InnovAge Holding Corp. (INNV) Earnings Call Transcript & Summary

Okay. I think we're going to go ahead and get started. Thanks, everyone, for joining the Citi Virtual Healthcare Conference. For those who don't know me, I'm Jason Cassorla, and I cover the managed care and health care facilities and providers space here at Citi. We're happy to have InnovAge here today. Joining from the company is President and CEO, Patrick Blair; and CFO, Barb Gutierrez. Thank you both for being here today.

Thank you for having us.

Before we jump in, this is going to be a fireside chat format. So I'll lead the discussion. But if anybody does have a question, there should be a box in the upper-right portion of your screen to submit, and I'll certainly do my best to toggle over and get to them. So Patrick and Barb, again, thanks for joining us.

Thanks for having us.

Thank you.

Great. So maybe we just start off here with the discussion around the PACE program. Maybe could you just emphasize what the PACE program is, who the program serves and its importance as a program for individuals outright?

You bet. Well, thank you for joining and for everyone's interest. The PACE program stands for Program for the All-inclusive Care for the Elderly (sic) [ Program of All-inclusive Care for the Elderly ]. So it's a program that's primarily focused on individuals who are very frail, who have both Medicare and Medicaid coverage that are 55 years or older. All of them are nursing home eligible, which means they've been assessed for activities of daily living and other barriers to living independently. Generally speaking, they have approximately 8 chronic conditions, on average, and require assistance with at least 3 activities of daily living. I think what makes the program unique is that it's a globally capitated program that includes all the Medicare and Medicaid services, including all the social determinants of health and coordinating all the care and all the services across all the cities. The sort of cornerstone the program is the 11-member interdisciplinary care team. You'll hear us refer to that as the IDT. And this is a team that develops care plans, engages the participants and monitors their health status on a very longitudinal basis and really stays -- helps them stay in the home. And care is delivered sort of multimodal in the center as well as in the home and virtual. So it's a really great program. It's a program that truly does align the incentives for all stakeholders in that it saves a tremendous amount of money for states and the federal government. It's certainly in the best interest of the participant to help them live independently with dignity in their homes and in their communities. And for the providers involved, it's a very low, administrative overhead model. So the typical restrictions that you may find in a managed care program around authorizations and referral management, et cetera, are not present in the PACE program which allows providers really to spend a lot of time with the participants and make sure they receive all the care that they need.

Got it. All right. Yes, that was really helpful. I appreciate that. Maybe just on that context, it's interesting because the PACE program is pretty kind of underpenetrated, right? So there's over 2 million PACE-eligible individuals in the U.S., and the market is only about, call it, 2% to 3% penetrated today. InnovAge has a census in the 7,000 range currently. So that would equate to about 13% of the entire PACE program. So with that much of an addressable market to consider here, maybe you can just help us understand what the key drivers are to penetrate that market over time.

Sure. I think there are several. The first is, I think, leveraging strong government and public affairs to expand the awareness of the PACE program and the value proposition that it offers. To do this, you do need to spend time with states, helping them understand the PACE program and its value proposition and how successful it can be in helping reduce institutionalization among these frail seniors. In many ways, it's a similar value proposition that you would find in the managed long-term services and supports models. My belief is that, ultimately, we'd like to see PACE be a true choice and alternative to MLTSS, managed long-term services and supports. Today, for frail seniors, the only choice they have is among managed long-term services and support options, but they don't have a true choice to receive care through a PACE program. So I think over the long term, I think our goal is to do our best to attempt to position PACE alongside MLTSS as an option, a true choice for seniors. And then finally, I think leveraging the really strong community relations function to garner support from the frail seniors themselves, from the advocates that represent them, from the community-based organizations that support them.

Got it. Okay. Interesting. That's helpful here. I mean, maybe just talk about InnovAge within PACE really quickly, just to understand from a model perspective outright. You got 18 centers. You're the largest operator in the PACE program today. But thinking about the fact that you've generated, call it, low double-digit EBITDA margins while managing, as we said before, almost entirely a dual Medicare/Medicaid eligible population, so one of the highest acuity and highest cost populations in our health care system. I guess, just from that standpoint, what makes the InnovAge model unique to be able to generate a margin like that while managing this population? I think you talked about the capitation argument and so on. But just what about the InnovAge model that makes it unique enough to be able to generate a margin like that?

