ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

All right. I guess we can get started. So we are actually kicking off our health care conference with this session, at least for our coverage. Again, Jailendra Singh, health care technology and distribution analyst at Credit Suisse. Thanks, everyone, for joining us. So we are kicking off our conference for health care tech, at least coverage with ModivCare. We have Dan Greenleaf, CEO; and Heath Sampson, CFO, for a fireside chat conversation. By way of background, ModivCare serves the most underserved by facilitating nonemergency medical transportation, nutritional meal delivery and personal home care to enable greater access to care, reduce cost and improve outcomes. We are doing this in a fireside chat format. I have some prepared questions which I plan to cover, but if any of the audience wants to ask any questions, please e-mail them to me at [email protected]. Thanks, guys. Thanks, Dan. Thanks, Heath, for doing this. Really appreciate it. So to begin, maybe, Dan, I mean, I think it'd be good to give a little bit more background about the company for those who are not that much familiar with the business model of the company. And during the process, if you can a little bit touch upon the social determinants of health, how that is becoming such a critical part of health care these days and why that has been your core focus, that would be great.

Yes. So thank you very much, Jailendra. Thank you for having us here. We also are very grateful for all of you who are participating here today. And a couple of things about the company. The company was founded in 1996. Up until very recently, it was predominantly a transportation business. And what I mean very recently, when I came on Board in December '19, the company, I would describe to you is the Uber of health care. The company historically have delivered around 75 million rides. It manages 30 million members or 9% of the U.S. population, predominantly Medicaid. 90% of our business is Medicaid, probably 10% is Medicare Advantage, but we obviously see that evolving as Medicare Advantage begins to expand benefits to include transportation, personal care and meal delivery. And at this point in time, we've been on a bit of an acquisition spree. We bought 2 personal care companies. We bought a -- the UnitedHealthcare's nonemergency medical transportation business. We've acquired a remote monitoring business. We also acquired kind of the gold standard in technology from the standpoint of our transportation providers. And then we also launched the meal delivery program that we're very, very excited about with a national partner. And so where are we? We are one of a kind social determinants of health company. And there's nobody else that's doing what we're doing. I think there's people that are attempting to do it, but there's nobody who has the access to this 30 million member channel where when you think about personal care, you think about transportation, you think about remote monitoring and food. Those call points are largely all the same, too. So as long as we continue to get accredited and we have that license to hunt, the case manager who makes a decision about transportation is the one making decisions about food, the one making decisions about personal care and the one making decisions about remote monitoring. So -- and the other thing I would also point out to you is like we have a very much a recurring revenue business model. Many of our customers we've had for 10 or 15 years. Our contracts are largely -- or have some form of capitation, which is approximately 85% of those contracts. If you think about the average length of service for a personal care member, it's 4 years. You have a length of service for someone on PERS or personal response system is approximately 3.5 years. The vitals monitoring is 2 years. So we're in a very unique place because of the patient populations we serve. And you can make the argument food or meal delivery is forever, depending on the patient type. So what does social determinants of health mean? I mean in its essence, it means that your ZIP code is the most likely predictor of your outcome from a health standpoint, not the clinical interventions. People have access to clinical interventions. But what they don't have access to is transportation, what they don't have access to is personal care, what they don't have access to is meal delivery, what they don't have access to is remote monitoring. And what we know is those things play every bit as an important role or maybe more based on the data than clinical interventions. And clinical interventions also tend to be episodic where the patients we largely manage are chronic. And so a very different model. Again, we're a one-of-a-kind company. We saw the opportunity because we have this unbelievable channel with 30 million members and again, 9% of the U.S. population. And I think we'll have access ultimately to another 24 million if you think about Medicare Advantage.

Great. That's fair. That's a good background. So you mentioned that historically, you focused more on non-emergency medical transportation, but over the past few months or maybe year, you have expanded into personal home care and remote patient monitoring. How much of that expanding into new areas driven by COVID making -- impacting the health care system, the way care delivery is being -- care is being delivered versus maybe a shift to more value-based care and your role in the ecosystem? Help us understand how much role COVID is playing in that transition?

