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

agilon health, inc. (NYSE:AGL) Q4 2023 Earnings Call Transcript February 27, 2024

agilon health, inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $-0.28. AGL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. I would like to welcome you all to the agilon health Fourth Quarter 2023 Earnings Conference Call. My name is Brika, and I will be your moderator for today. All lines are on mute for the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Matt Gillmor, Vice President of Investor Relations, to begin. So Matt, please go ahead.

Matt 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. Please note that Steve and Tim will be referencing a slide deck posted to our Investor Relations website during their prepared remarks. 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 would like to walk you through the following elements. Our final results for Q4 2023; our updated guidance for 2024; an update on our member and market unit economics; a progress update on our 2024 performance action plan; and finally, our growth outlook for the Class of 2025. Before I get into the quarter, let me provide some context. agilon and the Medicare Advantage industry are navigating through a complex transition period, and we are taking significant steps to help mitigate the impact of this evolving environment on our business, including strengthening our reserves as well as focusing on the targeted actions we outlined in early January.

While the near term dynamics are negatively affecting our financial results, demand for our platform has never been stronger. As we continue to deliver significant value to patients, payers and our PCP partners. The underlying fundamentals of our business model remain intact, reflected in member economics, member growth, quality outcomes and physician NPS scores, and we are well positioned to accelerate performance over the medium and long-term. Let’s now turn to the quarter. Our medical margins for the fourth quarter in 2023 were $51 million below the midpoint of the guidance range we provided in early January. This was driven by $38 million from costs and revenue attributable to the fourth quarter and $13 million of development attributable to previous periods.

Relative to our guidance from January, the higher costs in our final ‘23 results were driven by two factors. First, as we completed our financial closing process in February, we received updated data, including relatively complete claims data from our largest payers, as well as additional information such as seasonality factors and census data. Completed our analysis of this data in mid-February, which indicated that medical costs for our members were higher than our previous estimate for 2023. Second, in light of this new information and the dynamic utilization environment, we have strengthened our reserves as we close 2023. Our team developed a range of reserve scenarios and we reserved at the high end of our estimates. The completion factor assumptions used in our 2023 close are significantly lower compared to the actual completion factors from 2022.

We believe this is a prudent approach given the environment and expect to carry this forward. Turning to the ‘24 guide, we have also lowered our 2024 medical margin guidance by $155 million to $425 million at the midpoint and lowered our ‘24 adjusted EBITDA guidance by $87 million to negative $38 million at the midpoint. Our updated guidance assumes the $38 million medical margin shortfall attributed to the fourth quarter ‘23 is not seasonal and will persist into 2024. It should be noted that our revised guidance assumes a gross cost trend of 7.9% less the impact of our strategic action items and a net cost trend of approximately 6.6% in 2024. This is 250 basis points above our prior ‘24 expectation and on top of the 7% medical cost trend we observed in 2023.

Despite our higher utilization assumption, we expect to grow our medical margin by 40% in 2024 and drive meaningful gains in adjusted EBITDA. As I noted before, agilon and the Medicare Advantage industry are navigating a challenging transition period during 2023 and 2024. Healthcare costs among the senior population are rising faster than contemplated in CMS benchmarks and planned bids, which may be driven by post-COVID pent-up demand. We do think it’s important to recognize a few things. First, Medicare Advantage has a relatively short repricing cycle and the program is designed to adjust to changes in utilization. Over the next 12 to 24 months, we expect CMS benchmarks will reset to reflect the rise in utilization, and many of our health plan partners will adjust bids and benefits to recapture margins.

We expect this repricing cycle will benefit our financial performance in future periods. Second, we have a strong balance sheet with approximately $500 million in cash and short-term investments. Even with the further moderation in our 2023 performance and 2024 outlook, we have significant resources to support our growth and ongoing actions to drive performance. Now to a refreshed view on the unit economics of our business, as outlined in the slide presentation on our Investor Relations website. For this commentary, I’ll be referencing Slides 9 through 13 of the deck. As we have consistently shared, our business model is driven by member growth and the ongoing maturation of member and market cohorts. While the macro environment has clearly impacted our overall unit economics in 2023, there are some very important takeaways from the data.

First, as we show you on Page 10, despite the negative 2023 utilization environment, our members that came on the platform from 2018 to 2020 are sustaining medical margin performance at attractive levels of roughly $150 per member per month. In our 2021 and 2022 member cohorts are showing positive margin progression. By comparison, our 2023 member cohort, representing approximately one-third of our membership, shows the impact of higher utilization and starts off at $25 per member per month. Second, as we show you on Page 11, while we have repeatedly talked about our member and PCP growth and its impact on margin progression, we are separating out the impact of compounded mid-to-upper teens same-store growth on the performance of our market cohorts.

