investor Relations for the firm. I won't go into a lot of detail on agilon, as Tim and Steve will go through this both here and in the Q&A up in the model room afterwards. But great story, one we love because, number one, it's targeting what we view as probably the most attractive market in all of health care. That's Medicare Advantage, phenomenal long-term growth opportunity and really entering the prime of the best decade of growth in patients. #2, a really impressive operating model that's capital light. They partner with existing provider groups and help them move Medicare risk. They do so without acquiring practices or opening practices. So start with groups of providers with large patient path, very efficient lifetime value for customer acquisition costs. #3, and probably most important, great operating culture and business model that delivers improved care for patients, improved incomes and lifestyle for physicians and reduces the cost of care. So it really is a nice triple win solution, which we often don't see in health care. There's conflicting interest a lot, but this is really aligned with what we view as a future of health care in the United States. So super happy to have them here today. With that 2 quick reminders, again, we'll have the breakout up in the model room afterwards. And I'm also required to inform everyone that our disclosures are available at williamblair.com. So with that, I'm going to turn it over to Steven.

Great. Thanks, Ryan. Well, it's great to be here. It's great to be in person. Feels like a long time coming and excited to talk to you today about Agilon. We are pretty excited about building a new primary care model, one that allows existing physicians, existing senior patients and existing health plans to move from the challenges of a transactional fee-for-service world into a subscription-based model that really allows that primary care physician to manage the total cost, quality and care for senior patients. We'll walk you through it. It's a much better model. We enter into exclusive 20-year joint venture partnerships with groups who've been in their communities for decades and are extremely well respected. And the company was founded in the middle of 2016. We went live with our first partner group, implementing them in '17, went live January 1 of '18, and the business has taken off. If you look at the numbers on this chart, with the class of 23 that we've already announced that we're implementing, we'll be approaching 0.5 million senior risk members on the platform. We've gone north of 2,000 primary care physicians. Of note, that's roughly 1% of the primary care doctors within the country. We've got a diverse set of partners. We started in primary care only groups, and we've really expanded. We added multispecialty groups within our second year, then scaled networks for people in health care, those are IPAs or physician organizations. And then most recently, we announced a partnership with MaineHealth, which is our first health system, which dramatically really expands that TAM overall. Physicians are winning and benefiting. But from an investor perspective, things I would call out really large growing addressable market. Ryan talked about Medicare Advantage and Medicare going over $1 trillion here. We go after that in a unique way. We like to go to markets and partner with groups that are 100% fee-for-service. This has never been done before and really unlock those. Half of our health plans, we work with 22, have never done this before. So groups haven't done it, physicians haven't done it, health plans haven't done it. So we're creating the market as we go. It gives us a really unique first-mover advantage. You start with a scaled partner, you have a 20-year exclusive joint venture partnership. You really control this move to value, and Tim will talk to you about it. It's the way we're generating mid-teens same geography growth quarter in, quarter out. Alignment, super important. We have incredible alignment with our physicians in which the practice economics are aligned with better outcomes from a cost and quality experience. we take 100% of the downside. We split the upside 50:50 with them. And as a result, physicians are winning. They're not only able to practice medicine the way they were trained, spend more time with their most complex patients, but their personal economics have changed dramatically. The average primary care physician makes $180,000 to $200,000 a year. In this model, we're going between $300,000 and $400,000, and we have physicians that are doing much more than that. And then finally, an incredibly efficient capital-light growth model, incredible visibility. Tim will walk you through a forecast out to '26 and why we have such high confidence in that. This is a scale issue and it requires a scale solution. The demographics are pretty massive, right? We're approaching 78 million seniors here by 2030. MA penetration is going to go well over 50%. That is pressuring these practices. These practices, on average, have been 75% commercial, 25% Medicare. That's moving to 70-30. It's moving up more and more. Historically, primary care physicians make a lot of money on their commercial business. They lose money on Medicare patients. And so if you just take that demographic trend, that's a major challenge. Primary care physicians, we need more of them, but the reality is, they're burning out and they're leaving. A big part of it is the complexity of this population. They need to spend more time, but you're in a system which pays them $100, $200 for a senior visit, is just not economically sustainable. And then finally, you've got the biggest payer in the country saying, we want all seniors by 2030 in a total care relationship with a primary care physician, in part because of the variations that you see here, dramatic variances in terms of minorities and underserved populations. So if you look at the right, that's what the chart looks like absent a new model for a primary care physician, less time, less economics. It's not a great outlook. That's where we've come in. We've created this new model. We basically moved people from the left in terms of a traditional