Cano Health, Inc. (NYSE:CANO) Q2 2023 Earnings Call Transcript

Cano Health, Inc. (NYSE:CANO) Q2 2023 Earnings Call Transcript August 10, 2023

Cano Health, Inc. misses on earnings expectations. Reported EPS is $-0.28 EPS, expectations were $-0.09.

Operator: Good afternoon, and welcome to Cano Health’s Second 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 Mark Kent, Interim Chief Executive 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. 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 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 certain financial measures that 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 Mark Kent, Interim CEO of Cano Health. Please go ahead.

Mark Kent: Thank you. And good evening, everyone. I appreciate you joining us to hear how Cano Health is turning the page to create a sustainable business for all our stakeholders. We are accelerating our strategy to enhance operational efficiency and executing our plan to improve the management of our medical costs to realize the embedded value within our business. Since becoming Interim CEO in June, I have worked with the team to conduct a thorough review of all aspects of our business. While our mission and vision remained the same, the strategy and tactics needed to realize the profitability embedded in our business requires a refreshed approach built upon a stronger operational foundation. By now you may have seen our press release and know that today we announce Cano Health is pursuing a comprehensive process to identify and evaluate interest in a sale of the company or all or substantially all of our assets.

We have already been working with advisors and are encouraged with the progress made so far. And while there is no timetable for a conclusion of this process, we expect to share more information at a later date and time when necessary. As a note, we will not be commenting further on this process during our Q&A session after our finished remarks. This step is important for Cano Health success. Joining with the right strategic partner is an opportunity to accelerate the value generated from producing favorable health outcomes for our patients and reducing medical costs within our communities. In the rest of my prepared remarks today, I plan to walk through the progress we have made in just a few short weeks to refocus our strategy on Medicare Advantage and ACO REACH, and to accelerate decisions and actions designed to support the organization’s long-term success.

I’ll discuss key dynamics impacting our business and how we will address some of these headwinds. First and foremost, our core operating strategy is now focused on providing primary care services for Medicare Advantage and ACO REACH members in our core Florida market. Through both our medical centers and our affiliated networks. Our evolving management team has a long and proven track record of operating successful primary care facilities and affiliate networks in Florida that improve health outcomes for Medicare Advantage, and Medicare ACO REACH populations. The team has a long standing solid relationships with our payer partners. We are leveraging their experience technical knowledge and relationships to streamline and improve our performance across the enterprise.

We are now implementing a new plan to flatten our operational structure, rigorously prioritized projects and our Florida operations to improve the speed and quality of the care we deliver and create a smaller brick and mortar footprint to optimize our core Medicare Advantage assets This new smaller footprint and more focused business required us to realign and reduce the size of our workforce, which we did just last week. While it is difficult to see team members go, the reduction was necessary to allow us to align with this new strategy. We thank those employees who are leaving us for their dedication and service. In order to focus on Medicare Advantage and ACO REACH operations in Florida, we launched processes to divest certain non-core assets.

While we cannot assure investors that a transaction will be consummated, we have received second round bids to divest the majority of our Florida Medicaid operations. While valuable the Medicaid business diverted critical physician capacity and care management resources within our existing medical centers, away from our core Medicare Advantage business. We found it was inefficient for our care management teams to serve both Medicare Advantage and Medicaid members who have very different needs. We also made important strategic decisions for our markets outside of Florida. By the fall of 2023, we expect to fully exit our operations in California, New Mexico and Illinois by selling or closing in those markets. We began notifying members, physicians, employees and our payer partners about our decisions over a month ago.

This decision impacts approximately 5,000 total members across 17 medical centers. We also expect to fully exit operations in Puerto Rico by January 1, 2024, which currently has approximately 8,000 members cared for by our affiliates. Cano Health remains committed to supporting our members as they transition to new providers to ensure they receive the highest possible quality of care. In addition to exiting operations in those states, we are consolidating medical centers in Texas and Nevada, while simultaneously evaluating offers allowing us to divest these assets. That consolidation plan is intended to improve the economics of these markets, whether they remain part of Cano Health or are divested. We plan to reduce our footprint in Texas in Nevada by closing about half of our centers in those markets to improve their profitability and cash flow.

With such actions, our Texas and Nevada medical centers will be highly attractive with the capacity to efficiently and effectively serve the growing Medicare Advantage population. Further review taking actions on other non-Medicare lines of business in Cano Health, such as Medicaid, behavioral health, pharmacy operations, and occupational health. Each of these lines of business is attractive on a standalone basis. We have received interest from multiple parties for these assets aren’t engaging in active discussions. And of course, we cannot assure investor that any particular transaction will be consummated. Our exit from California, New Mexico, Illinois and Puerto Rico, coupled with the consolidations in Texas and Nevada, and the potential divestiture of Medicaid will allow the organization to be laser focused on delivering high quality, high access and high member engagement for our Medicare Advantage and ACO REACH members.

Now moving on to the current business environment and the trends we are seeing. First and foremost, we are in the care management business, the quality of care that we deliver remains market leading and a source of pride for all of us. Unfortunately, we have had so several emerging process issues that have affected our ability to project our performance. However, these issues can and are being remedied. And our core Medicare Advantage business cavitated revenue in the second quarter of 2023, was well below our expectation. This was primarily due to a shortfall in the Medicare risk adjustment revenue or MRA collected versus what was expected and accrued for in prior periods. As the second quarter of 2023 close, we received the quarterly service funds from our health plan partners, which reflected their reconciliations of the actual and estimated MRA revenue from CMS for our members.

