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

Good morning. My name is Lisa Gill, and I'm the health care services analyst with JPMorgan. It is with great pleasure this morning that we have agilon health with us. With us, we have Steve Sell, CEO. Steve and I will have a fireside breakout question session after his presentation. With that, Steve?

All right. Thanks, Lisa. Good morning, everyone. It's great to be here. We have a full room and everybody in person. So it feels like maybe we're getting back to normal. This morning, I'm really excited to give you some context on the power of our business model, on the impact that we're having in these communities here, and you're going to see it in terms of incredible growth, in terms of primary care physicians joining in onto our platform and the impact we're able to drive from a margin perspective. I'm going to talk to you critically about how we're able to do that across a diverse set of 17 markets in 2022 and 25 markets in 2023. And then I'll close with an updated guide we issued an 8-K this morning to talk you through that. So starting with context. Primary care physicians need a new business model, and we fundamentally believe they are the key to restructuring health care at the local level. But the current fee-for-service system is broken, and it's delivering a health care experience that is fragmented, it's uncoordinated, and for primary care physicians, it's unsustainably economic. The challenges of that system are getting worse every day, 10,000 people a day are turning age 65 pressuring the local systems. And while key constituents like CMS and health plans believe that primary care is the key to the solution, we are facing a woeful shortage of primary care physicians. We've created a solution, which we call the agilon Total Care model. It allows primary care doctors to practice medicine the way they were trained, spend the most time with the most complex patients. It changes the payment model and aligns their incentives in which they take the total care responsibility for their senior patients. It provides them with a holistic view across their senior patients, which they've never seen before, insights on the opportunities for improvements in terms of cost, quality and experience and a single experience that they have not had before. As we work with our primary care partners to transform health care at the local level, we have a simple flywheel that I'll walk you through. We entered geographies that are typically 100% fee-for-service, and we enter into a long-term exclusive joint venture. Primary care doctors join our platform through their group. As we create a budget-based model working across all payers in the community, we invest extensively in terms of care delivery resources. Think social workers, pharmacists, care managers that are in the primary care office as well as nurses embedded in high-volume intersections in local health care like ERs and hospital floors. We are able to provide them with insights that allows that care team to be decked against those opportunities, and that delivers better patient outcomes, which I'll show you, from a cost, quality and experience perspective. And that creates new physician economics and new practice economics as we take the same patients, the same doctors and the same dollars and we're able to take out waste. That gets this flywheel turning. As the results are better, as the economics are better, more doctors join, both in existing geographies and in new geographies. Today, our flywheel is turning pretty quickly. We've more than doubled our markets from '21 to '23. We're in 25 markets in 12 states. We have 500,000 senior patients on the platform as of this year. We are now working with 1% of the primary care doctors across the country, and we've invested or reinvested over $400 million into local primary care since 2018. Patients are winning as well. Our stars performance, which I'll show you, is top notch. For all of our year 2 plus markets, we are able to get them to a critical threshold, which is above 4 stars. The market macro tailwinds are at our back. CMS, by 2030, wants all senior patients to be in a total care relationship with their PCPs and MA has become the de facto insurance model of choice for seniors. We lay all of this across a very strong economic model that has subscription economics laid across a long-term partnership with physicians that have long-term sticky relationships with their patients. And all of this is supported by a capital-efficient acquisition model. We measure the impact and progress of our model in 2 important ways: our growth in markets and members and our growth in margin. The scale we have reached, which I show you on this page, of 500,000 senior patients, growing at a compound annual growth rate of 50%, is remarkable. Not only has our TAM grown as we enter these additional markets, but we are capturing a larger share of it. And today, we are announcing that in 2023, we will add a record 130,000 new senior patients to our platform. This is a step-up of 54% from the 84,000 that we added in 2022. At the same time, we are inflecting a large margin ramp each year. It demonstrates our ability to add members on the platform in large numbers, but we are also able to mature our cohorts across that period of time. In 2022, we stepped up both medical margin and adjusted EBITDA substantially. And today, we are providing 2023 adjusted EBITDA guidance of $75 million to $90 million, another meaningful step up in profitability. To understand this phenomenon how an annual EBITDA ramp of plus $40 million in '22, plus $70 million to $80 million in 2023 gets created, you need to get underneath the composite view and understand how members mature across time. This cohort migration of members across time is one of the true powers in the financial model of agilon. Our ability to create long-term member subscription economics that appreciate over time is super important for our physicians, for the communities, and it gets that flywheel turning faster and faster. In 2022, I talked to you about stepping up adjusted EBITDA of $40 million to $45 million. What drove that? 90% of that came from our year 2 plus markets as we're able to deploy programs have a meaningful impact in terms of medical expense reduction as members mature over time. Our year 1 partner markets had 84,000 members. That's a very substantial number. They really had a de minimis contribution to our adjusted EBITDA ramp in 2022, but given what I just told you about '23, imagine as those 84,000 members migrate from $51 in '22 to a meaningful step-up in '23. At our Investor Day, we will give you the full view on these cohorts and how this stairstep works from year 1 to year 5 markets. But here, we're giving you this aggregated year 2 plus partner view to get the sense. Finally, there's platform support leverage. We have an incredibly capital efficient model. We've been able to reduce platform support costs in '22 from 7% to 5%, and in 2023, you will see another significant improvement. So the next chunk of this presentation really talks about how we're able to do this. How we're able to do it across a diverse set of 17 markets, 2022, it'll be 25 markets, as I said this year. And what I'll tell you is it's not an accident. We have a consistent and structured process. We have a data insight model that points out the opportunities. We have a consistent set of operational processes that run on a daily cadence in these offices with our partners, who are the patients that need to be seen? Who are the patients to follow up? What should social work be doing around that? We have an expanded care team model that is far greater than our partners had in the fee-for-service world. Not only do they have extensive resources within that primary care office, but they do have folks embedded in ERs, they do have nurses embedded at hospital floors. We do have referral teams that make sure that when a primary care physician