ModivCare Inc. (MODVQ) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to day 4, our last and final day of the JPMorgan Healthcare Conference. I'm [indiscernible] an associate here in the health care investment banking team. Today, we're here to speak with ModivCare, and we have Heath Sampson, President and CEO of ModivCare; Barbara Gutierrez, CFO; Scott Kern, Head of Corporate Development. We'll have time at the end for questions. But for now, over to you, Heath.

Yes, thanks, and thanks to JPMorgan for another great conference. It's great to be here. And it was a successful week and this is a great way to finish off the week for us, giving a presentation to all of you here in the room and also people that will be listening. So let's get going. So first off, for us, just to ground everybody, who are we? So a national tech-enabled platform with market-leading solutions. And it really is in the SDoH space, but specifically for us, when we talk about that, we talk about supportive care and the supportive care services address the SDoH needs, and they're also integrated. So if you think about a platform that's out there that has all these services, we're the only one that has that. So starting off with transportation, personal care, and then remote monitoring. And as the weeks and years go by, transportation is known to be a critical benefit for addressing needs. It removes the barriers [indiscernible], we are national, the largest, 48 states, about 34 million lives managed and we do about the same in the number of trips. On Personal Care, we're also one of the largest. We're primarily located in the Northeast though, 7 states, but do about 28 million hours of care with 15,000 caregivers, and we'll get into this more, but that taking care of people and assistance in daily activities is a critical component to the health care system, and that continues to grow in the need as well. So we'll get into that. And then lastly, and the evolution of remote monitoring or devices in home is critical and a big part of addressing these SDoH needs, whether that's a PERS device or whether that's some type of other scale or medication management system that continues to grow. We're also national there. About 45 states, approximately 240,000 active patients. And this is really important about 2.5 million interactions. So these interactions really give us an opportunity to engage and do more than just the important need of helping people when they're really in need. So we're about $2.7 billion in revenue. And as of the last update we gave, we were about $214 million in adjusted EBITDA. So the team, I couldn't be more proud of the team, many of these new people knew with Barb here and the rest of the team here. So I'm just going to go through briefly here because it's really important. This was purposefully put together and the skill sets that we have here. Starting off with Ilias. Ilias is in charge of our Mobility, is our President of Mobility. And he comes from Radial or and Ryder. And his background is in logistics, but it's also in the logistics of using technology. So his leadership and ensuring what we do in mobility and then adding technology to that and really getting better from integrating with our customers and understanding our members. He's been a big value. DaVita, where Anne has came from, if you think about what DaVita has and the people that are in these locations that help people with kidney disease and is Head of our Home Division. So perfectly tailor-made from her skill sets to really about Home. Barb, who's new to us, coming from InnovAge, if you think about what InnovAge does, it really is taking care of the sickest people and that's a big part of what we're going to talk about today. Actually, for us, too, is to take care of people actually in their home. So I couldn't be more happy to have Barb. We have Jessica Kral, who spent almost 20 years at UHC across many different platforms from Optum to managing integration. Enrique, new to us, Valet. So Valet is a company that hires lots of hourly people to do work in helping companies and their facilities clean. So his engagement capabilities with hourly people has been tremendous. And then lastly, with Jeff and Seth, if you think about people in health care, in the space between payers and providers, so health care services in supportive care, these are some of the 2 best that understand what a customer needs and that what needs to happen from a clinical perspective as well as from a data perspective. So I spend a lot of time on here because they're the reason why we are here today, and they're going to be a big part of our future and strategy. So a little bit more on our platform that we have built this holistic supportive care platform that addresses SDoH. So first, again, on NEMT, it's a required benefit. When you have an illness, you need to be able -- our payers and providers need to provide transportation. We're doing work with certain populations in certain states. And it's showing that even though people have the ability, there's about 25% of people that aren't getting that service. So the point of this is -- it's no longer about us just providing the service. It's actually looking at the population for our payers, providers and determining who should get it. And there's an unmet need. The stat around SDoH just in general, is about 18% to 20% of people who have a need are not getting it. So you layer on transportation. There's a heavy need and transportation is a critical part of these SDoH services. And again, we're the largest about $1.5 billion in revenue, and again, about 24 million lives that are managed. Moving over to