ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

All right. Good morning, everybody. I think we'll go ahead and get started here. So first, I just want to welcome everyone to the DB conference as we kick it off here to those in the room and those joining on the webcast. We are very fortunate to have ModivCare here this morning with us. I want to thank you guys for taking time out of your schedules and running a company to participate in the conference. Really appreciate your time and you guys for being here. Up here at the table with me, we have Heath Sampson, Chief Executive Officer of ModivCare. Also in the room, we have Barb Gutierrez, the newly appointed CFO; Kevin Ellich, Head of Investor Relations; and Zach Miller, VP of Finance. So welcome, Heath. Thank you for being here.

Yes. No, thanks for having us. We really appreciate it.

So I'm just going to kind of launch into Q&A here. And I think the first topic is one that some investors have struggled with as we think about the increases in utilization and what that's going to mean for results. And I think as we know now, you can correct me, Heath, but I think we're at around 60% -- sorry, 20% full risk contracts, 15% in fee-for-service. And I guess that's really, 65% would be the balance on some sort of shared risk contract. Can you just talk to us a little bit on the shared risk side? So with these increases in utilization on the risk sharing, how does this kick in? Is it based on utilization? Is it based on margin? What's the trigger for that? And then where does it kick in? We've got utilization right now running around 8.5% in the second quarter. At what point does that kick in and how fully hedged are we? How do we think about like being hedged on an EBITDA basis versus having a receivable that we're going to collect later. And I know that was a bunch of questions tied into one, but maybe if we could just sort of start there with utilization and these shared risk contracts.

Yes. So for everybody and maybe people that listening to the webcast, so for us, being the premier supportive care company that's focused on social determinants of health, we have a lot of different services, whether that's our home business that has personal care and monitoring and other services, where we're connecting with members, people in their home. The focus for a lot of investors right now, whether that's on the debt side or the equity side, is on the mobility business, which is our core business, which is, call it, kind of 60% of our business. So the questions around utilization and -- are centered on the mobility business. There's actually a natural hedge on the other side from a home business, utilization going up on the home business is actually a good thing. So rightfully so, for where we are as a company going through this transformation, the questions that are focused on the transportation business and specifically utilization because the way our contracts are structured, and that's the first question, is historically, prior to COVID and even during the beginnings of COVID, most of our contracts, many of our contracts are capitated. So you said they're 85% capitated and then 15% not capitated. But over these last number of quarters, we've been more specific around what that means, which gets into -- well, they're not -- all the 85% isn't truly capitated. There's this shared risk component to that. And before I get into this a little bit more, and it fits with where health care is going with our business as a whole as well as within transportation. So historically, businesses like us, it's been more -- very transactional around doing the specific service, care in the home, giving a trip, providing a device. You talk to any of the payers or providers in here, because of the rules that are coming out with CMS, it's required to pay more attention to that specific person and what is their illness. That shift has really happened really over the last kind of 12 to 8 months, and it's continuing to accelerate. And so that philosophy why I bring this up by our customers, primarily payers, is to have this focus on the patient and not necessarily the individual transaction. And what that has led to within mobility, specifically since I've been here in renegotiating these contracts under that philosophy, we've moved to this win-win relationship because the focus should be on that specific member and not necessarily on the transaction, AKA, the [ trip ]. So we've moved to having more, call it, shared risk contracts. So 20% are full risk. So those are where we get paid the capitated rate and regardless of cost, store trip volume, we have to manage that. 15% is truly just -- we get paid a percentage above kind of fee-for-service. And then this middle part, the 65% is the shared risk contract. And that's the way actually I expect things to continue to move, more in line with managed Medicaid, definitely in line with MA, is to have this focus on the member and therefore these shared risk contracts. And the way these shared risk contracts work are exactly that. Utilization and cost, no one should be burdened in the wrong way, us or the customer. That's the purpose of that. So if utilization goes way up, we're going to share in that. If costs go up, we're going to share in that. And that's the way these contracts work. And it's a good thing that we did that, especially coming out of COVID, it really allows us to protect the downside that we've limited the upside if there's, God forbid, another COVID situation to ensure that we are in a win-win relationship. So those are allowing us to ensure that we -- as we come out of COVID, we're in a great space to grow and maintain our margins on top of that.

