Parth Mehrotra: Thanks for the question, Jess. So on the first part, look, I mean, we restructured the contracts effectively to preserve the EBITDA and earnings power for both our doctors and us. And so that’s reflected in underlying benchmark expense, what our MLR targets were and then how we got paid and so forth and how we share the risk with the payer downstream. So the payer has some skin in the game. So again, it was pretty much as expected, and there was a reason we did that so that you can see, I mean, at the midpoint of our guidance, we’re still trying to grow EBITDA over 20%. And in this environment, I think, hopefully, that’s just very differentiating both for our physicians to keep – preserve that earnings power and then for our shareholders.
So I think we feel pretty good across both the MA book, and then the commercial book is a basket of different contracts. We are managing close to 700,000 lives in commercial, which is a pretty big pool. And I think, again, the care management fees and you can see the trend of growing care management fees every quarter, that’s becoming a pretty big part of our care margin and our EBITDA profile. And that’s a very stable part because you’re getting PMPMs. So I think that’s on top of the fee-for-service reimbursement. And that, again, speaks to our ability to work with the payers, get paid for the work we do downstream and acts as a hedge to prevent or to mitigate some of the volatility we see in the MA book. So overall, we feel pretty good across all lines of business.
Operator: And our next question will be coming from Ryan Daniels of William Blair.
Ryan Daniels: Hi guys, thanks for taking the question. I’m curious if you can dig a little bit deeper into the pipeline. I know we’ve already talked a lot about this, but a clean quarter, so maybe it makes sense to focus on the future. And my question is specific to the provider market. We continue to hear about health systems remaining under pressure. They’ve done a lot of physician group acquisitions that haven’t worked out. And I’m curious if you’ve seen any change in the volume of pipeline, specifically as it relates to health systems or larger groups. Thanks.
Parth Mehrotra: Yes. Thanks for the question, Ryan. So we continue to have a lot of good dialogue across the spectrum. Obviously, the small practices with our sales team, bigger new market entries with big anchor groups, which could be independent medical groups but much bigger in size, 100, 200, 300 providers and then obviously, big health systems. I think every time there’s some disruption, and it takes time for these to simmer and strategic objectives being redefined, if you will, by senior management teams of these organizations. Our hope is that we now have a very good track record for the past nine or 10 years and then specifically since we’ve gone public with a lot of publicly available data that we are hopefully one of the partners of choice that they reach out to.
And our BD teams has their hands full, and they’re doing a great job reaching out. It just depends on the nature of the deal and discussion specifically with health systems. You need a lot of alignment. There’s a lot of discussion around how core the employed group is? There have been many reports written about subsidization of physician compensation and so forth by health systems. And I think it’s really a health system by health system discussion and the objectives of the senior management team and how strategically we could fit into a long-term relationship with them. When we enter a state, this is not a – we don’t act like a vendor or a technology partner just selling one particular product. This is a way of doing business, and we are in extension of their physician alignment strategy for, hopefully, decades to come.
So it’s a very strategic relationship, and so that just takes time. But we feel pretty good about our positioning and continue to have a pretty good dialogue.
Operator: And our next question will be coming from Whit Mayo of Leerink Partners.
Whit Mayo: Hey, thanks. Good morning. Parth, can you just maybe unpack the growth in attributed lives that was up 10%, probably places you at the upper end or above the guide? How much of this is organic or new panels? And when I look at the growth rate of the attributed lives, it’s growing less than the provider growth. And last year, it was growing kind of twice the rate of the provider growth. Maybe this is just lapping the Delaware ACO deal from last year. So just trying to understand this dynamic. Thanks.
Parth Mehrotra: Thanks for the question, Whit. So there are two or three factors. Number one, we entered Connecticut last year, as you remember. So that was an acquisition of a pretty big IPA in Connecticut. And so we got close to 185,000 lives. So that obviously distorts some of the year-over-year comp. As you noted, we exited Delaware. So obviously, that gets out of the equation. So I think that also impacts year-over-year comp. And then the rest of the growth is pretty much organic, same-store and then new practices that join us in each market. We are building multi-specialty groups. So provider additions include specialists in addition to primary care or OBGYNs or pediatricians. So attributed lives are obviously only linked to primary care, but it’s a pretty good mix.
