Privia Health Group, Inc. (PRVA) Earnings Call Transcript & Summary

All right. We'll get started here. Good morning, everyone. I'm Jailendra Singh, health care technology and distribution analyst at Credit Suisse. Thanks, everyone, for joining us for this session. Next up, we have Privia Health, from the company we have Shawn Morris, CEO; and Parth Mehrotra, President and CEO; and Robert Borchert, SVP of Investment Corporate Communications. For background, Privia Health is a national physician enablement company that partners with leading doctors to keep people healthy, better manage disease and to reward providers for delivering high-value care. We are going to do this in 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]. Thank you so much, guys, for doing this. Really appreciate.

To begin, maybe you guys reported your earnings earlier this week, maybe less begin there and provide quick highlights from the results before we get into discussions on other key topics.

Parth, do you want to jump into that?

Yes, sure. Thanks, Jailendra. So we just reported Q3 on Monday morning. You can see the summary of results here. Overall, really good quarter. We exceeded expectations on all our metrics, raised guidance for the full year on all our metrics, as you can see here. This is the progression of our guidance in Q1, Q2 and now with our Q3 results on the far right. We opened 2 new markets in California and West Texas, and broad-based momentum in the business, existing market growth, new market growth, attributed lives, moving towards a spectrum of risk and really good performance in value-based care this year. So that's led to increase in our guidance even without the 2 new markets across our key metrics.

Great. That was a pretty good strong quarter. Maybe let's take a step back and given it's true for most of the companies in my coverage, I think the investor education and sell-side education going on. So maybe for those new to the story, let's spend some time on your business model, kind of how you differentiate compared to other traditional PCPs or even other physician enablement companies, maybe spend some time there?

Yes. Jailendra, I'll start. Shawn Morris, CEO. Jailendra, we appreciate you inviting us today. We've been met just a few years ago when we in private equity. But I think with any organization seeing success, I think really solving a problem. And health care is, we all know it, very, very complex. Doctors are seeking a solution, as you know, on our earnings call, I talked to, we spent, the weekend was 60 of our physician leadership. And they really are looking at more solutions to support their autonomy. They want help and support with their entire panel. They want common sense technology that works for them, but also works to engage their patients in their health care. And the last but not least, and what we do and still as they want to transition to value-based care in a successful manner. And it's -- we talked about that first line. We truly believe, and I think the results and the performance are supporting it. We have a differentiated solution, and we are building the next-generation physician organization and delivery care network, but the secret sauce when we got a little slide in minutes, but it's really about building large-scale single tax ID medical groups, providing the foundational services with an embedded tech solution and aligning the incidents across the groups and managing multiple risk contracts, we manage over 70 today. And again, it supports their entire panel. They don't want to click on different widgets, they don't want kind of move in and out. But the solution has to scale. We all know if you're going to do this naturally, you've got to scale, you have to align incentives across all the stakeholders, be that the physicians, primary care, the specialty networks, and the right networks, get the patients to their kind of the right time, the right place and even align your contracts back with the payers. I want you move to that next slide, Parth. As I've noted and we've talked a lot about the Privia solution has to be scalable. What I mean was all types of providers, primary care focus along with that right specialty mix independent, we have independent physicians as well as employed, employed in the medical groups, even employed in-house systems and the models working very successfully and really, again, across over 70 value-based care contracts. That middle top section, Large TAM. We all know it, physicians can influence 2/3 of a $2.7 trillion health care spend, and there's 1 million docs in the U.S. and nearly all face the same challenges regardless of whether they're employed or out there fiercely independent. If you want to hit the scale, you've got to utilize great technology and it has to be believe as being kind of embedded in some way with the -- because providers prefer that, and they want to work across their entire panel versus within different panels, within cohorts other panel. We're a profitable company. We've been profitable for 4 years. We don't spend our capital building the 4 walls and employing a lot of physicians. We really, really believe to be capital, it's got to be a capital solution and the performance of utilizing the entire ecosystem of those physician groups across the U.S. is kind of how we attack it. It goes without saying, you have to align incentives up and down, Parth spoke to that and the critical nature of doing that in a successful matter with any business, you've got to have an experienced team that's kind of been there, done it, seen success, obviously, had some failures and really learned from that and kind of moving doctors along this continuum. This strategy, and we talked about it a lot during our IPO process and continue to very simple strategy, but it's difficult to replicate, and it's elegant in that manner. We identify that anchor group. We move into the market. Our machine and our seller goes out, identifies existing independence and other physicians of various sizes. And we kind of -- we build around that anchor group be it a health system, be it an independent group, be it a small physician practice. And then we drive those improvements, administrative and clinical. And we -- and we kind of move that market into value-based care at scale over a period of time. We're using our Privia care partner model to actually identify new markets as we move into those. There is a slide here. It's really a double click, and we mentioned at the beginning, and we'll talk more about it. But the combination of these services are what drive our success. We build the large-scale groups, physician-led governance. It's key to preserving autonomy, integrate the technology and it's not just point of care, why it's odd before them, the encounter -- during the encounter and in between encounters getting the right ambulatory utilization, integrating technology into the solution for the provider and the patient, providing those foundational, clinical and administrative services. And we monetize the network, aligning incentives, high-performing value-based arrangements. We build value-based care ancillaries where we need to. We also do things such as clinical trials for physicians and our patients if need does. Kind of the last part, I guess, we jumped into the questions really just to cover footprint slide. We're not a startup. We've been at this for -- going on 8 years. It gives you an idea of kind of the scale of the organization, how we've moved into our different markets, a market for us is a state, 8 states now with, as Parth mentioned, moving into California, expanded Texas recently in the West Texas. It's 8 states plus district of Colombia. So it's a dashboard. I make note that the metrics don't include the recent providers in West Texas and California because it's as of 9/30, but really kind of down that bottom. We're seeing some great Net Promoter Scores from patients, from our providers, and we're having really our best year of growth and performance. And I think it's just kind of getting into thing and running at scale, and we're providing a solution out there that the physicians realize is working, and our physicians are some of our best salespeople. They're selling their colleagues of what's working and kind of that they should be part of it.

