Privia Health Group, Inc. (NASDAQ:PRVA) Q3 2023 Earnings Call Transcript

Privia Health Group, Inc. (NASDAQ:PRVA) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Good day, and thank you for standing by. Welcome to the Privia Health Third Quarter Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Robert Borchert, SVP, Investor and Corporate Communications. Please go ahead.

Robert Borchert: Thank you, Gigi, and good morning, everyone. Joining me today are Parth Mehrotra, our Chief Executive Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast can be accessed from the Investor Relations section of priviahealth.com. Today’s financial press release and slide presentation are posted on the Investor Relations pages of priviahealth.com. Following our prepared remarks, we will open the line for questions. And we ask that you please limit yourself to one question only and return to the queue if you have a follow-up, so we can get to as many questions as possible. The financial results reported today and in the press release are preliminary and are not final until our Form 10-Q for the third quarter 9 months ended September 30, 2023, is filed with the Securities and Exchange Commission.

Some of the statements we will make today are forward-looking in nature based on our current expectations and view of our business as of August 3, 2023. Such statements, including those related to our future financial and operating performance and future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered along with the cautionary statements in today’s press release and the risk factors described in our company’s most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. Reconciliation of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website.

Now I’ll turn the call over to Parth.

Parth Mehrotra: Thank you, Robert, and good morning, everyone. Privia Health delivered another solid performance in the third quarter as we continue to execute on multiple fronts to extend our market reach and drive future growth. This morning, I’ll provide an overview of key business highlights, then David will discuss our MSSP and recent financial performance and our 2023 guidance outlook before we take your questions. As we build one of the largest ambulatory provider network in the nation and positively impact care delivery, the Privia Health operating model continues to gain market share with providers. We experienced solid new care center and same-store provider additions as we increased our provider density in existing states.

We added 235 implemented providers in the quarter and a record 499 implemented providers through the first nine months of 2023, which highlights our momentum. In addition, our year-to-date gross provider attrition in 2023 remains near the lowest in our company’s history. These factors helped drive practice collections growth of more than 18%. Adjusted EBITDA was up 20% in Q3 versus the same quarter a year ago as we continue to scale our operating model in existing states, while increasing our number of providers and investing in new states. Today, we announced our entry into the state of South Carolina. We are partnering with Greenville ENT and Allergy Associates as our anchor partner in launching Privia Medical Group, South Carolina. We expect the Specialty group practice with approximately 20 providers to be implemented on the Previa platform in the first half of 2024.

South Carolina is the sixth new state we’ve entered over the past 12 months, and we are excited about our significant progress in expanding our national presence. In addition, as you can see from our financial performance, we are absorbing all new market entry costs while delivering year-over-year EBITDA and free cash flow growth at the mid-to-high end of our original guidance. We continue to expand Privia€™s national footprint, which now includes more than 4,100 implemented providers in our medical groups caring for over 4.7 million patients. Our more than 1,000 care center locations span across 14 states and the District of Columbia. We remain focused on building one of the largest multi-specialty medical groups and ambulatory care delivery network in the country.

And our scale and diverse provider and payer partnerships are true differentiators. Privia serves approximately 1.1 million attributed lives across more than 100 at-risk payer contracts in commercial and government programs. Total attributed lives increased more than 29% from a year ago. This positions our business as one of the broadest, most balanced and diversified value-based care platforms in the industry. The diversity of our value-based book of business is core to the strength of our operating model. Our commercial attributed lives increased 35% from a year ago to $675,000. Across our commercial, Medicare Advantage and Medicaid value-based contracts, we own care management fees as well as incremental shared savings in addition to fee-for-service reimbursement.

We offer a highly differentiated value proposition to payers to drive better patient outcomes and lower costs. This generates financial benefits for providers, payers and Privia across a broad population. As we noted last quarter, there remains a significant embedded opportunity for us to move our Medicare Advantage lives into upside and downside risk arrangements over the next few years. We remain focused on thoughtfully moving to increased risk arrangements while continuing to provide significant opportunities for EBITDA and free cash flow growth. Our strong overall performance could not be accomplished without the strength of our 4,000-plus physician and provider partners as well as the hard work and dedication of all Privia employees. Now I’ll ask David to review our 2022 MSSB performance, recent financial results and 2023 outlook.

