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

Good morning. My name is Lisa Gill, and I head health care services here at JPMorgan. With us this morning, we have Privia Health. Presenting for Privia is CEO Parth Mehrotra. Close? I always get this wrong. After, Parth is going join me, and we're going to do a little fireside chat after the presentation. So with that, Parth, I'm going to hand it off to you.

Thank you, Lisa, for inviting us. Always a great conference to kick off the year. So some prepared remarks just to tell everybody about the story and refresh it. Privia is looking to build 1 of the largest primary care-centric delivery networks in the country. Our footprint today is 14 states plus D.C., where we partner with over 4,600 providers that practice medicine in close to 1,200 distinct care center locations. Taken care of over 5 million patients. And then 1.2 million of those patients are attributed in some value-based arrangements. We partner with providers in every single specialty. You can see pretty high retention rates at 98% and very high patient NPS. Our business model comprises of 3 fundamental components. In every state that we operate in, we establish a multispecialty medical group, where the providers join and access all fee-for-service contracts to see every single patient, every single payer, every single age cohort. We partner that up with a risk-bearing entity that allows our providers to participate in different value-based programs across the spectrum. And then we have a full integrated tech and services platform that support those 2 entities where we go very deep in the workflows of our practices, transform them, make them high performing. This deliberate business model allows us to access the broadest possible TAM in health care, where we can partner with every type of provider overseeing every patient in every single payer contract across all age cohorts, and that allows us to be relevant in almost every state in the country. We have a pretty consistent strategy where we enter a state, establish all 3 components with a full physician-led governance model. We organize providers wherever they may be in the health care ecosystem, independent providers that was affiliated or attached health system, those in clinically integrated networks or IPAs and other facility-based providers. We drive growth and profitability and deliver very tangible value to them. And then over time, our aim is to move -- transition these practices to do as much value-based care across all lines of business, commercial, Medicare Shared Savings with CMS, Medicare Advantage and then Medicaid. Privia sat solely in the intersection between providers of health care and payers on 1 side. And this slide shows our tangible value that we offer to both of those constituents. At the end of the day, our job is to transform our providers' practices into very high-performing ones and increase their take-home pay on a net basis. We do that with better fee-for-service contracts, improvement in revenue cycle, enhanced productivity, increased revenue through value-based care, and then growing these practices on a same-store basis. And to the payers of health care, we give them access to a very sophisticated, large community-based multi-specialty medical group and a delivery network, the ability to perform value-based care at scale, a very flexible strategy that adapts to the local dynamics in every single state. And then an ability to have providers stay autonomous and thriving in the communities versus being forced to close their practice or sell it in duress in these times. And then finally, obviously, we help generate very significant share savings across the entire population. A key moat around our business is our ability to go very deep in the workflows of our practice, and we have a very methodical process that we use to help providers move to value-based care. Starting with practice fundamentals on the left. We partner with practices across the spectrum here, but you can see, over time, the objective is to move them towards the right and take -- and participate in very advanced risk models. And we are helping our providers do all of this work at the bottom of the page. That's the day-to-day grind in health care. It allows us to be deeply involved in the workflows, influence those workflows, make these practices really efficient and deliver value that I just talked about, both to the providers and then the payers of health care. The second component of our services platform is our technology stack. And you can think about this as a cloud-based ERP to manage and run a very sophisticated integrated medical group and a risk-bearing