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

All right. Good morning, everyone. We're going to get started here with our next session. I'm Jamie Perse, health care provider analyst at Goldman Sachs. And we've got InnovAge here for our next panel, Patrick Blair, CEO; and Barb Gutierrez, CFO. Thank you guys for joining us.

Thanks for having us.

Happy to be here.

Let's start high level, just introduce the company a little bit more. I think some investors are still getting up to speed. So maybe just a quick high-level summary on InnovAge and the key elements of the business and business model and the opportunity you see?

Sure. Well, I would start with just sort of the high point or that InnovAge is the largest PACE program in the United States. The company went public in March of 2020. In terms of our service offering, we're a program that's focused on frail seniors who are at risk of institutionalization if not, but for the services that we provide. We provide services that extend from primary care, preventative care all the way through hospital care, long-term supports and services, care in the home, even if someone is institutionalized, we have responsibility for them as well. We combine both Medicare and Medicaid funding streams into one capitated payment for services. So we're at full risk for the continuum of care of both Medicare and Medicaid services. And the program continues to grow. We continue to see a lot of opportunity in the marketplace and really excited to be a part of it.

Great. Well, let's dive into the PACE program itself. It's been around for a long time, but it's still probably there's a lot of room to grow if states adopted and so what's the state of PACE? And I think over the last few years, it's probably been lost in some of the other things going on at the company. But are you seeing incremental interest from states in adopting PACE? And more broadly, just what's the longer-term opportunity in terms of patients and market size?

Sure. Well, in some ways, I feel that the pandemic has played a bit of a role in accelerating a lot of the interest in PACE as a solution for keeping people safe in the community and outside of nursing facilities, InnovAge and other PACE providers have tremendous success during the pandemic with vaccination rates and keeping people safe at home. And I think that's really kind of caught the attention of a lot of the policymakers both at the state level and the federal level. I think heretofore, PACE has been a program that's flown a little bit under the radar for -- when compared to sort of the broader health care initiatives across the country. I mean it wasn't until 2016, roughly that PACE programs were able to operate as a for-profit entity, and InnovAge was of the early movers in that. So you have a lot of very small not-for-profit programs that make it difficult to access the kind of capital that is needed to grow and expand. And there is a period of time where you need to absorb some operating losses as you're bringing and scaling a center. And I think that's sort of kept pace expansion somewhat limited, and then when you think about sort of the larger policy initiatives related to vulnerable populations, obviously, Medicare Advantage in the last 20 years has been a big evolution, managed long-term care has taken up a lot of time at the states, managed Medicaid, the health benefit exchanges. So there's been any sort of quantum programs that both Medicare and Medicaid have been focused on. I really don't think PACE has sort of been a priority given some of those other programs. But if you look at the average age of a PACE beneficiary, it's about 77 years old. There are people that have upwards of 8 to 10 chronic conditions. And now we see the average age of Medicare beneficiaries approaching 77 years old. So you just have this sort of confluence of -- the population is getting older. The needs are evolving certainly a lot of individuals with more complex needs. And I think our view is that as the population ages and gets hire in need, we're going to see PACE become a much better solution, I think, for that challenge, maybe some of the other primary care-centric programs that are more office space. I think that really gives PACE a real opportunity to grow and meet the needs of states and CMS as it evolves.

Okay. Great. Let's go to the business itself. It's been a challenging couple of years. You joined in December 2021 and navigated the company through extensive sanctions in your largest markets and some in California, too. Give us a sense of the operational enhancements you've made. I mean you've gotten out of all of these sanctions at this point. What are the last being operational enhancements that are going to set you up for the next chapter that you put in place over the last 12 to 18 months?

