Cano Health, Inc. (NYSE:CANO) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Please standby. Good afternoon, and welcome to Cano Health’s First Quarter 2023 Earnings Call. Currently, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. Joining us on today’s call will be Dr. Marlow Hernandez, Chief Executive Officer; Bob Camerlinck, Chief Operating Officer; Mark Kent, Chief Strategy Officer; and Brian Koppy, Chief Financial Officer. The Cano Health press release, webcast link and other related materials are available on the Investor Relations section of Cano Health’s website. As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the 2023 fiscal year.

Investors are cautioned not to unduly rely on forward-looking statements and such statements should not be read or understood as a guarantee of future performance or results. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. We caution you that the forward-looking statements reflect our best judgment as of today based on factors that are currently known to us and such statements are subject to risks, uncertainties and assumptions that could cause actual future events or results to differ materially from those discussed as a result of various factors, including, but not limited to, risks and uncertainties included or discussed in our SEC filings.

We do not undertake or intend to update any forward-looking statements after this call or as a result of new information, except as may be required by law. During the call, we will also discuss non-GAAP financial measures. The non-GAAP financial measures we will discuss today are not prepared in accordance with GAAP. A reconciliation of the GAAP and non-GAAP results is provided in today’s press release and on the Investor Relations section of our website. With that, I’ll now turn the call over to Dr. Marlow Hernandez, CEO of Cano Health. Please go ahead, doctor.

Marlow Hernandez: Thank you, and welcome to the call. We appreciate your joining us today. I have been looking forward to having this opportunity to discuss with you the operating progress we are making on the action plan we described on the last call like everyone here, I’m disappointed by our share price performance. And my team and I are laser focused on the near-term execution of that plan. During today’s call, you will hear from our Chief Strategy Officer, our Chief Operating Officer and our Chief Financial Officer. You will hear from them how we are streamlining operations, improving operating cash flow and simplifying and optimizing our business model. We have continued to streamline operations with SG&A expenses lower today than one year ago, though we have a business that survey 44% more members.

Our operating cash flow is improving despite higher interest rates due to maturing medical centers and the use of our capital-light models. And we’re simplifying and optimizing our business model, through divesting certain non-core assets, driving provider networks and favoring profitable contracts to further strengthen our high-performing operations and markets. Cano Health’s performance in the first quarter of 2023 reflects our continued focus on profitably growing our value-based membership and our commitment to greater efficiency and long-term value creation. As I mentioned in our last earnings call, we outlined a clear action plan, and this quarter’s results reinforce our confidence that we’re on the right track and gaining momentum, while recognizing there is still work to be done.

Overall, our solid start to the year gives us confidence to raise our full year 2023 guidance for membership and total revenue and reaffirm the ranges of our medical cost ratio and adjusted EBITDA from our prior guidance. Shortly, you will hear more about how we are focused on near-term execution to maximize long-term shareholder value. Membership growth varied across service lines, reflecting ongoing execution of our disciplined strategy, prioritizing profitability and cash flow and ensuring strong clinical results. We ended the first quarter of 2023 with total membership exceeding 388,000 members, growing over 25% since December 31, and 44% from the first quarter of 2022. Our Medicare membership as of March 31, 2023, was approximately $207,000 growing 16% since December 31 and 29% from the first quarter of 2022.

The sequential growth was almost entirely due to ACO reach, as we thoughtfully trend our Medicare Advantage MA affiliate network. Total revenues grew to $867 million in the quarter. an increase of 23% from the prior year and were above our expectations due to higher capitated revenue per member per month for our Medicare membership, inclusive of ACO reach and MA. Consistent with our focus on value-based care, our capitated revenue as a percent of total revenue is now 97% which is a historical high. Clinical results in the first quarter of 2023 continue to reflect the differentiated capabilities of our value-based platform. Our key medical cost metrics, such as hospital admissions per thousand, and high-risk patient visits remained stable in the first quarter of 2023.

Therefore, we expect our MCR to moderate as the year progresses, especially in the third and fourth quarters as we realize the full benefit of stop-loss and pharmacy rebates. As evidenced by our consistently strong clinical outcomes, Cano Health has established a highly differentiated Medicare-focused business model. Last quarter, we indicated that management was evaluating all aspects of our operations to enhance shareholder value. After a thorough evaluation, we plan to divest certain noncore assets to narrow Cano Health operating focus to our core Medicare Advantage business and bolster our highest performing markets. We began this process in the first quarter with our team over value and expect to complete the initial divestments in the coming months.