What the data shows, is that our three earliest market classes, with annual growth rates of 12% to 24%, have seen between a $36 to $86 per member per month reduction in medical margin due to new member dilution. This is not dissimilar from the impact that new markets have on the platform as they also take time to mature as risk adjustment and our medical cost management levers improve. Said differently, our strong same-store growth has created an embedded opportunity in our earliest markets to focus on new doctors and their senior patients to drive performance of those markets. This data aligns well with our ‘24 performance action plan as it is fully within our control. Finally, our growth algorithm of growing markets, growing members and growing medical margins remains intact, albeit with a more measured and narrowed focus given the macro environment and its impact on our results.

Pivoting to our performance action plan that we discussed with you in early January. We continue to make progress against our plan, which will position us to accelerate our path to profitability and cash flow generation. As a reminder, our plan includes the following four elements, one, expanding support for primary care doctors joining the platform in mature markets. Two, leveraging our strong payer relationships. Three, addressing our data visibility gaps. And four, boosting our operating efficiency. Today, I wanted to provide you a brief update on our progress. Let’s start with PCP, onboarding and education. As a reminder, we provide structured training to primary care doctors during our implementation process with new groups, but we historically have not provided the same training to new physicians joining veteran practices.

As outlined in our newly released cohort data, the strong same-store growth with doctors joined the platform in our earliest markets has created variation in these new physicians understanding and performance in our partnerships. We are on track to deploy this training to 90% of the doctors in our targeted mature markets during the first half of 2024. We expect these efforts will improve our BOI performance and clinical program enrollment in the back half of the year, supporting our financial performance in 2025 and beyond. Next, payer strategy. We have been encouraged with the dialogue and level of engagement with our payer partners in recent weeks. As many of you know, we partner with the leading physician groups that typically represent 20% to 30% of the independent primary care capacity within each local community.

Payers rely on our partners to offer a comprehensive network and benefit and our consistent track record of quality and cost performance. From a visibility standpoint, we are now receiving detailed data for supplemental benefits from most of our large national and regional payers. We believe this will enable agilon to understand and better forecast these costs, which was a source of volatility in 2023. Additionally, we have been able to negotiate targeted changes in our percentage of premium rates in key markets. This reflects that payers want to partner effectively with agilon and our groups over the long-term. We expect to make continued progress, deepening our engagement with payers during ‘24 and for 2025. For data visibility, this month, we began onboarding data from our largest payer into our new financial data pipeline and we will begin ingesting data from other large payers over the next several months.

We expect to onboard data for over 55% of our membership during the first quarter and 75% of our membership during the second quarter. This data pipeline will enable our internal teams to process and analyze payer data faster and with much more detail, which will improve our forecasting and operations. We are also expanding the use of the Minerva platform we acquired in 2023 to support clinical program enrollment and we will better leverage HIE and ADT data to impact transitions of care. Final area of focus is operating efficiency. We have taken targeted actions to reduce our platform support to 3% of revenue in 2024. Additionally, we have reduced our geographic entry costs by $10 million in our updated 2024 guidance to reflect a measured approach to our growth.

Now, let’s turn to growth with the Class of 2025. Given the current environment, we are taking a measured approach to our growth. This is reflected in the quality of groups we are bringing on the platform and the longer implementation cycle we have been able to achieve in recent years. I’m pleased to share that the Class of 2025 new partners will include at least five groups with more than 60,000 new MA members. This will expand our network to include 36 physician groups and 3,000 primary care doctors. And as I mentioned, we have lowered our geographic entry costs to a range of $55 to $65 million, which is down from our prior ‘24 estimate of approximately $70 million. It’s important to note, that this lower range still contemplates the potential for additional senior patients in the Class of ‘25 to come on the platform or for incremental onboarding costs associated with the Class of ‘26.

In closing, I want to offer three important takeaways. First, agilon is navigating through a transition period for our company and the Medicare Advantage industry. Medical costs are temporarily outpacing revenue benchmarks during 2023 and 2024. agilon and the industry, including CMS and our health plan partners, will adjust to this new environment, supporting our ability to return to a more normalized margin trajectory over time. Second, we are taking significant actions to improve our performance against this dynamic environment. From a forecasting perspective, this is reflected in the significant strengthening of our reserves, exiting 2023 and our reset guidance for ‘24 that assumes recent utilization remains elevated. From an operating perspective, we are executing against the action plan we have outlined, with a focus on best-in-class execution on factors we can directly control.

Third, and finally, our business model is working. Demand for our platform has never been stronger and we are delivering significant value to patients, payers and our PCP partners even in a difficult environment. This is reflected in the updated member cohort information we have shared, which is translating into significant economics to our PCP partners, reinvestment into local primary care and our ability to drive consistent improvement in quality measures across our network. We remain confident in the strength of our platform and physician network, as well as the long-term opportunity for agilon. With that, let me turn the call over to Tim for his comments.

Tim Bensley: Thanks, Steve and good afternoon. I’ll cover two items before we go into Q&A. First, additional details on our 2024 guidance. Second, balance sheet and cash flow expectations. I’ll reference several of the slides during my comments. Starting with guidance details. You can see our updated projections for 2024 medical margin on Slide 5 of the presentation. We now expect our medical margins to be in the range of $400 million to $450 million in 2024, which compares to our prior guidance midpoint of $580 million. The primary drivers of the change includes, first, the lower starting point in 2023 medical margins which Steve addressed. Second, our assumption that higher costs from 2023 will carry forward into 2024, including a reduced outlook for the Class of 2024.

