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

Good afternoon. Thank you for joining us. My name is Lisa Gill. I am the health care services analyst with JPMorgan. It is with great pleasure this afternoon that I introduce InnovAge. Presenting for InnovAge is CEO Patrick Blair. Post that, we will take some Q&A from the podium. Thanks very much, Patrick.

You bet. Well, thank you, Lisa, for the opportunity to present today, and thank you for those in the audience who've decided to join us today. By way of background, my name is Patrick Blair, and I'm the President and CEO of InnovAge. I joined the company in December 1, 2021, and was appointed as CEO in January 1, 2022. So I've been here a little over a year now. And prior to InnovAge, I held senior leadership roles at Amerigroup, Anthem and BAYADA Home Health Care. And so I have a lot of deep experience in government programs like this. And it's a pivotal time for the company, particularly as we continue to work through some audits that took place over the last couple of years, but we've been under enrollment sanction in 2 of our larger markets the last year. And so we're making great headway there, and I'm excited to tell you a little bit more about the company. We've accomplished a lot. And most notably, I think we've taken the opportunity to really build a sustainable platform for growth going forward. And so I look forward to telling you a little bit about the journey we're on. And with me today is Barbara Gutierrez. She's our Chief Financial Officer, and she's been with the company about 6 years. So let me just move through the slides here. All right. Green button. Oh, top green button. Okay. Sorry. There we go. I may be making some forward-looking statements in the presentation today. So just I encourage everyone to read the disclosure and the presentation will be on our website. So for those of you who are unfamiliar with the PACE program, what we do, in essence, is coordinate and provide preventive care and primary care as well as acute care and long-term care services and supports to very underserved populations in the communities that we serve. And these individuals have very complex health care needs, social needs. And without the services we provide, many of them would be living in nursing homes. So it's really a program designed to help people live safely in the community. And we care for our patients using an interdisciplinary team. That's sort of the core element to a PACE center. And then we also maintain a proprietary network of specialists, much like a managed care organization would, to help us deliver care and deliver the services that we don't deliver inside the PACE organization. We, in essence, combine the dollars for both Medicare and Medicaid in order to deliver a really comprehensive set of services focused on helping people live in the community. And I think we believe at our core that PACE really is the gold standard when it comes to community-based integrated health care. And it's because of the expansiveness of the services that we offer that we're able to offer a very participant- or patient-centric approach, and it helps improve health outcomes, drive quality, all while lowering costs and helping people live safely in the community. Currently, today, we operate 18 centers in 5 states, with approximately 6,500 participants as of September 30. And we have 2 de novo centers that are virtually ready to go in Florida, in Tampa and Orlando. They get to be operational, but I'll mention a little bit more about them. PACE, overall, operates in 32 states. And the average size of a PACE Center is very small, about 200 participants. And the PACE program continues to serve a very large and growing market. We estimate that there's roughly 2.5 million, 2.2 million members who are eligible for PACE. And we think the total addressable market is north of $200 billion. And the simple math on that is if you just take the Medicare population, about 1 in 6 of them are dual eligible, and that's an element that's required for eligibility to PACE program. And then of the -- of that number, 1 in 4 are also nursing home eligible, which is a second eligibility criteria. So we're dealing with a subset of the Medicare and Medicaid population. It's a very frail population that's consuming a lot of resources. And it's really our privilege to serve them. And I'd like to think of it as -- it's such a remarkable program that I feel a moral responsibility to grow the program. It's such an exceptional program for seniors in need. And our employees really view it as an opportunity to deliver transformational impact to a very vulnerable population and allow us to all live by the doctrine of doing well by doing good. We're the largest PACE provider in the U.S. by number of participants, and we're the only publicly traded PACE provider. And our value proposition really resonates with all of the stakeholders that we feel accountable to. Our participants have a chance to live safely in their own home, which is very important to all of us or in the community and avoid the confines of a nursing facility. Families have much less of a stress burden. As we know, family members often provide a lot of the caregiving to seniors in the family. And so we're able to dramatically reduce the burden on families. And then the governments themselves get increased access to a very robust set of services and coordination on those services. And states are always looking to rebalance the supports for long-term care from a facility-based model to a community-based model. And so I think PACE really allows our states -- and then they have the fiscal predictability of a capitated payment system. And so all of this makes PACE very attractive to state governments, increasingly so. And for our physicians, I hear from our docs that it really allows them to practice medicine the way they were trained to, with an interdisciplinary team, small panel sizes, ability to spend plenty of time with their patients, being rewarded for quality not quantity, and having a team that's able to help carry out the instructions on the care plans that the providers play a big role in creating. So in some ways, we refer to it as just a real win-win for stakeholders, much like other value-based programs. In terms of the eligibility criteria, I touched on a few of these things, but someone has to be 55 or older, they have to be eligible for both Medicare and Medicaid simultaneously. They have to live in an eligible service area. They have to require support, often with 2 or 3 activities of daily living. That can be everything from ambulating or walking around the home, housekeeping, food preparation, toileting, showering, help with those things is what -- needing help with those things is what qualifies someone for a PACE program. But they have to be able to live independently in the community with PACE services to be eligible as