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

Good morning everybody. Thanks for joining us. I'm Gary Taylor, cover health care facilities, managed care and value-based care here at Cowen. My pleasure to have agilon with us this morning. Agilon is a physician-oriented value-based care company providing capitative physician services to Medicare Advantage Health Plans through their platform and partnership model. The company has over 350,000 total Medicare membership across 25 different markets. So we have Chief Financial Officer, Tim Bensley. We have Chief Medical Officer, Ben Kornitzer; and Head of Investor Relations, Matt Gillmor.

So let's start with the call of last week. I think I lose track of time. I think it was last week. A couple of things I want to touch on. One is 2023 is a really significant pivot towards profitability from the company from, sort of, mid-single-digit EBITDA to sort of mid-80s millions of EBITDA. So pretty sharp pivot. Can you talk about kind of what the key drivers are there? And then, where do we go beyond '23 towards that 2026 goal that you have out there?

Yes. No, absolutely. And you called the numbers right. I mean this is -- I think 2022 was an important year in terms of our EBITDA, [indiscernible]. And it wasn't getting to the single-digit EBITDA positive [indiscernible], but it's not like [indiscernible] $43 million increase in EBITDA year-over-year. So that was actually a pretty big increase as well. And I think you have the numbers right, as we go into 2023 we guided the numbers at the midpoint of our guidance of $75 million to $90 million of adjusted EBITDA, it's like another $80 million pickup. So yes, we're definitely reflecting on that side. The drivers of it are that -- really the things that have driven our performance over the last few years continue to drive -- in fact, if anything we're driving it a little bit outside performance versus what we expected. We continue to do tremendously well on that budget. So a big part of our movement year-over-year has been our ability to bring margin and membership [indiscernible] . We've got a very large class of [indiscernible] coming in at 2023. We've just implemented new markets that are over 100,000 new members coming from the new markets that we just went live with in January. And at the midpoint of our guidance, we're going to add something like 135,000 new members this year. So there's a huge membership obviously [indiscernible]. That will have less impact to the EBITDA flow through in 2023. That's a big part of the second part of your question about [indiscernible] so hold on that one for a second. The second thing is, I mean, we have done and we continue to do a really good job of -- as those markets come on and as we secure them on the platform, being able to generate better overall quality of health care for our members, better overall health outcomes for our members and also just eliminating a lot of waste in the system in terms of driving cost out of the system. And that has resulted in a really nice maturation cohorts for each of these markets as they kind of go on the platform for 1-year, 2-year, 3-year, 4-year [indiscernible] on with the market sort of PMPM on the platform for over 5 years. And really pleased what we saw in 2022, we just reported that at the end of the year, those markets that were on the platform for 2 years plus are kind of excluding the year 1 markets, had like a 33% increase in Medical Margin PMPM basis, where we're already have like $124. But each year, you can see the membership growth versus that medical margin growth, it comes just through in the numbers. So if we had about a 45% increase in membership in 2022, our medical margin dollars have increased [indiscernible] 57%. So you're just seeing that member maturation flow through with medical margin continuing to grow at a faster rate than membership [indiscernible] type of numbers which are on the platform. So we're really pleased about all the things we're doing there. One of the things we're going to want to do is step up second [indiscernible] or talk a bit about just what are those drivers that had that medical margin up. But we've shown it in our results [indiscernible] positive. And as we look forward to what we've guided for 2023 to get to the $80 million, you'll see that factor again. So we've guided to about a 50% increase in membership, but about an 8% increase in medical margin dollars. So that's the same phenomena of those markets maturing on the platform and getting that positive growth with medical margin. And the next thing is, we do get really good leverage of our overall platform support cost. And that's what we [indiscernible] well. I think in the last couple of years, we've seen more than a 100 basis point improvement in terms of leverage that we're driving out of it. And we drove our platform support cost as a percentage of revenue [indiscernible] over 5%, about 5.4% last year, which was again more than 100 basis points in 2023. The guidance we put out there to get to that $80 million increase in adjusted EBITDA would be another 100 basis points or more improvement. That's just the way our model works, that we don't have to add, especially in this market or at the corporate level. We don't have to add as much resources over the year as we are adding membership obviously so we get [indiscernible] way forward through there as well. I think each of the thing is really in the middle of P&L and just a really positive target that we've seen on those markets clearly on the medical margins.