We will provide further updates on this process at the appropriate time. In addition to the divestment of certain noncore assets, our management team is making important strides on near-term objectives to accelerate our path to positive free cash flow over time and fully realize the embedded earnings potential within our medical center. The objectives of the plan we have in place are to sharpen our operating focus, improve care margins and simplify the core functions of our business, therefore, reducing associated costs. Part of this essential work is streamlining the organization and making sure the right people are in the right roles. I’d like to turn the call over to Mark Kent, our newly appointed Chief Strategy Officer, who brings a proven record of effective health care operating offer site to his role.

He will talk about the opportunities we see across our platform to unlock synergies in our administrative functions and to optimize and expand margins through our affiliate partners, specialty networks and payer contracts. Then Bob Camerlinck, our Chief Operating Officer, will take you through the operational enhancements we are making to accelerate the path for realizing the significant embedded earnings potential in our medical sensors. Go ahead, Mark.

Mark Kent: Thank you, Marlow. Since joining Cano Health earlier this year, I have been focused on enhancing the company’s strategic planning process, identifying new synergies across the organization and making it easier for our team members to execute our strategy. Ultimately, our goal is to improve profitability and generate positive free cash flow over time and we believe there are multiple levers we can pull in connection with working to achieve that goal. For example, in addition to our planned divestiture of certain non-core assets, we are optimizing our affiliate operations to fully engage our affiliate providers and manage them against our higher performance standards to drive better results. This quarter, we executed on this strategy to prioritize high-performing MSO contracts and affiliates, which resulted in targeted trimming of some membership.

This initiative moderated sequential membership growth in the quarter and may create near-term headwinds to our affiliate membership growth in this calendar year. However, we expect the incremental profitability generated through higher performing affiliates will have a greater positive impact on our financial performance over the long term than simply adding volume. As we mentioned on past calls, our focus is on achieving profitable growth. And as such, we would expect to continue to take action to trim underperforming contracts and affiliates throughout the year if performance does not align with our standards. Another area of focus is how we manage our payer agreements. Over the past three years, our rapid growth resulted in a significant number of new and varied payer agreements.

Servicing these varied agreements add complexity and cost to everyday operations. And we are focused on simplification and related cost reduction by reducing the types of agreements in place. Based upon our thorough analysis, we also identified instances where the payer agreements may not have been fully aligned with our preferred model of care. And so now we are working on modifying contracts to align the inherent economics of those partnerships to the clinical value we are providing. Moreover, we are holding our specialty networks to the same performance standards that we hold our affiliates and payers. As a result, we intend to continue to adjust contracts where appropriate, and narrow provider networks. In doing so, we believe we are decreasing the administrative burden on our company and are making further improvements to our cost structure while improving patient outcomes.

Collectively, we believe these levers represent an important NCR opportunity this year and into next. Therefore, we are excited to empower our team with the insight and authority to take these actions. With that, I’ll turn the call over to Bob Camerlinck, our Chief Operating Officer.

Bob Camerlinck: All right. Thank you, Mark, and good evening, everyone. Over the past few months, our enterprise has absorbed a lot of change to the operations. through various integration, consolidation, optimization and scalability efforts. We believe that by focusing on Medicare Advantage and improving operations, we can unlock the greatest long-term value for the enterprise. One of the many things we have done is to enhance the Cano at home program. We think we can have meaningful impact on improving patient outcomes and lowering medical costs. We are enhancing our Cano At Home offerings to increase engagement with our patients. We are increasing the number of staff to support our patients, and we are modifying the method by which we identify patients at risk.

This new process is designed to identify patients with chronic conditions through multiple channels and prevent costly ER visits and hospital admissions by delivering primary care home study by delivering primary care at a home study. The essential service is meant to be closing the gaps in care between patients regular primary care visits. We anticipate this program will generate a 5% to 10% reduction in preventable emergency room visits. Increasing engagement with high-risk patients is another focus for our care management programs. Historically, we have engaged with approximately 85% of our high-risk patients within 30 days of enrollment or being identified as high risk. We are now targeting 90%. To achieve this higher level of success, we have increased our medical center outbound calls to high-risk patients and created a centralized high-risk patient task force.

This task force is solely focused on removing the barriers that would prevent a patient from accessing care at our centers. And we know that as patients increasingly access care, the results is lower emergency room visits and hospitalizations. We believe both of these initiatives are extremely valuable programs, sell reduced medical costs and further improve clinical outcomes. As we enhance our membership and member engagement, we enhanced the value of our medical centers. Today, we have included a slide in our financial supplement, that details the expected trajectory of adjusted EBITDA performance of our de novos by vintage. As you can see in the slide, we believe there is a meaningful earnings opportunity from filling capacity in our medical centers.

I will note that these expectations are consistent with the illustrative model we shared in our 2022 Investor Day. Now let me highlight a few dynamics that are important to understand and consider when reviewing the analysis. Approximately 85% of the de novos are in the youngest three vintages and therefore, expected to have an average negative profitability outlook of $0.5 million per center. We believe these medical centers will mature and the embedded earnings potential we see based on our older centers will come from new membership growth by utilizing existing capacity and improving profitability on existing members. The largest inflection point in the J curve generally occurs between years two and three with profitability accelerating rapidly from that point.

