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

Hello, and thank you for joining us on day 3 of the Barclays Healthcare Conference. I'm Sarah James, and I'm pleased to have with us here today, Apollo Medical Holdings. We have Chief Financial Officer, Eric Chin; and Chief Operating Officer and Chief Technology Officer, Brandon Sim. I'll turn it over to them now for a presentation.

Thank you, Sarah. Thanks for the warm introduction, Sarah. Happy to be here today, and thank you to Barclays for having us. We are Apollo Medical Holdings, a leader in integrated health care management and delivery, and we're happy to present to you today. Caroline, could you go to the next slide, please? Perfect. Thank you. So ApolloMed is a leading physician centric, tech-enabled risk-bearing health care management company. That's a lot to say. But essentially, what we're doing is we're operating an integrated value-based care health care model, which aims to empower the providers in our network to deliver care in a high -- high-quality care in a cost-effective fashion. We're headquartered in sunny Los Angeles, been around for 25 years, and we manage over 1.1 million lives across 14 different IPAs. We're contracted with over 7,000 physicians, and we're very excited to be presenting here today. Caroline, could you go to the next slide, please? Thank you. I'd like to start our story today by talking about the way we're transforming health care delivery and management here in the U.S. We're primarily a physician-led organization. We have a proven track record of profitability as well as being able to effectively manage risk, growing member enrollment and growing provider participation in our value-based care model. We're doing this through our proprietary tech-enabled platform, which we'll go into detail about more later in this presentation. And we're also combining our deep clinical expertise with our technological expertise to create operational excellence and boost our margins and provide better quality. So all of this leads to a financial model that's supported by highly predictable unit economics due to our capitated revenues as well as predictive learning -- predictive machine learning, with upside potential from our risk-bearing arrangements, which we've had a lot of success in, and we just reported on in our quarter 4 earnings. We're also just getting started. I want to emphasize that despite our track record of years of strong financial performance, that's still an enormous and continue to grow, appetite for value-based care, especially with the rapid nationwide shift to value-based care from fee-for-service models. ApolloMed is essentially a peer value-based care play. Most of our revenue comes from capitated revenues under value-based contracts. And so we're very excited about these tailwinds and think we're perfectly positioned to capitalize on those tailwinds going forward. We're currently operating in just a small fraction of the overall market opportunity, and we think that the technology platform that we've built allows us to scale and execute a multi-faceted growth strategy. We're focused on alignment for our patients, providers and payers in a win-win-win scenario during this growth strategy, and we think that our experienced leadership and demonstrated success puts us in a really strong position to dominate this market. Caroline, could you go to the next slide, please? You're already -- sorry, just kidding. So just for some quick background and for those who are not quite as familiar with our story and where we sit in the somewhat complicated U.S. health care ecosystem, I'd like to go to this slide really quickly just to situate ourselves. So for example, members get insurance either through their employer or through the state or federal government, perhaps through Medicaid or Medicare. Those payers then delegate the care for those members to providers who can form groups of independent physician associations or independent practice associations, IPAs. We're currently taking risk through our consolidated IPA segment and managing our nonconsolidated IPAs around, 14 of them, through our MSO or managed service organization, where we take care of all the nonclinical functions for a provider, which allows them to focus on what they do best, which is taking care of the patient with the highest quality possible. These 9 clinical functions include services like paying and adjudicating claims; doing eligibility; credentialing doctors; provider network outreach; reviewing authorizations; and other administrative tests. The MSO then aggregates payments from payers and manages risk from these various payers, serving as a single-payer to our IPAs and contracted providers. And finally, members can seek care from over -- from our network of over 7,000 contract physicians as well as our various labs, urgent care clinics and other facilities. And some of this, we'll go over later in the slide deck as well. Through our IPAs, MSO and ACO, accountable care organization, we're one of the nation's largest population health managers and one of the very few that delivers a full spectrum of health care. And I want to take a moment also to differentiate ourselves from other companies like Kaiser, One Medical, where they operate a staff model. As I mentioned earlier, in our independent practice association model, our providers are not necessarily on our payroll but are contracted with us and often in exclusive contracts. Caroline, could you go to the next slide, please? Thanks. So as mentioned earlier, there are a couple of major revenue sources across the spectrum of health care that we provide. As you can see on the slide, our consolidated IPA segment provides 81% of revenue. And through the consolidated IPAs, we assume financial and clinical responsibility and risk for our patients' care. This represents the majority of our revenue and is, for the most part, capitated revenue. In the next segment, the next-generation ACO or risk model, we take risk directly from CMS, the Center for Medicare & Medicaid Services through our next-generation Accountable Care organization. And through that program, we manage risk for around 30,000 aligned beneficiaries across 15 U.S. states and territories. We traditionally report earnings from this -- shared savings from this program. And we are proud to announce that we were one of the top ACOs in the nation in terms of gross savings amount and gross savings percentage for the performance year of 2019, which was disclosed