These reconciliations resulted in a reduction to our final 2022 and mid-year 2023 estimates during the second quarter. Upon stepping into the Chief Strategy Officer role in April of 2023, I asked our team to perform a cross functional review and audit of our clinical documentation, billing and coding and estimation methodologies, and to suggest ways to enhance our practices. Our review found that while our clinical documentation, billing and coding followed by nearly all internal policies, we have clear opportunities to implement simpler, scalable and more effective protocols designed to enhance our performance. The largest gap we found was attributable to back-end processes and the ways that data from those processes inform our MRA estimates.

The prior processes were overly manual, and our back testing analysis demonstrated that they provided limited predictive power. During my time at Humana, and during my time operating independent value-based care, primary facilities and a hospital, I learned that the value-based care model succeeds best when physicians have every tool necessary to make informed decisions. And so to enhance our data capture, this quarter, we quickly began revising our approach to limit data variability and to ensure we close gaps in real time data reporting. I believe our estimates going forward will reflect a more accurate view of these MRA projections that will result in a higher realized and appropriate MRA revenue. We were also impacted by higher utilization than expected in the quarter.

This was primarily due to the utilization of health plans supplemental benefits, such as OTC flex cards, and higher utilization across outpatient and pharmacy services. As you recall them from our first quarter earnings call, we received information from payers about higher utilization of OTC flex cards very late in the quarter. Prior to receiving actual card utilization data, we assumed that that the trend would be in line with historical patterns than new payer information made it clear that in the second quarter, utilization of the cards was significantly higher than in prior years. And in several cases, we realized that service fund OTC flex card impacts in 2023, which were not present in 2022. Moreover, health plan data received in the second quarter of 2023 included retroactive adjustments for OTC flex card claims, dating back to January 1 of 2023.

As a result, not only do we experience higher OTC flex card utilization in the second quarter of 2023, but we also received unfavorable prior period development from the first quarter of 2023. These OTC flex cards became more prevalent in the 2023 annual enrollment period among health plans, particularly in Florida. While they provide an enhanced benefit for our members, at risk value-based providers like Cano Health are unable to influence or manage these costs, which we recognized in our third-party medical cause. Given these unsustainable burden, OTC flex cards placed on third party medical costs, we are intensely negotiating with several payers to mitigate these costs in 2023. And making reduced OTC flex card costs a top priority in our negotiations for 2024.

In the second quarter of 2023. We also saw higher than expected utilization partially attributable pent-up demand for outpatient procedures. Pharmacy utilization was also higher than expected in the quarter. And remained elevated due to higher branded drug costs, primarily related to certain diabetes medication. We expect this to continue in the second half of 2023, and are closely monitoring the claims that we receive. To mitigate these costs, we have a number of action items that are underway. And I will discuss these momentarily. Clearly, these headwinds mean it’s imperative that we position ourselves to better facilitate, manage and influence care delivery, and our medical centers and affiliate networks. Focusing on Medicare Advantage and ACO REACH provides Cano Health with the opportunity to rebuild its foundation in a market we understand is very well.

It also allows us to implement and scale critical operational changes across our footprint, giving us greater leverage over time. Now, let me highlight a few actions we’ve already taken to simplify our operations and refocus our core capabilities. First, we have successfully rightsized our payer agreements to reflect the size, scale and impact of our organization to position Cano Health as a true partner with our payers. Actions Taken include developing broader master agreements with payers to replace multiple complex agreements with the same payer. This is intended to allow us to manage our payer relationships more effectively, and to yield the best economic impact for our enterprise, not just in a particular region, or for a single plan. Second, we are using our scale to negotiate with specialists and hospital systems, which should enable us to reduce our third-party medical costs and support our ability to focus on improving the overall health outcomes of our patients.

As part of our restructuring, our Cano at Home program relaunched with a renewed focus on increasing engagement with high-risk patients. The goal is to improve our delivery of primary care in the home setting to avoid costly ER visits and hospital admissions. We previously mentioned that this program can generate a 5% to 10% reduction in preventable ER visits, and increase our ability to treat high risk patients outside of the hospital. Simultaneously, our member engagement teams have increased contact with high-risk patients to control adverse medical outcomes. For example, in the first half of 2022, we engage with approximately 800 high-cost members. In the first half of 2023 as part of the action plans that have been implemented, we have engaged with nearly 49,000 high cost members.

Clearly, this level of engagement will have multiple benefits for the organization, including the recognition of higher MRA scores. And lower medical costs as we engage and manage these members and better member engagement and better increased member satisfaction. Four, we are making operating enhancements to improve our insight into and influence over our medical costs moving forward. This includes reorganizing certain functional areas, and adding new positions to strengthen core capabilities. To that end, we have added a leader of value-based care optimization, who is responsible for evaluating the various patient touch points along the patient care continuum to ensure that our physicians, specialists, pharmacy services, Cano at Home and care management teams are all seamlessly connected.

