agilon health, inc. (NYSE:AGL) Q1 2024 Earnings Call Transcript

agilon health, inc. (NYSE:AGL) Q1 2024 Earnings Call Transcript May 8, 2024

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Operator: Hello, everyone, and welcome to the agilon health First Quarter 2024 Earnings Conference. My name is Seth, and I’ll be the operator for your call today. [Operator Instructions] I will now hand the floor over to Matthew Gillmor to begin the call. Please go ahead.

Matthew Gillmor: Thank you, operator. Good afternoon, and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I’d like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. And with that let me turn things over to Steve.

Steve Sell: Thanks Matt. Good afternoon and thank you for joining us. On today’s call, I’d like to walk you through the following elements. Our Q1 ’24 results and forward guidance. The tangible and rapid progress we’re making against our performance action plan, in particular with strengthened payer relationships an update on our CFO and CMO search, and finally our perspective that against the backdrop of a constrained Medicare program funding environment. The demand for value and the value proposition our company offers, has further accelerated among physician groups and payers, including MA plans and CMS. Starting with our quarterly performance. MA membership grew 43% to 523,000 members, while revenue grew 52% to $1.604 billion.

Both metrics were towards the low-end of our guidance ranges. This was primarily due to timing differences in signing new payer contracts as we work with our health plan partners to refine key terms. Additionally, our updated guidance for membership and revenue reflects our decision to exit certain unprofitable payer contracts which I’ll discuss in a few moments. Medical margin grew 1% to $157 million and reflects an in-quarter medical cost trend of 9.1% which is above the trends we observed in Q4 of 2023. Given the current environment we believe the assumption of continued elevated utilization is a prudent approach. We also recognized $8.7 million of net prior year claims development. Consistent with our approach to first quarter cost trend recognition, we have taken a cautious stance in closing out 2023, given the uncertain environment.

Absent prior year development, medical margin would have been towards the high end of our outlook for the quarter. Adjusted EBITDA grew 21% to $29 million which was above our guidance. This stronger performance reflects better flow-through of medical margin to gross profit and favorable timing of geographic entry costs. During the quarter, we also began ramping our implementation work with five new physician groups that comprise our class of 2025 new partners. Despite the challenging macro dynamics for MA and our measured approach to growth the health care system continues to accelerate towards value and the demand for our platform among high-quality physician groups like the Class of 25 new partners remain strong. Turning to our guidance. We are maintaining our full year medical margin and adjusted EBITDA outlook, with the prior year development we booked in the first quarter being offset by favorable payer contract updates.

Our Q2 and full year guidance assumes that medical cost trends remain at elevated levels. Our paid claims data for some of our largest payers which are relatively complete for January and February, indicates cost trends for our members were elevated in January and began moderating during February. This is also consistent with our real-time indicators, including our expanded use of payer census data which indicates that inpatient utilization moderated throughout the quarter and versus the prior year was relatively flat during the month of March and declined in April. While these indicators are early, we view these data points as encouraging relative to where we booked Q1 and our guidance assumptions. Turning to our performance action plan. We’re making tangible progress executing our plan, which positions us to accelerate performance and profitability.

As a reminder, our plan includes the following four elements; refining our strong payer relationships, expanding support for our primary care doctors to narrow variability, improving data visibility and analytics, and accelerating our operating efficiency. Let me provide a few updates. Starting with payer relationships. As discussed on our last call, our physician partnerships are critically important to payers as a key part of their network and value-based care strategies. Ongoing changes in the environment are driving productive discussions with payers around key terms and several recent successes reinforce this point. First, we’ve negotiated off-cycle percentage of premium rate increases in multiple markets to reflect higher costs associated with payer bids, including supplemental benefit filings.

These improvements were captured in our initial 2024 guidance. Second with a focus on sustaining the long-term relationships with our value-based care network, multiple-regional and national-payers have provided agilon and our partners with a series of adjusted favorable economic terms, including retroactive relief on prior year medical margin losses in a couple of markets, the June 30 exit of an unprofitable group Medicare Advantage contract in a mature market and the Q2 exit of several payer contracts in a year-two market. All of these payer contract changes were made in close collaboration with our local physician partners. The dynamics in the year-two market, including payer benefit changes during 2023 and 2024, elongated the path to sustainable profitability for our partnership, and will result in agilon exiting this market.