Third, a partial offset from higher revenue associated with stronger performance in our Burden of Illness documentation efforts as we close 2023. We are now assuming a cost trend of 6.6% for 2024, which is 250 basis points over our previous 4.1% assumption. I wanted to note that these are net all-in trends after the impact from our clinical programs. Our gross trend assumption for 2024 excluding these programs is now 7.9% compared to 5.3% previously, and it’s in line with the trend we observed in the fourth quarter 2023. On Slide 6, I wanted to call out some of the adjusted EBITDA dynamics that impacted our 2023 results and how those dynamics work in 2024. During 2023, the relatively modest growth we generated in medical margins of $8 million created negative leverage to our consolidated adjusted EBITDA.

This was due to the prior year development we recorded in 2023, which lowered our medical margin. Additionally, we had a handful of markets in an EBITDA loss position, including several markets from the Class of 2023. Because of this, we had higher operating expense growth relative to medical margin growth. For 2024, we expect this dynamic will reverse, with medical margin growth driving more flow through to adjusted EBITDA. One key dynamic is that we expect the Class of 2024 will be profitable from a market EBITDA perspective and we don’t expect prior year development to recur. From a balance sheet perspective, as Steve mentioned, we have approximately $500 million of cash and investments and minimal debt. Our available cash and investments include $495 million that is consolidated on our balance sheet and another $21 million of off balance sheet cash associated with our ACO REACH entities.

Based on our updated guidance, we expect to use $125 million to $150 million of cash during 2024. For reference, our cash flow realization is offset from our medical margin and adjusted EBITDA performance by about 12 months because of the timing of our settlements with payers. Based on this, our 2024 guidance would result in 2025 use of cash of about $25 million with an expectation of positive cash flow in 2026 and beyond. With that, operator, we are ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] We have the first question from the phone lines, Lisa Gill of JP Morgan. Your line is open, Lisa.

Lisa Gill: Tell your overall views on when we think about utilization trends, it seemed that in some of your comments that maybe you think some of this is pent-up demand or is this the new normal and you feel that ultimately CMS and the health plans will adjust to this new normal when we think about bids? So that would be my first question. I just want to understand how you’re looking at the current environment as to whether you think this is the new normal or you think there’s some level of pent-up demand.

Steve Sell: Lisa, thanks for the question. I guess I’d start by saying I think we’re operating in a very dynamic utilization environment and what we’ve communicated today sort of tries to demonstrate the respect for that environment. We obviously have seen an acceleration in trend in Q4, stepping up to a Q4 trend level of 7.7%. Our assumption into ‘24 is that utilization continues at that level. And so, we see it persisting. And looking at the data that Tim talked about, we didn’t see a tremendous set of seasonality within that, but concluded that this will persist. And that’s been reflected within our guidance for 2024. We do expect, as we said, that benchmarks will catch up with this. We’ll see what the final notice looks like when we get that later in Q2.

And we have been encouraged, as we’ve talked with some of our plan partners about their plans for 2025 in terms of their bids and specifically that they will be focused on bidding for margin. And that’s obviously material as it flows through to us. So, our belief is that it is ongoing and it’s going to be at this elevated level at least through 2024.

Lisa Gill: And then if I just think of some of the elements in the ‘24 guidance, I just want to better understand the impact of v28, the two midnight rule, and then the comments that you made around supplemental benefits. So, is the comment around supplemental benefits that you have less risk around some of the supplemental benefits based on negotiations with managed care? And if you can just help me to understand those three, that’d be great. Thanks.

Steve Sell: Sure. Our revenue guidance for the year includes the impact of v28, which has that rough 2% impact we’ve talked about, offset by our actions and the other elements in revenue. The two midnight rule is factored into our in-patient assumption in ‘24 and is part of that trend that Tim and I laid out for you in 2024. And then supplemental benefits, as we look at the relative change from ‘23 to ‘24 across the mix of our payers, we do not see nearly as great an escalation as we saw ‘23 over ‘22. And our payer conversations right now are focused on our ability to mitigate those things we can’t control, like supplemental benefits, whether that’s through a carve out, whether that’s through a corridor or capping that. So it’s a combination of those things, Lisa. Tim, anything you’d add to that?

Tim Bensley: I think that’s right. Right on. And by the way so –

Lisa Gill: Great.

Tim Bensley: We are – yeah, go ahead.

Lisa Gill: No, no, you go ahead. I just denoted, that’s great. Go ahead –

Tim Bensley: No, I was just going to say, just to tag on, just to quantify the supplemental benefit issue. We do expect to be like a slight headwind in 2024 with 20 basis points or so, but that’s coming off a very big headwind that we had in 2023 so.

Lisa Gill: Okay, appreciate the comments.

