Astrana Health, Inc. (ASTH) Earnings Call Transcript & Summary

All righty. Am I good to go? Let me give the intro. So let's get started. Hello, everyone. I am Jermaine Brown. I'm one of the healthcare technology and distribution analysts here at Crédit Suisse. Thank you for joining us. Next up, we have Apollo Medical Holdings management. From the company, we have Dr. Kenneth Sim, Executive Chairman and Co-CEO; Brandon Sim, Chief Technology Officer and interim Co-COO. And Eric Chin, Chief Financial Officer and Co-COO. ApolloMed is a leading physician centric technology-enabled health care management company that's leveraging its proprietary population health management and health care delivery platform to provide integrated, value-based medical care. The goal is to empower the providers in its network to deliver the highest quality of care to its patients in a cost-effective manner. Brandon will lead off the presentation with some opening remarks. We'll then open up the line for Q&A. With that, Brandon, over to you.

Thank you, Jermaine. I appreciate it. I'm going to share my screen here. Perfect. Jermaine, thank you again. I've got Dr. Sim, our CEO here; Eric; and myself; and Dave, one of our Board members, and I'm very excited to present the story of Apollo Medical Holdings. As Jermaine mentioned, we are a leading physician centric, technology-enabled and risk-bearing health care management company. We're leveraging our proprietary population health management and health care delivery platform to operate an integrated value-based health care model, which aims to really empower our providers in our network to deliver the highest quality of care to our patients in a cost-effective manner. Right at the beginning here. So we are headquartered in sunny Los Angeles. We've been around for over 25 years. We currently manage over 1.1 million lives across 14 independent physician associations or IPAs, and we're contracted with over 7,000 physicians. I'd like to start our story here today by talking a little bit about the way we're transforming health care delivery and management. Like I mentioned earlier, ApolloMed is a physician-led organization with a proven track record of profitably managing risk, growing member enrollment and growing provider participation in a value-based care model. We're doing all of this through our proprietary technology powered integrated platform, which I'll go into more detail about later in the presentation. We're combining our deep clinical expertise with cutting-edge technology to create operational excellence and boost our margins. And all of this really leads to a financial model that's supported by highly predictable unit economics due to our capitated revenue and ability to predict costs through our machine learning models as well as coupled with upside potential from risk-bearing arrangements, which you've had a lot of historical success in. In addition, we're just getting started. I want to really emphasize that despite our track record of strong financial performance, there's still an enormous and growing market for our integrated management and delivery platform. Especially during this -- these tough months through the pandemic, we've seen a rapid nationwide shift to value-based care from a more traditional fee-for-service care based model. And that value-based care model allows us to empower our providers through our platform to focus on what's most important, which is keeping the patient healthy. We're currently operating in just a small fraction of this overall value-based care market opportunity. We're in the midst of executing a multifaceted growth strategy focused on win-win-win scenarios, for our patient partners -- our patients, our providers and our contracted payer partners, and we truly believe that our experienced leadership and historical demonstrated financial success puts us in a really strong position to really grow substantially in this market. For those of us who are not quite as familiar with the story and where we sit in the U.S. health care ecosystem, I'd like to follow a simplified example here on the slide, of how the dollar flows through the U.S. health care ecosystem. So if you're patient, for example, you may get insurance either through your employer or through the state or federal government with an insurance company or a health plan. These health plan payers will then delegate care of that patient to providers who form groups of independent physician associations or IPAs. We are currently taking risk here at Apollo through our consolidated IPAs and managing our nonconsolidated IPAs, total of 14 of them, through our management services organization or MSO, which takes care of all the nonclinical and health care administrative functions for the providers, allowing them to focus on what they do best, which is treating the patient. These nonclinical functions can include tasks like paying claims, reviewing authorizations or other administrative tasks. The MSO then aggregates payments from these health plans and other payers and serves as a single-payer to our providers in the IPA. Finally, members can see care from my network of over 7,000 contracted physicians as well as through our owned or partnered labs, urgent care clinics and other health care facilities. Through these variety of channels, our IPAs, our MSOs and our accountable care organization, ACO, we are one of the nation's largest pop health management companies and one of very few that provides a full spectrum of health care. As I mentioned on the last slide, there are a couple of major revenue sources across the health care spectrum that ApolloMed provides. The first is our consolidated IPA segment, through which we assume financial and clinical responsibility and risk for our patients care, and this provides a majority of our revenue, 82% or so. We also take risk directly from CMS, The Center for Medicare & Medicaid Services through our Next Generation ACO model, which