Given the tight alignment in our partnerships in the rare circumstance where agilon and our physician partners are not winning together, we have the flexibility to mutually wind down our operations. Overall, we are pleased with our recent progress with payers and we may execute additional contract enhancements for 2024 and 2025 as appropriate. Turning to PCP support. The expanded support for the newest PCPs in our model is on track. In addition to robust training sessions in our mature markets, local medical directors are reinforcing these learnings with an active quarterly review of a PCP’s patient panel to ensure high-risk patients are receiving appropriate interventions, including proactive visits and appropriate enrollment into our clinical programs.

Over time, we believe these efforts will improve and narrow the variability in physician performance across our network, and our partners are already seeing benefits in patient care and consistency of care delivery. For data visibility and analytics, we are making rapid progress standing up our financial data pipeline and leveraging additional data sources. As we have discussed this will enable our internal teams to process and analyze data faster and improve our forecasting and operations. We have now onboarded greater than 55% of member data from our large national plans and CMS into our pipeline. And we are on track to onboard greater than 75% of member data, as we move through Q2. We have also made advances leveraging our expanded use of payer census data and HIE feeds to monitor our inpatient activity.

As I mentioned earlier, our real time payer census data indicates that inpatient activity for our members, which accounts for about 25% of our medical costs, moderated over the course of the first quarter and into April. And finally, for operating efficiency. Earlier this year, we accelerated centralization and better use of technology to reduce our platform support to 3% of revenues in 2024. I am pleased to share that we are ahead of schedule for our targets, and our platform support was just 2.8% of revenue during the quarter. We have made significant investments in our platform in recent years, and we’re starting to recognize the efficiency benefits from these investments. We continue to maintain a very disciplined approach in managing our controllable costs and are assessing additional opportunities to improve internal efficiency.

With respect to the funding environment for Medicare Advantage, like others we were disappointed the final notes for 2025 didn’t reflect the rising costs that have been observed across the industry. Despite this, we believe this environment is reinforcing agilon’s unique role in important ways, especially because the demand for value continues to accelerate among payers and physicians. Payers recognize the value agilon delivers in terms of patient experience, accurate documentation and quality. Our partnerships consistently achieve 4+ star quality ratings and expand access to preventative primary care services. Our value delivery and deep connectivity with PCPs is even more important for payers in a challenging funding environment. We believe this dynamic is supporting our ability to proactively refine our payer contracting, which I discussed earlier.

For primary care doctors, the need for an alternative to fee-for-service, payer demands for value-based care and the strength of our platform continues to drive a robust demand backdrop. Our class of 2025 new physician partners include five leading physician groups with a long history in their communities. More leading physician organizations want to join the agilon network and platform to be part of the movement towards value-based care. Our new partnerships with these five groups demonstrate the power of our growing network, especially in communities where we operate today, like Kentucky, Minnesota and North Carolina. Lastly, let me address the CFO and CMO transition and the ongoing search process. We continue to run a robust process and are impressed by the quality of candidates we have seen and their appreciation and interest in agilon.

Our primary focus is identifying the right candidates for our organization. And we expect to provide a more definitive update on or before our next earnings call. With that, let me turn the call over to Tim.

Tim Bensley: Thanks, Steve and good afternoon. I will cover three items before we go into Q&A. First, additional details on the prior year development we booked in the first quarter; second, balance sheet and cash flow; and third some additional details on our updated guidance. Starting with the prior year development. As Steve noted our results included $8.7 million in net prior claims development. In our 10-Q Filing you will see we booked $16.5 million in total claims development. This includes $7.8 million from retroactive membership, which comes with offsetting revenue that has very limited impact on our medical margins or adjusted EBITDA. The unfavorable development incurred during the quarter reflects our decision to adopt a cautious approach to our 2023 claims runout.