Well, I think the first is the expansiveness of the benefits themselves. As I mentioned, we cover all the Medicare, think about it, discovering all the Medicare Advantage Part C and D benefits, as well as all of the Medicaid long-term services and support benefits. So it gives us a lot of levers in a very high-touch model across the continuum of care to manage the population. We obviously focus on the levers that are the highest cost, specifically around inpatient facility. And we have a regular cadence of reviewing trends in inpatient admissions and readmissions, the upstream drivers of those costs and take a lot of action to reduce avoidable admissions and with a particular focus on avoiding the high-cost nursing facilities today, whether that's a short-term stay or a longer-term stay. That's a big focus. And we use a lot of the social determinants of health levers to do that. We also focus on advanced directives, making sure that they're up-to-date, and that the end-of-life care is kept up to date for our participants to avoid the highest-cost end-of-life care concerns and all the unanticipated costs that will come with that. So I think it's just the breadth of the program, the high-touch model and the ability to put the participant and their family at the center of all of the care.

Got it. Okay. No. That's really helpful to get an overview of the company and the PACE program. So maybe just, Patrick, you started only a few months ago now, and we'll get to this in a little bit. But I'm sure, right now, you're rectifying -- your focus is rectifying some of the near-term issues from the audits. But moving forward, once the dust settles in the audits, maybe just given your background, any areas around the forward strategy you're taking a deeper look into at this point? Maybe help us set the stage, that would be helpful.

Sure. Well, you're certainly correct that the focus right now is on the audit findings and just making sure everywhere we have an identified deficiency, we're addressing it, wherever it may exist and ensuring it never occurs again. But going forward, I do believe there's some opportunity to focus on. And I think my background on the payer side brings sort of a unique perspective to this. If you think about the PACE program, you have value creation in sort of 2 dimensions. You have it as a provider, and then you have value creation that can be achieved by being a great payer or implementing great managed care capabilities. And the company's central focus since its inception, it's much more heavily weighted toward being a provider. And we're working on all of the opportunities we have now to fortify and correct all -- the issues that have been identified as a provider. But I think what makes the company -- or makes PACE really unique is there's a big payer opportunity here as well. So when the dust settles, sort of, as you say, I'll be more focused on ensuring we have best-in-class payer and managed care capabilities around health care analytics and actuarial insights that would support the rate setting and rate negotiations, targeting and addressing medical costs trends in a very analytical and in targeted way, certainly risk adjustment. There's opportunity there to continue to improve provider contracting, and network management are also significant areas, as well as provider performance management. So these are things that managed care organizations are continuously improving on year after year and find ways to control medical costs and expand margins. So I believe in the fullness of time, this will be a big focus that I think my background uniquely brings.

Got it. No, absolutely. That's extremely helpful. Appreciate that color. Maybe we just segue into the audit construct, right? So maybe just to clear the air, you've had a couple of audits regarding your Sacramento and Colorado facilities that led to new enrollment freezes for those centers. I guess, just given how these audits and freezes have impacted the near-term outlook for the business, can you just help us understand at a high level what happened with these audits, including the deficiencies found and how you're cracking them?

Sure. I think, broadly, the findings are focused on the provision of services that touch deficiencies in the quality of care, access, timeliness of care, care coordination and documentation. For example, we had deficiencies in -- or inconsistencies in our ability to transport participants, to schedule follow-ups with coordinating entities and then to communicate, exchange information between our teams and third-party providers. And the audits also revealed opportunities to improve our documentation. That's sort of another category where we're required to document every aspect of the care in the medical record in a timely fashion, and there are certain standards of practice that exist for both states and CMS. That's certainly an area of focus for us. If I look at some of the -- if I look at Sacramento, as an example, and, to a degree, Colorado, there were deficiencies around our network and provider contracts, just simply needing more of certain specialists to provide complete access. There were opportunities to identify to train our staff, whether it's documenting in the medical chart or completing certain in-home service records, just ensuring we have the correct staffing levels, making sure we're getting appointments scheduled on time. So a lot of this, I think, as I said on the earnings call, is very addressable. It's just good leadership, focus and execution. And I think I have a great deal of confidence that these are all things that we can address, and we'll be a better company as a result of it.