in 2020. Finally, our MSO, managed service organization provides non-medical services to medical companies and IPAs, which I mentioned earlier as well, and that provides around 5% of our revenue. We're also looking at new growth areas, such as a commercial EPO and a commercial ACO, which are alternative risk-bearing arrangements that we are looking to grow in the future. Caroline, could you go to next slide, please. Thanks. This is just a quick overview of how the company is structured. As mentioned earlier, the publicly traded entity is a ApolloMed. And underneath, we have certain brands in our consolidated IPAs, such as Allied Pacific, Alpha Care and Accountable. We also manage around 0.5 million members in leading California IPAs, such as LaSalle, and we have the next-gen ACO segment in commercial ACO and EPO segments as well. Next slide, please. Perfect. So I'd like to emphasize again that for those who are not familiar with value-based care models, the drastic shift in what -- moving from a fee-for-service model looks like when we go to a value-based contracting model. Our driving mission is to create a technology-powered platform that can deliver better care under value-based contracts through our horizontally and vertically integrated care model. So for example, in the traditional fee-for-service model, your doctors will be paid or providers will be paid based on the quantity of services they provide for their patients. However, this does not align their incentive financially with providing necessarily the best care possible. And that leads to siloed care with little coordination among providers. We all can imagine going to the doctor's office and having to fill out the same information on forms over and over and over again, having to call 10 different places to try to get lab results mailed from one place to another or faxed. And so under a value-based care model, we're able to present a more integrated health care ecosystem. The traditional fee-for-service model, which is volume based, also can potentially result in redundant or even contradictory care, which ultimately hurts the patient. For us, we're concerned about total cost of care as well as providing overall quality for the patient. And so that reduces a lot of this redundant and unnecessary testing. There's also benefits in terms of data interoperability, preventive care instead of reactive care under a value-based model and properly aligning financial and clinical incentives for our providers. And so really, what we've done is we've allowed providers to focus on what they really want to do, what they really care about, which is taking care of the patient to the best of their abilities and aligning their financial incentives with that noble goal. Caroline, next slide, please? Thanks. I'll go over this slide a little quickly. What's great about the model is that this alignment that I've talked about, benefits all the stakeholders involved, not only are patients and our providers, but also our payers and our other partners. Patients get improved health outcomes, improved experience and reduced out-of-pocket expenses. Our providers have flexible work schedules, better work-life balance and are properly aligned and incentivized by financial incentives and especially during the difficult year that we had in 2020. This is really important for our providers. Our payers are happy because they can improve their quality scores, such as star and risk adjustment scores. And our platform's technology focus allows them to do that very effectively. Next slide, please. I also want to mention that this is a little bit of a busy slide, but I want to mention that, really, all of our spectrum of health care, both services as well as providers and consumer-driven options are centered around the patient. And so ranging from acute options like a hospital to sub-acute and home health, for example, as well as our medical groups and consumer-driven kind of entities such as ambulatory surgical centers and urgent carry centers. These are all available through ApolloMed and ApolloMed-affiliated entities for our patients. And so we're really quite integrated across the health care ecosystem and are able to provide all those services and integrate data from all of those services. Next slide, please. Here's just a quick -- some pictures of some of our urgent care clinics and points of care where our members can be served. Next slide, please. I kind of went over this earlier already. So go to the next slide, please. Yes. I'd also like to emphasize our very well diversified payer mix. And so we have contracts with over 20 different health plans, 16 of which are listed on this slide. Our average tenure with key payers is around 15 years, and less than 15% of our total net revenue comes from any one payer. And so you see a big difference between us having diversity in our payer mix versus some other companies who may be more reliant on a particular health plan or payer partner. Next slide, please. Ever since 2019 when I started, we've really been putting a lot of investment in terms of our proprietary technology platform. Health care is pretty broken in the United States, and a lot of it is because of the lack of technology that's being implemented in the health care arena. What we would do here that's very different from others is that we combine both clinical expertise that we've gathered over 25 years of operating a managed care model and combining it with really top-notch engineering talent. We're using artificial intelligence, machine learning and natural language processing to improve both operationally as well as in terms of the quality that we're providing for patients. And so we already see impact on that. Caroline, next slide, please. In terms of, for example, automating parts of the revenue cycle management process. Currently, we're over 80% of our claims are automatically processed by our technology system. We also have an integrated care management tool, which allows for the seamless integration of utilization management, case management, taking care of high-risk patients as well as other managed care functions, such as eligibility and credentialing. And finally, we're very focused on quality and population health. And so we have real-time, value-based care metric engines to give providers real-time feedback on what they're doing. We also have a platform that allows us to send real-time actionable notifications to providers to help them -- to help assist them on value-based care