transactional fee-for-service model in which those physicians don't have time. It's very fragmented. It's very payer driven. So depending upon the card you come in, the experience that you have in the office, the quality program, the incentive program is driven by that. In the model on the right, we are multi-payer, but we have one approach. Regardless of what card you're coming in with, it's one incentive program. The people in the front office know how it works. The physicians, the care teams understand that. You're surrounding these physicians with far more resources, social workers, pharmacists, care managers, nurse practitioners. They have that total responsibility, their resources in the primary care office, but also outside embedding folks in ERs, in other places. And you have a subscription model that goes from that $100 a visit to roughly $850 a month that, that primary care physician in this partnership has got the total responsibility for. The way we got here is we made a few key choices, and really, it's the advantages that I'm hoping that you'll take away. The partnership model is very conscious. We don't build facilities, we don't go out and buy doctors. As Ryan said, we focus on these geographies that are 100% fee-for-service. So we're not -- you're not going to find us in Southern California or Southern Florida where a lot of companies in value-based care grow up. Why? I grew 20 years in Southern California, that's where the ecosystems are. It's easier. There's a lot of things around you. So when we talk about creating this and then owning these markets for 20 years, it's a conscious choice. We've purposely focused only on over 65 Medicare Advantage and a new program called direct contracting, which we are changing the name to REACH now. But the concept is it's a subscription model and you have the total responsibility. The advantage you get, you get that first mover advantage I talked about, scale with a partner and alignment. Why is alignment so important? An aligned primary care physician behaves differently and drives outcome. The holy grail in health care, people can look at a lot of data and say, why are these decisions not changing? The reality is you have to get alignment with that physician. And when you do have alignment, you can make decisions and influence care delivery in the ways you see on here. Referrals to high-value cardiologists can save as much as $2,000 per patient. We stratify those patients, provide the physician with the top-tier cardiologists from a cost and quality perspective. Prescription drug, huge in an over 65 population. You can save nearly $10,000 per patient by substituting a clinically equivalent drug. But there's a lot of incentives that sit within health care that make that more difficult. That's where that alignment comes in. And you can see the other examples, which are here. But the point being that's where the power of this aligned PCP is. Local market scale is crucial. Having 1% of the PCPs in the country is big, but it really starts at that local level. Syracuse and Pinehurst are 2 of our newest markets. They literally went live in January, but look where we're starting. We just started generating revenue January 1. We've got 50 PCPs or roughly 1/4 of the primary care market. In Syracuse and in Pinehurst, 26 PCPs, 40% of the market. Look at the next largest players there. In Pinehurst, the next largest practice for PCPs, to PCPs. When those physicians decide to move to value, who do you think they're going to do it with? We control it, we guide that. Tim will talk to you about the same geography growth rates, but that's the point on this scale. You can influence care downstream and you become the vehicle for others to join in. You put it together, scale and align PCP and you move from the picture on the left to the picture on the right. On the left, a world which is uncoordinated, no accountability. Basically, when the physician -- or when the patient leaves the office, primary care doctor really doesn't know what happens. They don't know if they're going to the ER. They don't know if they're going to the hospital. In the world on the right, there's way more resources. They're able to spend more time with the complex patients. They've got people embedded in the high-volume hospitals and the local ERs that's really allowing them to influence stat care delivery. You've got prioritized skilled nursing facilities, you've got folks rounding within those. You can make major differences in terms of overall cost and quality. The first mover advantage the one I talked about, but the significance is now that we're doing this across diverse partners and geographies. So regardless of a geography you're in, what your MA penetration rate is, the type of group health system, multi-specialty group. You can find a group in the Agilon network that looks like you and it's why our growth is accelerating. It's not just the macro forces, but it's really the success that we've generated. All this leads to improving overall quality and experience. You're seeing reductions in readmission rates. You're seeing world-class Net Promoter Scores of 80-plus, that's better than like Apple or Southwest Airlines. And in health care, it's really kind of off the chart. So seniors love it. Physicians love it, and you're getting the benefits from a cost and quality perspective. I'll hand to Tim here. But quickly, just the results that he's going to talk to you about are driven by these business model advantages. We're able to grow quickly and efficiently. We're able to get to profitability within our markets within 1 to 2 years consistently across the board. He'll show you the cohorts with very predictable margins. We're comfortable working with groups of all different types, sizes, as long as they have those elements that we talked about. And we're able to drive improvement in them. And this is all laid across a very sticky patient-physician relationship 20-year joint venture. Our physicians on average have been in these practices 13 years, and their patients have been with them for a decade or more. So this is not new. This is really mature, and we're leveraging the power of what's there. Tim?