Sure. Well, one of the things I've said to our team and I said more broadly to the market is that one of the things that makes a PACE program very unique is that we're both a provider of services and we're a payer of service. So just as we need to be the very best at community-based primary care and geriatric care, we also have to be a great payer of care not unlike the other managed care organizations where there's a set of capabilities and competencies that are necessary to be successful. So I think the lasting improvements we've made in many ways focus on being a great provider, but also building these payer competencies. And I really maybe think about it into the way we work and the changes we've made there. We've up-leveled the talent at virtually every level of the organization. We still have a lot of work to do, but we've really focused on making sure we've got the right talent and all the right roles. We focused a lot on redesigning and improving how our interdisciplinary team works together. At the core of a PACE model, you have 11 individuals that work daily together on all of the cases that are a part of our business. And how those 11 interdisciplinary roles communicate, how they document the care, how they follow up on care, how they use the system. We've sort of, in some ways, sort of transformed that entire operating model via the interdisciplinary team. We've also established what we call a triad operating model, which is this notion of we have 3 leaders in each of our centers that share responsibility results. And that's the sort of the center director, which is more of an operations leader the medical director, which leads all of sort of the physician-driven clinical care and then the nursing leader who drives the nursing care in the clinic itself. And so we've built an accountability model with a very clear balanced scorecard of how those 3 individuals communicate and interact, et cetera. And that's serving to just drive much more accountability for results, much more accountability for compliance in the organization. We've implemented a, we call a 5-pillar scorecard. You can kind of think of it as a balanced scorecard where we look at participant satisfaction, we look at employee engagement. We look at our compliance audits on a monthly basis, which we do across the entire company. We look at a set of quality measures, we look at financial measures, and we look at sort of growth. And so our entire organization is now anchored around that balanced scorecard, and it's driving sort of lasting improvements. So the way we work as a leadership team and as a broader organization has been completely transformed in the last 16 months. And then on the tools we use, we made a large investment in Epic, and we've got more than half of our centers up on that. We're expecting to have Colorado up on that, possibly in just the next month or 2, our largest market. We invested in a home care system, access care that helps us integrate our -- more of our clinic-based care with home-based care. We've got better tools for recruiting, better tools for transportation. And so in some ways, we've sort of created industrial strength, technology and tools that are going to allow us to scale and grow much more efficiently and drive productivity. So we really transformed the company is how I would say it. And we're just running the company better than it's ever been run.

Yes. With that context, I mean you've done a lot over the last 18 months or so. You had a comment on the last earnings call that the hard work of performance improvement begins now. So what does that mean in that context? What's left to do to really drive operational performance?

Well, I think the best way to think about it is our mindset as a company has just been laser-focused on compliance, which in anyways is operational excellence. And so much of what has driven our decision-making for the last 18 months has really been about ensuring we come into compliance so that we could have the sanctions removed, which we were successful with. But then ensuring that we have an enduring and durable compliance operating model. While that leads to performance improvement, I would say we're just now really leaning into how do we really improve the unit economics of the business? How do we improve our patient satisfaction, our employee engagement? How do we improve our health outcomes? And then I think the area that we're probably focused on the most is a set of payer capabilities, InnovAge as a long-standing provider was much more focused in the past on the provision of care. Now we're really looking at our provider network management and how the negotiation of our provider contracts, we're looking at what we call resource management, which is more a candid kind of utilization management and trying to wring out unnecessary services in sort of health care utilization. It means getting better at risk adjustment. It means getting better at negotiating actuarially financially suitable rates for the risk that we carry. It means having better systems to pay claims so that we can pick up on fraud and abuse how we can pick up on overbilling. All of those things are really going to have a significant impact on our medical costs over time. And so I think moving from more of a compliance orientation to putting a foot in the canoe, if you will, of performance improvement is the big transition right now and just trying to get much better, much more productive, getting the most of Epic as it relates to productivity and staff efficiency and staffing ratios. So we're really starting to lean into those things that are going to improve the financial performance of the company.

Okay. That's really helpful. I'll come back to some of the kind of payer capabilities that you just spoke about. First, just clinical labor, I mean, we're just in this environment where it's tough to find staff. Where are you in terms of filling critical roles and just your staffing, both on the clinical side and also nonclinical?

