LifeStance Health Group, Inc. (LFST) Earnings Call Transcript & Summary

Welcome to the first day of the conference. My name is Craig Hettenbach. I cover the digital health space for Morgan Stanley. Very pleased to have with us LifeStance today, Chairman and CEO, Ken Burdick. So Ken, welcome.

Thank you.

Before we get started, just to read some important disclosures. Please see the Morgan Stanley research disclosure website www.morganstanley.com/researchdisclosures.

So with that, Ken, we're just past the 1-year anniversary of you joining LifeStance. So I thought we'd start with, number one, kind of what led you to the company? And then number two, we can talk about organizational changes that you're helping to approve upon.

Sure. So this is about LifeStance, not about Ken Burdick, but I will just give you a little bit of background. I was on the payer side for 40-plus years. And I was running a company called WellCare, which was acquired by Centene. I sort of did about a year of that transition, and I was retired. I retired for 19 months, and I get this question a lot. The only one I don't get the question from is my wife because what she observed was even though I was busy, it didn't seem like I was as fulfilled. And she's right. She knows me pretty well after 37 years. And so I'd say there's 3 things that brought me to LifeStance. Number one, I really did miss being a part of a team that was just trying to make progress every day, moving the ball forward to use a football analogy. Number two, I learned about 10 to 12 years ago, how critically important mental health is. It's because at a company that was long since acquired by Aetna, Coventry. They put me in charge of both the behavioral subsidiary and Medicaid. And it just gave me an incredible perspective in terms of how for many years my colleagues and I were missing the importance of treating mental health as a comorbidity to physical health. And then the third, I really love the business model that the founders had created. The notion of using your insurance to access care makes it so much more affordable for so many millions of people at a time when as a country, the demand is unprecedented. So those are the reasons.

Great.

Now in terms of the second part of the question, the company had phenomenal growth for its first 6 years. And so I was brought in very specifically to sort of take all that growth and try to bring some large company sort of systemic practices. When you grow from nothing to oh, 7,000 clinicians and 9,000 total employees, you just can't run the business the same way. It can't just be about relationships. It has to be about putting systems and processes in place. So that's what we're doing. I'm biased, but I believe that most of the organization are responding really well because we have more structure than we had before. I think once we roll out a multi-year strategic plan that's really going to help because I would say, for the first 6 years, like most entrepreneurial businesses, everyone just ran the 100-yard dash every day. And now what we're trying to do is say, we are actually running towards something, and that's the desired state.

Great. Well, that's a great intro. Maybe just building off of it and just touching more broadly on the behavioral health market. There's many different solutions out there. Some are virtual only, some are out of pocket. Can you just touch on what differentiates LifeStance in the marketplace today?

Sure. I think so many of the mental health, behavioral health companies that spawned in the last 3 years are virtual only. So the first thing that I would say differentiates us is we are hybrid. So we will meet the patients wherever they want to be seen. It can be in person. We have over 600 physical locations, and we can talk about that. That made a ton of sense when 95% of our visits were in person. It didn't make a lot of sense when with COVID, it flipped and all of a sudden 5% of our visits were in person. But we've kept that physical footprint because every quarter, we're seeing a sort of a steady movement back toward in person has a preference from the patient. So I would say the hybrid approach is number one. Number two, we have multiple license types, so a multidisciplinary approach, which allows us to meet with a patient and then decide what's the appropriate level of care. Is it -- do they need medication, in which case, we're going to use a psychiatrist or a nurse practitioner. If not, then they can meet with a psychologist or a therapist. And so that multidisciplinary approach, I think, is huge. It allows us to refer sort of within the system to make sure that we've sort of customize the right care for the right diagnosis. Third is we almost exclusively use commercial insurance. So people, as I mentioned earlier, get to use their benefits and they're not paying out of pocket, which I didn't realize until I joined LifeStance, how common it was for people to have to pay for their metal health care outpatient out of pocket. It's more than 50% of the time. And that puts a real sort of constraint on people's ability to access care. I'd say the last thing beyond our size, which is certainly a differentiator. But I'd rather talk about the patterns that we use working with primary care to get referrals. So I think one of the challenges that some of the early stage companies have had is the B2C, the amount that's spent on customer acquisition, and we are really fortunate that we have forged these referral relationships all around the country. And so our cost of acquisition is de minimis.