Operator: Thank you. We now have the next question from Justin Lake of Wolfe Research. You may proceed with your question.

Justin Lake: Thanks. Wanted to first kind of go through this bridge that you laid out for us today versus the January 5th, specifically on the medical cost side. So you have $250 million a year of medical cost PMPM kind of headwind versus $141 million before. So you had $38 million of incremental new costs in the fourth quarter, is the way to think about it? And did you just multiply that by another three quarters to annualize it, to kind of drive that delta? Is that what I’m looking at here [inaudible]?

Tim Bensley: Yeah, that’s a great question. And I think the change of $38 million is total medical margin. We had a little bit of incremental revenue. I think the full change. So the way we look at it is, we essentially went into the fourth quarter looking at all the things that Steve just went through and how we essentially have been refining our process and making sure that we get to a number that we feel we’re going to be adequately reserved for the end of the year. We actually added $68 million of medical expense to our final close versus what we were guiding to in early January. Of that $68 million, about $13 million of it, is actually for some incremental membership that we realized. So we’ve added about $55 million of actual cost to our reserves.

To get to your point, and I think you are pretty close to the number. In the fourth quarter, we added about $40 million of that $55 million with the other $15 million in the previous quarters. That $40 million incremental – that total incremental with the $40 million going into the fourth quarter leaves us with a trend on base medical expense that is accelerating in the fourth quarter. And Steve talked about some of these numbers. Our full year base medical trend, so without supplemental benefits, is 7% now for 2023 for the full year, the fourth quarter accelerated to about 7.7% for the full year. We’ve taken that 7.7% base medical expense and essentially assumed that slightly higher than that for our full year 2024. So essentially, yes, we’ve taken that fourth quarter step up and flowed that through into 2024 guide.

Justin Lake: Okay. And then just a couple of things on trend. One, can you tell us some of the breakdown here of what you’re seeing specifically, one of the companies is out there talking about in-patient then seeing some pickup in short stays even before the two midnight rule. What are you assuming for that? I don’t know if you gave an answer to that question that Lisa asked on the two midnight rules, specifically, what is the impact that you’re assuming there? Maybe you could tell us the pickup in short stays versus total admissions, how much pressure does that put on total admissions? And then lastly on ACO REACH, there’s been some discussion that CMS is seeing trend higher in the fourth quarter, and they’ve kind of talked to the ACO REACH plans about that.

Can you give us some numbers there in terms of how much trend CMS is reporting in the fee-for-service program in the fourth quarter versus what they’ve seen year-to-date to kind of maybe measure that pickup versus MA? Thanks, guys.

Steve Sell: Sure. So I’ll take the first one, and you take the ACO [technical difficulty]. So, Justin, in terms of trend, we are seeing some step up in terms of in-patient medical. It is in line with what we considered within that overall trend, and the two day rule is definitely contributing to that. But it’s still in line with what we’ve laid out for Q1 and within the full year. The other categories that we are seeing stepping up is the ones that we’ve talked about before, which is the surgeries principally in the outpatient side, but also seeing some in-patient surgery, a lot of that was in Q4, some may have been driven by exhausting maximum amount of pocket and some just sort of induced utilization around that. But also specialty cost and Part B drug.

Tim Bensley: Yeah, and just on the ACO REACH side, we are also seeing in our ACO REACH numbers an acceleration in claims expense in the fourth quarter, similar to what we’re seeing on the MA side. So that’s certainly coming through our numbers. The one thing that I think and part of your question is, that’s a little bit different in ACO REACHES. As those claims increase, that will actually go into the final calculation for the retro trend adjustment. So as overall Medicare fee-for-service claims are going up or costs are going up, the revenue will adjust up as well. And that’s allowed us from our perspective to pretty much hold and we’ve booked our final ACO REACH close pretty much in line with where we had guided.

Steve Sell: The full year national ACO REACH, Justin is at 6.8% and our performance came in at 2.7%. So we beat that national benchmark by 410 basis points.

Tim Bensley: That 6.8% on the national trend is pretty similar to what we’re seeing for the full year on the MA side. So it’s what I was referring to.

Justin Lake: And was there a pickup there in the fourth quarter? Did CMS come to you and say we’re revising that number up?

Tim Bensley: CMS doesn’t come to us and say that. They just give us the claims data and they give us the Medicare fee-for-service reference population data on a monthly basis.

Justin Lake: Okay. I’ll follow-up offline. Thanks, guys.

Operator:

Steve Sell: Thanks, Justin.

Operator: Thank you. We now have a question from Ryan Daniels with William Blair.

Ryan Daniels: Yeah, guys. Thanks for taking the questions. Let me start with a big picture one, just on your relationship with your managed care payers. Given some of the headwinds you’re seeing, I know you’ve talked about getting better data feeds and maybe restructuring some of the contracts. One of your peers today actually moved down the risk adjustment or risk scale, I should say, to do some partial risk and move away from full capitation. I’m curious if you’ve debated internally if that’s a strategy you’d consider pursuing or if you’re just going to kind of stick with it through the storm here, given the trends you see longer-term in the business and the cohorts?

