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

Good afternoon. Thank you for joining us. I'm Sarah James, Barclays emerging health care delivery model and provider analyst. And I'm very excited to have with us today, Apollo Medical and CEO, Brandon Sim. Brandon, thank you so much for joining us.

Thank you so much for having me here. I appreciate it. I love to be here in person.

Perfect. So as we're talking a little bit off stage, one of the really interesting areas is the idea of value-based care savings in primary care is something the payers have been increasingly talking out even at this conference, a lot of positive commentary on that. Maybe you can talk a little bit about how you see yourself fitting into the ecosystem and the uniqueness of your business model?

Yes, absolutely. And that's a great question. I think as value-based care continues to grow as we make the transition from kind of traditional fee-for-service reimbursement mechanisms to a more value-based reimbursement mechanism, the first thing I'd probably note is that while there is a huge focus on primary care, there are a lot of -- most of the medical dollars still spent not in primary care currently. And I think that's something that we're uniquely positioned to tackle and does contribute to some of the profitability that we're seeing kind of both at an overall level as well as in our core cohorts that maybe some of our peers are having trouble replicating. And it's really that not only do we have a great relationship with our primary care doctors, we're working with multi-specialists, we're working with hospitalists. Our doctors are the ones in the hospital. I'll give you an example. Unfortunately, my grandpa is 90 years old. He just was unfortunately admitted to the emergency room due to acute kidney failure. And this happened 3 weeks ago. I went to go visit him in the hospital. It's one of our partnered hospitals, by the way. And the doctor making the rounds, the nurses making the rounds, they were ApolloMed doors, ApolloMed physicians. So they actually knew me and they took great care my grandpa as they do all patients. But that's an example of how our doctors are really embedded into kind of the entire continuum of care for a patient. It is primary care, yes, it's also multi-specialty care, hospitalist care and so forth. And so it really helps us control a greater portion of the dollar than kind of just reinsuring it or treating the hospital as a vendor or a multispecialty group as a vendor later on. That being said, I think you asked about some -- how we position ourselves against some of our peers. We're also very well diversified in terms of population mix we're dealing with, not just Medicare Advantage, Medicare fee-for-service as well, managed commercial members, Medicaid is a big book of our business and ACA exchange members kind of rams it all out. So we really try to work with the doctors on their entire patient panel rather than kind of selectively focusing on one group or another. So -- and we have a lot of visibility into our claims. In California, we're delegated to do prior authorizations, do claims processing. We actually see all the claims data in the prior auth coming in before the payers do in most instances. And so that's contributed to kind of our ability to look into trends as they come and be more accurate with where we think our MLR is going to lie. So hopefully, that helps answer your question a bit.

Absolutely. So you were recently incremented to the co-CEO role, congratulations. And I'd love to get just your take on how you see the long-term growth algorithm and what you want to do strategically now that you're in the seat?

Yes, absolutely. First of all, that was, I think, in our Q3 earnings call. I've been with the company for almost 3 years now, prior to that was in finance, actually myself. And it's been very interesting ride, a very exciting ride, actually. We've seen a very exciting level of growth, both on the top line and bottom line over the past 3 years. We've kind of professionalize a lot of our operations, our leadership team, I mean that I'm personally very excited about as we invest in talent and continue to invest in the patient care and patient experience. And I think that's what we're going to continue doing over the next 5, 10 years to come. Nothing is going to change from the path we've set out on over the last couple of years since I've been with the company. There's going to be a lot of focus on growth. We just hired a Chief Growth Officer from Optum, which we announced in our Q4 earnings call. We continue to plan on making our operations as seamless as possible, even as we take on payer like functions and continue to invest in patient care and patient satisfaction.

Great. Let's talk about the investment in technology a little bit. Can you talk about technology that is provider-facing, physician-facing and also consumer facing?