Well, I think we've struggled. First, I'd say we've struggled with all of the same challenges that others in health care have as it relates to finding staff and retaining staff, and that was a big challenge for us early on. But in recent months, we've made a lot of progress on addressing staffing challenges. We've addressed some wage gaps, which kind of have surfaced in the organization over time where you have gaps between hourly rates in the market and what we are paying internally. So we've had to address some wage gaps. We've built an internal recruiting team that's really starting to get its stride now, and it's allowed us to reduce our reliance on higher cost recruiters of talent. Right now, I think the three primary roles that are giving us the most challenges. It's always physicians. Physicians are -- there's only so many geriatric oriented physicians in the market, and we have to work hard to find them nurses sort of a perennial challenge for any company that's doing care in the center or a community. And then lastly, home care staff. I'd say of the three, the home care challenge is probably the greatest. We hear the same thing from a lot of the larger home care companies. But we've done a great job in recent months of building a strong staff. We've made some wage adjustments that have really, I think, helped us retain some of our people and attract new people -- and I feel like we're -- every day, we're spending less time worrying about are we adequately staffed. I think we're in a position now where we've got what we need, and we're retaining people at a better rate than we ever have. So our retention rates have gone up in recent months. And I think I'm hearing we're sort of probably at market leadership levels as it relates to employee retention and excited about the progress we're making.

Okay. That's really helpful. Let's go to Colorado. This was your -- this is your largest market. It was about 50% of census. You had the sanctions listed in January, first enrollment in March. I think that's a monthly thing. What are you seeing now in terms of pipeline? And how do you go back to the referral sources and reengage and just get the ball rolling on patient referrals?

Sure. Well, I think the first thing is, as you can imagine, when you're under sanctions for such a long period of time, you kind of worry about what's going to be the reception of the market when you come back -- when you're released and you're sort of open for business again. And I think we're really pleasantly surprised that there's a lot of enthusiasm in the community for us to be back in the market, enrolling again we're feeling a lot of interest in what we're doing in the market. So I think the receptivity has been great. As a result, the pipeline is definitely strengthening every month, I'm really pleased with the work we're doing sort of in a multifaceted marketing campaign that has allowed us to build a pipeline that's grown each month in turn, the actual enrollment ramp in Colorado is meeting expectations. So I think we're tracking well. One of the things that I think people do lose sight of in PACE is once we've identified a prospect and we've, let's say, qualified them according to our guidelines and enrollment rules, et cetera, we then, in any ways, hand them off to a state. And then the state goes through their own process of sort of qualifying them and they're sort of the final sign off. I think in Colorado, one of the things that's interesting for us is that the local state entities are having to adapt to new volume that they haven't been receiving for the last 18 months. So we're feeding them a lot of volume and they're working through that. So we're having to adapt a bit to their sort of rhythms of enrollment processing to allow us to meet all of our objectives, but so far, so good. Everything is going really well. I think it's going to still take a few more months for us to get sort of back to the point where we were prior to sanctions, but all indications are we have the right momentum.

Okay. I think the message coming off the third fiscal quarter call was that you could get back to pre-sanctioned enrollment levels by the first quarter that July to September quarter. You just said that enrollment is on track. Am I matching those 2 statements?

Yes, I think that's fair. That's definitely fair. There's -- right now, we're tracking to those comments. What I think I said was -- we think of enrollment on a net basis. There's members that we enroll and then there's members who disenrolled. They could pass away, they can move out of the area, if there's always a set of disenrollments. But that sort of net monthly enrollment level that we were achieving prior to sanctions, I think that we're on track to achieve that in the first quarter of our new fiscal year.

Okay. Perfect. Let's shift gears a little bit. Part of the story coming out of the IPO was M&A and de novos. Let's go to the de novo piece. You've got 2 facilities you're working to open in Florida. I think you need some licenses. You need review by CMS in the state and the 3-way agreement. What's the status of all of the work that needs to be done to open those facilities? And any comments on timing?

