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

All right. Hello, everyone. I'm Jailendra Singh, healthcare technology and distribution analyst at Credit Suisse. Thanks, everyone, for joining us for this session. Next up, we have Apollo Medical Holdings management team. From the company, we have Brandon Sim, Co-Chief Executive Officer; and Eric Chin, Chief Financial Officer. The company is a leading physician-centric technology-powered health care management company that is leveraging its proprietary population health management and health care delivery platform to enable providers in the successful delivery of value-based care. We're going to do this in a fireside chat format. I have some prepared questions, which I plan to cover. We will then open the line for Q&A, and please e-mail me any questions you would have at [email protected]. Thanks, Brandon. Thanks, Eric, for doing this. Really appreciate it.

So maybe to begin, you guys reported earnings last week. Any quick highlights from the quarter you want to go over in addition to expectations for this year or maybe next year?

Yes. First of all, thank you, Jailendra and Credit Suisse for having us here today. Eric and I are both excited to be here and to answer some of the questions that you prepared, Jailendra, as well as any from the audience. As you all may know, we reported earnings last Thursday, and it was a very successful third quarter for us. We reported a record quarterly revenue, a record quarterly EPS, and of course, related to that net income attributable to ApolloMed shareholders. And so it's something we're very excited about. We've continued to carry on the strong momentum we've had in terms of delivering high-quality care to local communities in the current geographies that we serve. And we were also excited to raise both revenue and EPS projections for the full year of 2021 on the back of a very strong third quarter. And so we hope that we can continue to ride this momentum, and we think that we have a lot of exciting news planned for the next quarter and the next year to come. So happy to answer additional questions about that, but at a high level, very pleased with the quarter and confident about the rest of the year as well.

Great. Great. One thing I actually want to gel into, like, clearly, you guys have been in the business for a long time and have been a public company for some time. So -- but it's only recently like a lot of focus on these value-based care companies, like tech-enabled primary care, physician-enabled med companies. What think -- what do you think is changing now versus what was there like 2, 3 years back? And what are the key drivers there? And what are your thoughts on the company's competitive positioning to take advantage of that trend?

Yes, that's a great question, Jailendra. And I think there's been certainly a lot of interest and a lot of entrants into the public markets in the last couple of years. We became public in December of 2017. And since then, there have been many other somewhat similar, but slightly different models that have entered the market. So I think there's been a huge explosion of interest around value-based care is taking a step back because I think doctors understand that that's where the future of care delivery in the United States is going to go. A recent AMA survey, for example, said that close to 90% of doctors understand that value-based care arrangements are going to be here to stay and that they will have to adopt them sometime in the near future. So I think it's clear to both payers, providers, and organizations like ours who maybe straddle the 2 that value-based care arrangements and being able to succeed in those arrangements is going to be a critical thing for doctors to be able to participate in for the next decade or more to come. And so given that backdrop of the rise of value-based care and accountable care, there's been an interest in helping doctors actually succeed in these contracts because for the majority of America, that has not been the traditional reimbursement mechanism for providers. And so our mission is to help doctors, help and empower doctors to not only participate in value-based contracts, which as most doctors in the survey have known, and as CMS has stated in their most recent white paper, that we will be moving towards that direction, but also help them succeed financially and align their clinical and financial outcomes together in a value-based arrangement, value-based care arrangement. And so I think we're very uniquely positioned to take advantage of that trend, as you said, Jailendra or to even -- or to lead that transition into value-based care for a couple of reasons. The first is that we've been operating in probably one of the most advanced states in the U.S. for value-based care arrangements, which is California for over 20 years now. Most of that time as a private company, quite recently as a public company, and we've shown proven sustainable results in terms of being able to generate shared savings, being able to generate dollars and send those back to the physicians in exchange for their work, taking care of the local communities that we serve. And so we've been profitable for many years now, which is differentiated. We have a fully in-house proprietary technology platform that we've built over the last 2.5 years, which is not only tailor made for each local community that we have, but also flexible and scalable enough for us to enter into new geographies, which we're proving out with San Francisco and New York this year and hopefully a couple of other new geographies next year, which we'll announce when the time is right. And we think that we have a long history of expertise in terms of doing value-based contracting. In California, we're delegated to perform not only medical services, but also administrative services, such as claims adjudication, utilization management, care management, care navigation and so on and so forth. And so that expertise that we've had over the past 20 years has been formalized into a playbook and a technology platform that we can use over and over again as we expand to local communities nationwide. And so I think for all of those reasons and our strong financial position, history of profitable growth, we're very well positioned to be a leader as the nation moves towards value-based contracting. And happy to chat more about each of the specific things in the questions to come. Thanks, Jailendra.

