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

So I'll go ahead and kick it off. Thank you for everyone for coming to the Agilon Health presentation. For those of you whom I've not yet met, my name is Ryan Daniels. I'm the health care services and IT analyst here at William Blair that covers Agilon, so very pleased to have 2 members of the management team up here with us at the podium. First to my direct left is Tim Bensley, who's the company its Chief Financial Officer. Next to him is Steven Sell, the company's Chief Executive Officer; and up here in the front row is Matthew Gillmor, who runs Investor Relations just waived as well.

So very happy to have all 3 of them with us today. Agilon is our top health care pick. We've talked about this heading into the conference and to many of you who were in the offices this week. We think it's a great growth story with a ton of momentum and organization really with a winning solution for patients, payers and providers, which is pretty unique in the health care market and really is part of what's accelerating the growth profile, leading to such a strong long-term outlook for the organization. So really happy to have them here to share their story. Just a couple of quick logistics. We will have a breakout session up in Jennie A following this. So we'll save the Q&A session for that immediately after. And I'm also required to inform you all that our disclosures are on our website at williamblair.com. So with that, I'm going to turn it over to Steve, who I think is going to kick us off, and then Tim will finish [indiscernible]. Thanks everyone.

Thanks, Ryan. Good afternoon, everybody. It's great to be here. It's been a really impactful last 12 months for our company and for our physician partners that we work for and for their [ patients ]. And I'm really excited to share that update with you today. We thought we'd start with just some investment highlights if you're thinking about agilon as an investment. And if you didn't know a lot about health care, what would I encourage you to sort of think about. The first is that we're in a really large, growing and attractive market. 10,000 people a day are turning age 65. The Medicare program will soon be spending $1 trillion a year in terms of covering all of those seniors. And it's also a market that's got some challenges that we'll talk about. Looking -- it's a market looking for solutions for both physicians and patients. The second thing I'd call out is that we have a very unique solution. We partner in a long-term joint venture with physicians. People who have been in physician groups for decades. They are extremely well respected within our communities. And that partnership creates incredible alignment with primary care physicians. That partnership model in addition to creating alignment allows us to do a few things. In our markets that have been 100% fee-for-service, and today, we're in 32 markets in 14 states, which is pretty remarkable for a company that's 6.5 years old. And it gives us a real first-mover advantage. We are moving not just our partners, but these communities from fee-for-service to risk that's unlocking a tremendous opportunity that I'll talk to you about. And finally, probably what I would focus on most is the results of the business. Ryan hit it. We are performing incredibly well when you look at cost and quality, what that means for patients and patient satisfaction. Our physicians are winning. They are materially changing the trajectory of their practices. And when that happens, other doctors notice and other doctors are joining in those 32 communities I talked about, but also in new communities. And so it's an incredibly efficient growth model that Tim will walk you through. But let me back up and talk about the challenge within this huge market. My first point is it's really difficult to be a primary care physician serving the Medicare population today in a fee-for-service system. The economics for these primary care doctors are upside down, and it's got dramatically worse over the last couple of decades, it gets worse every year. In short, the cost of running these practices is growing far faster than the Medicare fee schedule reimbursement for primary care is. Physicians are having to work harder. They're having to see more patients in order to just to stay level, not surprisingly physicians are burning out. 1 in 5 primary care doctors are considering leaving the profession within the next couple of years. And at a time when everyone says we need more primary care, the growing shortage is only getting greater. Second challenge, it's pretty difficult to be a senior patient in the Medicare program with fee-for-service underlying it. There is huge variability in terms of cost and quality. The experience is uncoordinated. It's fragmented. Your primary care doctor doesn't know what happens when you typically leave their office but the senior patient really doesn't have anyone guiding them. Differences in quality and outcomes leads to dramatic differences in cost. Variability is a huge opportunity that I'm going to talk to you about. But when you look at the fee-for-service system today, you see 2 to 3x the variation in terms of the spending in those regions and the amount of time that senior patients are spending in the hospital. Finally, the system is asking more primary care doctors whether it's CMS, whether it's health plans, people are saying, the key to this is going to be we need more primary care. We need them at the forefront. And we believe, at the same time, we should make move to value. The problem is primary care physicians don't have a business