Okay. Got it. No, that's very helpful. Maybe just going to Colorado, right, big state for InnovAge, about 1/2 of your revenue generated from that state alone. The latest update suggests that you're in the process of submitting and updating approval for each of the corrective plans with the state and kind of CMS partner here. I know you just reported a couple of weeks ago, but do you have any further update in Colorado at this point? And with the enrollment freeze beginning earlier this month, maybe you can help us get an idea of how trends have developed so far post freeze, that would be helpful.

Well, I think in terms of new information, we did submit our corrective action plan to the health care financing policy organization within the state. Regarding any -- how trends are developing, we haven't provided any additional updates since our Q2 report. So I don't think at this point, we'll provide any new information, other than what was provided in the earnings call.

Okay. Fair enough. I understand. I appreciate it. That's helpful. Just going to Sacramento really quickly. You're a little bit ahead of the process there, right? You've submitted your corrective action plan already, and I think you're now in the monitoring stage with CMS. Correct me if I'm wrong there. But this center's one of your newer ones with a census less than 200. As you come out of this monitoring process and the freeze is potentially lifted, do you think that the census will build pretty quickly back at this point? Or do you think because of kind of what's happened there, it would be a little bit more delayed? In relative terms of how when you first set up the center, right, and you thought there was a ramp of progression in census, do you think that will still play out once you get over the audit freeze? Or do you think there's going to be a little bit of a different argument there, just because of the audits?

Well, I think the first thing to keep in mind is that we've not been able to do any marketing or any sales efforts while we're under sanction, and so we really don't have a historical precedent in the company for this. And so without the marketing sales efforts underway, I think Sacramento is going to be a good test to really -- in many ways to understand what do the various cycles look like from the audit time lines, from the time the audit is conducted to the time that the sanction is lifted, to the ramp-up of sales. I think, really, this is going to be an important sort of test for us that will give us some more confidence in our ability to forecast this going forward.

Okay. Yes. Fair enough. That's helpful. Just trying to understand the dynamic here as you're coming out of it. Maybe just turning to your other states. On the call, you noted that there was preliminary findings in a routine audit for your New Mexico centers that would suggest similar deficiencies to that of Sacramento and Colorado. Just thinking about the rest of your state footprint, should we expect the likelihood of a similar outcome for enrollment freezes for New Mexico? And then maybe how should we consider like the future audit construct in your other states, including Pennsylvania and Virginia, at this juncture? Or do you think you've been able to appropriately and proactively address the potential concerns, right? Are you getting ahead of this in your other states? Or how should we think about New Mexico and your other states, I guess?

Maybe I'll take the last part first. So as I've said, each time we learn something new from the audit, whether that be in Sacramento, Colorado or New Mexico, we're immediately looking to apply those learnings to every market that we're in. So in some ways, the audits are giving us a bit of a diagnostic to then apply actions throughout the enterprise. And so I can say confidently that everything we're learning, there is a plan to ensure that it's in place across the company. On the first point, I think it's important to keep in mind that there are a lot of nuances to every state, so it is difficult to extrapolate an outcome from one state to the next. Just at the highest level, Sacramento was a routine audit for a new center. And so it was a very different situation in Colorado where the audit was the result of a complaint. And New Mexico is also a routine audit but a more mature market but similar in that it's routine to Sacramento. And so that's one thing I would just point out that there are differences right out of the gate. And then the other is that, generally speaking, all audit findings are organized into sort of higher-level categories that are common in the audit process. So you can have a finding that aligns to a similar category in different states, but the specific participant case that's being reviewed and analyzed could have very different details within the same category. So you can have -- so even within a category, the actual cases and what's transpired can lead to very different outcomes for the audit. And CMS, in particular, really has 2 paths that they can take on every audit: they can allow you to correct the deficiencies as part of just a corrective action plan that's monitored or they can require that the deficiencies be corrected while the sanction's in place. So even though you could have similar findings, you could have a situation where you're not under sanction but you're still correcting them. So if you took a category like failure to provide care that meets the needs of a participant across all settings, 24 hours a day, every day of the year, that's a category. The specifics within that category could be very different from state to state and from participant to participant. So we're taking these lessons learned, but it's extraordinarily challenging to assume your results in one state should be -- or the themes in one state that could be the same theme in another state would result in a sanction or any other negative findings.

Got it. Okay. I think it's really helpful to kind of delineate that kind of construct there. Really appreciate that. Just a couple more on the audits, around this.

That's okay.