Well, I would just say that it's going very well. So we are tracking to all of our objectives. We've committed to getting those centers up by the end of the year. We're already starting to hire a few key people. The state has been a wonderful partner and very supportive of what we're trying to push is an aggressive time line to get these centers open. So we've had complete support by the state. I'll just say that everything is tracking according to our objectives.

Okay. Sort of first time going on offense in a way in a while. There were more states in the original plan. What's sort of the strategy around or thinking around when you're ready to open more?

Yes. Well, right now, our focus is very much on Florida and making sure that we just execute flawlessly on bringing up that business. And then as I've said before, we've realized we have a lot of capacity in our existing centers. And so job one is to fill the capacity in our existing centers as much as we can because it's obviously a much lower marginal cost of growth for filling those existing centers. But in terms of new centers, I think as we were coming into -- before the sanctions, the company had a very laudable list of de novo market entries. And many of those, while they get sort of sidetracked as a result of the sanctions we're still very interested in states like Indiana and Kentucky and Ohio. Of course, we think there's more opportunity in California. There's new states like Texas that we follow closely and are very interested in. So I would say we still have a very credible pipeline of new markets. We want to get Florida right because Florida will allow us to unlock the other markets just due to the fact that it shows that coming out of sanctions, we can deliver on a commitment to a state. We can do it right, and that's just going to enhance, I think, our reputation in the market to be able to be a partner states.

Okay. Okay. Good to hear. Let's talk about the overall growth profile of the -- well, census growth will leave reimbursement aside for a moment. I think you said mid-single-digit net growth in states that were not sanctioned, then we have probably accretive growth relative to that in Colorado and these markets that were sanctioned plus Florida and that will be accretive as well. How should we kind of put those pieces together and think about over the next 12 to 18 months with the growth profile of census might look like?

Barb, you want to start right here?

Yes. So we haven't released guidance yet, but just putting those pieces together, I think you're thinking about it absolutely correctly, Jamie, in that we -- as Patrick said, we have a lot of capacity in our existing markets, Colorado, having been on sanctions. We've got a lot of opportunities. So likely there'll be some accelerated growth in that market, the same with Sacramento. And then the rest of our business in those single digits as well. There's just lots of opportunity, and then adding on to that to be accretive will be the de novos. So I think you put that all together. And I think we'll see a bit of an increase early out of the gate in terms of growth because there's a lot of opportunity, and it's a lower base. But then we think it will level out in those mid-single digits.

Okay. Let's go to reimbursement. First, high level. I mean what's the reimbursement environment like for pace, both CMS at the state level? Just any comments on that? And I guess one risk we think about is it's not like states are swimming in money. So how should we think about the sustainability of the reimbursement environment and then of some specifics on what you're actually seeing, but maybe, Patrick, you can...

Yes. I would say that we, as a company, are getting much better at sort of making the case to our regulators of what's the right risk to rate alignment? And I sort of think about it in that there's a rate for every risk and it's our job to make sure the states understand our total cost from a medical perspective. Clearly, there's some inflationary factors that factor in the medical and the sort of the operating side of the business that we're pushing very hard with our states. What I would say is states do have a duty to ensure rates are actuarially sound. And we know, to your point, states are not swimming in money but we also know that companies like Molina and Centene and United, even sort of in the most challenging periods have been able to work with states to get actuarially justified rates. And so we think the same should be true of pace. It's not easy, managed traditional Medicaid managed care. It captures a much more significant mind share in a state than PACE does. PACE is generally a smaller program, sometimes run by a different agency than the agency that runs Medical managed care. But we're starting to see a lot more cross-pollenization, and we're starting to make similar cases to justify our costs in subsequent rates that Medicaid managed care is. So I think we're making progress, and we've got recent examples of where the right cooperation with states using talent in our organization that have an actuarial background to make those arguments is helping. There's never any guarantee and states can be very arbitrary on where rate ultimately falls. But I think there's some good examples in and Barbara, why don't you weigh in, of just where we're making progress. And so I don't I want to have confidence, and I do have confidence that you may have years where you have some imbalance between rate and risk because there's always a delay in terms of looking at past experience and setting rates for the future. There's always -- but on average, we should plan to be paid for our risk.