And so you indicated that utilization was sort of a driver of the risk sharing kicking in. Can you just confirm that? And then maybe can you just talk to us about when do they kick in? Does utilization have to get to 12%, like it was pre-COVID, before this sharing kicks in? Or where does that start to have an impact?

Yes. So in our shared risk contracts, there are different flavors of that shared risk contract. Some are based on a band of gross profit. Most are based on a Matrix between utilization and costs. So think about a Matrix on that. When we set the contract, we set -- if you're familiar with manufacturing, you kind of set that standard cost that we think is going to be the case. And this Matrix allows it to move within that. So -- and the whole point is we shouldn't be penalizing anybody for increased utilization and get back to the member. Someone that's on dialysis needs to go to their appointments. We don't want to utilization manage the wrong way with members. So it really is -- there's no really big thresholds. We're asset thresholds right now. So if utilization is going up on those shared risk contracts, we're passing that through.

So would that be the case regardless of magnitude? I mean, if utilization went to 25%, would it be the same thing that you're protected? Or is there a piece of that that you do endure with that?

Yes. So on the utilization, we're protected, right? It's not going to be 25%. But yes, we're protected right now on all those shared risk contracts and fee-for-service contracts.

Okay. And that comes back in the form of an increase to the PMPM. Is that how -- what's the actual -- how does the actual hedge accrue to you?

Yes. So it is. It's an increase in that PMPM. It basically is if utilization is going up and we're doing more trips and we thought it's more expensive to us, we're going to get paid on that. The reality is, and this is one of the things, how it works is when that situation happens, it gets put on the balance sheet, and then we'll collect it over the next 3 to 6 months. And the inverse is there. The other side, if it's too low, and this was a big part of COVID, it actually gets put on the balance sheet as a payable.

So on the current situation with utilization increasing, if it's put on the balance sheet -- so if you had full risk, it would just be you would see a decline in EBITDA and a decline in cash. But because this is going on the balance sheet, we're seeing a decline in cash and an increase in receivable. Is that how that goes through, and we're not seeing a decrease in EBITDA?

That's correct.

Okay. So there will be a timing capture for the receivable. But we shouldn't see a situation where, I'm just making numbers up, instead of if you're going to report $50 million of EBITDA this quarter and you actually report $40 million and you say, "Oh, but there was $10 million related to utilization and -- or redetermination, whatever it is, excluding that, it would be $50 million, and this will normalize." It's not -- we shouldn't expect that. It should be an actual hedge.

Yes. No, exactly. That's the whole purpose of the contracts. Where it gets to -- so an increase in utilization or trip volume for that matter, we're protected on our contracts, the big dollars. Where it is and what we need to do is contact center. So we get a bunch more phone calls when you take trips, we need more people to manage the trip in the field. That is the cost that does increase, but at a much smaller scale. So -- and when you -- that is an important thing for us to manage. So if we want to get back to our margins, our margin guidance of kind of 9%, 10% range in the mobility business because we're at a lower end of that, we're at downside of that, we need to take that cost out, which involves modernizing our platform. So right now, we take about 28 million calls at $4 a call. The majority of our interactions with our members are via phone. Half of those calls -- approximately half of those calls are people wanting an update on where their ride is, confirming their booking or where is my ride. So that -- those common technologies that other industries do and by the way, as well as in health care, why not just send a text or an IVA, IVR. You call Mrs. Smith and you're calling about your trip at 10 a.m. Those type of modernization and automation are important for us to get back to the higher end of our margin. And that's -- and then as utilization goes up, our estimates on what we've given for -- what's happening in 2024 assume that higher utilization, assume that redetermination happen. So we feel really good about our initiatives to have in place to offset those as well as get back to the strong margins.

