agilon health, inc. (NYSE:AGL) Q3 2023 Earnings Call Transcript

agilon health, inc. (NYSE:AGL) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Hello, everyone. Welcome to the agilon health Third Quarter 2023 Earnings Conference Call. My name is Carla, and I will be your operator for today’s call. Today’s call will include a Q&A session. [Operator Instructions]. I would now hand you over to your host, Matthew Gillmor, Vice President of Investor Relations. Matthew, please go ahead.

Matthew Gillmor: Thanks, operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Before we begin, we’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 on this call are non-GAAP 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. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. During the Q&A session, we’d ask everyone to please limit themselves to one question so we can get through as many questions as possible. With that, I’ll turn things over to Steve.

Steve Sell: Thanks, Matt. Good evening and thank you for joining us. Momentum across our business remains strong, and we are making rapid progress against our vision, to transform healthcare in 100 plus communities by empowering primary care doctors. As an indicator of our success, this year we are on track to reinvest more than $250 million into local primary care based on the high quality, cost effective care being delivered by our partners. These results are enabling our partner groups to expand access to preventative services, improve quality outcomes, and drive value for the communities they serve. I want to thank my agilon colleagues and our partners for their trust in each other and their belief and support in a network that is shaping a better healthcare system for our country.

Before discussing our performance for the quarter, I wanted to take a few moments to highlight our decision to sell our Hawaii business. As we have discussed with you, Hawaii operates very differently compared to our core partner markets in the continental U.S. In our core partner markets, we leverage a common operating structure. This operating structure is centered around a long-term joint venture with a skilled physician group and non-delegated multi-payer relationships with health plans and CMS. The key differences in Hawaii’s operations, namely the lack of a joint venture partnership with a large physician group, a much smaller senior patient-physician panel size, and Hawaii’s delegated MSO infrastructure made our Hawaii business increasingly less strategic to agilon and created a drag on our financial results.

We are pleased to transition MDX Hawaii to a new owner that is better positioned to invest into the business and optimize its delegated infrastructure, which should benefit patients and the community at large. The sale of Hawaii will enhance our ability to focus even more specifically on our partner markets at a point in time when we are driving increasing success across PCP’s entire senior panel. This quarter and going forward, you will hear us consistently highlight the power and importance of our integrated senior business across Medicare Advantage and the traditional Medicare populations. Our ability to generate successful outcomes for patients, PCPs and the system in a multi-payer full risk model is increasingly unique. Our focus on this opportunity will pay dividends in the years to come.

Turning now to the quarter. Partner market performance was again extremely strong across both MA and ACO REACH. All of our key financial metrics were generally in line or above our guidance ranges, especially on an underlying basis. Our results continue to demonstrate the unique power of our model to inflect profitability, while driving significant growth. During the quarter, our total membership on the platform increased 43% to 508,000 members, and revenues increased 75% to $1.2 billion. This was above our guidance and was supported by the successful onboarding of new PCPs and faster pull-through of members, particularly in new markets. Adjusted for the sale of MDX Hawaii, our partner market growth was even stronger, with total membership up 49% and revenue up 85%.

Even with our faster membership growth, adjusted EBITDA continues to inflect higher, increasing more than $20 million year-over-year to a loss of $6 million for the quarter. This was in line with our outlook and supported by strong medical margin gains in our partner markets across MA and REACH. Adjusted for Hawaii, our partner market EBITDA was positive $6 million for the quarter well above our outlook and it was even stronger on an underlying basis as our results included some net negative development from 2022. Our combined medical margin across MA partner markets and REACH was strong in the quarter, with MA generating $111 million and REACH generating $55 million. These results demonstrate the power of a PCP focusing on the most complex patients across their entire senior panel with differentiated information and care team resources.

As an example, our year two-plus partner markets in MA and REACH both generated over $130 per member per month in medical margins year-to-date. Think about the value delivery to our PCP partners and the health system when we generate this magnitude of savings across an average panel size of 400 to 500 senior patients. From a guidance perspective, we have raised our membership revenue and adjusted EBITDA outlook for 2023. This was supported by the growth and margin progression in our MA partner markets, including REACH, and the sale of MDX Hawaii. We also plan to maintain a more conservative reserving approach as we exit 2023, and this is intentionally reflected in our medical margin outlook for MA and will support our future performance in 2024.

Our ability to execute against our adjusted EBITDA targets during 2023 and enhance our visibility to 2024 continues to reflect the strength and durability of our model. As I have discussed with you previously, the key differences in our model are driving differentiated clinical and financial performance. Unlike the traditional fee-for-service system, which predominates across healthcare, all patients in our model have a fully aligned or attributed relationship with their primary care doctor. And through agilon’s platform, our PCP partners have the data and resources to proactively impact patient care. This translates into specific differences in the way healthcare is utilized and managed. And this shows up in our business in very tangible ways.