It might not be on, sir.

Is it on?

Yes, I don't think it is on.

And the fact that I have a little bit of a cold and a little hoarse, froggy probably didn't help in [indiscernible]. I'll just talk aloud for the next 5 minutes, how about that?

We can hear you.

You can. Okay. Great. Yes, I'm good. A bit loud. Did you want to jump in just a little bit because I think I don't want to [indiscernible] in the middle of the P&L is so important and the basis of our model of how we developed markets over time and how that medical margin improves over time. It's so important. I don't know if you want to talk a little bit about the program and how we [indiscernible].

Yes. I mean, so if you think about it, our entire model is based on having a specific profile on our patients. And so you really have to be able to characterize what their existing diagnoses are if they can really understand -- we're going to be understanding you if patients have heart failure, they have renal disease, that they have COPD. And being able to put all those -- all of those conditions together, then you can understand what are the different programs that you need. So for example, one of the programs that we've been spending a lot of time recently thinking about is renal disease. So we know that about 40% of patients with advanced renal disease who go on dialysis crash into dialysis. That means that rather than having a thoughtful approach for how you're going to manage their kidney disease, they wind up in an emergency room, eventually in a hospital and getting emergency dialysis. The costs are dramatically higher, sometimes 2x it would be if they were on managed starting plus maybe not appropriate for dialysis in the first place. When we took a look at our data, currently as much as 1/3 of patients who are on or starting dialysis could be managed medically without even dialysis in the first place. And so our ability to identify patients who have a declining renal function over time, but that ties back to that very early process. We get all the data from our patients, whether it's claims data, where we can pull it in with physician reviewers, whether we can pull that data in using the new technology acquisition that we recently acquired in the past week or so, all of that allows us to intervene. And you see that cost curve turn over time. And we're seeing dramatic improvements across virtually in all of our markets. The other thing which -- we have a primary care-led model. So it's all about PCPs seeing their patients and seeing them very frequently. We had a retreat this past weekend and I was talking to one of our physicians. And he was telling the story that he had a patient, who was going to the emergency room every 6 to 8 weeks like [indiscernible]. He had a heart failure that really started as a result of being a lifelong smoker. He had a restrictive cardiac disease. He had COPD. Every 6 to 8 weeks, his legs would swell up with fluid, his lungs would swell up with fluid. They would admit him to the hospital, they would give him IV diuretics, take a couple of days to get all of that extra fluid off and then they would send him home. The intervention was, come to see me every single month. We're going to write a date every single month in the calendar and you're going to see me. And we're going to check your daily weight. We're going to check your blood pressure every single day, we're going to check your symptoms every single day. As soon as they do this intervention, [indiscernible], they should get -- it's not rocket science, but it's changing the paradigm that PCP has the resource, has the time, has the economic incentive to actually be able to do the right thing for their patient.

Do you have any markets or medical groups yet where medical margin has peaked or gotten [indiscernible] stuff for a couple of years? Or is it generally still even in your oldest group still seeing...