Steve Sell: Yeah, Ryan. No, listen, I really appreciate the question, and we obviously are in a volatile environment, as we’ve talked about. I think we believe the future is value based care and full risk value-based care. I think we building a differentiated model and it made significant investments at the market and the platform to make that a reality. And I think we’ve got lots of data points like the one I just shared on ACO REACH or locally with our payers that we can outperform that fee-for-service environment. But specifically to your question, I think we’re in this transition period in terms of MA funding and plan bids and we’re doing it against a backdrop of an elevated utilization environment. And so what we’re doing is, we’re actively tuning our payer economics and our risk sharing.

We’re doing that two ways. One is in terms of an increased percentage of premium for capitated business that we’ve got and we’ve been able to have some success around that. We’ve got more conversations actively going. And the second is reducing our exposure for elements that are really out of our control. So supplemental benefits, star scores outside of the ones that we control around that or just aggressive bid that lead to far higher utilization assumptions than were laid out from an actuarial perspective. And so that tuning, Ryan gets reflected in a variety of ways. But I think that’s the way we’re looking at it. I think our payers are looking for us to do more. We’re just looking for an economic and a risk sharing arrangement that sort of balances the environment.

Ryan Daniels: It makes sense and super helpful color. And then I’m curious based on that commentary especially about reducing your exposure to things that are outside of your control, which I think is noteworthy, how receptive are the payers to this? Do they kind of appreciate that yeah you shouldn’t be penalized for these things that you can’t control and we’re looking for you for other value adds so that they’re willing to negotiate? And how big of a piece of your book of MA business has gone through that level of negotiation? Thanks.

Steve Sell: So to-date we’re relatively early in that. We have had some success across some very key markets, across a couple of payers. We’ve got it going with many payers right now, Ryan. I would say, the value that we provide is very evident to these payers, particularly in this utilization environment. And they want to have a strong primary care supply chain. And our groups represent the largest and sort of most prestigious groups within their communities. And so it’s very important. So that is factored into our discussion and we’ll give you an update on the next call in terms of how that’s progressing. But I think we’re pretty optimistic.

Ryan Daniels: Okay. Thank you for the comments.

Operator: Thank you. We now have Jailendra Singh of Truist Securities. Your line is open.

Eduardo Ron: Hey guys, how are you doing? This is Eduardo on for Jailendra. Thanks for the question. Just on the bridge. It looks like the Class of 2024 medical margin declined more than the total medical margin relative to your January expectations. Is there anything that you’re seeing which makes, I guess, you more cautious on the Class of 2024 versus the rest of the book?

Steve Sell: So the Class of ‘24 assumption reflects the full step up in the utilization trend that we talked about across the entire book. I think it drops from $76 PMPM to $52 PMPM is the math on that change. So that is what’s driving the change that you see there.

Eduardo Ron: And then just on the, I guess, the gross medical cost trend impact being 7.9% versus the net being 6.6%. That rough math sort of points to the clinical programs having a roughly $50 million impact on your year two plus lives in ‘24? I guess first, does that sound right? And can you discuss, I guess, which programs you see being the largest contributors to this trend benefit?

Tim Bensley: Yeah, the math is right on. We think that there’s a little bit of supplemental benefit headwind in those numbers as well. But the overall value of those clinical programs for us should be about 140 basis points in 2024.

Steve Sell: And Eduardo, what I would say is, all of our clinical programs, palliative, renal, high risk management, are focused on reducing unnecessary ER and in-patient visits. We had really good success in ‘23 with those with – at in-patient medical down 2%, which is far better than sort of what we’ve seen nationally. And I think we’re expanding those two more markets and enrolling more patients in those programs based on a more accurate assessment. So, those are the things that are giving us the confidence around the numbers you just laid out.

Eduardo Ron: Thanks.

Operator: Thank you. We now have Whit Mayo of Leerink Partners.

Whit Mayo: Hey. Just one clarification about numbers. What was the actual cost trend for the full year in 2023? I hear 7.7% for the fourth quarter and close to 8% for the gross trend this year. But how does it compare yet to the full year?

Tim Bensley: For 2023, Whit?

Whit Mayo: Yeah, yeah.

Tim Bensley: Yeah, absolutely. So our base claims trend, so this is without supplemental benefits, all-in for the full year we’re now with the – incremental reserves that we booked will be 7%. So our 2023 full year trend was 7% and then the fourth quarter accelerated to 7.7%.

Steve Sell: And if you include the supplemental benefit effect, the non-medical that 7.0% that Tim talked about, Whit, goes up to 8.2% for 2023.

Whit Mayo: Okay. Perfect. And just remind me the percent of your claims that you’ve completely settled at this point for ‘23?

