SelectQuote, Inc. (SLQT) Earnings Call Transcript & Summary

Welcome to today's call with SelectQuote management team. [Operator Instructions] It is now my pleasure to introduce Matt Gunter, SelectQuote's Investor Relations. Mr. Gunter, you may begin the conference.

Thank you, and good morning, everyone. Today, we are excited to introduce a new phase for SelectQuote, the launch of Population Health. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today's call, a replay will also be available on our website. Joining me are Tim Danker, CEO; Raff Sadun, CFO; and Bob Grant, President of SelectQuote Senior. Following our prepared remarks, we will have a question-and-answer session. [Operator Instructions] And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company, and therefore, involve a number of uncertainties and risks including, but not limited to, those described in our earnings release, annual report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?

Thank you, Matt, and thank you to our investors and analysts for joining us on such short notice. We are thrilled to speak with you this morning about our official launch into the large and rapidly growing health care services space. In partnership with our large carriers and leading service providers, we have created Population Health, a health care-focused patient engagement organization. Population Health brings a comprehensive approach to help improve patient health outcomes and optimize cost through enhanced patient health care literacy and best-in-class service. So with that, let's begin on Slide 3 with a brief overview of our core insurance distribution business and why our holistic approach to customer intelligence and service is also at the heart of our Population Health initiative. SelectQuote is a leading technology-enabled, direct-to-consumer insurance distribution platform. We pioneered the first direct-to-consumer sale of term life back in 1985 through a model that combined direct marketing, technology and a professional inside sales force that compares and shop the market to find the best fit for each consumer. Our convenient, customer-centric approach is best articulated by our tagline, we shop, you save. Over the last decade, SelectQuote Senior has grown into our largest division, with year-over-year revenue growth exceeding 100% for the last 4 consecutive quarters. The senior health industry features a large attractive TAM of over $30 billion and favorable tailwinds. 10,000 Americans are aging into Medicare eligibility each day and more seniors are migrating away from traditional Medicare towards benefit-rich Medicare Advantage plans. And finally, seniors are increasingly choosing the convenience, choice and great advice provided by SelectQuote's agents over traditional field agents. In summary, SelectQuote's agent-led service model and significant data capabilities paired with our health care providers, carriers and consumers make Population Health the natural next step for our business. At this time, I want to bring Bob Grant, the President of SelectQuote Senior, into the conversation to discuss the next phase for SelectQuote Population Health. But before I do that, I want to thank Bob for his tireless leadership on this critical next chapter for our company. The strategy, partner relationships and the vitally important operational aspects of Population Health have really been driven under Bob's leadership. Bob?

Thank you, Tim. I'm so excited to speak about a topic I'm particularly passionate about: Improving patient care and reducing health care costs. I'm so thrilled to highlight the great work the team has done to create a truly unique patient-focused health care services offering in Population Health. Turning to Slide 4, let's begin our discussion of Population Health with a look at some of the significant challenges facing the U.S. health care system. The United States spends more than any other developed country without obtaining better health outcomes. At the most foundational level, barriers to patient engagement and generally low patient health care literacy, especially among seniors, contribute to the challenges. Not surprisingly, seniors suffer from the highest rate of chronic conditions of any age group, and treatments for these chronic conditions represent about 96% of our Medicare spend. Yet seniors also generally demonstrate the lowest level of health care literacy of any age group. Over 40% of seniors indicate they need more information about their benefits to better self-manage their care. Low health care literacy can lead to higher rates of avoidable hospitalizations, readmissions and emergency room visits. CMS estimates that low senior health care literacy costs Medicare over $25 billion each year. Accessing good care can also be complicated, especially for seniors. Care is often fragmented across primary care and specialists, and seniors often face practical hurdles such as lack of available transportation to medical appointments. On top of that, many seniors find managing and adhering to their varied prescriptions particularly difficult. Patients taking 5 or more prescriptions are 4.5x more likely to experience adverse drug events than patients on fewer than 5 prescriptions. SelectQuote Senior patients average around 6 prescriptions per patient, and questions about pharmaceutical benefits typically come up in about half of all of our customer care service calls. Experts estimate that approximately 1.5 million preventable medication-related adverse events occur each year. In summary, patient satisfaction is generally low, and each of these factors contribute to a lot of waste in the expense. U.S. health care now totals around $4 trillion per year and makes up around 18% of the U.S. GDP. The estimated cost of hospitalizations related to patients not taking medications as prescribed is over $100 billion annually. 2/3 of all ER visits are also deemed preventable. And only 4% of health care spending is in primary care, which is underfunded compared to other specialties. Put simply, similar for shopping for Medicare Advantage plans, there's a lot of confusion, friction and cost in the legacy model, and we believe there's a significant value in applying SelectQuote's approach. On Slide 5, we're going to present our framework to drive the value against these complex challenges. First, we apply a data-enabled high-touch approach focused on engagement to improve patient health care literacy. This approach should be tailored to address each patient's unique needs. This effort is, by nature, an ongoing effort and not a one in them, requiring regular reengagement based on a patient's evolving health care needs, and we need to ensure that carriers have a complete picture of their patient's health profiles to deliver appropriate preventative care. The great benefits provided by our carrier partners' plans only work when utilized. Second, we create a robust ecosystem of best-in-class health care services to improve access to value-based primary care and other critical services. The first step is connecting patients with high-quality, value-based primary care, but the next steps facilitate other aspects of total patient care and wellness, ranging from appointment scheduling to transportation services to healthy meal delivery. Another key aspect we tackle is the problem of medication adherence for seniors taking multiple prescriptions. We believe the best approach to improving medication adherence is a robust prescription drug education program combined with personalized pharmaceutical delivery tailored to each individual. Tim will now provide an overview of the large and growing markets where SelectQuote participates. Tim?