In addition, we are implementing several new Predictive Services to improve our ability to provide proactive reporting and analysis of value-based care. Utilizing integrated data about our care touchpoints will ensure that we have the means to quickly assess and identify gaps in care while caring for our patients. Fifth, we have thoroughly reviewed and strategically aligned our referral networks to ensure that we have the right referral partnerships with a focus on patient health outcomes and offering the right care in the right setting at the right time. Six, we have a number of initiatives to identify and leverage our patient population data to determine where generic alternatives represent the greatest opportunity. This includes identifying whether prescriptions are prescribed by our own Cano Health physicians, or originate with outside specialists.

This insight will help us make quick and appropriate actions to reduce our pharmacy costs without sacrificing the quality of care or efficacy of medications prescribed. And finally, we remain committed to operating as efficiently as possible, and reducing our SG&A expense. As I mentioned, to adapt to new business footprint, we made the difficult decision to realign and modify the size of our workforce to improve our cost structure. It goes without saying that these initiatives are critical for our success, and for our future as a value-based care company. Redirecting Cano Health strategy to focus on the highly profitable and scalable Florida Medicare Advantage market and the capital light ACO REACH business will put Cano Health on a path towards improving our profitability and cash flow.

There is still a significant amount of operational work to be done in our medical centers and our corporate functions. But we are encouraged by the potential and the great progress we’ve seen so far. Systems, initiatives, partnerships and relationships all need to work and communicate in unison to maximize value for each decision we make. In the coming month, our organization will demonstrate its focus on optimizing our operations to generate greater efficiency, build better relationships with our payers, and improve health care outcomes for our Medicare Advantage and ACO REACH members to ensure the organization’s long-term success. And now, I’ll turn the call over to Brian Koppy our Chief Financial Officer to take you through the financials.

Brian Koppy: Thank you, Mark. And thanks everyone for joining us today. It certainly has been a challenging and disappointing quarter for us and our various stakeholders. We are working relentlessly to execute the initiatives Mark has laid out and to accelerate the organization’s path to significantly improved financial performance. Starting with the results of the quarter, total membership increased 35% year-over-year to approximately 381,000 members in the second quarter of 2023. This represents an increase of approximately 100,000 members from the second quarter of 2022. Total Medicare Advantage membership grew approximately 14% versus the prior year, but was about flat sequentially as continued membership growth in our medical centers was partly offset by planned terminations of our affiliates.

Membership also declined sequentially and ACA and Medicaid, which were impacted by contractual changes, and redeterminations respectively. Total revenue for the second quarter of 2023 was approximately $767 million, up from approximately $689 million a year ago. Total capitated revenue in the quarter was approximately $743 million, an increase from $655 million in the second quarter of 2022. However, in the second quarter of 2023, capitated revenue was lower than expected, primarily driven by Medicare risk adjustment, or MRA revenue, which is approximately $58 million lower than previously estimated in our most recent full year 2023 guidance. This lower MRA revenue reflects our updated view of the final 2022 and mid-year 2023 MRA revenue estimates of the approximate $58 million shortfall versus our expectations.

Approximately $44 million was out of period, or related to services provided in 2022 and the first quarter of 2023. The Medicare Advantage revenue PMPM was $1,027 in the second quarter of 2023, down 13% sequentially from the first quarter of 2023, primarily driven by the lower-than-expected MRA revenue. The Medicare ACO REACH revenue PMPM was $1,309, down 12% sequentially from the first quarter of 2023. Also lower than expected, and was primarily driven by revised benchmark data we received from CMS related to the 2022 and 2023 performance years. Visual information about our membership mix and our PMPM is available in our second quarter earnings release and second quarter financial supplement posted on our website. Our medical cost ratio or MCR in the second quarter of 2023 was 103.5% compared to 82.6% in the second quarter of 2022.

Excluding ACO REACH the MCR was approximately 108.6% in the second quarter of 2023, compared to approximately 81.8% in the second quarter of 2022. This increase was primarily driven by an increase in our Medicare Advantage MCR. The year-over-year increase in the MCR was primarily driven by lower capitated revenue due to the reduction in MRA revenue discussed previously and higher third-party medical costs due to higher utilization and higher costs associated with OTC flex cards offered by our health plan partners. The higher utilization contributed to unfavorable prior period development of third-party medical costs during the quarter of approximately $44 million primarily related to medical service utilization of approximately $26 million and OTC flex cards of $18 million.

The higher utilization of OTC flex cards occurred across nearly all our health plan partners. In the first quarter of 2023. Cano Health recognized approximately $13 million of OTC flex card costs, while the second quarter of 2023 recognized approximately $51 million, of which approximately $18 million was unfavorable prior period development from the first quarter of 2023. What we see now is the aggregate cost from these OTC flex cards was approximately $33 million per quarter in the first half of 2023. This compares to approximately $12 million per quarter in the first half of 2022. As a result, greater use of OTC flex cards by our Medicare Advantage members is projected to add $84 million of third-party medical costs in the full year 2023 compared to the full year 2022.

Direct patient expense in the second quarter of 2023 was 7.4% of our total revenue below the 7.6% in the second quarter of 2022. SG&A expense in the second quarter of 2023 was approximately $99 million, down approximately $6 million, compared to the second quarter of 2022. The total SGA expense as a percentage of revenue was approximately 30%, which was above our expectations, primarily both due to lower capital revenue and headwinds to our cost reduction initiatives related to hire professional and legal fees. Net loss in the second quarter of 2023 was approximately $271 million, compared to a net loss of approximately $15 million in the prior year, primarily driven by a higher operating loss, the change in fair value of warrant liabilities and higher interest expense.