Yes, absolutely. So historically, we've been very much B2B2C in a way. So we sell to doctors, we work with doctors, and through our relationship with doctors, primary care, multi-specialty hospitalists, we also serve our patients. We have made strides to not only improve that experience for our participating doctors and our partner doctors, but also directly to the patient as you mentioned, the consumer in this case. So I'll walk you through maybe a quick example of how a doctor might work with us and through ApolloMed's platform. If I'm a primary care physician, for example, and I've partnered with a ApolloMed, if a patient comes in, regardless of that patient is Medicaid, Medicare, commercial exchange IFP, for example, or regardless of what plan they're with, whether it's Humana or SCAN, United Healthcare, they can use our platform -- the exact same platform the exact same way every single time. So the front office person might be checking the member's eligibility. And instead of having to go to 10 different websites, depending on what kind of insurance the patient has, they just use Apollo's website. During the actual visit itself, lots of times, the primary care physician will want to make a referral, for example, to a specialist or for them to get a lab test or something of that nature. Instead of having to request something from United Healthcare and then for Humana, depending on where the patient is, Anthem, whatever it is, not trying to single out any names here, they would submit all prior auth request to ApolloMed. Our back-end APIs will process that request. 60% of the time that auth is going to be automatically processed, and the doctor will know right away and they can tell the patient right away, whether they can go do that service or not. And by the way, 95% of the time the answer is yes, obviously. And so the patient doesn't have to wait 2 or 3 days to get their response and see the specialist and make that appointment. They can go do it right there in the office. The front of staff can help them make that appointment and they can go -- a lot of our patients go there the same day to get their follow-up treatment. For the doctor, it's a lot easier having to manage waiting 2 or 3 days, oh it's a denial, now you got to appeal, wait another 2 or 3 days, the patient is suffering the whole time. Finally, as we get over to the revenue cycle part of things, they're submitting the claim to us right away as well. And over 90% of our claims are automatically adjudicated and processed. And so from my point of view, a prior auth -- a claim is simply a prior auth, which has a date attached to it for the date of service. We've already approved that procedure. We already know how much of cost. Why should we make the doctor a way to get paid, right? And so, for us, as soon as we have a prior auth, we get the claim paid. Doctors kind of don't have to worry about fighting over when they get paid, looking for reconciling all their payments from 15 different partnered insurance companies and so on and so forth. So that's kind of the patient or provider-facing experience of it. And then for our patients, with our recent acquisition of Orma Health, which is both kind of a capabilities hire as well as an acquihire, quite frankly. There are 2 founders joined us as Chief Analytics Officer and President of Provider Solutions. We're really looking forward to using their technology across our entire 1.2 million member base. That means seamless telehealth visits that you can enter into via text message, just tried it yesterday. It means RPM capabilities and analytics dashboards on the back end for our care managers to monitor blood pressure cuffs, smart scales and so forth as well as a patient portal, which is an app that people can download and check on some of their data kind of longitudinal across all of their claims if they're in ApolloMed new inpatient. So hopefully, that helps to answer some of the technology.

Yes. Maybe you can talk about how you're using technology to drive savings and some of the accomplishments you've had in that medical savings arena?

Yes, absolutely. I think one point I'd like to make is that despite myself being a little biased that come from technology background myself, we're fairly parsimonious when we think about spending on technology. We built out the entire technology platform purpose-built for our providers and our patients over the last 3 years that been here. I was the first software engineer at the company, for example. And it hasn't really -- it's been an investment, but you haven't really probably noticed it on our operating expenses or G&A. We've remained profitable throughout. And it's really because we are -- we know we're not a technology company necessarily in which we're trying to sell a SaaS product, but we're trying to build technology in ways that genuinely enhances the provider's ability to do what they do, which is care for their patients and kind of walk some of you through -- kind of walk all of you through how that might work day-to-day earlier. We're going to continue investing in technology that's part of maybe what we'll get to you when we talk about the adjusted EBITDA bridge from '21 to '22, but we don't anticipate it to be -- to ever become a huge cost center for us. Instead, we hope that it's going to be making doctors lives easier as well as helping to control medical costs as we process all of the claims and look at all of our prior auths and have good visibility into the pipeline of the costs that are going to come, so to speak.