Turning to Slide 6. SelectQuote remains very focused on the large insurance distribution markets in which we participate collectively. Medicare, Life and Personal Lines Auto & Home represent total addressable markets of over $180 billion. The core Medicare market represents a huge opportunity of over 60 million seniors expected to grow to over 75 million by the end of this decade. We size that addressable market at over $30 billion, and collectively, SelectQuote and the large direct-to-consumer brokerages comprise around 5% penetration of this market. We will continue to aggressively scale into that massive and highly profitable market opportunity. But SelectQuote was built on the flexible nature of our best-in-class customer acquisition platform and its adaptability into other large lucrative adjacent markets. Strategically, we believe our investments in these adjacent markets like Population Health will add even more value to consumers and will, in turn, reinforce our core insurance distribution business, creating a powerful flywheel effect. With Population Health, we can tap into the even larger pharmaceutical and Medicare Advantage value-based care markets. Collectively, these 2 sectors represent addressable markets totaling over $1 trillion. Turning to Slide 7. So what is Population Health? Population Health is an actively managed, high-touch approach to improving senior health care outcomes. At the highest level, we have 3 simple objectives. Number one, improve patient engagement and health care literacy, so seniors can access more benefits. Number two, personalized solutions to simplify the health care journey; and finally, facilitate better care through coordination of strategic value-based care partnerships. Bob will now provide some additional details about the strategic and operational aspects of Population Health.

On Slide 8, we will provide a more detailed view of the verticals where SelectQuote and Population Health will initially participate. First, SelectQuote Senior has grown into the market leader in Medicare plan distribution by always putting the customer first. We feel our industry-leading retention and LTVs are a testament to the great advice our 100% internal agent force delivers every day. This customer-first attitude has helped us achieve these results, and that attitude has also driven our decision to enter into the health care space. Second, after a consumer opts into Population Health, our Customer Success Agents, or CSAs, will work to assess and improve health care literacy in all of the Population Health members independent of SelectQuote's tailored insurance advice. This means frequent reviews of Medicare plan benefits to ensure that patients fully utilize them. It also means gathering and regularly updating our records through health care literacy assessments, health risk assessments and prescription drug assessments so that we and our partners can better facilitate care for improved patient outcomes. Third, as we already discussed, another focus of Population Health will be accelerating patient adoption of value-based primary care offerings. Population Health CSAs will check for relevant service provider locations and perpetual options that might be a good fit for each patient and then educate the patient on how value-based primary care differs from the more traditional approach to primary care. Fourth, we highlighted earlier that medication adherence is a significant challenge that many Americans face. Later, we will provide more details about our recent acquisition of Express Med Pharmaceuticals, which will be branded SelectRx. Our specialized medication management pharmacy service combines a high-touch patient-centric drug adherence program with a full-service prescription fulfillment center that delivers customized pill packs to each patient store. And lastly, Population Health will serve as a one-stop facilitator through a growing array of service provider partners, whether it's scheduling an upcoming appointment, arranging transportation through our new exclusive partnership with Lyft or enrolling a patient in a healthy meal delivery service, we will engage our members to deliver a more holistic patient care. Moving to Slide 9. Let's explore the ecosystem of best-in-class service providers that we are assembling to deliver a total patient care experience. We feel there are 3 foundational pillars to improving patient outcomes and reducing health care costs. First and foremost, SelectQuote Senior will not lose sight of our initial mission, and we'll continue putting hundreds of thousands of consumers on the right low-cost and benefit-rich Medicare Advantage or Medicare Supplement plan to address their unique needs. However, secondarily, we have realized that we can do more for both our MA and MS members and nonmembers to help with their health care journey. We believe more patients would benefit from holistic primary care provided by a Population Health network of leading value-based primary care providers. Therefore, we will educate Population Health members on best-in-class, value-based primary care available in their area. While we continue to explore relationships with additional providers, our current partners include such market leaders as ChenMed, Conviva, Iora, Oak Street Health and others who operate 430 clinics in 25 states that are rapidly expanding. And our partnership with leading telehealth provider, Heal, will allow us to extend our value-based care reach to much of the rest of the United States, including patients in smaller towns and rural areas. In addition to providing patient education about value-based primary care, we can offer these service providers valuable data and insights to target their expansion and growth. Third, we are deeply committed to reducing patient complications and the worsening chronic conditions brought on by poor drug adherence by reducing adverse drug events. We feel this pillar is so foundational that we recently acquired Express Med, a leading specialized medication management pharmacy. We will supplement these 3 pillars with a growing array of complementary services to enable a true one-stop shop to help meet patients' needs. Our goal is to build Population Health into a complete health care ecosystem that can, in turn, help transform the health and wellness of our members. Turning to Slide 10. Let's explore the value Population Health brings to our patients and our partners. SelectQuote Senior has built a world-class customer acquisition and contact engine built upon deep carrier and customer relationships. Our unique model pairs highly skilled agents with leading purpose-built technology to deliver the highest retention and strongest customer relationships in the industry. Last year, we brought around 500,000 new members onto our Medicare platform and spoke to millions more. Every day, our customer care associates conduct over 5,000 unique conversations with seniors. With a contact rate of north of 80%, our customer-facing associates create a rich regular cadence with our seniors. We are already leveraging these relationships to educate members on Population Health's unique offerings. And if a consumer opts into Population Health, we're already gathering valuable information for our carriers and service provider partners to deliver better outcomes to patients at lower costs. Our Population Health CSAs gather health risk assessments that can help provide insight into each patient's unique health needs, pain points and barriers to engagement. With our expanding Population Health ecosystem, we are positioned to deliver an even more comprehensive one-stop shop of health care services to seniors. In short, we believe that we are uniquely positioned to efficiently and cost effectively deliver scale to proven value-based primary care solution providers. And because our initial growth target will be SelectQuote Senior's Medicare customer base, we believe that there is a natural customer acquisition synergy to drive accelerated adoption of Population Health services. Tim will now touch on the positive impact Population Health can have on all stakeholders.