is an accountable care organization model. And through that program, we manage risk for around 30,000 patients across 15 U.S. states and territories. It provides around 11% of our revenue. And finally, our last major chunk is through our MSO, as described earlier as well, which provide non-medical and other administrative services to our providers. Through that service, we collect a percentage of revenue as a management fee, and that accounts for around 5% of our revenue. Most recently, we started a commercial EPO offering through, which we're delivering care under risk-bearing arrangements for employers and employer groups as well as a commercial ACO offering. So just in summary, in totality, we managed the medical lives of around 1.1 million patients. A majority of these numbers are in our risk-bearing consolidated IPAs and as well as in our managed IPAs. And we've also demonstrated financial success in managing our ACO and are expanding rapidly our commercial ACO and EPO segments as well. So as I mentioned earlier, our driving mission is really to provide measurably better health outcomes for our patients. And we've really done that by building a technology-enabled platform and integrating it with our very strong physician network in order to deliver value-based care. For some background, traditionally, U.S. health care has been delivered in a fee-for-service setting, which really incentivizes for optimizing for volume rather than for actual medical outcomes and quality of care. Our integrated platform breaks down the walls between the siloed uncoordinated providers. With our platform providing kind of interoperability necessary in their data, allowing for seamless transition between providers no matter where you go in our network. We've all experienced going to a new doctor and having to fill out pages and pages of forms, new patient forms having to describe the same medical conditions over and over and over again. Instead, on our platform, our providers are given actionable, proactive notifications about you because all that data is shared through our technology platform in order to optimize your health. Instead of your doctor trying to cram in as many visits as they can in a day to try to optimize how much they're making. We've taken that dilemma away from them, making it easier to do the right thing, and the best thing for your care by presenting a win-win incentive structure. Our pop health programs incentivize quality of care, giving providers bonuses for meeting quality measures and caring about you and your health rather than the volume of visits that they can cram into 1 day. All of this really leads to a better patient experience and better health outcomes and allows us to do so more efficiently and at a lower cost. What's good about this model is the alignment that we've created across all of our stakeholders, our patients, providers, health plan payer partners as well as our facility and hospital partners. Patients experience improved health outcomes, improved patient experience and reduced out-of-pocket expenses, especially during these tough times, our providers are able to kind of reduce their risk of burnout through a flexible schedule, and relief of their administrative burdens. We have managed to grow our membership quite rapidly with our payer partners and also achieved significant savings through risk-bearing arrangements and risk-sharing arrangements with our facility partners. I'm not going to go over everything on this slide, but I just want to kind of point out the magnitude and kind of breadth of the health care platform that we built centered around our patient. We provide services everything from the medical group, our primary care physicians, specialists, hospitals and ancillary providers to urgent care centers and alternative points of care, to more traditional points of care like hospitals, skilled nursing facilities and home health. And all these are kind of supported by our other services, such as our telehealth platforms, our labs, our radiology centers, and most importantly, our AI and machine learning driven population health platforms. Here are just a couple of quick pictures showing some of our facilities that we've built. We think there's a lot of benefit for our providers as well. Providers really love being a part of our network. We -- as mentioned before, we really align financial compensation to them, to align with taking care of the patient and the total cost of care. We provide a good work environment and culture. They're not trying to cram in as many visits as they can in 1 day. And we take off a lot of the administrative burdens for them, things like billing, processing claims, et cetera. Our relationship with our payers is also very robust. We have long-term relationships with an extremely well diversified mix of payers. As you can see on the slide, we have contracts with over 16 major health plans. Average tenure with key payers is around 15 years. So we have long-standing relationships with these payers. And we're well diversified. Less than 15% of our total revenue comes from our top payer, and the top 5 payers account for less than half of our total revenue. So we're not beholden to any particular payer. Finally, I'd like to talk a little bit about our proprietary technology platform. Over the last year or 2, we've really put a lot of investment and focus on our proprietary technology platform. We're combining kind of technology expertise in artificial intelligence, machine learning and natural language processing with our clinical expertise in order to automate a lot of health care tests such as claims adjudication, authorization approval as well as do population health metrics such as risk stratification and providing actionable notifications for our provider network. So far, we've processed over 2.5 million claims with no human intervention whatsoever, saving tens of thousands of man hours of work. We've automated a lot of our