P3 Health Partners Inc. (PIII) Earnings Call Transcript & Summary

Okay. Hello, everyone. Welcome to the 42nd Annual JPMorgan Healthcare Conference. Today, we'll start with the presentation, and we'll leave some time at the end for Q&A. I'm Cameron Wang with the Healthcare Investment Banking Group at JPMorgan. And it is my pleasure to introduce to you today the CEO and CFO of P3 Health Partners, Sherif Abdou and Atul Kavthekar. So without further ado, I'll turn it to both of you.

Thank you, Cameron, and thanks to JPMorgan team, and thanks for having us in the 42nd Annual Conference of JPMorgan Healthcare. Today, I'm going to give you a little bit overview, just whoever is familiar with P3, just increase the familiarity or if not, I'll give you an overview of P3. Then we'll talk about what we are not seeing the topic of the day, utilization and medical costs. So we'll get in details and we'll leave room for questions and answer about that as well. Then I'll tell you about our significant robust pipeline that we're looking at. And then Atul will come and talk to you about the guidance that we gave for '23 and guidance that we just released on '24. So we're -- P3 is a patient-centered, population health management focus in Medicare Advantage, physician-led mainly an affiliate model organization that went public in 2021, started operation in 2018. We started in 2018 in 1 counties, today we sit in about 18 counties. We started in 1 state, today, we are in 5 states. And started in 2018 with 10,000 lives. We guided the street this year and next year to 135,000 lives, 125,000 to 135,000 Medicare risk lives. We started with 300 primary care physician in our platform. Today, we're nearing 3,000 primary care physician with a 98% retention throughout the counties that we're in. And our revenue was almost $83 million in 2018. We guided the street for next year of $1.45 billion to $1.55 billion in revenue. And we're going to talk about the medical margin and what drives to profitability next year. So you've probably seen this before, the most important piece that Medicare Advantage risk value-based model is one of the best value creation and don't take my word for it. CMS just recently announced that they're going to take their entire traditional Medicare, turn it into an ACO reach. So they targeted by 2030 the entire Medicare book of business will be in value-based contracting. So that's why we believe it's the right space to invest in. The models, we believe in our affiliate models as you can track, it's working much better than bricks and mortar, working much better than acquisition. And sometimes and sometimes not with the joint venture as well. The most important thing is we have a team that has done this for 30-plus years. We have a history in health care partners. We have a history in building population, physician-led patient-centered population health management company. And the time for overall space and for -- definitely for P3 is the right time. It's an inflection point where we see that there is a significant upside. We're turning into profitability. We're turning into a steady state of growth. And that's why we believe it's the right investment with the robust potential value creation for all shareholders and stakeholders as well. So the purpose of this is to share with you our per member per month medical margin over the years. So in '21 was $16, '22, we had to double it or triple it to get to from $52, from '22 to '23, we had to double it plus from $53 to $125. The reason that I'm tracking this help me out here, next year, I don't have to do doubling, all what I have to improve this 30% to 40% from $125 to $170, what we guided on is to put us into profitability. So the buildup of profitability, it didn't happen all suddenly. It built over the year, maturation, persistent lives, consistent operation execution. And now we are in an inflection point in the verge of turning profitable and sustaining profitability and maybe grow it even further. And Atul will talk about the embedded EBITDA in our mature persistent population as well. So kept asking myself, how do I address because everybody is stopping us. We're here in the conference, everybody is stopping us. Are you seeing the same trend as like the other people in the utilization, the medical cost? And can you -- and why is it that you don't -- you're not seeing the same thing. So I'm going to answer this 2 ways. Number one, we're not seeing this across the industry. I called my friends in ChenMed and called my friends in Apollo, and I called my friends in Heritage. And they're not seeing the trend that was reported in multiple article about increased medical utilization. So it's important for us to look at it. It's just happening in certain peers, but not across the industry. That's number one. Number two, we're not seeing that internally. And let me address the question because I know some of you is going to ask, what make you immune to this if it's to happen? The experience of the team is one thing. The knowledge of our people that calculate and finance and accounting that calculate our IBNR is significant. The model of delegation where we do a prior authorization, we do utilization management. And we do claim processing ourselves our ability to see a faster, better, more efficiently than a lot of others is what makes the difference, is what produces this trend that you're seeing here in medical cost year-over-year. Utilization, you can look at it and say, Sherif, this is flat. We're keeping utilization flat in the middle of pandemic and post pandemic is an impressive keeping utilization flat and keeping medical costs flat, while it's -- everybody's reporting -- or industry, Medicare had reported 7% to 9% increase in their health care expenditure year-over-year, yet you're seeing P3 Group and MSO and lives flat year-over-year. So let's look at this in details. Hospital inpatient, down 6%. Hospital outpatient and ambulatory surgery is up 8% because we shifted them intentionally outside of the hospital to reduce complication, to reduce cost and to have a much better utilization trend. Part B infusion drugs minimally increased because we manage it. Dr. Bacchus and his team and the rest of our experienced medical management team is spending -- and Bill Bettermann as well, spending times day in, day out, managing the Part B drugs and infusion costs. Skilled nursing is down 2%. ER visits and ER costs is down 2%. That will result into is some sort of like you saw at the end, flat trend in the medical cost year-over-year. $790, $789. Yes, it's a dollar raise, but really it's flat. It's -- that is the power of P3 care model. That's the power of P3 experience. That's the power of P3 teams. That's the power of the delegation model that is consistent and back to the trend of 5% to 6% in the industry in medical cost expenditure year-over-year to keep it flat. So you asked about the quality. We sampled and -- across the board by a specific category of HEDIS, the follow-up after admissions or ER visits, hemoglobin A1C control and medication adherence and medication adherence for hypertension. And as you can see in the preliminary results in our 2023 is 5 stars. So very, very impressive to our medical team, kudos to our physician leaders, Dr. Bacchus and his team that they continue to flatten the medical cost curve while improving and maintaining a high grade of quality as well. So finally, before I turn it over to Atul to talk about the guidance for '23 and '24, I'm going to tell you about the exciting news where we're going from here. We have in a very advanced conversation looking at a strategic partnership in multiple cities with different health system for us to advance the relationship and conversion of the population from fee-for-service into value-based contracting. One of those city -- that transaction or that partnership will be a transformative into this city because one of the cities that we're working on, it will be the first time in this large metropolitan area that you will see a clinically integrated system of care. So I can't wait until we're ready to publish this and take -- and talk about the details of it. Finally, we are in advanced conversation with a leading -- industry-leading technology platform to add the power of generative AI and predictive modeling to our tech stack that will enable and empower our provider and patient alike to be able to manage the medical costs better, to be able to document better and to be able to maintain the quality and close the quality gaps better. So again, thank you very much, and let me turn it over to Atul to talk about the guidance.