I think as you address the issues with your states and CMS, half of these centers, you noted before, it's sort of care coordination, documentation concepts. Should we think about these remedies as more administrative? Or do you believe it will have to be -- you have to incrementally invest into these centers to meet these compliance considerations? Is there any way maybe you can help frame what these additive costs could potentially look like? Just trying to understand where you were before. You've got the audits. You got to comply and where you will be after. You think about the extra costs that might have to go into it. Any help framing that would be helpful.

Sure. Well, I'll start with just -- my focus is making sure that our centers have everything they need to address the deficiencies that we're seeing in the market, and that means the right mix of the people, the process and the tools that they need to be successful. But I think it's fair to say that many of the improvements we need to make are administrative and process improvement in nature, things like better training checklist to make sure we're closing loops, ensuring accountability to follow standard operating procedures, making minor system enhancements that help automate manual tasks, help reduce the amount of manual documentation, creating reminders in the system and improving the user experience when it comes to documentation. Those are all things that are super important, super impactful, but they're not large incremental costs. The most significant area of investment that we're making, I think we've talked about this in the past, is related to the Epic implementation, which is getting the enterprise on one system. And this is going to have a tremendous impact on effectiveness and efficiency long term and going forward. So -- but I think it's fair to say there's a lot of administrative improvements. I've also talked about the need that we've made. We've made some investments in training, made some investments in compliance and operational excellence. These are just core investments that create an operationally excellent organization and then recognizing those are sort of center level. I've also identified opportunities for rebalancing resources and to look at maybe making -- as we make those investments in the centers, perhaps we can run a little more efficiently at the corporate level or the non-center level in some of our corporate areas. So we're looking at all the non-center level costs, non-labor costs, overhead, capital assets, et cetera. So sort of all in, I feel pretty good about where we're -- how we're looking from a cost perspective.

Got it. Yes. And that just kind of leads to my next question. I was just thinking about this. I mean, you're targeting, right, these deficiencies, the actions around them. You would think that some of the efficiencies that you're going to be able to kind of garner are going to be margin-accretive in a lot of ways, right, the efficiencies, the process of the enhancements over time. So while there might be a little bit extra investment, just to be compliant, would you kind of characterize it as more margin-enhancing over time, like better positioned? Like how would you think about it from that perspective?

I think it's too soon for me to commit to that. I think the way you laid it out is there's a lot of opportunity for puts and takes as we think about margins. And as I described earlier, there's really 2 dimensions to value creation in the business. There's the provider side and there's the, let's call it, the payer side. And ensuring those are fully optimized is my job 1 in my first year of leadership.

Okay. Got it. Fair enough. Maybe we'll just switch gears a little bit here.

Sure.

I just want to talk about the de novo side of things. I mean, you announced this past Friday, CMS has denied your application to develop a previously announced de novo in Indiana. You've had some issues with de novo builds in Kentucky and potential future builds in California, just given what's happening with the audits. Maybe just a quick minute to help us set the stage as it relates to the near-term kind of future de novo construct here? Just a quick overview would be helpful.

Well, I'd say that we're doing everything we can right now to have the sanctions lifted. Like that is job 1. And when I think about any sort of de novo growth or M&A growth, the single most powerful lever we have to fuel growth, de novo growth or M&A is to get the sanction lifted. That's the single most important thing we can do to catalyze de novo growth. We remain despite -- we've been halted -- our progress has been halted in Kentucky, we remain very committed to those states, and we have good relationships with those states. But clearly, we need to make progress on the sanctions. And we're still at this day and time, still planning to move forward in Tampa and Orlando in fiscal year 2023, but earning the right to have the sanctions lifted will be the strongest catalyst we have to maintain our current progress and to create new momentum.

Okay. Got it. I appreciate it. Just on the de novo construct, I mean, just putting all the issues with the audit side, just wanted to go at a high level here. Maybe can you just walk through the process, the state selection here, the state selection process, how you decide to build in the market and just the overall decision-making that goes into the de novo build, the de novo side here?