Got it. Great. And then when you think about overarching industry trends, you talked about visits are starting to happen more in person again. And so you're positioned there. Are there other industry trends you're watching that you want to be on the right side of the next 3 to 5 years?

Yes. Certainly. It's a slow trend. It was slow in the physical health space, and it's certainly lagging behind in the mental health space, but this whole focus on outcomes and value-based care. Having spent decades on the physical side, it was always so obvious, but it's been so difficult to move from a fee-for-service to a pay-for-value. But I think that sort of on the heels of the macro trends on the physical side, I think that's where we need to get to with mental health. And so one of the things that we're trying to do with these relationships that we have with primary care is do some real studies to figure out what the impact is. So historically, in mental health, you've used these sort of questionnaires. There's the GAD-7 for general anxiety disorder. There's a PHQ-9, which is for depression. But it's not as compelling as being able to say because somebody has received therapy, they're showing up more often at the office or they're showing up more at school, et cetera. So starting with that and then looking into what other patterns of behavior have changed. Are they seeing their primary care physician more often? Are they spending less time going to the emergency room or even an inpatient setting? And then ultimately, the holy grail for me would be when we can do enough work with the physical side of health care to demonstrate that when you're effectively managing both the physical and the emotional well-being, there's a reduction in total cost of care. I have no doubt in my mind, that's true, but now we have to prove it. And that's going to take a while.

And access is something that's very important, particularly for mental health. And so maybe you can touch on just the ability what you're able to do there from an access perspective? And then to your last point, it's going to take a lot of time, like what are we looking at in the next 12 to 18 months? So when would you have proof points?

Yes, I wish it was 12 to 18 months. I don't think that's realistic. It's probably 3 to 5 years just having seen this evolve on the -- again, on the physical side. The -- it's going to take a level of collaboration that really hasn't existed between people focused on somebody's emotional well-being and people focused on their physical well-being. And so it's putting that together. It's doing sufficient studies. It's doing the right attribution and then having significant data to support that hypothesis of mine. But again, I've seen it so much in managing both Medicaid and Medicare populations that -- it's just a matter of having the rigor to do the study, having the scale that we have to produce statistically significant data.

Got it. So one of the things from an efficiency perspective and coming from your payer background, it was a mind-boggling number of like 450-plus or so payers that LifeStance worked with. I know that's something been one area of focus to bring that down. Can you talk about how that impacts the business? And then I guess that's step one. Like step 2 would be how are you making sure what the payers are still working with that you're getting the value that you're delivering on?

Yes. So when you're in a hyper-growth mode, it's like every contract is a good contract. So we would just sign them up, sign them up, sign them up and lo and behold, we had hundreds and hundreds of payer contracts. We had more payer contracts that I thought there were payers in the space, having spent 40 years on that side of the business. But if you have a national payer, oftentimes, we have a separate contract in every state. So that's how it became so large. So the motivation here was part of a broader plan, which is the company was unbelievably successful in growing. But now we had grown, and we had to get more organized, and we had to streamline and simplify that we could drive operating leverage. And one of the ways that occurred to us early, early on was [indiscernible] Let's look at these payer contracts. And I don't know what that number was, let's call it, [ $450 million ]. What kind of utilization do we have for each of these payer contracts? Because it costs something in credentialing and then loading the rates every time they change, et cetera. So it was largely a simplification play and we reduced payer contracts by 1/3, and it has less than a 1% impact on our revenue and our visit volume because essentially, there was nothing going on with that contract. Now as we continue to look at it, we're looking not just at the volume, but what is the nature of the relationship. Do we work well together on credentialing because that's a big deal, getting a clinician credentialed so they can see patients? Do we have administrative obstacles that get in the way of seeing patients? And then thirdly, do we have a reimbursement as appropriate for the work that we're doing? So those are the 3 criteria that we will use going forward. I don't expect we will have the same volume of payer contract reductions that we've had in the past year. But I expect we will continue to sort of work away at making sure that we have high-performing contracts.