Operating results in the second quarter of 2023 also included a $62 million increase in the reserve within other long-term assets on our balance sheet, resulting from the full write down of MSP recovery Class A common stock. Adjusted EBITDA in the second quarter of 2023 was negative approximately $150 million, compared to positive approximately $10 million in the prior year. This was primarily driven by higher medical costs and lower MRA revenue as I previously described. It’s important to note that we recognize $88 million from two large out of period items that are not expected to recur in the back half of the year. To summarize the $88 million of out of period items first MRA revenue was $58 million lower than expected, and included $44 million unfavorable out of period adjustment for lower MRA revenue, while approximately $14 million is expected to recur in each, the third and fourth quarter of 2023.

Second, as I mentioned previously, there was $44 million of unfavorable prior period development related to utilization of third-party medical services, and OTC flex cards. We are withdrawing our full year 2023 guidance provided on May 9, 2023. As our management team continues to evaluate strategic interests assess the divestiture of non-core assets, and accelerate changes to Cano Health’s operating structure. These factors are dynamic and outcomes vary widely. While we expect to continue to provide you with updates to our outlook as warranted. However, there are some factors to consider as you think about the remainder of the year. First, as I mentioned, we recognized $88 million of out of period items and unfavorable prior period development in the second quarter of 2023.

As such, this amount is not expected to recur in future periods. Second, we still expect our financial performance to improve in the second half of 2023. Despite higher utilization of OTC flex cards and medical services through the end of the year. The improvements in the second half of the year are driven by operational activities, which Mark highlighted benefits from third-party medical cost recoveries such as stop loss in Part D rebates and traditional seasonality, which typically benefit results in the second half of the year. Third, we recently made the decision to reduce our workforce by approximately 700 people are 17% during the quarter. About 20% of these reductions are due to exiting operations in California, New Mexico and Illinois, with another 20% due to consolidations in Texas in Nevada, and the remainder attributed to other operational functions.

These actions are expected to yield approximately $50 million of annualized cost reduction initiatives beginning in the third quarter of 2023. And through the end of 2024, partially offset by an approximate $4 million restructuring charge that we expect to record in the third quarter of 2023. Fourth, we currently expect to reduce our medical center footprint from 169 as of June 30, 2023, to approximately 136 medical centers by year end. After our market exits and consolidations are completed. The remaining centers will include approximately 123 centers in Florida and 13 centers in Texas and Nevada. It is important to note there are approximately 23 centers in Florida predominantly related to our Medicaid operations. Fifth to California, New Mexico and Illinois markets, we are exiting, have year-to-date adjusted EBITDA losses of approximately $14 million as of June 30th, 2023.

For these markets, there will be costs remaining for 2024, which are primarily related to certain leases that we have yet to sublease are fully exit of approximately $7 million. In regard to Puerto Rico, which we are exiting effective January 1, 2024, the year-to-date, adjusted EBITDA losses were approximately $9 million. Now, let me turn to our cash flow and liquidity. At the end of the second quarter of 2023. Cash used in operating activities was approximately $45 million year-to-date, and was primarily due to unfavorable operating results. Cash used in operations was also impacted by the change in working capital, which reflects lower accounts receivables, including lower estimates for MRA revenue compared to prior periods. We ended the second quarter of 2023 with approximately $15 million in unrestricted cash and $110 million of capacity remaining in our revolving credit facility, providing us with approximately $125 million in total liquidity at such time.

However, for the test period ended June 30, 2023 the company was not in compliance with its financial maintenance covenant under the Sidecar Credit Agreement, which relates to the 2023 churn loan we closed earlier this year and requires our first lien net leverage ratio to be tested quarterly. At such date, the company’s first lien net leverage ratio exceeded the maximum limit of 5.8 to one, primarily due to the lower capitated revenue and higher third-party medical costs. We have successfully negotiated with our creditors and on August 10, 2023, the company has obtained a waiver and amendment of the Sidecar Agreement through September 30th, 2024. The company’s current liquidity as of August 9, 2023, was approximately $101 million, which consists of unrestricted cash and reflects the full draw of the Credit Suisse revolving line of credit.

Our expectation that having secured the 2023 Sidecar Amendment, we will repay a significant portion of the CES revolving line of credit. The full draw was prudent capital management while we negotiated the Sidecar Agreement. Furthermore, as the company achieves its various divestiture objectives, the immediate use of those proceeds will be to repay the revolving line of credit. And then, within 18 months, the intent is to use the net proceeds to reinvest back into the business with the balance being used to repay debt. Given the operational headwinds we’re facing in 2023. And the fact that the company’s current liquidity is not expected to be sufficient to cover our operating, investing and financing uses for the next 12 months. Management has concluded that there is substantial doubt about Cano Health’s ability to continue as a growing concern within one year.