Good afternoon, everybody. My name is Atul Kavthekar. I'm the CFO. So I wanted to very quickly go over guidance as hopefully, some of you have seen, earlier today, we issued a press release and reaffirmed our 2023 guidance. So in summary, revenue we have guided to $1.2 billion to $1.25 billion of revenue. We have also reaffirmed our medical margin guidance between $155 million to $175 million, which is -- implies a PMPM of between $120 and $130. We've reaffirmed our adjusted EBITDA loss from between $50 million to $30 million this year. And just because I know there's some questions, just a quick reference, we started the year with a strong cash position just over about $40 million in the bank. But I want to talk a little bit about 2024 guidance. Again, this is all also summarized in detail. We're very excited about the future. We think we're making some great strides. And as we promised, we wanted to give a little bit more color on the '24 guidance. So we are guiding to revenue between $1.45 billion and $1.55 billion in revenue. And so this just to give some sense of scale and relative to the midpoint of 2023 guidance is roughly about 18% to 27%. So we view that as very, very strong and robust growth, very excited about that. And that implies roughly ending a year -- ending the year at around between 125,000 to 135,000 Medicare at-risk lives. So again, I think we are feeling pretty strong -- feeling pretty good about the strength of the business as it sits. Medical margin, again, reflecting some of the comments that Dr. Abdou made around medical margin and some of the success we've had, we expect that to continue. We are guiding to overall medical margin of between $230 million and $250 million and medical margin on a PMPM basis of between $165 to $175. Again, very strong results that we're anticipating, but at the same time, not something that is terribly outside of the trend that we've seen. Finally, down to EBITDA, we're expecting between a profit, as we had stated earlier, between $20 million and $40 million next year. So we're at a very important inflection point for the company. We feel that we are in a great place to make that cut over from a loss-making to a profitable entity in this year as we have expected and as we've been talking about for a while. So this is a substantial improvement. In that range, that's just to remind everybody, that's a $60 million to $80 million improvement on a year-over-year basis. And we -- I'm going to double-click on that in a second, but it's really driven by a couple of things around medical margin and around cost management. So for my last slide, I just want to cap off and just give a little bit of context to this. So there's a journey. We've been following and making tremendous strides. If you look here at the left side of the graph, in '22, we reported a loss of $128 million. And so improving over that over this year, we are now at the midpoint of our guidance, which we just reaffirmed at a negative $40 million shows an $88 million improvement. What we're talking about for next year is a $70 million improvement. So we're not even trying to accelerate. We're actually thinking this is just in line with the trend and maybe even hopefully something conservative, but guiding to a midpoint of $30 million. And that's broken out into 2 components. And so medical margin improvement, about $57 million out of that $70 million. So that really comes down to a couple of different pieces. It involves our reimbursement. We have been working very hard to make sure that we are seeing our patients on a regular basis, identifying their conditions and making sure that reimbursement is appropriate for those patients. We have substantial membership growth, but nothing out of the ordinary, again as well as a management and a continued expectation around being able to maintain medical costs. And that's something I think that's also very important. Again, just consistent with what we've been observing historically. The second component, a little smaller component, about 13 out of that increase year-over-year is related to operating expenses. Admittedly, it's not the most exciting thing, but we've done a lot of work this year to become more efficient, to be smarter in how we are working and bring down those costs. And that is reflective of just the year-over-year decrease. So we're at a run rate, I think, that is going to be manageable for us for the next year, and that's about $30 million. Again, so getting to a midpoint of $30 million, which we believe is not necessarily relying on any sort of Herculean effort. We think that this is just consistency and execution and the momentum that we've seen so far. So those are -- that's all the comments I have for the prepared slides. So maybe we'll turn it over to Cameron for questions.