Okay. And that makes sense. Maybe Shawn, you touched on this, but like your approach is more partnership approach. Some other companies are doing more kind of capital-intensive model, opening clinics and it wasn't all. And there are some other companies who have actually -- slightly different model than yours. Help us understand why your approach makes more sense and what drives your decision to go with this approach versus others in the marketplace?

Yes. We respect -- there's a lot of ways to do this. We respect to our peers and how they go about it. We just believe there's a big TAM out there of 1 million physicians. We have over 3,000. But we've got -- there's a lot of running room. And these -- we -- the performance over the years has shown that if you can provide the right infrastructure, physician-led governance, providing them technology, providing them the right tools within those practices and how to engage their patients, you can be really capital efficient in building a model that works. And we believe that there's -- like I said, there's a million physicians out there. They're struggling with those same challenges that I mentioned earlier, and this health -- there is value-based care health systems that are really looking for a physician aligned model, and our pipeline is, I think, showing that today that which is -- it's better than ever, and we're excited about it, Jailendra.

Yes. Jailendra, the only thing I would add is maybe what's probably underappreciated is the combination of these 3 elements here in our model allow us to exercise in partnership with our physicians, a lot of control on the outcomes. That's what really matters. Do you really need to build the 4 walls and employ the physician and give them a salary versus saying you're independent. If we do well together, you have the opportunity to make a lot more and influence outcomes in the same way as somebody might be doing by building the 4 walls and the infrastructure. So we think the capital efficiency, combined with us building the medical group, having a risk-bearing entity and having a full tech-enabled platform gets us everything we need to influence outcomes and really make an impact on the lives of these doctors and succeed as independent providers making a lot more than they would as an employed position.