That is why the company is pursuing a comprehensive process to identify and evaluate interest in the sale of the company, or all or substantially all of its assets. While pursuing multiple initiatives to streamline and simplify the organization to improve efficiency and reduce costs. These initiatives accelerate our shift to focus on our core assets in Florida to improve profitability and cash flow. And we expect our focus on Medicare Advantage and ACO REACH to result in more efficient operations and lower medical costs, while helping our patients live their healthiest lives. In conclusion, the company is committed to strengthen our financial footing and implementing our operational and strategic initiatives to improve patient health and deliver for stakeholders.

Now, I’d like to turn it back to Mark for a few closing comments.

Mark Kent: Thanks, Brian. In conclusion, as Brian I have just walked through, the company is committed to strengthening its financial footing, and implementing operational and strategic initiatives to improve patient health and deliver value for our stakeholders. As discussed, the company is working with its financial advisors to evaluate and develop the inbound inquiries we have already received, as well as to engage with other potential buyers. We have a good company and a strong plan to address the headwinds facing the company. And there is and we believe will continue to be strong interest in this company. As you would expect, we will not get further into the details of our strategic review process. But we are laser focused on achieving a value maximizing transaction for our stakeholders.

And we expect that our current liquidity and available options are sufficient to complete such a process. With that in mind, we ask that you focus your questions on the substance of our second quarter 2023 financial results. And so I will ask now, the operator to open the call to your questions. Operator?

Q&A Session

Operator: Your first question comes from the line of A.J. Rice with Credit Suisse. Please go ahead.

A.J. Rice : Hi, everybody. Thanks for all the details. First of all on the liquidity comment you said that August 9 we had $101 million of liquidity, you had fully drawn down on the credit line at that point, and that you got the waiver the next day. And you expect to pay that credit line which I guess is about $110 million, substantively backed by end of September would that amount of money still be completely available to you or that limit $101 million to some lower amount. Once you pay that back?

Brian Koppy: That’s right. The revolving line of credit is still available, and we’ll access it as needed. And now that we’ve kind of cleared certain hurdles we’ll repay that back and kind of use that as needed throughout the quarter.

A.J. Rice : And I think you said you would negotiate on the Sidebar Agreement through September 30. Will you then revert out of compliance again, post September 30? Will you be still okay?

Brian Koppy: Are you talking about September 30, 2024? [Multiple speakers]

A.J. Rice : I had the September 30th. Is that in ‘24 that you’ve extended it too? Okay.

Brian Koppy: Yes. Yeah.

A.J. Rice : All right. Okay, that’s good. Just one other area that I ask question about. So, the stop loss agreements have traditionally, built up to the point where in the back half the year they gave you some help, obviously, with where you guys are running year-to-date, I would assume that would be a factor in thinking about the back half that those stop loss agreements might be kicking in quicker? And how have you factored that into your thinking about the back half? And obviously, there’s prior period, adjustments you’re making? Do you have the ability to go back and say, hey, that should have triggered some of these stop losses, coverage from prior periods? And we should have some recovery there. And if you’ve been able to do that, any sense of the size of that?

Brian Koppy: It’s a great question. And that’s part of the assessment that we’re doing given the higher first half utilization, you’re right, you’re going to expect a certain level of increased stop loss on that. And that is factoring into the comment that yes, we not only will have the traditional recoveries from stop loss in the third primary, fourth quarters, but now we would expect that number to be a little bit higher than its historically been. We’re not providing specific guidance on that. But you’re right on and the thinking and that’s part of how we’re thinking about it, too. And as we look forward, we’re not being — taken any of those items in advance, we’re not going to pull those if that information, that those recoveries forward, we’re going to let them play out as they happen in the back half of the year.

A.J. Rice : Okay, thanks a lot.

Operator: Your next question comes from a line of Josh Raskin with Nephron Research. Please go ahead.

Josh Raskin: Hi, thanks. I’ve got a couple. So, apologize up front, but just first, just on membership, how many members do you have left? Do you expect in the centers that you have left? So, Nevada, Texas and Florida? That’s the first part of the membership question. And then how many are core Medicare Advantage or REACH in Florida?

Brian Koppy: I would say a majority – I’ll start with the ACO REACH, a majority of the members in ACO REACH are in Florida. So, that’s pretty standard. And then from a membership perspective, and where we say there’s in total — there’s about 5,000 members in California, in New Mexico, Illinois, that we’re exiting.

Josh Raskin: Okay, we can figure out the rest. And then I know we’ve gone through this before, because you’ve had the issue in prior years. But can you just remind us the process on recording risk adjusters for MA lives and how you record the revenue, seemingly before confirmation from CMS or even your health plan partners? Are you giving data to your health plan partner saying this is what we think the MRA is? And this is what we’re going to record? Or is there some confirmation from the plan? I’m just — I’m curious how this is now the second time you guys are off by a large amount in this process?

Brian Koppy: Yeah, a majority of the MRA change was due to the final 2022 MRA. So, this is when it comes in as the final and this comes from the health plan. So, it’s their final reconciliation. And then now given that we’re mid-year in the year, you start getting your first insights into the mid-year 2023. So, the prior year — the prior adjustments I referenced was due to the final 2022 which you — we started that in 2022. So, that’s why that that couples forward from prior year where the mid-year or is starting with the 2023 numbers.

Josh Raskin: I guess my question is, are you looking at a specific member and saying we think there’s two specific risk codes that are going to get tripped? We think it’s an incremental $600 per member per month and that’s what we start accruing as revenue all based on internal Cano decisions? Or are you relying on the health plan to say, the totality of that member in terms of other sites of care and prescription drugs. And all that sort of stuff is, and the health plan is giving you that data?