Sure. So maybe let's talk about the pricing model and various revenue streams you guys have like capitation, I don't know if you have fee-for-service and odd management fee income, like help us understand those contracts? And any color on the business mix of the revenues across different payers?

Yes. So I'll start off with some high-level comments around our revenue streams and then hand it off to our CFO, Eric, to discuss the exact percentages that we published. So at a high level around our various revenue streams, you'll notice that we serve patients across different lines of business. And so we have Medicaid patients, managed Medicaid patients, we have Medicare Advantage patients, commercial, Affordable Care Act exchange patients. And then on the fee-for-service side of things, we also participate in ACO where we take care of Medicare fee-for-service beneficiaries. And so I think that's another differentiator between us and some of the recent entrants, which is that we're focused on helping and serving a broad base of patient populations, especially those who are traditionally underserved and that health care equity is something that's very near and dear to us. We're not going to turn away patients because they're Medicaid, for example, even though the premiums are lower than Medicare Advantage. We are very proud to serve a lot of Medicaid patients, and we're proud to continue doing that as we expand across the United States. Given that, I'll hand it over to Eric to let him chat a little bit about some of the exact splits between what that business breakdown looks like for us today. Eric?

Yes, sure. Thanks, Brandon. From a capitation revenue perspective, capitation revenue makes up about 75% of our total revenue. Then we have our risk pool settlements and incentives, which makes up 16% of total revenue, followed by management fee income at 4.5%. We also have some fee-for-service making up about 2.6%. In the third quarter, we had some strong performance in our risk pool and incentives line item, primarily driven by a settlement from our ACO as well as strong performance in our full risk pool with our partner hospitals and other incentive payments that were received during the quarter. To answer your question about the business mix by -- for the business by payer type, we have 40% coming from Medicare, 37% from Medicaid, 18% from commercial, with the remainder coming from other third parties.

So as we think about -- like as you mentioned, Brandon, that one of those few profitable companies in this space, maybe let's spend some time on the unit economics and the cost structures. How are you different here in terms of your PCP, other peers? Do you -- like what is the structure on sharing the VBC savings with providers and what type of risk they take on?

Yes. Absolutely, Jailendra. And the unit economics will look slightly different based on the line of business. But as a whole, I would characterize it as we take a percentage of premium for each patient. What that premium looks like will be different based on which business segment they're in, but we'll take a percentage of that premium in order to assume the risks for professional and/or facility for that patient. And so out of the percentage of premium dollar that we receive, we will pay a percentage of that premium to let's say, our primary care doctors. We'll pay a percentage of that to specialty care doctors, to facilities, to labs, to diagnostic centers and the entire suite of kind of medical care that a patient might need. In addition, we'll use it to pay for operating costs, which we actually handle in our MSO, wholly owned affiliate, which is named Network Medical Management. And so out of that full 100% of the dollar, some percentage of it will go to medical costs, some additional percent will go to operating costs and what is left is going to be partially shared with the doctors and partially kept as profit at the ApolloMed level. And so in a way, it's, I think, at a high level, very similar to some of the -- some of our peers. But where we excel is in a couple of different areas. One, that we can maximize the percentage of premium that we're getting due to our long-standing relationships with payers and our reputation for managing care very well. Secondly, on the cost structure side, we've invested a lot over the years in our population in terms of preventive care, in terms of care navigation, care management, and so we can lower what our MLR is as well on the medical cost side. Then when we get down to the operating expense side, we've created a fully in-house proprietary platform to, for example, automated claims adjudication, over 90% of our claims are automatically processed without being touched by manually by a claims examiner, for example. We've automated various parts of credentialing and utilization management. And so all of that as well as our scale leads to a much smaller operating cost that we have to pay as part of that dollar. And finally, what that means is that at the bottom line, we have a lot more to share with the doctors, which keeps them happy and I'm wanting to stay in the ApolloMed network, and we have a lot more at the bottom for ApolloMed shareholders. And so that's what you've seen in terms of many quarters of consistent financial outperformance. And so that's a little bit about how our economics and cost structure kind of trickle down through each of the costs that we have to pay. And that's a little bit about why we're differentiated as well because we're able to achieve higher revenues, we're able to cut medical costs by keeping things efficient, by keeping patients out of the hospital and really participating in a win-win arrangement with patients. And then finally, we're able to lower our operating costs as well through the use of technology. And so all of those factors lead to profitability at the bottom line as well as our ability to pay doctors more than our peers might. Hopefully, that answers part of your question.