And finally, scale and density matter. De novos opened in highly concentrated markets with other Cano Health facilities benefit from economics of scale in marketing campaigns, administrative costs and improving patient level economics through our new and enhanced care management programs in those regions Our focus remains on unlocking embedded earnings within these medical centers. And while the acquisitions we’ve made are designed to help supplement the losses of the de novos in the early stages, these de novos are expected to contribute meaningfully to our results over the long term. I am confident these de novos and our entire value-based platform can deliver long-term value over time, especially when combined with the care management and operating enhancements we have put in place.

As we continue to execute against our plan, we look forward to showing progress and successes in our operations. And now I’ll turn the call over to Mr. Brian Koppy, our Chief Financial Officer, to take you through the financials and full year guidance.

Brian Koppy : Thank you, Bob, and thanks, everyone, for joining us today. Total membership increased 44% year-over-year to approximately 389,000 members in the first quarter of 2023. This represents an increase of approximately 119,000 members from the first quarter of 2022. The Medicare Advantage membership grew 19% versus the prior year, but was effectively in line with the fourth quarter of 2022. Our participation in ACO REACH exceeded 67,000 members at the end of the quarter. In our Medicaid service line, membership grew 6% sequentially to 82,000 members. Keep in mind that our Medicaid population serves a higher proportion of pediatrics and elderly patients, which we believe will moderate potential headwinds from reach determinations.

We also added over 46,000 ACA members in the quarter as a result of higher marketplace enrollment. At the end of the first quarter, 36% of our members were Medicare Advantage, 17% were Medicare ACO REACH, 26% were ACA and 21% were Medicaid. Total revenue for the quarter was approximately $867 million up from approximately $704 million a year ago and $680 million in the fourth quarter. Total capitated revenue in the quarter was approximately $841 million and higher than expected. In the quarter, the Medicare Advantage PMPM was $1,180, up 9% sequentially and better than expected, primarily driven by better engagement with new patients in the prior year and favorable adjustments related to payer contracts. First quarter Medicare ACO REACH PMPM was $1,489, up 8% sequentially and also better than expected and was primarily driven by revised benchmark data we received from CMS related to the 2022 and 2023 performance years.

Additional information about our membership mix and our PMPM is available in our press release and updated financial supplement posted this evening on our website. Our medical cost ratio, or MCR in the first quarter of 2023 was 84.2%, compared to 79.5% in the first quarter of 2022. The year-over-year increase in the MCR was partially driven by the higher mix of ACO REACH, which has a higher MCR than our other service lines. Excluding ACO REACH, the MCR was approximately 79.6% in the first quarter of 2023, compared to approximately 73.8% in the prior year. The increase was larger than expected and primarily driven by higher utilization of supplemental benefits among certain Medicare Advantage plans, particularly the OTC FlexGuard or the over-the-counter FlexGuard.

Higher utilization of branded prescription medications and unfavorable prior year development of approximately $7 million in the quarter. We expect the MCR to moderate throughout the year, particularly in the second half due to continued higher-than-expected revenue PMPM and seasonal trends in the medical costs, which include higher recoveries from stock loss and pharmacy rebates. Direct patient expense in the first quarter of 2023 was 7.9% of total revenue and below the first quarter of 2022 of 8.6%. SG&A expense in the first quarter of 2023 was approximately $96 million, essentially flat compared to the first quarter of 2022. We However, SG&A was 11.1% of total revenue and 260 basis points lower than the first quarter of 2022. The year-over-year decline in direct patient expense and SG&A as a percentage of revenue reflects the impact of cost reduction initiatives described in our fourth quarter 2022 earnings call and favorable operating leverage given the scale of top line growth.

Net loss in the quarter was approximately $61 million compared to a net loss of approximately $100,000 in the prior year, primarily driven by a higher operating loss the change in fair value of warrant liabilities and higher interest expense. Adjusted EBITDA in the quarter was $5 million, down from $29.2 million a year ago. This was primarily driven by the higher medical cost ratio and higher operating expenses attributable to ramping up a significant number of new medical centers we added in 2021 and 2022. Now let me turn to our cash flow and liquidity. We ended the first quarter with about $32 million in unrestricted cash, and our $120 million revolving line of credit was undrawn, providing us with approximately $152 million in total liquidity.

