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

Hi and welcome to agilon health guidance update. I will now hand over to Matthew Gillmor.

Thank you, operator. Good morning, and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements, due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results, and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. Following prepared remarks from Steve, Tim will join us for a Q&A session. With that, I'll turn things over to Steve.

Thanks, Matt. Good morning, and thank you for joining us on short notice. Our call this morning is intended to provide an update on how 2023 is finishing and our first look at 2024. As called out in our press release, a significant increase in medical and nonmedical costs during 2023 has had a material impact on our full year results. I will walk you through what has changed since our last update, why our confidence in our business model remains high and how these factors impact our revised guide for '23 and our initial guide for '24. My comments this morning will follow the presentation found on our Investor Relations website. Before I dive in, let me give you 3 framing thoughts. First, we are clearly living in an elevated utilization environment that is challenging, and we assume that environment will persist through 2024. Second, our 2023 underperformance was largely driven by 2 issues: a forecast that failed to recognize these elevated cost trends and a data and analytics gap that led to our being late in both recognizing the magnitude and source of the utilization shifts. We can do better on both of these items and in fact, have made significant strides in the last few weeks. Finally, growth has been a source of differentiation, as we have become the destination for primary care doctors looking to move to value. But one aspect that we failed to appreciate was that material growth in mature markets has brought a significant number of new primary care doctors, and there is a low-hanging fruit opportunity to do a better job in terms of onboarding and educating these newer doctors, so they fully understand and can perform well in our model. Now as we turn to Slide 3 in the presentation. We are lowering our 2023 guidance for medical margin to a midpoint of $350 million and adjusted EBITDA to a midpoint loss of $62 million. Higher cost trends became visible to us starting in mid-December, as we closed our November results. We recognized at that time that we were seeing cost trends that were 2 to 3x higher what we had seen in 2022 in key areas like specialist costs, outpatient surgeries and Part B drugs. In the face of this change, we made a proactive decision to both adjust our Q2 and Q3 completion factors and increase our Q4 utilization assumption. We are carrying the higher utilization assumption into our initial 2024 adjusted EBITDA guidance of $40 million to $60 million. Given the lower baseline and the elevated utilization assumption for 2024, we have made the decision to withdraw our 2026 outlook. While 2023 has not played out as we expected, we continue to drive value for primary care doctors. In fact, this year, we have reinvested over $200 million back into local primary care, which is up $40 million from last year. It is very clear to us that we have a lot of work to do. We have identified a targeted set of actions we believe will drive performance in 2024. These include boosting our operating efficiency, leveraging our strong payor relationships, addressing our data visibility gaps and expanding support for our new primary care doctors. On Slide 4, this is a chart that we showed you in November. Let me show you what has changed here in terms of medical margins. The most significant change has been in core medical performance, which is $110 million lower than our previous projections. $90 million is from higher costs, and you can see from the callout box, how that falls across the quarters. These are the elevated costs I just spoke to in terms of specialists, outpatient surgeries and Part B drugs. $20 million of the core medical change is from negative revenue revisions tied to 2 year 1 payors, which provided updated data to us in December. The other change is an adjustment in terms of net prior year development, which resulted in a $3 million of lower revenue from Part D settlements. On Slide 5, you can see how utilization has accelerated from 2022 to 2023. When we talk about areas in which our business model is working well, I would point out significant progress in terms of hospital inpatient costs. In fact, the clinical programs for renal, palliative and high risk management that we shared with you on our Investor Day, have driven a net decrease of 2.6% in terms of Inpatient Medical, which is roughly 10% of our total costs. This was not enough to offset a significant step-up in terms of utilization in key areas like specialists, Part B drugs and outpatient surgeries, which are running 2 to 3x higher than last year. Our new projections assume these trends will persist through 2024. In fact, when we look at outpatient surgeries like hips and knees, we believe we are about 60% of the way through a backlog of pent-up demand from COVID. On Page 6, you can see that despite the 2023 headwinds, we have made significant progress against our mission to increase value for primary care doctors. On this slide, we show you our Year 2+ partners, which enables you to see our performance on what is essentially a same-store basis across Medicare Advantage and REACH. By taking better care of patients, we have increased our combined medical margins