P3 Health Partners Inc. (NASDAQ:PIII) Q1 2024 Earnings Call Transcript

P3 Health Partners Inc. (NASDAQ:PIII) Q1 2024 Earnings Call Transcript May 11, 2024

P3 Health Partners Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the P3 Health Partners’ First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this event is being recorded. I would like now to turn the conference over to your host, Mr. Ryan Halsted. You may begin.

Ryan Halsted: Thank you, operator and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements being made during this call are forward-looking statements under the U.S. Federal Securities laws, including statements regarding our financial outlook and long-term target. These forward-looking statements are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.

Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward-looking statements made during this call speak only as of the date hereof and the company undertakes no obligation to update or revise these forward-looking statements. We will refer to certain non-GAAP financial measures on this call, including adjusted operating expense, adjusted EBITDA, adjusted EBITDA per member per month, medical margin, medical margin per member per month, medical margin per member per month for persistent lives and cash used. These non-GAAP financial measures are in addition to and not a substitute or superior to the measures of financial performance prepared in accordance with GAAP.

There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Information presented on this call is contained in the press release that we issued today and in our SEC filings, which may be accessed from the Investors page of the P3 Health Partners website. I will now turn the call over to Dr. Abdou, CEO and Co-Founder of P3 Health.

Sherif Abdou: Thank you, Ryan. Good afternoon and welcome everyone, to our first quarter 2024 earnings conference call. I am joined today by Eric, Amir, Bill, and Atul. We would like to begin by providing an update on the tremendous progress made in the first quarter. We just reported a strong Q1, which exceeded our internal expectation on our top line, but fell short on our adjusted EBITDA target. Overall, we are quite pleased with the start of the year, and therefore, we’re reaffirming our previous full year guidance of positive $20 million to positive $40 million of adjusted EBITDA for the year. Starting with the top line. Our revenue for the first quarter of 2024 grew approximately 29% year-over-year, supported by a strong pipeline.

As we previously indicated, our per member per month funding was up approximately 8% year-over-year despite the headwinds of substantial membership growth along with the V28 and V24 changes and the benchmark reduction. Our Medicare lives have grown to approximately 126,800 lives or 23% growth year-over-year, which really exceeds the low end of our guidance range for the full year. This includes approximately 11,000 ACO REACH lives, up from 7,400 at the end of last year. As we said before, our percentage of persistent lives is a key driver of our pathway to profitability in 2024. I’m pleased to report on the success of our member renewal in the new year. Approximately 90% are now persistent as defined by lives from December 2023 that remained with us in January 2024, up from 86% last year.

To-date, we have launched in six new counties, adding 8,000 to 10,000 new lives with an existing payer partner, expanding our total number of counties served to 27. Operating expenses improved to $26.2 million versus $35.6 million during the first quarter of 2023, representing a 26% year-over-year decrease and robust operational efficiencies. Our medical expense in the quarter were approximately 12% lower sequentially, which reflects our view of a normalizing utilization trend consistent with the commentary we made on our last quarter call. While we agree with the principle of conservatism in the current environment, we also believe that we are over conservative to the tune between $20 to $30 PMPM based on the actual claims run out we’ve experienced year-to-date for 2023 data service.

Atul will go into much more detail, but we will continue to work with our actuarial auditor to align our reserve with actual paid claims. With that as a context, our adjusted EBITDA was a loss of $19.8 million, roughly flat to the first quarter of 2023. On a PMPM basis, we were approximately $86 better than Q4 of last year and approximately $11 better than the first quarter of 2023. Lastly, we are thrilled to announce our strategic partnership with Innovaccer to leverage their advanced AI platform. Through this partnership, we will advance P3 in the areas of predictive modeling, accelerate quality, gap closure and provide our clinician with actionable data at the point of care. With that, I’d like to turn it over to our CFO, Atul Kavthekar.

Atul Kavthekar: Thanks Sherif. I will start today by discussing our recent quarter and how we are progressing towards our full year guidance. Then I’ll provide updates on our liquidity position at the end of the quarter. Top line results for the first quarter were in line with our expectations with capitated revenue of $384 million and total revenue of $388 million, both representing growth of 29% compared to the prior year. In the first quarter, our medical margin was $36.6 million or $96 on a PMPM basis. There are two noteworthy factors that impacted our medical margin in the quarter. The first is the general approach of conservatism around our IBNR and medical expense accruals. As an example, as we look back at last year’s activity with the benefit of having time for the claims from that period to present themselves, we have confirmed what we suggested at that time and now estimate that we had a cushion at that time of between $20 to $30 on a PMPM basis.