I want to shift gears just to clinician growth and certainly for an industry where there's more demand than supply. I think organically, you've been growing kind of mid-teens. So very robust growth in clinician net adds. Can you talk about -- you mentioned before some of the primary care relationships. I know you're doing other partnerships with like women's health and chronic care. Just let's dig into a little bit just the growth in clinicians that you're seeing and what's helping to drive that.

Sure. The -- just to set the stage. So in the first 6 years, we grew about 60% organically, literally hiring one clinician at a time and about 40% through rolling up independent mental health practices. Currently, we are only growing organically. I wanted to put the M&A on hold for a bit. I wanted to fortify the existing platforms that when we went back and started doing acquisitions again, like on day 1, we could bring them on to our robust platform and not miss a dime. What was happening in the early years was too much variation was allowed. So you acquire a practice, they keep doing things their own way. And again, coming from fairly large companies, I've never seen that work well that if you aren't able to standardize and drive some consistency, you don't drive the operating leverage that's required to run a sort of robust business. So we're working on that. We are growing our clinicians. I would say largely because they love the fact that we can fill their appointment schedule, and that gets back to referrals. We also try to give them a great deal of independents and flexibility. So even though they are W-2 employees, which is actually another differentiator for LifeStance, we don't tell them they have to work 40 hours. They can work whatever schedule they want. Obviously, they are only paid for the visits that they conduct. But that has been really, really valued by our clinicians. It's one of the reasons why I think we've had so much success. And just to put that in some kind of context, we probably hire 1,000 or so clinicians every year. When I share that number with people, they're just blown away, but those gigantic numbers. As it relates to these referral partnerships, there's several huge benefits. Number one, I've already talked about by working closely with primary care, you mentioned women's health. So we're trying to find those partners where the patients that they are seeing have a really strong combination of physical and mental health needs. So menopause is one example. And we're sort of the exclusive provider of behavioral health for a menopause company. We're doing the same thing with people that are on dialysis. So we work with U.S. Renal Care. Those are just sort of obvious examples of you can't treat the person well if you're ignoring the behavioral aspect of the conditions that are being treated. So those are a couple of examples. I think we're going to do a lot more of that going forward. Right now, it's a matter of we've got a nice pipeline of activity. It's getting people to focus and prioritize because this is sort of a new area of development.

Got it. And on the clinician side, a couple of years ago, the company has hit with some turnover, also broader industry across health care, we've seen that, but it has since stabilized. And so can you talk about just the angle of turnover, kind of what you're seeing? And then what are some things once the clinicians are on board that keeps them there at the company?

Yes. So you're right. It has stabilized, but we still have a fair amount of turnover, and I think that's a function of this disconnect between supply and demand. If you are a mental health clinician today, you have a multitude of options. We think we are the best fit for that clinician that wants to exercise more autonomy that sort of has that ownership mindset, which is why we've been so successful with acquiring independent practices. But it's -- so turnover is real, even though it has stabilized. The things that I think we can control. We've got to make sure that we onboard our clinicians well. We have to make sure that we fill their appointment schedule as soon as they're credentialed. And then we have to make sure we're wrapping them with a set of tools and processes, things like billing and appointment scheduling and credentialing that are sort of best-in-class that they can't see elsewhere in certainly, they couldn't have experienced in a small mom-and-pop independent practice, which is typically where we're pulling our clinicians from.

