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

Good afternoon. My name is Lisa Gill, and I am Head of Healthcare Services with JPMorgan. It is with great pleasure this afternoon that we have with us Privia Health. With us today, we have Parth Meh...

Mehrotra.

Mehrotra. I never can say that right after all this time. Parth is going to run through a quick presentation and then sit down with me for a couple of questions. I'll turn it over to you.

Thank you, Lisa. Thanks for inviting us again. It's our fifth year at the conference, including a few private years when we were private. So I really appreciate being here, in January. I'm Parth Mehrotra for those of you who don't know me, I've been at Privia for 9 years. Since early stages of the company, way pre-IPO, was President and COO before, and took helm of the company mid-year last year. So a pleasure to be here again. So we have about 15 slides to talk to you about the business. A fairly good overview. A lot of you know the story that I can see in the room. And then hopefully, we'll just get into Q&A and make it interesting. So the elevator bridge on this company is, we have a very unique physician alignment model, where we are creating integrated medical groups, risk entities and a full service and tech platform all in one. We are partnering with every single type of physician, every specialty, every patient that walks in the door across any reimbursement model. We play value -- the theme of value-based care in the broadest possible sense, including obviously the fee-for-service book, and we are transitioning these practices into value-based care over time. All that leads us to have the biggest TAM, multiple growth drivers. The business is highly profitable today, capital-efficient profile, free cash flow generation, and we lead with a great management team. Obviously, I am biased. By definition, we have access to the biggest TAM in health care. The pie chart represents spend in health care for each of the 4 segments. There's about $1.9 trillion of physician enablement spend, Privia touch is about $6 billion. That's one way to look at the TAM. We have 2 other bullets on the right. Privia today has about 4,100 providers that are implemented on our platform, out of a potential 1 million in the country. So you can see we're just barely getting started here. And then finally, collectively, those providers see about 4.7 million patients out of a total of 340 million U.S. population. So use runway to go, the model is applicable in any potential state. So while the TAM is big, we have a lot of headroom going into it. We are one of the largest primary care delivery networks in the country already. You can see here our current footprint, it's 14 states, 4,100 providers practicing in about 1,000 care center locations, collectively seeing 4.7 million patients. And then 1 million patients out of those are in some value-based arrangement. You can see we have a really good patient and provider NPS, really good retention rate. And we've been doing this, like I said, for over 10 years. So the model is really proven and makes money. What we do is very consistent and replicable across every state in the country. We established our presence by setting up an integrated medical group, multi-specialty in nature, coupled with a risk entity and a full tech and service platforms. The medical group has a physician-led governance model that sits parallel to the management team of the company. Once we enter a state, we are looking to add providers in those medical groups wherever they might sit in the health care ecosystem. They could be independent practices, small provider groups, big provider groups, sitting with inside of health systems, sitting inside of IPAs or clinically integrated networks or any other facility-based providers. Once we onboard those provider groups, we are looking to transform the practice, drive the profitability on both the fee-for-service and value-based book of businesses. We drive same-store growth. We grow the practices and make them viable. An increase at the end of the day, the take-home pay for these doctors. And then ultimately, we are looking to transition all of these providers into value-based care reimbursement models at massive scale. That's the underlying operator word. And what's differentiating for us is that we do this across all segments of the U.S. population. The commercial book, Medicare Shared Savings with CMS where we are one of the largest participants, Medicare Advantage and then Medicaid. You can see here we sit in the intersection of both providers on one side and payers of health care on the other. And we have a very unique value proposition to both these constituents. To the providers at the end of the day, we're looking, like I said, to grow their practices, increase their take-home pay, make their practices more viable, grow them on a same-store basis, and these are the ways in which we add value to them, which is very self-sustaining, which is very deep and it's very long lasting. To the payers of health care, we offer one of the largest care delivery networks with community-based providers. It's often the lowest cost delivery network in those communities. We are able to do value-based care in a very innovative manner -- in a very innovative formats across those lines of businesses at scale. And we have a very flexible value-based strategy where we can move these providers across the risk spectrum over time as they get ready, the payers get ready, we have enough density. So it's not a cookie-cutter approach. That's a reality of health care in the country. And then we follow whatever the local geographic limitations might be and we work best around that. All that leads to very significant shared savings across all of population cohorts. You can see here just deep diving into our value-based book. We have about 675,000 commercial value-based lives, about 420,000 government lives, which is split between about 200,000 lives in Medicare Shared Savings programs, close to 150,000 lives in Medicare Advantage and about 70-plus thousand lives in Managed Medicaid. And at the bottom of the page, you can see we take -- we're in enhanced track or we take the maximum risk that CMS allows us to take in MSSP and about 70% of that population on those lives. About 23% of our MA book is in partial or full capitation, where we are taking significant downside risk. And in Managed Medicaid, we're just doing it on an upside-only basis. I think this slide is going to be very important last year and going into this year. Any provider organization downstream from the