makes a referral, that patient gets to the best qualified specialists available for them. This view here, I think, reflects one of the greatest powers of agilon. I also think it shows to you how we're different. This is a market view. There is variability in fee-for-service health care, and this market view reflects that. And that is true in 70%, 80%, 90% of the markets in the country. Here, we show you primary care physicians performance, arrayed around really the tenets of what you need to do to be successful in value-based care, it's access, it's quality and it's reducing utilization. What you see here is that there is significant variability in this market based on the fact that it's been uncoordinated, it's been fragmented. These primary care doctors are in a group together, and yet you can see how varied their performance is. The first thing that we do when we come in as we aggregate all of this data and give them this view is that they can see just how different their performance is against each other, but also against what is best-in-class Medicare performance. Medicare is a national program. The secrets in terms of what you need to do from access and quality and utilization are not hard to understand. But these doctors had never been able to see that because it's been so fragmented for them. And look at our results. In year 1, we had wide variability. We've been able to narrow that extensively through the structured and consistent process. By year 3 in this market, from an access perspective, almost every primary care physician is where they need to be in this case in terms of annual wellness visits for greater than 90% of their population. From a quality perspective, this is looking at diabetic patients and blood glucose control. You also see incredible improvement in a narrowing and variability with most of the primary care physicians there. And from a utilization perspective, you see a 20% reduction in admits per 1,000 really driven by the bottom quartile. We provide incredible data to these physicians, The ability to have a significant improvement in the bottom quartile of those physicians raises the boat overall for this market and is really meaningful. Now the outcomes that we're able to drive in this market, we're driving in all of our markets. This is incredibly valuable to payers. They are not able to drive these sort of results. We share this with payers, they are joint operating committees, and they have a fragmented fee-for-service network that's out there. The ability to have a partner like agilon working with our groups driving these outcomes are meaningful for them. It's super important for these communities. It's obviously great for patients. And it's great for physicians. Other physicians see this, and they choose to join agilon as partners. Now this is our network view. This is looking at 17 markets. On the left, we're showing you where did we start from a quality perspective when we brought these partners on board. And the takeaway is that we have the ability with that structure process to drive every single market above that critical 4-star threshold, which for people who are not inside health care, that is where CMS has said we will pay a 5% bonus for reaching that threshold. That comes from the structured process. That same structured process allows us to show a significant reduction in terms of admissions, readmissions and time in the ER against a composite view of a local benchmark. There is a benchmark in every county in the country. Medicare is a local program. That's how you get paid. That's how you get benchmarked. And so it is very easy to see where you started and the ability to drive that over time. One of the final things I'll highlight in terms of how we do this is you need to do a very good job, an exceptional job, taking care of the most complex patients. They drive the majority of challenges from a cost perspective, from a quality perspective. And here, we are showing you some research that we'll be publishing next week in a white paper, which we're very proud of. It shows our ability to manage diabetic patients, which are roughly 25% of the senior population, at levels that are really exceptional against the Stars benchmarks, which are out there. But more importantly, the improvement that we show on here relative to the Medicare Advantage average nationally. We are 2 to 3x better in terms of the rate of improvement based on this structured approach, which we've taken. And then you look at the patient outcomes from a controlled group. We're controlling roughly 90% of the diabetic patients within versus the uncontrolled group, and you can see a significant difference of 74 admits per 1,000 between them and roughly $135 per member per month. Managing complex patients makes a real difference in this business, and we are doing a very good job at that. And so where does that leave us? Our flywheel is turning very fast. Primary care physicians are choosing to join us. They are joining us in new states. We've added 4 for 2023, and they're joining us in existing states. The ramp of 600 primary care physicians in the last year is significant. And as we look out to '24, we see another meaningful step-up coming our way. One analogy that I would leave you with is I think what we are creating in now 12 states is a value-based care infrastructure, which is not just available to our partners, it's available to any physician that wants to make the move to value-based care. The insight model, the payment model, the incentive model, the resource model that I talked about makes it easy for physicians to make the choice to join these partnerships and move into value-based care and bring the patients with them. That's a key part of our model. We're working with existing capacity, existing doctors that have their patients, they are moving from the fee-for-service world into value-based care. You can see certain states that are relatively new for us in which it's incredible acceleration. Michigan is an example. We've been there 18 months. We have doubled the number of primary care physicians in Michigan from 150 to 300, and we've more than doubled the number of members in that market. We are also, as we are looking at working on the class of '24 and even the class of '25, finding groups that maybe weren't ready to be early adopters a few years ago, but now see that infrastructure set up, they see the outcomes for peer groups, large groups that are making the choice to come over, and we are going to run them in large implementations so that they can come on our platform and be successful. So let me close. Our platform is being successful. Our flywheel is turning rapidly. Just to reaffirm what we put out an 8-K this morning. We're reaffirming our '22 guidance, which has that meaningful step-up of $40 million to $45 million year-over-year. We are providing the preliminary '23 outlook of $75 million to $90 million in terms of adjusted EBITDA. Notably, this only has $5 million to $10 million coming from direct contracting. So what it says is our MA business and that flywheel is really driving outsized year-over-year improvement and impact. We are raising our ending Medicare Advantage membership to greater than $400,000 in '23. That's up from $390,000 that we had previously, has this record class that I talked about in direct contracting and reach, I know we're going to talk about this, we'll be at 80,000 to 85,000 members. We actually made the conscious choice with a couple of our partners to have a longer implementation cycle, bring them on into some direct contracting entities in 2024 so they can really hit the ground running and get the benefit of all the programs I talked about. And finally, the class of '24 is really looking very good for us. It will not only be strong in terms of new markets. But as I mentioned, in our existing geographies, we are seeing some very large groups that will most likely be coming on board. So with that, Lisa, we go to questions.