That's helpful. So you figured a few questions for me in that response just now. But I guess I'll bounce around a little bit. Apologies. As it relates to these initiatives on the cost side, is there a capital outlay that will be needed? Like as we look at CapEx in the next few years and we think about free cash flow and what that could look like, is there an outsized CapEx outlay that we should expect in connection with any of this or otherwise?

I think our CapEx that we've had, historically, call it, kind of 1% of revenue is in line with what -- it's manageable within that. We've been investing a lot as much as even the last couple of quarters on our technology infrastructure, and this is just a continuation of that. Most of the stuff that is needed to make this modernization is just execution with our current people.

Okay. And then can you just tell us when we had the contract payables on the heels of COVID, it was 1.5 years, 2 years before those all got paid back. But now we're talking about receivables and collecting those in 3 to 6 months. Can you just tell us why we should expect that to be a shorter period? How we can feel confident with that?

Yes. This is a really important point. And this is a question that everyone should pay attention to because it gets to what you've seen in the past versus what's happening today. So during COVID, obviously, there wasn't a lot of trips. A lot of these contracts were not renegotiated to where we are today. So we benefited heavily from increased cash coming into our balance sheet as well as on the P&L as well, but the big bolus was on our balance sheet. And many of these contracts, primarily the full risk contracts, did not contemplate a COVID. So there was no really how do you settle this up because those contracts are typically 3 to 5 years. So there was no need to -- some of them said you'd settle up in a year, some would say you'd settle up at the end of the contract term. So we didn't contemplate this in COVID, right? So there was -- we didn't have to pay these back in many of these instances during COVID. And still, as recently as Q1 of this year, I didn't think we were going to pay a lot of these back. But for many reasons, primarily to ensure that we have this win-win relationship, and I ensure that I can continue to grow, we did finalize the settlement of old COVID payments in Q2, $96 million of payables that we paid in Q2. At that same time, across all our contracts, full risk or shared risk, we locked in what we -- which is the settlement period. So it's anywhere from 3 to 6 months. So one, COVID payments gone. While that was a lot that you paid off in Q2, so that will not happen in Q3 and Q4 because we're done with that. And then, of course, the settlement periods are more 3 to 6 months. And to finish this off. When we're -- because we're so large and we have many of these different contracts, and now we are in this kind of net, kind of neutral, we're actually in a net receivable position, we're going to get paid on all this historical stuff. So I'm very comfortable with our normalized working capital post COVID. Our contracts are working. I don't expect any big fluctuations, and I'll just confirm what I said that I'll be generating between $30 million and $50 million in the second half of this year and that will go down to [ their line ]. We feel really good about that.

Great. And then just since you mentioned that 28 million calls at $4 a call is $112 million a year. And I think on the slide, you talked about $60 million to $80 million of annualized cost saves from automation, but you also indicated on the slide that $60 million to $80 million comes off a $260 million run rate of payroll and other expenses. So I guess when I think about that $112 million from the calls and maybe you said half of those could be, my words now, could be -- could use a text for, so maybe $56 million or so could possibly go away if you replace those calls with text. That's getting close to the 60% to 80%. So I guess I'm just curious, is that the right way to think about it? And then looking at this $260 million of payroll expenses versus the $112 million I just talked about on just the call center expenses, is there -- I guess, there's other stuff, right, [ that you can prune ]. Can you just talk about that?

