Bright Health Group, Inc. (NYSE:BHG) Q4 2022 Earnings Call Transcript

Bright Health Group, Inc. (NYSE:BHG) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Hello, and welcome to the Bright Health Group Fourth Quarter 2022 Earnings Call. My name is Alex, and I’ll be coordinating the call today. I’ll now hand over to our host, Stephen Hagan, Investor Relations Director. Please go ahead.

Stephen Hagan: Good morning, and welcome to Bright Health Group’s fourth quarter 2022 earnings conference call. A question-and-answer session will follow Bright Health Group’s prepared remarks. As a reminder, this call is being recorded. Leading the call today are Bright Health Group’s President and CEO, Mike Mikan; and CFO and Chief Administrative Officer, Cathy Smith. Before we begin, we want to remind you that this call may contain forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the risk factors in our current and periodic reports we filed with the SEC.

Except as required by law, we undertake no obligation to revise or update any forward-looking statements or information. This call will also reference non-GAAP amounts and measures. A reconciliation of the non-GAAP to GAAP measures is available in the company’s fourth quarter press release, available on the company’s Investor Relations page at investors.brighthealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated March 01, 2023, which may be accessed from the Investor Relations page of the company’s website. With that, I will now turn the conference over to Bright Health Group’s Chief Executive Officer, Mike Mikan.

Mike Mikan: Thank you, Stephen. Good morning, everyone, and thank you for joining Bright Health Group’s fourth quarter 2022 earnings call. I’ll start with a few comments on our continuing business and share why we are confident that the company is well positioned for the future. I will then briefly discuss our ongoing efforts to exit the ACA marketplace insurance business, before turning the call over to Cathy to go over our fourth quarter and full year 2022 results. 2023 marks a year of significant transition for our business. And I’m pleased to report that our continuing business is off to a strong start. As you may recall, in January, we provided an overview of the strategic focus for the continuing business, and how it is built for success in value-driven care.

Importantly, when we speak of value-driven care, what we are focused on is the value layer of healthcare, the common set of value additive capabilities across managed care and care delivery that drive consumer satisfaction and better health outcomes at a lower cost of care. With that, I’ll discuss why we’re confident in and enthusiastic about our continuing business and our future. As a reminder, our continuing business consists of two segments: Consumer Care, which includes our value-driven care delivery business; and Bright HealthCare, which is our delegated senior managed care business. Importantly, we believe in our model. And as we continue to execute on our efforts to rightsize the business, we expect adjusted EBITDA to be profitable in both segments and at the enterprise level in 2023.

Importantly, we have a business with greater predictability in its range of outcomes with significant less volatility. In our Consumer Care segment, our value-driven care model has demonstrated differentiated results, and because of that, it has attracted significant commitments from payers in each of our core markets. We expect to manage 275,000 to 300,000 value-based consumers by the end of 2023. Approximately 65,000 of those lives are attributable to our ACO REACH business with the balance being a mix of value-based care contracts with our payer partners, including Marketplace, Medicare Advantage and Medicaid Consumers. In the first year of these contracts, we have been prudent in the level of risk we’re assuming and have eliminated the downside across our contracts to focus on achieving adjusted EBITDA profitability in our Consumer Care segment.

However, consistent with our belief in value-driven care, we will continue to move these contracts to greater risk sharing and fully capitated models over time. Our expectations for the Consumer Care segment have not changed, but due to a revised revenue recognition accounting treatment, which Cathy will explain further, we now expect revenue of $1.1 billion or greater in our Consumer Care segment. The revised revenue accounting does not impact adjusted EBITDA or the number of value-based care lives served in the segment. We have been building strong relationships with our payer partners in our Consumer Care segment, and because of our aligned model, have been able to quickly attribute live this year and engage with our members. This segment is well positioned for capital-efficient, long-term growth and we continue to build a strong foundation, serving aging and underserved consumers that have unmet clinical needs through our fully-aligned care model.

Our delegated senior managed care business and our Bright HealthCare segment continues to build on its strong performance with our delegated provider partners. This segment is well positioned in the fast-growing California Medicare Advantage market with significant opportunity for long-term profitable growth. We continue to focus on integrating the business, executing operational improvements and driving towards segment profitability in 2023 on an adjusted EBITDA basis. In addition, we had strong performance in the annual enrollment period and started the year with over 120,000 Medicare Advantage consumers, resulting in positive net consumer growth in California. And as a reminder, given our strong positioning in special needs plans, we expect to grow within the year and our forecasting ending the year with over 125,000 Medicare Advantage consumers.