Yes. Absolutely. So there's a variety of criteria to identify priority markets. I think we'd probably start with just the overall political environment and regulation that exists in a state related to PACE, how attractive is the state to PACE, how important is PACE to the goals they're trying to achieve. If there's already PACE operating there, really understanding the rates and reimbursement for the program is top of the list and then obviously looking for sort of density of dual eligibles and frail seniors that would be eligible participants. We also focused certainly on the hiring pool for the interdisciplinary care teams, those 11 disciplines, those roles. I really want to understand what's the marketplace to ensure we can find the right talent within a market. Competition. And competition for a PACE program, if you will, can come in sort of 3 dimensions. It could come from managed LTSS programs, managed long-term service and support programs; it could come from Medicare Advantage as Medicare Advantage programs continue to have vehicles that serve more frail seniors; and then PACE programs. Depending on the state, the state could offer distinct service areas to each individual PACE or territories or it could -- sometimes, you can find yourself competing in a territory with other PACE programs. So we sort of look at all of those factors as well as the hospital market and the specialist market because those are important providers we need to have in our network. And so looking at the cost structure, the unit cost and utilization exists within the network is super important as well.

Got it. Okay. That's really helpful here. Maybe just to switch gears a little bit. Just wanted to go kind of more on a census angle here, right, your referral sources. So I just wanted to dive into the InnovAge referral machine. Maybe just help break down the typical mix of InnovAge referral sources and just at a high level how you've noticed a pretty significant uptick in digital referrals. How do you see that channel moving forward in context of your longer-term growth rate with the investments that you're making there?

Sure. Well, if you maybe take our top 4, 5 referral channels, friends and family is #1. And, say, roughly 23% of our referrals come from friends and family. We -- to your point, we've seen digital advertising sort of rise to #2 since we've invested more digitally, and it's about 17% today. And then there's a variety of community-based organizations, assisted living organizations, other health care professionals. I think, collectively, you're probably looking at another 30% between those 3 categories. And you're maybe around 6% for nursing homes. So it's still a little early in my tenure to have clarity exactly and confidence in that we've got the right KPIs for digital, that we've got the right benchmarks. I sort of -- it's still early to know sort of what really is possible there. But I can say that we've made some really smart investments in all the things that a lot of companies are doing around programmatic display and video have been 2 really powerful elements for us, and it's obviously a lower acquisition cost channel for us if we can do it right. And so I'm pleased with the progress, but it's an area that I need to spend more time on as we move forward. And I'll be happy to come back to the -- to this group in the future and share more details about it.

Absolutely. Perfect. We look forward to that. Great. I just wanted to go quickly to -- around the argument that you've discussed that there's about 2% involuntary disenrollment per month, largely due to mortality issues, right? I guess if you -- could you help frame how voluntary disenrollment has typically trended? And while it's early following the audits, are you seeing any uptick in the voluntary disenrollment worth noting at this point?

I think I'll let Barb maybe weigh in there, if you don't mind.

Yes, sure. I'd be glad to. So yes, Jason, as we've said in the past, on average, our overall disenrollment rate averages 2%. It fluctuates a bit throughout the year. Not uncommon that during the winter months where there's a spike in flu or COVID, it can be a little higher. And in other months, it's a little lower. But on average, it definitely hovers around that 2%. It also can differ slightly in the market. So to your point, about half of that is related to mortality, and that's pretty consistent. And then the remainder, the -- about another half of that half is -- are also things that really are things that are out of our control. People may move out of the area, they may lose resources, so they're no longer eligible for PACE. So the true dissatisfaction or voluntary portion is less than that 0.5% on a monthly basis. And we've talked about that in the past, that on an annual basis, it's maybe around 6% on an annual basis. So that portion is very small and can be a variety of things. People may want to go back to their old physician or just don't want to be in the PACE program. So that dissatisfaction rate is actually very small.

Got it. Okay. That's -- I want to turn to the rate side of things. Barb, you've mentioned that you received a combined rate increase of 5.3%, factoring Colorado, Pennsylvania and Virginia for the fiscal year 2022. But on the last earnings call, you noted that California announced a low- to mid-single-digit rate decrease effective January 1. So could you just help frame how you're seeing the rate environment from your state partners in totality? And then maybe help just address what's kind of going on in California and what you're looking to rectify there.

Sure. Generally speaking, the rate environment is very friendly with the states, and so no issues there. We're seeing just kind of normal course discussions as it relates to our rate environment. As it relates to California, which is on a calendar year, and you mentioned the unexpected decrease in rates is really driven by the fact that in determining those rates, California used 2020 Encounter data, which we believe is artificially low because that was really during the height of COVID. So it's not representative of an ongoing rate situation. So we have asked the state to reconsider that, as has the State Association in California, Cal case. So still working through those conversations and have asked them to reconsider the base data that they've used to establish those rates. But generally speaking, all state discussions are very friendly.