Yes. No, that's a really good question. I'd say it's played a significant role because it's highlighted the inequities that exist in our health care system. And so if I think -- what do inequities look like? Well, transportation access is a major inequity. We also know that broadband, and we take all this for granted. That broadband is an inequity. And not just when you think about, okay, I've got an iPhone. Well, so what if you don't have a data plan, right? And so we have -- the gentleman who runs our food business owned restaurants. He was a franchisee for one of the large restaurant companies. And when COVID hit, he had 7 children show up at the McDonald's, they came with preprepared meals, and the only thing they were there for was to get broadband access because they didn't have it in their home. And so that's been highlighted. Food deserts are highlighted. Pharmacy deserts are highlighted. We also have all become very familiar with what occurs when somebody is socially isolated. I think we've all had our own personal experiences. So from my standpoint, I think COVID has shed light on this in a way that historically, I think we -- was underappreciated, if you will. So with that being said, when we got here, I got here in December '19, and I went out to JPMorgan and met with the One Equity team, and we were out there talking to them about a company called Results, which was really an onshore BPO, and we got to talking to them about the bigger picture around social determinants of health, around personal care, around food. And it just became abundantly clear that someone needed to step in and do this. And we also believe fundamentally that the country and CMS, if you just listened at what the last -- CMS' outline of what they're going to invest in, one is inequity and two is looking at the whole person that there was a real opportunity here to really become, again, one-of-a-kind value-based care business focused on social determinants of health.

Dan, I may also add that from a COVID perspective, health care into the home, right? It's actually [indiscernible]. And not just clinical care to add on what you're saying around social determinants of health into the home supportive care and the offerings that we currently have. So COVID has enabled that to happen and we know it works.

Yes. That makes sense. So clearly, I mean, you guys do create value for, of course, the end consumer population members. How about the value proposition to payers? I mean have you done any study, sort of analysis to find out how much in annual medical savings or some form of clinical impact your clients have seen over a certain number of years or something like that? Anything you can share?

Yes. I mean, there's been a lot of good work done here. I mean if we look at from the CareFinders business, they did work on reduction of falls and if you think about elderly and what an issue that is, they saw a 67% decrease in the number of falls as a result of things that the caregiver did. The other thing is flu vaccines. They're incentivizing us to ensure that the patients are getting flu vaccines. If you look at -- one of the things we really love about the VRI business, which we'll refer to in the future as ModivCare Monitoring is that they're so connected with that patient base. So of the 10 calls that they receive, 9 of them have nothing to do with vitals or PERS. It's around other things like food or transportation or personal care for that matter. And so we know that the data also supports because of this kind of constant interaction we have with that patient base, we've been able to drive things like ER avoidance. So -- and then the last thing I would say too, Jailendra, is that we've got programs underway with large payers looking at these components and delivering a value-based care solution. So we'll have even more data on these things that is going to be less fragmented than what I shared with you, but again, getting into a place where we're addressing these patients very holistically.

Okay. That makes sense. Maybe if you can spend a few minutes here on individual businesses. Maybe start with your nonemergency medical transportation business. Any color you can provide in terms of how the model works in terms of pricing structure, contract type and all? And I think at one big place, you talked about maintaining like more than 90% retention rate with states and MCOs. Help us understand like what drives that kind of retention level.