Total debt at the end of the first quarter was just over $1 billion and included current and long-term debt, capital leases and payments due to — capital leases and payments due to sellers. Our total net debt, defined as total debt less total cash, was approximately $982 million as of March 31. In addition, our net leverage ratios as defined by our credit agreements were within maintenance covenants, and we still expect to maintain sufficient headroom throughout the year. During the first quarter of 2023, cash used in operating activities was approximately $29 million. This was a nice improvement compared to the first quarter of 2022. This improvement was also mitigated by higher interest expense of approximately $10 million versus the prior year.

Excluding cash interest expense we saw our core operations mainly improved cash flow even as we brought online 24 new de novos during 2022. For the full year 2023, we expect cash from operations to be in the range of approximately $70 million to approximately $80 million. Now let me turn to our outlook for 2023. Today, we are raising expectations for 2023 year in membership and full year revenue. Meanwhile, our guidance for the MCR, adjusted EBITDA and cash flow remains unchanged. 2023 year-end total membership is expected to be in the range of 390,000 to 400,000 members, an increase from the prior range of $375,000 to $385,000, primarily due to higher ACA and Medicaid membership. I would also like to mention that we now estimate that we’ll have 170 medical centers by year-end, below our prior projection due to consolidation initiatives to drive operational improvements and further cost reductions.

Total revenue is expected to be in the range of $3.25 billion to $3.35 billion, an increase of $125 million at the midpoint, primarily due to higher Medicare revenue. Turning now to MCR. The full year 2023 total MCR guidance of 81% to 82% is unchanged. However, we expect it will likely be in the upper end of that range, primarily due to higher utilization and unfavorable prior year development we saw in the first quarter. We expect the MCR to be in better in the second half compared to the first half of the year, and our outlook for ACO REACH is unchanged at approximately 93% for the full year. The expected second half improvement in the MCR is in line with the performance realized in 2022. Adjusted EBITDA outlook for the full year 2023 is unchanged and expected to be in the range of $75 million to $85 million.

Additionally, we expect 2023 interest expense to be approximately $100 million, which includes approximately $19 million of non-cash interest expense. Guidance for stock-based compensation is approximately $50 million, and capital expenditures are approximately $15 million, both unchanged from our prior guidance. As I mentioned, cash used in operating activities is still expected to be in the $70 million to $80 million range. In conclusion, we began 2023 by securing the capital necessary to execute our plan. Operationally, the year started with favorable revenue PMPM, and our focus remains on lowering our medical costs, continuing to improve our cost structure and unlocking embedded profitability within our medical centers, to improve profitability and cash flow over time and maximize long-term value for our shareholders.

Now I’ll turn the call back to Marlow for a few comments, before we open the call to your questions. Marlow?

Marlow Hernandez: Thank you, Brian. Before we take your questions, I’d like to briefly address industry trends and our recent board changes. Starting with industry trends, I would like to comment on CMS’ final rate notice, I believe that CMS is doing the right thing for seniors and for the country. Through programs like Medicare Advantage and ACO REACH, CMS is investing in the present and future of medicine, value-based care. CMS is emphasizing payment for outcomes rather than for volume of services. CMS is expanding patient choice, protecting the underserved and spurring innovation. CMS is also being fiscally responsible so that the Medicare program can continue to serve seniors for decades to come. As it relates to the industry, margins have been squeezed through higher rebates and OTC benefits.

Given the risk score changes in my conversations with our payer partners, I expect this margin compression to moderate in 2024, which I believe is positive because more of the healthcare dollar will be focused on primary care and prevention. Turning now to our Board. As you may know, three former directors departed from our Board in late March. Our current Board and management team are significant shareholders of the company and are fully aligned on the action plan we have outlined to simplify our business, grow our high-performing operations and drive sustainable profitability over time. Our former directors were deeply involved in all decision-making, up until the time of their departure. They have every opportunity to work constructively with the full board on the development and execution of this plan.

Instead, they opted to leave abruptly and launch a highly disruptive and misleading public company, which we believe is aimed at furthering their stated self-serving and short-term agenda at the expense of the long-term interest of all shareholders. We have a great deal of work to do to unlock the value embedded in our business and realize Cano Health’s full potential for the benefit of all stable. At Cano Health, we help our patients live a longer and fuller life. We’re transforming healthcare delivery and redefining primary care by making healthcare more proactive, connected and light. Despite the challenges we have faced, we maintain an unwavering dedication to providing our patients with our differentiated model of care, which benefits not only them, but also their families, our payer partners and the communities that we serve.

Keeping these principles in mind, while improving our financial results, it’s ultimately what we believe creates long-term value. As we exit the first quarter, we firmly believe Cano Health is well positioned to leverage our competitive advantages to deliver sustainable, profitable growth over time. We believe the divestiture of certain non-core assets will create important flexibility to strengthen our high-performing Medicare Advantage operations. Moreover, we have streamlined and consolidated administrative functions and have taken important steps towards optimizing our affiliate partnerships, specialty networks and payer contracts for improved clinical outcomes and profitability. In addition, we plan to leverage our low-cost patient acquisition model to continue to fill available capacity at our medical centers and further improve care margins through operating initiatives.