utilization management process as well. And most importantly, we're able to provide real-time value-based KPIs, such as HEDIS quality measures for our providers. This is powered by our machine learning model, and we think it's really important that not only is the technology there, but it's also real-time and actionable. These are not platforms that the provider has to log on and dig in really deep to understand what they have to do. They're being told in plain English in a real-time fashion, how they can best take care of their patient. So now we finished kind of the overview of what we're doing here at Apollo. I'd like to take a moment to talk about the market opportunity moving forward. We truly think that we're well-positioned to take advantage of a significant and large and growing market opportunity. Just in the state of California, there's around a $76 billion for what we call provider services. So Medicare, Medicaid and commercial spending, and more than 10x that nationwide. We're also well-positioned relative to some of our peers in this space. As you can see on the slide, with some of our representatives peers, some of which you folks may all be familiar with. Although our market cap in the public markets does lag behind some of our peers here on the slide, we believe that our revenue and financial history holds up well. And not only have we grown our revenue and managed over 1.1 million lives, we've also managed to do so profitably with a trailing 12-month EBITDA of positive $180 million. And that's really all thanks to our deep clinical and expertise -- clinical expertise and operating chops kind of married together with our technology platform. We've revised guidance up after our successful third quarter, and we're going to continue being profitable while growing into a huge market at the same time. Our team here at ApolloMed is also executing a clear growth strategy and playbook. We're consolidating additional IPAs. We're entering new markets and geographies, both through our ACO program and through our consolidated and managed IPAs. We're going to continue our investments in technology, which will power preventive care and automation to further boost our clinical care capabilities and our margins. And finally, this -- all that -- those first few points will naturally lead to an expansion of our physician network, our membership and the strength of our partnerships, both existing and new. I'd like to talk about the first 2 of these in more detail. The first thing I want to talk about is the integration of our acquired IPAs. In 2019, we completed the acquisition of Alpha Care Medical Group and Accountable Health Care IPA, accounting for over 250,000 members and over 700 primary care physicians. We have a playbook down to integrate these IPAs into the overall platform within 2 to 3 years of closing. It's key that we continue to drive that strategic growth by looking for undervalued IPAs in strategic areas. We're working really hard on changing the culture to a more value-based care culture compared to a fee-for-service one, and we're working on improving the contracting situation and getting them onboarded onto our technology platform. This is a playbook that we think is easily replicable. Both in other counties in California, where we're not as well represented as well as nationwide, as you can see on the slide here. We're currently managing 1.1 million lives, and we think that by the end of 2021, we will be well-positioned to add membership until we get to 2 million managed lives. We think that around half of that improvement will come from increased membership in the state of California and around half of that outside of California, nationwide. We'd also like to take a moment to kind of thank our providers and frontline heroes for working with us and doing such a great job through the ongoing pandemic. We've really worked hard with our providers in order to provide the best care to our members during these trying times. We've created some drive-through testing stations, testing a lot of our members in the Los Angeles area. We've made the shift to telehealth as we see increased utilization shift to those platforms. We provided kind of a critical equipment and protective equipment to our providers and relieved their administrative burden kind of preventing a lot of the burnout that we've seen taking place nationwide among providers. And we are -- we've moved to a work-from-home arrangement for our employees. Eric will go over some of the financial implications of the COVID pandemic in just a bit. I want to conclude my part of the presentation here today by telling you just how excited I am to go to work every single day because I get to work on -- all of our team actually gets to work on our life's passion here at a ApolloMed. It's hard work, but we're so excited to have the chance to reimagine what is really kind of a broken U.S. health care system and work on operating the ApolloMed model that I've described here today so that people really get the best health outcomes possible. None of us could have predicted that endemic hitting us this year, to be perfectly honest. But it's only sharpened my focus and our team's focus and continue to expand our platform and reach, especially since the majority of our patient population is traditionally underserved. It's a Medicare and Medicaid population. We truly believe that there are strong, strong market tailwinds for value-based care nationwide. And our robust financials, a robust playbook and our innovative delivery platform and technology platform position us perfectly to take advantage of those tailwinds and grow rapidly over the next quarter and the year to come. We're all really looking forward to it, and we hope that you'll be there along with us. So thank you for your time today. I will now happily pass the presentation to Eric Chin, our Chief Financial Officer and Co-COO, to give us the financial review for ApolloMed. Eric?