our other services, which include personal care, remote monitoring and then tech related. These are really the expansion of these SDoH services. So yes, personal care as a stand-alone is critically important. Remote monitoring is critically important, and tech is critically important. But when you put it all together, coupled with transportation, it really is proven to be an expansion on this. And then this brings it together from a one mode of care perspective again, the one platform that we have, it's the same person that needs transportation likely will need personal care, likely will need some type of device to help them monitor and then you layer on technology to help the people that are in the home, it really is a complete holistic supportive care platform. And that's how -- what we do today and then what our big plan is for tomorrow is to put these all together because what happens because we have this access, we can actually change outcomes and improve quality. So again, the individual supportive care solution that is high touch is critically important, and we get paid for that. But even more so now is to offer these solutions because we have this access to give a survey, understand a member. And therefore, if you get a blood pressure reading or you do some other change in outcome because they go see their PCP, that's just on top of these services we provide, one that's a heavy value to the payers, but it's also value to us because we actually do get paid for that service. So the next slide is a little bit more on this. So managing the nation's most complex and costly chronic conditions, and there's a few things on this. You see the size. I think a lot of people know this, but it's important to talk about this, about 90 million members are on Medicaid, 65 million on Medicare. It was our population about 330 million. So it's a critical part of our health care system is to manage Medicaid and Medicare patients. And you can see below what we manage, about 29% of these Medicaid lives we manage today, about 12% in Medicare. So we have the scale and size to address these needs. So the dynamics, what's happening in this market, there's no question, a lack of access, like I talked about before, 18% to 20% of people that have an SDoH need don't get it filled. Frequent readmissions happen because of this. Just someone that has complex conditions, it costs about $4,000 to $5,000 when they go to the hospital. And if they get admitted for congestive heart failure, that's $20,000 to $30,000. A lot of that can be avoided with upfront proactive outcomes management. And then as you go down before, the duals, the highest risk patients are no question, a big part of our solution. But because we have this access, managing low risk or medium risk is just as important. Because about 75% of the high-risk patients today, last year, they were lower medium. So when you really understand that member or that patient -- and we can do that because we have this touch point whether we're in their home for 2 hours or 24 hours or driving 3 days a week, we can just do a little bit more for those low and medium risk people to ensure that they are taken care of and outcomes change, so they don't move to that high risk, which is very expensive for our payers and very challenging for our providers, who everybody knows are overworked. The other reason that we can also do this, to do all that with people is challenging. You layer on digital engagement, you can do that at scale. That's been a big part of what we've done over the last 12 months and a big part of what I talked about earlier with Jeff Bennett who came over, who was who was with higi, and we have that platform now. Our capabilities for digital engagement have really expanded. And then the solutions around that. So the solutions that we have, we get paid for, but there's a lot of opportunity for us and for our patients to change these outcomes. And then there's a mechanism to do that. There's the HCC coding system and specifically Z Codes. And you can see those have expanded in 2024, and those are really SDoH codes. And why those have expanded from CMS because we know they impact the quality of care. So because we have those services, we can actually help that with our clinical network and actually use those and hit those. But more importantly, we can make sure that our payers are able to do that. This engagement quality is really important. When some of our payers are competing to win business within the MA space or even win a Medicaid market, quality scores are really, really important. And I'll give some stats around that. We're working with a large payer that's trying to maintain and win a specific state and engagement is challenging for these type of populations. So we -- with our solutions, because we have digital engagement, we are able to right now -- and we're not even done with this, members, they couldn't get in touch with. We've given 65% of those members an SDoH survey. That SDoH survey is a requirement for this payer to actually win the state. In addition to that engagement around SDoH, we've closed 25%-plus gaps that they couldn't before. And why -- again, why is that? Because we have the access and the trust with these members. So -- but that's just on the solutions we have. So we provide the solutions and then we do this a little bit more. And then, of course, monitor and risk avoid the ED visits. As we know, we talked about that before. And then of course, member satisfaction. When you have this engagement in constant communication and you do it in an empathetic manner and really care about them, member satisfaction and retention goes up. So