Yes. So a couple of specific things. Relative to CMS and Medicare rates, much like MA plans, we already know what our calendar year '24 rates will be in the low single digits, so similar to the MA plans. And in all of our states except California, they're all in a fiscal year, July 1 fiscal year. So as Patrick indicated, we're right now in the throes of having those conversations. I think the difference is we've been more active, I think, in those conversations and really trying to demonstrate as Patrick said, our costs and our profile. And we're seeing some good indications, none of its final yet. And so we'll -- a few more months, we'll have some more finality, but we're seeing some good receptivity to us demonstrating our costs and our risk profile.

Okay. Okay. Let's go to the margin profile of the business. You mentioned unit economics earlier. Margins are just pressured over the last couple of years. How should we think about just margin recapture and the components of building back to higher margins?

Well, I think it starts with growth and sort of filling that capacity in our centers, especially in a place like Colorado, which dominates sort of our profile. So I think we're adequately staffed in that state. In fact, we have some, what I would say, staff that's going to allow us to grow and leverage at a very low marginal cost because we've staffed up for the sanctions, and we've staffed up for the compliance and oversight monitoring. So I feel like growth is sort of the primary ingredient. I think we've got -- we know people continue to -- they want to hear the answer of how much of that cost buildup was temporary versus permanent. And it's still early to tell that because the monitoring oversight post sanctions is still fairly significant. And so we're still carrying a lot of those costs. But I think by the end of the calendar year, we're going to be in a place to really understand our overall cost structure and what was temporary, what's permanent going forward that we need to address. And then with the Epic, we made that investment because we believe that we should be able to do more with less. It's going to help the organization be more efficient. Now the reality is, I've always said hold up at constant, just sort of hold that decision constant, it's going to cost more to operate the centers now than it did presanction because we need to make sure that we're able to maintain our compliance. But I think growth plus sort of the impact that Epic will have plus the impact of all the other things that I mentioned we've done to the business, I think it allows us to get back to what you would consider that target contribution margin that we saw 20%, 25% prior to sanctions. Barb, any weigh?

Yes. No, I think it's a combination of all those things. It's the revenue absorbing that capacity. It's the improvements from clinical value initiatives, the payer initiatives. I think what we've said in some of the prepared remarks, the composition of our margin may be a little bit different going forward, but there's a lot of positive things that are going to offset some of those additional costs, and we do believe that we'll get back into that normal range.

Okay. I get the growth piece in leverage and you've got some risk in balance right now with the way mortality is taking out some of the -- you've had growth in acuity. But the piece I want to focus on is just the payer initiative and clinical value initiatives. How much opportunity is there to drive down external provider costs? And how should we think about the cadence of seeing meaningful progress there?

Yes. When you think about just sort of the rough order of magnitude of what a company should be able to achieve. You think about the Medicaid managed care companies. This is a core part of what they do. And they're probably looking for a 1% improvement on medical cost each year. That's sort of probably what they're targeting. And I think given where the company is and how nascent our capabilities have been leading up to this point, whether it means how we manage our provider networks and the rates that we pay our providers -- are third-party providers that provide care, whether it's hospital, physicians nursing facilities, et cetera. The mix of where our population is between the community, assisted living and nursing facility, permit nursing facility. The cost structures of each of those 3 are very different and how we manage that effectively and manage each of those settings appropriately. That's going to have an impact on our cost. Risk adjustment is an area that we came out of the gate strong. There's been some low-hanging fruit that we've executed on. And now we're starting to build the discipline that the same larger, well-established managed care organizations have around risk adjustment. And I think that that's going to have an impact. Resource management, more about sort of how we manage inpatient visits. I think we have a lot of opportunity on ER utilization. The better the interdisciplinary team is operating and the better the communication is throughout the system. If we can stop ER visits, it stops inpatient admissions, which stops SNF admissions, which cause a decline in people, which can move someone from a home to an assisted living. That sort of virtuous cycle is where we're focused from a resource management perspective. and I think we're making a lot of progress. And then claims payment, an area of -- there's a lot of science that goes into paying claims accurately so that you're not overpaying for services. And we've identified a few areas. It's something that straightforward is hospital DRG's. We now have a process in place where we're auditing every admission and every payment from a DRG perspective, and we have identified over payment. And so we're cleaning that up. And so I think the notion of targeting 1% of medical costs over a year or 2 period for us is a really reasonable expectation.

