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

Hi, everyone. We are going to get started. So if you could take your seats. Wonderful. Thank you so much. Good afternoon. My name is Abbey Stanley. I am an associate on the healthcare investment banking team based in New York. And it is my privilege and honor to be here with you all today and introduce Astrana. Today, we are going to have Brandon Sim present, and then that will be followed by a Q&A where CFO, Chan Basho will also be joining us, and he is the Chief Operating and Financial Officer. So with that, I will pass it off.

All right. Thank you, everyone, for joining us late in the afternoon here. I am recovering from some laryngitis, so I'm going to try to push through for the rest of this presentation, but thank you again. So I'm here representing Astrana Health, which is a value-based provider organization. Of course, we'll start with some standard SEC statements. And of course, nothing here is to be construed as financial advice. And I'll start officially by saying that I think everything that -- something that everyone in this room already knows, which is that the existing U.S. healthcare infrastructure is fundamentally broken. And it's broken on 3 axes. One, it's not accessible for patients. Despite spending almost 20% of our GDP on healthcare, as we all know, it's very difficult for patients to get timely, high-quality and accessible health care, both primary care and inpatient care. Secondly, on satisfaction, it's fundamentally broken for both patients and providers. Providers are dealing with an infinite feeling number of touch points. Patients can't get access to provider networks as they -- as I mentioned earlier, and patients are bouncing back and forth between a fragmented and uncoordinated system. And finally, something that's near and dear to my heart, it's very limited in terms of technology and coordinated care. And that's where this is a lot of where Astrana comes into play. What we here at Astrana do is we transform that status quo fundamentally into coordinated, aligned networks that genuinely provide better care and outcomes for patients while aligning financial outcomes in a way that allows value to accrue to Astrana and its shareholders. On the left, you'll see the status quo payment model. Each provider is contracting separately with different payers. They are receiving typically fee-for-service payments where they're being paid based on volume, not outcomes. And on the right-hand side, you'll see what the Astrana health model is. Instead of all the payers in a multi- to multi-relationship contracting with providers, that entire layer of reimbursement is being subsumed by a single payer or pseudo single payer delegated model that Astrana operates through the technology and care coordination platform that we've built. What that means is that all of the dollars that the payers might have paid providers directly in this way on the left side of the page, all flow first to Astrana, and Astrana then manages and operates that downstream provider network, coordinates the delivery of care for its members and ultimately generates better outcomes and hopefully, financial savings for itself and for its payer partners. And really, this creates 3 flywheels essentially that lock in members, providers and payers into that ecosystem that I just described. For members, we're able to engage members longitudinally across their lifetime, whether they're Medicaid members, commercial members on the ACA exchanges or our seniors in Medicare and Medicare Advantage. We can invest in them proactively throughout their life because they are delegated to us through the single payer model regardless of what payer they're with or regardless of what line of business they're with. What that means in addition is that we have the unique financial ability to make investments in a patient's health in a preventive fashion more so than any payer could possibly do. Take, for example, a hypothetical situation in which we could invest, let's say, $1,000 into a patient's health. And we know for a fact, someone could tell -- an Oracle or God could tell us that, that would save $100,000 of cost in 10 years. It seems like a no-brainer to do. But for any given payer, they may not want to do that because they don't know if that patient will even be their financial risk in 10 years. In fact, they might have spent $10,000 a day to save their largest competitor $100,000 because they happen to have a better benefit design in 9 years when AEP rolls around. We don't have to worry about that issue because we follow members longitudinally regardless of what payer they're with because of that single payer infrastructure that we've built. The investment that we make in our patients' health has a much higher likelihood of accruing to us in the future. And even if you look at it from a purely economic standpoint, not to mention the obvious moral and kind of societal benefits of this, the