Slide 11 depicts what has us so excited about Population Health, in that our success in this arena is aligned to benefit all stakeholders significantly. First and most importantly, patients win. Patients benefit from improved health care literacy and wellness education with an evolving understanding of the rich benefits to which they're entitled to through their Medicare plans. Patients went through value-based care that helps to deliver improved patient outcomes and a reduction in unnecessary utilization. Patients went through the convenience and simplicity of specialized pharmaceuticals delivered in easy-to-use dosage packs. In short, patients win through improved health, more convenience and lower medical bills. The service providers we work with win through accelerated customer acquisition on the proven platforms they have built. We believe that our large and growing base of Medicare customers and our leading customer acquisition model will dramatically accelerate the number of consumers discovering these service offerings, enabling our service providers to focus even more time, energy and resources on what they do best, patient care. Our carrier partners win when patients develop a richer health care literacy and understanding of the benefits their plans offer. Carriers win by seeing a more complete picture of the unique health challenges, chronic conditions and prescription drug profiles of their patients. And carriers win when holistic, value-based care touches more of their Medicare base. These carriers win through better patient retention, higher patient satisfaction rates and lower medical loss ratios. And finally, when patients win, service providers win and carriers win and Population Health and SelectQuote's shareholders will win. We believe that Population Health can make a meaningful positive impact on the huge U.S. senior health care market and moving the needle even slightly on patient outcomes means big dollars. We believe that Population Health services will drive new direct revenue streams for SelectQuote. And early results suggest that SelectQuote Senior customers touched by Population Health services are also more likely to retain their Medicare plans longer. Bob will now touch on our flexible tech and how quickly we adapted to Population Health.

Turning to Slide 12. SelectQuote is built upon the solid foundation of our purpose-built technology. I'd like to take a few moments to point out some of the fundamental elements of our technology that we were able to adapt to support our market push into Population Health. Everything starts with our proprietary CRM developed for SelectQuote's employees, SelectCare, which powers all customer interactions and serves as the platform for all agent activity. We have built deep data integrations with our carrier partners using flexible APIs and unique technology. This technology stack has allowed Population Health to quickly integrate with our emerging ecosystem of care providers to drive Population Health. Our in-house data scientists enrich our database of over 1 billion data points with data from carriers, service providers and third parties. These valuable data feeds gave our data scientists a head start in integrating vital third-party data into our Population Health database. These data feeds also drive the proprietary algorithms that activate our customer life cycle marketing, or CLM. Population Health was able to utilize the lessons learned by SelectQuote to build the CLM program, auto trigger communications and workflow for our CSAs to proactively contact customers. Many CLM outreach programs occur at regular time-defined intervals and some are trigger-based if the customer action precipitates a call. Our CSAs work on a proprietary dialing platform that uses a customized version of SelectQuote's SelectCare application that will drive contact rates and positively impact members' lives. As we indicated on our second quarter earnings call, we were recently able to contact about 85% of all of our new Medicare customers to conduct a welcome call. And we are also confident that Population Health can replicate those results. SelectCare's engagement model and workflows also manage and obtain appropriate consumer agreements and disclosures for education, engagement, services and data sharing. Our Population Health agents work on an optimized agent desktop with integrated workflows, scripting and tools for efficient and accurate call management. Finally, all Population Health CSA activities are driven by our proprietary Next Best Action algorithms. When a Population Health CSA connects with a member, the Next Best Action intelligence prompts the most beneficial action for that particular patient, be it completing a health risk assessment or a health literacy assessment or a specialized medication management pharmacy membership. On Slide 13, we provide a high-level overview of our unique rapid development approach that evolved our technology platform from one focused entirely on insurance distribution to one that will support our new population health lines of business in a very convinced time frame. We have spent north of $150 million to develop our technology stack over the life of our company. And essentially, all of our technology has been rebuilt in the last few years with scalability, flexibility and adaptability to meet service offerings in mind. Our in-house team of engineers utilizes component libraries and proprietary common code modules to accelerate development and deployment of new code and new user interfaces. Serverless APIs provide virtually infinite scalability to our business applications. Container orchestration allows our teams to automate much of the provisioning, deployment and load balancing activities that many companies still perform manually. And our continuous integration and continuous deployment strategy means we can deploy new code frequently and without disruption to operations. I've obviously only scratched the surface today, but I would point toward the short time required to launch Population Health as proof of what we are doing works. We were able to develop and launch the Population Health tech stack in less than 90 days after we have fully defined the business requirements. That's pretty unique and gives us a very significant head start against competitors who may wish to follow into this space. On Slide 14, I'd now like to provide a more concrete example of the impact Population Health can have one patient at a time. Meet Henry. Henry is a 78-year old widower who lives in Fort Wayne, Indiana. He still resides in the home he has owned for over 40 years. He's quite satisfied with the Medicare Advantage plan that SelectQuote placed him on a few months ago, but Henry admits he doesn't fully understand all aspects of its health care benefits. Despite the rich prescription drug benefits in his MA plan, henry still worries about costs related to the 6 prescriptions he takes to manage his diabetes and hypertension. Unfortunately, some days, he can't recall whether he took all 6 medications and occasionally, Henry goes a few weeks before getting refills when one of his prescription runs out. Henry also goes extended periods between visits to his primary care physician and to his dentist due to transportation difficulties and due to concerns about copays. His only income comes from monthly social security checks. On Slide 15, we demonstrate the patient-centric approach Population Health brings to improving Henry's health, wellness and happiness. After enrolling in his MA plan, a SelectQuote CCA contacts Henry to conduct a welcome call. The CCA conducts a review of his MA plan benefits to ensure he fully understands all coverages. Then the SelectQuote CCA explains the advantages of joining Population Health free of charge as a member. After he agrees to being transferred, a Population Health team member enrolls Henry and then conducts a health risk assessment, identifying his unique social, nutritional transportation and other needs that may apply to improving his health and wellness. The data is stored in the Population Health instance of SelectCare. As the Population Health team gathers the information on Henry's health status and health care literacy, behind the scenes, the Next Best Action algorithms we discussed earlier dynamically guide the CSA through the conversations most critical to his health and wellness, whether that's speaking to certain ancillary services covered in Henry's MA plan or considering value-based primary care or enrolling for personalized pharmaceutical dosage packs as a member of SelectRx. Throughout his lifelong health journey, Population Health will stay connected with Henry's emerging health care needs. SelectCare's algorithms make timely assessments regarding when to contact Henry. On those follow-up calls, the Population Health team will update his health risk and health literacy assessments, keeping his carrier and caretaker community up-to-date and will provide timely and relevant information to improve his health literacy and wellness. This is just one hypothetical example. But we think that illustrates the value of the comprehensive and facilitated approach to care Population Health will deliver. As Slide 16 demonstrates, we have been thrilled with the early traction gained since we launched. In about a month, we have already enrolled around 29,000 patients into Population Health as members. We have found patients very receptive to the value proposition with over 80% of patients electing to opt in. We are actively engaging with these Population Health members. We have already conducted around 28,000 health risk assessments and 27,000 health literacy assessments. And since we launched our trial back in September 2020, we have provided around 7,000 customer introductions to value-based care providers. Tim will now talk about the interplay of SelectQuote, Population Health and our new venture arm of SelectQuote Ventures.