by 19% and generated 22% better economics for our partners despite the difficult year. That yielded a 13% increase in terms of gross profit for agilon on a same-store basis across our Year 2+ partners. While this was below our expectations for 2023, it demonstrates the power and leverage inherent in our model. At our company, we are constantly looking to adjust our people, processes and technology to changing market dynamics. For 2024, we have identified a clear set of actions to improve performance, balance risk sharing and enhance predictability. For operating efficiency, you will see that our OpEx leverage has improved from 4% in 2023 to 3% in 2024, due to our ability to leverage both corporate and market investments that drive our efficiency and performance in 2024. From a payor perspective, our relationships have never been stronger. We have found our payor partners willing to work with us to more economically manage the elevated utilization environment and to adjust for excess supplemental benefit costs. It's important to our payors they have a very successful delivery system, and in particular, a strong primary care delivery system. And through an alignment of mutual need, our recent conversations have reflected that reality. Better data visibility and analytics is a real opportunity for us, and we have executed changes in terms of our internal and external data and actuarial teams and externally created much better alignment with payor partners. Finally, there is a real opportunity to better onboard and educate new physicians in our existing markets and reduce performance variability. Turning to Page 8. When we talk about opportunities in our mature markets, this market is a great example. This market has seen 40% growth in primary care doctors and 75% growth in [indiscernible]. In addition to opportunities with payors and a new value-based care partnership, the big opportunity in this market is to focus on the 30% of primary care doctors that have joined post the market implementation. If we do this right, we should be able to move these new 76 PCPs from $34 PMPM of medical margin, up to the $161 PMPM level that our veteran PCP partners are seeing. On Page 9, we have outlined our revised guidance update for 2023 based on the macro utilization trends that we are projecting through Q4, we are lowering our 2023 medical margin outlook to a midpoint of $350 million, and our adjusted EBITDA outlook to a midpoint of negative $62 million. Our '23 revised outlook also reflects substantial investments that allowed us to add 270,000 members and 1,200 PCPs on the platform via the classes of '23 and '24. On Page 10, our 2024 guidance assumes another year of high medical costs, with a 5% medical trend that matches what we have seen in 2023. This year, one key area of step-up will be a combined $150 million of incremental medical margin from those large new 2023 and 2024 classes. Operating leverage acceleration from technology investments and centralized activities will yield $20 million of incremental improvement. Page 11 shows you a straightforward medical margin bridge. From a $375 million incurred medical margin starting point, you can see the impact of our Year 2+ classes, with a $228 million revenue, a $141 million offset from a 5% medical cost trend less the impact of our clinical initiatives and $20 million in nonmedical supplemental benefit costs. Finally, you see the $127 million lift from the class of '24, which is an all-time high level of $176 per member per month. A few call-outs on the impact of this class. First, it reflects our entry into a very mature managed care and value-based care market of Dallas, Texas. This is important in that it both expands our TAM beyond 100% fee-for-service markets, and it also provides a much higher year 1 starting point for this group. Second, this class also reflects our addition of 2 health system partners in Dayton, Ohio and Western Michigan that are coming on in existing markets and leveraging existed in infrastructure and contracts, which is also yielding a higher than average year 1 starting point. The output is a midpoint medical margin forecast of $580 million for 2024. So in conclusion, we have had a challenging year, driven by a forecasting miss in an evolving environment, coupled with our data visibility issues. We are going to manage through these higher utilization levels via our initial 2024 guide and our action plans, but these headwinds have created a delay in our market cohort maturation. But when we look at the power of our business model, there is a clear long-term opportunity built around the following key factors: first, the demand for a new primary care model that rewards patient outcomes has never been higher, and the continuing pain of the fee-for-service system only accelerates that demand. Second, the agilon platform is driving more value each year to our existing primary care doctors, making the case even stronger for prospective PCPs looking for an alternative. Third, membership growth continues to accelerate, creating long-term value, with the addition of 270,000 members in the classes of 2023 and 2024. And finally, as we talked about in our mature markets, variability in the system is our opportunity. And in fact, it's a central reason the company was created and the value proposition is so compelling that primary care doctors in every kind of medical group in the country are joining our network. We will now go to questions.

Welcome to the Q&A portion of the call. [Operator Instructions] The first question comes from Justin Lake from Wolfe.