Yes. Just a couple of follow-ups there. I mean, are you willing to disclose the -- how much savings you shared with the providers? Like I mean some of your peers talk about 50-50, some guys talk about 60-40. What is the split for you?

Yes, that's a great question. We are very flexible with our providers actually being a physician-founded and physician-run company. And so it really depends on the exact arrangement between which provider groups we're talking about. Some of them have elected to, for example, take no downside risk. So we'll shield them completely from any downside risk and then pay them only upside. But in exchange, of course, the economics will look a little different. Maybe they will take a little smaller percentage of the upside. Some physician groups want to take half upside and half downside, and we'll be willing to do that as well. So it's hard for me to tell you one exact percentage because it really depends from contract to contract. But I would say that we're very flexible as to the risk appetite on the part of physician groups, and we're there to kind of really empower them, not to dictate the type of risk that they should or shouldn't take.

And you also mentioned that you try to kind of maximize the percentage of premium is collected from payers. Is that a function of better risk holding, like you do a better job in terms of score so that you get higher PMPM at least in Medicare population?

So frankly speaking, to be quite honest, I would say that we're not the best as a company in our current stage at risk scoring, to be honest. And so we think there's room to grow there. Of course, there's room for legislation to change and deemphasize risk scoring, which we support in favor of clinical outcomes. And so what I really mean by that is that we are able to negotiate with payers because of our long-standing relationships with them and because of our strength in certain geographic regions in order to obtain contracts that may be a physician on their own might not be able to obtain it. So we're able to help them, do the appropriate medical economics, for example, understand the division of responsibility -- financial responsibility for various medical procedures and kind of determine the appropriate capitated rate with our payer partners.

Okay. Makes sense. And I'm assuming because of the business model of being a partnership, your CapEx is a pretty capital-light model, I guess, right? But you still invest in innovative clinical tools and technologies. Maybe spend some time there, like what your focus areas are and what kind of unique needs your PCP partners have for that perspective?

Yes. Yes, absolutely. So one of the main things that is also different between our business model and say, some of our peers without naming names is that we primarily operate in an affiliate model, which means that most of our doctors, not all, but most of our doctors are not employed by ApolloMed nor do we own most of the practices, the brick-and-mortar clinics that our physicians operate in. And so for the most part, we have to integrate with a variety of different PCPs clinics. Our physicians keep all the practice economics, but we help them onboard into a unified backbone layer that allows them to still participate successfully in value-based contracting and take advantage of our data analytics platform that we built. And so there are some unique challenges that come along with that. For example, our providers use tens -- bordering closer to the hundreds of different EHR systems, for example. And so we're not there to force them to use a particular EHR. Again, we're there to empower doctors. And so what we'll do is we will build technology that is HR-agnostic. We'll integrate with different EHRs, we'll gather data from them and try to use that in order to handle all the RCM that we have to do and all the analytics that we have to do to help doctors succeed in value-based arrangements. Another example is in terms of clinical programs. We're not going to go into each clinic and force them to adopt to our clinical programs. We truly believe that there will be an efficient market where patients will go to the doctor in their local community, which serves their needs the best. And so by not forcing all of our doctors to conform to one unified clinical program, it allows our patients to find the one that works best for them. And so we're very happy to do that. But of course, there are operational and technical challenges that arise on that as well. For example, each doctor may have different conventions for how they write medical notes, for example, how they report encounters. And so we've built technology that allows for us to adapt to each of those differences in independent physician practices, aggregate them all into one common data lake and power analytics, RCM, care management platforms of off that centralized data lake. So that's it. The technology is built for the purpose of helping independent doctors, and we plan to keep it that way going forward as well.