Mark Kent: Yeah, let me jump in here. This is Mark. So, historically, I’ll put it this way, it was a very tedious and manual process. And as you can imagine, that process can be fraught with all kinds of errors. The new process is one based upon where we are predicting, based upon the data submissions, we are correlating and corroborating that information with respect to what is received by the health plan and what is received by CMS. And then we are then assigning an overall score to that with a probability predictive analysis to it. So, this is what is now in place is a very automated process where prior to it was extremely manual. And so as you just alluded to in prior periods, and in prior years, that’s what causes the mess.

Being able to predict that going into next year, as we approached planning for 2024, we have a much more reliable process. And we’ve already begun testing that, and we back tested it. And we have successfully been able to do that for the month of May, 2023. And successfully for the month of June of 2023. So, we are very confident of how we move forward. The issue is that all of this transpired and setting this budget and setting this guidance last year in 2022.

Josh Raskin: That’s perfect. And then just the last one, I want to ask about the specifics of the comprehensive process of the sale of the company. But I’m curious about the feedback. It sounds like you’ve made notifications in the market of your change in strategy and some of the exited markets, etcetera. And then I guess in southern Florida, I’m curious to feedback from your largest health plans, are they worried about care for their patients and continuity? Have they started to look for alternatives to delegate their members to other value-based care companies where they are – or is that all part of the, inbound strategic interest and sort of creating a catalyst for you?

Mark Kent: Yeah, the awesome thing we have great — this is Mark, again, we have really followed and found relationships with our health plan payer partners, such that they recognize the extreme value. And the way in which we wrap ourselves around our patients and our members, adds tremendous value in the market. I think you can either as even then I think the Secretary of Health and Human Services was in our Nevada market very recently commending us on the care that we provide. And so we are very thankful for that recognition. We work hand in hand with them, especially during this I would say this concerning time, if you will, whereby we are exiting markets, and divesting. So, we’re working through the process where we are selling in many places with the buyer in these areas, but they help plans understand and we’ve signaled with them and have been working hand in hand to ensure that their member our patient, there is no lack, no gap in the continuity of care.

And or the level of care in which they are receiving through this process. So, there hasn’t been any concerns there. And so we’ve been working very closely with them.

Josh Raskin: Alright, I’ll leave it there.

Operator: Your next question comes from the line of Andrew Mak with UBS. Please go ahead.

Andrew Mak: Hi, thanks for the question. Can you help us understand these flex card benefits a bit more? What’s the typical dollar spend by member and the spending patterns associated with these cards? And how exactly does the accounting treatment work for them? When are they expense on your income statement?

Mark Kent: We might take the first part of it. Yeah. So, it’s really interesting. And so each health plan, this is Mark again, each health plan administers it a bit differently. And in the dollar amount, depending upon the plan is also very different. And so we were seeing swings anywhere from $250 per month, up to $1,000 in a quarter. And so part of the problem with this, as you can imagine was that in 2022, most of the health plans did not put that in the service fund. And so — and then in 2023 there was a few blips in what we would call maybe settled data around about the March timeframe. But when you’re looking back historically in March, and you’d compare it to the prior year, you’re like, well, maybe this is a blip, don’t necessarily know what we’re seeing.

But come May of 2023, not only did you see it fully, but it retroed all the way back to January. And so that caught us very flat footed as you can imagine, because there were several plans who did not offer it in 2022, but offered it fully at an increased rate in 2023. And that is, and so that’s what caused a lot of that noise. So, I’ll allow Brian to address the —

Brian Koppy: Yeah, and I’ll just add to that comment — is our payers use a third-party vendor to reconcile and on their end, and then that’s comes through in the service funds. So, we recognize it as it comes through each month within those service funds, which we received from the payers. And as Mark said, a lot of them were catching up their activity in the second quarter service funds that we received. And as a result, that’s where we, we realized that $80 million, what we’re calling prior period development on just these flex cards. So, drove the significant impact in the quarter of around $33 million. So, pretty substantial.

Andrew Mak: Got it. So, this is a supplemental benefit that’s essentially priced by the health plan in their bids, but then you wind up taking the risk on it? So, I guess how do you ensure that something like this is priced correctly in the future?

Brian Koppy: Yeah, I mean, that you got it. Right. I think Mark mentioned, this is part of the negotiations that we’re undertaking right now for 2024. And giving our market size, our membership scale and certain geographies. Now, knowing fully how these things, how these plans, benefits are rolling through, we’re negotiating hard. And a number of these players won’t be in our lineup, so to speak, if there’s not changes to the call reimbursements or the service funds that we receive in 2024.

Mark Kent: Yeah, I’ll add a little more color, we really expected the economics in the filings, so that it — to bear themselves out, meaning, you’re providing this benefit. And so you would actually adjust your benefits to account for that. But what we’re seeing is it hit our service fund. So, it’s causing and or has caused us to re-negotiate the economics of our agreement. And in some places to terminate some plants.