Thank you, Brandon. So if we could move on to the next slide, please. All right. I will walk you through the numbers here. Starting with the top left-hand corner from 2014 to 2017, our membership grew by a CAGR of 27% due to the acquisition of 2 IPAs here in the San Gabriel Valley that merged with Allied IPA. That created a very deep stronghold for what eventually became Allied Pacific IPA. From 2017 to 2020, the membership grew by a CAGR of 6% due to the acquisitions that Brandon mentioned earlier in 2019 of Alpha Care IPA and Accountable IPA. In the top right-hand corner, you can see the growth in membership is driven by the growth in the physicians, as the capitated members tend to follow their PCP. On the bottom left-hand side, you can see our strong revenue growth throughout the year. Some items I'd like to highlight for you here, from 2019 to 2020 our guidance midpoint of $670 million includes $20 million of shared savings earned from the settlement of our 2019 ACO performance year. It also includes the Alpha Care acquisition coming online in June of 2020, and that provided $77 million in top line revenue in this year. Accountable came online in September 2020, and that provided an additional $16 million of top line. Moving to the bottom right, you'll see our strong growth in EBITDA or in net income as the bottom line. Contributing to that is the shared savings that I mentioned earlier. The net bottom line impact was $13 million from the settlement of the 2019 ACO. And also, we were fortunate to benefit from the decrease in utilization as a result of COVID-19. And in the third quarter of 2020, we recognized a savings of $10 million on medical claims expense. Next slide, please. I'll quickly highlight our 2020 guidance, which we are proud to say that we are on track to meet, and we raised in conjunction with our third quarter earnings. So some of the highlights here. Our revenue midpoint of $670 million that I mentioned earlier, that translates into a net income midpoint of $115 million. An EBITDA midpoint of $188 million. And finally, adjusted EBITDA midpoint of $104.5 million. Next slide, please. Now let's take a deeper dive into the quarterly performance. From a quarter-over-quarter revenue perspective, I mentioned earlier that Accountable IPA came online in the third quarter of last year. So we had an additional month of revenue from Accountable this period, and that's the $4 million in the current quarter. Moving over to the left. The large spike in adjusted EBITDA was driven by the $13 million of bottom line impact from the shared savings of the settlement of the ACO and the decrease in the claims expense of $10 million that I mentioned earlier. In addition to that, contributing to the improvement in margin is the technology platform and the automation that Brandon had talked about earlier. Next slide, please. This graph presents a breakdown of our revenue by line items. The main highlight here is our concentration in capitation revenue, which represents stable long-term contracts with diversified payers. As Brandon mentioned earlier, over 16 different health plans that we have contracts with and growing on a daily basis. Also, I'd like to highlight the risk pool and incentives revenue. The incentives is where you'll find the shared savings from our ACO as well as the revenue from our risk for arrangements with our partner hospitals. And lastly, to highlight is the management fee income, which comes in at about 5% of total revenue. And this is the revenue that we earn from our unconsolidated IPA for the management services we provide, and we collect a percentage of their gross revenue. Next slide, please. From a balance sheet perspective, we have a very strong, strong balance sheet, and it's poised for growth with a lot of dry powder available. You can see our cash balance is presented on the screen. And in addition to that, we have approximately $17 million available on our revolver. We have solid leverage and our debt facility has provided covenants, which we have plenty of cushion. Our current leverage ratio requirement is 3.75, and our actual ratio is 1.79. From an interest coverage ratio, the requirement is set at 3.25, and we clearly feed that with an actual ratio of 10.33. Next slide, please. Here's the build-out of our cap table. We have a market cap of approximately $650 million. When you add in the bank debt of $240 million less $99 million of cash, you arrive at an enterprise value of $795 million. So as a result, as Brandon mentioned earlier, we believe we provide a significant opportunity for investors. I personally am very proud to work with the folks at ApolloMed and help support those that are fighting COVID-19 on the front lines on a day-to-day basis. It truly is refreshing to be part of a company that is growing, innovative, technologically advanced. And like Brandon mentioned, this is just the beginning. We're just getting started here, everybody. So in conclusion, I believe that the combination of our historical financial performance coupled with our ability to raise guidance during the pandemic as well as our strategies for nationwide growth as well as technological growth, they all combine to provide a tremendous investment opportunity. Thank you for your time today, and I'll turn it back to Jermaine.