Tim Bensley: Yeah. So right now, but it’s a great question, because one of the things that we did when we went in and went through all those process to make sure that we’re adequately reserved for the full year is, we compared what our assumption is right now for full year completion rate to what it would have been for the same group of markets. So year two plus markets back, knowing now we know for our full final costs in 2022, what it should have been in 2022. Last year, at this point, our completion rate with December paid and final full year incurred, what the real costs were, would have been at a completion rate of about 76.5%. We’re assuming a completion rate right now on an apples-to-apples basis of about 75%. So we would have assumed that we’re about 150 basis points more conservative.

But in the meantime, now between then and now actually closing, we’ve been able to see our January paid as well. So a whole another month of data, which is actually two more months of data than we had when we guided in early January, and we’re just up over 80% complete.

Whit Mayo: Okay –

Steve Sell: And Whit – sorry, go ahead.

Whit Mayo: One last question –

Steve Sell: Sorry, go ahead.

Whit Mayo: No, good ahead, Steve.

Steve Sell: I just was going to give the context of, in the assessment we talked about receiving in February and doing the analysis from some of our largest national payers that are more complete than the composite that Tim talked about, but also in that, were updated seasonality factors and census data, because the world is moving for everyone. And so, that was all incorporated into the scenarios that we talked about. And ultimately where we landed on that most conservative scenario.

Whit Mayo: And, sorry, one last quick one. Just the change in the geographical entry costs this year, I thought that was largely a set rate for physician compensation ahead of the future implementing. What really changed there?

Tim Bensley: Yeah, so it’s really one of the largest parts of our geographic entry costs are the incentives that we pay to physicians in year zero to complete their annual wellness visits. And the higher completion rate we get, obviously, the better that is for us, because it allows us to have a positive impact on the next year’s revenue, as well as do a better job of getting our members enrolled in all of these clinical programs we’re talking about. We actually finished the year at a much stronger rate than we had been projecting, particularly in a couple of large markets and that drove our 2023 number up. Of course, in 2024, that number will be lower because the Class of 2025 – because of the size of the Class of 2025 compared to 2024.

Whit Mayo: Okay, thanks.

Operator: Thank you. Our next question comes from Elizabeth Anderson of Evercore ISI.

Elizabeth Anderson: Hi, guys. Thanks so much for the question. I appreciate all the additional color on what you’re seeing in the data visibility. I remember a couple of weeks ago you were talking about some of your sort of percent completion for 2Q, for 3Q, for 4Q in terms of data visibility, can you kind of give us an update on sort of, I don’t know whether it’s changed since the beginning of January in terms of that or sort of where your expectations of where you’ll be, say, at the end of ‘24? Thanks.

Tim Bensley: She’s talking about the financial data pipeline?

Steve Sell: So the financial data pipeline, Elizabeth, that I talked about in my remarks that we’re standing up this year, we are receiving claims already from our largest payer, and we’ll have many more of our largest payers talked about in Q1, that’ll be north of 50% of our members will be covered within that. And by Q2, we’ll have 75% of those based on our seven largest national payers. What that does for us is it gives us the ability to really have a very consistent data set across three quarters of our members. It allows us to be faster with it and to be far more detailed at the cost of care category level than we have been able to historically, because you’re kind of wrestling very different data sets. And so, it effectively becomes our data set that as soon as it’s updated, we have that ability to just move with it that much more rapidly.

And so, I think that’s what you’re referencing is where we’re at on that progression, and we’re on track and encouraged by that. And that will be a component as we come back and start talking to you in future calls on the assessments we’re making.

Elizabeth Anderson: Got it. That’s super helpful. Thank you.

Operator: Thank you. We now have Sean Dodge of RBC Capital Markets. Your line is now open.

Sean Dodge: Yeah. Thanks. For the Class of 2025, if we look at the composition of that, can you kind of help us compare and contrast that to the ‘24 Class? Should we think about this being a group that also launches with relatively strong year one medical margins? Or will these, again, given the composition, should we think about this being more like the ‘23 Class?

Steve Sell: So we – thanks, Sean, for the question. We have a really strong Class of ‘25, very excited to be implementing them right now. As I said, it’s at least five groups and 60,000 senior patients, and it will be at least one new state for us. If you think about it in sort of comparison to the Class of ‘23 and ‘24, you’re going to see a greater concentration of these new groups in existing states and markets than what we’ve seen. We think that’s really prudent. You’re able to leverage existing contracts, clinical programs, infrastructure around that, so that helps a lot. It is also in contrast, like, the Class ‘23 and ‘24, it’s less diverse. You’ve got more sort of multispecialty groups and primary care, and not as many different types of groups within those.

And then, as we just talked about, kind of the geo entry costs really account for the potential for more membership than that 60,000 I talked about in the Class of ‘25 or in the longer implementation cycles for the Class of ‘26. So some early onboarding costs for that. So that’s sort of the complexion of that group. And we’ll be sharing details on each one of these groups here in the coming period.

Sean Dodge: Okay. And maybe just quickly on that last point, should we think about this being kind of what the Class of ‘25 ends up looking like? Is it prudent given kind of the backdrop to pause here or just be a lot more selective in who you’re including? Or do you think ‘25 could continue to grow?

