agilon health, inc. (NYSE:AGL) Q4 2022 Earnings Call Transcript

agilon health, inc. (NYSE:AGL) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Hello, everybody, and welcome to the agilon health Fourth Quarter 2022 earnings call. My name is Sam, and I’ll be coordinating your call today. I will now hand you over to your host, Matthew Gillmor, Vice President of Investor Relations, to begin. 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 prepared remarks from Steve and Tim, 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 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 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, I’ll turn the call over to Steve.

Steve Sell: Thanks, Matt. Good evening, and thank you for joining us. 2022 was a very strong year for agilon and our physician partners, and we have entered 2023 with incredible momentum. We have made significant progress against our vision to transform health care in 100-plus communities by empowering primary care doctors to accelerate the transition to a value-based care system. The research analysis we published in mid-January highlights the success of our model, specifically in patients with diabetes. As many of you know, diabetes affects about 30% of the Medicare population and if not properly managed, can have significant long-term health consequences for seniors. Our analysis found that diabetic patients cared for by agilon Physician Partners when compared to Medicare Advantage and Medicare fee-for-service benchmarks saw a 2x greater improvement in A1c control, a 19% lower total cost of care and a meaningful improvement in health equity access and quality.

Consistent results like these are simply not possible in the legacy fee-for-service model, which is prevalent in the vast majority of communities in this country. With our early success in managing diabetics, we see a multi-decade opportunity for agilon and our partners in addressing significant variability in the way complex patients are managed, ultimately driving better outcomes at lower cost. To that end, we are making meaningful strides in addressing the access, cost and quality variability that defines the fee-for-service system. Our distinctive platform is rapidly unlocking for more primary care doctors, a care delivery and payment model that allows them to operate an outcome versus transaction-driven business model. This new primary care model delivers consistently better outcomes across our network and creates an infrastructure for additional doctors and communities to make the transition to a value-based model.

What is good for our physician partners and their patients is ultimately good for agilon, and you can see it in the incredible results of our business. Today, we are serving 25 diverse geographies. with 2,200 primary care doctors in nearly 500,000 senior patients. These figures include the record 130,000 new senior patients we will add in 2023. And today, we are pleased to share that in 2024, we will add at least another 130,000 new members with the opportunity for that number to grow. For context, our 2024 total Medicare Advantage membership will be approximately double the membership in the 2022 period, which we are reporting today on this call. Our accelerating momentum in both new and current markets comes from our ability to drive meaningful reductions in wasteful health spending, generating a surplus that we call medical margin, and we reinvest roughly half of that surplus back into local primary care.

Our medical margin for 2023 is projected at nearly $550 million, making agilon and our partners an incredible catalyst for stabilizing and growing primary care nationally. The rapid inflection in membership and maturation of earnings across a large and diverse set of markets, highlights that the agilon platform can be the standard for how primary care doctors operate in this changing health care landscape. We believe this latest step change in the business is also reflective of the power of a large and growing number of physicians winning together on a common platform. Now to 2022 performance. The overall momentum in our business was evident as our fourth quarter results closed out a very strong year. Performance across Medicare Advantage and direct contracting was in line or better across all key metrics, enabling a full year adjusted EBITDA of $4.3 million, even as we made substantial platform investments in technology and infrastructure to scale our organization for the future.

For the full year, our core MA business performed extremely well with membership increasing 45%, medical margin increasing 67% and medical margin per member per month increasing 15%. On one of the most important metrics in our fast-growing subscription business, our 10 year 2 plus partners improve their medical margin by 33% from $93 to $124, which accounted for 90-plus percent of the full year $43 million improvement in adjusted EBITDA. Similarly, for the quarter and the full year, our direct contracting or reach business came in ahead of expectations and contributed modestly to adjusted EBITDA. We continue to demonstrate the power of our model to deliver strong cost and quality performance as costs for our direct contracting patients were 1% better than the national trend, and we are on track to achieve a 100% quality score, reflecting excellence in areas such as post-hospital discharge and timely follow-up visits.

Our performance in 2022 drove an estimated $20 million in savings back to the Medicare program as well as positive surplus to our physician partners. The combination of 2 years of experience in this program and an increased level of transparency on the revenue calculations from the innovation center has increased our level of confidence in reach and the overall opportunity that we see to drive future performance. Turning to 2023. Our guidance reflects the momentum in our business as membership revenue, medical margin and adjusted EBITDA are all projected to grow even faster than they did last year. Our adjusted EBITDA guidance of $75 million to $90 million reflects a year-over-year increase of approximately $78 million at the midpoint where we are sustaining 50% MA membership growth.