Great. Makes sense. Just kind of digging into the physician network. I mean, clearly, I mean there are -- as you said, there are various business models. Some have like their own clinics or the building and they hire, employ these physicians and physicians leave their practice and join these companies versus like you and some other players have more like a partnership model. Help me understand like how do -- when physicians are making a decision like what kind of predictions will probably follow your approach, like do more partnership versus like other physicians who are willing to give up their practice and join some other platform. And which models do you think are -- probably make more sense or long-term winners in your view?

Yes. No, that's a good question. I think we primarily partner with physicians who are generally on the more entrepreneurial side, for example, who are more independent. These are doctors who want to maintain control of their own practice, who want to continue sharing in their own practice economics and don't want to work, let's say, 9 to 5 for on someone's payroll. And so that is exactly what a ApolloMed allows. We allow them to maintain their own practice economics, continue to run their own practice as they've been doing for years and have upside embedded into not only our value-based care arrangements, but also into their own practice economics as well. So we traditionally found success, primarily inbound interest, to be quite honest, from independent doctors who are -- who fit that mold and who want to use ApolloMed to turbocharge the potential earnings that they can have in capitated arrangements with our payers. As for how we source those doctors, we're just now building a growth team, which is something that we surely need, I think. But even without that, organic growth has been fairly strong in terms of inbound interest and existing physician networks. Jailendra, I may have missed a question of yours there. So if you could repeat that question that would be great.

That covers. I'm just trying to understand, like, I mean, if you're getting the inbound calls, is there risk like practices, which are struggling are the ones probably might call you, right? Somebody is doing really well on market share capture, volume and economics, I mean they might argue they don't need any help, right? So how do you manage that? Like, I mean, in terms of making sure that you're not getting the kind of selection bias there?

Yes, yes. Well, there may be a bit of adverse selection, Jailendra, that we think that most, if not all, physicians can be on our platform can succeed. And so even with perhaps adverse selection bias effect, we're actually happy to take on those providers who need help the most. Like you mentioned, those providers who already have everything set, they have their own big staff internally, who can handle all of this stuff. We think that even those providers can find additional support through our technology platform and our scale. But you're right in that they may not need it as much as some other doctors who maybe are a little behind in their practice. And so I think my answer to you would be that we welcome those doctors who have problems. We've had a history of helping those practices, turn it around and succeed and make a lot more and deliver better care to their patients. And I don't think we would avoid those practices at all. In fact, I would say it's part of the strategy to attract and bring on those doctors. And quick comment around -- sorry, Jailendra, quick comment around where I see the feature going. I think you asked around like which -- over the long term, which of these models maybe would be the best or might win out. I think there's room for both, quite honestly. Maybe that's a bit of a copout answer, but I actually think that both the staff model as well as an affiliate model are both going to exist. I don't think the steady state is with 100% of one or 100% of the other because there are always going to be physicians who want to run their own practices, and there are always going to be physicians who want to work on in a staff model. So I alluded to most of our physicians being in an affiliate model. I say that because some of our physicians are actually in a staff model, we do own some clinics. We have some doctors on payroll. And so for those -- for the minority of our doctors who are on our staff model, that's something that we're interested in expanding as well. I think our primary focus is still the affiliate model there.