Okay. Let's talk just shorter term cost structure on marketing spend as you ramp back up in Colorado and Florida. How should we think about that? And then where does that ultimately shake out in percent of sales terms or is that something that you'll find leverage on after you get back to kind of the new run rate?

Yes. No, I think it will peak a little bit as we ramp up and not only our base business but with the de novos. So we know that there'll be some expenditures there in those new markets, historically, the 3% to 3.5%. And I think it will be a little bit on the higher end of that range initially, but I think it will settle back down probably to the lower end of that range once we get ramped up in Colorado, Sacramento and the de novo.

Okay. And SG&A, Patrick, you've been pretty clear you had to be discipline during this period. How should we think about leverage opportunities on SG&A going forward? Are there things you need to -- that you haven't been investing in that you need to add back? Or is the profile on SG&A kind of sustainable?

I think the profile in SG&A is sustainable, and we're endeavoring to improve that profile. And if you look at some of our internal initiatives right now, we have a lot of focus on sort of just cost excellence in the company, especially in what we would maybe refer to as sort of corporate shared services, trying to rightsize those in a way that provides maximum value to the operations of the center. I think there's opportunity there, and we're really focused on that now. So I think I feel good about the SG&A profile going forward.

Okay. And then just longer term, how should we think about where margins can go over time? There were initial targets coming out of the IPO. Are those realistic and over what time frame?

Yes, I think they're realistic. I think for the previous comments that we made, the composition may be a little bit different. It's not going to happen overnight. But the combination of all these initiatives, the growth and all these cost and payer initiatives, we believe that, that range is still achievable over time. Not going to happen overnight, extended quarters before that really matures.

One more kind of going back to a previous discussion, but the de novos, can you remind me just how much dilution operating losses, where we'll get to a breakeven point into next fiscal year? If that's the right timing and just how to think about what Florida is doing to the P&L at the moment?

Let me take it.

Yes, please.

So typically, the de novos will start generating positive central level contribution margin just on the other side of a year. So not likely in this fiscal year because we're not -- as Patrick said, we're very focused on getting this open by the end of this calendar year. But we feel good about that model that on the other side of the first year, the de novos will contribute positively to the center level contribution margin be accretive there. There's -- and in part, we talked about this all the time. We're very deliberate where we place those de novos. We know what the market is, the market density. There's a lot of planning that goes upfront in terms of those markets. So we think they'll be -- they'll continue to be accretive on the other side of the year.

Okay. Last one for me. Guidance has been suspended for a while. You're coming up on your fiscal year. it seems like it'd be a good time to reintroduce guidance. Is that a reasonable assumption? Or how should we think about when you'll be ready for that?

Well, I think we're -- every day, we're getting more comfortable with sort of the time line guidance. I don't want to commit to the first quarter -- or to the committed guidance on our new fiscal year, but that's certainly our goal and objective. And if we -- if we're not providing guidance, it's for a good reason. But I feel like we're tracking well and understand the market's desire to have clarity, and we're committed to providing it.

Okay. Perfect. Well, thank you so much for joining. And thanks, everyone.

Thanks.