Yes, Okay. That's really a lot. We are still seeing improvement in every market, even in our most mature markets at this point. Obviously, we see that maybe obviously, we see the biggest improvement from year 1 to year 2, year 2 to year 3. And we showed some of those curves. It's almost a year ago now exactly what we did the last time we shared those cohort curves. We'll come back here in a couple of weeks, March 30 and actually do our next Investor Day. So it's coming up pretty soon, and we'll show a complete view again of kind of what that looks like. But we are still seeing -- each market is still young enough and each market is still improving, but I think we'll show you some pretty good stuff. And that actually, I don't -- I probably want to move onto something else, but a quick answer to the second part of your question about what that kind of dovetails into about longer term, it was a year ago that we put out our last kind of longer-term guidance and pretty robust numbers, obviously. I mean we're talking about getting to -- at the middle of the numbers, we talked about somewhere around 800,000 members in 2026 and medical margin numbers on a PMPM basis in the mid-160s, platform support costs at or below 3% and EBITDA dollars up around that $600 million range. We'll come back in a couple of weeks here and update those numbers. But I think all the things that we've seen over the last year would tell us that we have really, really high confidence in our trajectory against our long-term objectives. But the only reason I bring it up, I just want to mention one thing, probably the biggest thing that is different from what we said last time is, we are just getting more members on the platform earlier than we thought even a year ago. The class of '23 ended up being bigger than what we had talked about a year ago. Like I said, we're going to add when you include the same geography growth at the midpoint of our guidance, like 135,000 new members, that's a huge class for us. And in 2024, we've already said that, that class will be at least 80,000 members in new markets and 130,000 members in total. Again, I mean, it's kind of an interesting number that class -- our projection for MA members in '24 is almost exactly twice as big again as it was that we just reported in 2022. So every 2 years, we're still doubling up the size of our membership. And getting those new members on the platform early means that we have more membership sitting there now, that 2, 3 years from now it's going to be in that more developed state of medical margin, like we just talked about in the other markets that are maturing. So it's a really important part of our confidence in our future projections.

And then just getting there, I mean, to that point, we -- our model was 90,000 patients growth at 2024, and you're saying at least 130,000 now. So -- and if Ben can chime in on this, too. But what -- I mean, I think The Street looks at it and says there's so many companies trying to do value-based care. Some of them are part of big integrated payers, some of those are independent, some of those are clinic models, some of those are affiliate models. But something about your joint venture model, it's clearly resonating with these physician groups that they're joining in these types of numbers driving that type of enrollment growth. So tell us what you think the most important part of the attraction is?

Let me start, then you can jump in for more like -- you probably can jump in more from a close like having been a doctor and how the doctors are thinking about it. And I think generally speaking, if we're looking at -- and by the way, what we're saying now that our model and our partner mix has changed tremendously over the last few years. So if you talked to us 2 years ago, we would say, hey, we are 100% independent primary care physician groups. We now, of course, just brought on our first large regional health systems. So that's no longer the case, although we think that the way our model applies to somebody like MaineHealth and a regional health system works just the same way or -- as well as it will with an independent. But I think the overall driver has been this idea of, if you're in a situation where the way that the economics work for a physician or a physician group for Medicare is just literally upside down. We're able to come in and say, hey, if we treat -- taking full risk and doing the things that we can help them do around everything from how they're identifying burden of illness to how they're managing the course of care to drive the improved quality and outcome for those patients, we can actually return those economics to that physician group and allow them to stay independent and to have actually a meaningful right side up economics. And I think at the end of the day, just that model is what continues. And by the way, the success that we've shown in our existing groups, the fact that we're not just saying it but we're actually delivering it, now we can have groups that we're looking at to come on to the market -- come on to our model and say, "Hey, if you want to come on to our model, you don't have to believe us, go talk to these other 3 partners we have that are already doing this and being successful." That network effect along with just our continued success and just the design of the model has just really made it very attractive, I think, for groups to come on. And the interesting thing to us is it applies now to not just a single 10 independent PCP partnership, but it worked very well now across these large kind of distributed networks that are kind of PO organizations. A great example is that United Physicians in Detroit that's coming on is a very large group of set up in that kind of PO structure. And now obviously, we're starting to make it work with the health system. So I think from a macro standpoint, our model works for what is needed today. And it works very well for the physician in the physician group. I don't know if you want to talk a little bit about from a more physician perspective, why it makes sense there?