And obviously, our focus is to double down on primary care. We’re trying to consciously build primary care-centric delivery networks where we get attributed lives and then we can take that network to – downstream to the payers, as we just talked about. So – but those are the puts and takes as to the movement year-over-year.
Whit Mayo: Can you just remind me the number of lives in the Delaware ACO, just so that we can reconcile the percentage headwind?
Parth Mehrotra: Yes, approximately 12,000.
Whit Mayo: Okay.
Operator: And our next question will be coming from Jailendra Singh of Truist. Your line is open.
Jailendra Singh: Thank you. This is Jailendra Singh from Truist. So you called out solid ambulatory trends in the quarter. Any particular specialty or payer categories you would call out? Any quantification or directional color there would be helpful. And a quick clarification question. Did you share anything on the unfavorable PYD in the quarter? I know it was pretty small.
Parth Mehrotra: Yes. Thanks, Jailendra. So it was pretty broad-based in terms of utilization. So really no specific specialty or payer to call out. We’re pretty diverse across 13 states. So I think it was pretty broad across the board as you’re hearing from everybody else, too. And yes, I don’t think there was any major PYD to call out. We’ve pretty much gotten all data from – on 2023 now, and so that’s all reflected in our accruals in our results. So we feel pretty good about the estimates we made, what we accrued for and the actual results so far have been reflected based on all the data we’ve gotten for 2023.
Operator: And our next question will be coming from Daniel Grosslight of Citi. Your line is open.
Daniel Grosslight: Hey, it’s Daniel Grosslight with Citi. Thanks for taking the question here. I want to go back to some of the comments you made around MA and specifically around capitation as we think about 2025 and beyond. And I guess, it’s really a mechanical question for you. If you see that you get comfortable after the 25 bids that you can take risk in a more conservative way in 2025 and beyond. How quickly can you move lives back into capitated contracts? Is that a month, two months? Or is it really kind of a 2026 event that we’re looking at?
Parth Mehrotra: Yes. Appreciate the question. So two points on this. Number one, it’s usually an annual exercise. So you pretty much start January 1, and so you start having those discussions in Q3, Q4. And then secondly, and I think this is a more important point. We’ve always held a view that 100% capitation is probably not the best way to take risk downstream. We prefer deals where the payer has skin in the game, we as the intermediate entity has skin in the game and the physician performing in those deals have skin in the game. And we split our economics 60-40 with our docs. And we prefer in all instances ideally that the payer also has some skin in the game and economics. And that’s because then you don’t have any irrational factors influencing outcomes.
So I think there’s been this notion that 100% capitation is probably the best way to take – assume risk downstream, and we just don’t have that viewpoint here. So while we like to keep increasing our risk book, we actually prefer to do deals where we are not 100% capitated and assuming all the risk. So with that backdrop, as I said earlier, as the payers feel all the pressure from V28 by adjusting their bids, adjusting some of the supplemental benefits, so on and so forth, adjusting some of the new drug costs that may be hitting, ideally, we factor all that in and have a rational discussion with the payers. And in this environment, you have to be very conscious downstream that you are paid to take risk when you’re assuming more risk. And I think that’s been the policy.
As we’ve said, revenue recognition is all over the place in this particular sector even for the same life. If you’re an MSSP, you don’t recognize GAAP revenue, if you’re an ACO REACH for the same life, you recognize the entire medical spend. Depending on the level of capitation, you can recognize premium revenue or not. We actually just focus on earnings and free cash flow. Ultimately, that’s what matters. Can we generate shared savings? Are we getting paid to take risk? Are doctors taking home more pay for the work that they do? And then we’re happy to share that it with the payers of healthcare. And I think that’s probably the best contract you can enter into. So we’re going to keep seeing opportunities to do that. We have close to 170,000 lives in MA, 16-odd thousand are in capitation today.
So there’s a huge opportunity to keep increasing the level of risk, but we’ve got to be paid to do so.
Operator: And our next question will be coming from Adam Ron of Bank of America.
Adam Ron: Hey, thanks for the question. So we heard commentary from many peers in the space that the 2025 Medicare Advantage rate notice was disappointing due to lower benchmarks and growth rates or trend assumptions from CMS. And I should probably know this, but how does that actually flow into Medicare shared savings? Like do we already know the benchmarks for Medicare shared saving in 2025? And if not, what is your read on it based on the data from CMS? And how does it compare versus what you think trend would be in your expectations? Thanks.