Andrew Mak: Got it. Okay. And then just wanted to follow up on the Medicare Risk Adjustment. It sounds like you’re pinning the issue on a very manual process previously. But when I hear that it sounds like that, it would just take longer to arrive at that MRA estimate. But that doesn’t necessarily explain why that estimate was so off. So, was it an underlying issue in the data itself? Or was it a shortcoming in the manual estimation process? Thanks.

Brian Koppy: Yeah, I think I would say it’s a combination of factors that you would — you can refer for back to kind of how things work. There’s some operational, and I would say there, then it ties into how does that information flow into making the estimates? So, it’s they’re both related to the estimates, but the estimate has to be based on kind of your view of the new information that’s coming in. And is it up to date? Is it the latest scoring or latest MRA related to the engagement of those members, and the charts that are being looked at? So, and that’s where there’s been a significant look back as to, I call it the root cause analysis on some of that information that’s being corrected, going forward.

Andrew Mak: Got it. And does that data flow through the panorama system?

Brian Koppy: Yeah, so it’s all data enhancements and information that is being reviewed and reports that are being looked at to make sure that as Mark said, there’s unison and information flow and communication of activity. So, all the various departments are aware of the activities of the members.

Andrew Mak: Great, thank you.

Operator: Your next question comes from the line of Parker Snure with Raymond James. Please go ahead.

Parker Snure: Hey, good afternoon. This is Parker Snure on for John Ransom with Raymond James. Appreciate some of the detail you gave on the non-core markets EBITDA year-to-date. I was just hoping to get some detail or just an update on the maybe the year-to-date performance from the kind of core Florida Medicare Advantage assets that you plan to maintain. I’m just trying to get a sense of, okay, what could this business look like if you guys get on the other end of getting shedding some of these non-core assets that you wish to get rid of?

Brian Koppy: Yeah, I mean, I think the easiest way to just kind of take the markets that we talked about, that underperformance. And we know, we’ve talked in the past about the rest of the non-Florida markets, which would really be the Texas and Nevada. And then you also have Puerto Rico and DC in there. But if you look at Texas and Nevada, they’re clearly — they’re pressured this year. And that is why we’re undergoing the consolidation. And that’s going to help improve that performance and that asset going forward. But clearly, when you look at Florida, Florida is the biggest operating market. It has a disproportion of the pressure that we’re seeing in the quarter and year-to-date. When you think about looking forward, a lot of those you kind of take those one-timers out, you look at the improvement on the cost reduction efforts just on the SG&A.

But then you get the enhancements from the operational activities around reducing medical costs, we believe there’s substantial upside of the just the core Florida market, core Florida Medicare and ACO REACH business. And that’s really the long-term view and structure that we’re putting together around how we want to think of this business going forward in terms of our scale density. And position within the market, particularly the high value Florida market, where we continue to believe that asset alone is going to be highly profitable as we go into ‘24 and beyond.

Parker Snure: Okay, if I can just get one more follow-up. I mean, just going back from the one of the prior questions on OTC flex cards, I mean, what kind of leverage do you have in those negotiations? Where you’re able to kind of insulate yourself from some of the upstream plan design? Are you just at the whim of whatever kind of members you get? And whatever plans in the in certain plan design that they’re in? Or, are you able to carve out certain areas and certain kinds of sites of care that you make that you don’t want to be exposed to? And, outside of the OTC flex cards? Are there other areas that you would wish to kind of insulate yourself from I know, you called out higher pharmacy costs. Maybe you just talk about kind of your ability and your leverage in those negotiations?

Brian Koppy: Yeah, I’ll start a little bit and Mark can add any color if I don’t hit it fully. But I would say, the supplemental benefits are being looked at across the board from the payer side as they go into 2024. In general, just given the new rating, the new rates for 2024. So, I think all health plan, all payers are pulling back on those broadly, what we’re doing is having discussions specifically on the ones that we see predominantly in the south Florida market here as well, where we can influence that and find those payers that are reasonable. We understand these payer — the supplemental health benefits are attractive to members. And we want to work collaboratively with the payers to grow membership. So, it’s — there is a mutual beneficial discussion to be had, because they need us to help them grow their membership, but we also need them to ensure that it’s a – I’ll call it favorable financial terms as we serve those members.

So, that’s kind of how we’re looking at the supplemental benefits for particular plans that we’re negotiating with.

Parker Snure: All right, thanks so much.

Operator: Your next question comes from the line of Gary Taylor with Cowen. Please go ahead.

Gary Taylor: Hi, good evening. I had a couple of questions, one, on the revenue that you expect to exit Medicaid, I guess we know that Medicaid revenue assuming that’s mostly in Florida, but California, New Mexico, Illinois, Puerto Rico, half of Texas and Nevada. Can you give us some sense of what the revenue annualized revenue is on that block of business that you will look to exit?

Brian Koppy: Yeah, so Illinois, you’re talking about Illinois, California, New Mexico year-to-date, maybe? I’m going to say $9 million, $10 million of revenue.

Gary Taylor: And that’s, most of that’s still fee for service. It’s not most of that isn’t capitated yet are some of this.

Brian Koppy: Some of it is yeah, it’s a small portion of it. But yeah, non-risk.

Gary Taylor: The Puerto Rico losses similar as the revenue similar on the revenue there.

Brian Koppy: Now, Puerto Rico has got a pretty decent revenues relative if we’ve been in that market for a while, we said, what, 8000 members a year up to $35 million, $40 million revenue year-to-date.