So first off, Steve, thank you so much for all the detail today. I'm sure that it probably seems incredibly clear to you on and you see your competitive advantage. But one of the big questions we get is how do we think about all of these different physician enablement companies? What makes agilon different than peers? And as we have more companies in the marketplace, like what's the real differentiator? Are you going up against competitors trying to recruit physicians in markets? Or is it still so new that that's not the case?

So no, I appreciate it. I think it's a great time to be a primary care doctor. And I think we're all in a very good space is the way I would start by answering that. Because when you look at this supply and demand, limited supply primary care doctors, complex patients aging, the demand for really leveraging those PCPs is great. I think what is fundamentally different is if you think about that slide I showed about that market, we're doing this at a scale and we're saying we are going to use the primary care physician as the key to restructuring care delivery in that community. I don't know anyone else who's doing that. That then leads us to -- we need to work with the existing docs that are in that community. And so we're entering into the exclusive joint venture partnership, which is fairly distinct. And that's really allowed us to create a culture with our doctors taking a long-term view. We have a national network, which is growing and new doctors constantly tell us that when they get a chance to meet with our existing partners, that is really a game changer for them. They're finding people that are like mining, they're really able to change that. I think our platform then supports that the ability to provide that view. Our partners have never seen that before. Amazingly, because it's so fragmented, right? They're getting it from different payers. And then we're focused on how do we reduce that variability, which, I think, people don't necessarily even really take that on and didn't necessarily believe that those types of results were possible.

And I find it fascinating, and this has always been the way that you've looked at the market is to go after the less known Medicare Advantage markets that seniors are everywhere, right? So a lot of people think I'm going to go to your Arizona, I'm going to go to Southern Florida, and that's not where you are. You're going to different parts of the country where you're teaching the doctor about being a at-risk primary care physician. Does that limit your opportunities for those kinds of markets or...?

No. I mean there is 80%, 90% of the markets in the country look like the picture that I showed southern California, Southern -- I mean I was in Southern California a long time. Southern Florida, Arizona, I mean, those are markets that made the move into value-based care a long time, that infrastructure that I talked about is set up there. The ability to be first to go to these markets to find as big partner to set up that infrastructure to get that flywheel going and getting other partners to join, we love that model. The 12 states that we're in has increased our total addressable market of members in those states from 5 million to 7.5 million. There is a lot of runway. And what we're seeing is more and more doctors joining, more patients coming on the platform, which is how you're getting that 50% compound growth rate year-over-year.