model that will allow them to spend the time, allow them to coordinate all of that. We're solving that problem. We're creating a better health care system for communities. It's better for physicians and it's better for patients. We call it our total care model and over the last 6.5 years as we brought on 650,000 senior patients as we're serving roughly 1.5% of the primary care physicians in the country, these are the results we've been able to drive across the 3 basic tenets that you need to be successful to deliver high-quality care. You need patient access, and we're seeing dramatic step-ups in terms of annual wellness visits for our senior patients, getting in understanding what their conditions are. Quality, particularly in terms of quality dealing with those most complex patients, the Medicare program is fantastic in terms of calling out what best-in-class looks like. It's very easy to benchmark in the Medicare system. On quality, they have a 5-star system. Above 4 stars, they pay health plans a 5% bonus. Getting above 4 stars is extremely important. Across all the markets I talked about in every single 1 of our year 2 markets, we're across that 4-star threshold. The value that provides to the government, the value that provides to payers and by association, our physicians is significant. And finally, you're going to hear me say this repeatedly, high-quality care is cost-effective care. When you drive that type of quality, senior patients spend less time in the hospital. They spend less time being readmitted into the hospital when they've been discharged and they spend less time entering the emergency department, which is really the last place you want to be entering health care unless it's absolutely necessary. Now there's a couple of slides today that I want to call out for you that I would really hope that you remember. This is one of them. This is how we do this. And this shows you the primary care physician who's got that trusted relationship with the patients, our partners bring that to this partnership and it shows on dealing with complex patients, in this case, diabetics. Diabetics represent 25% to 30% of seniors. When their conditions are not managed, they can spend a lot of time in the ER, they can spend a lot of time in the hospital, and over the long-term, it can lead to catastrophic outcomes like blindness or amputation of limbs. Managing diabetics well is table stakes to be successful in value-based care and for our physicians to thrive and our patients to win. What you can see on the right -- in the upper right, is basically what fee-for-service medicine looks like in this country. Medicare, again tells you what best-in-class looks like for diabetics. You want to have 80-plus percent care gap closure on diabetic eye exams and 80-plus percent care gap closure on blood glucose control or A1c. Before we go to a market, oftentimes, this is what it looks like. Physicians within a group, maybe [ operating ] the same EMR, operating with the same payers, each of which has their own practice. Look at that variation. I talked about variability as an opportunity. Look at how variable they are in terms of treating diabetic patients. Each one of those dots is a primary care physician. In 1 year, we were able to move to the lower right, and you can see how many of those primary care physicians are best-in-class as Medicare would define it. That movement is in 12 months. We're able to do this again and again and again, in the left shows you basically what's driving that. We are able to provide these primary care doctors with a better information model and a better resource model and obviously, a better economic and incentive model as we change the way they get paid and they're being rewarded for those outcomes on the right. This primary care physician now has a pharmacist available to work with their senior patients around medication adherence. They have a care manager who's able to follow up with that patient after their visit. They have access to retinal cameras for those diabetic eye exams. They have a team that's able to go into the home to help manage those most challenging patients. And in terms of information, they know when their patients are in the hospital, and they know when they're being discharged and the -- we're working with their schedules to get those patients in for a follow-up visit within 48 hours, it has a dramatic impact. That happens across a variety of areas within senior patient care. This is just one example, but I think it's instructive about how we're able to go into a diverse markets with very different types of groups and drive such significant improvements in quality. Medicare benchmarks. It's very easy to look at what best-in-class looks like. And so not only are we delivering better performance than the overall Medicare Advantage program, but our partners are improving faster. What this shows you on those 2 critical areas, eye exams and A1c control is that our partners are driving 2x to 3x the rate of improvement for their senior patients. That is significant. What did I tell you? High quality care leads to cost-effective care. And so what do we see from a cost perspective? Across our broad network, the difference between controlled patients, and we showed you the -- how well our partners do 1 year in terms of controlling their diabetics, 50% fewer inpatient admissions. That is significant. The hospital is a significant cost area for senior patients and nearly a 20% reduction in terms of total medical expenses. High-quality care is cost-effective care. That performance is driving growth. There is a simple flywheel. What did I talk