We will continue to work with our actuaries over the next few quarters to observe the actual paid claims experience in 2024. Specifically, we will work to reevaluate our reserve estimates in light of the easing of utilization over the first quarter of 2024, around which Dr. Bacchus will provide further details. Over the next few quarters, depending on our data collected, it may be appropriate to favorably adjust our reserve. The second item worth mentioning is the impact of a timing difference related to our Part D exposure. Essentially, we recognized the full expense in the quarter, but we do not recognize any credit for the rebates until subsequent quarters when these amounts are typically provided by the health plan. The impact of this in the quarter is approximately $8 million.

As it relates to operating expense trends, our corporate, general and administrative expenses decreased from over 12% of revenue in the first quarter of 2023 down to just below 7% in the current quarter. This is a sequential improvement from 8% of revenue from the fourth quarter of last year and consistent with our guidance for high single-digits. We remain committed to continually improving our operating efficiency and continue to monitor spending. Adjusted EBITDA for the quarter was a loss of $19.8 million compared to a loss of $19.1 million in the first quarter of 2023. On a per member per month basis, adjusted EBITDA was a loss of $52, an improvement of $11 PMPM compared to the first quarter of 2023 as we successfully improved margins and lowered costs on a per member basis.

We anticipate showing improvements as benefits from medical cost reductions, operational efficiencies and potential positive true-ups flow throughout the year. These will create a contour rather than a straight line spread of results. Our net loss in the first quarter of 2024 improved by 5.7% compared to the same period in the prior year, in part due to the improvement in corporate and general expenses. For the remainder of the year, we expect these expenses to continue to taper. As for liquidity, we ended the quarter with approximately $32 million in cash. Additionally, at the start of the second quarter, we received approximately $15 million in regular cash capitated premiums and an additional $15 million of capital on our new note. To that end, we are reaffirming our full year 2024 guidance.

We still expect MA members to be between 125,000 and 135,000 and remain confident that our 2024 revenue will be between $1.45 billion and $1.55 billion. Medical margin will range between $230 million and $250 million representing $165 and $175 on a PMPM basis. And finally, adjusted EBITDA ranging from plus $20 million to plus $40 million. We’re confident in our ability to achieve our EBITDA guidance for multiple reasons. First, we have the potential of a significant reserve release with our 2023 actual claims almost complete and showing strong improvement from previously booked expenses. Second, we started the year with strong membership growth, increased persistency and overall increased funding. Third, we expect an increase in our accrual of sweeps this year.

And finally, our daily key indicators point to utilization being more on par and even below what we saw in 2023. And with that, I’ll turn it over to Dr. Bacchus.

Amir Bacchus: Thanks Atul. In our last earnings call, I stated that we had early indications of decreased medical expenses from December 2023 to January 2024. Now that, that data is more mature, I can indeed report that December 2023 to quarter one 2024 continues to show a downward trend in utilization. For admits per 1,000, we saw a decrease of 2%. For emergency department visits per 1,000, they decreased by 6%. In addition, despite the two-midnight rule change, we continue to see improvement in our observation — 1,000 rate to the tune of a decrease of 10%. During the first quarter, medical expense was $918 PMPM, improving from $1,042 sequentially, a 12% decrease. In addition, P3 has continued to bend the cost curve for high-risk members by accurately projecting and implementing appropriate care plans without incurring additional costs.

We continue to proactively manage utilization for cost avoidance as well as conduct concurrent claims reviews for recoveries where we are delegated. Our effectiveness in high-risk populations has been a key driver in P3’s ability to effectively manage medical cost trends. Our care model continues to be effective in reducing costs, working in tandem with our high-risk population through an improved focus on [Indiscernible] and hospice care, increased enrollment into the COPD program and continued provider and patient engagement. We remain focused on improving utilization management to reduce unnecessary utilization and wasteful spending while improving the patient experience. Lastly, as Sherif mentioned, we’re excited to have partnered with Innovaccer to ignite our AI and data capabilities.

We will use InNote, Innovaccer’s EHR-agnostic physician engagement solution, to seamlessly close coding and care gap and use the company’s population health analytics suite to achieve quality and cost goals, and we will use Innovaccer’s patient engagement solution to drive omnichannel patient outreach to improve the patient experience. Thank you. And with that, back to you, Sherif.

Sherif Abdou: Operator, let me make some closing comments, and then I’ll turn it over to Aric. Today, we reaffirmed our 2024 guidance across all our metrics and shared with you that our membership was up 23%, our revenue was up 29%, our OpEx was down 26%, and our funding per member per month was up 8%. And despite that the EBITDA is lower than expectations, we shared with you information to affirm and give confidence to myself and the team that we will achieve the targeted EBITDA positive for 2024. With that, I would like to reiterate that now is the right time for P3 to transition to our new CEO, Aric Coffman. I believe he is a perfect fit to guide P3 through the exciting new chapter. As I reflect on how far our company has come since inception, I am thrilled to welcome Aric to the team.