Yes, that makes sense. With that said, I mean, you guys just recently announced anything, as you mentioned, California market and expanding in Texas. Maybe let's spend some time there, provide some color on the anchor group chosen for partnership and how this accelerates your growth moving into 2022?

Yes, I can start there. So we entered California with BASS Medical Group. They've been around for a long time, grew from a very small group to over 400 providers in the Bay Area and also a little bit outside of the Bay Area. And our fundamental strategy is we pick a group that comes with great physician leadership, great operational leadership on the ground. They understand the market, they understand the payer dynamics. They have a lot of influence in the physician community in that state. And we are leveraging that. So on day 1, we have this benefit in working with an anchor group to really grow the market pretty quickly versus going in and we have no idea what to do because we've never been there. I think that's the uniqueness again with working with existing large groups. They are looking to partner with an entity like Privia that preserves whatever their existing ownership structure might be, whether it's a health system employed physician group, in this case of California, a very democratic ownership in BASS, multiple hundreds of the physicians actually own the medical group, and they were vehemently independent and wanted to partner with somebody who can preserve that.

Okay. Maybe switching over to value-based care for a moment. Let's spend some time there. I think before I talk about Privia Care partners offering, one thing I want to also understand the one other distinction is where some of your other peers are focusing more total downside risk, full capitation where your business is more -- much more diversified fee-for-service, plus you do take full risk in some cases. But more skewed towards other business models. Help us understand the distinction there as well, like why that your model makes most sense? And if indeed, we see other model gaining some success you can make -- maybe spend some time there.

Yes, absolutely. I can start, Shawn can add. So fundamentally 2 or 3 key points, and I'll use some of the slides we have on the earnings call. Number one is it's important to again understand we are the risk-bearing entity that takes -- that has all these contracts and support our physicians and other payers across all types of value-based arrangements, across all patient cohorts. Again, I think it's underappreciated that payers and providers are looking for moving to value-based care across the demographic spectrum. Obviously, Medicare Advantage is an important element of that. It's the highest for capital spend. But if you go to a national payer or CMS, there are other programs that are very successful. As you can see on this slide, we have out of 3 million patients, 760,000 in some value-based program. A large portion of them in commercial value based. We are very successful in the Medicare shared savings program with CMS over the last 7 years, where the payer is effectively also the regulator, and we've done really well in that setting. We have a large pool of Medicare Advantage lives. And we do this across the spectrum of risk. Full capitation, again, is a small segment of the market. We can move to full capitation as these markets mature. And then importantly, with this strategy, we have the ability to enter any geographic market in the country. We are not -- if you're focused on only one segment in this case, full capitation MA as an example, you really need some characteristics to hold true for a particular geographic area, mainly high MA penetration, high density of dual eligibles and so forth. Our strategy allows us to pretty much enter any stage, any geography, work with all types of patients, all types of providers and then look at what strategy might work best at this moment of time. And as the demographics evolve over time, we'll move with that into other programs.

Okay. To that point, you guys recently launched Privia Care partners offering. Maybe spend some time there, how this is different from your full Privia technology solution platform? And I think it was clearly lot of confusion from investors in terms of how they should think that launch has more of a like an offensive strategy, not defensive strategy? Spend some time there? And what are the economics if you can share something?

Absolutely. So fundamentally, what Privia Care partners allows us to do is approach a provider group that is only interested in a value-based care offering. And they may be satisfied today with their fee-for-service book, which is fine, but it allows us to open up the TAM with a lot of health system related ACO entities or clinically integrated networks or other independent physician association type entities where a lot of providers today are accessing some sort of value-based program. So it's our way of offering that solution. And then over time, hopefully convincing a lot of those providers to move to the full stack in the medical group and have a solution for the fee-for-service book as well. So we think it's a greatly offensive strategy, allows us to also use some capital from an M&A perspective in partnering or buying IPAs or ACOs that may exist out there that may be underperforming that we can then work with the physicians to enhance the performance. It is also something a lot of our payer partners are asking us to do and work with some of these legacy risk pools that have not performed well given the legacy technology infrastructure or processes that may not be scaling with these populations. So that's our strategy for that product.