For example, we continue to have outstanding results in the standardized star ratings measures. For 2024 stars, the percentage of our membership in four-plus star plans will increase modestly to approximately 84%. However, as most of you know, plan level star ratings also include the performance of non-agilon providers. For our year two-plus partners, agilon’s specific performance is 4.3 stars and increased nicely year-over-year. This was despite more stringent cut points and relatively flat star ratings industry-wide. We continue to excel in areas like preventative cancer screenings, diabetes control, and medication adherence. Our quality results will drive meaningful value to our patients and the healthcare system in the years ahead. And because of our high member retention, agilon and our physician partners will share in this value over the long term.

Additionally, our ability to drive differentiated cost performance was clearly evident in the recently released ACO REACH results for 2022. This data allows agilon to compare our performance against the unmatched fee-for-service system, as well as other value-based care models. During 2022, our REACH ACOs drove nearly 10% savings relative to the Medicare benchmark. This was more than 2.5x better than the program average, and our results included more than 90,000 beneficiaries in diverse markets. Agilon also returned nearly $30 million in guaranteed savings to the Medicare trust fund last year. As you can see from our REACH results this quarter, our differentiated cost performance has carried into 2023. Looking forward, we believe our leadership position as the platform and network moving physicians to full risk has grown considerably.

This is a function of the magnitude of savings we are generating across the entire senior panel of a primary care doctor. Our timing is also important as primary care physicians and the broader system increasingly need a scalable solution for multi-payer full risk. This dynamic is driving the ongoing inflection we are seeing from a demand perspective, among both physician groups and health systems. For the class of 2024 new partners, we now expect 25,000 new ACO REACH members, and we are increasing our expectation from 100,000 to 110,000 new MA members. At this point in the year, we are nearly complete with our payer contracting cycle, which gives us better visibility into the membership pull-through. We also now have a clear line of sight to a very strong class of 2025 with multiple new partners signed, including independent groups and health systems.

Implementation for this class has already begun, which should bode well for future performance. Before turning the call over to Tim, I wanted to offer a few comments on 2024. We remain highly confident in the trajectory of our adjusted EBITDA inflection and expect to share an initial view in early January. As we have discussed previously, we operate in a very forward-looking model, and our visibility into the key drivers for next year’s performance are quite high. First, we have a large and growing class of 2024 new partners with an attractive margin profile that should be meaningfully accretive to adjusted EBITDA. This is a function of a longer implementation cycle for this class and targeted investments we have made around technology and centralizing key processes.

Next, the combined strength of our 2023 run rate margins across our integrated senior business will have key positive implications for 2024. First, our REACH performance will carry forward, driven by our ability to maintain the cost differential compared to the benchmark. And second, the reserve actions we have taken in Medicare Advantage should reduce the risk of negative claims development next year. Finally, we remain very confident in our ability to manage the new risk adjustment model starting in 2024. The impact adds on from the V28 model change is relatively modest and given the limited maturity of our partner markets and senior membership, our ability to mitigate this impact is very high. With that, let me turn things over to Tim.

Tim Bensley: Thanks, Steve, and good evening, everyone. I’ll now review highlights from our third quarter results and our updated outlook for 2023. Starting with our membership for the third quarter, total members live on the agilon platform increased to approximately 508,000, including both Medicare Advantage and ACO REACH. Our consolidated Medicare Advantage membership increased 58% to 420,000, driven by the addition of new partner geographies and 9% growth with our same geographies. Adjusted for Hawaii, MA membership and our core partner markets grew 69% to 384,000 and our same geography growth was 12%. Reported revenues increased 75% on a year-over-year basis to $1.2 billion during the third quarter. Year-to-date, revenues increased 73% to $3.5 billion.

Revenue growth was primarily driven by membership gains and new and existing geographies. On a per member per month basis, or PMPM, third quarter revenue increased 11%. This was primarily driven by benchmark updates and membership mix, including higher benchmarks in several new markets. Adjusted for Hawaii, revenues increased 85% to $1.1 billion and revenue PMPM increased 10% during the third quarter. For our MA business, medical margin on a reported basis increased 42% year-over-year to $108 million during the third quarter. Year-to-date, medical margin increased 67% to $408 million. While this was below our outlook for the quarter, the difference was primarily driven by performance in Hawaii. Adjusted for Hawaii, medical margins increased 46% year-over-year to $111 million for the third quarter and was in line with our expectation even with approximately $6 million of net negative development.