well. So it leads to a very complex participant. The average age for our participants is 77 years old. The average number of chronic conditions for a PACE participant is 8. The average number of prescriptions is 9. They need significant assistance with their activities of daily living. And without the services that we provide, it's nearly certain that without the right family support, people are going to go into an institution. So that's really the core of what makes someone eligible for PACE. And by coordinating the care and delivering much of the care inside the 4 walls of our center, we can really drive improved outcomes, better quality all while achieving fairly dramatic cost savings relative to what Medicare and Medicaid would have otherwise paid had they stayed in a fee-for-service program or even a managed program. And we believe that the center is really important for a good reason because through regular center attendance, it allows us to have line of sight on the risks that these patients have, not only with their medical situation but also with their social situation. And this allows us to sort of help us catch potential issues sooner, it allows us to triage into the correct setting much more effectively and avoid costly emergency room visits as well as subsequent hospital admissions, which is very common after one of our participants goes into an emergency room. And we believe PACE programs have a real advantage over traditional managed care programs who try to serve these populations, but they're serving them off and they're forced to coordinate more than arm's length. We're in a unique position where we're not only coordinating all of the care, we're seeing someone up to 2 to 3 times a week in our center. And so our ability to really understand what their needs are and how to divert high-cost unnecessary care or risky care is a core part of what we do. You can see here from the slide itself that we're very effective at reducing ER visits and hospital admissions as well as readmits. And this has been, I'll say, risk-adjusted to reflect similar populations with other risk scores. And like other risk-bearing government contractors, we're also -- we need to manage medical costs and medical cost trends of our population, which makes us very much a payor as well as a provider. But most importantly, what we're able to do is to forestall or avoid nursing home admissions, that's really the key to what we do. And even this week, as I've met with interested parties and investors, I get a lot of questions that attempt to draw comparisons between Medicare Advantage and PACE. The 2 programs are similar in that we both are characterized as integrated care. There is some significant similarities in terms of populations, but there's a lot of differences between us and the Medicare Advantage plan. As I mentioned earlier, the first most notable is that we are -- the participant has to meet a nursing home level of care. And that is often a very small subset of what any Medicare Advantage plan would cover. And that means they're at risk of institutionalization if they don't receive these integrated services. And PACE benefits include the full array of Medicare benefits, plus the full array of Medicaid benefits. So we're taking about $7,000 per member per month, sometimes much more than that based on risk scores for every member we care for. If you look at a Medicare population, maybe it's 900 to 1,100. So there's a very big difference in the populations and the benefits that we offer to the population. And we think our model is a very robust model. And probably -- I'm not aware of any other programs in a value-based environment that take as much financial risk as a PACE program. As I said, one of the things that makes the model very unique is that we're both a payor and a provider. And we have to be excellent both, and I don't think that's really been the heritage of most PACE programs. They've really excelled at delivery of care, but less so in terms of the things you need to do to be able to manage a full risk population and manage total cost of care and cost trends. And the combination of being a provider and taking full risk for Medicare and Medicaid really positions us well to be an excellent resource to states who are looking to control the cost of this population. And given my managed care experience prior to InnovAge, this is one of the big focus areas for me is to bring to InnovAge some of the fundamentals of being a great managed care organization and payor. If you think about the team, I mentioned the IDT. So this is really the hub of not only care coordination, but the hub of delivery in our centers. It's made up of these interdisciplinary teams. It's a very patient-centric model. It involves a minimum of 11 disciplines, which develop and manage individual care plans for all of our participants. And the team includes a center director, someone who runs the center; social workers; nurse practitioners; nurses; primary care physicians; dentists; physical therapists; occupational therapists; home care professionals; drivers; dieticians; behavioral health therapists. I mean -- so -- and we employ all of these individuals in our center, and then we contract for specialist services. So the team is critical to monitoring the progress of participants, exchanging information, looking for change of condition, looking for changes to be made in the care plan and get ahead of risk that exists for the population. And as I said, in addition to the delivering the care through the interdisciplinary care team, it's critical that we function as a payor that can manage complex medical costs. And you can see here on the slide, that includes things like provider network management, just like any other health plan. We have to build a network. We have to make sure we have the right composition of providers. We have the right unit cost of the providers in that network. From a resource management, very akin to what you would refer to as utilization management. This is about using evidence-based guidelines to make sure people are getting the right care and that we're optimizing quality, value and cost. Claims payment, we pay a lot of claims because all of our third parties, whether it's a hospital or a cardiologist, they're billing us just like they would any other health plan. And so we have to be very rigorous on how we pay claims and ensuring that we're paying accurately and appropriately. And then risk adjustment or risk payment accuracy, it's really important. We have a very chronic population. And on the previous slide, you see that our risk scores are nearly double what you would typically find in a Medicare Advantage population. It's just critical that we focus on being paid fairly for the risk that we're shouldering, the characteristics of the patient. When I think about this past year, calendar year '22, it was a really important and transformational