Slide 17 details the self-reinforcing health care flywheel that we are building that includes not just our core SelectQuote insurance distribution business, but also our 2 new entities, SelectQuote Ventures and Population Health. As we discussed earlier, SelectQuote contributes over 35 years of experience, fine-tuning the industry's leading tech-enabled, agent-led insurance distribution platform. SelectQuote also contributes a large and growing base of hundreds of thousands of loyal Medicare customers who could benefit from Population Health services. Our new venture arm, SelectQuote Ventures, leverages our deep expertise in both health care and customer acquisition to identify potential partners and potential acquisitions that could further enhance the Population Health platform. SelectQuote ventures will focus on attracting innovative, market-leading health care businesses with high-growth potential that could benefit from our expertise and ability to rapidly scale leading solutions. Population Health will deliver more benefits, simple solutions and better health care through its expanding suite of health care services. In turn, as the health and satisfaction of Population Health members improves, we expect further expansion of our leading Medicare retention and LTVs. Bob will provide an overview of our recent acquisition of a leading specialized medication management pharmacy, Express Med Pharmaceuticals.

Let's now turn to Slide 18 to discuss SelectQuote Ventures' first acquisition in greater detail. Express Med Pharmaceuticals uses high-touch, technology-driven approach to achieve improved prescription adherence. Express Med has designed an innovative pill pack called MyMedPak that's customized to unique needs of each patient. Prescriptions are filled from a state-of-the-art distribution facility. Frequent patient engagement is critical to ensuring the prescription data remains current and patients stay on track with their meds. The results are impressive. Express Med's Medicare members average taking over 10 prescription drugs each. Yet Express Med has been able to achieve drug adherence in excess of 95% compared to a national average for seniors on 5-plus drugs of around 50%, and that led to high member retention. Let's return to our hypothetical patient case study from earlier to illustrate how SelectRx membership can help Henry achieve improved prescription drug adherence and improved health. The SelectRx service fills all of his medication needs. Henry receives personalized medication packs via the mail, reflecting the meds he should take at different intervals throughout the day. The package provides clear dosage instructions, including easy-to-access QR code that will provide specific video instructions on each of his meds right on his smart phone. The Population Health team will also periodically check in with Henry to ensure that he is staying current on his meds and his prescriptions haven't recently changed. As part of the SelectQuote and Population Health family, we now have a great opportunity to scale this business significantly. And with that, Raff will now describe our acquisition of Express Med in greater detail.