entity that we form. There's no 1 company that we know that can truly come up with a cloud-based platform that supports all aspects for every single patient going around this race track in every reimbursement model, every payer, every state, every age cohort. And so we have partnered or built components of this race track over the years. We've partnered with about 30-plus companies that innovate day-to-day on different components and optimize it. And I think that's a core value we add to all our medical groups and practices so they don't have to worry about this and we stay at the forefront of innovation across all of these components. Privia has one of the most diversified value-based platforms in the country today. As I mentioned earlier, out of the 5 million patients, 1.2 million of those are in some value-based arrangements, and you can see the split here between about 800,000 lives in commercial value-based, about close to 500,000 lives in government value-based programs. This makes us a truly unique asset. We're doing commercial value-based on about 800,000 lives, on which -- 35% of those of which are in downside risk arrangements. We're only a handful of entities in the whole country that operate at this scale in the commercial risk spectrum. Within the government lives, we have close to 200,000 in the Medicare Shared Savings Program with CMS, in which we take downside risk in 76% of the lives of the Enhanced Track, the maximum permissible risk that we can take in that program. In the Medicare Advantage book, 3/4 of the book is an upside only risk arrangements. 1/4 of the book is in significant downside risk arrangements given the current M&A environment. And then Medicaid, we're just doing upside risk just given how the programs are structured with that population. We've consistently said that it is called risk for a reason, and so you need a pretty extensive experience in managing risk especially if you're trying to do this profitably. And we try to do that by diversifying risk and managing close to $9 billion of medical spend across 100 value-based programs. We have robust oversight. And then ultimately, the operational execution, our ability to be very deep in the workflows of these practices allows us to really influence the behavior of our physicians and manage the total cost of care for the patients in a very deep manner that allows us to be very profitable while we're taking risk. All of that translates into pretty superior unit economics. A key aspect of our business is the competitive advantages compound as we grow at scale. And our vision is to be 1 of the largest medical groups and risk-bearing entities in every state that we operate in. So as you can see, from 2018 to 2023, we significantly decline our customer acquisition costs by close to 40%. Platform contribution per provider increased 30-plus percent. Our payback period declined by over 50%. And lifetime value to CAC increased by over 100%. And these stats are some of the best I've seen across my career, across any industry given our very high retention rates. Those unit economics ultimately translate into very superior, consistent financial performance. So this is literally the money slide, pun is totally intended. And you can see our performance. So these are the 7 metrics all the way down to free cash flow that we guide annually and then update every quarter. And you can see our performance through market cycles, economic cycles, health care cycles, pre-COVID, COVID, post-COVID, we've consistently compounded this business, added our units, both implemented providers and attributed lives, increased our top line, increased our bottom line, improved our margins. And then the beauty of this business model is, on average, we've converted 100% of EBITDA to free cash over the last 6 years. We're really proud of that. This business has effectively 0 CapEx and really good cash flow profile. And all of that translates into a very strong balance sheet and capital position. You can see we're going to -- at the end of Q3, we would have close to $500 million of cash, $475 million, no debt, and that gives us a very strong balance sheet to continue to compound this business as we grow the medical groups. We're formally reiterating our guidance that we gave at the end of Q3 to the high end of the range for all of our metrics, with attributed lives being above the high end of the range. We feel really strong about closing out 2024. We've had a record sales year in 2024, as we've mentioned on our Q3 call, and that gives us a lot of visibility going into '25. So we feel pretty good from where we stand. And with that, I think we're ready for some questions.