Just like in 2022, the inflection in our 2023 adjusted EBITDA is powered by our year 2-plus markets, which generate substantial operating leverage at the market and corporate level. This step change in earnings is being delivered, while 44% of our membership is in year 1 or 2 markets versus 37% in 2022. And highlighting the long-term embedded earnings being created, but we continue to drive significant improvements in the current period. These results also highlight the operating leverage inherent in setting up the infrastructure for full risk in a local market as the flow-through of incremental medical margin dollars to adjusted EBITDA is significant. The takeaway is that the maturation of our markets and members is accelerating our adjusted EBITDA gains in 2023 and beyond.

Looking to 2024. As I mentioned earlier, the success of the agilon network is both improving our collective performance and driving our growth. The class of 2024 will reflect that momentum as we will onboard at least 6 new groups, 2 new states, 80,000 members and 500 primary care physicians. This class will be at least double the size that we predicted last March at our Investor Day and reflects the accelerating demand for a new primary care model driven by the success of our partners, and powerful dynamics with senior demographics, physician practice challenges and payer demand for a move away from fee-for-service. The class of 2024 partners are very diverse and include primary care, multi-specialty and both independent and employee groups affiliated with health systems.

Of note, the class of 2024 represents a meaningful step forward for the organization in tapping the unique power of the large and growing local addressable market. We have highlighted in the past the power of transforming the payment model in a local market to full risk. Once our value-based care infrastructure is established, other physician organizations, including health systems, can confidently and quickly move into full risk value-based care, leveraging the infrastructure and learnings of that local market. As we have purposely expanded to 14 states and 30-plus markets over the past 6 years. We have established for ourselves an in-market TAM of 33,000 primary care doctors and 10.5 million senior patients. This year’s class includes particularly large new partner organizations within our existing markets and states driving outsized in-market growth for next year.

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As I mentioned in our last call, our sales cycle has accelerated, and this will allow for a longer implementation period for new partner groups in 2024. This, coupled with the increasing scale of our platform positions our new partners to generate outcomes much earlier in their life cycle, including a higher starting point for quality performance and medical margin. Performance of our new partners will be further supported by the acquisition of mphrX, which we completed yesterday. The company’s Minerva platform uses fire-based standards to aggregate, access and exchange data across health care delivery networks. We have known their team for some time and piloted their technology during our 2022 new market implementation process. The integration of this technology into agilon’s existing technology platform, will enable faster onboarding of our partners and more rapid integration with EMR systems.

This improvement in speed, particularly with complex EMR integrations, will support our ability to scale and enter additional communities, especially with distributed physician networks and health systems. Every incremental week is important during our implementation process, and this technology will effectively buy us time and accelerate our ability to drive outcomes for both patients and physician partners and continued investment in our platform to accelerate success of current and new partners should allow us to further strengthen our leadership position. Let me close with some perspective on the macro environment. The tailwinds for the move to agilon’s new primary care model have never been stronger. And in that assessment, I would include the recent advanced notice from CMS and the final RADV rule.

It is increasingly clear that the challenges of the fee-for-service system are too great. in both health plans and CMS are looking to a health care system that emphasizes the relationship between a senior patient and their primary care doctor and rewards health outcomes rather than the volume of visits. Agilon has been solely built for success in that type of environment. And these developments only increase our opportunity. When I look more immediately at the levers in our business, by getting members on the platform earlier, delivering a more effective implementation period with improved starting points for new partners and accelerating quality and medical cost performance in our more mature markets, I am less feeling extremely bullish on 2023, 2024 and beyond.

With that, let me turn things over to Tim.

Tim Bensley: Thanks, Steve, and good evening, everyone. I’ll review highlights for our financial statements and provide some additional details on our guidance for 2023. Starting with our membership. Medicare Advantage membership increased 45% to approximately 270,000 at the high end of our guidance range. Direct contracting membership increased 72% to approximately 89,000. Total members live on the agilon platform, including both Medicare Advantage and direct contracting increased to 359,000. Our MA membership growth was driven by the 6 new partner geographies that went live in January 2022 and 13% growth within our existing geographies. Revenues increased 49% on a year-over-year basis to $690 million during the fourth quarter.