Thanks, Bob. Let's now turn to Slide 19 to take a closer look at the Express Med acquisition and the growth potential for this new line of business within the Population Health ecosystem. Let me start by detailing the terms of our acquisition of Express Med. The potential purchase price totals $24 million in cash, consisting of $20 million upfront and a potential earn-out of up to $4 million. The company's experienced senior leadership team, including Founder and CEO, Jeff Liberati, will stay on. Although Express Med is currently a relatively small business with about 2,500 members, we are very excited about the growth potential of this business under our ownership. It also represents a great example of the value we can bring to solving one of the major problems with scaling value-based care, which is accessing new customers and consumer engagement, both things that we are excellent at doing at scale. That puts us in a very unique position as we evaluate various opportunities. Almost overnight, Express Med will be significantly more valuable under our ownership and as a stand-alone company. While the business is currently subscale, we believe we can leverage our customer base to drive significant membership growth under our ownership. In calendar year 2020, we added over 500,000 new Medicare approved policies to our already significant Medicare customer base. Our Medicare customers share many similarities with the Express Med target. In the near term, we believe we can add over 5x the rate of new monthly members than they have been adding on a stand-alone basis, and that can ramp from there. Currently, Express Med operates in 11 states and has a capacity to serve about 25,000 members. We plan to invest several million dollars over the next few months to provide service to members in all 50 states and expand the current facility to serve around 75,000 to 100,000 members. Based on how quickly the business scales from there, we do have plans to build other facilities to increase capacity even further as needed. The scale benefit we can bring without adding much incremental marketing cost can have a significant positive impact on profitability, which we'll see on the next slide. Slide 20 shows some illustrative examples of how financially attractive the SelectRx business can become with increased membership. This business is different than our other businesses in that there is an ongoing service obligation to deliver drugs. So we will recognize revenue and cost on a cash basis as the service is delivered. We will provide the life time value of a member as a KPI, but that will be a non-GAAP metric and only represents the value of new members added in the period. We will be providing more specific guidance in the next few months, but we wanted to give you a sense of what the economics of the business could look like at scale. We have shown an illustrative snapshot under 3 different scenarios. The first assumes 50,000 members at an average of 6 prescription drugs per member at the current drug cost. The second scenario assumes 50,000 members averaging 8 prescription drugs per member at the current drug cost. And lastly, the third scenario assumes 100,000 members averaging 8 prescription drugs per member and a 2% improvement in drug costs based on volume discounts. Assuming 50,000 members at 6 average prescriptions, each SelectRx member is expected to generate approximately $4,300 of annual revenue, and around $11,600 in lifetime revenue, yielding gross margin per customer of around $800 annually and over $2,000 on a lifetime basis and adjusted EBITDA of $400 annually or $1,200 on a lifetime basis. As you can see, the average prescriptions per member greatly impacts average revenue and profitability of a member. As the business scales, we believe there are even more opportunities to increase profitability through leveraging fixed infrastructure costs and potential drug cost savings. In the last scenario, assuming 100,000 members at 8 average prescriptions and a 2% improvement in drug costs, each SelectRx member is expected to generate approximately $5,700 of annual revenue and around $15,400 in lifetime revenue, yielding gross margin per customer of around $1,300 annually and over $3,400 on a lifetime basis. And adjusted EBITDA of $900 annually or $2,400 on a lifetime basis. That is over 30% more revenue, over 60% more gross profit and 125% more adjusted EBITDA per customer than the first scenario and shows the potential upside of scaling the business. The bottom right chart shows what the annual revenue would be under the same scenarios. At 50,000 members and 6 drugs, the annual revenue is approximately $215 million and adjusted EBITDA $22 million. In the 100,000 number scenario, the annual revenue is $570 million and adjusted EBITDA, $90 million. While this is a lower-margin business than our existing business, the lifetime revenue per member is over 7x higher than a current new MA customer. And once scaled, this business should generate a significant amount of annual cash flow. And with that, let me now turn the call back to Tim for some final thoughts.

Thank you, Raff. Before we open the call to take questions, let me briefly recap some key investment highlights pertaining to this exciting new phase we are entering on Slide 21. Population Health will build upon SelectQuote's flexible, proven customer acquisition platform made possible by our highly adapted tech stack. Population Health will also accelerate patient adoption of proven solutions to health care challenges. The solutions include improving patient health care literacy, improving accuracy of carrier and partner data about patient health care needs, increasing patient adoption of value-based care and improving patient drug adherence through our new specialized medication management pharmacy, SelectRx. As more and more SelectQuote Senior customers enroll in Population Health, we anticipate positive impacts to our customer experience and by extension our core Medicare LTVs. Entering the huge Medicare value-based care and pharmaceutical markets will expand SelectQuote's already large addressable market to over $1 trillion. Population Health will create significant new revenue streams at attractive margins, and we can do so at relatively low incremental customer acquisition costs by initially targeting the large and growing SelectQuote customer base. In particular, the SelectRx business we recently acquired has the potential to become a significant source of revenue, EBITDA and cash flow as we scale into the opportunity. Population Health's success will benefit all parties involved, patients, service providers, carrier partners and, ultimately, SelectQuote shareholders. And with that, I'll turn the call back to the operator so we can take your questions.

[Operator Instructions] Your first question comes from the line of Jailendra Singh with Crédit Suisse.

Thanks for all the update and information. You guys touched upon this in pieces, but I want you guys to bring this together in terms of how Population Health initiatives will impact your financials. Should we think of the Population Health as an opportunity to grow your non-commission revenue? Or should we think of this as a way to grow your LTV because seniors who opt-in are likely to have much better retention? Or is this a way to expand and optimize your customer acquisition channels? Or is it all of the above or something I'm completely missing here?

Yes. So Jailendra, great question. And we're going to have more to say over the next few quarters as we provide guidance for fiscal '22 and eventually update our medium- to long-term outlook. But I think we believe Population Health is a huge opportunity. As Tim and Bob walked through in the presentation, the TAM of the market is very large. There are way more dollars spent on delivering care than on paying commissions for distributing policies. So that should give you a perspective of the size of the opportunity. And we think we're uniquely positioned to play a key role in that marketplace. I do think that there will be some knock-on impacts, positive impacts to persistency and LTVs over time. But this is a business that will have significant revenue and EBITDA tied to it, irrespective of sort of those LTV benefits. I think the LTV potential benefits from higher persistency is a nice sort of add-on to that, but this sort of stands on its own 2 feet. And there's multiple different revenue streams, obviously. I think we're getting paid for different types of services. I think it's worth noting that a lot of these services involve fees that are paid upfront. So from a cash flow perspective, the cash will come in faster than selling a policy. And we're leveraging the marketing costs that we've already spent to get a customer. So the incremental cost should be somewhat lower. It's one of the reasons why we bring so much value to this space, is that we've already built a huge customer base for these services, and we can help our partners sort of scale these benefits for patients. Bob, anything that you'd add to that?