I think the partnership model is very unique. I think physicians, whether you're part of an independent practice or you're part of a larger integrated health system, people go into medicine because they want to sort of have their hands on the driving wheel. And so the small notion of interdependent, right? The amount of sort of complexity and resource of transform to value-based care, no one can do that on their own. But at the same time, they don't want to be employees. They want to feel like they are having skin in the game and helping to define, sort of, the future of where their care [indiscernible] model goes. Anyone that runs the business knows you're going to get better outcomes if people have skin in the game. I mean, I came from a health system where we knew when we employed a physician, their productivity automatically, once they got the salary, went down 50%. So we just had an agilon physician leadership retreat ended Sunday. When I joined, I went to our first physician meeting. I think we had about 15 people that was just over 3 years ago. The next one we had was in '21, I think we had 65 attendees. And we had 200 participants this past weekend, over 3 days. There's a couple of takeaways I think are very relevant to your question. One is we have broaden all of our new markets. So there's huge new class that Tim had spoken about. And already it's the beginning of March, and you have markets that are basically understanding the levers, just put it up. So I was going to say that we've broadened all of our new markets early. And so you now have this very large class of 2024 basically benefiting dramatically earlier in the life cycle from the learnings of markets there. 3, 4, 5 years within the life cycle, we've never seen that before. The other thing that was very interesting is we share comparative data across our markets. Now we blind that data. Each market can see how they're performing. We always have some markets that are higher performing and lower performing. When we take a look at our key clinical initiatives. There is no market that is performing best in class across every initiative. And so my interpretation is every single market has significant opportunity, whether it's to better identify patients with diabetes, with COPD, with CHF, enroll people in renal programs, palliative care probably, every single market left there, so there's 2 or 3 things. Even if I'm doing really well overall, that I could really, really move the needle in. The other thing that happened is we brought in potential markets. So there was one group that we brought in that said, listen, we will only join if every single one of our shareholders unanimously votes. And anyone that's been part of a large group, maybe you can get 70% or 80% or 90%, but they say we want every single shareholder, and they weren't sure they were going to get over that threshold. They left that meeting being really, really optimistic. So there was just a sense of energy in the room. And then I think the last conversation sort of as people were at the end of the conference and all the suitcases were in the side of the room, 2 of the doctors were both physician executives from different practices were catching up, they had a cup of coffee. And I happened to be within earshot. One of them said to the other, "Hey, if you take a look at your economics recently, I took a look at our physicians and their take-home salary, I couldn't believe it. 60% of my primary care doctors take home salary is all coming out from the full risk senior line of business." And the other one said, "It's interesting." [indiscernible] I was just looking in, it's 50% too. And it kind of been crept up on them over the past couple of years where the idea of value-based care and senior care has begun just kind of a hobby, let's see if we can do this. Now essentially, this is their core business. They wake up in the morning as a physician, if you want to succeed. And so that's a huge change in the mindset. And I think the physicians that were coming together in this retreat, either they were experiencing the same thing or they were hearing from their colleagues, this is sort of the path that they're on. I think that has been sort of very transparent.

I mean if you kind of summarize that back to the conference that I made, it's like so just to kind of really quickly, a couple of things. That idea that one of the drivers of the model is we have great physician alignment because of the things that Ben was talking about. So a 20-year partnership, we are sharing the positive outcome, economic outcome with the physician group or with the physicians, just keeps them aligned and it turns into those. And by the way, that we're not -- we know also that they're well aligned because we have like great physician retention. I mean I think our physician retention is met like 90% or something, which is very high compared to other models out there. And to Ben's point, we're bringing the resources to help them do those things. We have the economic -- or we have the financial strength to be able to come in and do that. So be it overall processes and systems and information that we're bringing them or to help them do that, or actually bringing incremental operational or care management resources to the market. And all of that for us can be done in a market when we enter the market at scale. So because we're not -- we don't have to go in and build the clinic and hire doctors and market for and bring in new members. We're going into a market and doing that and transforming the group and the market kind of at scale with the existing members that are in that PCPs panel. So those 3 kind of components of great alignment, we bring the resources, and we can -- and we have the scalability are just 3 incredible components that I think are pretty unique for our model.