Yes. So the point of laying it out like that is to show that it's very reasonable for us to hit these normal -- kind of normal interactions with Medicaid and Medicare members. Not everybody is going to want a text. Now everyone will use IVA, IVR. Not everyone will use an app. There's many other initiatives. So I think our assumptions are very reasonable off of that $260 million in general. So the bulk of it, like you said, is the contact center. Call it another $80 million to $100 million is also in how we manage the transportation network. All the way from we still manually inspect cars, not just use camera that our transportation providers do themselves. We still manually route a lot of things. So there is a lot of -- we still have hundreds of people in exceptions that just look at exceptions. We have hundreds of people that follow up on complaints that is normal in healthcare. So it's a very manual process, both on the contact center side as well as managing the operations. So the initiatives that we've laid out, what we have in front of us is very reasonable. That $80 million -- that $60 million, $80 million is there. The amounts that we expect to get in 2024 is reasonable as well. You could argue it's bigger, right, if you think about AI, but we'll save that for another day. Let's just get to the kind of the core stuff and hopefully, we improve on that.

Okay. Great. Still balancing. We get asked a lot about secured capacity as it relates to thinking about the 2025 bonds. I think calculations, including ours, tend to range between $0.5 billion and $1 billion. Size of that tranche is $0.5 billion. So that would be needed. Are you able to share a number that you guys have internally as it relates to secured capacity or any kind of comments broadly about it?

Yes. So we feel really good [ of ] our ability to refinance those under a secured capacity time frame. We could refinance those now if we wanted to as well. Our goal is to ensure that we get the lowest cost of capital for us. I feel really good about our ability to generate cash. I feel good about our strategy. And then -- and to refinance just under that and then you layer on the eventual monetization of Matrix on top, it allows me to ensure that I get the lowest cost of debt too. And that's my focus, and I feel good about our ability to do that.

So in theory, stability of results, improved results could yield a better cost of capital?

Yes. Yes, absolutely, right? Because a lot of you guys are in this room or a lot of people that aren't in this room are like, what's Q3 and Q4 going to be, especially after this Q2 payment of COVID. And I want to show that we're doing great.

What's the risk of -- we're in a net receivable position now, which is great. That's important. But there are receivables and payables now that are part of this equation and not as much just kind of the payables like it was more so before. What is -- with what we talked about earlier on these risk-sharing contracts, there's potential for [ AR ] to come up, get it back quickly. But nonetheless, optically, it could be there in the immediate term. What's the risk of a really big AR number and working capital going against you again and -- I mean, I know you just reiterated $30 million to $50 million. I'm not sure how to ask this in a way that it's fair to you, but do the receivable trends fit with what you, I guess, would expect and are not out of line with what would feel comfortable, I guess, is the way I'd ask you?

So like us, like anybody else, you're getting lots of questions on what's the new normal of care utilization after COVID. And I think in many areas, we're starting to get to a new normal. And that, with our contracts post COVID, that's what started. So it really -- the receivables just started in Q1 and Q2. So we're kind of starting from scratch. And so we didn't have any kind of receivables to pay that off. So that was kind of -- that's a [ bag ] in Q1 and Q2. So -- and then I also do expect, and this is in line with many people in healthcare that is kind of steady utilization growth. So that -- with that steady utilization growth, coupled with we have all these contracts, we're going to be paying off using these receivables to pay off that. And also, there's payables, too, because we're large. I do believe we won't have these big swings in working capital. Right now, I think we're in a net of 30-ish-plus receivable. I think that's the right way to think about it, kind of 20 to 30 receivables/payables as we manage through these next number of quarters and years.

20, 30 net receivables?

Yes, net receivable, it could go into the net payable...

Okay. So on either side of zero between the...

The timing and size of these, call it, a working capital of $20 million to $40 million need with the construct of our current contracts. And I do expect us to continue to change these contracts. They get more in line with where healthcare is going, but I don't want to distract you all right now.

I guess, as we talked earlier about the risk sharing and you're directly hedged, whether utilization goes to 20% or whatever absurd number I threw out for illustrative purposes earlier. But it would be fair to say that in that situation that you would have a bigger receivable?

Yes. Okay.

So as it relates to utilization, that's something we can be mindful of. Even though it won't impact your EBITDA, it will impact receivables over a very short term and then gets paid back. Is that fair?