Justin, are you there?? Operator, we can't hear Justin.

I will move to our next question, and then I'll come back to Justin and see if the line is working okay for him then. Give me a few minutes. Okay. Our next question is from Lisa Gill from JP Morgan. If you could unmute your line and ask your questions.

Operator, do the participants need instructions that to unmute their line, is there a button they need to hit? .

No, they should be able to speak. Do you see if you could ask your question, Lisa?

I'm on the line. Can you hear me?

There you go. [indiscernible]

All right. Figured out something correct today. First off, thank you for doing this instead of next week. So I appreciate that for my end. Just really want to understand something a little bit better. And you talk about the visibility going into 2024 and addressing data visibility. Just given the number of revisions in 2023, what are some of the differences of the level of visibility you now have going into 2024? And I appreciate your comments around elevated utilization trends, we have been seeing that. But really, it's more on the visibility side and the data that you're getting, for example, from the payors, et cetera, like how do we get more comfort that you do have that level of visibility going into '24?

Yes. Thanks for the question, Lisa. I mean I think when we look at this year, we've got this macro utilization that's up, but from our perspective, it's a forecasting issue and then there's visibility on a data lag. To your question about what's changed is we've really worked intensively with our payor partners to be getting claims data information in faster. And so we've got payors that a year ago would have been a 2-month lag that are moving to a 1-month lag, we're getting it earlier in a monthly cycle. So those things are very powerful for us. We also have really, as I said in my prepared remarks, kind of overhauled our data and actuarial teams, both in terms of internal and external resources leases. So we've got a lot of external data points from a few firms that we're laying in with the payors. And then Tim and I and our data team are spending a lot more time with the leadership and the plans talking about exactly what we're seeing and what that means for us. And so I think it's a combination of those things that has given us better visibility, that's led us to the actions that we've taken in terms of revising the guidance and increasing the trend assumption for '23 and then the projection out to '24, basically maintaining it at these higher levels. So more wood to chop on that. I mean this is a key area for us. But I think the combination of how we're forecasting to incorporate that and these other data points as well as the work to improve it is a key part of that.

Steve, just as a follow-up to that. Like if I think about the comments that you made around physician interest in agilon and these types of platforms, is the reduction in your guidance, is that hurting you in any way in attracting or retaining physicians? Because my guess would be right that the payment to them, the maturation time line is longer. So is that having any impact when we think about the outer years of attracting new physicians?

So Lisa, I mean, I think there's great alignment between our physician partners and us. Both of us are very motivated in terms of driving improvements in medical margin by delivering great patient care. What we tried to show you in the presentation was that even in a difficult 2023 year, we showed a 22% increase in terms of the physician economics and a 13% increase in our agilon gross profit. So we're making progress year-over-year. It's not at the level that we had initially projected. And then I'll just say what I ended with my comments with the alternative in fee-for-service is just so difficult for these docs, that I think the fact that we continue to show improvement, there's alignment around how can we get better. For example, this onboarding of PCPs in these existing markets so we can really narrow that gap relative to their veteran partners, we have the benefits of that learning when we [indiscernible] their markets. I think there are all things that we can do to address that.

Lisa, this is Matt. One thing I might add to this answer is the value prop that we offer physicians is really, really compelling and the magnitude is really impressive. So we're obviously disappointed that we're not achieving our expectations this year, but the value prop is still highly differentiated and very sizable. So just to throw that out.

And Lisa, maybe just to [indiscernible] Steve talked about the 22% increase for that all of our partners have been here since '22 or before in terms of what is being pushed back to them for what they're being reinvested, that number is over $200 million now. So it's a very large number as well that we're essentially sharing back to the partners of reinvesting in our PCP groups.

The next question, we'll go back to Justin Lake, if you could ask your question as we see if we can hear you then.

Just working now.

We got you, Justin.

All right. Thanks for the question and bearing with me. The -- so just to follow up a little bit on Lisa's question around the docs. I'd like to go backwards. And when you look at your doc groups now, some of the -- obviously, the year 1 docs are a much lower margin, but are there any doctors that aren't seeing profitability that are out beyond year 1? Are there any kind of one-offs, two-off? Are there any that just aren't making it through the process of kind of ramping?