before we do a summary on the financials, this kind of brings it all together. And the solutions we have with where health care is going, again. So we can leverage these trusting touch points to maximize every valuable member. So here's the solutions, transportation, personal care, monitoring, whether that's PERS or some other device, medication adherence and then because of the digital capabilities and the ability to track this longitudinally and do the surveys at HRAs or SDoH surveys, you bring this all together, you can actually, for us, one hope, but change the revenue model as well. And that's what's on the right here. So the wonderful thing for what we do, we get paid on a per member basis for the services we do. And then like health care and then with us, because we can do SDoH surveys, because we have the technological capabilities, coupled with having a network of nurses behind that, we can start doing triage to help the providers who are overwhelmed on what is important and not important. So virtual care and of course, gap closure. And we'll get paid differently on that as well. Incremental. You know when you get a gap closure, whether whatever it may be. It's anywhere from $40 to $100 of payment just for that on top of what we're doing just already today. And then as our capabilities get stronger, you have longitudinal data that you can collect. So we get smarter, we know more, and you can get paid differently. So you can see the evolution of health care and the evolution for us, specifically in the SDoH services, how our revenue model, and it will expand as well. But it's all because of these solutions we have and the new strategy and philosophy to ensure that we're customer-focused around that specific member, not just the transaction, the member itself and what the health care needs are around that. So overall, from a financial perspective, and this is a summary again, from a revenue perspective, you can see a majority of our revenue of that $2.7 billion is in NEMT, growing heavily in our Home Division, which is comprised of personal care monitoring. From an adjusted EBITDA perspective, the change is a little bit more. About 60% is NEMT, 30% PCS and just over 10% RPM. And that Home Division continues to grow as well as NEMT for us over the last couple of quarters, if you've been listening to the calls, you can see from a sales perspective, our new go-to-market strategy, we've been selling and winning many, many opportunities that we didn't have before. A lot of it has to do with our current capabilities and our ability just to do well in our individual solutions, but bringing them together and then really adding more value about every deal that we actually bid on, we end up pointing. So I couldn't be more proud of the sales opportunities that happened over the last 12 months and what we have going into 2024. You can see the trending from a financial performance perspective, lots of growth that has happened there, and you can see what's trending on the adjusted EBITDA and finishing at 214. The decrease, if you're aware of where we are, the decrease for us has to be with going from 222 to 214 and that is primarily as coming out of COVID. We had COVID benefit in our NEMT business, knowing that and through Q2 of 2023, we're -- the benefit for us is behind us. Now the focus for us is to build this platform that we have built and continue to provide these services and grow beyond where we are today. So strong financial performance, coming out of '23 and going into '24. So in summary, again, solutions that address these complex growing population of people with these complex issues coupled with SDoH needs. So the SDoH needs have been out there forever, but the health care system has recognized how important that is. And again, you see that in the regulatory responses that CMS has done, you see that in how states are requiring our customers to address SDoH, and the data is showing that it works. And it's helpful to those people, and it's helpful to the health care system as a whole. So we have these [indiscernible] in attractive end markets with this differentiated value proposition within each of those solutions and then no question, we're the only platform that has it all. So the market opportunity for us for health care as a whole, you can see just for the solutions we have, we have about $150 billion in white space to go after. But you have to do, and we're doing this leverage technology to do that. It increases member satisfaction. It allows us to scale and it allows us to gain insights that build upon each other. So tech is an important part of the strategy on what we do. And then lastly, we have an ownership in another incredible business that's in the risk adjustment business that have nurses that go in people's homes [indiscernible]. So we have that, and we couldn't be more excited about what they have done over the last 12 to 18 months, and that's an important asset for us that's also on our balance sheet and a big part of our ability. At some point, we have the value that's unrealized there that we can capitalize and ensure that we monetize that and get significant cash flow into that. So all that together, is a strong balance sheet with lots of tailwinds within the industry. And then because of the great people that we talked about before, the solutions that have been built from a process and tech perspective, we couldn't be more excited about that as proven by the sales and growth opportunities that we are seeing today. So right on 20 minutes as planned to get through the presentation and then maybe we'll open it up to some specific questions that everyone may have.