In summary, while we are excited about the momentum in our business and the opportunities that await us in 2024 and beyond, our focus remains on executing immediate priorities to improve profitability and accelerate cash flow improvements this year. During this quarter, we made significant progress toward these objectives and expect to continue to do so in the future. With all that in mind, we ask that you focus your questions on the substance of our first quarter 2023 financial results, which we believe provide important early indicators that we’re on track and gaining momentum. And so I will ask now the operator to open the call to your questions.

Q&A Session

Operator: Thank you, Dr. Hernandez. We’ll take our first question this afternoon from Jason Cassorla at Citi.

Ben Rosssi: Hi. Good afternoon. Thanks for taking my question. You have Ben Rosssi on here for Jason. So thinking about the assessment of your non-core operations and possible decision to divest our A assets during your last call, you provided some added transparency on your non-food operations, which included about $100 million in revenue and $40 million in EBITDA losses for 2023. Just curious how those markets are performing against expectations to start the year. And then if you assess potential divestitures, what does that process look like? And what would prompt you to divest a given facility? Is it fair to think that the pace of onboarding these assets is coming in lower than expected? And then also with that, if your goal completing divestitures in the coming months, how would you describe inbound interest?

Brian Koppy: Yeah, this is Brian. Thanks for the question. A lot there. Let me start with the performance of the non-Florida markets. Generally, they’re coming in line in this first quarter. As I think you mentioned, we said last quarter, roughly $40 million projected losses in 2023. I’ll call it, roughly 25% of that is in the first quarter. So essentially coming in line. Though I would say we are — those markets that are larger in scale — we’re starting to see some momentum in that and others are to follow behind that. But generally, as we start the first quarter, those markets are performing as we would have expected this early in there and they start as we ramp up those demos.

Marlow Hernandez: And let me just add to, Brian. We’re focused on growing our highly differentiated Medicare Advantage, focused medical centers. And we’re very excited about the value creation opportunity that exists outside of Florida. We have to take multiple factors into consideration when deciding what is non-core and what to divest, and that includes the clinical outcomes, the growth rate, the earnings trajectory, the position in the J curve Scale and density are, of course, important, but it’s multi-factorial I’ll just summarize that we have performed a thorough review of our operations and are excited about the coming months as we further strengthen our high-performing Medicare-focused operations.

Ben Rosssi: Great. And just as a quick follow-up on embedded capacity. You mentioned last call some of the embedded capacity within your facilities and ability to maybe double your membership out of your existing medical centers without additional expense. Could you just update on your — update us on your progress there and maybe the pace for filling this existing capacity, and then how much of your guidance raise on membership as a result of maybe filling this existing capacity? Thanks.

Marlow Hernandez: Yes. So, we still have significant available capacity. As you heard from our prepared remarks, we’re expecting 170 centers at the end of the year, while raising guidance. And you can also see in our investor supplement, the continued growth of our medical center membership filling that capacity, and we have significant more to go with a low-cost acquisition model that we have with two-thirds of our patients coming in through non-demand generating activities. And just like with our capital-light MSO models, we’re seeing a nice growth and improved earnings trajectory that is not capital-intensive and is a clear tailwind for this year’s earnings, particularly in the second half of the year.

Ben Rosssi: Okay, got it. Thanks for the commentary.

Marlow Hernandez: Sure.

Operator: Thank you. We go next now to Jailendra Singh at Truist Securities.

Jailendra Singh: Thanks. And thanks for taking my questions. Apologies for my hoarse voice here, but I’ll try. Just following up on $7 million of PYD in the quarter, can you provide some details there? Was it related to any particular contracts or geography? And excluding this PYD, I mean, would you say that trends were better than you in terms of outlook around utilization? Maybe provide some color there, like were there any variances across various categories.

Brian Koppy: Yes. Thanks Jailendra. I hope — I do hope you feel better. Yes, the PYD, it’s $7 million. So, I would say it’s kind of sprinkle a little across various contracts and arrangements. So, nothing that I would call out there. And then I would say, yes, I think trends generally were in line other than the two that we really highlighted, which was this use of the over-the-counter card that we saw more significant utilization than we would expected. And then second, followed that up by additional utilization of branded drugs, which is not overly surprising, but we are seeing — we’re getting the new membership and it takes a little bit of time for those new members as they see our primary care doctors and they become further engaged to find lower cost at generic products. So, that’s why we’re comfortable over time that member engagement should be able to mitigate that higher branded drug utilization throughout the rest of this year.