Yes, there is. But the other thing is that we still have a payable too, right? So that payable would be -- so it's not all binary, that payable actually get eaten into in that event. So again, the right -- we have the right mix of contracts that -- but you're correct, but it's not going to be as dramatic as it might...

Okay. I want to hit on redetermination just for a minute to just kind of on the -- again, the accounting of it. You're seeing the same data we are. 37% disenrollment is probably they've done 15%, 20% of the total live so far and 73% procedural redeterminations. Mathematically, if we look at it, you would need to have between 82% and 100% reversal of those procedural redeterminations to get back to that kind of 10% to 15% guidance. I think, on the call, you said you were seeing early indications in some states like 50% to 80% re-enrollment. So it's not far off from what I'm talking about here. Is that still the feeling you're getting because that -- the percent of these procedural terminations getting reenrolled is an important number for us to -- or it's important for us to have a sense of that. Is that continuing post the Q2 call?

Yes, it's right in line with what you said. The most important thing for us is understanding our mix of contracts and what states those are in. That far outweighs the national data that you just sent out. And as we know, 30 -- 29 states and D.C. said they have stopped those procedural disenrollments. That's an important point because most of the disenrollments that are procedural are primarily in Republican related states. Most of those 30 are Democratic states, [ moat ] and our full risk contracts, primarily states [ or ] primarily Democratic. That's probably the most important point to make around your question. So we do not foresee procedural disenrollments to happen in those states because they said they're not. And that makes it easier to manage this kind of disenrollment/enrollment phenomenon that you're seeing there. The states that are Republican that's happening, those are in shared risk, so we're protected by that. So that's probably the most important point. So it's in line with our estimates that we've given. We feel good about where we're going to fall out this year. In fact, it's probably a little bit less and slower than we thought. So -- and I expect that our estimates that we've given in 2024 play out from a net perspective, which was -- it will be a $20 million to $40 million impact to us in 2024.

Okay. And then at the ground level, just in terms of accounting, if I think about a person who's disenrolled June 1, they go into pharmacy July 1 to get their prescription, and they're told they've been disenrolled. I think, as I understand it, they have 3 months from June 1 to get reenrolled to have continuous and retroactive coverage. So as long as they get reenrolled by September 1, that would be continuous to them, to the patient. But I think if they get disenrolled June 1, you are not looking at revenue for the period that they're disenrolled regardless of what's continuous and retroactive. So is that also on the Matrix, like is that considered a -- Is it a loss of a life and now the pool of utilization is based on your adjusted lives? Or is this like a decrease in utilization -- or sorry, is this a change to margin or whatever it is that kicks in a risk chord or a risk sharing and your PMPM goes up for other parts of your people who are enrolled?

Yes. So utilization is math and in our shared risk contracts, whether it's because of a redetermination or really because of change in trip volume, that math is contemplated in those shared risk contracts. So it gets back to -- I don't -- we don't have an issue on timing or coming back within our shared risk contract. So we're protected. So I feel good about that. Again, those are primarily Republican when that's happening, so I feel really good. So you shouldn't have a fear that we're going to have a P&L impact.

And why is that again? Is it actually a PMPM adjustment that you get when someone drops off the Medicaid role because you're having a margin impact or whatever it might be?

Well, so that would show up that way and how the math is calculated. Yes, that's correct. But where the issue would be, again, this is -- would be in full risk. And full risk, that is an issue. And we -- but again, we talked about that, that we don't foresee that being a timing issue with procedural. And the way it works within shared risk is that it flows through, it might go in the balance sheet payable and receivable, but that's in line with the guidance that I gave around -- bumping around kind of $20 million to $30 million each way. That's contemplated with procedural disenrollment within our guidance.

Okay. So on the shared risk side for redetermination, it should be hedged and there might be a balance sheet impact. That's fine. We've talked about that...

Yes. It's not going to be a big one or a small one. It's going to be in line with what I said.