No, I think it was really well said. And I think that I agree that it should help our LTVs. And we believe that it will, the initial signs are, but more so, it helps us do more for our customers, which we definitely feel and see that demand today. It also helps us do a lot for our noncustomers. People call us for a reason, and we're not able to help every one of those consumers because we have a limited offering right now and the fact that we sell Medicare Advantage and Medicare Supplement plans, and that's not always the crux of a consumer's issue. We find that drugs and drug costs and the ease of buying drugs, especially for more complicated situations, comes up a lot on calls. And this should give us the ability to help there. And I would say the same thing with doctors' services and finding quality of care. We talk a lot about how over 65 and Medicare primary care can be very different than under 65, but a lot of people don't make the transition to value-based care and kind of higher quality of care primary care and we want to assist with that education and help people get better access to care.

Okay. And then my follow-up with respect to these partnerships you highlighted with the value-based primary care and house call companies, is there a scenario or possibility where you might want to own some of these smaller-sized companies in this area? Or do you think the partnership is the best path forward?

So it's a -- sorry.

Go ahead, Bob. And then I'll add color.

I was just going to say, it's a really good question, Jailendra. We were really focused on the partnership side of that today, but would definitely not rule out helping and having deeper partnerships, especially on the digital side of that question. We feel like we can add a lot of value there because the engine that we've built is really good at customer coordination and customer engagement. And we can assist -- both the folks we're partnering today are better, their ability to scale faster because we can help them with non, kind of, clinical interventions and more call center services. And then to that point, as we transition into the digital space and try to help more rural customers that don't have access to quality of care today, we believe that there is an opportunity for potential ownership or, I'll call it, deeper partnership going forward.

Yes. Great question, Jailendra. I'll just add. I think this is part of our announcement around SelectQuote Ventures. And this is not a typical venture fund, if you will, in a traditional sense of the word. It is a way for us to kind of analyze potential partners, potential acquisitions, some may require capital investments, some may not. Obviously, we feel like we're bringing a lot to the table in terms of our operational expertise, certainly access to a very large and growing customer base. And at the end of the day, we think that we can help proven solutions efficiently scale and are part of the solution to kind of the customer acquisition challenges that are out there.

Your next question comes from the line of Frank Morgan with RBC Capital Markets.

I guess I kind of want to go back to the basics again here. On who is your actual customer and who is actually paying you, you gave some color on the pharmacy side. But I'm just curious, any more detail there on sort of this value-based coordination of services, are you being paid like a PMPM by the carriers? Or where does the revenue stream come? And then does this any way come across as competing with maybe the carriers, particularly on the drug side? That was my first question. And I'll let you answer that before I do my follow-up.

So with respect to the revenue model, it really depends on sort of what aspect of it, it is, right? So on HRAs and prescription drug assessments, we're paid on a per completion basis by carriers. With respect to value-based care providers, they're generally paying us for managed care services associated with potential patient orientation, visit scheduling and other patient engagement services. And then SelectRx is essentially a subscription-based pharmaceutical service, and we're getting -- the vast majority of it is reimbursed by the carriers. There's a small copay from some individual customers, but that's sort of the revenue model. Bob, do you want to touch on the carrier side?

Absolutely. So on the competition to carriers, it's a good question. We've worked closely with our carriers as we've kind of brought this to light and made sure that in no way, shape or form are we trying to compete with them, especially on the pharmaceutical side. They've got great offerings on kind of more simple mail order and true specialty pharma. We believe that this, though, is an opportunity for us to help the carriers get adherence up in more day-to-day chronic diseases, such as diabetes and high blood pressure and folks that are on complicated situations. And we're working closely with them to try to bring those adherence rates up, and believe that we have is -- what we have built or what we are buying in Express Med is very, very different than what the carriers have to offer today, and they're very supportive of us trying to get those adherence rates up and education up. Because everybody wins if that changes because most of the data or all the data points too, if adherence rates can rise, good health outcomes will be significantly better and the carriers will win.

Got you. And then my second question would just be on the staffing up to do this, the CSAs, is this all incremental bodies that will need to be employed and brought in? Or is there some way to leverage some of your existing capacity over in the traditional business?

It's a good question. This is incremental bodies. It is a very separate business. It needs to be that way. And -- but what we can do is take folks that were maybe on our Medicare side or things like that after our busy season and move them over full-time into Population Health, but it is a very different role and also doesn't require licensing. We have a lot of testing and things that we do to make sure that they understand how to effectively use the technology, but what's great about what we built is the scripting tool and a lot of the things really helps make their job a lot easier and understand that Next Best Action and what they need to say and questions they need to ask on that call. So it is separate hiring, and it is a very separate business. It needs to be that way.

Your next question comes from the line of Elizabeth Anderson with Evercore ISI.

So when you were just talking about some of the additional hiring needs, like what usually is the time frame that you're thinking about that? Obviously, you have the AEP hiring that's going on now and in the near future. And then sort of what is -- how are you thinking about the time frame for us helping to scale this business?

Yes. I mean I think from an investment standpoint, we are definitely spending sort of incremental dollars now and will be in the fourth quarter to scale both Population Health and Rx. So we've mentioned that last earnings call, and we're spending incrementally or investing incrementally in some of these initiatives to do that. So in terms of how fast they scale, I think we'll sort of see over the next couple of quarters what that looks like and provide the updates as we go along. But anything to add to that, Tim or Bob?