Jailendra Singh: That’s helpful. And then a quick follow-up on last quarter, you guys talked about $70 million of cost savings on OpEx and $20 million medical expense improvement from these underperforming affiliate termination we talked about this evening as well. Let me update us where you are with respect to that $19 million combined savings? How much you have captured in Q1? How much is in hand versus what you’re trying to get in 2023?

Brian Koppy: Yes. The SG&A savings are really making strong progress. We’re in line with where we expected to see in the first quarter here and would continue that throughout the year. So, I’d say, generally, kind of break it into quarters, we’re slightly ahead on the SG&A savings as it’s come through. But I would also caveat that, we’re continuing to look for new opportunities to continue to create efficiencies and opportunities for further SG&A savings. So, part of me says the work is never done, but these initiatives that we have launched are well underway and for the most part, just waiting for the time to pass for them to kind of drop to the bottom. As far as the affiliate actions, those are underway as well. They’ll take a little more time.

So I’d say those probably will occur more in the back half than in the early part of the year because you got to kind of work with the contracts and they take time, et cetera. But those initial action items that we identified are in progress. And that — but I would say both Mark and Bob are continuing to work that effort as well and really continuing to work with each of the payers as well as the operators in the organization to see what other opportunities there are.

Jailendra Singh: Perfect. Thanks a lot.

Operator: We’ll go next now to Justin Lake at Wolf Research.

Unidentified Analyst: Hey guys. Thanks. This is Austin on for Justin. I appreciate all the color around the strategic review. Just sticking with that for a quick moment, how should we think about as you guys are going through the businesses, what does this start to take shape as is it exiting certain businesses? Is it may be prioritized in that MA line, perhaps stopping kind of that enrollment growth on the Medicaid and ACA lines. Just curious, any additional commentary there and then sticking there, any color that you can kind of spike out on the pricing trends in the ACA cohort that you guys brought on? I appreciate it.

Marlow Hernandez: Yeah. So, you started with how we think about the business. And how we’re simplifying and optimizing the business to our highly differentiated and high-performing MA focus medical centers and the use of capital-light models. The rest are, by definition, non-core. And we’ve got opportunities there to give us further flexibility to strengthen the balance sheet and invest in the medical centers and capitalize Medicare-focused models that provide us excellent clinical and financial outcomes.

Unidentified Analyst: Great. And then maybe one follow-up, Brian, if there’s any commentary on the pricing turn on ACA that would be great. And then, turning focus to the guide a little bit. Any updated expectations on what full year membership kind of in the MA line is going to look like? And all of that in the commentary, it sounds like DC outlook maybe got a little bit better versus prior. Are there any other moving parts to kind of keep in mind as we bridge that consistent EBITDA outlook? Thanks.

Brian Koppy: Yeah. I mean, I don’t think there’s anything I would — on the ACA, I think nothing that I would call out. I know I would say if you look at our PMPMs for the quarter, it’s a little — they’re on the lower end of where we would expect. There was just some reconciliations of quality share programs that came through in first quarter. But going forward, I think, I believe our first quarter PMPM is around $11 or so, but we would say, I would expect that to be $30 going forward or so, give or take. So I don’t think there’s anything unusual there. And like that business is a nice complement. But as Marlow mentioned and as we’ve mentioned in the past, our focus is squarely on the Medicare Advantage business and ramping that business and those opportunities moving forward. I can’t remember what the second part of your question was, if you could repeat that.

Unidentified Analyst: Yeah, just the MA enrollment growth, Brian. Just curious, how that’s trending versus expectations. I think you guys are looking for some growth for the year from here versus kind of flat sequentially, just hoping for kind of some update there.

Marlow Hernandez: Yeah. Let me just take that. Our focus is on growing profitably. And as I mentioned, streamlining, the organization as you can see in the supplement, and we continue to see nice growth in our Medicare staff model centers in that MA line of business. We are thoughtfully trimming our MA affiliates, and we’ll continue to do that. And even though that present some modest headwind to MA growth in general, it certainly strengthens our profitability and gives us the additional opportunity to invest and realize a very significant earnings potential within our medical centers as you can also appreciate in the investor supplement.

Unidentified Analyst: Thanks guys. Appreciate the color.

Marlow Hernandez: You’re welcome.

Operator: Thank you. We’ll go next now to Josh Raskin at Nephron Research.

Unidentified Analyst: Hey, thanks for taking the call. This is actually Marco on for Josh. Just have another quick question around the non-core asset divestitures and the structure of those, it sounded like the first tranche could come in the next couple of months. So the current thinking on your end that these divestitures could be done in several steps instead of one larger transaction, and is there any preference from your end on either doing it in a series of smaller transactions or one large transaction? Thank you.

Marlow Hernandez: It will likely be a series of transactions and value maximizing ways that makes sense for our shareholders and allow us to create optimal long-term value.