Great. Thanks so much, Parth. So just given your position in the market and the large fee-for-service book you have, you probably have some visibility into current utilization trends. Can you maybe talk about what you've been seeing from a demand and utilization over the last year and going into the end of the year?

Yes, absolutely. I think utilization continues to be pretty strong. And we've always distinguished utilization between ambulatory utilization with community-based practices, and then downstream utilization with some of the specialists and then in the facilities. We continue to see elevated levels, and we actually think this is the new normal, and that's what we bake into our assumptions in the value-based book, and then we have a pretty significant fee-for-service books so that benefits from increased utilization.

And are you seeing any differences in the specialty versus ambulatory?

No, I think it's across the board. So there's no real difference. I think we continue to see pretty strong trends across all lines.

This slide is a great slide, looking back on '24. As we think about '25, I know you're not ready to give guidance yet, but you talked about a record selling season for 2025. Is there anything you can share at this point about how you're thinking about '25?

Yes. So our business is really predictable. When we start, beginning of the year, 95% of the P&L and all of these metrics are pretty much locked in, which allows us to give very narrow guidance ranges. You've seen our consistent performance over the last 4 years as a public company. So unless something exogenous happens in the year, usually, it's pretty predictable. So we give guidance in 5 weeks. But as I mentioned, we had a record sales year. We're closing the year strong. So that gives us a good jumping off point. So we feel really good about 2025 as we sit based on our previous comments on our ability to grow EBITDA 20-plus percent in this environment despite there being pretty significant headwinds in MA and in the value-based book of business in general. We've assumed that we won't get much tailwinds at all and then manage all the headwinds. So the ability of our business to continuously compound and if you see, we've grown EBITDA 25% at the high end of the range in '24. And then we continue to expect to keep at that base of 20-plus percent in '25. So I think we feel pretty good where we sit today.

And you've called out a couple of pockets of variability in your business, namely the potential to misjudge the value-based care book of business, the impact of utilization trends and the impact to new market entrants, which when we think about that and then when you think about the pressures of any 1 of those pockets, how should we think about whether it's new market? We talked a little bit about utilization. We talked not directly though about what's happening in MA. How do we think about how some of those will impact 2025?

Yes, it will be very consistent with previous years. So when we give our guidance, we don't include any new market business development. And that could be pretty accretive if we enter a new state with a pretty big asset or be a little bit dilutive if we have to spend some money, and we start with scratch. But either way, that's not included in guidance. So we'll update our guidance during the course of the year as we enter new states. I think we've been very prudent about our approvals across the entire value-based book. I think it served us well. We've got all the data we have to close out '23 performance year, and now exiting '24. So we'll continue to be very prudent, but there could be some variability in the value-based book. I think our track record seems pretty good in how we managed expectations. But I think that continues to be the main source of variability. I think the fee-for-service book will be very stable. So -- but again, we feel really good given how predictable this business has been from that perspective.

You talked today about commercial value risk. You talked about your full risk arrangements. Where do you see the value proposition for fully capitated arrangement models going from here? I know you called out 2025 as being challenging again on the MA risk side, as we've seen that really in '24 as well. But where do you see some of the opportunities?

Yes. Our value proposition has been very consistent since our inception. We're trying to offer something to the entirety of a physician practice. Every single physician, every specialty, every patient walking in the door. And as mentioned, like we try to do value-based care across all lines of business. That is very differentiated. A lot of companies are there that are just focused on 1 particular line of business with the MA population taking full risk. We think it's important to understand, and we've been saying it for long, the most optimal arrangements are where the payer of health care, an entity like Privia or any other enabling providers and then the provider all have skin in the game. Our providers are asking us to enable them to take more ownership of the total cost of care. They don't wake up every day and say, either a current Privia provider or a prospective provider, they don't wake up saying, we want to do full risk because that's the new buzzword and the whole investing community is focused on it. Look, we understand that our job is going to be increasingly to be taking ownership of the total cost of care or big pieces of it. And then we'll get paid based on how well we do in that endeavor. And then number two, we don't have the skills capabilities, actuarial abilities, data analytics, a tech stack or disease management capabilities to do that. So you, Privia, or company XYZ, come and help us. And we don't want to lose money. We've been in medical school for 35 years -- 35. We spend -- we come out with a lot of debt. We like to do all the work to take care of patients, but you try and help us in this endeavor to do this profitably. I think that's been misconstrued as full risk is the only avenue to take with. So there's a distinguished -- you've got to distinguish between the ability to take risk and manage total cost of care and the willingness to take a full risk contract from a payer. That's purely a financial arrangement. And so we've been really successful in enabling our practices do this profitably from day 1 and do it across the spectrum of risk.

And if I remember correctly, it's a 60-40 share. Is that correct? In both upside and downside?

That's correct. So the providers, for every dollar of shared savings, Privia keeps $0.40, and our providers take $0.60 up and down. So they have real skin in the game.