Okay. Great. That's helpful. Maybe just on the federal side of things, right? You think about the PMPM structure that you receive, the federal side of your Medicare Advantage side. I mean, CMS just proposed a 4.5% rate increase for Medicare Advantage for the 2023 plan year, excluding risk coding trends. Is that how we should think about that portion for InnovAge specifically when we think about like PMPM rates for calendar 2023? Or are there other considerations that might not make that rate comparable? And then also just to tack on there, is there any of the provisions within the proposed rule itself that would impact PACE at large that are worth noting?

Sure. I'll take the last part first. We're not aware of any proposed pieces there that would impact PACE specifically. So as it relates to the rates, so PACE is on a similar model to Medicare Advantage, but it is not the same model. It's very similar, but it's not the same. So while the Medicare Advantage rates are going to be in that 4.5% rate, we think the PACE, our best estimate now as we've looked at those rates will be just slightly less than that but still in the low to mid-single digits but slightly less than the MA rates. It's a different model.

Got it. So low to mid single. Okay. Got it. Great. That's helpful. Maybe just switching gears here on the labor side of things. Barb, you talked -- this past quarter, you discussed cost of care was up 5.5%, primarily as a result of wage inflation. I know you lift your guidance given the Colorado audit, but you noted before that you included some weighted adjustments when you previously guided to fiscal 2022. And now you're seeing incremental wage pressures, if I have that correct, for the back half of the fiscal year. So I guess, can you help quantify the incremental wage pressure you're expecting, maybe frame it where historically wages in the 2% to 3% zone, and now they're ticking up to the mid-single digit? Or how would you frame the incremental wage pressure?

Yes. No. That's spot-on. So historically, we have seen just what's typical in that 3% range in terms of market increases. You may recall that when we issued guidance this year, we also talked about the fact that, in addition to that normal 3% wage inflation, we also included some market adjustments. We saw this coming late last spring. And so that would be likely a couple of hundred basis points, so call it in the neighborhood of 5% that we had already included into our guidance. Incrementally to that is where we're seeing some additional wage pressure as it is in the broader market. So in the back half of our fiscal year, we could see a couple of hundred basis points additionally in the back half of that year related to that and then general market conditions for health care.

Yes. No, absolutely. Good to understand. Maybe just sans the rate side of it, maybe we just talk about your turnover construct, right? So relative to others in the long-term care industry, you have a pretty attractive voluntary labor turnover rate. I think somewhere in the 25% plus zone, maybe ticked up a little bit of late. Well, that compares to long-term care industry of the 30% to 60% range. Maybe just in aggregate, can you give some detail on the initiatives that you've taken to retain employees and why that voluntary rate sell is so low relative to some of your peers and the rest of the long-term care facility industry?

Patrick?

Sure. Yes, yes. I'll share that I think, first, we've done, as Barb mentioned, some market analysis to identify a handful of positions where maybe the greatest retention risk exists and made some very specific and targeted adjustments there. I think we've also amped up sort of our support and recognition that our frontline employees are receiving from the managers and team. Certainly, benefits and compensation are the first thing that comes to mind for new employees. But for employees that have been with us that we're trying to retain, it's as much about recognition and training and development and career opportunities and team dynamics and communication transparency that can have a really significant impact. So we've certainly leaned into certain market adjustments that are absolutely necessary but also supplemented that with a lot of more qualitative recognition programs that I think are having a great impact. And we just have a highly mission-oriented group of people. PACE is dealing with the most frail seniors that exist, and this population of employees really enjoys the work that they do and the support that they're providing. So I think there's a lot more we can do and need to do around recognition and rewards, but I think so far so good.

Okay. Got it. That's very helpful. I know we're running up against time here, and I have a couple of few more questions just to think about. Just wanted to go -- maybe, Patrick, you talked about the M&A front before. Obviously, you're dealing with the audit fallout there. It's first of mind. But maybe just -- it would help to understand just the M&A environment, how you're thinking about capital deployment there. Maybe discuss how you've approached M&A in the past and what you see the pipeline currently developing at this point.