payers looking to do value-based care, looking to take risk, has to manage that risk very prudently. I think we pride ourselves in doing this very profitably, and there are 3 components to how we manage risk. On the left is just diversification of the book. Each of our different programs are constructed separately across commercial, Medicare Shared Savings and Managed Medicaid and Medicare Advantage. That diversification allows us to hedge risk across these different books, and we're not succumbing to an anomaly having in one book of business across 100-plus payer contracts. We think we have one of the best, most sophisticated actuarial and data -- healthcare economics team and data scientists, obviously overseen by an audit and compliance function and board oversight, which is key. And then finally, it's operational execution day-in, day-out as we are managing risk. What's important to note is we share upside and downside with our physician partner 60-40. The doctors keep 60% of the upside. Privia takes 40%. They also share 60% of the downside. That aligns very good interest. When we decide to dial up risk, we do it in a joint decision with our physician practices, that ensures that they are working and managing the risk alongside us as a company supporting them. I think that truly differentiates us. This is an overview of our tech stack. You can see the workflow of the physician office in this race track. And the punch line I want to leave you with is there is no one health care IT company that has effectively formed a cloud-based ERP for a physician's office that can see any patient that walks in the door, any reimbursement model for any specialty across both fee-for-service and value-based care models and across the risk spectrum. So if you look at all the functions that have, have to happen as a patient goes through this racetrack, we believe we've taken a barebones EMR revenue cycle engine and then added 30-plus different tools and created this racetrack where we are deeply embedded in each of our practices. All of them get implemented on this platform. It adds a lot of productivity lift, lot of efficiency gains, and we think it's a real competitive advantage to have a lot of our doctors on a common platform. We have 2 case studies. So all of that good stuff leads to real outcomes in both any state that we operate in and then a particular physician practice and then ultimately translates into the results for the company. So you can see here, Mid-Atlantic, which is Virginia, Maryland, D.C. is our biggest and initial market that we started in 2013. In 10 years, we've grown this from being almost nothing to 1,300 providers, which is one of the largest medical groups in that geography. You can see we are collecting over -- close to $600 million of fee-for-service collections. We've grown attribution and value-based arrangements from almost nothing to close to 500,000 lives, and we've saved over $600 million in shared savings over the last 8 years. You can see we've had same-store provider growth, both on fee-for-service and value-based on the right. All of that leads to is great density in the market, and this is a network that we can offer to payers of health care. This is a market where we are exhibiting unit economics and margin profile that is well exceeding our long-term targets for the whole company. So this gives us confidence that the model works. It's proven, and we're trying to replicate this in other states as we grow. You can see the impact here in this case study for a particular physician group. There's a 17 provider group joined us in 2014 with very simple objectives. Can this remain a viable practice? Can this thrive and have a best-in-class technology platform, services platform? And then can we reorient the practice to be -- to have a revenue stream around value-based care? And then more importantly, they were bleeding doctors to retirement and could we grow this practice on a same-store basis? So you can see the impact we've had in 8 years. We've close to triple the revenue. We've doubled -- close to double the provider base in the practice. We've increased annual patient visit volume by 35% and increase per provider patient volume by over 24%. And you can see they earn today about $1.1 million in shared savings. So this is a transformation. This is a classic example of the impact we can have on a small community practice that if left on its own probably would not thrive in this macro environment, in a health care ecosystem, which is consolidating. And so this is what Privia is able to do. All that leads to -- you can see these are 6 financial metrics that we guide every quarter. The 2 units for this company at the top left of the screen are implemented providers and attributed lives. We want to get doctors on the platform. They see patients. We want to move as many patients into value-based arrangements. We collect dollars on all of those patients, fee-for-service and value-based, that's practice collections, and we charge a management fee that translates into care margin for this business. We charge about 11% to 12% on fee-for-service, 40% on value-based care, and we own a care management fee on top of most of our value-based lives. Our platform contribution takes into account all the costs that we incur to service these practices, and then the gap between that and EBITDA is sales and marketing and G&A. You can see we've grown EBITDA pretty consistently over the past 5 years, meaningfully so since we've gone public. You can see our year-to-date results on the far right. What's more important is 80% and 90% of EBITDA converts to free cash flow. Our annual CapEx is less than $100,000. It's a very capital-efficient business, and that's what we do. We reiterated our guidance. This is our guidance as of Q3 at our earnings call. We are reiterating it. It's the exact same slide that we showed at our earnings call, across all these metrics. You can see the initial guidance at the beginning of the year and how we updated it at Q3. So we are reiterating all that guidance, including the free cash flow conversions across all these metrics. Finally, we have a very strong capital position and balance sheet. We have no debt on this business, $371 million of cash, fully diluted share count of 125 million. So -- and the businesses, like I said, generating 80% of -- converting 80% of EBITDA into free cash flow. So that gives us a lot of capital to take risk, to grow the business organically and not rely for any external sources of capital and then go address the TAM that we are able to build. And with that, we'll take questions.