David Mountcastle: Thank you, Parth. We continue to see solid performance across our value-based care book, including our success in the Medicare shared savings program in the 2022 performance year. The results publicly released in late August show that across our seven ACOs, we lowered utilization and cost significantly below that of our peer ACOs. This performance was even better when compared to fee-for-service Medicare. We generated total shared savings of almost $132 million, up 32% from a year earlier. We operate one of the country’s largest ACOs in the Mid-Atlantic region, carrying for about 61,000 patients in the MSSP enhanced track. We delivered savings of 10%, which for the second year in a row with the highest savings rate of all ACOs with greater than 40,000 attributed lives.

With 77% of total MSSP lives and downside risk in 2022, Privia Health is well positioned to expand further into and succeed in value-based care arrangements across the risk spectrum. For the 2022 performance year, we have 10 ACOs in MSSP with 7 in the enhanced track. During the 2022 performance year for MSSP, Privia Health’s ACOs managed over $1.8 billion in medical spend. However, we only recognized our share of the gross shared savings and practice collections and GAAP revenue, which was approximately $91 million. This performance clearly demonstrates our success in transitioning to value-based and downside risk contracts over time as we generate increased profitability. Privia Health’s operational execution continued to deliver strong financial results in the third quarter of 2023.

Our implemented provider count was 4,105 up 14.2% year-over-year. New implemented providers and strong ambulatory utilization trends led to practice collections increasing 18.2% from Q3 a year ago to reach $723.5 million. Adjusted EBITDA was up 20% over Q3 last year to $18.8 million, highlighting our ability to continue to generate operating leverage as we expand and grow in existing and new markets. For the first 9 months of 2023, practice collections increased 16.4% from a year ago to almost $2.1 billion. Care margin was up 18.7% and adjusted EBITDA grew 18% to reach $55 million. Our business profile continues to show very strong cash generation, coupled with no debt and pro forma cash balance of approximately $371 million. As noted in the table on this slide, we received $91.2 million in cash from CMS in October as payment for Privia Health’s portion of shared savings generated in the 2022 performance year of MSSP.

As you may recall, we received the CMS payment in fourth quarter last year as well. We then share approximately 60% with our providers for their participation and success in MSSP, leaving net cash of approximately $40.7 million to Privia. Our year-to-date free cash flow was $57.3 million, pro forma for the net cash received from CMS. Our updated 2023 guidance highlights the strength and resiliency of our operating model and diversified book of business. We are raising our guidance for implemented providers and platform contribution to above the high end of our initial ranges and maintaining our previous updated guidance for the other metrics as communicated in our Q2 report. Our year-to-date performance gives us a very high level of confidence to achieve our updated guidance and close the year strong.

Our robust financial and operating model is enabling us to deliver EBITDA and free cash flow growth while absorbing approximately $10 million in new market entry and expansion costs in 2023. We expect our new markets to scale significantly in the coming years as we grow our provider base and attributed lives in these new states while delivering proven unit economics similar to our more mature markets. We continue to expect 80% to 90% of our adjusted EBITDA to convert to free cash flow this year, given our capital efficient partnership model and annual capital expenditures of less than $1 million. We remain focused on building Privia Health into one of the largest ambulatory care delivery networks in the nation, and we look forward to continuing to serve our physicians, providers and health system partners and their patients.

Operator, we are now ready to take your questions.

Operator: [Operator Instructions] Our first question comes from the line of Joshua Raskin, from Nephron Research.

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Q&A Session

Joshua Raskin: I guess starting with just what is the upside of the implemented providers coming from? I’m just curious if that’s more in some of these new markets that you’ve been building out or in some of the older networks and the density, I think that Parth spoke to. And then conversely, I guess the other question would be, are you seeing more competition for providers? I’m thinking specifically for sort of big health system opportunities.

Parth Mehrotra: So it’s a combination, as we had noted in our prepared remarks, we’ve had a record implemented providers in the first nine months, and that’s reflective of very strong sales, and that happens with a five month lag. We’re seeing very good increase in density in the existing states. And then we’ve obviously added 6 new states as we noted. So it’s really very broad-based, which is really good to see. I think our model is gaining a lot of traction. It’s a very proven model with unit economics proven, and everybody we speak to understands what they are partnering with Privia for. So I don’t think we’ve seen an increase or decrease in competition that we did last year or the year before. A lot of the participants have been around for a while. So I just think we’re gaining a lot of traction and momentum and a lot of new sales are coming from referrals from our existing physicians, which just speaks to the strength of the model, that’s what you’d like to see.