present value, so to speak, of that future deferred cost is going to accrue to us at a much higher rate than it might for any given payer. So we think that the place to build this kind of care coordination model, the place to build this infrastructure is where we have built it, which is as this third-party neutral single payer model that sits outside of any given payer. For a provider, there are obvious reasons to partner with Astrana. Providers in our ecosystem don't have to worry about the popery of relationships, touch points, reporting and analytics overhead that they might have to on a fee-for-service basis with each individual plan. Instead, they interface with one payer, Astrana. All of their payments come from Astrana, all of their prior auths are approved by Astrana. All of their claims payments are sent to and they receive payments from Astrana. And so there's a much lower burden in terms of administration, and we're supporting them with our clinical teams, over 1,000 clinical members and care managers at the corporate level in order to help them manage the patient, not only on an episodic basis when they come into the clinic for an encounter, but also in between visits as well. And finally, payers want to partner with Astrana as well. We're helping them reduce the volatility on their medical cost ratio. We're helping them bend the cost curve. We're helping them take risk on populations that they find perhaps troublesome on their own. And ultimately, over time, we're helping them grow differentially because we're providing a great experience to their members. And I won't go over all the details of this slide, but you might ask, well, if it sounds like such a great model, why are all the other folks who have done this not doing so far? And a big reason is because they aren't doing it exactly the way that we are. A lot of folks who have taken on value-based contracts in the recent 3 to 5 years have taken on value-based contracts without any visibility into contracting, UM, claims payment and without ultimately acting as a single payer, but rather as a financial intermediary that's bearing risk essentially blind. They don't have the ability to see where the members are using -- are utilizing care. They have no ability to understand what the unit cost of that utilization is. And ultimately, at the end of the year, literally at the end of the year, they're handed the bill saying this is how much you owe the payer because of the utilization that happened throughout the year. And oftentimes, by the way, that doesn't even happen at the end of the year, it happens 6 months after the end of the year, which leads to huge retroactive payments or negative prior period adjustments. In our model, not only are we responsible for financial risk and managing the downstream networks, we're also responsible administratively for all of the things you might associate with the payer. So on the bottom here, you'll see we actually contract all of our networks, both provider -- primary care specialists and inpatient. We credential our networks. We process prior authorizations for our networks. And ultimately, we pay claims using the dollars that the payers give us on a monthly basis. And this is a model that many people thought was just a California model. And indeed, we did start in California. It's a good guess. On the left side here, you'll see an example of one of our very first markets in the San Gabriel Valley, just east of Los Angeles. And you'll see the model really playing out here. We report in 3 different segments, and I haven't gotten to that. But I think hopefully, this image will show just how synergistic those 3 business segments are. In the green, you'll see our affiliate network, our contracted providers downstream. In the blue, you'll see our care delivery network, which are the employed sites that we actually own and operate under the Astrana Care and affiliate brand. And together, both the affiliate and the employed physicians together provide the chassis for which we provide care delivery in the regions we serve. And you'll notice that the care delivery sites are strategically placed throughout kind of our footprint of where our members and where affiliate providers operate. And from our start in East Los Angeles, we've grown across the country. On the right-hand side of the page here is an example of that exact same 3-segment business in Southern Nevada, in Las Vegas, for example. You'll see that we have a large number of primary care specialist affiliate providers as well as employed sites located strategically throughout that area. And from 1 to 2, we've gone to -- we've grown to 16 markets across the country today. So primarily throughout the Sun Belt, but also in the Mid-Atlantic and in the Northeast. And when we implement our care model with the density providers that I showed you on the earlier slides, we're able to drive better access, outcomes and quality for our patients. For example, in our