Thanks, Steve. All right. Let me just take 1 minute and Steve went through a really great description of how the model works operationally. Let me just take 1 second and ground us on how it works financially. So a really simple graphic of our financial model. As Steve said, we enter into the -- we enter a market at scale forming a risk-bearing entity with these large-scale primary care physician groups. It's essentially a 50:50 JV between us and that primary care physician group. That RBE -- as that RBE, we then go contract with all of the payers in the market to take full risk on all those Medicare Advantage patients that are attributed to our PCPs. We usually get about 85% premium from -- that's flowing through from CMS to the payer through to us. So we take that 85% premium through the very aligned model, which I'll talk a little bit more about and that Steve just talked about. We drive positive outcomes, which results at the end of the day in a positive surplus or a positive medical margin, as we call it. After we take out some operating costs, we essentially have a positive market level surplus that we share 50:50 with our primary care physician groups. I mean the remaining part of it flows through to agilon, sort of this is our gross margin, what we call network contribution. And sort of the impact of all the things that Steve just talked about in our financial results are kind of listed down here in these 4 other items. The 20-year partnership, the length of the partnership, the duration of the partnership in combination with that really tight alignment that 50-50 sharing generates ends up in a very, very nice, aligned model that aligns physicians to help drive economic outcome or financial outcome. We have tremendous visibility into both growth and embedded margins in our existing PCP groups. I'll talk a little bit more about that in a second. As Steve talked about, the model is phenomenally capital-light. And I'm going to actually walk you through the economics of how that works and the low cost versus high return that we get when we bring new members on to the platform. And at the end of the day, as we bring members onto the platform, 2 important things. One is, we are bringing significant embedded margin along with them, and I'll show you how that margin -- that embedded margin then evolves over time. And the second thing is, all of that sits on top of a very leverageable platform support costs or G&A cost base that we leverage over time and will help, again, as I'll show you in the second, our long-term margin opportunities and long-term margin outlook. So we've had really great momentum since we started -- started back in 2017, brought our first partnership market in 2018, had -- under 60,000 members back then, we are projecting this year to grow to 260,000 to 270,000 MA members. And when you put 80,000 to 90,000 direct contracting members on top of that, somewhere around 350,000 members live on the platform by the end of this year. That generates obviously significant revenue. We expect to report somewhere between $2.5 billion and $2.6 billion of revenue this year. And as we've been talking about, we are continuing developing medical margin through that time as those members are maturing the platform as we add more markets. The medical margin progression has been tremendous. We'll show you in a second. We're actually growing medical margin year-over-year on a PMPM basis, as well as the significant growth in medical margin dollars. And again, we're guiding to and expect to generate somewhere around $300 million of medical margin in 2023. It's interesting as we grow that membership and you can see it kind of growing from that initial 30,000 members or so all the way through the 300,000-plus members that we're going to have this year. Each year, as we bring new members on, we do see dilution in our medical margin PMPMs or in our overall margin. And because those new members come on each year at a lower medical margin, I'll kind of show you how that works on a cohort basis in a second. But even notwithstanding that, we've grown overall medical margins in absolute and in dollars significantly. And again, projecting out through 2022. And that sits on top of a very leverageable platform support cost model, very leverageable G&A. And with that now with this year's growth, we expect to move to EBITDA -- adjusted EBITDA positive of somewhere between $0 and $10 million this year. So this will be our year of a big move into positive EBITDA. So I talked about when we bring new members on each year, be that through new markets that are entering or through the same geography growth or the growth of members in our existing markets, and they tend to have a dilutive effect on our overall medical margin PMPMs, although, of course, they are contributing to the overall growth in medical margin dollars. This slide essentially disaggregates that and says, let me take out the impact of dilution of new markets -- new members, rather, and just show you how individual cohorts have progressed over time. So when you look at the first one here, about 24,000 members that came on in