Yes. So I'll talk about some of the macro items and then I'm going to turn it over to Heath, who'll talk about some of the financial components of our model. On a macro basis, again, 30 million members, 9% of U.S. population. We contract predominantly with states and payers, and it's about 50% is states and 50% is payers. On the payer side, we've got about 6 payers that represent 80% of the business. I'll also point out that 5 of those 6 payers represent 80% of the Medicare Advantage business. So you can see like as Medicare Advantage continues to expand into meal delivery, as it expands into remote monitoring, as it expands in personal care, we are really well positioned to partner with them. So that's kind of the macro. I look at -- one of the questions I think you asked later on, Jailendra, was how do you score out the size of the market? Well, it's 80 million lives, right, roughly x $60 a year. That's it. There's your number for Medicaid. And so we get kind of a per member per year around that $60 and we're responsible for managing that patient population. So what matters to the plans? I think one of the things that was -- and Heath confers is what’s kind of our Achilles heel was automation. They want to make this member experience as fluid as possible. And I would say that because we were the biggest, we got away with stuff that I don't think necessarily made the members' lives as easy as it could be. We've made significant investments. We've got 400 or 500 people in tech now. And we're building out a best-in-class automated modernized business. 60% of our transportation providers are now digitized from 0 when we got here. We've rolled out a rider app. We've rolled out our member app in versions 2.0 and 3.0 and 4.0 are all on the way. We're integrating those apps with, for example, our food business too, so it becomes a one-stop shop for the member and a case manager when it comes to accessing either food or remote monitoring or transportation. So the other thing I would also say is our membership satisfaction scores are bananas. I mean they are best-in-class. You compare us to any other health care company out there, our membership satisfaction scores are best-in-class. So what does that mean? I mean if you look at -- so we look at on a scale of 1 to 5, 5 as you'd recommend a family member to our company, well, 75% of our members grade us a 5. 90% of them grade us a 4 or 5. And again, I do not think there's another health care company who has those kind of membership satisfaction score. So we're doing a pretty extraordinary job. And as we solve for this automation and modernization piece, given our size, and given our relationships and given what else we're bringing to the party, I just think it's going to be very difficult to not want to retain us. I mean because we do have the scope. We do have the scale. We've taken 20 years to build out this transportation network. And now we have the best technology platform. And I would really start thinking about us as a platform company. Like an Amazon, like a Google, we are an absolute platform company, given what we're going to be able to deliver to our members, our payers, our states, our case managers going forward. So with that, let me turn it over to Heath, you can talk about some of the economics.

Yes. Thank you, Dan. So for nonemergency medical transportation, the way it's contracted, whether that's managed Medicaid or Medicare or directly with the state, you typically get the entire state or a portion of the state and you're exclusive to that. So that's unique for NEMT. So a lot of the time, especially with states, they want the entire state. So you'll have a contract with the state from anywhere from kind of 3 to 6 years. And as Dan mentioned, we've had many of those for 10-plus years or then with an MCO, they're really evergreen and they occur -- continue to occur. And just briefly with the MCOs, it's primarily client satisfaction. So we've been in this for a while. So a big part of how we price these is based on all the data and all the trips we've had. So we have a really good idea based on the type of customer base or the type of service within that area, we know how to price that. So because of that, 85% of our contracts are capitated and 15% of those are fee-for-service. Within the capitation, there's some nuances between what's full risk and not full risk. But in general, we have exclusivity to that specific state or that portion of the state and 85% are capitated. And most of that we get paid on a per member per month basis. And then the economics you can see from a standpoint, we've been doing it for a while, basically rolls out to be after everything bottom line about the ranges of 7% to 10% EBITDA margins for us.

Okay. That's helpful. Just going back to Dan, your comments around the market size. I think you disclosed on like $4.3 billion of TAM in that market. Who are the other players you compete with? And anything you can share in terms of competitive landscape there?

Yes. I mean we compete with another company, MTM, who's about 1/4 of our size. There's -- another Southeastrans is another one that's kind of a fraction of our size. Veyo is a fraction of our size. So there's other companies out there, but I would also say to you that nobody has made the investments that we've made into social determinants of health. And I don't think there's anybody that's made the level of investments we've made into the modernization and the automation of the business. And so yes, they're out there, but I think they're going to be increasingly less important to what we're doing going forward because of all the other services that we're bringing to the member and also that we've got a best-in-class technology platform now.

Okay. That makes sense. Switching to the other business lines, primarily your personal home care and RPM. How are these contracts structured? Are they like rolled into your existing lease NEMT contracts? Or these are like additional contracts payers and states sign with you guys?