Medicare Advantage population across the board, 67% fewer hospital admissions versus a Medicare fee-for-service benchmark, shorter inpatient length of stay and a vast majority of prior auths automatically approved. So for the members that are in our model, when they go to their primary care doctor, even if they're in an HMO, they're walking out the door with an approved prior auth in hand, oftentimes able to go see the specialist before they even return to their home. And the bottom is kind of a visual walk-through of how that might look for a given patient journey. And like I mentioned earlier, we also serve members longitudinally throughout their lifetimes. So we have 1.6 million members in value-based care arrangements today, where we're taking on partial or full risk, 20,000 providers caring for those members with over 98% of them retaining or staying with us on a year-to-year basis and a very well-diversified book of revenue as well. Majority Medicare with 61%, but also Medicaid, commercial exchange and other fee-for-service arrangements as well. And we're not overly concentrated with any one payer either. Our largest payer is just over 1/4 of revenue, but there is a long tail of kind of revenue partners where we have contracts with over 20 different payers. And at the end of the day, because of this model and the long-term investment we've made in these populations, we've been able to power strong financial results in all utilization environments, whether it's COVID, whether it's V28, whether its high utilization years coming out of COVID, and we believe for the upcoming future as well. As you can see here, in the last 6 years since I've been at the company, we've grown revenue at a 33% CAGR. We've grown adjusted EBITDA at the same time, and we plan to continue growing in the mid-20s in the medium-term. So now diving a little deeper into how exactly we're doing this. There are really 4 levers that we're pulling, and they're all pretty simple, frankly, either grow membership, you grow revenue per member. And those obviously multiplied together become overall revenue growth. On the cost side, you are controlling the cost trend in terms of medical costs. And finally, you're driving down G&A operating and finding operating leverage in your business. And if we can push revenue up through both membership growth and revenue per member growth, if you can push medical costs down and we can push G&A down, then you have a winning platform for value-based care. So first, on membership growth. Over our 30-plus year history, we have grown throughout California in a county-by-county fashion. First, as I mentioned, in Los Angeles, but growing into Inland Empire, going into Central California, Northern California, where we are today. We have a clinic actually a couple of miles from here in San Francisco. And then down in Southern California, growing in Orange County and down to San Diego. And we believe now serving most of the metropolitan areas where most of the population of California resides, starting from the San Francisco Bay Area all the way down to the Mexican border. Now outside of California, we've continued to grow the model as well in both Nevada and Texas and more recently into Georgia, into the Mid-Atlantic and into the Northeast in Connecticut and Rhode Island. And really, part of the playbook isn't that we claim that we can change medical outcomes within 12 months when we join. That's very challenging and sometimes impossible. Now there are some low-hanging fruit, but generally very difficult to do. But where we really excel is in using the technology platform we've built to first generate OpEx efficiencies, lowering the cost it takes a group to perform all the administrative functions and then taking those savings and dollars to reinvest in clinical programs and nurses on the ground in care management programs, disease management programs and then using those investments over time to generate value in the value-based care arrangements for our payer partners and ultimately for patient -- to drive patient outcomes. We've also grown inorganically in the past few years. For example, last July, we announced the closing of a large deal that we did, the acquisition of Prospect Health, which was around 600,000 members and value-based arrangements, primarily in Southern California. Integration for Prospect Health remains on track. We've guided to $12 million to $15 million of synergies in the first 12 to 18 months, and we believe we continue to be on track for executing on those cost synergies. At the same time, on our third quarter earnings call, we had chatted about certain contract renegotiations that we felt were important to have done. And we are happy to say that a large majority of those outstanding contracts have been finalized for Q1 of 2026 start as we had previously guided to. And finally, on leverage, there's some concern around the elevated level of leverage that we took on by acquiring Prospect, which is