So we do have markets that are off of our projecting, Justin, in terms of these mature markets that are below sort of the levels that we obviously forecasted that. In terms of year 2+ markets that are running negative relative to where we're at today.

Yes, Justin, you are asking about are there individual doctors in those year 2+ markets that aren't getting any -- that aren't generating any profitability?

Yes. Start there, just like, I guess, individual docs deals a little bit could be pretty variable. I was actually asking more about individual markets. Are there individual markets that are losing money overall? Is there anybody that you're actually having to take a loss on?

So yes, at the market level, we do have some groups with our revised utilization assumption that would run at a loss for 2023. So that they're off the trajectory that we would be laying out for those. So that only one market.

We had one market that gets below breakeven market EBITDA in 2023 with these revised -- with these revisions.

Got it. And what happens there? Do the docs start -- do you start thinking about saying it's just not going to work in this market or what has been some of the issues in that market specifically?

So in that market specifically, I mean, it's in some of the categories we're seeing nationally, but they're more exaggerated. So supplemental benefits has been an issue, in which there was a material change in that. And we saw the impact of that nationally, we ran $24 million over our expected budget for the year and supplemental benefits. But proportionally, this market was higher around that. We've seen some of these outpatient surgeries running heavier than what we expected and the cost of those surgeries. So this opportunity for alternative sites of care for that surgery delivery is another opportunity which is there. In terms of the things to do around that, Justin, I talked about the work we're doing with payor partners, and that's one of the markets where we're pretty actively engaged around the economics and the magnitude of the change from 1 year to another. And the ability to sort of have an economic arrangement that works for the payors and works for us so we can have kind of a sustainable delivery. And as I said, I think there's pretty good alignment around that. Primary care doctors and health plans have this mutual interest and the health plans need a really strong primary care delivery system. So that -- those are the things that we're working on.

Okay. And then I apologize if I missed it, but did you give a cash flow number associated with the 2024 guidance?

We did not. But at this point, what we're saying is due to the much lower 2023 guidance that we just put out, our projection of getting to positive cash flow in 2024 is going to be pushed out to 2025.

Okay. So the -- how much revision is there in '23? And how much do you burn in '24? What's the updated '23 cash flow number now? And what's the '24 cash flow number?

Yes. So right now, we would expect to end 2023 with over $500 million of cash on hand -- unrestricted cash on hand. That's about $150 million cash burn year-over-year from '22, and that number will be approximately cut in half in 2024 and then bring it to -- the burn cut in half '24. I'm sorry, not the cash but the burn from $150 million [indiscernible].

[indiscernible]

Yes. And then 2025, we would expect that to then turn back to positive cash generation.

Next question comes from Shailendra Singh from Truist.

Can you guys hear me?

We can hear you.

Okay. Yes. Okay. So my first question, the medical margin guidance reduction of $105 to $110 million in '23, can you provide more color around like how much of that have you already experienced or observed, and how much is your estimate? What I'm trying to understand is, and I know this is not a traditional approach, but are you building any cushion in your '24 guidance for any negative PYD?

So thanks for the question, Shailendra. I mean I think we laid out proportionally where this extra $110 million sort of breaks out across that -- $90 million of cost breaks out across the quarters, $18 million in Q2, $31 million in Q3 and $41 million in Q4. And so you can see sort of the progression across time and what our expectation is as we go into Q4. We are at a, like I said, a 5% overall utilization expectation, and we think that's prudent. But the goal here is to really set a strong foundation to step off from '23 as we go into '24, and to make sure that we have really appropriate expense assumptions around that.

Yes. And Steve, the only thing I would add is, and Steve talked about this business in prepared comments but the changes that we have made to -- particularly as we closed November now as we're approaching December to work with payors to get better data, to get some accelerated additional information about what we think has happened to utilization. Obviously, it was a big part of what led to this adjustment to our medical margin and medical expense outlook. But what that also does is just gives us greater confidence as we're closing out the year [indiscernible], we're closing the reserves that are now appropriate, and we're not building in or anticipating prior year development continuing into 2024 as it did in 2023.

Just a quick clarification there. Steve, so how much complete data do you have? Is it through August or September?

What our completion rates are?