Yes. So on the personal care side, it's hourly. We get compensation on an hourly basis. The company averages on kind of right now at 30 million hours. I think as we come out of it, that number will be close to 40 million. But yes, it's an hourly basis, and then we pay the caregiver x amount, and the difference is what we essentially -- for all intents and purposes, we get to keep. On the remote monitoring piece, it's a per member per month. We get something for PERS. We get something for vitals' management. And then we also have, again, as I talked about these 2 contact centers, which we describe as E3, our care centers that are in frequent interaction with the patient. And there may be plans out there that say, "Hey, we would really like you to spend time focusing on this diabetic population." And they'll pay us some kind of per member per month for that as well. And as it relates to food, it's a meal. So what do you get? We get paid x amount per meal. Shipping and cost to get that meal is x and the difference is ours. So that's how it breaks down right now. I would say, Jailendra, ultimately, and this is one of the things we're working on with our payers is ultimately we're going to bundle all these services. We're going to bundle meals, we're going to bundle personal care, we're going to bundle remote monitoring transportation. You think about also on the personal care side, average length of service is 4 years, lots of dual eligibles. So if you think about where as a society, we really want to influence quality and cost, that's an area that's of high value to a lot of people. And so I think that's -- yes, I think that pretty much sums it up.

In the personal home care business, I mean, there have been a lot of discussion around wage inflation and the shortage of workers. Have you guys experienced any issues in terms of hiring caregivers?

Yes. I mean that's been a real issue. I mean we've been at 360,000 hours per week for quite some time. And the good news is, is our retention levels for our care workers are still at about 70%, which is well above industry averages. And the question is, well, why is that? Well, we -- because of the number of hours we have and the concentration and scale of where we are, we're able to create predictable take-home pay for people. That's what they want. So as it relates to wage inflation, we're not going to chase wage inflation. We just aren't going to do it. I mean I don't -- the type of person that wants to be a caregiver is very different than the type of person that wants to put boxes together at Amazon and -- or serve coffee. And so we don't think we need to chase wages and haven't done it yet, I really don't have plans to do it. The key to this business is all about recruiting. It's a simple business. It is recruiting and retention, recruiting and retention. It's getting the caregivers on board because the demand is there. And then it's about retaining them. And our retention levels are industry best. So that's what I would say about that. I mean I'd also point you to the recent jobs report because they did highlight health care. They did highlight home care and people are coming back to work. And this is the first time we've seen an increase in home care workers in -- I think it's since January 2020. So -- and then the other big bucket that we're very focused on is transportation. And if you look at -- I think there's 54,000 transportation jobs added in October. So we feel very good that people are coming back to work and that the types of people we are looking were over-indexed on stimulus and other things like that. And -- but we feel like we're in a really good position to start taking advantage of workers coming back to their jobs. I don't know, Heath, is there anything you'd add to that?

Yes. So on the personal care side, and you've said this too, we're down just because of not being able to get the people back to work anywhere from 10% to 30%. So the demand is there, but the unfortunate thing right now people aren't getting the help they need. So when we get back, it's just a matter of getting these people in the door and trained and then that should -- we should be able to fulfill that demand. So just it's an exciting place to be on that side of the business once we get the people back to work.

Yes. I think the demand is -- I think Heath and I think, in some estimates, it's 50% above the number of caregivers. So we just need to get caregivers onboarded. And again, I think the signals that we're seeing from the labor market are positive.

The other thing you noted on wage, with wages going -- could go up, typically, where we are located in the Northeast primarily, and there's examples, it's a direct example back to July of this year, New Jersey because of wage pressure, actually increased the reimbursement by $2.00.

[ An hour ]

An hour, yes, that's built into the way the contracts are structured in New York. Connecticut did the same. So in the Northeast, primarily and just in general with personal care, as wages go up, say, minimum wage goes up, typically, it follows with increased reimbursement.