I have time for a couple of others here. Are you able to say anything about Matrix in terms of -- I know you said before, you'd like to see that EBITDA at $50 million to $100 million to get the right monetization. I guess, Frazier is going to probably drive the bus ultimately there, but it sounds like you're in a good space with them on all this. Are you able to give us any -- I think they have some privately available information for people that sign up on it. So a lot of people know what Matrix's EBITDA is right now. But I'm not sure if you're able to say anything about it. Are you able to give us any sense as to whether you're getting closer to that range or if it's still a lot of wood to chop or is it just hard to predict?

Well, my main responsibility is to ensure Matrix is performing well. And I'll tell you, we're completely aligned with Frazier and the management team and a tremendous job what they've done with that company to ensure we're the 2, size perspective. And the value of that nursing network is really the value that is out there. So yes, we will be monetizing that because it makes sense to do more than just risk adjustment for that business because you have access to those 5,000-plus sticky, valuable nursing network. And there's a lot to do, right? There's a lot to happen. So we know that it's going to go somewhere to another company that can help -- help use that nursing network to really, really grow. So I feel -- we haven't given -- I stick to the 50 to 100, so you can box in it as it makes sense for me to tell you exactly what it is. That's not a good thing if we're in the market trying to sell, right? So my whole goal is to ensure that when Frazier and I are all on the same page to monetize this, that it happens in the best way and it's a win-win for us. So I feel good about it. I would stick with the $50 million to $100 million. And I look forward to when it goes somewhere else.

Got you. There's enough time if there's a question in the audience right now? If not, I can ask the final one, but I want to give a chance to those out there. Okay. Maybe I'll try to do a couple of short ones. So can you tell us utilization today, 8.5%, pre-COVID was 12% plus. I think there's some structural differences as to why it won't go back to 12%. Can you just maybe discuss those? And then lastly, can you just tell us a little bit about how MA contracts are structured differently to Medicaid or if there's anything worth talking about there?

Yes. So this has really been consistent with what we've said over 1.5 years ago, where we think utilization is going to be, kind of finishing at that 9% to 10%. The way we are -- I think the new normal of utilization is the kind of exit in 2024 that way. That's the way we're planning, and that's in line with customers, the industry and where we are. So we will get to that endpoint of new normalization in 2024. And I do think it is a steady increase from where we are now, even though Q2 was a little bit more of a bump. Q2 is usually seasonally a little bit higher, but I do think it's just normal to that 9% to 10% range on normal utilization. And why it's not going to go back to 12%? Primarily 2 reasons: change in healthcare, [ telehealth ]. It's the utilization of certain -- mental health is generally down further from where it's going to be. But the other reason why is historically, back then, utilization management was not a priority. So people were taking trips that they shouldn't have taken. So those 2 reasons, we have clear data on this that it's not going to get back to that 12.5% for those 2 reasons and end at that 9% to 10% [ normalization ]. And then even still, what was different back then, those contracts are very different. We have these shared risk contracts. And even within our full risk contracts, some of them actually have a yearly actuarial settle up. So regardless of where utilization is going to be, there's a win-win relationship for us. This is an important benefit to ensure that people get the healthcare they need. So I think we're in a really good spot on where utilization is going to end up in the end. And then with MA, totally depends on the utilization is different for different things, but it's the same. So the one thing about MA, and this gets back to what I said earlier, MA is heavily focused on that specific member. The trip is a part to changing outcomes, ensuring that person is healthy days out of the hospital, gets ahead of some illness. So that's where it's really moving to providing information and data and integration with the MA beyond just the transaction of utilization management.

Which fits perfectly for you guys.

Fits perfectly for us.

Yes. All right. Let's wrap there. We're out of time. I just want to say, Heath, thank you again so much for taking time out to be here and for bringing the team and it's always great seeing you guys. Thanks for your participation.

Yes. We really appreciate it. Thanks for the questions and look forward to talking to everybody.