So that's a unique position that you've actually worked in coding for the company yourself in software development. So now, as you have a more strategic role in the company, how do you use that feet-on-the-ground experience to create an institutionalized feedback loop and making sure that you're pushing the right tech updates?

Yes, absolutely. I mean I think it's something that even in my role, it's important for me to continue doing. Maybe I'm not attending the daily stand-ups anymore, but it's something that we're continually asking for feedback from our providers, going to their offices, asking what can be better about the products. One of our partner groups, for example, just opened a new clinic a couple of weeks ago. I was there, and I saw kind of our software on their screens in the front desk. And I kind of just sat down with them, trying to figure out what could be better. So I think that's a continual process that I'm encouraging our engineers to actually do as well. I think some of you may know that, at other companies, they're forcing some of their engineers to really get on the ground and interact with the end users of the technology, that's something that I believe in strongly as well.

Great. So you brought it up. So let's talk about the bridge. So first, we'll start with top line, and we'll hit EBITDA second. But as we think about the moving pieces. There's been some changes to the ACO program. You're exiting a very profitable NextGen ACO and moving into reach. How do you think about retention of those members, and how impactful that is to your revenue bridge versus organic growth?

Yes, absolutely. So we guided towards, I believe $1.05, something like that $1 billion of revenue for 2022 at the midpoint, something that we're very confident in. Management has typically been very conservative with both top line and bottom line numbers. So something we think will definitely hit. And included in that are a couple of factors, and I'll also point out what factors are not included if that helps for the audience here. So including that are: one, 7% to 9% organic growth in our core regions in capitated revenue that's maybe $40 million to $50 million, something like that relative to last year. Also included in that is our -- as you mentioned, our transition from the NextGen ACO program to the direct contracting program for this year as well as further on next year and beyond the ACO reach program. So we expect around a net impact of, call it, $240 million to $260 million there. That includes the loss of the ACO, some of the ACO payments in the AI PVP program and then a subsequent gain due to the revenue recognition for the dry contracting program.

Is any of that onetime in nature? Do you have a double -- like an overlap between the 2 programs in '22, so we should think about that or beyond?

Exactly. So -- kind of the $60 million we're taking away includes the -- not only the revenue payments, but also the incentive dollars. Those will not be -- those will certainly not be recurring as the program is over. In addition, there is a onetime or a yearly cash settlement in the following year of a given performance year for the ACO program. And so we do expect a onetime Q3 2022 payment for the 2021 performance year of NextGen ACO. And going forward, we would expect that to go away. And then, finally, kind of embedded in this is a gain of around $5 million to $10 million based on organic membership growth in our managed IPAs and our managed services business, which also represents around 7% to 9% there. So kind of organically, 7% to 9%, some DCE impact, doesn't include any impact from Orma, which is the recent acquisition or Jade, nor does it affect -- or nor does it include the impact of SB 510, Senate Bill 510 that they have recently signed into law recently. So we think this is probably a base case scenario here.

Okay. Great. And you guys just released EBITDA guidance for '22 for the first time. So maybe you can help us bridge that as well.