Let me -- I'd like to add to that. Just based on my experience, as you know, I have been at this for long time, helped to build one of the largest Medicare Advantage companies that are out there. Usually utilizing the IPA model for Medicare only and Medicare Advantage only patients, very successful. But at the same time, throughout that 13 years of doing that, addition -- hundred, it's not thousands of physicians, once they're successful, in any value-based program, they want to utilize why is that across your panel. So it's -- I mean it's -- I think it's what doctors are seeking. They want to provide that level of care, they want to practice in that manner across the panel. And if you're able to do that, the key should be when they're reducing costs, providing higher quality, generating that differentiated experience, they should be rewarded for doing so. And they see -- and then if you're not able to do that across the panel, I mean it's -- I think it allows that Privia Care Partners model for us to get in there and get the most part, allows them to kind of get some experience with us. And we do believe some will transition over to the core solution.

Okay. Maybe let's spend some time on the markets you pick and just help us understand how do you go about taking those markets for future business expansion. Any key criteria you focus on while selecting these markets?

Yes, I'll start. So given the diversity of the business and our ability to focus on value-based care across the spectrum as well as the fee-for-service book, pretty much all the states are open to us to enter. We are not looking for any particular characteristics as we said. Secondly, we can -- as we said earlier, we can partner with all kinds of physician practices; small, large, single specialty, primary care-focused, multi-specialty health system affiliated. So again, that allows us to partner with all kinds of providers and access that TAM much more broadly than I think a lot of other companies. Having said that, obviously, you want to go where there's a high density of population and absolute population is higher. So as you can see, we are now in Florida, Texas, California, 3 very big states in the country from a health care TAM perspective. Our initial lenses can we enter space where you have that population density. The markets may be immature from a value-based perspective, but we are willing to play that long game. And that's probably the single most important criteria. The second is obviously an aligned anchor partner. We really focus on who we want to partner with whether we go de novo and start our medical group from the ground up with a very small group or do we partner with a big anchor like BASS in California or with Health First in Florida that gives us a jump start. So I think those are the 2 criteria, but the whole country is pretty much open to us.

Yes. Yes, that makes sense. Maybe let's touch up on the supply side of the business in terms of the physician network, kind of -- I think you did make a few points around why a primary care physician will choose to partner with you versus someone else. But from your side, like how do you -- how do you manage a benchmark physician performance? Like are there certain criteria you evaluate on a frequent basis?

Yes, absolutely. Our value proposition is very ROI-driven. On this slide, you can see where these various puzzle pieces from the left is what fee-for-service reimbursement might a doc group have before joining us, what may be their expenses on the technology stack, what's their throughput on revenue cycle as an example. So on the fee-for-service book, what may be their productivity? Are they spending way too much time negotiating with payers or managing the inefficiencies that exist in a smaller or a big practice today. So we can add a lot of value on the fee-for-service book relative to their baseline benchmark before they join us. And that's a pretty strong value proposition and ROI we deliver day one. And then as we move to the right, again, practices lie on different spectrum of what they are doing with value-based care? Are they predominantly fee-for-service or have they participated in any value-based contracts? What are those contracts? How are they performing? Are they underperforming or have not generated any SHIP savings. And again, that just varies by the nature of the program they are in, how many lives they have, how well they are managing those lives. So we effectively go and create a business plan for a practice across their entire book of business. And relative to their pre-joining Privia baseline, we have a thesis on how much improvement we can drive across all of these levers across their entire patient panel, then we start focusing on how do we grow the practice same-store as their productivity enhances as they are doing better with us, can they organically grow, adding new providers, adding new APs and NPs, seeing more patients and getting market share. So it's effectively -- these are small independent businesses, and we are enabling them to grow bigger and our financial interests are totally aligned. So as they do better, we do better. And that is a very strong value proposition and moat. And given our business model, as we talked on that first slide, these practices are joining our medical groups, our risk-bearing entities, and they come on to our technology and operations platform. It's a self-selection process, and it leads to very, very high retention rates. Very difficult to get out and they are doing really well and they are very happy.