Got it. Maybe just building on that, because I think even before you came on board [indiscernible], there were some initiatives in place from a productivity perspective and you have that OBIE kind of online matching. How is that going? And are there kind of proof points you're able to see internally? I know you've shared some stats with the Street in terms of lower cancellation rates and things like that, but can you give us an update there and just overall how productivity is performing?

Sure. So productivity has improved. I think there's still more room to go there. But you mentioned probably one of the indicators that we're most excited about. In a world where people have to wait weeks and weeks and weeks to get an appointment, I couldn't understand why no show cancellation rates were so high, but they're high across the industry. Through a more concerted effort and trying to make sure that we got the right clinician with the right patient, we've been able to drop that from 14% to 10%. 10% still feels high, but it's a strange thing. I guess it's somebody gets up the nerve to go ahead and see a counselor and if it takes more than a week or 2, they can change their mind and that happens with some regularity. So that's one issue. The OBIE is our online booking and intake system, and that has been fantastic. That has helped reduce the cancellation rate, but it's also created a much better experience for patients trying to access mental health. To be able to do it right, online has been great, and we're looking to just continue to expand that by making the process easier and easier and easier for patients.

Got it. I want to pivot a bit. I know data and AI is kind of all the rage for the markets today, and I know more broadly this year for LifeStance. You talked about this is a year of investment in terms of the scale of the business. So when we think about data or AI or tech investments, what are some things you're doing? And what do you think is the impact on the business over time?

So we're doing some really basic technology investments like a human resource information system, which -- when we were just so focused on hyper growth, we weren't thinking about how do we manage all that. So that's not what you're really talking about. What you're talking about is how can we use machine learning and how can we use artificial intelligence to run the business better. And one of the things I'm most excited about is some pilots that we are doing to help our clinicians do their documentation and it is machine learning, filling out the notes is so critically important, and you're typically doing that right after the session. So you have a limited amount of time, you're trying to do it the best of your ability. And if we can make that far more efficient and effective and accurate, that will be a great service, not only to our clinicians, but to their patients. So I would say sort of automated notes through a machine learning tool. And then when I think about some of our highly repetitive practices, some of the billing that we do, I think there's great opportunities to use AI there as well. And we don't have investments underway today, but I expect that once we have streamlined our end-to-end processes, we have done some basic automation. That's really the next frontier. So I think that's only like a year or 2 out.

Got it. I want to touch on just the footprint. So on the one hand versus virtual, of course, you have an advantage. You mentioned 600 some-odd centers. Earlier this year, the company communicated to the Street that you're going to close 30 to 40 centers. Can you just talk about that process? It's maybe on the umbrella overall more efficiencies, but just how that's going? And is this going to be an annual assessment in terms of as you look at your footprint and measure that?

Yes. Just to show how far the company has come. In its early years, we were sort of communicating our growth by how many centers we had. And that probably made sense as a very crude way of sort of using a proxy for growth. Once the pandemic hit, and we saw this huge move from in-person to virtual, in my opinion, we had more space than we needed. So what we're doing now is we're trying to be really thoughtful. We're trying to think long term, we don't want to overreact and cut back too much. So we are dramatically limiting the number of de novos that we are doing, and we have consolidated space. In addition to the 35 that we announced in the remainder of the year, we think we probably do another 35 or 40. And the criteria is pretty straightforward. It's one where there are very few people utilizing the office where we have another office nearby and where the office is just not up to our sort of physical standards for security, et cetera, because so many of these -- like I said, we did 86 acquisitions. And we want to have a consistent look and feel and professionalism to our space, and some of them fell sort of under that benchmark. And so I do, to your question, expect this will be an ongoing exercise. I don't know where we're going to end up. We don't need 600 physical locations. We think it's a huge advantage so we will have hundreds but I would expect that over time, we will move to larger footprints. We've got more clinicians. Our clinicians tell us they love the comradery that exist when they can interact with their colleagues. And so if you think about having a multidisciplinary practice, if you're really going to reverse one of your patients to somebody else who you think can better treat, it's great if you have a relationship with them versus just sort of looking up on a screen to see what their credentials are. So our clinicians are telling us that a larger practice works. It's obviously more efficient in terms of the staffing that's used to surround the physicians, whether it's a front office coordinator or a medical assistant, et cetera. So I think we'll just continue to look thoughtfully. As we're looking at everything across the company, we're just going to be more focused. We're trying to be more disciplined and we're looking for sort of obvious efficiencies without in any way impacting the patient experience.