We expect this segment to generate over $1.8 billion in revenue and meaningfully contribute to overall enterprise adjusted EBITDA profitability with a target medical cost ratio of 86% to 88%. As we discussed in October, we have exited the Affordable Care Act marketplace as an insurance carrier, seizing coverage at the end of 2022. As Cathy will discuss in a moment, there are several elements that impacted our financials related to the discontinued business, specifically one-time and exit-related winddown costs. However, if you exclude such costs, we met the 2022 annual guidance range for medical cost ratio and adjusted EBITDA that we set last March. The costs associated with our discontinued operations caused us to fall below the $200 million minimum liquidity covenant in our $350 million credit facility.

We’ve been working cooperatively with our bank group and we are pleased to report that we have entered into a waiver and amendment as described in our SEC filings, which reduced our minimum liquidity requirement through April 30. We are actively engaged with our Board of Directors and outside advisors to find the best long-term capital structure based on our size and financial expectations. While we cannot speculate on the outcome of those discussions and resolutions, I’m confident that we are taking and will continue to take the actions that are in the best interests of our shareholders. I’ll now hand it over to Cathy to go over our fourth quarter performance and our updated outlook.

Cathy Smith: Thank you, Mike, and good morning, everyone. I’ll start by briefly discussing our balance sheet. I’ll then recap our fourth quarter and full year 2022 results. Since the changing composition of our business for 2023 means that outside of the Medicare Advantage business, historical results are less informative for our future performance. From there, I’ll provide an overview of the continuing business’ performance and then review our 2023 outlook. Starting with our balance sheet. As of December 31, 2022, we had over $277 million in non-regulated liquidity, nearly all of which was in cash and cash equivalents. We had approximately $2.8 billion of additional cash in short- or long-term investments held by our regulated insurance subsidiaries.

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Our $350 million credit facility was fully drawn as of the end of Q4, when factoring in the $46 million letter of credit committed to support our direct contracting business. The credit facility had a minimum liquidity covenant, which required us to maintain $200 million in cash, limiting our short-term flexibility. As noted in the 8-K we filed today, we fell below the minimum liquidity covenant in the credit agreement in January, and we have received a waiver and amendment from our bank group, which reduces our minimum liquidity covenant until April 30 of this year. As of the end of last week, February 24, we had over $150 million in non-regulated cash. With that in mind, I’d like to touch on some information that will be included in our 10-K.

Our financial statements will include a going-concern qualification, which is predicated on the company’s ability to obtain additional capital to fund our ongoing operations over the next 12 months. Our current credit facility is set to mature early next year, and we have continued to work on options for the credit needs of the business. As Mike said earlier, our business is expected to be profitable, predictable and less volatile. This is a very different credit profile as we go forward. Additionally, we are taking actions to preserve cash, including our discontinuing operations efforts. We believe we have significantly more certainty regarding the size of the liability of the discontinued operations, which is in line with our year-end estimates.

We continue to settle the remaining claims for the discontinued operations and gain additional insight on the risk-adjustment liability, based on the latest report received in February 2023 with claims paid through December 2022. We are working hard to obtain additional financing to alleviate going-concern qualification. We are laser-focused on addressing these issues and will provide updates as appropriate. In the fourth quarter, revenue for the continuing operations was $551 million and $2.4 billion for the full year. The Consumer Care segment contributed $364 million and $1.8 billion for the fourth quarter and full year, respectively. Fourth quarter Bright HealthCare revenue was $394 million and full year BHC revenue was $1.7 billion. The full year 2022 Bright HealthCare medical cost ratio was 93.9%.

The reported BHC medical cost ratio includes Medicare Advantage states that we exited at the end of 2022. For reference, our California Medicare Advantage operations achieved an approximately 92% MCR in 2022, excluding prior-period claims. This represents solid progress towards our 2023 MCR target range. The fourth quarter adjusted EBITDA loss was $109 million for continuing operations, and the full year adjusted EBITDA loss was $233 million. Our combined full year net loss for the continuing operations and the discontinued operations was $1.36 billion. It is important to note that this includes approximately $500 million of non-cash charges, investment impairment charges, exit-related costs and restructuring charges. In addition, other non-GAAP adjustments of approximately $100 million, including 2022 investment losses, would bridge our full year 2022 adjusted EBITDA still within the guidance range provided in March of last year.