Okay. And when you do a partnership with these groups, do you replace their technology? Do you kind of try to tamper with their current tech platforms? Just help us understand the -- there are some variance in the strategy on that front as well like some companies replacing tech platforms, some kind of just helping them to improve the tech platform. What's your strategy?

Right. That's a good question, too. So I think it depends on which part of their tech stack we're taking back. So for example, the main piece of technology most provider practices are using is their EHR system, right? Their electronic health record system. And so for that key piece where they normally basically run everything, we're not really going to touch that part. We're not going to force them to change to our EHR necessarily. If they would like to, we will give them that option, but we're not going to force them to do that. Instead, we will build tools around what they already have in order to aggregate their data, to provide them with data and to integrate as best as we can with the current practices that physician practice already does. For other parts of the tech stack, for example, if they already had some outsourcing solution for billing or for claims adjudication or if they already had some outsourced analytics platform, we'll have a case-by-case discussion with them. For the most part, we believe that our tools are going to be better. And for the most part, we can actually save the practice money if they can terminate some of their contracts and simply use ours. But if they really beholden to what they want to do, for the most part, we'll abide by the physicians' desire. And so I guess I would summarize by saying for the EHR, we definitely are not going to force them onto anything new. For other parts of the stack, we believe our solutions are better, but we would give them the choice to do so or not.

Okay. That makes sense. What has been your physician retention rate? I mean, have you just lost any physicians? And if yes, then what has been the primary reason for that?

Yes. Yes. I think our physician retention rate is quite good. It's over 90%, maybe even higher if you don't include physicians that we were perhaps mutually agreed to leave. And so for those who have left, there are a couple of reasons. Some doctors, for example, I remember there are very few, but a couple perhaps want to -- some want to retire, for example. So that's one of the biggest sources actually. Some want to maybe run their own group or something like that, and they currently do not see the benefits of Apollo. And while we do try to convince them of the benefits and there are real tangible financial benefits as well as technology and care -- patient care benefits, at the end of the day, that's their choice to make. But for the most part, I think the biggest impact is going to be from retirement.

No. Okay. That makes sense. Any particular metrics kind of you track to kind of evaluate these physicians, how they're performing and is kind of over time?

Yes. Yes, absolutely. So because we take in all the claims information, referral information and we can look at the financial performance of these doctors, we can hold them accountable in a way that perhaps other organizations purely provider groups might not be able to. So for example, we can calculate which care for their patients that they have closed or they haven't closed. So we can calculate the overall health of their population or how they're taking care of various stratified parts of the segments of the population. And so all of those things are actually embedded into the downstream value-based arrangements we have with those providers to get a base out, they get a base capitated rate for primary care downstream, but they also can get value-based bonuses depending on how well they're taking care of their patients. And we are certainly tracking that and showing it on a single kind of what we call a provider dashboard on our point-of-care tool that we provide our doctors so that they can track their performance over time.

Okay. And you guys also talked about, I think, guiding to like probably 70% or 80% annual growth in managed lives to more than 2 million in the near term. What sort of time line are we looking in terms of hitting that goal? Is it like, I mean more like next year? Just help us understand what strategy has actually kind of in that growth.

Right, right. There are 2 main buckets where that growth is going to come from that we had anticipated when we first announced that goal. There's some tailwinds from some payer contracts that we are expecting to increase in size or to go live in the near future, probably this quarter. So that's going to be organic in nature. There's also some -- a very long list of pipeline opportunities that we have on the inorganic side with doctors who have wanted to partner with us actually. They've -- all of our M&A so far has primarily been inbound interest in doctors' groups who want to join the ApolloMed platform and want to figure out some arrangement for them to do that. And so for some of those opportunities that I mentioned in our last earnings call, has taken a little longer than we had expected due to potentially the lack of architecture and infrastructure that they have around accounting, around legal and so on and so forth. But we remain very confident that in the near term future, perhaps not this month necessarily, but in the next quarter or so that we will be at or very close to the stated goal. And so there is a slight delay, but we think it's really in the interest of our shareholders because we're targeting a differentiated set of pipeline opportunities who perhaps need a little bit more help, but we'll also have more upside once they join the ApolloMed family.