For the full year, revenues increased 48% to $2.7 billion. Revenue growth was driven primarily by MA membership gains from our new and existing geographies. On a per member per month basis or PMPM revenue increased approximately 2% for the quarter and for full year, which primarily reflects benchmark updates and market and member mix. Medical margin increased 93% year-over-year to $61 million in the fourth quarter. For the full year, medical margin increased 67% to $305 million. Even with the dilution from our strong membership growth and a higher proportion of members in our year 1 markets, medical margin increased as a percentage of revenue and on a PMPM basis. For the full year 2022, medical margins were 11.2% of revenue compared to 9.9% last year.

and medical margin PMPM increased 15% to $96 versus $83 last year. Medical margins benefited from stronger performance in our year 1 markets and significant gains in our year 2 plus partner markets. As Steve mentioned, in our 10 year 2-plus partner markets medical margin PMPM increased by 33% to $124 in 2022, up from $93 in 2021. Network contribution, which reflects agilon on share of medical margin increased 74% to $22 million during the fourth quarter. For the full year, network contribution increased 56% to $132 million. The year-over-year increase in network contribution reflects gains in medical margin as well as the relative contribution of medical margin across our markets. Platform support costs, which include market and enterprise level G&A, increased 35% to $42 million in the fourth quarter.

For the full year, platform support costs increased 19% to $146 million. Platform support costs were higher than our internal forecast during Q4, largely due to investments to help scale our business in 2023 and beyond. The growth in our platform support cost continues to trend well below our revenue growth reflecting the efficiency of our partnership model. For the full year, platform support cost declined to 5.4% of revenue compared to 6.7% last year. Our adjusted EBITDA was negative $10.6 million in the quarter compared to negative $26.7 million last year. On a full year basis, adjusted EBITDA was positive $4.3 million compared to negative $38.6 million last year. The $43 million year-over-year gain in adjusted EBITDA for the full year was primarily driven by higher medical margins in our year 2 plus partner markets, which generate significant operating leverage against market and enterprise G&A.

Adjusted EBITDA contribution from direct contracting, which is reflected on a net basis within other income, was positive $8 million in the quarter and positive $14 million for the full year. Our underlying performance in direct contracting from a cost and quality standpoint remains strong and continues to outperform benchmarks. During the quarter, CMS provided updated estimates for the retro trend adjustment, which positively impacted our revenue benchmarks. This drove modest upside to adjusted EBITDA contribution and offset the platform support investments I mentioned previously. Turning to our balance sheet and cash flow. As of December 31, we had $909 million in cash and marketable securities and $43 million in outstanding debt. We remain extremely well capitalized and do not anticipate needing any external capital to drive our future growth.

Additionally, we continue to anticipate generating positive cash flow as we move into 2024. Our strong balance sheet position and adjusted EBITDA progression gives us significant flexibility to make targeted investments to further strengthen our scale and scale our platform, including both internal and external investments. From an external perspective, we continue to evaluate targeted capabilities that can leverage our growing membership base. To that end, we are pleased to complete the acquisition of mphrX. As referenced in the accompanying press release we issued this afternoon, we expect the integration of mphrX into our existing technology platform will accelerate the onboarding and performance of our new partners through faster data integration.

While the acquisition will contribute to our adjusted EBITDA in 2023, we do expect modest levels of accretion in 2024 and beyond. From an internal perspective, we can continue to focus our investments in technology and growth. In 2022, we stepped up our geographic entry costs going from $33 million last year to $68 million in 2022. The — the increase in geographic entry costs relates to 2 factors, which we view as key positives. First, the class of 2023 new partners included over 100,000 members, which went live in January of this year. This is almost double the size of the class of 2022 and compared to our original estimate of 80,000. Second, given the shorter sales cycle, our 2022 financials include some costs associated with implementing the class of 2024 new partners, which will go live in January of next year.

In total, our member acquisition costs, including both new geographies and same geography remain in the $400 to $600 range. This is incredibly efficient and considering our high member retention and improving unit economics will generate very attractive returns. Before turning to our guidance for 2023, I want to note that we did identify 2 material weaknesses in our internal controls, which we have disclosed in our 10-K filing. These were identified during our first Sarbanes-Oxley audit as a public company and did not impact our financial statements. We are committed to maintaining strong internal controls and are implementing procedures to remediate this as soon as possible. Turning now to our guidance. For the full year 2023, we expect ending membership live on the agilon platform will grow to a range of 485,000 to 500,000 members including 50% growth in MA membership to approximately 405,000 and steady ACO reach membership at approximately 88,000 at the midpoints.