Turning to the Consumer Care segment. Value-based care consumers were up modestly in Q4 to approximately 530,000, including over 410,000 from Bright HealthCare, 46,000 from direct contracting and over 70,000 from other value-based external payer relationships across Marketplace, Medicare Advantage and Medicaid. Of the Consumer Care lives, approximately 30% were directly attributed to our clinics. And as we said in our update in January, we have been very successful in retaining those lives through our expanded external payer contracts, as well as moving consumers from affiliate relationships to being served through our clinics. In 2022, the BHC lives attributed and managed by our own clinics performed better on gross margin than other BHC commercial lives by over 15 percentage points.

This differentiated performance is a key driver in the over 50% increase in consumers served compared to the number directly attributed to our clinics last year at the midpoint of our guidance. The Consumer Care segment was the area impacted by the change in revenue recognition accounting I mentioned earlier. In the fourth quarter, we recognized the full year 2022 change in revenue recognition and associated medical costs, moving from gross to net revenue recognition for some third-party payer contracts. Further consistent with the full year 2022, Consumer Care includes Bright HealthCare commercial lives, which gets eliminated with enterprise reported consolidation. In 2023, this elimination goes away as we move entirely to third-party payer relationships.

Consumer Care premium revenue and gross margin were impacted by a year-to-date true-up for risk-adjustment estimates that was recognized by the Bright HealthCare Commercial business that flows through to the capitated Consumer Care lives. In direct contracting, now ACO REACH, we demonstrated strong performance in our first full year, with a full year gross margin of more than $8 million, and approximately breakeven on an adjusted EBITDA basis. In summary, our fully-aligned care model performed well in 2022, delivering solid performance with external payers and in direct contracting. The Consumer Care segment is well positioned for 2023 to be successful in managing a growing number of external payer lives and in ACO REACH. In early January, we provided an updated view of our 2023 metrics and financial expectations.

While our expectations for the continuing business in 2023 are consistent with our view provided at that time, due to the change in revenue recognition for value-based care contracts, we are forecasting a lower revenue range for 2023. It is important to reiterate that we are managing significantly more external lives and their underlying medical costs than last year, but we have structured performance-based contract with prudent levels of risks. This lower downside risk share in the early years of our contracts is contributing to the finalized net revenue recognition. We expect 2023 enterprise revenue between $2.9 billion and $3.1 billion. This forecast reflects an expectation for $1.1 billion to $1.3 billion in revenue from our Consumer Care segment and greater than $1.8 billion in revenue from our Bright HealthCare segment.

In Bright HealthCare, we expect end-of-year Medicare Advantage consumers served to be greater than 125,000, and we expect the medical cost ratio for the segment of 86% to 88%. In Consumer Care, we expect a total of 275,000 to 300,000 total value-based consumers, including approximately 65,000 from the ACO REACH program and 210,000 to 235,000 from our value-based relations with other payers across Marketplace, Medicare Advantage and Medicaid. We expect both operating segments of our continuing business to be profitable on an operating income basis, excluding non-cash charges. And we expect those segments contribution, combined with a total company adjusted operating cost ratio between 13% and 14%, to result in enterprise adjusted EBITDA profitability for the year.

We are confident in our path to adjusted EBITDA profitability for 2023, and I want to provide a little more detail on the bridge items in each segment that support our forecast. In Consumer Care, the largest driver of improving profitability is membership growth, new payer agreements, mix shift of more consumers served through our clinics versus affiliates, and growth of our ACO REACH members. We also expect a benefit from lower operating expenses from the cost reductions we’ve implemented to-date and run rate benefits of any further restructuring. On a GAAP basis, the segment operating loss in 2022 was also depressed due to an intangible asset impairment that is not expected to recur in 2023. In our Bright HealthCare segment, the year-over-year profit improvement was primarily due to pricing, RAF increases due to (ph) continuity and medical cost management initiatives.

As a reminder, our California Medicare Advantage business had a medical cost ratio of approximately 92%, excluding prior period claims in 2022. In 2023, we expect pricing and benchmark rate increases to contribute approximately 300 basis points to MCR improvement. The net benefit of RAF to be approximately 100 basis points, and our medical cost management initiatives to contribute nearly 100 basis points. This takes us to the midpoint of our 2023 MCR guidance range for Bright HealthCare. On a GAAP basis, Bright HealthCare 2022 results also included a goodwill impairment charge that is now forecast to recur in 2023. We have high visibility to the items that are likely to drive our improving results in 2023 and expect greater predictability in our revenue and gross margin based on our contract in Consumer Care and the stable trends we’ve seen in our Medicare Advantage business.