a $707 million deal. We had guided that we would get under 2.5x pro forma net leverage to pro forma net debt to adjusted EBITDA within the first 12 to 18 months. And we're happy to say that we've gotten to around 2.5 actually the very first quarter reporting the consolidated entity. The next item, as I mentioned, is around revenue per member growth. So obviously, growing the number of total members, but growing the revenue per member as well as important. And a big part of that is the shift from taking partial risk on the members, taking 35% to 40% of the premium dollar to moving up to an 85% to 90% of the premium dollar construct. We're responsible for more of the members' costs, both on the outpatient and on the inpatient side of the house. And you'll see over here -- sorry, on this graph that over the last 4 years, 4 or 5 years, we've really grown that full risk part of the book dramatically from essentially 0% of our members in '21 in a full risk arrangement to at the beginning of this year, in January, around 80% of our members -- of our revenue, sorry, coming from a full risk arrangement. And we really think this makes sense because we're able to align our outcomes, both financially or our financial outcomes rather with the patient outcomes, both inpatient and outpatient, rather than having us be accountable for just the outpatient outcomes, but the payer being responsible for the inpatient outcomes, which causes further fragmentation alignment issues when taking care of the patient. Next, obviously, in addition to optimizing for revenue, we have to do a good job at the end of the day at optimizing for cost. And we think we've done a really good job at doing that because of the longitudinal nature of the care model, because of the software stack that doesn't let the patient follow through the cracks and because we're able to leverage our clinical teams and care management teams to take care of the patient even between episodic visits of care. And what that's resulted in is, as I mentioned earlier, 67% fewer hospital admissions than the Medicare fee-for-service benchmark, vast majority of prior auth auto approved, a lower rate of readmission. So it's not just us getting folks out of the hospital and then them crashing right back in and a very high net promoter score among our patient population. And finally, the technology suite, the operating system, we believe that drives that drives all these outcomes is reflected in our ability to, one, create a proprietary technology platform from scratch that is built in-house in the U.S. with American engineers, but two, to do it at the same time while growing revenue and EBITDA without a meaningful visible kind of investment, that's a drag on profitability. And we've really built a full set of tools, both for our providers, our internal care teams and ultimately for the payer functions that we serve. First, for the provider, we built an all-in-one point-of-care tool that exists both on its own and in EHR that powers both quality, care management and administrative functions. And it's clear that providers who use our tool are performing demonstrably better than those who don't. For example, an improvement of around 24% in HEDIS gap closure, which is the Medicare Stars gaps in care and an over 30% improvement in annual wellness visit completion, both at a very statistically significant rate. On the care management side, we built an in-house tool that connects with the provider-facing tool that uses our proprietary algorithms to classify which members are at risk of an adverse event and suggests a potential next best action to engage in for that member. And taking it a step further, for those actions that are nonclinical in nature, that are purely administrative in nature, such as making a phone call or doing a text outreach, we're able to now automate a lot of those with our AI agents. So our agents are making phone calls automatically or texting the member automatically to remind them about upcoming visits or to have them schedule a visit with the patient -- with their PCP upon discharge from a hospital, for example. On the back end, our analytics teams are using our command center, so to speak, to look at risk and understand the portfolio of risk that we're taking on in a given market. So we're able to see, for example, are there spikes in costs in a particular specialty or with a particular set of providers in a given region and address those costs in a proactive fashion. And I'll make a note that this is especially useful for our business model because we, as I mentioned earlier in the presentation, have -- are the single payer. And so we're processing the prior auths, we're paying the claims. And so we actually have visibility on those 2 -- on the utilization metrics in our situation even before the payers do. So the prior auths come first to us, then we forward the result of our approval or denial to the payer. The claims come first to us, then we forward the