year for the company. We really used the time to strengthen the foundation across every facet of our business. We've meaningfully upgraded talent across every dimension of the company, still a lot to do. We added an Independent Chairman to our Board in addition to our financial sponsors. We've expanded and built, I think, what is an excellent compliance program that doesn't stop when the audit stops, it continues to go. It continues to self-audit every month and ensure that we're delivering high-quality compliant care everywhere we can. And we closed a lot of critical technology and people gaps. We started to introduce this notion of being a better payor, a better manager of medical cost trends. We started to introduce those capabilities. I'd say we laid the foundation and we still have a lot of work this calendar year to do. And then we invested in some technology. One of the things looking back on the business and sort of what contributed to some of the deficiencies that were identified in our audits and then ultimately led the sanctions was our operating systems. We were operating on, I think, it was 3 or 4 medical records. We've worked in a strategic partnership with EPIC to create a customized version of EPIC that's going to be the first-ever design exclusively for a PACE program. And so we've brought up our Virginia centers on that, implementing our Pennsylvania centers now. So we're making great progress there. So I just couldn't be more proud of the organization, the team and the support that we've all received from our Board of Directors and investors to make these long-term investments, which set us up for some durable growth going forward. But to be clear, it's a work in progress. It was a very transitional period for the company. We're still trying to return to a sense of normalcy post-COVID, while also navigating these audits, and it's been a real challenging task for myself and the team, but we couldn't be more excited about where things stand now after a year's hard work focused on it. With respect to regulatory update, on the regulatory front, it's hard to know how familiar folks are with the company, but we had 2 enrollment sanctions, not dissimilar to what occurs in the Medicare Advantage program. In Sacramento, California, 1 center, and then in our 6 centers in Colorado, we had enrollment freezes. So we could serve the members we had, but we could not grow. And so we finished all audits. So all audits have been completed. In Sacramento, we were released from sanctions by CMS. And for the state, they completed their audit just before Christmas, and so we're waiting to hear back on the outcome of that. And then in Colorado, both the state and CMS completed their audits just before Christmas. So we're also waiting to hear from both of those regulatory agencies on next steps. So as I said before, I think we're -- we continue to be a wonderful solution for government payers. And I generally believe that the regulators have a desire to see us be successful. I think there's -- it's easy to be dubious of regulator intentions, but I can say I've been elbow to elbow with regulators for over a year, and they want us to be successful. At the same time, they have a job to do, and they've got to make sure that we're delivering compliant care for every participant. And so that's part of it. Looking forward, I'm not sure our growth strategy is any different than anyone else's. It's multipronged. We're very focused to begin with on reinvesting in our business as it relates to the operating excellence and operational infrastructure and ensure we have a compliant organization. But then it's really about responsible growth in our existing centers. We have a lot of capacity in our existing centers. That's a priority for us. I'll spend a moment on that. We have 2 new de novo centers and we have our eyes on other markets. Just between those 2 de novo centers, we've got north of 2,300 participant capacity out of 6,500 participants we serve today. So a lot of intrinsic physical capacity in the organization. We've also built some staffing capacity through the audits that will help with our scaling as we come out of this. And then we look at partnerships. We're looking at lots of really interesting asset-light, capital-light partnerships that we think exist with a variety of stakeholders. And this has been a great forum to catalyze those conversations. And so there's a lot of real interest. And then on the acquisition front, we're always looking at acquisitions. We certainly always keep a pipeline. It's a little smaller now than it has been in the past because we've been so focused on our knitting, so to speak, but we think there's a great opportunity for that going forward. And as I mentioned with organic growth, it really is the most capital-efficient and most margin-accretive way to grow. And so we're really focused on putting the sanctions behind us and then very focused on filling as much capacity in our centers as we can. The marginal benefit of every new member in those centers is much greater than going out and breaking new ground and building a new market, which is a part of what we'll do, but we want to get the centers filled first. And we have some staffing that we built up in order to see our way through the audits, and now we're going to be able to deploy that staffing. We didn't fire anyone. We didn't let anyone go in the year we've been operating, all with the intention of making sure we pass the audits and that we're ready to go when it's time to begin serving more seniors again. And then lastly, in terms of the investment highlights, I think it's -- as I pointed out, it's important to know, this is just a large and growing market. People ask, well, COVID probably led to a lot of deaths of seniors with these sorts of chronic conditions, didn't that shrink your opportunity to serve? And I think just at the same time, there were seniors that weren't eligible for PACE that COVID accelerated that group to become more eligible for PACE. So any way you look at it, the addressable market for PACE is large and growing. We have an industry-leading model in our view. We've certainly had our challenges, but we still have a great team and a great model. And the unit economics on the business, we believe we can return to them over time. It's hard to know today exactly how future unit economics will compare to maybe what we were doing before we went public. But I think the reality is we see a real opportunity for attractive margins for investors going forward. And we're building a model that's scalable. And we should be able to enter new markets more quickly. We should be able to integrate new businesses more quickly. We should be able to reach profitability more quickly. These are all objectives that we've been planning for during this period that we've been addressing the issues. So with that, I think we're going to move to Q&A.