Great. So let's start with the model -- this physician enablement model and the competitive landscape today. Can you talk about when a provider is choosing Privia versus others. One, has the competitive landscape changed in the last 2 years? And two, what is the value proposition that this physicians are really looking for when they select Privia?

That's a great question. So fundamentally, as I alluded to before, we think we have a model that is very unique, that is looking to partner with the entirety of the physician practice, every single specialty across all lines of business. I think other than OptumCare, we don't think there's a model that's actually creating big integrated medical groups in the country. So our value proposition is to the whole practice, and I think that's very differentiated day one. Secondly, I think we are looking to do value-based care across all lines of business. That's a very tough undertaking. We are deeply embedded in the workflow of these practices. We do fee-for-service. We are transitioning those practices into value-based care. There's a natural path to this. We don't think the composition of the U.S. population is going to change. 55% of us are going to be commercially insured. To do value-based scale at scale, you have to attack that population as well. So while I know there's a lot of focus on Medicare Advantage, and that's a big opportunity on a per capita basis, doing value-based care across the book, I think is a true differentiation for us. I think those are the reasons some practices join us as we're willing to do that.

You talked about the risk component and you talked about 150,000 Medicare Advantage lives that are in some type of risk relationship today. When I think about what's happening right now from a utilization perspective, we heard large managed care companies back in June talk about we're seeing an increase in outpatient procedures, orthopedic, cardiovascular, and then over time, we started to see some of the other models have an impact, right, where they said that higher utilization. I know you have less -- when we look at your overall just 23% right, are in these types of relationships. But -- is it that you've been able to manage this better than others? Is this that because it's only 23%, you're seeing an offset to this? How do I think about how you've been able to manage through these changes in utilization in 2023 versus kind of the marketplace?

I think there are a few points, and I'll go to this slide where we call it -- it's called "a risk for a reason." I think, like I said, any provider entity taking risk has to manage through all those elements. Utilization can go up, utilization can go down, how you're contracting with the payers, what MLR thresholds you get under which you will make money and the doctors will make money. Having a real health care economics function, data scientist function, having a real data warehouse where you can get the data, not having optimal data is a risk you have to manage. And you don't get it equivalently in all of those buckets. So I think we've structured the company from day one with all of this infrastructure in place, for that reason. I don't think we are immune in any of our risk books. I do want to highlight one thing. Despite how much downside risk you take financially, you still have to manage risk. So we are looking in the MSSP population, even though we don't take 100% risk, CMS shares with us, we are looking to bend all those elements of the cost curve, ER visits, ED visits, facility costs and so on and so forth, for our underlying patient population. We're trying to manage disease states for the most chronically ill patients. So you have to -- when you are taking risk, you have to manage those lives. And I think that's a combination of everything on this page, including operational capabilities. And I think when things don't work right is when folks appreciate this page, and I think hopefully, companies like ours stand out for the capabilities we have.

Going back to your comment that you need to do more than just Medicare Advantage, when we think about the commercial market. And I know Sean had worked for one of the prior physician practice management companies back in the 90s. And it didn't exceed in the commercial market. Why do you think that the market today is maybe in a position via value-based care, via physician enablement finally there for the commercial market. And over what period of time do we really fully get there?