The only thing I would add is it is a nice offset to our AEP hiring since it is an unlicensed position. We can use a lot of the momentum we get from AEP hiring to help scale this. And then we can also use -- as you guys know, we do a good job of taking folks that maybe aren't succeeding in a sales role or customer service-oriented and placing those folks from the AEP class into those roles. This will be no different than that. Again, it will be full-time once they move over here, but we can really leverage our other work to build this up.

Got it. And as a follow-up, are these sort of partnerships both on the value-based care side and on the pharmacy side available to all of your payer partners? Or do you sort of envision like deepening relationships with some more than others?

So they're really available to all our payer partners, and we work closely with our payer partners to identify who is doing the best job from a care standpoint and who's leading to the most consumer and carrier savings by best health outcomes. But some, right, work with WellCare and Humana and not others, others work with us. So it depends on the area, and we're continuing to try to expand that so that we have a good, solid value-based offering for each carrier in each market. But that's how I would answer that today. We're trying to get it expanded, though, to where all carriers can really win in this and also make introductions to different carriers with our value-based care providers.

Your next question comes from the line of Daniel Grosslight with Citi.

Congrats on this interesting pivot here. The core SelectQuote business is a pretty heavy capital consumer. And I'm just curious how much investment will you be dedicating to this new platform? And do you anticipate this being funded all with cash on hand?

Yes. So again, I think we're going to be able to share more over the next couple of quarters. But like I said before, most of these services that we're talking about are generally paid upfront. So they are cash-generative, and we are leveraging a lot of the cost that we're already incurring within the business. It's one of the reasons why we think we can provide so much value and so quickly, is that we've already spent a lot of these costs to get a customer or potential customer. And we're really now adding on sort of incremental revenue and some costs, obviously, but along with leveraging that spend that we've already spent. So for the most part, these things will be cash-generative relatively quickly. The SelectRx business is a little bit subscale right now. That will change quite rapidly as we start scaling it up. And again, once that has reached a certain scale to sort of cover the fixed cost, then it will be cash flow positive based, every new customer will be cash flow positive that first year. In terms of overall size of investment and raising more capital, I mean, for the most part, it will be relative to the opportunity that presents itself. I think when we raised the capital back in February, that obviously went a long way to sort of bridge the gap towards sort of positive cash flow based on how the business looks now. A lot of these initiatives are cash generative. And so we'll continue to look at those types of opportunities, but we don't have any immediate plans to raise additional capital right now.

Got it. Okay. Okay. And would you anticipate opening this up to members where SelectQuote isn't the broker of record? And are you able to use this platform as a customer acquisition platform for those non-SelectQuote members to get them into plans where you are the broker of record?

So answering question one first. Yes, we will absolutely use this offering for non-SelectQuote members that we feel like need help with something. On two, no, we will not be the broker of record because of that. Really, that's there as a separate offering because, again, a lot of the folks call us today with a pretty specific issue that we try to solve through a new Medicare Advantage plan or new Medicare Supplement plan because a lot of times, that's at the center of their problem. But we need to take that further because some just have a ton of questions around how they should better buy their drugs or they just -- they have an issue with the quality of care that they're receiving or don't have a quality primary care physician. And that's where we'll help. So Population Health will independently help those consumers kind of away from the SelectQuote core offering.

Our next question comes from the line of Jeff Garro with Piper Sandler.

Yes. Maybe one for me on SelectRx to start. I'd love to hear more on the plan for SelectRx to expand from 11 states to 50. And wondering whether that's a matter of deploying additional resources? Or if it will also require procuring pharmacy license in those 39 states that Express Med isn't in today?

So because it's a licensed pharmacy in the 11 states, the process is actually fairly easy for us to get licensed in the other 39. And we're in the process of doing that today. It is not a big capital expenditure. It's more just time, and we've already started down the path of that time. So we're really excited to be able to expand. And thankfully, because it's such a high-tech business, that expansion won't be a very difficult or overly capital-intensive ask. Raff, anything to add to that?

Yes. I agree with that. I think that's on the sort of expansion to the 50 states. And then I think with respect to expanding the facility, the facility currently can handle about 25,000 patients. We are investing now to increase the capacity to between 75,000 to 100,000 customers. And obviously, depending on how fast we scale, we have additional plans to bring on other facilities as needed.

I think, Jeff, one thing to add. As Bob and the team were looking at the specific opportunity with Express Med, really this is around this thesis of poor medication adherence, is driving a substantial amount of the high health care costs and poor outcomes. And we know from our own SelectQuote customer base, they average about 6 prescription drugs, about half of our calls with our CCA's the kind of pharmacy experience comes up, and those are issues from pricing transparency or benefits complexity or just the kind of time consumption involved are all kind of points of friction with our customer base. So we think there's a lot of pent-up opportunity here. We're talking with thousands of customers daily on something that's very near and dear to them, and we think this will be a great potential for us.

Great. And to follow-up, thinking about those illustrative SelectRx scenarios, I know it's quite early on, but would welcome any initial thoughts on how long it might take to reach 50,000 or 100,000 members.

Yes. I think we'll provide more feedback on that as we progress here through the quarters, and hopefully, we'll have more -- more than 1 day worth of experience running it ourselves. I think we've got pretty good visibility into the ability to scale much, much faster than they have been. And we're really excited about that. And again, I think as we scale that business, we'll be able to provide a little bit more perspective on what that looks like and the timing around the different scenarios. Bob?

Yes. Only thing I would say is, obviously, we're not giving a time frame to it today, but we feel really confident as evident by our -- are already expanding their capacity from 25,000 up to 75,000 and even looking for ways to expand capacity additionally. So I think that shows our confidence in what we can do for that kind of unique population of folks that have a chronic disease, but aren't eligible for the kind of true specialty pharma, more folks that just need to be managed closer through a program like this. And honestly, need way more education than they're getting today from the pharmacy world and the dangers of polypharmacy and everything that we can do to try to avoid adverse drug reactions.

