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

Good morning. My name is Lisa Gill, and I'm the Head of Healthcare Services here at JPMorgan. It is with great pleasure this morning that I have with me, Agilon Health. Presenting for Agilon Health will be Steve Sell, the CEO; and then Steve will join myself and Tim Bensley for a fireside chat here just for a few questions after the presentation. So with that, let me turn it over to Steve.

Thanks, Lisa. It's good to be back. Good morning, everyone, and thanks for being here. Before we dive in, I'd like to make a few key framing points for you to take away. The first is when you look at primary care today, the demand for a strong alternative to fee-for-service and specifically fee-for-service and Medicare has never been stronger. Second, our business model is working for doctors, patients and payers, and we'll show you those results. Third, 2023 was definitely a challenging year. But in many ways, the work that we did this year has set the foundation for meaningful improvements in 2024 and beyond. Our '24 guidance assumes the benefits from that work and a higher utilization trend continues through this year. And finally, the long-term thesis and opportunity remains firmly intact and the state of primary care and the overall health care system only reinforces that point. So let's start with the problem. It's very challenging to be a primary care doctor in fee-for-service and particularly in the Medicare program in terms of fee-for-service. As we show you here, I don't know of another business that has seen a 20% decline in the effect of unit economics. But that's the reality for a primary care doctor in Medicare today. When you look at the fee schedule, when you look at the changing mix of their practice with more seniors growing as you see on the right, and the escalating cost of running a practice, not only are they upside down, it's getting worse. Not surprisingly, doctors are burning out and 1 in 5 primary care doctors are considering leaving the practice in the next few years. At the same time, key stakeholders like CMS and health plans are saying the key to solve this is to make the move to value. There is incredible structural support from the nation's capital and beyond for this move and it lines up very well with the desire of primary care doctors to improve access and deliver high-quality, cost-effective care. And while everyone says primary care doctors are the key, the problem is they don't have the business model to do it. They don't have the time nor do they have the capacity. We're solving that problem for primary care doctors and for the healthcare system. Our total care model takes the same doctors, the same patients and the same health plans and moves them from the challenges of fee-for-service into a total care relationship, in which there is a budget the ability to invest ahead of the outcome with additional resources and far more information than they've ever had. When we talk about the model working, this is the one data point I constantly look at that gives me great confidence. Our ability to deliver consistent results across our network. To be successful in value-based care, you need to do a few things. You need to have high-quality access for senior patients. We're seeing a 2x to 3x increase in annual wellness visits relative to fee-for-service. From a quality perspective across these diverse geographies, across all types of groups, we are delivering quality scores at 4 and above. All of our year 2 partners, regardless of where they start, are getting across this critical threshold in which Medicare will pay health plans a 5% bonus, strengthening our value proposition to health plans. And better quality care translates into better cost care. We're driving significant reductions. Seniors are spending far less time in the hospital, far fewer seniors are accessing through the ER, which is really the last place that you want to enter the healthcare system unless it's absolutely necessary. And we're seeing a substantial reduction in terms of readmissions. An example of this great work is in the peer-reviewed palliative care study recently published in the Journal of Pain and Symptom Management. The survey looked at 900 patients treated by Agilon partner physicians and compared those enrolled in a palliative care program versus a control group. What the survey found was an alignment between the wishes of the senior patients and their family to have a passing at home and the outcomes that the program was able to generate. We saw a 65% reduction in hospital-based deaths, seniors able to spend an additional 5 days at home at the end of life and a 33% reduction in the total cost of care. In our business, there is a natural flywheel in which better performance drives higher growth and it follows what you see here. Docs join. We make an investment in care delivery that keeps patients out of the ER and out of the hospital unnecessarily. And as a result, our physicians do better. It changes their practice. It changes their outlook. More doctors want to join. And you can see the impact, 31 markets, 2,400 primary care doctors and 650,000 senior patients. These are the drivers of our long-term financial model. Growth, particularly of new partners and members, is tracking meaningfully ahead on the success of our model and the demand from PCPs for an alternative to fee-for-service is accelerating. Our ACO reach business tracked well ahead of our expectations in 2023, and we expect that to be strong again in 2024. Operating leverage continues to be ahead of pace as we leverage investments we have made in technology and the ability to centralize and standardize many activities that previously occurred in our respective markets. I'll drill down now on medical margin and 2023 performance. When we think about our '23 performance at a more detailed level, I would call out 2 components that sit in our '23 full year guide. First, medical margin was off by $172 million. This is a result of 2 factors: an initial forecast assumption of a net 2.3% expected medical and nonmedical cost trend that was too low and influenced by our recent experience and the expected in-year impact of our clinical initiatives. And then are being slow to predict and adapt to the utilization surge that began in the second quarter around outpatient surgeries, Part B drugs and associated specialist costs. 