I think -- I mean, in my mind, just looking at the model, I mean, the foundation of physicians willing to join the platform is probably more powerful than any other part of the story or how you could explain it or [indiscernible] pitch it or anything else.

Yes, that's great. You kind of have it on both sides, a number that are willing to join and the fact that they're staying. I mean that's physicians kind of voting with their feet, I guess.

Just some quick context too, right, in health care. So we've had a year-over-year almost 15% -- not -- [indiscernible] that's health care in general, 15% increase in PCP [ program ]. That's never happened before. Last recorded year, 30,000 adult primary care physicians left the field of medicine completely. That's never happened before. There is no pipeline of residency training program that can fill that gap. We also know that we have dramatically increased in the number of patients over 65, so complexity of disease is going to go up. And so if I were to step back and look at some of these macro factors, there are major workforce issues right now with primary care. And I think one of the things that's differentiated about our partners is they're getting off that hamster wheel. They're able to spend more time with their patients. Their economics are more aligned. They're much happier. Our retention rate is actually 95%. So you think about the macro environment, where like people are heading for the exits, and our physicians are staying, and they're growing their packs. And we actually had a session on increasing your workforce, now [indiscernible] only session because there were so many groups actually interested in growing their actual practices. So I do think that there is a change in that dynamic as that's very much in contrast to what we're seeing in terms of the macro health care environment.

Okay. I want to talk about a couple regulatory things. So just the first, the 2024 MA advance notice, the reduction in the total benchmark, most of that are driven by the new risk score model with CMS has proposed, we talked about this a little bit last week, but maybe just for the audience, how do you see that risk score model impacting agilon in aggregate? And how do you think about it impacting 2024? You haven't given any '24 guidance, except for enrollment. But we're hearing from actuaries. We're hearing some in the lobbying and that it's a negative 3.1% industry average, but certain physician groups with certain types of patients could see double digit increases or decreases in their average risk score. So what's your perspective on that risk score model?