And if I think about the growth in MA lives that you talked about today and you put in the 8-K, is that coming from the -- like we just had open enrollment, right, and for all the health plans is it that you have certain relationships with certain health plans and that's where the members came from? Is it that some doctors had more members than you anticipated? Like how do I think about where that membership came from?

Well, so it's -- I mean, I would say the flywheel is working in our new markets, right? So that's a meaningful part of it. And it's working within our existing geographies. So we have that double-digit same geography growth every year. What payers love about our model is that we typically are growing 1.5x or more above the market average. If we're in a 4% growth market, we might be growing at 6% or 7%. If we're in a 15% growth right rate, we could be in the low 20s. The other thing that payers love is that we have incredible retention within our base. And so people are staying with them they, really getting the benefit of the benefits that have been offered by the health plan that are there. And so I think that growth is coming from a variety of places. I think we've had another very strong AEP, but we really want it to be strong across all of our payers because that's important for the success of our model.

You have 4 new partnerships for '24. They have a longer implementation cycle compared to maybe some of the others in the past. Maybe walk us through some of the key steps in that typical implementation? And specific to '24, can you talk about using that extra implementation time to prepare to go live? Are they going to be that much better off when we think about what first year economics traditionally look like?

Well, the incremental impact of extra months is really important in terms of how they start. But I think I would back up and say why do we have a longer implementation cycle. We have a longer implementation cycle because we have a shorter sales cycle. It used to be a year, now it's 4, 5, 6 months. We have a 4- or 5-person BizDev team that's driving this, which is pretty extraordinary when you look at the growth, and it's really by leveraging the network, which is there. And so that's a key part of really driving the overall cycle, which is there. The implementation, when you walk through it is we go in and we create the payment structure across multiple payers. We aggregate the data so we can provide that view. We bring on the local team and those care team resources that we talked about, and most importantly, we make sure that we get the primary care doctors to get their patients in on a much higher way that, that access so getting people up to that 90% threshold or 80% in that year 0 is super impactful and it gives you that base line. So the more time you have, the better information you have, the more you're able to get patients in for that. The more you're able to install clinical programs, things like taking care of complex renal patients end of life care that maybe you wouldn't have been able to normally get in, in what we call our years [indiscernible]. And so that all affects the benefits that you get from that. But it's a -- well, I guess the last thing I would say is that our partners are very savvy. They understand the benefit of the longer implementation cycle and so...

They're not anxious to kind of get on the platform and...

Well, I think how you start is super important. And so I think the -- if you have a longer implementation cycle, you can probably narrow some of that variability in the year 1 market. That market we showed you is probably like a 7- or 8-month implementation cycle back in the earlier days. We could have something that could have 14. And so that could help you with that.

No, that's helpful. A big focus in the MA space over the last couple of years has been supplemental benefits. And although planned design benefits, agilon is responsible for managing all the costs, right?

Right.

How does the company evaluate the benefit offering for its members to make sure you're maximizing utilization of benefits that can drive better outcomes? And is this something that's been beneficial to agilon to have these better benefits with MA?

Yes, well, I think so. And I think the payers would tell you that our shopping compare program that we run seniors through so they make a good choice given their health condition and matching that with the benefits available to them is best in class. We actually have the seniors come to a briefing. Now that we're back in person and then virtual as well. And at the end, they get an overview, they met with their doctor and then they walk through the health plan. So they make a really smart choice. Then once we set up, we want to make sure that we're taking advantage of that -- of those benefits. An example I'll give you is Humana just featured us in their value-based care program. for having created a program that focuses on physical activity for seniors. It was a 12 video series and they have a benefit that if people do certain things, they can get a $60 or $70 and we ran that for the primary care doctors narrated the entire thing. They walk through the primary care doctors guided their senior patients to go and take advantage of that. That helps keep people healthier. Humana wants people to do that. And the uptake on that benefit from the agilon part is dramatically greater than what they see anywhere else.

And that's going to help the outcomes longer term of the number.

It's going to help the flywheel.

For you, if we think about the flywheel yes.

It's going to be good for the patient, for the doctor, that that's the idea is to have that.

You did mention ACO reach, and we did say we were going to talk about it today. It's modestly profitable in 2022, right? So originally, I think that Tim had talked about 0 to $29 million, us and the rest of the sheet just kind of goes right to that middle of $15 million. Today, you talked about $5 million to $10 million of profitability for ACO REACH. Do I have those numbers right?

2023.

2023.

So the number year-to-date for ACO REACH in '22 through Q3, we haven't reported Q4 obviously, we added $6 million. What we're seeing for next year is roughly the same membership base. It's going to be $5 million to $10 million against a total guide of $75 million to $90 million.

Which means it's very small. And I think that...

10 -- Less than 10%.