Okay. That makes sense. Just let me get a pause here and see if anybody has any questions. Of course, you can e-mail them to me at [email protected]. S-U-I-S-S-E.com. I don't see anything at this point, but just I want to go back to remote patient monitoring. Is that like -- just help us understand a little bit more. There are a lot of RPM companies out there trying to get into government space, Medicare, Medicaid, some of them focus on few chronic care conditions, some more broad based. Where do you fit in that whole competitive landscape? And are there any specific chronic conditions which you try to be expert in? Just trying to understand the role you play in the whole RPM continuum?

Yes. So I think I'll just go through our service offerings, and then we'll talk about where we've specifically been involved in some instances. But I think diabetes is a great example of where somebody has had us focus on those patient populations. But again, you got PERS, which is for those of us who grew up in a certain time ago, it was the falling and I can't get up lady and she pressed the button. So that's one aspect. Vitals monitoring is another aspect of it. So think blood pressure, think pulse oximetry, those types of things. A third one is medication management. And it's a huge issue. And if you think about our patient populations, I mean, the -- you think you'll find the medications in 2 areas, one in a cookie jar and the other on boxes by the door. And again, you can start seeing where the coalescing of the aides and E3 and other things can help with medication compliance. And then the overlay of these 2 care centers that are staffed in some instances with nurses who are interacting with those patients all the time, predominantly because the patient reaches out for them. The fascinating thing that -- what's fascinating about it is that given social isolation and some of the other things, it's incredible what the patient will do from an outreach standpoint to us. And our Net Promoter Scores in that business is above 80%. And -- but again, as you start thinking about pulling these businesses together, so you've got the remote monitoring, the food, the personal care, they all go through in many respects, the case manager. And what does the case manager want? She wants ease of use or he wants ease of use. And they're look -- and so what we need to continue to do is continue to get credential. Credential at the state level or credential with the payers who give us these licenses to hunt. So -- and again, because we have this 30 million member lives that we're managing, nobody is in a better position to reposition that product into a channel. And our current customer base only uses -- about 10% of our customers use the VRI product right now. So we think there's just -- and again, none of these other remote monitoring companies are bringing all these pieces together and making it easier to do business with the case manager. The other thing that we're big believers in, Jailendra, is device -- being device agnostic. So if you have an Apple Watch, we can tie that into our system or any of the other products. And we also think that's a significant competitive advantage for us. We're also really going to be one of the few companies that have moved to 4G from 3G. We're in the midst of that -- trying to get the right word, that movement. And so I think we're going to be really well positioned on that front. Most companies are going to be at 3G. And so again, you start thinking about the speed at which information exchanges, we're going to be in a very unique position and demand basically the products we use have 4G capabilities. So that's something else. But it's a #2 company in the space currently behind Philips. But nobody owns the channel like we own the channel, and we think we're in a very unique position to be able to sell into the channel and then to sell to the case managers who ultimately are making these decisions about these products.

Dan, you mentioned this. Because we're device agnostic, and because we're national, we can go where a customer wants to take us too to a specific population because we can implement just about anything. So that's happening right now, as you know, you mentioned some of that. So we can follow our customers where they want to go.

That's helpful. In last few minutes we have here, just a couple of more financial update question. Like how do you think about the long-term top line growth, margin opportunity in the business? And do you need to do M&A? Or is it more like more organic growth? Just help us understand the long-term growth targets and the drivers?