Yes, it's a great question. I fundamentally think going back to our business model. It's very hard to do risk and commercial as an outside entity that is just helping physicians without running medical groups. On the commercial population, like all of us in this room, we are having very sporadic encounters other than our annual well visit, is largely fee-for-service. Unless you're doing it from within a medical group setting with real physician governance, and you can do it at scale where you take a network to the payer of health care and have contracts that can stratify the population and allow the medical group entity to do value-based care for each subsegment of the population. You can start with pediatrics with children, with women. And then obviously, I would call it the healthy working adults from 23 to probably 50, and then you're managing the pre-Medicare lives between 50 and 65. I think doing commercial risk is very sophisticated across each of those buckets. We are looking to get paid based on quality outcomes, children getting their vaccinations, children shown off of the annual well visit, mental health issues. In that 50 to 65, you're trying to do all the preventative stuff, cancer screenings, colonoscopies, so on and so forth, vaccinations. And so how you get paid at scale matters. And I think you can only do in an integrated structure like ours where you can take a big network with a large number of lives, and then it becomes interesting for a payer of health care to do.

And are you seeing payer interest in these kinds of programs today?

I mean, absolutely, we've got 675,000 lives. And on each of those lives, so we see 4.7 million patients, if you take 55% are commercially insured just generally, you can see on 1/4 of those, we are trying to do value-based care, where we've taken a simple fee-for-service reimbursement model and added a care management fee and added shared savings on top of that. We may not increase the fee-for-service reimbursement as much as we can increase the other 2. So the doctors are now finally starting to get paid and you have a value orientation on a commercial population, which has seen the highest cost escalation. I think that's very unique for our company to do with the payers, and they are interested in doing that. The other important factor is they're very interested in everybody who's turning 65. And we are a unique model where we know everybody's birthday. We know when everybody is turning 65. If we manage that population really well from 50 to 65, that's a very healthy MA patient, MA life that's entering the Medicare Advantage book. So I think for all those reasons, payers are looking to, again, work with us in markets where we can get density in our integrated medical group structure to do this.

The other area of growth you've had in the last few years is health systems. And I would think that health systems are probably looking for something different, and the relationship that they have with Privia. Can you maybe just walk through a traditional health system and some of the opportunities you see there?

Yes. Absolutely. Close to 50% of all providers give or take the case study are employed, aligned affiliated with health systems. Historically, they've built big medical groups to feed the facilities. And as reimbursement model shifts, it's not a natural place where you can do value-based care. So we become a very good partner to them for a few reasons. Historically, health systems have looked to acquire or employ doctors, oftentimes subsidizing the medical groups for the inpatient line of business, that's unsustainable. I think COVID excavated some of those trends, the cost pressures, the inflation pressures. So health systems, number one, are looking to us to have large medical groups and grow their medical groups without buying practices. And the Privia model is a very natural way for them to do, across all lines of business and all specialties. They're interested in all specialties, not just primary care. Again, our business is uniquely structured to do that. From a defense side, you have a lot of employed providers that are looking to exit health system employment. And the health systems don't have a catchment area for those docs. So a Privia model becomes oftentimes a place where they could land and still have all the affiliations with health systems. And then finally, I'll just complete the thought, the last is obviously this transition to value-based care. So health systems have established their own CINs, their own ACOs, they're trying to take risk. And again, their core competence is running facilities, running complex surgeries, and I think we can help them manage that book.

Do you think that they're on the right trajectory, though, when I think about value-based care, a lot of it is shift in site of care when we think about moving towards lower cost settings and to your point that the hospitals, they built these big elaborate organizations and then hired a bunch of doctors to feed those organizations. Do they understand like that this is the way that it's moving and the reimbursement models are changing?

Look, I think they absolutely do. I mean they are run -- even both on for-profit and not-for-profit side. The health systems are run by very capable executives. They understand it. They're dealing with a legacy set of infrastructure costs and investments that they've made. But if you look at where they're looking to invest incremental dollars, a lot of it is in the outpatient setting. I think they understand that the hospital is a place where you can have complex surgeries, but then you can do a lot of surgeries and procedures in an outpatient setting where the health system is investing in. I think this transition is going to be by health system, by geography, and it's not going to be homogenous. Some health systems are going to be ready, some are not, some have very large not-for-profit mandates and be critical access hospitals for the Medicaid population, and I think that's a mandate that they have with their foundation. So I think they're serving a need that is very hard to do in a forward-profit sense. I think you've got to respect that. But I think over time, not -- a Privia model, it's not right for every single health system, but the most forward-leaning ones are looking to partner with us and do that.