Your next question comes from the line of Jonathan Yong with Barclays.

Just on the ventures component, it sounds like you're taking a more formalized process to some of the work you're doing. So is this -- is the capital allocated to vendors going to be brand-new and separate from what you normally do from a capital allocation perspective? Just want to get some color there.

Yes. So I think Tim referenced it before, but SelectQuote Ventures is not a dedicated VC fund sort of in the traditional sense. So there's no dollars specifically earmarked towards M&A activity. I think we're going to evaluate sort of each potential deal on a case-by-case basis, determine sort of deal structure and financing as appropriate. Again, some of those partnerships are exactly that, just partnerships with other providers, some of them, quite frankly, we're building from scratch, and then some of them could be acquisitions. So it's really -- it ranges the gamut, I think. Population -- or SelectQuote Ventures is sort of the overall entity that we're doing these initiatives under, but each deal will sort of be evaluated on its own merits.

Yes. And I think the way that Bob and his team have approached it is very smart. We pulled together a team of health care and business experts, and we are going to really focus on kind of innovative market-leading health care solutions that we think have a lot of growth potential. And some of those, again, may just be partnerships, some we may be making contributions outside of capital, some may require capital. So again, just to reiterate Raff's point, this is not a typical VC fund. We don't have earmarked dollars, but we do think that there's a lot of opportunity. And again, we think with our operational capability, our technology, our people and certainly, a customer base that added upwards of 500,000 policies over the past year, that we can really help solve customer acquisition issues as well.

Your next question comes from the line of James Bach with KBW.

I don't want to sound repetitive. I just want to sort of stitch together everything from a business model perspective. Can you, at a high level, kind of give a basic description of what Population Health is and sort of how that flows through the financial statements? Is it product? Is it a bundled suite of services you sell? Is it a framework or a software package or services you kind of overlay over the existing tech stack? Can you just kind of describe that a little bit?

Yes. So I'll talk about the operational and then let Raff cover the financial portion of that. From an operational perspective, it is much more of a health care kind of ecosystem. We are helping best-in-class services that are not -- are struggling maybe on the customer acquisition side or even in the case of Oak Street and other large ones, they're not struggling there, they're just -- they could obviously use more education. We feel like we sit in the perfect position to educate towards those services and get consumers over there to receive more education from their team and/or go see their facilities, those types of things. And then that though as far as that health care ecosystem, it's kind of limitless for us as far as what we can do. We're constantly now working with the carriers on who and what types of services are saving the system money and leading to better health outcomes. We are actively pursuing either partnerships and/or deeper deals within those spaces. And they could touch on a lot of different things, whether those are digital experiences and/or in person experiences. So just try to get consumers to use practical services better. It could be as simple as the emergency room versus chronic -- or sorry, versus urgent care and where the nearest urgent care facilities are to their house, which ones are open 24 hours, kind of those types of things. And then a lot of our consumers, we ask a lot of questions on the health literacy side about if they understand when and how they should use urgent care versus ER. And most of our members really don't. So we are really excited about where we can go with that. And also coordinating people to go to their homes, to ensure that homes are safe and food, those types of aspects are important to us as well. So again, it is more of an ecosystem, but Raff can touch on where the revenue model is today?

Absolutely, yes. So basically, this initiative will roll up into our Senior segment from a financial disclosure standpoint, so a lot of it is it's own separate legal entity from a reporting perspective. It will be reported up through Senior. And we'll likely start reporting some new KPIs around some of these initiatives over the next couple of quarters as we start progressing and those KPIs make sense to explain the expansion of the business.

All right. And just on a follow-up. When you're talking about maybe the bulk of the services that come through Population Health, I mean, you talked about getting cash upfront. I'm just trying to understand the kind of the revenue and expense recognition dynamics and how that's going to differ from the traditional core SelectQuote business?

Yes. So I guess with respect to health risk assessments and some of these initiation discussions we're having on the value-based care side, most of those are paid upfront as fees, and so they'll basically hit revenue. And they'll be paid when we do those initiatives. And so there's some incremental costs associated with the CSAs that help perform those activities. But for the most part, that activity just hits revenue when we complete one of those things. The SelectRx business is similar, but there's an ongoing service obligation with that business. And so basically as opposed to selling a new policy, where we're booking to the lifetime value over 10 renewal periods upfront and then the cash comes in over time, on the SelectRx business, we're basically booking revenue for the month based on how many drugs were sent out to that customer. And the costs are incurred basically in the same month associated with those drugs and delivery, et cetera. So it's more of a cash recognition. And then that's kind of why we also showed like the lifetime value of a new customer, that it won't show up that way on the P&L, but we think that's an important thing to keep in mind, especially as people think about lifetime value with respect to the policies that we sell. So -- but that -- it would be more on a cash basis.

There are no further questions at this time. I would now like to turn the call back over to CEO, Tim Danker, for any closing remarks.

I just want to thank you all again. We do appreciate the extra time on short notice, and we know that you're very busy during earnings season. As you've heard from us since the IPO, we strongly believe SelectQuote is built very differently. Today's announcement is -- and the potential that we see in Population Health is really only possible because of the uniqueness of our model and our deep technical capabilities. Also, I want to thank Bob and his team. This is truly a watershed moment for our company. And with that, we want to thank you. We look forward to speaking with you soon when we report on our third quarter results. Have a great day, everyone.

This does conclude today's conference call. You may now disconnect your lines.