Got it. I have a few more I can get through. But if there are any questions from the audience, you can raise your hand and we can get the mic to you. All right. So maybe just touching on the financial metrics, right? As I mentioned before, you guys have been very clear this year is investing in the business and that margin expansion should follow. You're at roughly mid-single-digit adjusted EBITDA margin for this year and have said exiting 2025 at 10%. Can you just talk about the confidence in moving margins to that? And then on a longer-term basis, again, not to get ahead of yourselves here, but just how do you think about profitability metrics and what makes sense for a business like this?

So I can speak most effectively to the near term. You're absolutely right, in '23 and '24, we've been very clear we're going to make the investments so that we have built a platform that allows us to grow 20-plus percent a year sort of in perpetuity because we think that's the opportunity that's out there. But even to date, after 1 year, I can see enough opportunity that we're going to have some margin expansion in '24 just because some of the efficiencies that we've already created some of the simplification standardization. With even greater margin improvement in '25, I remain very confident that we will exit '25 double-digit margins. In terms of where we go from here, it's likely going to depend on a couple of things: reimbursement from payers and the mix of services that we offer. Primarily now we are doing talk therapy. We do some site testing. We will likely do more site testing. We don't do a lot of group therapy. I think that's another great opportunity going forward. And so I think it will be sort of the payer reimbursement and the service mix that will determine how far into the teens we get ultimately with our margins.

Got it. And I do want to come back to M&A, like you said, when you came on board, it was hit the pause button, which makes sense to kind of get the operations underneath you. What's a reasonable time period in terms of when you feel like the business will be at a place where you can return to M&A? And will M&A look different versus when the company scale?

Yes, that's a great question. So this is going to be overly simplistic, but if you think about what we've said '23 and '24 are investment years, I would suggest that '25 is likely when we get back into the M&A game. And when we do get back into M&A, to your question, I think we're going to do 2 types of M&A. Historically, we've only done tuck-ins, which is basically you bring in clinician practices. I believe we have reached a scale where there's likely an opportunity for us to acquire capabilities. So instead of building it ourselves, we can find somebody that's already built something that we could leverage Day 1 and achieve some significant synergies. So I don't have anything on the radar screen right now. But I suspect that if you look at us over the next 3 to 5 years, you're going to see both types of acquisitions. What I'm thrilled with is even with no acquisitions, we're achieving that very high teens, maybe even 20% top line growth, which means when we get back and we can sort of fuel that with M&A, we are setting ourselves up for a really nice growth story.

Great. Well, as we wrap here, Ken, just a lot of change underway and particularly operational improvements and enhancements. As investors look out the next 12 to 18 months, what are some things to kind of keep an eye on in terms of the LifeStance story? What do you want to be executing on over that period of time?

Yes. I think investors ought to focus on what we commit to doing for '24. I'm proud of the fact that over the last several quarters, we have hit our commitments each and every quarter. I think investors should expect we will continue to do that. And so our guidance for '24 ought to show some meaningful margin improvement, and that should accelerate further in '25 when we start to reap the full year benefit of these investments that we've been making in the first couple of years since I've been there.

Got it. Okay. Well, I think we're out of time. So thanks, everyone, being here, and thanks for your time, Ken.

Thank you, Craig. Appreciate it.