Awesome. Thanks, Heath. Any questions from the audience? Yes. Please just wait for the mic so that we could catch you on the transcript.

[indiscernible]. Could you talk a little bit more about the investments you're making to automate the NEMT business? How far along are you at any -- what cost savings, I guess, what do you estimate?

The cost savings as well. Yes. So for the -- technology is important across the entire platform. For the Mobility business, it's important from the strategic stuff that I talked about before, but it's also important from a cost perspective and for how we deliver the service that we currently have. And the strategy that is new to us, the strategy is for us to -- there's great technology out there that we can buy as opposed to build ourselves. So text messaging platform. We should buy that. We shouldn't be building our own GPS system, we should use Google. So you can go across the value stream of how you deliver transportation and there is technology out there. So our strategy has been to acquire or license those softwares and then stitch them together. And then the other important part of our strategy is when you have that micro services modern technology put together with these solutions, then it's also to integrate with our key stakeholders in transportation. Obviously, our customer, it's the specific transportation providers that deliver the service. And then it's with the facilities. So the facilities, a dialysis facility. So those integration points with them is critically important. So in the facility, I'll start there, when someone that needs to go to dialysis 3 days a week, and we have one customer, and then we actually have 4 other customers, we really have a lot of volume within that facility. And there's a lot of dynamics within that facility that happens. So it's a change. So change to transportation typically means a challenge. So how do you get ahead of that? You integrate and allow that facility to manage and book and really API into our modern technology to ensure that they manage that. Critical component. I was with another large payer and he was saying, with our dialysis facilities, we spend about an extra $50 million that we shouldn't spend because transportation is hard. When someone is sick on dialysis, they take an ambulance. And the facility or their provider, just the way the incentives work, they are going to get an ambulance regardless. They're not really the responsible party for that. The payer is. So you have this misalignment on incentives, $50 million and it mainly is because there's a lack of information and integration. So we could solve that and are solving that for them. So that's an important part of the strategy of being integrated with the facility. With the transportation providers, they are the people that do the trip. So if we enable them as well, then we don't -- the member doesn't have to call us, and we call the transportation provider. If we enable that and digitally -- they're digitally on our platform, they can interact with that member, high satisfaction, way lower cost, higher performance. And then lastly, with our customers. And especially on the MA side, the customer or member experience is critically important, and they want to control that member experience. So why not have the ability to use that specific payers platform, whether that's a contact center or their app and then the API into our system. And the reason for that discussion is that's the strategic change from a technology perspective that's allowing our performance to be the highest it's ever been. And then it's the key part of why we're able to lower cost. So if we're integrated into each of these, the people are -- that normally would do that, actually, we don't need to do that. Other people can do it. And then you layer on all these other services, whether that's a text message, whether that's an app, whether that's automated distribution of trips, those things allow and take waste out of the system. So that's the strategic importance of that you can see and then the cost savings that we get out of that. So we've said publicly that we should get $60 million to $80 million out when we're done with this. Within 2024, we expect to get between $30 million and $50 million out. I feel really good about our ability to do that. It's happening. You're seeing it happening. Last quarter, we're giving stats on that, and we said -- it was about a $3 million for the quarter, just for the quarter. So if you want to annualize that, you times it by 4. So it's working. The initiatives are being tracked, and we're leveraging common technology. So I'm really excited about what we've been able to do there, and the strategic pivot is paying off.

[indiscernible]. Just a little bit newer to the company, but just trying to understand maybe how has labor been, say, over the last 12 to 18 months? It's gotten better. Any comments around that would be great.

Yes. So likely consistent with many of the companies that have sat here today and companies that actually have frontline employees that heroically do their work every day, which are primarily hourly employees, that's improved over the last 12 to 18 months for us. So -- and that impacts our Personal Care business, our 15,000-plus caregivers, but it also impacts our transportation business because the drivers are the same demographic primarily that use that. So -- and you can see that in the numbers for us on the transportation side, our cost or operating cost or what we're calling kind of purchase services costs have leveled off and decreased. And then in our Personal Care side, you can see that as well. For us, on our personal care side, that's really showing up and allowing us to maintain our high retention rates of 65%, but has really improved our ability to recruit. And so we're getting the caregivers in and able to get them through. So labor will always be a challenge, I think, in the U.S. for many years to come, and especially in the health care world. But for what we have done is on top of that to kind of stabilization and is allowing us to outgrow and outgrow the market. So we feel good about it.

Could you remind me what capabilities you [indiscernible]. And then basically, how has that been integrated and what needs to be done?

Yes. So for some people that maybe don't know that. So this is prior to me coming here, Circulation was acquired to be a part of our transportation delivery. So then there were other acquisitions that were made in the technology space prior to me getting here. So Circulation is a part of our platform and helps us deliver the service and we'll continue to do that. So it's working for us and a big part of how we deliver our service. But I'll go back again. It's not the sole component. So it has its part and it plays its part. Maybe -- and this is a little bit of me speculating from the past. The past, it was maybe going to be larger because we were going to build everything around Circulation, but that strategy is, we'll use Circulation for what it's good at. And then we add the other technologies around that, like I talked about before.

Can you just talk about -- so you mentioned a deal that was done, I'm not sure when. But any other future M&A that you're kind of looking at? Just how you think about M&A and the broader strategy and how that plays into cash flow and how you're thinking about that, say, the next, 2 to 3 years?