to you about in terms of investment themes, the biggest differentiator is our performance, the better we perform, the greater we grow. We are investing more in care delivery, those care team resources that I showed you. The more we invest, the more we're able to drive better patient outcomes. Those outcomes create economics. We split the surplus, which is Tim will walk you through this. The difference between the revenue and the total health care costs, 50-50 with the partners we absorb 100% of the downside, say you'll never lose money. Those new economics are changing the trajectory of that practice and addressing the challenge that I talked about at the very beginning. It's threatening primary care. Other doctors are noticing. They're joining in existing communities and new communities and look at what it does to our growth, 32 markets, 1.5% of the primary care doctors within the country. Each year is a record year, this year of 2023. We're north of 130,000 members joining the platform, and we've already let you know that in 2024, because this is such a forward-looking model will have greater than 145,000 new senior patients. That growth drives scale and there's 2 competitive advantages that I want to call out for you that comes from that scale. The first is local. We're in 32 markets and in 14 states. And what have we done by going first to these markets. We've created an infrastructure that enables not just our partners and health plans and hospitals and others to make the move to value-based care. It enables additional physicians and their patients who want to make that move. In short, we have become the standard in these communities for doctors and patients who want to make that leap into the new world of value-based care. There is a tremendous in-market total addressable market within it 10.5 million seniors, I just told you, we're at 650,000. 33,000 primary care doctors, we have less than 3,000. If we never went to another community, the runway of opportunity is tremendous. The second differentiator and competitive moat that we're building is in terms of national scale. The ability for us to invest in clinical programs, things like renal care, complex kidney disease, patients CKD 4 and 5 that are able to manage those conditions. Palliative, end-of-life care, able to work with families and patients around advanced care planning and better manage that for a better quality last year or 2 of life. The ability to invest in technology. We've just made an acquisition of mphrX. They have a platform called Minerva. That allows us to connect faster with these electronic medical records that our partners have identify patients earlier and get them aligned with those programs. We did not have these capabilities a couple of years ago. And when Tim shows you the other slide, which is going to show you the trajectory of each one of our markets and what's happening in medical margin across time, think about these differentiators in that scale. Tim?

Thanks, Steve. All right. I'm going to take you on a whirlwind tour of a very powerful financial model. For those of you that aren't really familiar with exactly how this works, what Steve was talking about, the left-hand side of the slide just gives you a very simple understanding of how our model is built. So we go in and enter a market at scale with an existing PCP group, and we essentially get contracts -- contract with all of the payers in that market. Usually, if you start on the left-hand side of this page, at about 85% of the premium that those payers are receiving from CMS or the Medicare Advantage patients. We, of course, take all the risk then for the course of care and the cost of care for those patients. And that typically -- and that is -- we typically do that, obviously, at a lower cost than the revenue that we're receiving. The difference between those 2 numbers is what we call medical margin. So that's the surplus that we are generating in each market. That we share essentially with our partners 50-50. Now before we do that, we actually have some operating costs we bring into the market that are deducted from that medical margin to get to a market level profitability. That market level of profitability is shared 50-50. By the way, really important point. We typically get to -- we're typically a positive medical margin we're generating a positive surplus with every one of our partners in year 1 and we're typically running positive operating profitability, if not in year 1, but at least a year 2. So we get to profitability pretty quickly. And if you just real quickly look down on the right-hand side of this page, some of the key attributes that drive our financial outcome. First of all, that model that I'm talking about, where we going with a 50-50 partnership and are sharing the surplus that we're generating drives tremendous alignment between agilon and our PCP partners to drive outcome over time in an aligned way. We have tremendously high visibility to growth a number of things drive that. Steve talked about some of them. But just the fact that we have a large existing embedded membership within our current practices that we partner with that are either people converting from fee-for-service into Medicare each year, are people aging in up the commercial panel of our providers into Medicare each year. And then we also have really good forward-looking visibility to our future growth. And Steve already talked to you about our visibility into our class of 2024, for instance. And we also have a process in which we implement our new markets up to 12 months before going live. So long before we go live, we have really, really