Yes. No, absolutely. The -- I think a couple of starting comments are one, obviously, it is an advanced notice, so we'll see what the final is. But all the comments that I'll make are assuming that it is the final, like this is the impact of what they've actually put out there if it went in place fully in 2024. Notwithstanding the fact that there's usually a little bit of an uptick in maybe the benchmark part of that between advanced and final notice. And there's still -- obviously, all the comments now have come in and CMS will look at that and there's a lot of talk out there. We'll see what happens in terms of whether it's pacing over time or whether there's any other changes. But assuming that we don't know what those are going to be, we don't have a crystal ball, I just assume that the advanced notice is what it is. And CMS, of course, has said, "Hey, on average, across the entire system, we would expect that there'll be just the impact of the structural changes to risk adjustment will be like a 3.1% impact." So we've gone in and done the analysis on, hey, let's roll through all of the changes to our existing member base and obviously see what it is for us at the detailed code level, which codes have been eliminated, which codes have changed waiting factor and also put the changes in the demographic waiting factors in. And maybe this is not surprising. I don't think it's coincidental, we're rolling up a number that says, we think the impact to us kind of pre any mitigation or any levers that we have to pull is also in that 3% range. Maybe that's because our overall average risk score is not that different from the national average. I mean, our overall average risk score is something not usually over a 1. Even our most mature markets, we don't have markets that are up there with [ 156,718 ] or something risk score. We have more of a bell curve kind of population of members. So it's coming out for us to be in about that same range, but that's pre-mitigation. Some of the other factors that can help us and one of the reasons that we've said, even with that, we believe that the rate -- the advanced rate notice is very manageable for us in 2024 and keeping us on track for our medium-term projections, which we will talk more about come March 30th is we have a couple of things going in our favor. One is we're just going to get the benefit of having a lot more members on our platform than we thought we were going to have a year or 2 years ago. And so that doesn't change anything from a rate basis, but it does mean that as we move forward, having those members on the platform, more members on the platform earlier de-risks our ability to deliver those longer-term members. The second thing is, so I want to say this the right way, we're really good at risk adjustment. And it doesn't mean -- what that means is we don't get out over our skis. We're not being -- we don't do risky risk adjustment, I guess, is the way to put it. We have a very good, well-defined process. The information we put in front of PCPs for them to consider in the risk adjustment process is all peer reviewed. All of our risk adjustment process, all the codes themselves, the conditions themselves have to be certified and accepted by the actual PCP and which means they do a great job of also doing things like making sure they're deleting codes where conditions have resolved. So we have a really good process. And one of the things CMS has said is, hey, we would expect that, although the unmitigated impact of 3%, that people will still make progress on risk adjustment. And since we do it so well, we would expect that, hey, we are going to continue to make progress maybe better than some other folks would do. And what actually even makes that probably a little bit better for us is the more -- the bigger mix of members you have that are early in the risk adjustment process, meaning they really have been relatively unmanaged or are still in kind of our multiyear process of getting to more mature risk adjustment, meaning we don't get to perfection on risk adjustment in 1 year. It takes us year -- our implementation year 0, maybe year 1, maybe year 2. Through those years before we're getting closer to that, we just have a higher mix of our members that are those less mature from a risk adjustment standpoint. We've got a very, very big class of 2024 coming in that we just talked about being at least 80,000 members from new markets and 130,000 members overall. Those will obviously get the benefit of the risk adjustment process that we put on them because they're relatively unmanaged today. And all of those factors will, I think, help us get to the next level and offset some of just the rate impact of it. The second thing is, though, I think there's some offsets that will happen on the cost side as well. Some of the stuff that Ben was talking about is we're actually seeing better performance on the cost side than probably we would have expected a year ago as well. And our ability to continue to drive those clinical programs and practices that will continue to improve the quality of care and the health outcomes for our patients. We expect that will be better than we expected a year or 2 years ago, certainly as well. So we'll get that benefit, and we'll continue to drive that. And then probably the last thing is -- and I wouldn't say that we are like -- we haven't counted on this or we're not like saying, if we don't get this, we're in trouble. But I would think that there's going to be some likely -- some amount of benefits compression that payers themselves are going to be looking at to help offset this. And obviously, there's been hundreds of dollars of increase in supplemental benefits over the last few years as the rates have gone up, and that's been reinvested. But even a small change in benefits at $10 PMPM, $20 PMPM change will go a long way to offsetting the impact of it. So I think when you look across all of those factors, we're still analyzing and trying to figure out how much we get out of one versus the other. But when you look across all of those, there's more than enough levers that we have to really manage the notice through 2024 and then stay on track for the longer term.

I have a little clinical components. If you take a look at the advanced notice of the diagnoses that they're removing or modifying, they were really directed a lot of sort of activity that would be more consistent with practices that are [indiscernible] risk adjustment [ shops], where they're doing aggressive screening, like every single patient with cardiac disease is getting imaging, getting other advanced testing across a broad population. Our model is all done through PCPs, sort of follows the way that a PCP or practice medics did, it's integrated. And so as a result, those specific codes are much less likely to be seen in a very high number among our PCPs because the things that we're picking up are things that are sort of part of how they would regularly get care. So for example, if patients with renal disease who are being entered into specific care management programs for renal disease, that standard of care with how a primary care doctor would practice medicine versus every single patient over the age 65 getting a cardiac echo. We're just not an engine in the way that some purpose-built clinics might be where that is part and partial of what they do. We're not sending external parties into patient's home. Again, everything is through that lens of that PCP. And so when CMS, I think, made those adjustments, they were really directed at some of those more aggressive intervention, broadly screening practices, not what you would see in the way that a normal PCP as part of a regular practice would be conducting the medicine.

Are we out of time? We started at 9:10. Is that all right. Okay.

Glad you had that last question in.

Okay. So I guess I'll promptly thank you very much. Thank you.

Absolutely. Gary, thanks a lot. Appreciate it.