And you talked about the commercial market, which I think is -- again, I think most investors focus on Medicare Advantage and taking risk in Medicare Advantage. If I look back to the '90s, there are a number of plans that took risk on the commercial side and weren't able to make it work, in my opinion, because we didn't have technology, right? You're taking risk and you don't know what's going on with your patient and then you're getting the bill afterwards. When we think about the future of the commercial market specifically, we've seen pockets, for example, Southern California seems to really work because of the way the provider relationships are. Is it for you? Are you seeing that as well where there's pockets where the physicians really know and understand how to do this? Do you think that this can be rolled out across the country when we think about the commercial market?

Yes. We're really excited about the commercial business. I'm glad you bring it up. I mean, 50% plus of the population is commercially insured. And as long as there's working class America, all of us in this room, that's not going anywhere. We all know about the significant cost pressures on inflation in the commercial book and what employers are facing, self-insured or insured employers. And our ability to create very dense medical groups in communities close to the homes of the people, managing their care, their significant others' care, the children's care. So this is a pre-Medicare population. I think it's very differentiated. I think you need a lot of scale. You need very good technology, as you mentioned. And you need physicians to kind of have that muscle power or muscle memory to do that. Now I don't think you take full risk or significant downside risk in commercial. It's open access product. We're doing it with close to 800,000 lives. It allows us to fundamentally change or add to how these doctors are paid. So you take a simple fee-for-service payment for a visit, and you convert it into 4 income streams, you start getting an added PMPM. You get bonus payments based on quality metrics, which include things like annual well visits, vaccination rates, cancer screenings, so on and so forth. And then ultimately, our pitch to the payers is that we'll help lower the MLR. And to the self-insured employer. And that becomes really differentiated as we take this network, which I think is for all the focus on MA, we think there's a massive opportunity. But you need real scale and you need to be embedded in the workflow of the practices and do all the dirty work, all the revenue cycle work, paying every single claim every day of the week. And I think that gives us a lot of competitive advantage.

Jamie Dimon spoke yesterday about the fact that we spend so much money on health care. As an organization at JPMorgan, we spend $2.77 billion each year in health care. And that we don't really focus on wellness and that we need to change the system in a lot of ways of what you're talking about. Do you think there's opportunities to grow to direct self-funded employers with physician networks and offering these services? I'm not looking to circumvent managed care, but a lot of the large employers are self-funded.

No, I think you're totally right. And I think managed care has a role to play. I mean, as you know, most self-insured employers rely on...

For the network, yes.

For the network to manage as a PPA and to provide certain services, so they have an important role to play. Ultimately, care is delivered by doctors in the community. We think the business like ours is on the right side of history. This is the best setting, the best relationship with a patient, a child with a pediatrician, a mom with the OB/GYN, all of us with our primary care family medicine. We don't change our PCPs unless something really bad happens to them or us. We move locations. That's a 10-, 20-year relationship. There's an embedded level of trust that goes generations. And that person and their practice is uniquely positioned to take ownership of the total cost of care, whether it's wellness programs, disease management, behavioral health, mental health, directing us downstream. The power of their pen is very strong. And -- but I think you've got to enable them, you have to compensate them for all that good work, and I think they've been treated unfairly from an economic value capture perspective relative to the value they can add. And so that's where a company like us comes in the mix, where we're enabling their practices to do that.

And as we think about the competitive landscape, when you're out there and you're talking to doctors, why do they choose Privia versus 1 of the other MSOs that are out there in the market?