strong visibility into exactly what's happening. So right now, for the class of 2024, we're already implementing those partners, and we have good visibility into not only what that membership is but what the economics for that cloud will look like going into 2024. Our model is extremely capital light because we enter these markets at scale with existing PCP practices, we don't really have a large acquisition cost. Our costs are essentially the cost that it takes for us to implement those markets each year. It's only about $500 per member and for us to acquire and bring a partner -- bring a member onto the platform, which we get paid back usually within the first year that were out there actually operating the model. These are tremendously attractive lifetime value to customer acquisition cost because not only do we have low cost, but we have tremendous retention of our members over time. And then those margins in our -- we have tremendous embedded margins within each of our markets. So as our members and our partners mature on the agilon platform, margins grow over time. And as Steve said, I'll show you a really great slide as exactly how that's been working in practice. So we have really great confidence and visibility in our long-term value drivers. And right now, our EBITDA has actually been inflecting positive year-over-year. Really 4 things that are driving that. The first thing is our ability to continue to put members on the platform. I'll show you in a second. We continue to do that at an accelerating rate. The second thing is our ability to progress medical margin at both the market and member cohort level over time. Again, I'll show you that in a second, exactly how that's working, but we're doing it at or ahead of the rate that we expected to do to project to our long-term model, our long-term projections. Member vintage as we grow and the average vintage of our members and markets grows, the mix of higher medical margin PMPM markets increases, and we drive profitability that way as well and we get tremendous leverage as we grow. I'll show you a slide on this as well. But as we grow in each market and as we add markets, we're getting tremendous leverage against operating costs, and that's creating very strong flow-through to adjusted EBITDA in each market as they grow year-over-year. Steve talked about the first point is our ability to add members over time. When you look at our ability to the markets that we've added, basically from the 2 markets that we had live back in 2018, to the 32 markets that we -- 32 partners that we tend to have live in 2024. We're growing markets at a 60% CAGR, and that's resulting in about a 50% CAGR over that time period in overall membership. And the interesting thing is a chart in the middle, you can see not only are we growing, but we have actually increased the number of members that we're adding each year year-over-year. And you can see the class of '23 for MA coming in at about 138,000 incremental members that we expect to add this year. In 2024, it will be our biggest class ever. We expect to add about 145,000 members. And again, that's something we have really clear visibility to because we're already implementing those markets that are going to represent those 145,000 members. And then when you look at it, the MA membership in concert with our ACO REACH membership, we're going to add about 170,000 members to the platform in 2024 and that will take us from close to 500,000 members on the platform in 2023, starting to get upwards closer to 700,000 members next year. So growth is accelerating. And we're not only growing strong, but that growth is accelerating each year. So this is the famous slide that Steve was referring to. Our ability essentially grow medical margins as members and markets mature on the platform. This view is particularly -- purely a member view. So what that means is when you look at each line on this graph, it takes out any of the dilution that we would get in a market from new members that come on in any year that would dilute our medical margin in that year. And it just shows, for instance, in the line that starts in 2019 to $37, those are the -- that's the medical margin per member per month, $37 of the 2 markets are the members that we brought on in the markets in 2019, which would have been across 3 markets. And then you can see how the medical margin has progressed only for those members over time. And the impressive thing is not only that we're getting to good numbers, but each of these lines is progressing in a very similar way. And you can see that we've already got a couple of markets in 2022, our couple of member cohorts in 2022 that were already operating over $200 medical margin PMPM. For those of you that aren't as familiar, I'd just point out that, that hump in the middle, of course, in 2020 is a little bit of an anomaly because that was COVID impact, and there was a particularly unusually low utilization in that year. But other than that, the lines have been really in each member cohort progressively going up. This now looks at it medical margin progression over time, but at the market level. So in this case, each of these lines represents all of those markets that have come live in a particular year and how those total market cohorts have grown over time. So in this case, each year, there is the impact of dilution because as we grow in market and bring new members into each of these market cohorts, they come on initially at a lower medical margin, and then we develop them over time. And you can see that, that in-market growth across each of those cohorts has been significant, double-digit