As we discussed with you last call, we applied additional judgment incremental to the claims triangles in setting our 2023 IBNR reserves. Since then, we have observed some higher paid claims in several regions. During the quarter, we maintained the same level of judgment associated with the 2023 and prior dates of service. As a result, the unfavorable development was recognized as incremental expense during the quarter. One important data point — for the class of 2022 and older partners, which represented our same geography partners and payers in 2023 our estimated completion factor for 2023 claims is 93.5%. This is approximately 150 basis points below the actual and known completion factor for these same geographies and payers at this point last year.

We believe this is a positive data point as you think about the adequacy of our reserves for 2023. Turning to our balance sheet and cash flow, agilon ended the quarter with balance sheet cash and marketable securities of $426 million and another $26 million of off-balance sheet cash associated with our ACO REACH entities. We used $69 million of cash during the first quarter, which was consistent with our expectations and reflects the seasonality of our distributions to physician partners and settlements with payers. After considering cash received from the majority of marketable securities, we continue to expect to use $125 million to $150 million of cash during 2024. As we have discussed previously, our cash flow from operations improved during the back half of the year as we settle with payers for performance from the prior year.

Our 2024 guidance would result in a 2025 use of cash of about $25 million with an expectation of positive cash flow in 2026 and beyond which is consistent with the outlook we previously shared with you. Turning to our guidance. We have updated our membership and revenue outlook to reflect the exiting of payer contracts Steve referenced. These contract exits are effective during the second quarter and will be completed by June 30. We’re maintaining our medical margin guidance of $400 million to $450 million and adjusted EBITDA guidance of negative $60 million to negative $15 million. The primary changes in our guidance include the negative prior year development we booked in Q1 being offset by the payer contract updates. With that, let me turn the call back to Steve for some brief closing comments.

Steve Sell: Thanks, Tim. Before opening the lines for Q&A, I wanted to emphasize three key points. First, we are maintaining our full year guidance for medical margin and adjusted EBITDA, and we continue to take a cautious posture with respect to medical cost trends. Second, we are making tangible progress executing our performance action plan, most notably with our payer relationships and operating efficiency. We expect to make additional progress during 2024 and we’ll update you as we move forward. Third, the demand for value is accelerating among physician groups and payers, including MA plans and CMS. Our value proposition to primary care doctors and payers is even more important in a constrained funding environment and will serve as the foundation to accelerate our future performance. With that, why don’t we move to Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from Ryan Daniels at William Blair. Please go ahead.

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Q&A Session

Ryan Daniels: Yeah, guys. Thanks for taking the questions. Maybe one big-picture one to start. Interesting commentary there about the need for more value-based care given the cost pressures in the market. So I can see that accelerating the pipeline. But on the other hand, if there is lower shared savings due to higher utilization and perhaps lower payments to the providers, I’m wondering if that somewhat dilutes their enthusiasm. So how do you think about how those two divergent market aspects could impact the pipeline over the next year or two?

Steve Sell: Yes. Thanks for the question, Ryan. I think what we are seeing is the current environment is really only accelerating the value that we provide both to payers and to our physician partners. I think what you are seeing in some of the payer outcomes we talked about really reflects the desire to have a sustainable value-based care network that they can grow and add additional members into. I think when you look at our class of 2025 you can see that our value prop to them is really significant. We are adding groups in existing states where we built infrastructure like Kentucky and Minnesota and North Carolina. And these are groups that are leaders in their community and have outstanding reputations. And so they see a real opportunity to drive additional value through a value-based partnership with us.

And I think, it just tells us that fee-for-service is really not sustainable. So the reality of fee-for-service is getting more challenging, our ability to be able to navigate and drive additional value in this environment is that much greater and additional physician groups are wanting to join us.

Ryan Daniels: Okay. That’s perfect color. And then as a follow-up, maybe a little bit of a double-click down on some of the contract renegotiations as you look to redefine some terms there. Can you speak to how far along you are as a percentage of your book of business or in-markets that are seeing pressure? And then I’m curious if that progress that you expect over the next few quarters could be seen in 2024? Is that more likely setting up for a more favorable ’25? Thanks.