Yes, absolutely. So I think the first thing to note is really that we have great visibility into our MLR for this year. We remain profitable to the tune of 13%, 14%, 15% adjusted EBITDA margins. We're aiming for a long-term goal of 15% to 20% EBITDA margin. That being said, we are seeing slightly lower adjusted EBITDA this year relative to last year. I would say the trend is still going upwards, but only from a year-over-year comparison because we're seeing probably 4 to 6 percentage points of increase in medical loss ratio across our population. This will hit our income statement in 2 different ways. On the professional side of the risk, which we actually recognize, it's going to hit in -- as a greater COGS line relative to capitated revenue. And on the facility part of the risk, which we don't actually recognize as revenue because of [ CARE ] Act in California, you're going to see that as a lower risk on incentive dollar amount on the top line because that's already kind of a bottom line number, so to speak. And so overall, we're going to see around $20 million on each side, 4% to 6% of MLR increase. That's $40 million. We're also seeing a lot of kind of -- we're also making a lot of investments in our staff. And so part of that is kind of wage inflation, general inflation, which we're seeing especially hit our frontline workers harder. And then part of that is hiring kind of other members of other executives, for example, our Chief Growth Officer, hiring BD folks on the ground, ops folks on the ground as we look to enter new regions and states. And so we're anticipating currently a run rate of around $20 million more in operating costs, corporate costs than last year. And so bridging you guys over [ 20, 20, 20 ], we're also expecting an increase in profitability from our ACO. We moved from a 5% risk corridor to a 15% risk corridor in '21. And so we expect around $25 million to $30 million increase there. And for some of those newly acquired groups that we're talking about, although kind of the general trend is the 4% to 6% MLR increase, our efforts there have actually led to a, we're guessing, 6% to 8% MLR decrease, as they continue to onboard into the ApolloMed platform. So that will cancel out some of that $40 million loss that we talked about. And so overall, we're going from around $174 million to, I believe, midpoint of $148 million.

And just so we can level set it against the rest of the industry group. Are you guys -- how do you treat clinic losses for new markets?

Yes. So maybe right before I answer that question, I just want to make it clear that when we see -- when we're talking about seeing a 4% to 6% MLR increase across the board, we're not talking about 95% to 100% or 110% to 115%, we're talking about 78% in MLR to 83%. We're talking about a well-managed population that we especially managed well during COVID, in a year where many of our peers saw increased costs because of COVID, we actually saw decreased cost because of COVID. We were running at a 78% MLR, including COVID testing costs that we were paying, that were theoretically, not our financial responsibility to pay, even including those costs, which are around $20 million, we're still running at 78% gross margin. So I just want to make it clear that this is not a long -- we don't anticipate MLR to keep going up 4% to 5% a year. This is a onetime rebound to a very -- still a very sustainable level well within our long-term kind of EBITDA margin targets. That being said, to answer your question, on the adjusted part of things, we do disclose kind of the bridge between adjusted EBITDA and EBITDA. So you're all free to kind of take those clinic losses out to around $20 million, I believe, as well out of the adjusted EBITDA. Normally, what we do is it's a 2- to 3-year period. I kind of talk to the auditors to make sure, but around 2-, 3-year period where that would drop out of the adjusted numbers. So it should be dropping out pretty soon.

How do you think about balancing growth versus cash flow generation? So if you do have a 2- to 3-year ramp for a new market profitability, how do you balance those 2?

Yes. The 2- to 3-year mark is really something we think is probably on the slow end for us. COVID didn't help. We weren't able to go out of the doctor's offices and teach them what to do and get them using technology perfectly. So we do -- we are seeing a bit of a delay in some of the new markets we acquired in 2019 and 2020. But going forward, we don't expect it to necessarily take 3 years all the time. That being said, there's absolutely a growth versus profitability question. We think we're in a strong position because we've historically been profitable. We've been profitable every year for many years. And so we'd like to continue that. We think we can grow at a 30% to 40% clip over the next 5 to 10 years, which I know sounds ambitious. But even organically, we think we can do that while maintaining 10%, 15%, 20% EBITDA margins. And here's why. There's a huge amount of revenue that's inherently embedded in the 1.2 million members that we already have. Even if we didn't touch a single new member in the next 5 years, which is not what I'm saying we're going to do, by the way, but even if we didn't, there's still upwards of $1 billion kind of embedded value revenue in those members alone. If you take a look at kind of what we're reporting as revenue, through the PM divided by the number of members we have from peer PMPM, you'll notice that's a lot lower than a lot of our peers. Admittedly, it is because we have a mix of patients. It's not purely Medicare and Medicaid is going to be a lot lower premium. But, in addition, it's because we're not taking the full amount of risk that we're already managing. I gave that example about my grandpa earlier in this call in this chat to use the Zoom. But we're really not recognizing all of the medical spend that we're managing, and we're taking steps to resolving that. So even without kind of some of the M&A promises or any kind of expansion in new regions, we think there's a lot of value embedded in our current patient population. And we're taking steps to invest in new growth as well.