2023 though was also a year of significant investment at the corporate and market level as we transition to a global center of excellence to improve performance. We expanded local market staffing for clinical programs and stood up a large year 1 class. Well, these costs created a greater burden on the '23 P&L. They have facilitated both medical margin expansion and greater operating expense leverage in 2024. As we outlined on our call last Friday, we have taken a clear set of actions to improve our performance and enhance the predictability of our results against the market dynamic that is far more challenging. We believe our model provides us with a meaningful set of controllable levers that will allow us to buffer our performance against the potentially adverse set of uncontrollable factors like macro utilization. For example, on this page, I double-click into our changes to date and a '24 set of milestones that can be quite impactful. First, from a data and analytics perspective. We have added new data and actuarial leadership and coupled that with a trusted third-party reviewer. We are presently building a digital financial data pipeline that will provide standardized and actionable data with our 7 largest payers covering 75% of our senior patients. This claims and eligibility data will be complemented by system-wide data to improve forecasting and operational insights. From a physician education and onboarding standpoint, we are focused on 2 groups of new doctors, those joining in new markets with new partners and those joining veteran partner practices that have not had the benefit of an initial orientation on our partnership. For both, we've created a structured training. In '23, 90% of the docs in our new markets went through the training and delivered outstanding results during their implementation year. In the first half of this year, we will similarly educate 90% of the docs in our targeted more mature markets, using the same program, which had helped narrow the variability between newer and veteran primary care doctors. I previously talked about our Global Center of Excellence and in '24, we will take more burden off of our primary care doctors and allow them to maximize their time with senior patients. Finally, our strategic relationships with our payer partners are built around mutual need and candid exchange, allowing us to take on difficult topics like risk sharing and the division of financial responsibility. This is a very important slide and it brings together many of the concepts we are discussing today, the effectiveness of our business model, the ability to take out variability across markets and the power of a standardized process to drive consistency in terms of medical margin performance across a disparate set of primary care doctors from different markets and medical group types. What this chart shows is one key process metric to identify, assess and ultimately manage complex chronic condition patients, and it shows the class of '18 on the left, up through our newest class on the right from '24. In 2018, in the first year, our first market of Columbus, reached a CCR rate of 82%. In each year, they and every other market have progressed. But in 2023, as we standardize both information and process and aligned our doctors through consistent incentives and increased capacity, we have seen every market class reach at least 90%. That's an all-time high, many with meaningful improvements and both Columbus, our first market and our most recent new class of '24 have both reached 92-plus percent. This has meaningful implications for quality and cost management. The better assessment I just showed you drives better clinical enrollment. Earlier, we talked about the strong results from our palliative care study published in 2023, a 65% reduction in hospital-based deaths, a 33% reduction in total cost of care in much greater satisfaction for the patient and the family. Here, we show you a strong step-up in our earliest 2 markets with palliative care programs, reaching roughly 3.4% of the population which is impressive when you consider that the potential universe is somewhere between 4% and 6% of that population at any one time. We attribute these strong results due to a combination of a better assessment process, combined with a long-term primary care doctor patient relationship that is built on trust. And a skilled palliative care discussion around personal and family goals and overall program options. And better enrollment in clinical programs for complex patients results in meaningful reductions in avoidable inpatient hospital spend, and in '23, through the effectiveness of our various clinical programs, we saw a 2.6% reduction in inpatient utilization. This outcome demonstrates our ability to move the needle when we identify and engage senior patients around a specific condition or need and lays out a road map for further expansion across our markets. And so when we think about our '23 earnings and our '24 guide, we see a business that has well more than doubled our MA membership from 230,000 members in '22 to 550,000 members in '24. And next year, we will grow our reach membership north of 100,000 members. We are very cognizant that utilization continues at elevated levels, and that has been reflected in our revised '23 outlook and our utilization assumptions for '24. The meaningful step-up in medical margin and adjusted EBITDA for 2024 is driven in large part by '23 actions in areas like chronic assessment and management, a '24 class that leverages all of these platform strengths and significant operating leverage that allows for a much greater pull-through of MA and REACH medical margin dollars to the adjusted EBITDA line. When we think about the earnings power of our business and how we generate cash, it is important to break apart the market classes into a few key categories. Year 2 plus, year 1 and year 0. Well, the progression of these classes get shown to you in a composite medical margin. It is important to understand that year 2 plus classes drive the entirety of our adjusted EBITDA and cash flow power. Year 1 classes historically run just above or below breakeven although the class of 2024 is expected to contribute immediately. The year 0 implementation classes bring on a new class at roughly $500 per member to onboard. And in 2023, we spent $71 million to onboard the 140,000 members from the class of '24. And all of this lays across the corporate expense of roughly $100 million. These dynamics set up a business in which, as we reach critical scale through both MA and REACH Medical margins, adjusted EBITDA will increase nicely, although there can be more difficult to see in our reported figures. So in closing, from a macro perspective, when we look at the power of our business model, we see a strong long-term opportunity built around the following key factors: one, 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; two, the Agilon platform is driving more value each year to our existing primary care doctors, making the case even stronger for our prospective PCPs looking for an alternative: third, membership continues to accelerate, creating long-term value through more members on the platform earlier; and then finally, as we've talked about in our mature markets, Variability in the system creates a great opportunity. And in fact, it's a central reason the company was created and the value proposition is so compelling for primary care doctors around the country in medical groups of every different kind. Thanks, Lisa.