encounters to the payer. So in a way, by assuming the position of the payer, we're able to have real-time and as up to date as it gets visibility into the utilization of our members and thus build analytics around that in much of a different fashion than some of our value-based care peers who do not have that real-time visibility. And finally, because we have this platform that's built in-house, we're able to operate at a very cheap cost. Every incremental member that comes on board does not represent -- is a marginally small cost for our platform. We're not paying a vendor a large PMPM amount. We're not paying them a percentage of shared savings. This is a software that we built internally. And so we're able to very quickly onboard members to our technology platform. That's what we're showing with the Prospect Health acquisition, for example. Finally, I wanted to go over some of the industry challenges that I know exist today. Certainly, an increased scrutiny, including this morning in the press on risk adjustment. And we've never -- and we continue to never play the risk adjustment game. In fact, for the first 2 years of V28 that have phased in, our RAF score has actually gone up in those first 2 years now, not by a lot, to be fair, but we've gone from around 1.0 to 1.02. What that shows me is that not only are our members undercoded, but that post V28, we believe that there's actually an opportunity to have our members be more appropriately coded. And in fact, if there's a V29 to come, there are rumors of perhaps an inferred risk model where you look at the chart directly or you look at the totality of information by the patient to determine their true level of risk using AI or otherwise, we actually believe that would be a tailwind, if anything, because it would accurately show the risk of our members that we're taking. But in any case, even in a non-V29 world, we believe that we haven't been hurt by V28, and that shows not only in our RAF scores, but also in the continued strength in the financial performance over that time period. Next, on utilization. The entire industry has been similarly hit with very high utilization across the board. While we're not immune to higher utilization trends, we have managed to predict and to control utilization in a way that the rest of the industry hasn't. So for example, in 2025, we guided to around 4.5% trend blended across our lines of business, and we continue to believe that we are on track to meet or exceed that number. Next, I think there have been a lot of challenges around kind of the idea of value-based care in general, the idea that there should even be provider groups that can take on full risk in a responsible way. I think from the very beginning, we've talked about even years before many companies, many of our peers even existed, we've talked about taking risk responsibly, taking risk only on the parts of the dollar that we think we actually have control over, for example. So we've always shied away from taking on Part D as in dog risk because we don't have any particular control over the pharmacy. We've shied away from taking risk on supplemental benefits because we don't have control over whether seniors use their flex cards to go buy rounds of golf. We've really tried to stay away from things that we don't have control over and put our eggs in the basket of things that we genuinely think we have influence over because of the longitudinal care model and the infrastructure that I talked about earlier. And finally, obvious concerns around Medicaid and exchange, Medicaid in terms of the Big Beautiful Bill, exchange in terms of some of the subsidy negotiations that are happening as we speak. And while those will be potential headwinds to the business, we think we have relatively limited Medicaid and HICS exposure relative to our predominant over 60% of our revenue, which comes from Medicare and Medicare Advantage, and we think that we'll be able to persevere and continue growing even in the face of HICS and Medicaid headwinds. With that said, we're happy to reiterate guidance for the full year -- for the financial year of 2025. We'll be reporting in early March, and we continue to believe that the results we put out in Q3 are the accurate kind of range for the year. With that, I'll conclude and just say that we're -- I'm very happy to be at an organization where we think doing the right thing truly leads to great financial outcomes as well. We believe we're building the nation's strongest delegated risk platform, both from a clinical standpoint, the strength and density of our provider networks and the technology and operating system that power it all. We've grown tremendously in the last 5 or 6 years. We look forward to continue growing and continue bringing the Astrana Care model to communities across the country. And so with that, I'm happy to open it up for questions. And Chan, my COO and CFO, will join me in taking questions as well. Thank you, everyone.