Steve Sell: Well, I think so ‘25 is that we said at least, right, so five groups and 60,000. So there is the potential for that to grow. I do think we’re very prudent in terms of, in particular, our payer contracts. Now, this class is in the footprint that we sit in today, so you’re able to leverage a lot of existing footprints. So there’s probably not as much of a dynamic on that. But a big part of this is sort of the pull through on these groups. But that’s sort of where we’re at right now. At least five groups, at least 60,000.

Sean Dodge: Okay, great. Thanks again.

Operator: We now have Stephen Baxter of Wells Fargo on the line.

Stephen Baxter: Yeah. Hey, thanks. So I just wanted to ask, at this point, as you look back at sort of the cohort progressions, especially the older cohorts, has there been anything that structurally changes your view of the company’s ability to get back to these economics over time? I mean, one thing that we’ve been thinking about is that, on the health plan side, they have two levers to really deal with this. First, they have kind of the repricing, but then they’re also seemingly cutting a lot of corporate overheads. So they might not even be necessarily getting back to the same medical margins that they would have had on a pre-COVID basis. So as we sort of think about it, just wondering if you could provide some thoughts around the potential achievability of those economics. And I guess what looks like it’ll be a pretty different environment going forward? Thanks.

Steve Sell: Yeah, Stephen, I mean, it definitely is a dynamic environment and you’ve got the elevated utilization. I appreciate you’re asking about the cohort data. I mean I think clearly elevated costs impacted the member cohorts and the market cohorts that are in the deck that’s on the investor website. I think we’re encouraged when you look at the member cohort data, which is basically members that came on at ‘18, kind of how they’re performing across time. ‘19, same thing. If you look at the classes of ‘18, ‘19 and ‘20, they are progressing or sustaining near $150 PMPM. That’s on the low side, but we’ve talked about that 150 to 200 is sort of where we’re shooting for, and obviously we’ve got some that are north above that.

The market class data, what we’ve shown you for the first time within that, is the impact of dilution from mid-teens same-store growth year in, year out. And so it’s very impactful in terms of what you’re able to drive across those markets. And our action plans are focused on. We’ve added 400 providers and 100,000 MA members since the initial year one. Those are dragging those markets. So you see a $36 PMPM impact in the market Class of ‘18, an $86 PMPM impact in the Class of ‘19, and a $44 PMPM impact in the Class of ‘20. Those are dragging those market numbers that you see on the next page. And so our opportunity is in that action plan I talked about around addressing PCP variability. How do we focus on those new doctors? How do we focus on those new patients?

How do we get them more educated and understanding sort of the elements of the value based care model and really what’s available to them within the care team to drive that improvement. We see that as a major opportunity for us to drive those up. And so I think we believe based on ‘18, ‘19 and ‘20, you can get members to that level. And with markets, we’ve got to be able to accelerate and drive that cohort maturation for those newer members and newer PCPs at the same level. So that’s kind of how we’re thinking about it. That’s a lever we can control. You’ve talked about levers outside of our control, like how plans file their bids and their benefits. We are encouraged based on what we’re hearing around that and how they’re thinking about ‘25.

That would obviously flow through dollar for dollar to us. That’s part of that payer economics and risk sharing discussion that I talked about. And then there’s obviously what will happen from a benchmark perspective and how much of this accelerated utilization will be captured within that. But we think we’re in this two-year cycle, we think those elements should improve the spread ‘25, ‘26, ‘27. But we’re really focused on what we can control and we see this variability with newer doctors and with newer members as a great opportunity for us.

Stephen Baxter: Okay, thank you for the color.

Steve Sell: Sure.

Operator: We now have George Hill of Deutsche Bank on the line.

George Hill: Yeah, thanks for taking the question, guys. And Steve, this is kind of like a big picture question for you, which you talked about some of your health plan partners bidding for margin [technical difficulty], but there’s kind of guardrails around what they can do, right based upon what the final rate that looks like, the TBC, how close they want to bid to the benchmark and impact the rebate levels and things like that. So I’m wondering kind of from where you sit, what do you think about the margin expansion potential in 2025? And kind of like, I’m going to kind of use that as the proxy, what can that look like for you guys? Because some of your health plan partners talked about needing to increase margin low double-digit dollars per member per month as you look out to 2025? I’d be interested to hear how you think about those moving at a big picture level?

Steve Sell: I think the math is, if you do a $10 PMPM adjustment in terms of a bid across a 0.5 million seniors in MA, I think it’s an annual number of $60 million, right. So that if you talk about low double-digits, that gives you the ability, the sort of dimension what that could look like. And that’s one element of this, George. And so, I think we’ve had conversations with people. Some people are thinking more than that, some people, I think, are still trying to figure that out. But I think that’s one piece of it. But I will come back to what I was just talking to Stephen about, the thing we can control is really around this variability and the new docs and the new patients, we think that can be very material in terms of the improvement that we can see from that perspective as well.