On a per member per month basis, medical margins across our core partner markets increased by 4% year-to-date to $119, driven by the maturation of markets and member cohorts. For our year two-plus partner markets, medical margin PMPM increased 17% to $134 on a year-to-date basis. MA medical margins for the quarter included a net $8 million in negative development, including $9 million in prior year claims offset by $1 million in prior year revenue. $2 million of the net development was attributed to Hawaii and the remaining $6 million was attributed to our core partner markets. The negative claims development this quarter was almost entirely isolated to system issues with a single payer related to supplemental benefit costs. As we discussed last quarter, we are making focused investments to improve our visibility into data gaps with payers.

Excluding the year-to-date development, MA medical margins would have been approximately $125 PMPM in our partner markets and $143 PMPM in our year two-plus partner markets. We think this is an important metric as it better reflects the year-to-date run rate performance of our MA business in light of the sale of MDX Hawaii and the actions we have taken to minimize the risk of negative development in 2024. For our ACO REACH business, we continue to be very encouraged with the performance, which again outperformed our guidance this quarter. REACH generated $55 million of medical margin in the quarter and $117 million year-to-date, which is a twofold increase from last year. Additionally, on a per member per month basis, REACH profitability this year is roughly comparable to the year two-plus MA partner markets.

This level of performance is encouraging and underscores the power of our multi-payer full risk platform. While REACH is not consolidated in our financial results, we do think it is relevant to think about our medical margin performance on a combined basis across our MA partner markets and REACH. This is because our combined MA and REACH performance is what drives our key profitability metric adjusted EBITDA. For 2023, our combined medical margins for MA partners and REACH are consistent with our original guidance expectations. As Steve mentioned, this sets a strong foundation for performance in 2024. Our adjusted EBITDA on a reported basis was negative $6 million in the quarter compared to negative $26 million last year. On a year-to-date basis, adjusted EBITDA was positive 28 million compared to negative 20 million last year.

As a reminder, adjusted EBITDA includes geography entry costs primarily associated with new partners that will generate revenue in 2024. The year-over-year gain in adjusted EBITDA reflects the increase to our medical margins across both MA and REACH as well as platform support leverage, partially offset by performance in Hawaii and the net negative development. Excluding Hawaii, our adjusted EBITDA would have been positive $6 million for the quarter and $42 million on a year-to-date basis. From a utilization standpoint, composite utilization across MA and REACH was generally in line with expectations. For MA, we did observe an increase in utilization during May and early June, which resulted in some in-period development that we recognized during the third quarter.

This was contemplated in our guidance and trends moderated back towards normalized levels during the third quarter. For REACH, utilization during the first half of 2023 developed favorably relative to our expectation. As a reminder, our results in REACH better reflect our real-time performance against the unmanaged fee-for-service system because of how the benchmark mechanics work. Turning now to our outlook for full year 2023. Please note that our updated guidance excludes MDX Hawaii for the full year. We have raised and narrowed our adjusted EBITDA outlook to a range of $6 million to $18 million from a prior range of $0 million to $23 million. We have also updated our membership and revenue outlook, which are both higher on an underlying basis, excluding MDX Hawaii.

From a medical margin perspective, our revised outlook is $455 million to $470 million and is approximately $50 million lower than our prior range. This reflects two factors. First, the removal of Hawaii represents about $20 million of this change. Second, one of our primary goals is to exit 2023 with appropriately conservative reserving posture in MA. In light of this, we continue proactively refine our model to account for utilization trends as well as any potential blind spots with health plans. We have assumed utilization will not moderate any further from recent levels, which accounts for $30 million of the change to our MA medical margins. We think this is a prudent approach and is informed by our decision to maintain a more conservative reserving posture.

We are pleased to make these decisions which provide a strong foundation for future performance while still modestly raising our adjusted EBITDA guidance. Full details on our fourth quarter and full year guidance can be found in the earnings press release. With that, let me turn the call back to Steve for some brief closing comments.

Steve Sell: Yes. Thanks, Tim. Before opening up the lines, I want to emphasize three key points. First, the sale of our Hawaii business enhances our ability to focus even more specifically on our differentiated core partner business and positions us for continued success in ’24 and beyond. Second, our leadership position as the platform and network moving physicians to full risk has grown considerably and you can see it in the clinical and financial results we are driving and in the accelerating demand from physicians in independent groups and health systems. And third, with access to better data, resources and incentives, our primary care doctors are actively managing the way healthcare is utilized across their entire senior panel, which is yielding meaningfully better outcomes for doctors, patients, and agilon. With that, we are now ready to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. We will now take our first question, which comes from Lisa Gill from JPMorgan. Lisa, your line is now open. Please go ahead.