So on this state of New York expansion, I mean, why do you think this is the right time to go or I should say here, not there. But just thinking about the competition in this market, I mean anything which really stands out when you think about this market expansion?

Yes. Yes. New York is a state that's exciting for us because there's just a large population there that is similar to populations we already serve in California. However, the difference is that value-based care is years behind in New York than it has been in California. So we see a great opportunity there to fulfill part of our mission, which is to help doctors engage in and succeed at these value-based care arrangements. And so without speaking too much in detail, we are currently in negotiations with some payers. We're hoping to help CIPA begin value-based contracting, capitated arrangements in the near future, hopefully, before the end of 2022. And we look forward to that ramping up in the New York market as they transition from traditional fee-for-service reimbursement schemes to value-based arrangements, which I think has a lot of upside for both CIPA and for us if we were to succeed.

Just give us about your thoughts on the impact of COVID on your business? And what kind of headwinds and tailwinds you have seen on from that perspective? How has been your MLR trends on your books? I mean there has a lot of noise in the marketplace from different companies having different -- seeing different trends. Just curious what you have seen just put those things in perspective.

Yes, absolutely. It's been a difficult and very long. It feels very long kind of period now where we've been dealing with COVID. And from the beginning, very proud to say that we've taken a very active role in the communities we serve to preemptively and retroactively battle the effects of COVID. For example, we were one of the first groups in Southern California regionally to provide -- to help out with both vaccinations as well as before that to help out with COVID testing. We've made sure that rates of vaccination in our communities is higher than the national average. And what that's meant is that we've had tailwinds continuously throughout COVID in terms of lower utilization as well as not experiencing some of the heightened inpatient cost that some of our peers have reported. And so we've definitely seen some tailwinds, to answer your question, from the last year or so in terms of lower MLRs. We do expect for the rest of the year and going into 2022, a return to normalcy. We are seeing utilizations come back up. Like their procedures come back up. And in our projections, we've assumed a return to 2019 pre-COVID numbers in terms of MLR. Just want to point out that even our pre-COVID numbers were very well managed, right? We were profitable pre-COVID. We've had a lot of growth, a lot of operational efficiencies that we have expanded up on during the last couple of years. And so we expect to come out of the other side post COVID with a very strong operating model, very strong unit economics as well as we did before. So I think we do to answer your question, we're seeing a return to normalcy, but we're prepared for that return, and we think we'll be successful going forward.

On that, are there any key regulatory hurdles, update or challenges you are closely watching from political spectrum point of view for your business?

Yes. I mean I think there's always some risks with government-related business. And so there were some bumps in the road with the recent transition and administration. I think we've navigated that as best as we can, and there are still some things that we can't yet discuss as a result of that transition, primarily related to the direct contracting program. But as soon as we are able to, we will certainly inform the investment community. As far as longer ranging risks, we're actually quite optimistic by what we're hearing from CMS. They recently released their white paper to the public, announcing their goals, which are two: one, reduce health care and equities; and two, to have all Medicare fee-for-service beneficiaries in an ACO, Accountable Care Organization, by 2030. So both of those goals are very much aligned with exactly what we've been doing, what we plan to do going forward, and we hope to partner very closely with both that entity and others in terms of achieving those missions.

Right. I guess with that, anything else you guys want to talk about before we wrap up, which we didn't -- something we didn't cover?

Now, Jailendra, you've been quite thorough, I think. We are excited by the momentum we've had in quarter 3. We think that there are a lot of catalysts for exciting change, both in terms of organic growth, inorganic growth, innovation programs and more going forward into the last quarter of the year as well as in 2022, and we look forward to connecting with you and other investors again shortly.

All right. I guess with that, we will wrap up the session. Thanks, Brandon. Thanks, Eric, for participation. And thanks, everyone, for listening to. Take care. Bye-bye.

Thank you. Take care.

Thank you.