Before I turn the call back to Mike, I just want to know how much I appreciate our amazing Bright Health team across the country. Now, here’s Mike for some final comments.

Mike Mikan: Thank you, Cathy. As we look ahead to 2023, we are confident that our continuing business is well positioned for both the current market environment and the future, as we expand our refined model. We’re serving the fast-growing aging and underserved consumer segment, and we see significant opportunities for future growth across both our continuing business segments: Consumer Care and Bright HealthCare. We recognize that, at this stage, we have much to prove and that is exactly what we intend to do. We have taken actions to focus and simplify our business going forward. We are gaining more certainty on the final obligations of our discontinued operations and we are taking steps to strengthen our capital position. While exiting an insurance business is a significant challenge, the team is focused on ensuring we do so in an effective and in efficient manner.

Before we turn it over to questions, I want to thank the team at Bright Health for their hard work as we make this transition in our business and as we focus on making healthcare right together. Operator, let’s take the first question.

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Q&A Session

Operator: Thank you. Our first question and for today comes from Joshua Raskin from Nephron Research. Joshua, your line is now open. Please go ahead.

Joshua Raskin: Hi, thanks. Good morning. I wanted to focus on the $90 million to $105 million of improvement in EBITDA that’s coming from the MA revenue growth in medical cost management. I think, Cathy, you broke out a couple of statistics on basis points, but could you just give us some color on — a little bit more of the drivers on that revenue growth membership? It looks like year-over-year will be sort of flattish, although I think member months might be up. But is there a coding improvement in that? I think you talked about risk scores. Maybe just give us a little more color on what’s driving that?

Mike Mikan: Hey, Josh. I mean, the biggest driver is the rate increase, but we do expect as we — if you know, Josh, we’ve grown — since we’ve acquired our MA business in California, we’ve grown significantly. So, now that we’ve got several — couple of years of memory continuity, naturally, we’ve improved coding, and so we’re going to get a lift with respect to RAF, or we expect a lift in RAF next year, and that — we think that’s worth about 100 basis points. So, the rate increase is about 300 basis points. When you include RAF, that’s another 100 basis points. And then, how you bridge from the kind of normalized 92% MCR in 2022 to the midpoint of our range of 87% is 100 basis points of medical cost initiatives working with our delegated senior care partners and trying to drive down — continually drive down unnecessary costs. So that’s really how you bridge, but the revenue is by rate and an improvement in RAF.

Joshua Raskin: Okay. That makes sense. And then, just a follow-up on the cash situation here, you have till April. Could you just give us some sense of what cash flow from ops looks like? I know there’s a lot of seasonality of the business and you’ve got some claims runoff. And so, I feel like there’s competing forces here that aren’t going to be sort of normal going forward. But how much cash, I guess, you need by April 30? And maybe just help us understand how you’re thinking about what potential options could be?

Mike Mikan: Well, let me — let’s start from a high level. So, first of all, our business going forward, Josh, is — as we’ve talked about, is a very different risk profile. We believe it’s adjusted EBITDA profitability going — profitable going forward, cash flow positive at the both segment level with less volatility. Obviously, the ACA insurance business was volatile for us. So, without that, going forward, that’s going to improve predictability. So, I’ll start there. The second part of our cash need is getting to a fixed and certain liability on the discontinued operations. As we’ve worked through the last of couple months, we’ve done a really good job of paying down claims, working with our state regulators to get fixed liability around the clean component of the discontinued operations.

And then, it’s really around risk adjustment. And we’ve gotten of late, the latest report in February that had claims paid, as Cathy said in her prepared remarks, through February and is consistent with our year-end estimate. So, we believe every day we’re getting closer to fixed and certain liability around the discontinued ops and that’s very consistent and in line with what we booked at year-end. So, when you take those two, we believe we’ve got a pretty good understanding of what our cash need is. As Cathy said, our current cash position is about $150 million on the corporate side, Josh. What we had said previously at the J.P. Morgan conference is, we believed we would end 2023 with about $200 million to $300 million of corporate cash or risk-based capital that would come back to us over time, likely early ’24 — in 2024.