Gary Taylor: Okay. And then on the MRA revenue of 50, is that 44 is out of period. Some of that’s ‘22, some of that’s first quarter of ‘23. Do you have that hand like what it was for first quarter of ‘23 for just trying to somehow build to like a normalized first half of ‘23?

Brian Koppy: I’m trying to, I would say the way you think about it is kind of, $14 million, a quarter or so is a way it kind of normalizes out from that perspective.

Gary Taylor: And the 44 million have procured expense development negative is that truly key ideas and prior year? Related ‘22, are some of that also related to the first quarter?

Brian Koppy: Yeah, the significant majority, almost all of its related to first quarter.

Gary Taylor: First quarter, okay. And then last one.

Brian Koppy: Sorry. I’m sorry, Gary, I just — I don’t mean to cut you off. Just want to — like I said, we talked about 18 of that is flex cards. So, that’s all first quarter, and then the balance of 26 of that 44. And most of that is still first quarter as well.

Gary Taylor: And then last one, I saw the EBITDA adds back 52 million reserved for other assets. I’m wondering is that writing down that MSP receivable or what is that?

Brian Koppy: Yeah, yeah. Okay, I was going to look to see what you’re looking at. But yes, you’ll see that as a call out the line that we call out.

Gary Taylor: So, it’s written down to zero, apparently.

Brian Koppy: That’s correct, you think about — I think you’re very familiar with the MSP, but as we looked at, it’s been a number of unfavorable developments related to MSP since our last earnings call. We did a complete review of that. And, we used a third-party specialist to review that valuation and decided to write that down.

Gary Taylor: Okay, thank you.

Brian Koppy: Thanks, Gary.

Operator: Your next question comes from the line of Jessica Tassan with Piper Sandler. Please go ahead.

Jessica Tassan: Hi, thank you guys for the detail. And thanks for the question. So, I just — I think, Brian, you suggested that you guys expect about $100 million of total 2023 claims expenses related to the OTC Guards. I just want to make sure that we got that that correctly? And then that implies like about $500 of expense for every single capitated MA member? Is that accurate?

Brian Koppy: Yeah, I think we — I was, I think I said around $84 million is the full year impact. And it varies. It varies by plan, I’d have to — but some plans are 500, some are 250, some are 350. So, it does, so if I take your 100 down 84, you’re going to get below 500? Probably on average. So, it’s a very rich benefit for sure.

Jessica Tassan: Okay, got it. And then I guess I was — the way I understood it was 84 million of incremental expense in 2023. But that is 84 million total expense and ‘23 related to these benefits?

Brian Koppy: Okay, so yeah. So, if you’re looking for the, yeah, that’s right. The incremental was that let me just make sure. But yeah, if you look at the expectations for 2023, you’re going to be worth $33 million a quarter. So, yeah.

Jessica Tassan: Okay, so the 84 is incremental or total?

Brian Koppy: Incremental? Yeah. For me, versus what we thought in 2022. If we — the 2022 was about 12 million a quarter now we’re up to $33 million a quarter.

Jessica Tassan: Got it? Very helpful. Okay, great. So that’s, got it. That’s pretty helpful. So, then, just in terms of two more in terms of the MSP recovery, is that your primary vendor stop loss insurance? And then I guess just given the write down year-to-date, is there any change in the terms or extent of your stop loss coverage and ‘23 be relative to 2022?

Brian Koppy: Yeah, no, just to be clear, I need to be super clear, they are nothing to do with our stop loss at all. They’re just third, they traditionally handled third party recoveries related to other types of benefits that you may have. If there’s an accident, whether it’s workers comp or some other benefits, it’s completely separate from our stop loss.

Jessica Tassan: Got it? And so then was that 40 million in 2022, related to medical costs? Or was that below the gross margin line?

Brian Koppy: I just want to make sure we answer properly, what you refer —

Jessica Tassan: Was just the expense benefit related to MSP? Did that hit at the medical claims expense line? Or was that below the gross profit?

Brian Koppy: Yeah, it was the medical expense line.

Jessica Tassan: Got it? And then just last question is, what do you attribute the kind of inability to scale in California, New Mexico, Illinois, and Puerto Rico? And just what makes you all confident that you can consolidate in Nevada and Texas and still succeed in those markets? And thanks, I appreciate the questions.

Brian Koppy: Yeah, no, Thanks, Jess. I would say it’s not a function of, we don’t believe we can scale in those markets. It’s a determination as to our – I’ll call it our financial liquidity position, that we don’t have the luxury of waiting for those centers in those markets to fully mature. And we had to make the difficult decision to exit those markets now, before they can fully mature. So, that’s the way I would view it. And that’s — so now I’ll get to the second half of your question, which was what are we doing in Texas, Nevada? Well, all we’re doing in Texas, Nevada is consolidating to enhance the profitability of that market to ramp faster, because we do believe they’re on the right trajectory, we’re just going to give them a boost and reduce the cost structure since consolidate the membership into the or cause the highest return centers that we have there, which will then get more members in those centers and that J-curve will significantly ramp.

Jessica Tassan: Got it. Thanks again.

Brian Koppy: Thanks.

Operator: Ladies and gentlemen, that will conclude today’s conference call. We thank you all for joining. And you may now disconnect.