How do you think about capital deployment? So you guys have talked a lot about M&A? What does the pipe look like? What is the mix between capitated MSO? And how do you go about funding it?

Yes, that's a great question. I think markets have certainly been challenged as we all know, especially in the public markets. Private markets have been lagging quite frankly, in terms of valuations that we're seeing. And so, while M&A will still be an important part of the strategy, we remain cash flow positive. We don't plan on raising for the sake of raising money. I don't want to dilute anyone. And quite frankly, M&A is going to be -- maybe take a second -- maybe be on the backbone relative to some of these kind of organic growth initiatives that we have, especially because of the huge amount of value that's already, like I mentioned, embedded in our existing membership population.

Maybe you could talk about organic growth then. So as we think about what ACO reach means to your geographic expansion, how do you think about different markets, entirely different states versus contiguous and how much opportunity there could be?

Yes. So we're seeing growth not only in ACO reach, although that is an easy way to -- not easy, but kind of an exciting way to grow, we're also seeing growth in our managed care segment of the business. So what that means is partnering with additional physicians both in California -- new counties of California, Bay Area, San Diego, for example, Central Valley, but also moving -- looking at contiguous regions, as you mentioned, like Arizona, Texas, New Mexico, Oregon, Washington State, for example. And so those are all things we're actively exploring, whether it's through JVs, whether it's through maybe a small acquisition or a tuck-in and then kind of using that as a launching point to go off from. We acquired a couple of groups in San Francisco, for example, access primary care and Jade over the last year. We look forward to growing those, seeing really strong results after AEP already. So that all fits into kind of the organic growth strategy on the membership side. And then obviously, there's a huge amount of upside to be had in kind of increasing the blended PMPM of our population as well, which is currently extremely low relative to peers. And so moving up the risk track, moving from professional to full risk, moving from managed lives to professionals to full risk, those are all kind of huge opportunities for us to grow organically as well.

Is there anything that you can break down within that for us of your move to pass the risk, what might be achievable in '22 or '23 versus what it's more of a longer-term goal?

Yes, absolutely. I think some items are more achievable short term, such as moving to full risk in California on our 600,000 net risk patients in California. Some items, for example, like our JV in New York City with 500,000 fee-for-service members with CAIPA, will probably take longer realistically as New York historically hasn't been as mature of a value-based care state as California where we are now. And so I think we are conservative, but cautiously optimistic about our ability to move patients from a fee-for-service to, whether it's professional risk, full risk type arrangements, and we think it will serve as a huge driver of organic growth over the next 5 years.

Okay. Great. So in our last minute here, I wanted to give you an opportunity to talk about what you think The Street might be missing or what might be undervalued to Apollo Medical?

Sure. Yes. I think the first thing really is something I've talked about a lot during this presentation, which is the embedded value in our populations that we aren't even capturing at the moment due to a variety of state-specific regulations. We don't quite gross up revenue or recognize revenue or have unlocked some of the bottom line opportunities that maybe some of our peers have been able to accomplish with a similar-sized population. And so that's something we're looking forward to remediating to attacking in the near future. And then I think there is a lot of embedded growth in New York as well that we haven't talked about at all. Those 500,000 members, we don't include in our 1.2 million membership number that we give out to The Street. We're not really achieving meaningful revenue or EBITDA on those patients either. And I think probably the last item is really just the long-term predictability and profitability of the model. We've been around for 25 years. We founded by physicians, and we continue to be profitable year-over-year even as we deploy a great amount of resources to invest in our future growth. And so I think we serve -- we're excited about the future of the company and look forward to maybe talking to some of you about some of these levers in more detail over the next coming weeks.

Great. Well, thank you so much, Brandon. It's very, very insightful. Very helpful. Thank you.

Thank you, Sarah. Thank you for having me.