CAGRs across each of these lines for end market -- end market same geography growth. Notwithstanding that dilution, we've still seen again, steady progress on medical margin upwards. And you can see in 2023, even at the total market level, we're projecting a couple of markets to already be over $200 medical margin PMPM. But again, everybody on a relatively consistent progress. The other thing that's interesting about this chart is that each of the markets or each of the market cohorts are essentially starting at a bit of a different point. You can see the 2019 cohort starting as low as $35, 2022 starting at $61. Everybody starts at a little bit different point. But over time, we have the ability to basically develop those markets and all get them up to the same kind of medical margin rates as the markets mature. I talked a little bit about market vintage. So really important. If you think about the markets -- when we have markets that are in year 4 and 5, they're generating that $150 to $200 plus medical margin, over time, as we have more and more markets that are in that year 4 or year 5 plus that math alone is driving our overall blended medical margin across agilon. And you can see today, if you kind of look at the 2023 bar on there, our average market vintage this year is about 3.3 years. By the way, that's about the same as last year. We haven't made a lot of progress in that because we have a really big class coming in this year. But the good news is the big classes coming in, in 2023 and 2024 that I showed you, 140,000 almost members in 2023, almost 150,000 members in 2024. Those members will now, of course, have a couple of years to mature between now and 2026. By the time we get to 2026, we'll be at almost a 5-year average market vintage. And again, when you consider what the medical margins are for those markets that I just showed you in year 4 and 5, that's really important to our economics. And also as we grow then, we see tremendous leverage against our platform support costs or the G&A cost that goes directly against running our markets. You can see this has been a steady decline over time or steady leverage. I mean 2023, we expect to drop more than 100 basis points from 2022 down to about 4%. And we would expect that steady state that our platform support costs will be running under 3% by 2026 and going forward. So a big part of how we're going to generate adjusted EBITDA margins over time. Again, we're just seeing tremendous inflection in these rates. When you look at revenue growing at over 50% during this time period. You can see between Q1 2023 this year that we just reported Q1 more like a 74% growth in medical margin and revenue, and that resulted in about an 88% increase quarter -- year-over-year for the first quarter in medical margin dollars. And you can see over time, our medical margin inflection has been tremendous at about a 60% CAGR or certainly in line with what our revenue -- I'm sorry, with what our membership CAGR has been, and we expect this year to generate somewhere around $550 million of medical margin. And then just to wrap up, we have a tremendously strong balance sheet. As of March 31, we had over $800 million of cash on hand. We used some of that cash to repurchase securities in the deal that -- in the secondary offering that Steve just talked about since the first quarter. We do anticipate at this point that we're going to be generating positive cash flow for the first time in 2024 and thereafter. And because of all that, we really do not have any need for us to go out to the capital markets to raise capital externally to meet and achieve our growth targets. How we spend all that capital a couple of different ways. The primary use of our capital is to continue to support our PCPs in driving growth. And so we invest in our PCPs locally to drive same geography growth. We're continuing to make investments in our platform to drive the technology that helps drive that medical margin forward, and we are buying some -- looking at some things that we're actually bringing in external technology, the acquisition of mphrX that we announced last quarter. And I think with that whirlwind tour, Steve? We got a minute 15 here to close out.

All right. Thanks, Tim. So I'll just leave you with a few things. One is we've had a really strong start this year. Tim walked you through the numbers, but I don't know many businesses that show an 88% step-up in their main margin metric. We're tripling our adjusted EBITDA year-over-year while we're growing 60-plus percent. Two things are driving that, are mature markets that Tim showed you in that maturation year-over-year and strengthen the ACO REACH program, which we've got increasing confidence around. That carries forward to high confidence in 2024. It will be another year of meaningful adjusted EBITDA step up. Tim showed you what the progression has looked like. We're not giving guidance today, but we are feeling very good given the run rate in the business and our ability to manage the final rate notice very well. That's a function of our ability to be nimble and our overall sort of risk adjustment score, which is relatively one. And so the impact for us is not nearly as great. And finally, as Tim said we recently completed a secondary offering. That was a real clearing event. I think it removes some of the overhang that's been on the stock as CD&R steps down from 47% to just below 25%, and it's created great alignment with an excellent set of long-term investors who are excited about the future of the business. So thank you very much.

Thank you. And with that, we'll head up to Jennie A. [indiscernible].