Lisa Gill: Thanks very much and congratulations on the sale of Hawaii, although I was looking forward to doing a site tour, Steve. So I guess that’s off the table. Wanted to just follow up on the medical cost side. So Tim, you talked about system issue with a single payer, data gaps with that payer. If I remember last quarter, you also talked about increasing reserves to try to account for some of this going into the back half of the year and then we saw that the prior period development here in this quarter. Can you just talk about where you are on that data gap, the systems issue? Do you feel like that’s one fully behind you? And then secondly, when talking about utilization, you said in line, you saw a little bit of a bump in May and June.

What we saw with some of the Medicare Advantage players in the most recent quarter is that in the quarter, they actually saw higher costs than we’re projecting even beyond May and June. And one of the largest players talked about some COVID hospitalizations that they saw towards the end of the September quarter. So just want to really understand what you saw, what your expectations were and if you have anything on the COVID side or if you’ve seen anything on the COVID side?

Steve Sell: Lisa, I’ll start and Tim can chime in. I’ll start with we raised EBITDA guide on the year because of the strong overall performance across MA and REACH across nearly 500,000 senior patients, and that really sets a strong foundation for ’24. From a utilization perspective, composite utilization was in line with our overall expectations. As Tim kind of outlined, we did see a step-up in Q2 utilization in MA and REACH. The MA was within our guide, REACH actually developed favorably relative to sort of what our expectation was around that intra-period. In Q3, we’ve seen a deceleration. And our guide makes an assumption on utilization that will be flat through the end of the year, and that’s reflected in the reserve posture that Tim talked about in terms of an extra $3 million. But Tim, you want to talk about?

Tim Bensley: Yes. Lisa, just a couple of things specifically to your question. First of all, on the prior period development, I think we have made a lot of progress this year in partnering with the payers out there to try to close some of these gaps. Essentially, some of these information issues are caused by just the complexity of our model, and that’s also — it’s also a feature of the model, right? We’ve got over 30 payers, over 100 payer contract combinations in our markets. But having said that, I think we made good progress. The issue in this quarter was a very specific issue with just one payer. Hopefully, that was a lingering issue that we’ve now figured out where the gap was and should be okay with that going forward.

In terms of the utilization trend, remember last quarter when we talked about this, we said, hey, we haven’t seen the spike up yet. We didn’t have enough information from May or June to really see what some of the payers were referring to. We did want to make sure that we had covered the possibility that there would be some higher utilization in our guidance going forward. As it turned out, as we just reported, we did see some increased utilization in May although it that was greatly started to moderate in June. And as we’ve seen so far, started to — continued to moderate in early Q3 as well. I’m not completely surprised by that compared to some of the comments that I’ve made from some of the big payers, I think our model and even some of them have said should be performing better than the average out there.

So the fact that we saw a spike up and some moderation down is probably just a factor also of the strength of our model. On COVID specifically, we’re actually seeing — if you go back to last year, which is — you might want to think about that as the first really sort of post big COVID year. We did actually see some seasonality with COVID start to spike up last year in kind of the August and September timeframe in terms of utilization. We did see some of that again this year, although actually lower spike up in COVID this year than even what we saw last year. And the overall magnitude of hospitalization from COVID in terms of a spike up versus the baseline is not really material and not causing any material change in our medical margin performance or our medical margin outlook.

Lisa Gill: Great. Thank you.

Steve Sell: Thanks, Lisa.

Operator: Thank you, Lisa. We will now take our next question from Justin Lake from Wolfe Research. Justin, your line is now open. Please go ahead.

Justin Lake: Thanks. I appreciate the time. I wanted to start off — I’ve got a couple of questions, but want to start off on the REACH performance. So you said it was $55 million of medical margin. So give or take half your medical margin in the quarter. What were you expecting it to be in the original guide?

Tim Bensley: Yes. Justin, just real quick before — we can obviously talk a lot about the performance of REACH which was really — continue to be really positive in the quarter as it had kind of year-to-date so far. But the $55 million of medical margin that we talked about for REACH is not part of our consolidated results, so the $108 million of medical margin that we reported, which does include Hawaii. In addition to that, if you look at the footnote showing the unconsolidated ACO REACH entities, we had $55 million there and about $18 million of EBITDA [indiscernible].

Justin Lake: I apologize, that’s a very —

Steve Sell: Yes. If I can just add to that, Justin. I think we’re driving really strong medical margin performance across the entire physician panel across both REACH and MA. And so the $55 million that Tim talked about is driven by beating that national benchmark by more than 300 basis points. In my remarks, I talked about the ’22 results. You’re seeing that in ’23. But the same things that are driving success in REACH are driving success in MA, and our partner market medical margins came in at $111 million in MA which is sort of in our guide. And when you adjust for that PPD, it’s actually at the high end of our guide. And I think it’s just a function of this model that we’ve got around high touch and our ability to drive better access cost and quality outcomes. So that’s what I’d highlight.