metrics. Next slide, please. Okay. So as I mentioned earlier, we really truly think that we're just at the beginning here. We're only scratching just a tiny fraction of the total market opportunity in provider services, close to $1 trillion in '21 for provider services, including Medicare, Medicaid and commercial plans. And we're just starting to scratch the surface of that, not only in California but nationwide. Next slide, please. There have been a lot of similar models in other companies, some of which have recently gone public. So here is just a slide of some of our industry peers. We think we're differentiated, one, not only in terms of our technology platform and a strong provider network and clinical expertise, but also financially speaking, we have a history of profitability, and we hope to continue that in the future while not sacrificing our top line revenue growth. Next slide, please. And so the way to get to that revenue growth is by executing this clear growth strategy, which we plan to scale across the nation. So the first point in this strategy is to consolidate additional IPAs and enter new markets and geographies. We started that with our minority stake in CAIPA MSO, which operates an MSO that manages CAIPA, which is an IPA in New York City, which manages over 500,000 members. And we look to continue that relationship as well as others going forward in '21. We're also looking to build on the success of our innovation model participation with CMS, such as our next-gen ACO and participate in additional innovation models, such as DCEs starting in '22 and GEO DCE, perhaps starting also in '22. Finally, we continue to invest in technology, which allows us to really deliver preventive care rather than reactive care and also develop further automation to drive down operating costs. Next slide, please. In terms of the integration of acquired IPAs as part of our M&A strategy, we continue to implement processes for our legacy IPAs as well. And so for example, Alpha Care and Accountable Health Care IPA, both of which we acquired in 2019, we continue to make operational improvements. We continue to help them grow strategically in their geographic regions, and we continue to help implement a cultural change in terms of moving from a fee-for-service based mindset to a value-based care mindset, and we're very excited to continue doing that. We expect the completion of that process to take between 2 to 3 years depending on the IPA. Some may take longer than others, but we are -- we believe we're well on our way in setting the proper infrastructure up to prime them for success going forward. Next slide, please. We also plan to expand nationwide, as I mentioned earlier, and that's part of our -- that's a key part of our growth strategy. We're well positioned to not only increase our existing presence in California, both Southern and Northern California, but we're also exploring opportunities actively to expand their geographic footprint outside of the state. Currently, we serve members in 15 states and territories, primarily through our ACO program, but we're looking to add consolidated IPA and managed IPA members -- membership to our footprint as well. We're currently at around 1.1 [ million ] managed lives. This year, we provided guidance that we're going to look to add around 1 million lives to get to just over 2 million lives in the calendar year of 2021. And so we're excited to continue doing that. A lot of that will come -- some of that will come organically, but a lot of that certainly will come through M&A activity. All right. Next slide, please. I'd like to provide an update as of January '21, where we made a strategic investment in CAIPA MSO. I had mentioned a little bit about this earlier, but after the closing of this transaction, which we anticipate to happen in quarter 2 of this year, we'll be own -- we'll own 30% of the post-closing, fully diluted stake in CAIPA MSO. And so that's something we're very excited about. It also represents an opportunity for us to further scale our technology platform, and we are looking forward to partnering with CAIPA in New York for both our provider network and our technology platform going forward. Next slide, please. I also want to highlight the stellar next-generation ACO performance in 2019, which was, again, realized in the third quarter of 2020. APA ACO, which is our wholly owned subsidiary, was the fourth best NGACO in the country in terms of both gross savings amount and gross savings percentage, north of 7% gross savings relative to the benchmark for our line beneficiaries. That's something we're very excited about. We think it's a testament to the technology and the risk monitoring that we've implemented for the ACO, and we look forward to continuing that in the ACO for 2020 and 2021 as well as in future CMS innovation programs. Next slide, please. As a provider group, we've also been very active in our response to COVID-19. We were one of the first provider groups in the San Gabriel Valley here in Los Angeles to do drive-thru COVID testing, now almost a year ago that the pandemic has been here, and we're looking to usher the new norm back in by participating in vaccine delivery and vaccine rollouts. We're also supporting our providers during this tough time, making sure that they have access to the latest technology, the latest tools, telehealth, for example, to continue seeing their patients in the midst of the pandemic. Next slide, please. So in summary, I think we're -- just want to wrap it up here. We believe that we are a pure-play, value-based care model that is very well set up and positioned to scale rapidly due to our advanced technology platform and has a lot of room to grow. We're currently, primarily in California and Los Angeles and San Francisco, and we are looking to expand our footprint both across California as well as outside of California through both organic and inorganic activities. We think our combination of clinical expertise and technological expertise positions us very well to be able to execute on this model. We've proven that we could execute on this model here so far, and we look forward to growing top line and bottom line numbers very strongly in the years to come. Happy here to take any questions if there are any. Otherwise, thank you for being with us. Eric, would you like to go -- well, we can do questions first or, Sarah, if there are no questions from the audience, happy to turn it over to Eric for a quick overview of our financials.