our first partnership cohort in 2020 -- I mean 2018. Started at a very high level. It was our first focus market. Columbus, Ohio, a very strong performer, started at about $133 medical margin PMPM and has now progressed up to about $193 medical margin. And that is -- that's with $251 number in 2020, but you have to kind of discount that, obviously because that was the year that was sort of aided by lower costs from COVID, but significant growth from just in that cohort. If you look at all the other ones, these represent, for instance, the 2021. Or go down to the 2019 one, which is the green line, each of these next year started at a lower starting point medical margin as we brought these new groups on. They include both new markets that came on that year, as well as any members that came on through same geography growth in the existing markets. So for instance, the 2019 number, we started at about $39 medical margin PMPM across 35,000 members that were both the new markets plus any members that we grew in Columbus in our first group and essentially now have grown that to $161 over 3 years. It's interesting. You can see the COVID year and there is about $152, which was aided by COVID in 2020. But even with that, we've grown that in the next year, being able to increase that up to $161. And you can kind of see that, that progression in year 2 has been about the same in our cost of 2020, which obviously started in the COVID-assisted year and then the 50,000-plus members that we brought on this year, starting around $51. But the individual cohort performance or as we're seeing each cohort, they're kind of one that same trajectory of rapid increase into year 2 and then continue to progress in year 3 and beyond. Steve talked about -- and actually, Ryan did a great job introducing in talking about, this is a huge part of our model is that extremely capital efficient. So we have a really high lifetime value to customer acquisition cost kind of relationship. And so what I've done here is, really showing you all in what it cost us to bring a new member on and how that payback evolves over time. So if you look at all the members that we brought on in the 2020 cohort, that's about 41,000 members. It's a mix of both what came on in new geographies -- by what came on through same geography growth. And our cost to do that is only about $400 per member. So for each member that we're bringing on in a year, we're bringing in about -- it's costing us about $400. The costs are primarily represented by when we start up a new market, we go into up to 1 year of implementation in that market before we go live and start taking risk. And during that year, we're doing things like paying incentives to the physicians to complete structured annual wellness visits and make sure that we get a good baseline burden of illness capture. We're also putting some infrastructure into the market during that year to kind of get things up and running. All those costs essentially -- that's 100% of our cost to bring a member on in a new market. And again, so those costs are about $400. When you look across how much medical margin we're generating in each year after that, how much network contribution is flowing through to us, I mean we're getting a payback based on [Indiscernible] 2020 and less than a year. And our LTV to CAC ratio or what we're generating over the lifetime of those members is something like 13:1. So it's just a really, really high positive economic return equation for us. And the class of 2021 very similar. It actually came in at a little bit lower average cost per member, a little bit under $400. But again, tremendous generation of network contribution on a PMPM basis over the first couple of years and again, paying back in 1 year with double-digit 12:1 kind of LTV to CAC ratio. So the capital efficiency and quick payback of our model is really a key element. So this is kind of what this thing looks like looking forward to 2026, and Steve talked about just how much all of this alignment and leverage for us. You can see that we've already gone out and said that we expect in 2023 to grow from the 260,000 to 270,000 or so MA members that we're going to end this year, growing to almost 400,000 MA members. When you tack on top of that, the expectation that we'll grow to over 100,000 direct contracting, I guess then they'll be called ACO REACH members. We'll get to something like 500,000 members live on the platform in 2023. Over 2,000 PCPs live on the platform. And then as we roll forward to 2026, if you would just assume that we continue to grow with sort of the same algorithm. So we've been growing in the mid-teens, same geography growth, say 13% to 15% a year. And adding, let's say, 50,000 members on or so through -- from new geography adds every year. That would get us from 390,000 MA members to something like 750,000 out in 2026. You put a little bit of a premium on that, maybe we can grow a little bit faster, same geography. This year, we're bringing something like 80,000 new members. So perhaps we can grow more than -- or next year, 80,000 members. Maybe we can grow something more than 50,000 