Unidentified Analyst: Great. And then if I just get one quick follow-up. It looked like the MCR was up about 480 basis points year-over-year in the first quarter, while the guidance for the full year implies an increase of closer to 240 basis points or 290 basis points at the high-end. I know you spoke to some of the drivers in the quarter, but I was wondering if you could provide any further detail on what specific items need to improve through the rest of the year? And what the main drivers are for you to achieve guidance? Thanks.

Brian Koppy: Thanks. Yeah, I mean, I think the important point on the first quarter MCR is looking at the mix of the business, and as we called out the DC, I’m going to keep saying DC, but the ACO reach program, which, as you know, has a much higher MCR than the base business. So mix is certainly playing a big piece in that. But really, as we go through the year, even if you look back at 2022, you see the substantial improvement from first half to second half. Those are will be very consistent as we go — as we move through 2023 as particularly in the back half of the year when you start getting the stop-loss and other recoveries benefiting plus normal seasonal utilization. So those types of activities will certainly benefit the MCR, and then other actions around some of the trimming of the affiliates and improving the affiliate business in the back half of the year should allow us to achieve the full year MCR guidance.

Unidentified Analyst: Great. Thanks very much.

Operator: Thank you. The next now to Andrew Mok, UBS.

Unidentified Analyst: Hi. This is Thomas on for Andrew. Thanks for taking the question. First, could you provide some color on the impact from OTC flex cards, as well as branded drugs specifically drove MCR higher this quarter? Are these more behavioral changes or medical changes? And are there any controls in place to mitigate these impacts for the balance of the year? Thanks.

A – Marlow Hernandez: Yes. The first part about the Flex part, it’s a function of plan specific benefits. So a planned specific benefit design, and I would point you to my commentary on industry trends, and we’re sitting on historically high rebates and such OCC benefits that I expect to moderate in the coming year. Number two, as to the branded use of medicines, a class that we’re seeing higher utilization as our others are some of the newer diabetic medications. And there are various ways in which to engage with patients as appropriate, when there are generic equivalents and we’re bolting a lot of patients onto our platform, as you know, over the past year and half. And it takes time to evaluate and modify patients’ medications while improving their care.

We want to make sure that we’re improving care, first and foremost. But we’re also working with the pharmaceutical company programs, there’s a benefit overall as a result of Rx rebates and pharmacy stop loss that also benefit us as the year progresses, and we continue to take care of our patients.

A – Bob Camerlinck: Yes. I mean this is Brian. I’ll just add. We did call out the favorable PMPMs that we saw. That’s a great start to the year. So for the most part, while those do trend down, but it’s always good to start at a higher level than expected. So that gives us some additional confidence and I’ll just call it the one other item in the quarter was the PYD. Obviously, you expect that not to recur. So that becomes another driver why the MCR are in the first half – first half will be lower than the second year.

Unidentified Analyst: A quick follow. Could you provide some color on that — Prior Year Development as well as the favorable payer adjustments that you mentioned in the quarter? Thanks.

A – Marlow Hernandez: Yes. I think similar to what I said before, the PYD is pretty broad-based. We — between our Medicare and maybe a little more heavily geared towards the ACO REACH. But — so that’s generally what we saw in the quarter. And as we kind of think through the rest of the year, we think we have a good view of where that MCR is going to go based on the things that we just talked about in terms of the utilization of some of the benefits. And then operational improvements that we’re going to be pushing through. And I don’t know

A – Bob Camerlinck: I can add on the payer contract front. We have strong pair of partners, and we’re modifying contracts to align to the clinical value that we’re providing that our payer partners recognize that there are multiple levers in such contracts. We’re not done. And market-by-market. We are evaluating each and every plan that we take and each payer partner that we have to make sure that we’re prioritizing the best clinical and financial outcomes.

Unidentified Analyst: Great. Thank you.

Operator: We go next now to Brian Tanquilut at Jefferies.

Brian Tanquilut: Hi, good afternoon, guys. I guess my question is, as I think about what a lot of healthcare providers are saying right now, they’re saying that utilization has been strong in Q1, but also carrying over into Q2. So just curious, what are you baking into guidance in terms of utilization trends, whether it’s hospitals, labs, physician visits and things like that?

Marlow Her: Yes. As Brian mentioned, we started the year with higher revenues that we expect to continue throughout the year with the seasonality being what it has always been second half of the year having less utilization due to a number of factors, including holiday periods. Then you have the benefit of stop loss and a full benefit of pharmacy rebates as an example. So we see those as part of the in-line expectations to our calendar year. We are not seeing increased APTs or hospital-based utilization. We are seeing excellent patient engagement, the number of primary care visits by patients and even by restratification of patients, including our high-risk patients. We are seeing, however, a higher use of OTC benefits and these branded medications. And as we described, we have confidence — and because of the revenues, the seasonality, the stop loss and the care management that we have in place as to how the second part of the year develops.