We expect revenue in the range of approximately $4.28 billion to $4.37 billion or 60% growth at the midpoint. At the same time, we anticipate our adjusted EBITDA will continue to inflect higher to a range of $75 million to $90 million. This is driven by continued progression in medical margins across our maturing partner markets, along with platform support cost leverage. This more than offsets dilution from new members and markets as we are accelerating our EBITDA growth while also accelerating our membership growth in 2023. For the first quarter, we expect MA membership growth of 385,000 to $390,000, revenue of $1.07 billion to $1.09 billion and adjusted EBITDA of $32 million to $37 million. As you can see in the guidance table from our press release, we expect normal seasonality in our medical margins will drive moderating adjusted EBITDA throughout the year.

This reflects the higher mix of agents in the latter part of the year. Three other items to call out as it relates to our 2023 guidance. First, we expect direct contracting will generate modest adjusted EBITDA contribution in 2023 in a range of $5 million to $10 million. We also expect this will be weighted towards the back half of the year as we plan to take a prudent approach in estimating the retro trend adjustment and other factors. Second, we expect the mphrX acquisition will contribute approximately $6 million in revenue for 2023 with an immaterial impact on our adjusted EBITDA for the year. Finally, I’d note that our same geography growth will likely trend in the low double-digit range during 2023 across our partner markets. This reflects our decision to push several new partners within our existing geographies into the class of 2024 and provide for a longer implementation period.

With that, we’re now ready to take your questions.

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Q&A Session

Operator: Our first question comes from Lisa Gill of JPMorgan.

Lisa Gill: You got through a lot of detail here. wanted to hone in on the revenue number for next year. Is that substantially here. I know you gave a few of the metrics at our conference just a little over a month ago. But Steve, if I think about the revenue being higher, can you maybe just talk about the components to that. One, is it risk scores? Are the acuity levels higher? Two, I know that we had a nice rate, MA rates were better for 2023. How do I think about the revenue and then how that translates to medical margin?

Steve Sell: So 23 unit revenue has a nice step-up. I’ll let Tim kind of dimensionalize that for you, Lisa.

Tim Bensley: Yes. In fact, of course, the first pickup in revenues because we have this very large increase in membership coming in. Then when you look at, I think, revenue, at least on a PMPM basis, that’s going up around which, of course, is a big number. But the benchmark increase itself is your kind of blended across our markets and members is in that 4% to approaching 5% range to begin with. And then on top of that, I mean, we would expect especially in our kind of year 1 and year 2 sort of younger markets that we would get some continued wrap improvement as well, and that kind of tops you out to that sort of 6% or so range on a revenue PMPM basis. So that in combination with a very strong membership growth gets us to that overall revenue number.

Steve Sell: And Lisa, one thing I would add to Tim’s comment is, if you think about what we do, we love going to these markets and being first. They’re 100% fee for service, and we want to move them to value I think we found that there are markets out there with higher health care spend and therefore, higher starting points on rates as part of our mix that are really attractive for us, and we’ve been able to demonstrate success within them. And when you realize how large this class is with those year 1 markets that have a higher baseline plus the factors that Tim talked about, that accounts for that higher composite revenue number you referenced.

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

Justin Lake : So I wanted to ask 2 quickies. One, on the ACO reach membership not basically flat year-over-year. What are you seeing in terms of physician groups? I know not every physician group is in there. So are you seeing some entering some exit? Are you seeing changes in the underlying membership. Just trying to understand that. And then Steve, you gave some positive commentary on rates and probably the bigger question that I get from people is on this new risk model. Would love to hear your comments on how you lived through this back in California. The last time they put through a big change in the risk score model. So I would love to hear your thoughts on kind of maybe how that — how you’ve seen that change of limited and how you think it might affect agilon.

Steve Sell: Sure. Thanks, Justin. Two fulsome questions. So real quickly on ACO reach, same partners in ’23 that we have in ’22, and that’s sort of the year-over-year relatively flat. As we shared early in January, we did have some partners that could have gone in ’23. We pushed to ’24 because we’re very focused on having a strong implementation and a good starting point. And so we see opportunity in ’24 and beyond for additional ACO reach membership. We continue to see it as a very strategic program. I think we’re really pleased with our results from a cost and quality perspective. The value that we get both in direct contracting and Medicare Advantage of having that concentration within the practice and with the community is really very strong.