members a year. We can see this thing stretching up to like 850,000 members by 2026. And we've been a little conservative in these projections around what actually happens to new members coming on in the direct contracting or ACO REACH model as the model reaches maturity in 2026, so we've kind of held that flat. But at the end of the day, we would expect by 2026 to have something getting close to 1 million members on the platform, something getting close to 4,000 PCPs on the platform. And that medical margin PMPM increasing to -- even with all the dilution of new members on average across all markets about $165, that's going to generate getting up there around $1.5 billion of medical margin. And when you look at the flow-through then and the leverage we're getting against our platform support costs, it would put us up there well over $0.5 billion of adjusted EBITDA by 2026. Just real quick, when you look at the balance sheet, we've got a really strong balance sheet. Coming through the IPO, we still got around $1 billion. And as I talked about, we don't have a huge use for that in terms of needing that money to drive growth because we drive growth in a very capital efficient way. So -- and by the way, in addition to that, we would expect to move to cash flow positive through operations somewhere as we move through 2023, 2024. So all that adds up to, we just will not need to go raise capital anywhere to drive our growth through 2026. Where we're using all that capital, I mean, pretty straightforward. Steve talked about a lot of the things we're trying to do. Essentially, we're using the capital, #1, to drive growth and to support our existing markets and how they're driving that double-digit same geography growth, as well as investing in increasing capability to do a lot of the things and get a lot of the clinical programs in place, as Steve talked about. And Steve, going to close, I guess.

So I'll just close by saying, I think there's just a huge opportunity for value creation in this business. We've scratched the surface. We have 1% of the primary care physicians in the country across a diverse set of groups. That's accelerated pretty significantly. We added 600-plus for this class of 23, by far, the largest group of primary care physicians that are coming on. And so what are the value drivers for us. We're going to continue to add new markets and new partners. We're going to continue to expand access to primary care by getting other physicians in these communities to come on. Tim showed you the cohort migration. We're going to continue to manage costs, driving really attractive economics both at the member level and at that primary care physician level. Those physicians need to keep winning to keep fueling this. And there is a massive amount of unmanaged spend opportunity for us that we can go after. We've got over $0.5 billion of impactable spend just in our existing markets today, and that grows over time as we talk about things like specialty referral programs or renal care programs or palliative care programs, those are things that really can drive that. So that's what we got.

Have about -- Yes.

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Yes, so we -- so Jeff Loftsgaarden sitting right here. He runs our business development team. He does -- he lives here in Chicago, does an amazing job. And they have a really clear prioritization around what an attractive market looks like. You're looking at penetration rates from MA. You're looking at reimbursement rates, the benchmark rate that's there. But the biggest thing is that partner. So finding -- you're building around this partner for 20 years. You're getting married. They're going to be your growth vehicle, they're going to be your performance vehicle. And so finding a group that's primary care-centric believes in value, has a really strong governance model, so sort of constructive peer pressure and transparency is a big part of this. The thing about alignment and taking down variation, and Jeff's team does an amazing job of really qualifying those groups that have those elements. If you add all that together, that becomes a pretty attractive market. The top of our funnel for '24 is more full than it's ever been based on the success that I talked about, but it is really around choosing wisely based on those criteria.

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So the question is for primary care physicians, what's kind of the breakout. So different data points, but independents used to be 50% in the country. Now it's like 30% to 35%. That's kind of where we started, but we're starting to see it sustain and grow in these communities. That's a big part of what we're doing. When you bring in health systems that we've just gone into, it's like 50% to 60% of the physicians in the country work for health systems. Now again, we have to choose wisely. MaineHealth, if you talk to their CEO, Andy Mueller, he sounds an awful lot like the other leaders of the other partners that we work with in terms of the value that primary care can really use to drive and transform their system. Thank you. Appreciate it.