Sounds great. Patrick, first off, thank you for all the details. When we think about the PACE program, it's been around for 30-plus years. But the penetration amongst dual eligible members is still low single digit, as you talked about today. And part of this perhaps is due to the historic absence of for-profit participants. Can you talk to us about why it's been so underpenetrated and how the competitive landscape in PACE has evolved over the last several years, especially since we now have for-profit entities coming into the market?

Sure. Well, I think your point about not-for-profit, I mean, what Lisa is referring to is you couldn't be a for-profit PACE operator before 2016 when the law was changed. And so prior to that, all PACE were not-for-profit. The vast majority were associated or owned by a local hospital system. And so I think it's -- I think part of the reason PACE hasn't grown as quickly is because it's going to take a while for that to happen. You still have a lot of nonprofits and virtually all PACE are nonprofits. And it makes it -- I think their aspirations to grow geographically are different than a for-profit entity, access to capital is often more challenged than you might find in a for-profit world. You've got to shoulder quite a bit of start-up cost before you see revenue. I mean I think those are all very relevant and -- but I think they can be a greater burden for not-for-profit. So I think some of the slow growth really is anchored around the not-for-profit aspect of this. I think also -- it's not lost on me, and I think it's partly because of my career. So in my last 15 years, I spent a lot of time on Medicare Advantage and its evolution, adding special needs plans and ISNIPS, et cetera. I mean that was a big focus of CMS. Then I've spent a lot of time on health exchanges, another enormous focus by CMS. And then you think about states, their big move was not only traditional Medicaid managed care where they're moving moms and kids into privatized Medicaid, but then they started moving seniors and people disabilities and then you had managed Medicaid long-term here. So those are 3 -- 4 massive programs that for CMS and states involved millions of covered lives and had a lot of sort of bang for the buck financially and took a lot of attention from states and CMS. So I think some of the reason PACE has grown slower is it just hasn't been able to be a priority. But I do believe now that those programs are all in place, all functioning exceptionally well, I think states are now starting to say, what's next? What's the next natural extension of value-based care within a state long-term care program? Should PACE sit alongside Medicaid long-term care as an option? I think that's the kind of thing that could really unlock the growth opportunity. It's going to take time, but I think that's why. And then in terms of new competition, I think you've seen a lot more for-profits come in. I think it's a mixed story on their success to figure this business out quickly because it is very complicated. But I'm enthusiastic. The more for-profit companies that come into PACE. There's plenty of seniors who need our support. And just by virtue of how PACE programs generally operate exclusively in a territory, it's a different competitive dynamic than say Medicare Advantage, where we may have 10 plans in 1 territory. And so I really do believe that the more not-for-profit -- for-profits that enter the space the better, and I think it just raises the awareness and appreciation of PACE.