Perfect. Thank you, Brandon. Thank you, Eric. I have some prepared questions, which I plan to cover, but if anyone in the audience wants to ask any questions, please e-mail them to me at jermaine.brown@credit-suisse.com, and I will ask them on your behalf.

Okay. So just to begin, curious about your new offerings, your commercial EPO and your commercial ACO. Can you provide a bit more color on what led to their creation and how receptive clients are to them?

Sure. Eric, I believe you can speak a little more to this -- to our new offerings, our EPO and ACO?

Yes, sure. Definitely, Brandon. I'll take that one. So with regards to our new offering, the EPO relationship, we saw an opportunity to create a win-win situation with one of our large business partners in the area by delivering care under a risk-bearing and capitated arrangement. The member employees of that partner must utilize our doctors and hospitals within this EPO network. Thus far, our client business partner is very satisfied as this arrangement has saved them tremendous amount of their employee-related health care costs. Jermaine to address the question regarding the commercial ACO that arose as one of our health plan partners approached us a few years ago with an opportunity to contract in their ACO as they looked to create innovative and attractive products for employers. Given our experience in providing care coordination for aligned members, this was an ideal opportunity for us to enter this offering. As these are growing offering opportunities, we continue to look to continue the growth in both of these service lines going forward, and it is another tremendous opportunity.

We've grown it.

And I also just wanted to mention that these are pretty new offerings, but we're currently at around 53,000 members already and still accounting. So we think that we're well-positioned for growth in these 2 segments.

Perfect. And I just want to jump over to COVID-19. I have a few questions there. Curious about the impact that it's had on your business, both in terms of increased demand from health systems, increased interest in expanding services from your existing clients and then also increased utilization from these existing clients.