Yes. I think the focus right now is much more on remediating the issues. We've had partners, regulatory partners raise concerns, and we got to focus there first. That's going to earn us the right for the de novo and M&A capital deployment. We're certainly always open and -- to M&A opportunities that we get exposure to. And if the right opportunity comes along, we wouldn't hesitate to act on it. But I think, right now, our focus is primarily on our core business and getting out of the audits. But our overall growth strategy of same-store de novo and M&A is sort of very much intact. And I just think that the catalyst for acceleration of all those problems is going to be sanctioned. So that's sort of job 1. I don't know, Barb, do you want to add anything to that?

No, I think that's spot-on. It's still part of our long-term growth strategy. But as Patrick said, first things first. So that's where we're focused.

No, absolutely. I completely understand. I just wanted to make sure I cover that. Just maybe more on the regulatory or the government side, excluding the audits here. I mean, last year, Senator Bob Casey introduced the PACE Plus Act that would have expanded the PACE program pretty materially. There was also considerations in the Build Better Act that included some $150 billion in funding for home and community-based services that would affect the PACE program. I mean, with these considerations, maybe help us understand what you're seeing on the legislative front developing for the PACE program currently. Any potential upcoming vehicles? Or just from that perspective, what you're seeing would be very helpful.

Well, as you said, Senator Casey and Senator Scott put together -- put forward the PACE X Act of 2022. My understanding of that is sort of smaller version of the PACE Plus Act that was out there on February 10. It doesn't include the grant program, but it basically includes all the other provisions of the PACE Plus Act. It's bipartisan. It's intended to address some of the bureaucracy that can be in burden to PACE programs, applying to CMS and expanding into new geographies. It allows for the enrollment of PACE eligibles anytime during the month than the current restrictions that exist on where a PACE-eligible participant can enroll. So I think that's a really important one. In Florida, the state house is, I think, included in their budget. Nearly $30 million as a request from a PACE provider association to put that into the House budget. So that's going to be an interesting opportunity to follow and engage with. And then in New York, I think in the 2023 executive budget for health and mental hygiene, it included some language not dissimilar to the sort of PACE X that is about streamlining the licensure process and allowing current PACE providers to expand. So I think there's some really interesting opportunities that are out there on the horizon from a regulatory perspective and a legislative perspective, and we're staying on top of all of them.

Okay. Excellent. Great. Maybe just squeeze one more in here before times up. Just going back to the quarter really quickly. Barbara, I think on the call, you noted a continuation of the catch-up of care, kind of given COVID impacting your contribution margin in the quarter. You noted that pent-up demand is kind of leveling off. But can you quantify how much pent-up demand needs to come through at this point before care levels off completely? And do you anticipate a spike of pent-up demand later on, maybe this fiscal year, just given what's happened with omicron? Or maybe just help with this utilization argument kind of over the next couple of quarters would be helpful.

Yes, sure. There was a couple of things going on in the quarter that offset each other a bit, so trying to be a little bit clear about that. So we did see that pent-up demand start to level off, and that pent-up demand started in Q4 of '21 and into Q1 of '22. And that pent-up demand was primarily around specialist outpatient and other that related to the fact that during COVID, centers were closed. Our participants weren't -- were partially closed. Participants might not have been coming in as regularly and not seeing specialists as regularly. So that was that pent-up demand that we have seen level off in Q2 because we've had a couple of quarters now for that catch-up. Offsetting that in the current quarter were some additional costs related to omicron and then -- and some carryover from Delta and some costs related to the more recent spikes of COVID, so things like we mentioned, even things like increased housing cost medical respite as some of the congregate settings were closed, and we couldn't get people back into their original settings. So those 2 things were somewhat offsetting each other so that our costs quarter-over-quarter were fairly flat, up just a little bit. But those were the 2 things offsetting each other. And then we have signaled that we have seen those additional costs from omicron carrying over into Q3.

Got it. And then are you considering, I mean, omicron a little bit different? Are you considering the argument that there's a pent-up -- like an offsetting feature moving forward at this point? Or is there a little bit of a different argument than compared to the last quarter? Anything like that?

Yes. It's a different argument because our centers are open. Really, that pent-up demand was just getting everybody back on track with outpatient specialists and other. But the centers have been open for quite some time, so -- and participants are coming frequently. So it's a different issue.

Okay. All right, guys. I mean, we're up against time here. Thank you so much for participating, Patrick and Barb. Really appreciate it. Have a wonderful rest of the day. We'll call it there.

Okay.

Thank you so much. We will.

Bye-bye.

Take care.