I'm sure you and Barbara are so tired of talking about the sanctions and the audits, and it's so nice to finally see that you're getting towards that finish line. As we sit here today, did CMS, the audit results, did they give you any detail on where your performance -- and you did well and versus areas of improvement? Do they give you that level of detail? So when we think about maybe some of your other facilities and take those learnings and be able to bring that to the other facilities.

Yes. Well, they certainly -- as you expect from regulators they hold their cards close to their vest. And so they're not out -- telling you what a great job you're doing all the time. But it is clear based on our interactions on the positive side, the areas I think we've done a really nice job, I think the timeliness of care delivery is something we've dramatically improved, how quickly we're getting people care has been an important improvement we've made. I think all PACE programs have challenges coordinating care with providers outside of their centers, so specialists and hospitals, et cetera, I think that, that's an area where we've done a much better job is coordinating with external providers to the program. And then documentation, that is a very big critical thing within our PACE program is it's like document, document, document. If you didn't document it, you didn't do it. Even if you did do it, you didn't do it if you didn't document it. And so I think our documentation has really improved during this period. On the -- like where is the opportunity, the one area I would say is sort of akin to the external is when someone goes into a skilled nursing facility or to an assisted living facility, our responsibilities as PACE program doesn't go away. I mean it's -- they're still our participant and the expectation is that they will receive the same level of coordination and engagement as they would receive in our center. That's an area that we still have to improve. Managing care or coordinating care of someone living in a facility when that facility is struggling with all the same issues we struggle with from a staffing perspective is a tough one.

I mean I think that's the other thing that's come up a lot this week is both inflation as well as staffing issues. So maybe if you can give us an update on where you are on staffing issues today.

Yes. Sure. Barbara, do you want to hit that?

Yes. So -- glad to. So as Patrick said, we've really closed the gap quite a bit on staffing. We -- I would say, in the first part of calendar year '22 from that beginning, we've closed the gap. Not easy, a lot of challenges and certainly some cost to that, but we've closed the gap, which has resulted in this capacity, particularly in Colorado, right? So we've closed the gap on staffing and now we have this very intentionally. And we have the opportunity to grow and grow into that capacity. One of the related questions that you might ask is related to contract labor. That's been another place where we've had to supplement our staff as most of the folks in the market have. And we're very focused on our costs, and we've made some progress. We don't think we'll be able to unlock the full opportunity, though, until we're out of sanctions. So I think we've made -- I think the bottom line is we've made really good progress.

The other question that we get is around how do you pick where your next de novo facility would go?

Yes. No, that's a good one. Barbara will supplement. Well, we spend a lot of time on that. There's only 50 states. And so as you would expect, we're looking at all 50 states. And then there's a subset of those that have characteristics related to the density of the eligible population. For example, we look at drive times. So not only is it a dense population, but can you get them to center in a convenient drive time. We look at the network dynamics. Can we get unit cost contracts from our providers that will work in our model? Is there appropriate access from a specialty perspective? Sometimes real estate and the cost of real estate can be relevant to our decisions. But we take a pretty, I think, disciplined look at every market and try to weigh the short-term and long-term ROI of center selections. And Florida is a great example of where we've got 2 40,000-plus square foot state-of-the-art facilities because in Tampa and Orlando are very dense eligible populations. The traffic patterns are very positive. There's great health systems to work with, great providers to work with. There's a large staffing pool that we can access. All those things go into that calculation.

Can you talk about the cost, Barb? Like -- so when you choose that new market -- obviously, you talked about real estate. You talked about staffing. But is there a time line to profitability?

Yes. So on average, the de novos, depending on the size, depending on the market...

Is 40,000 square feet, that's an average size...

Large size.

That's a larger size. That's a larger size. So the cost can be somewhere between $15 million and $20 million, depending on the market. If it's here in California, it's going to be a little bit higher, whether we build the facility or we lease it and all those factors. So somewhere in that neighborhood, and that includes the cost of the facility. We have some preopening losses and just getting things started because we have to be fully staffed and functional before we can even be approved to start. And then there's some initial losses. Generally speaking, our de novos are positive contribution margin in about 12 months. And in large part, it's because of all the things Patrick said, we do our homework before we go into a market, so we really know what that market opportunity is. And in most states, other than California, those markets are assigned to a PACE program. There's really no competition in that market. So again, we really know going in, and so we've got pretty quick profitability.