Thanks very much, Steve, and thanks for all the comments. Let's first start off when we think about 2024, maybe Tim, this is a question for you. When we think about the potential headwinds and tailwinds as you start to put together more of the detailed guidance. I know you've given us some preliminary numbers, but are there anything specifically we should be thinking about?

Yes. I mean I think, Lisa, in terms of the headwinds, I think the utilization assumption I just talked about, we see '24 is another high utilization year. I think B-28, everyone is balancing that, but -- we obviously see that as manageable. I think supplemental benefits year-over-year, we see as another step up, although not nearly as great as what we saw in 2023. In terms of tailwinds, 270,000 members generating an incremental $150 million, these last 2 classes that have doubled the company, that's huge. Our platform just continues to get stronger in our clinical operations and the programs that we've got that expand around that. And then finally, as I just talked about, our operating expense leverage is great.

And Steve, the only thing -- and the other thing that you mentioned in the presentation, just to tack on, in the 270,000 members that's half our -- 140 of that coming from the class of '24. That is going to contribute positively EBITDA. That's a tailwind versus what we would have had certainly in '23 or before.

Just kind of digging in a little to the utilization comment, right? So if I go back to the third quarter, you had raised your MLR expectations by $50 million. And then we had to have a discussion on Friday as to where things actually come out thus far for the December quarter. Can you maybe just help us to understand -- I know you've talked about outpatient surgery, some inpatient volumes, et cetera, but was there something that really changed with your book of business? Was it just that you weren't capturing what was actually happening? How do I think about just that short period of time from when you reported at the beginning of November, right, to 2 months later?

Yes. I mean I think the goal with what we talked about on Friday in our revised '23 guide is to really set a solid foundation. We're trying to step off '23 in a good way and move into '24. That led to us as we saw higher paid claims come in really reintensifying our discussions with all of our payers looking at a variety of external data. We've just talked about some of the changes we've made in terms of our leadership and bringing in kind of a peer review third party. All of that led to a revised guide that had us see higher paid claims, revise those completion factors to Q2 and Q3 and elevate Q4 just based off that -- those higher utilization and what we saw around all of that, and that continues for Lisa into '24.

Data visibility has been a challenge this year, and you talked last week about getting payers that had previously been on a 2-month lag, when we took 1-month lag. You just talked about 75%, where you'll have better visibility. Can you maybe talk about, is there a difference in the type of payer? You said 75%, but is that -- were the large payers always giving you visibility and it was more of the small payers that there was a lag visibility or let's everybody is the same and you need to get everybody on the same plan?