I am filled with a deep sense of confidence that P3 is on a sound footing and poised for continuous success. So, let me answer three questions is, why now? Why Aric? And how we’re going to do the transition? As I mentioned to you, as myself and the company mature from founding to operating to growing, it’s time to put a fresh leadership. It’s well known that transition of founder into new CEOs and operators is a great, important step in any growing organization. And I believe it is important for us to bring in fresh blood and fresh set of eyes and skill set to continue to lead P3 under the same mission, vision, and value that we’ve built it on. Second is, why Aric? So, I believe for me, I know, Aric, over 10 years, 2014, I think, or 2013, the first time we met, and we worked together in HealthCare Partners with DaVita, and I continue to stay in touch with him through the last 10, 12 years.

And two years ago, Aric and I met had lunch in the [Indiscernible] area. And I’ve introduced the idea to him to become the successor to myself in P3 and since then, we’ve been working on them, finally came to the conclusion yesterday to make that decision. So, I believe that Aric is the right leader for the next phase — chapter for P3. And like I said, check all the box, doctors, great leader, great brand and great experience and value base. Finally is, how we’re going to do this transition? I’m going to be staying on as an adviser. I’m going to work very closely with Aric throughout the transition period. And I’ll be always available for any question or any support that anybody needed throughout that transition period. And I’m going to remain on the Board to work with the Board of Director as well to continue to enhance the value creation in P3.

With that, I’m going to turn it over to Aric.

Aric Coffman: Thanks Sherif. Let me start by saying how excited I am to join P3 and how impressed I am with the capabilities and trajectory. As it was mentioned, I met both Sherif and Amir many years ago while serving as a Medical Director and a practicing surgeon at a predecessor company to HealthCare Partners. They were early pioneers of value-based care, and we spent time together while at HealthCare Partners. I’ve learned a lot from them, and we’ll continue to do so as the CEO of P3. Following my initial time at HealthCare Partners as we transitioned to DaVita Medical Group, I then served as CEO of the Everett Clinic and Northwest Physicians Network in Washington State. While there, I worked closely with Bill Bettermann, who served as my COO.

We both stayed for a few years after the acquisition by Optum. These experiences, along with my most recent role as CEO of Honest Medical Group, help me develop the necessary skills in transforming care delivery from fee-for-service to value-based care. As we are all aware, our health care system continues to have significant pressures. We have an aging population, a shortage of PCPs and high rates of physician burnout. We need scalable solutions that engage clinicians and patients to bend the cost curve while providing high-quality care. The P3 model of physician-led, scalable, capital-light value-based care platform is a clear advantage, along with the delegated functions, including claims and utilization management. P3 has demonstrated the ability to lower health care costs through physician and patient engagement in a growing market with significant white space.

We will create depth in our existing practices by adding Medicare Advantage and Medicare ACO REACH membership to capture more mind share of providers we serve. P3 is also at an inflection point of achieving profitability, which will fuel our future growth. We look forward to expanding our footprint to capitalize on a tremendous opportunity. I am confident in our ability to drive long-term sustainable value for the entire health care system, our patients as well as for our stakeholders. I look forward to the opportunity to engage with many of the participants on this call over the coming months. It will be a pleasure to connect with our talented employees and associates across the organization as well. Thank you. So, with that, operator, we’re ready for Q&A.

Operator: At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Brooks O’Neil of Lake Street Capital Markets. Please go ahead.

Brooks O’Neil: Thank you very much. Good afternoon everyone and welcome Aric. It’s an interesting time to join P3. Let me start by just asking you, obviously, the company took more or less the last year a slowed growth, although 29% revenue growth is not exactly slow, but focused on existing counties, existing provider relationships, existing members. As you think about the future, is now the time to resume growing in new markets? Or do you think you need — the company needs more time to strengthen its base before beginning to look to a more aggressive growth posture again?

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Q&A Session

Aric Coffman: Hey Brooks, this is Aric Coffman. Thanks so much for the question. What I think is we have to have measured growth as we move through the rest of this year and do that in a way where our underwriting is solid and we’re clear on how we’re adding those lives into the portfolio.

Brooks O’Neil: That makes sense to me. Let me ask you this. Just listening to commentary around the industry, particularly towards the end of 2023, it was clear that many MA plans had seen significant utilization pressure that put a lot of pressure on the underlying economics of their business model. And my sense is companies like P3 — organizations like P3 have the deep experience in value-based care that’s so in-demand in the Medicare marketplace today. Is that your sense? Are you getting significant outreach from MA plans with which you guys work to suggest that there’s a huge opportunity for you to expand and bring the knowledge and experience you have to markets beyond where you currently serve?