And then there’s just this natural maturation in the cohorts, right. In a very difficult year, you’re seeing us projecting a 40% step up in medical margin from ‘23 to ‘24, a big part of that is this Class of ‘24 that comes on great experience, longer implementation. But I think if you think about our business as members mature across time, you should see this natural evolution and this spread should correct from where it sits today.

Tim Bensley: Thanks, George.

Operator: We now have Adam Ron of Bank of America on the line. You may proceed with your question.

Adam Ron: Hey, thanks for the question. I’m going to ask something very similar to what’s been asked already, but maybe from a different angle. So the payers are also talking about 2025 in terms of actual margin improvements. So like Humana saying something like 100, 150 basis points of margin. And most of that comes from cutting rebates and they’ve given a number, something like $40 at the max, looking at some ways of looking at it. On a percentage basis, if they’re talking about 100 basis points of margin, would that be higher for you just because if that does come in the form of rebates, it’s a higher percentage of the capitated benchmark? And just separately, is there a way that they do cut benefits and somehow it doesn’t flow to you?

Because you’re talking about carving out risk on supplemental benefits. And if supplemental benefits are the thing that are getting cut and you carve them out, does it somehow not end up impacting your P&L just trying to understand how much visibility you have into that and how much capacity payers have to cut benefits and not flow it into agilon?

Steve Sell: So I mean, I’ll just back up, Adam to what I said, which is, we are really trying to tune our payer economic and risk sharing arrangements in this environment. Utilization is up and we’re managing that. We should probably be receiving a larger percentage of premium. That’s part of the dialogue that we have with them, given the consistency of performance from a quality perspective that we’re delivering for them and for their patients. So that’s kind of a big part. The things outside of our control, how do we look at that? Do we corridor it? Do we cap it? Do we carve it? I mean – getting into sort of future scenarios about what gets changed and how that flows through? I don’t have a perfect crystal ball on that, but I do think this idea is, we are delivering an incredibly valuable service for them and we are trying to look at a sustainable model for them and for us that works around that.

So that’s sort of a general answer to your question, but a lot of dialogue with them as they think about their ‘25 bids, as they think about ‘25 markets and how our partnerships fit within that.

Adam Ron: Yeah, I appreciate that. And then just two really quick follow-ups. So G&A, I think like platform support costs are based on the current guidance of like 3% of revenue and last year’s performance, I think they’re growing in like the mid-teens. Is that a reasonable way to think about ‘25 as well, just on a dollar basis for platform support costs? And then finally, I think the adjusted EBITDA in ‘23 was around negative $90 million. Is that how we should think of operating cash flow losses in ‘24 as well, since we’re talking about a one-year lag? Thanks.

Tim Bensley: Yeah, I think on the first one, a little early for us to be guiding to platform support costs for 2025, but we would expect that we’re going to definitely continue to get leverage out of our platform support costs and continue to drive platform support cost growth will be obviously well below what our revenue cost growth or what our revenue growth is. So specifically a little early to say, but yeah, we’ll continue to get leverage for sure. On the cash flow numbers, what we talked about for 2024 is that our expectation is that we’ll burn somewhere between $135 – $125 and $150 million of cash use in 2024. If we hit our guidance for 2024 that we put out there. The way our cash flow works is, there’s kind of a delayed impact of the medical margin and EBITDA that we’re generating in 2023 has a big impact on our 2024 cash flow.

2024’s guided performance will have a big impact on 2025. If we can deliver our 2024 guidance, which, of course, we expect to, our 2025 use of cash would go from down to about $25 million or $30 million. And then that would put us on a good trajectory to be positive cash flow in 2026 and beyond.

Steve Sell: And, Adam, what I would say is, just we’re seeing tremendous leverage on the efficiency side from the investments we’re making in technology and the – centralization, standardization of activities that we’re doing, like chart reviews that previously got done within the local markets. And so I think just the scale that we’ve got, there’s a tremendous opportunity, not just in things like discussions with payers, but also from an efficiency perspective, for us to drive further – further around that. So I think as we continue to grow, there’s going to be far greater leverage from that perspective.

Tim Bensley: And we get very good leverage against our operating costs in our existing markets. I mean, most of the incremental costs that we add year-over-year to our platform support costs is because we’re adding markets as our existing market base becomes a bigger and bigger part of our overall membership. We just get really good leverage out of cost in those markets.

Steve Sell: It’s another benefit of growing in your existing footprint.

Adam Ron: Agreed. Thanks so much.

Operator: Thank you. We have no current questions on the line. So I would like to hand it back to the agilon management team for any final remarks.

Steve Sell: Well, thank you. Obviously, we’re living in a very dynamic environment. I think our ‘23 results and ‘24 guide we’ve shared with you are clearly impacted by those. But we feel like our targeted action plan is on track and our business model is working. And I think when you look at our cohort data, even in a difficult environment, it shows the value we’re providing to physicians and sort of what the long-term opportunity is within the business. So we look forward to talking with you all soon. Thanks for joining us.

Operator: Thank you for joining the agilon health fourth quarter 2023 earnings conference call. You may now disconnect your lines and please enjoy the rest of your day.