Operator: Our next question comes from the line of Elizabeth Anderson, from Evercore ISI.

Elizabeth Anderson: Can you talk about a little bit more detail on the MSSP accrual? I think there’s some continued out there in the market that perhaps sort of missed expectations. So just kind of explain to us like I know you provided the math, which was helpful. How you kind of think about that? How you think about the accruals there versus performance? And anything else you could say on that would be helpful.

David Mountcastle: Our methodology is fairly consistent as we’ve noted in prior quarters on the earnings call. We get data from CMS on a quarterly basis. We are updating both the prior year accruals as well as the current year based on that data. So at this point of the year, with 2022 results finally trued up and the payment received is obviously nothing in the accruals from a ’22 perspective, that’s not reflected. And then our 23 accruals reflect all the data we received so far. So we update that every quarter. Our guidance reflects those updated estimates. So I’m not sure what we are referring to from a market expectations perspective, but our methodology has been fairly consistent, and that’s reflected in our guidance.

Elizabeth Anderson: Maybe I know it’s early, but when you look out because obviously, we have to pull these thoughts together and think about 24 at this early date. Any thoughts on puts and takes or things we should keep in mind, even if you’re not ready to give specific guidance, but generally, as we think about the year ahead.

Parth Mehrotra: Look, it’s fairly consistent from past years. We’ll guide 24 when we issue what Q4 results early next year. The puts and takes are pretty much similar to what you’d expect. You’re seeing very strong provider additions this year. That’s the number 1 factor. You’re seeing attributed lives grow. So that impacts our value-based book. Obviously, we’ll update our estimates on shared savings across our very diversified value-based book of business across commercial and MSSP as we get new data. So that will be number 3. And then obviously, we’ve entered 6 new states, as we mentioned. So momentum in those states, investments in those states. I think we’ll be number as we have communicated this year, we’ve absorbed about $10 million of that cost.

You’ll expect that to continue. And then obviously, we are scaling our operating model. As you can see, the outperformance on platform contribution. The unit economics are really proven in the most mature markets. We’re able to deliver that down the P&L and into free cash flow. So I think you’ll hope to see that continue into next year. So those, I think, are the key puts and takes, and we’ll tally it all up, try to close the year strong and then issue guidance early next year.

Operator: Our next question comes from the line of Jailendra Singh, from Truist Securities.

Jailendra Singh: I actually wanted to follow up on Elizabeth’s question and let me ask that question slightly differently. So shared savings figure was down $19 million sequentially. I understand it includes MSSP results. Did you have any true-up related to that program in the quarter? And more important, there’s a lot of focus on your non MSSP savings in that item as well? Maybe spend some time like what key business out there? And how have been trends in those businesses?

David Mountcastle: Yes, in any typical year, we definitely have a lot of our true-ups, I’ll say, in Q2 and Q3 of every year from the prior year. And so I think what you’re seeing there is just some, I would say, normal variability that we see from on a quarter-over-quarter basis. We really take an annual and would probably say you really want to look at sort of a 12-month view of this. on a 12-month rolling basis. And on a 12-month rolling basis, you’ll see that we’re up pretty significantly from last year. And again, on a go-forward basis, that’s really what we’re using to look at it. So we’re not expecting any.

Operator: Our next question comes from the line of Richard Close from Canaccord Genuity.

Richard Close: Congratulations. Just looking at the care margin, I think it was 13.1% of collections in the second quarter, ratcheted down to 12.7%, if I’m not mistaken here in 3Q. Just anything to call out on that would be helpful.

Parth Mehrotra: I think that’s just pretty minor quarter-over-quarter movement. It’s impacted by a management fee, shared savings on the value-based book, some fee-for-service trends in existing and new states. So again, nothing significant variability from our expectations. You can see from our guidance, it’s pretty much in line with what we’ve outlined at the beginning of the year. So I would just say that, that’s quarter-over-quarter variance.

Operator: Our next question comes from the line of Brian Tanquilut from Jefferies.

Brian Tanquilut: Nice work on the quarter. It’s Taji Phillips, for Brian. I wanted to ask a couple on care management fees line looked really strong in the quarter. One, are there any one-timers to call out? Or how should we be thinking about the progression of that going forward? And then two, we’ve been getting a lot of questions on commercial risk for you all. Can you just confirm where any commercial risk contracts would land? I would think it’s in shared savings, but I just want to make sure that’s not part of the contribution of that care management fee strength.