Amir Bacchus: Yes, Brooks. Hey, this is Amir. How are you? Absolutely. From what we see, the MCOs and Medicare Advantage plans, et cetera, continue to look for that solution in multiple different areas. And as Aric said, we want to make sure we’re growing smartly, right? And we will continue to do that. But the interest is very, very high in multiple areas in multiple states. So, as we continue to prove the model that the model really truly works and create the EBITDA that we want to create that we’ve said we will obtain this year. Not only driving more and deeper into the practices we are in because of also ACO REACH, then we’ll be more apt instead of just going deeper in that the counties we’re in, but to look and spread to potentially other counties outside of the states that we’re in today.

Brooks O’Neil: Great. That makes total sense. Let me just ask one final one for, Atul. I’m not sure, Atul, that I understood exactly what you were saying with regard to the $8 million credit. Would you mind helping me understand — helping us understand that just a little bit better?

Atul Kavthekar: Yes. Yes, Brooks, thanks for the question. The — it’s really pretty straightforward. We expense the costs associated with the drugs in the current quarter as they are incurred. The revenue that offsets that, i.e., the rebates are given to us and administered at the end of the year when we receive all that information from the health plans. So, it’s similar to last year, as you recall, there was a little bit more of a timing difference in the way we recognize sweeps, and we changed that. That hasn’t happened yet for the rebates. Now, that’s something we’ll work on over the course of the year, but it’s really as simple as that.

Brooks O’Neil: Okay, thank you very much.

Operator: The next question comes from Josh Raskin of Nephron Research. Please go ahead.

Josh Raskin: Thanks. I’ll start with congrats to Sherif on all the success so far and building of the company and founding really, really impressive. And I’ll welcome Aric as well, good to hear your voice as well. My question is on the revenues. I think you said PMPMs were up sort of 8%. I’m calculating something a couple of basis points lower than that. So, I’m just curious if that was sort of in line with expectations. And then I know you’ve talked about sort of having less risk than others around the impact of V28. But do you have a view on what the impact was this early in the year? Do you have to wait for the MA plans to kind of give you data or better sense on your membership risk?

Aric Coffman: Well, it will evolve over the year, as you know. But I think, look, it’s generally in line with what we expected, potentially a little bit better than what we expected. So, we’re very pleased to see that it came out that way, at least that’s certainly what the documentation and the files are saying now. But we’ll monitor it. And as far as any kind of — if you’re going up with a different calculation, we can certainly work that offline and get you where we are.

Sherif Abdou: Yes and Josh, this is Sherif. Thank you very much for your kind words. And we expected, if you remember last time, we said that in the middle single-digits, and if you look at the RAV accrual, it’s about the middle — the single-digit. The rest of it is benchmark improvement. So, it came right or a little bit better than we expected. The entire is 8%. Some of it is benchmarked, but the RAV accrual is about half to 5% from the 8%. And we still, like we said, our overall RAV is still about 1.046. So, we still have a cushion and a runway to continue to improve before we see a real impact of the V28.

Josh Raskin: Got you. And then second question, just on discussions with your MA plan partners as you think about 2025. Your MLR in the first quarter is still over 100%. They know it will get down by the end of the year. But what sort of changes are you looking for, for 2025? Is there — are you guys looking for a higher percentage of premium? Are there certain benefits that you’re looking to carve out? I’m just curious sort of as you go into those negotiations in front of bids due next month, how are you thinking about what you’re looking for?

Sherif Abdou: Yes. So, absolutely. It’s a great point, Josh. We’re in serious conversation by modifying our exposure to the ancillary services or the benefits in excess of the medical benefits and also talking about the renegotiating or eliminating the pass-through from the health plans. And we find actually receptivity and definitely considering moderating the benefits or flattening or even decreasing it to the point where the exposure on the medical cost becomes better. But you said that the MCR is over 100. We looked at it, including the network expense, we’re right around 90.5% for the first quarter. Am I calculating it right?

Josh Raskin: Yes. Got you. Just the last one, I guess, on just the reserve methodology. I heard you talk about sort of this conservatism that may play out as you sort of pay final claim for 2023 and what you’ve done with the run out, there’s a chance that reserves developed favorably. Are you reserving 1Q reserves in sort of the same methodology? Are we getting sort of conservatism-on-conservatism? Is your view that you’ve got the same level of wiggle room, the same methodology in your 2024 accrual?

Atul Kavthekar: Yes, it’s a great–

Sherif Abdou: Yes. So, let me just address the methodology change, and then I’ll pass it on to Atul. Up until the second quarter of last year, we had calculated IBNR according to the triangle period. There was no additional cushion. And after that, we started adding 9% to 7.5%. So, we take the claims paid, we calculate the triangle, then we add 9%. And that is what we’re — that 9% or 7.5% is what we call cushion, Josh. Atul?