Sorry, go ahead, Shawn.

Yes, I was just going to say think about it there's -- if we're interested in really change in health care in the U.S., and there are some investors out there that tell us every time they meet us, do you really want to be on the right side of health care. And I mean we all know there's not tremendous density of providers that do fully capitated risk and even do value-based care successfully. I mean they -- some of them have done it and failed and some of them have one contract that maybe the succeed in, we believe that -- if you're going to really -- if you are interested in moving our country to value-based care, lowering health care costs, improving quality, and providing a differentiated experience to the patient and the provider and the doctor, you got to start this way. I mean it's getting there early, teaching them the foundation, allow much, and really move in markets, and we believe this is our mission, and this is what we're going to do.

That makes sense. Parth, you mentioned that you have a pretty high physician retention rate. Can you put any numbers around that? And for those that leave the platform, what are the reasons mostly?

Yes, great question. So when we went public in the S-1, we had 95%. That was the average over 3 years. As we stated in our Q3 earnings call, we are seeing record retention. It is much, much higher than that 95%, and that's probably normal for us. So literally less than 1% attrition this year. And the main reasons are either they are moving to a state where we don't practice, they are retiring. And the small segment of them might still decide to sell their practice and take cash upfront. And we have been very conscious not to do that in our model. In health care, physician alignment over the last 30 years. There's been a lot of pitfalls in our view. And I'll name 3 that we are very conscious in our model that leads to why physicians might leave. One is simply are you buying their practice and you got a check, capitalizing their earnings and then they effectively become employed for a few years, that sugar rush goes away and then they start independent again because they're already unhappy in an employed model. And you saw see that in the '90s in the PPM model, you see that with health systems, you see that with other entities that are buying doctors. So we consciously decided we will not cut enough front check and buy a practice unless there's a very good reason for us to own some entity for a strategic reason to enter a market and so forth. So that's one pitfall that we avoid and some practices, there's a price for everything. And if somebody is willing to pay a price, they can do that. Having said that, it is important to realize in our model, somebody is selling their practice, the buyer has to replicate this value proposition. The doctor has to leave our payer contracts, our technology stack, our risk-bearing entities. And whoever is the buying entity has to replicate that earnings stream, which is very hard to do. So oftentimes, even if a practice sells the ownership, they remain with us. And I think it's a subtle but very, very important point, but those are some of the reasons.

Makes sense. Maybe in the last few minutes, I want to spend some time on the technology, your tech stack platform. Just help us understand what percentage of the partners you have level the entire tech platform? And what do you expect that to be in future with a new Privia Care Partners offering?