Yes. Thank you so much, Sherif and Atul for that wonderful presentation. We'll now open the floor to Q&A. And just a reminder that if you're submitting questions online, we can receive them up here and read them out as well. So first question, can you provide more color on why your medical costs aren't trending the same as others in the space?

So like I said, the answer to this is twofold. Number one, there is a unique set of company that reported this, but also there are a lot of other companies that reported that there is no -- a significant trend in the company that paid attention to the details, medical management and utilization. Number two, the companies that have delegation models. And number three, the company that has been doing this for a long time, like ChenMed, Heritage and ourselves that are able to predict and calculate IBNR much more accurate, more closely. But more importantly, it's -- if you look at it in the last 3 or 4 years, our medical cost despite this significant growth, if you look between '21 and '22, we almost doubled the size of the company, yet the medical cost, as I shared with you, remained flat in the most part. And it's not news that you left it alone and it stayed flat. That means that you bucked the trend in the industry of mid- to high single digits and kept the medical cost, medical claim expense flat to that extent. Even if you extend it into 4 years, and we'll be more than happy to prior to us going public, it's about 2.2% average over the 4 years. That's 0.5% to 0.7% increase every year.

And can you talk about the V28 impact on your business? Your guidance implies high single-digit growth revenue in PMPM, which appears to be a lot better than some others that have negative reimbursement rates.

So we don't guide to a certain specific increase, but you're right to conclude that there is a single-digit improvement, high single-digits improvement in the funding year-over-year. In part because, again, the -- we've been methodically and diligently and appropriately coding and documenting over the last 3 to 4 years. We've never got out into the right side of the build curve, where RAF of 1.5, 1.6, and that had to be corrected with the V28. We actually -- and again, we don't guide on that. So it's been right above 1 barely, and it's going to be increased with some percentage next year because of the hard work of the operating team and the leadership on the field and Dr. Bacchus and his team to accurately, methodically, appropriately have the documentation of disease burden as a part of the care rather than as an independent operating tool. But it's integrating into the care and documenting the disease burden in order for us to improve the health of the population that we serve.

And then one of the issues that we've been hearing about is access to data. It's delayed, imperfect and can also impact medical spend negatively. Can you talk about the benefit of delegation versus non-delegation in that regard?