Yes, whichever you prefer. I absolutely have a couple of questions about the business model, but happy to have you guys run through the financials as well. So your choice.

Sure. Thank you, Sarah. So, Eric, maybe you can update us on some of the financials, especially given our full year 2020 earnings report yesterday. And then I'll turn it over to Sarah afterwards.

Sure. Thank you, Brandon, I appreciate that. So very quickly here, I'll just hit the highlights. At the bottom right-hand corner, you can see our revenue growth. This is driven in 2020 by 3 things: the $20 million shared savings from the settlement of the 2019 ACO performance year; the Alpha Care acquisition that came online in June of 2019; and the Accountable acquisition in September of 2019. On the bottom right, you'll see our strong performance to the bottom line, and that's driven by $13 million from bottom line impact of those shared savings and a $25 million decrease in our medical claims expense during the year of 2020 as a result of decreased utilization from COVID-19. Next slide, please. Here's just some details of the numbers: The highlights here, our revenue grew by 22% from 2020 -- from 2019 to 2020; our operating margin improved to 12% in 2020 from 6% in 2019; our EPS grew by 160% from $1.01 per share. Next slide, please. From a guidance perspective, we increased our guidance in 2020 throughout the pandemic year and beat our 2020 guidance and analyst expectations. Our 2021 guidance is conservative. It does not factor in any planned M&A. It includes shared savings of approximately $19 million, and that's based on our internal analysis of ACO claims. The claims savings perspective, we've included a somewhat return to the norm. There's a factor of $12.5 million of expected pre-COVID utilization levels that we expect to come in, in July time frame, with the rollout of the vaccine. And that compares to the $25 million savings that we have in 2020. Next slide, please. From a revenue breakdown, just want to highlight, our 81% of capitation revenue is based on long-term contracts in a stable environment. Next slide, please. From a balance sheet perspective, we have plenty of dry powder available to execute on our M&A strategy. In addition to the cash and cash equivalents on hand, we have $16.8 million available on the revolver. We have a solid leverage. Our leverage ratio is 1.64x compared to a max permitted 3.5x. Next slide, please. From a capitalization perspective, this just boils down to a $1.4 billion enterprise value. Next slide, please. And these last 2 slides just provide some background regarding our outstanding shares. From the perspective of the market, there are 54.4 million total issued and outstanding shares outstanding. With that, I'll turn it back to Brandon to close things out.

Eric, thank you for that presentation. And I'd like to thank everyone for listening to our story today. We're very excited and very motivated every day to come to work because we think we're truly addressing very complex but very important issues in the U.S. health care ecosystem. And we look forward to continuing doing that in the future, and I hope that you guys will be along with us for the journey. Thank you so much. I'll turn it back over to Sarah and the team from Barclays. Thank you for having us.

Thank you, everyone, for joining us. I think we're at time now, but thank you for joining us.