Yes. So I mean, we've talked about it. One is our business model consciously develops medical groups. The MSO is an attached element to it. The risk-bearing entity is an attached element to it. There are very few entities that are forming medical groups nationally. There's OptumCare, OptumHealth. We do it, a few others do it in select geographies. I think that's fundamentally the difference. We have -- these are run and governed by physicians. So we're not a separate entity than the medical groups. It is 1 entity and delivery network that we get. The second is all of the workflow that we are embedded in, all of that work that I showed on the slide that we do and then the technology stack allows us to be deeply embedded to improve these practices. I don't think you can take risk. I don't think you can enable physicians to take ownership of the total cost of care if you're not deeply embedded in the workflow. You have to do the dirty work. You can layer up some thin layer of tech stack or some data analytics on top of a practice. You have to align incentives so they have to have real skin in the game. You can't backstop their risk just because you want to get some lives and get dots in the platform. So I think from a long-term perspective, our ability to form multi-specialty medical groups for every single doctor, every single patient, having those patients in some value-based arrangements with every single player, that's a very hard thing to do. We've constructed the company consciously with that DNA. And I think you're seeing the benefits of scale where our competitive advantage compounds over time as we get scale. You're seeing that in the unit economics, you're seeing that in the financial profile. And if you take a step back, we're still at 4,600 providers. There are 1 million providers in this country credentialed. And even if you said half of them are stuck somewhere...

They're at a hospital or something right now.

And even those come out over time. Since the FICO days in the '90s, it's not like the doctors cannot leave the legacy plays. You can have this kind of financial profile with just -- not even 5,000 providers. So if we think we can take this from 5,000 to 10,000 to 15,000. And there's a -- there are a lot of providers out there that will like a model like this that can allow them to be part of something bigger, but yet have their autonomy in how they practice.

So when I think about the drivers of growth over the medium and longer term, is it simply that driving and adding incremental physician groups across the country?

Yes. So our 2 units are you get providers in existing states, in new states. They take care of more patients, and then can we move those lives into value-based arrangements. And Privia gets compensated. We charge, as you know, our pricing model, 11% to 12% on fee-for-service, about $0.40 on the dollar on shared savings. So we are highly motivated to move payment streams into some form of value-based arrangements to align ourselves with payers of health care, and that compounds the business. But you have to do it profitably, you have to do it thoughtfully. I think we have a business model that is extremely profitable, free cash flow positive at pretty small scale. So I think this can just compound at very good rates across health care cycles for many years to come.

It feels like investors think value-based care is a bad word these days. A number of companies have not performed well in this value-based care environment but you have. Has that translated at all to the physicians? Or are the physicians still very interested in these kinds of programs?

Yes, again, you'll have to distinguish between doctors don't wake up reading The Wall Street Journal saying -- which -- I mean they do interact with certain companies that may go out of business and they make bad choices because the companies just gave them heads you win, tails you don't lose deals, and they chase some shiny object or gave them enough compensation to join them. We've seen this in health care services, health care IT for 20, 30 years. I mean, you've covered a lot of companies. And every time there's too much investment dollars that flow towards a particular type of subsector within health care, call it value-based care, a lot of Silicon Valley money, private equity money. It's just a natural shakeout. I think a lot of companies don't develop a lot of capabilities and the economic and the more I described and really doing the hard work. They try and take risk when they kind of manage risk. And I think we've seen some of that play out in the last 4 or 5 years or so unfortunately, with a lot of companies filing for Chapter 11, having significant drawdowns in the public markets. I think the broader MA landscape with some of the reimbursement changes doesn't help. You've seen pretty significant pressures on the managed care industry as a result, you've documented that pretty well. It's well understood. So when you have those kind of pressures, you need a business model that can survive through all of that and support these practices. And so there's -- it's very conscious, what we've built. With every single patient in mind, every single type of specialists in mind and trying to do value-based care across all lines and across the risk spectrum.

You've done really well in Medicare Shared Savings. We will have a change in administration next Monday. As we think about that change that's coming, anything that's top of mind for you, anything that you anticipate could impact your business going forward?

Yes. The short answer is no. I mean, this might end here at Privia. We had President Obama, President Trump, President Biden, back to President Trump. I think the MSSP program across all of those administrations has really thrived and grown. It's 1 of the success stories out of CMS. It is 1 of the most widely adopted programs with community-based doctors with very good results, empirical results that are published every year. And so -- and I think they have a stated objective of moving every single MA life into some value-based arrangement.