No, there's kind of a mix Lisa between some of our -- the big national payers are on very different lags. We have our largest payers actually our most current, but we have a couple of other large that are actually on quite a bit larger lag. And some of our regional payers are both as well. I mean, overall, our average lag across all of our payers is about 1.6 months. So it's not horrible, but obviously, it's a little bit slower than what you would have [indiscernible] the actual payer. I think one of the bigger things that we're doing moving forward is putting a lot more expertise and infrastructure in place to do more with that information that we're getting even on that one point. And that's one of the things that Steve talked about in taking the way that we ingest data today, which is we get, as you can imagine, an immense amount of data that we're dealing with every day, but really dealing with it in the format that each individual payer gives it to us and on a payer by payer, market by market basis [indiscernible] estimates and using that [indiscernible] operational, go-forward plans, et cetera, and really now putting that through a model that allows it to be in a standardized agilon format. So it feels like our data, the way we want it, that we can drill down to, and it will give us the ability to do, I think, even more analysis and better -- a better job on our estimates going forward. And we'll have 50% of our payers on that by the end of Q1, 75% of them on the end of -- membership by the end of Q2.

And Lisa, I think if you -- at the macro level, if you think about [indiscernible] we have a scaled multi-payer platform across 30 markets in 14 states. And so I don't know anyone else that has that. I think if you talk to us in 6 to 12 months, this is going to be a massive area of differentiation. I mean I think not only are we getting the information in a standardized way with our payers, not only getting the surround elements around that, but we're able now to have a much more integrated conversation with our payer partners. I ran a payer for a long time. They're on a lag as well. And I think we're all managing through this utilization environment. And so the richness of that that's allowing us to -- with this team that I talked about really make these judgments and reads on it, I think, has been a step up. But the inputs into that, not just the receipt and timing, but also just sort of the actionability around it and consistency, I think, is fairly unique. Looking across 30 payers, whole bunch of different claims systems being able to have that view, I think that's going to be a differentiator for us long term.

Is there an opportunity, if I think about it from that data perspective, right? When you think about many of the medical procedures, there's a prior authorization, I would think that most of your primary care doctors have an idea of what's going on with the patient. Are you collecting that level of data to maybe preemptive...?

So one, there's typically a referral to the specialist, which is one. The prior office typically in an HMO product, right? And this is the new world of value-based care and which over half our membership sits within a PPO. So there's not always that indicator. Sometimes, there's something like hips and knees are an area that we talked about for a senior. There could be an echo test in front of that. That could be another indicator for that. So I think there are a variety of those things. But I think getting data in from surgery centers, looking at what the manufacturers are talking about around -- somebody has to produce a hip and the knee. It's just all of that I think with our precision can get much better and then can sort of tune things regionally because part of what we're seeing as the utilization is it's not equal everywhere. It varies across markets, et cetera.

And I think that's part of one of my other questions like when I think about that $100 million of additional medical costs, is it concentrated with any single one payer or in any single one region?

I think when you look at the difference between what we were saying when we guided in Q3 and what we're saying now is that incremental, it's about 40% of or so is actually in our new markets. So we do have, as we're getting more complete information and better information from the payers in the new market. We did see, obviously, a higher cost there, and we're recognizing that. And then the rest of it is essentially spread across the rest of our markets. I think if you go back to the very beginning of the year, and say, how does our expectation about claims expense and overall medical margin look across our markets, it's -- we have -- that difference is pretty well spread across our year 2 plus markets.

Yes. I mean I think it's distributed -- to your question about payers, distributed proportionately to sort of the membership mix that we've got. I think the concentration is in the categories, right, the hips and knees, the Part B drug, the oncology and orthopod specialists that sit within that. So that's a little bit more of it. And I think part of that is this pent-up demand that we talked about on Friday. Our estimate is that we're 60% through the backlog of delayed outpatient procedures for things like hips and knees that maybe someone got a referral during COVID, but has taken time to sort of feel comfortable and pursue that. That factors into our guide for '24 that, that stays at a higher level, but it also factors into actions like we've entered into a value-based care relationship with a partner in one of our very large markets that saw a very elevated trend to take the risk around that, go to an alternative site of care and a subset of orthopedics.

So just so I understand that, so you're subcapitating some of that risk when we think about certain categories. Is that...

Right. So just like we've done with partners around renal and palliative where we've done very well, and we showed you the inpatient results around that. Now as we pivot to the outpatient side, there are partners that we can work with around that. It can be a global cap. It can be kind of a corridor relationship. I mean, there's a lot of ways to pass risk. And so -- but that's the idea. And I guess my point going back to the scale we've got, that's the opportunity for us.

Okay. Now, that makes sense. When I asked about headwinds or tailwinds, you talked about supplemental benefits, and that will be an area of continued pressure as we move into 2024. I know in the past, we've talked about maybe having conversations with payers around potential ways to restructure some of this and potentially mitigate this for 2025. Can you maybe talk about some of those discussions and opportunities that you see?