Sure. So as Eric alluded to earlier, in the financial numbers. We've actually experienced -- and kind of consistent with other health care payers, we've experienced a decline in utilization due to the COVID pandemic. Part of that has shown up in a lag basis in our quarter 2 and quarter 3 earnings. Part of the lag being due to our obligations to set aside reserves for a claims payment, but they are showing up in our quarter 2 and especially in our quarter 3 results. As for kind of how it affects our business model, I think that we're extremely well-positioned to soldier through the pandemic because of our capitated revenue. As Eric said earlier, a large, large majority of our revenue is capitated in nature through long-term contracts with our well-diversified payer mix. That means that our revenues are going to stay stable despite the pandemic. In addition, we've been constantly working on our technology platform to better take care of our patients through the pandemic. So we've been incorporating telehealth options with some of our partners. We've been looking at remote patient monitoring with some of our partners. We've been improving our population health platforms for preventive care, and we're working really closely with our hospital and facility partners to take care of those members who do need it during this time. And so I think, overall, we're kind of taking -- our financials are solid through this time, if not even better. And through our technology and our delivery platform, we're doing everything that we can to take care of the patients.

Perfect. So you mentioned that you incorporated some additional technology. Can you add a bit more color there as far as technologies or tools that you've put in place recently that have come in handy and could help in the event of resurgence or a third wave or whatever term that they use now?

Sure. Yes. I've honestly, last count of which wave we're on, to be honest, Jermaine. But I think we're going to do our best, our very best to take care of the patient as well as alleviate some of the burden that's being placed on our frontline providers during this time. Obviously, the last, I don't even know, 8-ish months have been very trying for our providers and our hospital partners. As I mentioned earlier in the presentation, there's been a huge surge and kind of burnout for providers and for our hospitalists during this trying time. And we're doing everything that we can through our technology platform, for example, to alleviate that burnout. So one of the things that we're doing, which we've always done, but are doing even more effectively now is to kind of take away any kind of nonclinical administrative burden placed on them. A lot of our automation tools are machine learning driven, not as fragile as some of the other robotic process automation tools out there, are really focused on kind of reducing all this other stuff, administrative stuff that the doctors have to do, and allowing them to focus on taking care of patients when they most need it during COVID. In addition, we've been making a very strong population health push through our technology and our outreach platforms in order to make sure that people are still -- it's not just COVID, making sure that people are still doing the preventive care that's necessary, achieving the quality of care measures that are important during this time of COVID. And finally, kind of more directly addressing COVID itself. We're offering telehealth platforms through our partners so that you don't have to go into the doctor necessarily, if you feel that, that's a high risk thing to do. You can see our doctors over our telehealth platforms and get treatment that way. And so I think it's a multipronged approach. We're all going to do the best that we can. And I think, financially speaking, we're well-positioned to go through however many waves there are to come. Hopefully, not too many. Thanks Jermaine for that question.

Just curious on your telehealth partners that you're using. Can you say who they are?

Sure. It's a -- so we don't -- because we have independent physicians in our provider network, we don't -- we are currently not mandating that they use 1 particular telehealth platform. One of our partners, we actually own a small stake in -- we actually own a stake in them. I'm not going to mention the name in particular here, but we have a telehealth platform through that company. Which we are using in conjunction with an EMR software that they have. And then other than that, the providers are free to also use other telehealth platforms if they choose to do so. All that data is being ingested into our population health system. And so even though we don't mandate which telehealth platform they use, all that data that comes through is being added to our models and into our population health management platform.

So on that, do you use any particular EHR platform like an Epic or a Cerner? Or do you have that technology built internally?

Sure. That's a great question. So similarly to the last question, because these are independent physicians, we don't mandate that they use a particular EHR provider like an Epic or a Cerner. However, we do have either API hookups or kind of data interoperability to a lot of these leading EHR platforms. And that's the way that we get a lot of the data from those platforms into our kind of data and machine learning driven platform. In addition, we also have a provider portal, provider-facing portal that allows them to look at some of these opportunities, get notifications about how to take better care of their members and even submit us data as well. And part of those -- part of that platform is integrated with our -- with some of the leading EHR systems out there.