Yes. Sorry, I'll talk to some of this, and I'll let obviously Heath add color commentary. So on the transportation piece, we see enormous opportunities to expand into Medicare Advantage. It's 24 million lives. It could significantly grow the total available market for us. We don't think we need to acquire anything else in that space. I think we just feel like we need to continue to automate, modernize and make sure that that member experience is exceptional. And if we continue to do those things, I think we're naturally going to be able to grow the business. There's also a couple of significant RFPs that are out there, namely in the State of New York -- the States of New York and in Maryland, we think we're in a good position to win those. Again, there's no guarantees, but we're in a good position or at least to win part of them. So we feel very good about that part of the business. On the remote monitoring piece, there may be another acquisition we do, just because it helps us get into some additional states, but it's a national company right now, and it's ready to roll. On the food side, we partnered with a national company already, and it's a matter of us getting the license to hunt, getting the contracts with the large payers and states. And then I think we're going to be in an exceptional position to do something with that. I don't think we really have a bunch of acquisitions to do on that front. And then on the personal care side, I've got a couple of thoughts on that. Number one, where we are right now, we could be -- because we are in these incredible states of New York, predominantly New Jersey and Pennsylvania, that accounts for almost 90% of our revenue. These are really good states to be in personal care. And it could be -- those 3 states and given the other 4 states we have, we could get to $3 billion to $5 billion in revenue in those states alone. That being said, and you think about our model, about one-stop shop providing these other aspects of care, personal care is an important part of that. So we're going to look to expand into those markets where we have transportation, where we have food and where we have remote monitoring. So Heath, I don't know if there's anything you'd add to that?

Yes. Well, you touched on all. It's high growth within lots of great marketplace. One thing when you layer all these together and then you put technology on top of that, then you really integrate those, those are something we're obviously moving towards. So we're just talking individually how these markets have strong growth and strong EBITDA margins. So there's a lot more to come as we bring these all together and, of course, layer on all our tech and integrate them all. But Dan, you covered all the numbers.

Yes. And the only thing I would say also, I think it's in our presentation, but the personal care market is a $55 billion market, growing to $100 billion. It's 20,000 agencies. There's basically 3 large players. We're the #2 player now in the marketplace. So we feel like we're extremely well positioned there. On the food market, it's a $9 billion market growing to $15 billion. And on the personal care -- remote monitoring, excuse me, markets $8.5 billion market. It's only 13% penetrated right now. So enormous growth opportunities there. And then we've talked about the addressable market for transportation is going to continue to grow and increase. And a big part of that is going to -- what we're going to see in Medicare Advantage supplemental benefit expansion.

Right, right. And one thing we noticed that you guys have a very asset-light business model. So not a lot of CapEx requirements to execute on those growth drivers. Maybe putting that in context, your pro forma leverage just over 3x, I think talk about your long-term leverage target, where do you think you are very comfortable, when you're trying to make a decision between acquiring a business versus like maintaining your leverage target?

Heath?

Yes. So for us, from a capital allocation perspective, top thing for us is growth. And within growth, it's investing in the business and really a large chunk of that was done when Dan came here in late 2019 and all of 2020, and that was primarily focused on technology, and specifically to ensure that the NEMT business was modernized, one for the benefit of the member, but two, to make us the lowest cost provider. So -- and then next acquisition. And we've done a lot of acquisitions over the last 18 months. So it's growth first. And then -- but we want to continue to ensure that our leverage is around 3x. So we're a little bit above that now. So as we move through, even though growth is a priority, bringing down leverage is also a priority for us. So that's how we think about from a capital allocation perspective and you hit on it as well. Our adjusted EBITDA because of being CapEx-light is a good proxy for free cash flow. So as the months and quarters go by, we'll use that cash to continue to delever and then again be opportunistic with the right levels of acquisitions. So we feel like from a balance sheet perspective, with what we have and where we can go, we feel really in a good spot to continue to grow as well as to get back to that 3x leverage target.

I guess we are out of time here, but anything else you guys want to highlight, which we did not cover today?

Yes. I don't think there's anything that necessarily comes to mind. We're in a great place. And we're meeting the market where it is, Jailendra. I mean our members, our payers, our states, our case managers are all saying, "We want a one-stop shop for these services. We want to move into value-based care." CMS is saying the same thing. And again, I don't think there's another company out there right now that is well positioned to take advantage of the market tailwinds than ModivCare is right now.

Okay. All right. On that note, I guess, we will wrap up here. Thank you so much for doing this session of fireside chat with us. It was really, really insightful. Thank you so much, guys.

Yes. Thank you, Jailendra. I appreciate everybody else who's been on the line today. Take care.

Thank you.