Certainly. I mean it's a great question. So I remember sitting in 2018 and 2019 with our leadership team and we were thinking about the model is, and we were building, the thought is driving in the fog. At some point in your life, you're going to have to figure out how to drive in the fog. At some point in your life, you're going to have to learn how to drive in a snowstorm. It just -- it's part of life, I have done it. So we actually built the company and saying, how do you create a sense of prediction when it's not clear when the sun is not shining, when the data is not timely, when the data is not perfect. And you resort to a consistent behavior that results into -- what we start developing is KAI. Instead of KPI, we started developing KAI. So there is a set of actions that will result into performance and the experience matter in this that's saying, if you improve access to primary care to the patients, the [ AD ] emergency room and inpatient will go down. If you do that, I'll give you a number exactly, 6x or more exposure to the primary care office, whether being the care manager or the MA or the doctor himself or herself, will result into about double digits, 18% to 20% improvement in the quality gaps closure, 18% to 20% improvement in the documentations. But here's the thing, 30% or more improvement in the medical cost. Because I developed the trust and the knowledge, and I know that I can call, my primary care gets it. So my point is, our experience and our knowledge of that allow us to -- they are a set of actions that will improve regardless if you give me the data that you have, that much admits per 1,000 or whatever. Great, I know it. But what do I do about it? That's exactly what we decided to do. Start with the KAI, KPI would follow, follow these 2 and then the medical cost would resonate. So it's very important to rely on this. However, the delegation model allow us more visibility into our model. So we were talking about because we do prior authorization and a significant portion of -- and utilization management in our population that we serve, we're able to tell you what is our patient surgery next month, not only that -- this month or what happened last month, I can tell you we authorized for whatever the number of surgeries or procedures that need prior authorization that I have line of sight to it. That's going to happen next month. So the power of the experience, the power of knowing what actions that improve KPI and the power of the delegation model that would help us navigate the data challenges across the board.

If I could just add one point, Sherif. I think that those are all excellent points. One thing I would also add is that depending on how you measure it, roughly 1/3 of our business is -- falls under this delegated model. So we have a very, very direct line of intelligence as to what is happening, our finger on the pulse. But it's also very important to think about it. It's a sample size of 30% of the population. So for the balance of the 70%, 2/3 of the business that is not under the delegated, we have very good intel on what's happening there. It's generally a large sample size. So it gives us a broad overall perspective that I think really finds itself into the in the way that we account for the business. We record our P&L, and it just generally brings down some of the variability that you might otherwise have.

Got it. So you are guiding towards double-digit growth next year. Could you talk about a little bit of what is in the growth strategy?

Yes. That's a great question. And as we shared with you before, we're going to continue disciplined growth. We're going to continue purposeful growth, and we're going to focus on profitable growth. So these are the guiding principles to our growth. How do you do that? Almost 100% of what we are looking at is that organic, there is no acquisition. There is a couple of opportunity of joint venture and strategic partnership, but mainly it's an organic growth. It's mainly in the counties that we're already in. Even if we extend it, it's the contiguous county, one county over, so we can leverage our operating expense, our operating leadership into the new one. So similar, we've never deviated from our strategy. We just turned up and down. If you remember, when we presented the first time that we went public, first earnings call, we had a 6 or 7 spigot that can turn into our new contract into existing county, new county with existing contract, new providers in existing county, new provider and new contract. So that's a similar strategy that we're going. We've never deviated from our strategy. It's mainly affiliate model. It's mainly organic growth, and it's mainly in or in contiguous counties that we're in. Anything to add to that?

Okay. Next question. So positive $20 million to $40 million in EBITDA in 2024 is quite impressive. How were you able to move to profitability so quickly?

So I didn't know if the slides would show it, but let me walk you through. So membership growth, steadily, purposeful, discipline, ACO versus MA, big [ scan ] that has a 4.5 star versus other that has 3 stars. So all these discipline and purposeful growth are an important piece of our growth and success and moving to profitability. Number 2, managing the quality so it doesn't impact our funding. It's a very important piece. Number 3 in that element, appropriate, steady documentation of codes that allow us to pass the RADV audit almost every year, allow us to be confident that there is no clawback or a retro adjustment to our funding that will impact our moving forward. The second layer of this comes into a medical cost. Bill Bettermann, Dr. Bacchus, their leadership team, their operating team, so laser-focused on the medical cost and as I shared with you, maintaining the medical cost year-over-year does not mean that they're not working hard, means that their bucking trend of mid- to high single digits increase -- and as you saw, Medicare in their health care expenditure projection or some people call it benchmark. They showed a 7% to 9% increase year-over-year. We don't. We don't. So good funding, steady medical expense. Atul and his team has done a great job into managing the operating expense and bucking the trend of the increase in OpEx. Between these 3 elements, good, steady membership growth, good steady funding growth, good steady, stable medical cost, trending down medical expense between these 3 that will result into profitability. So we're very comfortable and confident that these what we shared with you in guidance continue to be the guiding principle and the numbers that we're going to achieve. And -- confident in the team and their performance as well.

Are there any other questions on the floor at this time? Okay. Well, I think with that, we can conclude our presentation today. Thank you so much for your time, and let's get another round of applause.

Thank you.