Yes. So a priority for us -- let me back up a little bit. The acquisitions that were made to fill out our supportive care platform were critical and important, and those happened a couple of years ago. So for us right now, because we have the capabilities and the solutions that I talked about for the last kind of half hour or so, we can just grow organically with what we have. And then you layer that on, it's really important for us to ensure that our balance sheet remains strong and gets stronger. So our target of 3x net leverage is a real item that we want to get back to for us. So that's our focus right now is to ensure that our balance sheet is strong, can delever. And then from a -- when it's right, the acquisitions make a lot of sense. You see the $150 million white space for us. And it will primarily be in that Home Division or Personal Care division, we're a national platform across monitoring and national across NEMT or Mobility, and we're the largest. So we think we can just keep doing what we're doing and continue to execute and grow there. But on the Home side, when you have access into people's home, that makes a lot of sense. And since rolling the Northeast, that's likely something we do. But again, a top priority for us to ensure our balance sheet is set and our leverage is in the right spot first.

Perhaps a question for me. You mentioned the $150 billion white space, both in your highlights just a couple of minutes ago. Can you tell us more about like what the space looks like and what are your assumptions to basically...

Yes. So it really is this solution as a whole. If you look at those individual, someone that has congestive heart failure, that's a big part of that $150 billion. So you look at the population as a whole and then you look at the services that we have. So that's the first off strategy. It's not about, hey, we're going to expand transportation. We're just going to expand personal care and so forth. When you look at that, each of those solutions surrounded by tech and clinical network behind that, we can really grow within those specific populations. So the $150 billion will grow through our individual solutions, but really we'll be more focused on populations that where the need for our services have and that's what we're really growing that vertical. Likely, again, most of the people that are most sick, but even still those people that are in the low-risk side that will be there. So diabetes, hypertension, the typical areas where there is a need in the U.S.

Touching a little bit on the payer side of things. What's your outlook for Medicaid redetermination? And how do you think it's going to impact...

Yes. Medicaid redetermination for us, and we've been really transparent around that, it is a headwind for us. 2023, we said there would be about a $5 million to $10 million EBITDA, and we said it's about a $20 million to $40 million headwind for us in 2024. The country each month gets smarter as redetermination happens. And for us, we're about 30% through that, and that kind of equates to the dollar amounts. And then the states that we are mostly impacted from redetermination are the ones that are remaining, and we're in line with that. And I feel really confident about the dollar amounts. I know there's a range there, but I think it's appropriate to stick with that range. So yes, it's a headwind, but manageable for us as we move through 2024.

Yes. And thinking about your supportive care platform, and yourselves are accessing some of the most vulnerable and underserved population. Do you think all of them make sense together? And how do you think you're driving incremental value through your platform as well?

Yes. So the -- together is a value because the people that need transportation likely need another service, but it really goes back to our customers, our customers that are payers and our customers that are providers. So specific customers in specific states may have a different need. I talked about the one payer where we're helping them get -- help them win a Medicaid bid. For them, it was really around customer [indiscernible] and ensuring they had the innovation with SDoH. So those specific services used our SDoH services and survey services and data services. But then if we have a current client that wants to expand with us that is in managed Medicaid, they may have a problem that is different than that. But likely that problem will need transportation, need personal care or need monitoring. So it's -- the most important point here is that customer-centric and then be member-centric for that, when we understand that, we can deliver the individual solutions, which transportations are largest, we can deliver 2 of them or some other things. So that's the new approach. And it's a big part of a change for our entire organization, right? So people need to think about all of our services and then what those services mean to the customer. So -- and it really gets back to again. We have this access. So most people see their PCP once or twice a year for 50 minutes a time. We see people every day and for many hours. So do the individual solutions, but again, when we understand what that patient needs, we can help that payer close the gap and then we can help that provider not be burdened with data or services that they can't or don't understand. So -- that's the approach and strategy that will help us continue to grow across our individual solutions and then across in a bundled way, too.

Probably a question on how you're thinking about 2024 and guidance and sort of what do you think are assumptions that underpin that?

Yes. So we will be giving our guidance like we have historically in mid-February when we do our earnings release around that. And a big part of us is what we're trying to do now is talk about all the things that we're doing well, whether that's sales, whether that's the cost savings. And then, of course, on the headwinds around redetermination. So those are the big items in the mobility side, and you can see the growth in the home side. So all those positives as well as those headwinds that are very near term and short term in 2024, will come together and we'll give the full guidance in February of 2024.

If no final questions, I want to turn it over to you for any closing remarks.

Yes. Well, first, thanks to JPM. It's a wonderful conference for us, and we get to meet a lot of our colleagues, a lot of the people here, and it's been extremely valuable. And of course, we really appreciate all the engagement with the investors that have happened over the last couple of days and the support that all of you have given and all the great tough questions that continue to come. So I look forward to engaging with you and speak to many of you in February when we finish off the year. So thanks very much.

Fantastic. Thanks, Heath.