Bob Camerlinck: Yes. And I’ll just add to that Marla mentioned the APT just for everyone’s reference, we did include a supplemental slide in our financial supplement around our total hospital emissions. So that would give you a good visual of the, call it, downward sloping APT trajectory that we’re seeing as we enter 2023.

Brian Tanquilut: Got it. And then I guess my follow-up, you called out the — I talked about the high-risk patient task force. So is that incremental G&A, or are you using existing employees and resources to drive this — so just curious, any color you can share with us on that. Thank you.

Marlow Her: Yes. No, it’s a great question. So it’s mostly a reallocation of existing staff. Our entire cost effectiveness program that we have executed over the past couple of quarters has been to invest more toward the direct provision of care rather than the administrative services. And so this is part of that continued realignment. Brian mentioned, there’s more opportunity. And that is part of the forward momentum that we’re carrying into the year. It’s all about our patients first and foremost, and aligning more resources in their direct care is where we’re focused on.

Brian Tanquilut: Awesome. Thank you, guys.

Operator: Thank you. And our last question today will come from A.J. Rice at Credit Suisse.

A.J. Rice : Hi, everybody. First, I just want to ask about — a little more about the MCR. If I look at last year, your Q1 was 79.5% and full year was 79.1%. This year, first quarter is 84.2%. I guess you could axe out the 7 million of prior development and it will be 83.4% and you’re looking to get to 81% to 82%. Now it sounds like stop loss, which you’ve talked about before will help you. wondered whether the fact that you got more ACO reach, does the stop loss have the same effect on the ACO reach that it does on the MA population. Similarly, also on the utilization patterns are you seeing ACO reach utilization over time now that it’s more significant for you to be similar to what you see in MA? And then you’re also calling out pharmacy rebates for the first time.

Is there any reason that that’s become a bigger part of what’s going on here other than the fact that you’ve got membership growth, I guess, across the board, but in terms of it helping you on the MLR as the year progresses.

Marlow Hernandez: Yes. On the Medicare and ACO stop loss, generally behaves the same way. So really no, I’ll call it, material distinctions there. And then, as far as underlying trends in ACO ratio, I think this is the nice part about having a scale size business. You start to see more consistent trends and understand behaviors better. We talked a lot about last year, learning the business, understanding the dynamics and the — just — I’ll call it, the financial economics of how the program is working. So, I think each month, each quarter, we get better and better at it. So we’re starting to get a better handle on it, particularly given the scale. So I think there’s less, I’ll call it, volatility when it was 4,000 members. So much easier from a business financial performance and projections, so I think that’s kind of how we’re thinking about it.

A.J. Rice: And on the rebates, the fact that you’re now calling those out. Is there anything that’s changed to make that a more significant factor in all this?

Brian Koppy: The only thing is just relatively higher use of random medicine and Part D spend on the volume, as you called out. And so that has a relatively more important impact than previous years.

A.J. Rice: Okay. All right. Maybe my follow-up question then would be on the liquidity and cash flow. So I think you said you expect to be $70 million to $80 million cash used for the year. So that leaves another 50 — well, actually another $35 million or so, I guess, from what $45million what you did in the first quarter, I think. It sounds like working capital or CapEx would be another $10 million or so. And then we don’t know what you’ll get from divestitures. But you also — is there any working capital swing over the course of the year? I know last year, there was quite a bit of volatility in the working capital from quarter-to-quarter. Any comment on that? And I also should just ask — I assume it is, but the $120 million revolver, that’s fully available right now to draw down if you need it.

Brian Koppy: Yes, I’ll start with that. Yes. We are untapped on the revolver. And so I think that’s — when I take a look — take a step back and that’s where I go back to our total liquidity, over $150 million to execute on our plan. And to your point about the divestitures, we have not factored any of that in. Those things, my view is, you take those when they happen. You don’t try to anticipate because you’ll never be right. So we’re — we started the year strengthening the balance sheet with the necessary capital that we needed, essentially to execute on this plan that Marlow talked about and others talked about. So from that perspective, I think we have a nice ability to work through what we need to do, focus in on those high-performing cash-generating Medicare Advantage lines and we’ll look strategically to divest any other non-core assets that that we can.

And I’d say there’s been a heavy interest, which is great to see. So as Marlow mentioned, we’ll prudently and expeditiously move forward to achieve the highest return on those assets that we have.

A.J. Rice: Okay. Thanks a lot.

Operator: Thank you. And ladies and gentlemen, that will bring us to the end of Cano Health’s first quarter 2023 earnings conference call. We’d like to thank you all so much for joining us today and wish you all a great remainder of your day. Goodbye.