Steve Sell: Ryan, thanks for that follow-up. I think we have worked really hard to build a network and a platform that delivers substantial value. I think, the conversations that we’ve had to-date with payers really has been focused on a long-term relationship and the ability to have a sustainable network they can add more members into. The focus to date has largely been on in 2024, and I itemized the benefits that have been there, whether it’s retroactive relief from 2023 medical margin losses or mutually working with our partners on contracts that were not sustainable. All of those involve payers that we’re going to continue to work with on a go-forward basis. We are now pivoting really to focus on 2025. We are very early in that process — but we are going to be renewing over one-third of our book as we move for 2025, and we are looking very broadly in terms of terms that can give us benefits around that.

So I would say there is an opportunity for further improvement within ’24, but we really have moved to focus on 2025.

Ryan Daniels: Okay, perfect color. Thank you so much.

Operator: Our next question is from Justin Lake of Wolfe Research. Please go ahead.

Dean Rosales: Hi, this is Dean Rosales for Justin. In last quarter’s call, you answered some questions on the older cohorts, specifically classes 2018 to 2020 and their progression to $150 to $200 PMPM Med margin range. Is there any update there as well as their progression speed relative to expectations? Thank you.

A – Steve Sell: So Dean, it’s very early in the year. I think we continue to see good work with our partners around reducing variability and driving medical margin improvement. So I think we would say we are on track with what we communicated on that last call.

Dean Rosales: Awesome. Thanks so much. And just as a quick follow-up, how are you guys thinking about pending TBC changes? How are payer partners speaking to this topic with you guys, obviously really popular right now? Thank you.

Steve Sell: We are in the early stages of talking with our payer partners about their filings for 2025. Obviously, TBC limits is one of the constraints that they’ve got as they look at their filings. What we are hearing is that payers are looking to adjust benefits down that would flow through directly to us. But obviously, we are going to know a lot more in the next couple of months as you look at that. But it is an extensive part of our dialogue with them particularly as we turn to 2025.

Operator: Our next question comes from Jailendra Singh from Truist. Please go ahead.

Jailendra Singh: Thank you. And thanks for taking my question. I want to go back to your agreement with certain payers to exit unprofitable contracts effective second quarter. How are you making sure that these decisions are not impacting your relationship with these payers and future contract opportunity given these exit decisions?

Steve Sell: Yes. Thanks, Jailendra. I mean the — all of these decisions are done in concert with our partners and with the payers. Every single payer that we have an updated economic relationship with that I talked about, we are continuing to work with them. And so it was arrived at mutually. It was really looking at the elements within this year two market as an example, that included some of those payer benefit changes, higher utilization, the final notice for 2025. And so together with our partner and that payer we made the decision to exit out of that arrangement. But these payers also want to work with us in other markets. And so we have active dialogue around that.

Jailendra Singh: Okay. And then my follow-up, maybe if you can provide a little bit more color on pockets of spend or utilization, you saw in the quarter. Is it the same buckets we have seen in the last few quarters in terms of high spending like Part B drug costs, supplemental benefit, outpatient surgeries. When you say trends, recent trends have been better, was that improvement across the board? Or are there any particular buckets we are seeing improving trends?

Steve Sell: So Jailendra, we continue to operate in a very dynamic utilization environment. I think you can see we’ve taken a cautious approach in terms of the trend that we’ve recorded for Q1 at 9.1% that’s up sequentially over Q4 at 8.7%. When we look at our utilization data points across a variety of categories for paid claims from our most complete payers in January and February, we saw those trends elevated. They began to step down into February. When we looked at our census data which is specific to inpatient, obviously, we saw a similar progression coming down January, February, March into April. And so I think, your question is from an inpatient perspective, we are seeing that trend come down. We did see outpatient and Part B drugs elevated in that claims data in January and February. So it is really a mix.

Jailendra Singh: Great. Thanks a lot.

Operator: Our next question is from Adam Ron at Bank of America. Please go ahead.