Yes, definitely. So one important point on the tech stack is we have built, what we believe is a, fairly integrated solution. If you look at the flywheel that addresses the entire patient provider encounter, everything from prior to showing up in the office or searching for the provider in yellow. All the data that a provider needs to have before the patient shows up based on -- if this is a patient in a particular value-based program, what are the statistics, is the patient show up in the hospital recently and so forth in the blue, how you interact with the patient in green virtually in person when you're seeing them. Can you highlight care gaps? Can you look at RAF reminders? Can you understand where you want to refer the patient and so forth? And then what happens when the patient goes home? Are they adhering to their medication. Is there -- are there follow-up visits? Are we monitoring some of the vital stats through a device. And is that data coming into the EMR? Is there a particular care plan for a patient that may be a senior with multiple comorbidities in a value-based arrangement. So this entire stack sits on top of different EMRs, predominantly, we partnered with Athenahealth for the EMR for a majority of our providers. We also partnered with NextGen for about 200-plus providers in North Texas. And then obviously now in California, the BASS Medical Group will remain on Epic. The underlying EMR is one component of the tech stack. I think watch more important is the flywheel that sits on top that can coordinate care. And again, we are very flexible there. We are very agnostic to building versus buying versus partnering one particular solution. We look for best-in-class. And if it doesn't exist, we build our own. And that way, the model is very, very flexible, and we are providing the best tools in one single platform so that the physicians don't have to go contract with 30-plus different point solutions, figure out all the APIs, figure out all the integrations and so forth. They are live on this whole platform holistically day 1 when they join us. And then to your second question on Privia Care Partners. So the fundamental difference will be the underlying EMR will be different for each of the provider groups that join on Privia Care Partners. We're not asking them to undergo that change. They're also not joining our single tax ID medical group for the fee-for-service book. So effectively, we will overlay a component of the stack for value-based care needs onto their existing legacy EMR. And what would be the -- what really important in that perspective will be probably on this slide where we are trying to capture all of the data, fair data, patient data as the patient moves around because that's what you need in the value base setting. You need kind of that claims history. You want to understand where the patient is and take good care of the patient. Put it on data warehouse, run the analytics and then have tools so that we can manage that patient population well. So that will be the fundamental difference in Privia Care Partners.

Okay. Well, that makes sense. Maybe a couple of questions here on like your long-term top line gross target, EBITDA margin targets, where do you stand today? And what are the drivers that will help you to get your long-term targets?

Yes, definitely. So you see a pretty -- you see the history here of the company. We went all the way back to 2015. Just to demonstrate how we build this and then the numbers in '21 are at the midpoint of our guidance range. Our business is very unique where we have multiple growth drivers. We can grow the same-store base, we can add providers in our existing markets, open new markets. Underneath those providers, you get a patient panels that are already existing. And I think that's a unique aspect of our business where we don't need to go and find new patients. So we have about 3 million plus patients across our 3,300 odd providers. And out of those, 760,000-odd are in some value-based arrangements. So that's a big lever where we want to move as many of those patients into value-based arrangement. And a combination of those 2 across the entire book of business drives our top line, which is practice collections, and you've seen how that grows. We think we can grow at top line 20-plus percent over long term. And long term, in our view, is a decade plus. You can see the history here, and we like to just keep going at it. This is a long game. We like to enter many states in the U.S., grow those states and build these big medical groups, move to value-based arrangements, increase the level of risk and all of those will hopefully allow this business to grow top line by 20-plus percent. And from a bottom line perspective, again, I think the uniqueness of the Privia model is you're getting an entity which is proven. We are profitable today with meaningful EBITDA. Our CapEx is less than $1 million, a lot of that EBITDA translates into free cash flow already. So luckily for us, we don't have to go through the breakeven point and figure out how an entity makes money and at what stage. We are at a stage where we are using this cash flow to grow the business, and we are scaling margins already. Our long-term targets are as a percentage of practice selections, EBITDA margin would be 5% to 7%. And as a percentage of care margin, it will be 30% to 35%. And I think it's important to reflect on that as I know a lot of investors are trying to peer comparisons. When we arrive at care margins for Privia, we are taking out these 4 costs in 2-way PCP here, all the medical costs, the physicians compensation, their share of any shared savings and the cost to build and operate a site. And I think when you normalize for that in other models, whether it's a clinic-based model or just a value-based model on MA, you will see the scale of our business is truly appreciated in this, you can appreciate that in the care margin number, if you normalize this for other companies, too. So it shows the breadth of the business, the profitability of the business and the proven nature already.

All right. Before we wrap up, Shawn or Parth, do you guys have any closing comments?

Jailendra, we appreciate your support. We appreciate your thought as to come on and talk about the business, as you can tell, a lot of momentum. The great retention, great sales and the performance of our value care-based care book is exceptional, and we're excited about the future.

Sounds good. On that note, we will wrap up. Shawn, Parth and Robert, thank you so much for participation. And thanks, everyone else, for joining in. Thank you. Take care.

Thank you.