Any questions? I believe we can have some mic runners. But in the case while people are still thinking, I can kick it off. Can you guys walk us through the strategic rationale behind the Prospect acquisition? And then what are some of the benefits that you're maybe realizing now?

Sure. Happy to do that. We've been on a journey for the last 3 years to build a scalable ecosystem that's high quality and accessible for all. We started with the CFC acquisition in the core Southern California market, along with CHS and most recently, Prospect in midyear 2025. What these acquisitions have allowed us to do is to really scale our platform and build a unique model that allows us to scale in a multi-payer basis. The biggest advantages that Prospect has brought to us is with our enablement suite, we have a set of services that we believe we can offer to more and more Americans. It's allowed us to quicken that pace and allow us to continue to grow in a prudent manner in a geography very close to us. Post the deal, we've been focused on integration activities that's starting from the contract integration-related activities, our network activities, clinical as well as core technology-related activities. We believe this will create a stronger foundation for our continued growth in the coming years.

Wonderful. Great to hear. I guess maybe switching gears a little bit, and it was touched on during the presentation. But can you maybe tell us how Astrana is adapting to these regulatory changes a little bit more with Medicaid and the health insurance exchange markets? Also, how is the company specifically positioned better or will benefit from MA rate update from 2026?

Yes. For the last 24 months, we have been focused on building out our Medicare book of business. When folks were not really expecting a Medicaid rate -- Medicare rate update, we were investing in Medicare, and you can see that in terms of the percentage of our revenue now coming from Medicare relative to 2 years ago. We remain very bullish in terms of our Medicare Advantage growth, and you'll continue to see that growth in the coming years. In terms of HICS and Medicaid, on the exchange or HIC side, we do expect subsidies to have a reduction in our membership as well as the continued change in terms of Medicaid enrollment for the undocumented population within California. On the Medicaid side, our reduction in membership has been about 20% to 30% less than the overall California reduction. We expect to be able to continue on that trajectory in future years, though we are ready for larger cuts in the next 24 months if that does happen. We've tried to position ourselves by working closely with the plans around key quality-related measures to make sure we are the network of choice for them as they continue to focus their membership on higher quality groups.

I think the last point that Chan mentioned is key because it's just -- we view this as a short-term headwind, obviously, and will be for all Medicaid index organizations. But I think what it really does in the long-term is it forces consolidation into entities that can genuinely manage costs, have a very low overhead OpEx kind of budget and can genuinely change patient outcomes and improve quality. And so the smaller organizations that have historically survived on Medicaid are going to be pushed out of Medicaid essentially. And those organizations who can prove that they can handle large-scale Medicaid populations with great outcomes and quality, as Chan mentioned, are those numbers -- the remaining members are going to accrue, we believe, to those organizations. So what we're trying to do, as Chan mentioned, is to position ourselves as kind of the network of choice as the organization of choice for our payer partners so that we can win together over the long run, over the cycle when Medicaid comes back. The same way that we work with our payers to position ourselves for both of us to win in MA, even when MA was out and people were at this very conference talking about terminating all the MA contracts that they could, we talked about leaning in and helping our payer partners get through a time of MLR volatility. And now it seems like MA is kind of back in vogue again.

I believe we have an audience question, if you do not mind.

How do you guys think about new market expansion? So again in the context of selection criteria, what are the must-haves?

Yes. As you've seen in our expansion to the 16 markets that we're in, we focus on markets that have density for our model, markets that usually have over 1 million to 1.5 million people in terms of population, markets that have a diverse set of providers. And in many cases, markets where payers are looking for an alternative to Optum. And we've had a very prudent approach. We could have grown much faster than we did, and we are continuing to scale our core markets, and we feel there's massive growth still in each of our markets today.

For another question, -- and again, I understand mentioned in the presentation, but maybe more specifically or additional, is there any updates that you could provide on the full risk contract negotiations the company has actually been executing since the close of the Prospect acquisition?

Yes. I can start quickly. As I mentioned, we've come to a resolution on those contracts that the company is very happy with. And I want to emphasize that, again, it's about partnership with the payers, not as much treating it as a zero-sum game where our higher rate means that they're paying us more and they're giving less to their bottom-line. A lot of our arrangements with payers have been creative in the sense that, yes, maybe we're getting a higher rate and that represents a net negative to their P&L, so to speak, but we're helping them find incremental P&L somewhere else where we can be a solution for them and hopefully keeping their books neutral or as close to neutral as possible. So in areas, for example, where they may have higher MLR populations, can we step in and maybe take that off their hands so that they are saving dollars in one area and kind of paying us more dollars in another area where we think our rate is too low? Or can we help them subsume membership from another higher cost entity or another higher cost medical group that maybe is not giving them the outcomes that they might want and they're paying kind of a lot for it. Can we be that alternative instead and help them kind of balance the books in some other way? So sometimes it is a zero-sum game. But in other areas, we do think that a more collaborative approach with our payer partners has gotten us to the place where we want to be.

All right. As we are kind of coming up on time, any final remarks the team wants to give? Otherwise, we are good to wrap up.

Yes. No, I think we're good. So thank you so much for coming late in the afternoon. I appreciate it. And Chan and I will be around if you have any other further questions as well. Thank you, everyone. Have a great JPMorgan.