You've called out that the start-up cost $4 million to $6 million when we think about these health system partnerships. It's basically a hunting license, if I think about it correctly. And so you go out and you sign up those physicians. How do the economics on the health system partnerships compare to your traditional physician partnerships?

It's actually very comparable. So we spend anywhere from $2 million to $4 million in any state that we enter, and that's to set up the leadership, that's to set up sales and marketing, implementation costs before even a single doctor joins us. That cost is very similar, whether it's a health system partnership or not. I think what the health system partnership gives us is a lot of relationships in an existing geography. Like when we show up in North Carolina, nobody knows us. Everybody knows Novant. Same with Ohio Health in Ohio. So I think it leads us to have an accelerated path to building big medical groups, which is what we are looking to do, but the cost structure is the same.

And point of breakeven or profitability?

I think we're looking to get to 200 or 300 providers when the markets break even if it's on only fee-for-service. If we can do value-based care sooner, that can happen sooner. We're looking to lower that threshold as we've grown the national scale of the business. So obviously, if we entered 6 new markets, we highlighted, we've spent about $10 million of new market costs that's negative EBITDA markets. But over the next 2 or 3 years, we're looking to break even those, and they'll all be positive contribution.

When I think about the competitive marketplace, right, this is something I'm sure you have to answer questions on every day. It doesn't feel like your competitors are doing the exact same type of partnerships with the health systems. Do you think the competitive landscape shifts because your offering is successful -- do you -- maybe just talk about the specific to the health system market as we see it today, how would you characterize the competitive marketplace? And how do you think that changes over time?

So fundamentally, going back to the slide, I don't think any of our competitors are building integrated medical groups risk entities with a full service platform across for all specialties in all line, all patients walking in the door. That's fundamentally how we've set up the business. That's very hard for somebody to do overnight if they've never done it. Running a fee-for-service line of business where you're running revenue cycle, where you are processing claims for 50 plus specialties is not easy to replicate. So I don't think there's any competitor that we come across that is doing exactly what we do in the way we do it. If you find it, let us know, we've got $400 million of cash, and we want to buy it. So I think the value prop that we offer is very unique. Like I said, it's not for every health system, but I think it gives us an edge, which very few have. It's a very hard model to run. You can have individual capabilities in one or 2 of these lines of businesses, but to undertake what we are doing in an integrated manner, and we've done it now in 14 states, it's a very hard.

And if I think about going back to your comments around specialty, it brings to mind the Greenville ENT relationship. When I think about -- you said all specialties, all areas, are there areas though specifically that you're targeting? So maybe use Greenville as an example, like how did that come to you and why did it make sense?

Yes. So originally, when we started Privia, I was focused on primary care, and then we expanded the definition to be gatekeeper doctors. So whoever is the first point of contact in the family. So pediatricians for kids, OB-GYNs for women, family medicine, internal medicine. We then morph that to be folks that take care of the chronically ills. So think about endocrinologists, pulmonologists. And then we got into specialist, nonsurgical specialties, ortho, cardio, onco, so on and so forth, but not surgical. And when we had health system relationships, you're getting all the other specialties attached to it. We think having integrated medical groups is the way to go because 80% of the cost sits downstream from the gatekeeper doctor. For us to be...

Probably more than that, right, I think.

Probably more than that, yes. So -- depending on the life and where they are. So for us to take do value-based care, when 80-plus percent of the cost is sitting downstream, we see a lot of data and we can manage those costs and if we can keep a person in the Privia network, we can monetize that life in many ways and manage risk and even share some of the shared savings with the specialists. I think that's the next stage of evolution of value-based care. So it's a very conscious strategy. And like I said, 55% of the commercially insured population and everybody else needs specialists. And I think to exclude them from the equation is very artificial.

So if I think about your model, should I think about this, all of the regions that you're in, we look to add specialists across the board so that everybody is kind of within your network. So it will almost be like a mini HMO model or if I think about a closed model, right, like Kaiser or someone else in the marketplace that...