Hello, everyone, and welcome to the agilon health Second Quarter 2021 Earnings Conference Call. My name is Brika, and I'll be the moderator for today's event. I will now hand over to Matthew Gillmor to start. Sir Matthew, please go ahead when you're ready.

Thank you, Brika. Good morning, and welcome to our second quarter conference call. With me this morning is our CEO, Steve Sell; and our CFO, Tim Bensley. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. With that, I'll turn the call over to Steve. Steve?

Thanks, Matt. Good morning, everyone, and thank you for joining us. We're hosting today's call from Austin, Texas. Before I get to the details of our quarter, I'd like to take a minute and talk about our experience in this important market and how it demonstrates the power of what agilon has built with our physician partners. In 2018, agilon entered the Austin market in partnership with Austin Regional Clinic, the largest independent multi-specialty group, and Premier Family Physicians, the second largest independent primary care group in the region. In 3.5 years, our partnership has expanded access to top-quality care in Austin by adding physicians, increasing clinical team-based support and analytics, and opening previously closed primary care panels to new senior patients. Our Austin membership has expanded at a compounded annual rate nearly double the local growth in the Medicare Advantage program, all while dramatically improving quality and generating world-class patient experience scores. Last year, we expanded with 2 new anchor partners in East Texas that are currently in the implementation phase and will go live in 2022. Our Austin experience of local and now statewide growth in independent primary care and the resulting benefits in terms of senior patient care, quality, and access is an experience that we can see replicated further in Texas and in numerous communities and states across the country. Now, with the focus of our call, I will cover 4 areas in my prepared remarks. First, some highlights from our second quarter results; second, our collaboration and recently launching Primary Care for America; third, an update on our progress in driving growth for new markets in 2022 and 2023; and finally, I'll wrap up with some comments on Direct Contracting. Starting with a few highlights from the second quarter. We were pleased with our performance this quarter. Revenues increased 70% on a reported basis and were up 58% normalized for retroactive membership from the first quarter. Membership increased 45%, and same geography membership growth was up 17%. Our same geography growth approach is distinctive and highly efficient as it is driven by strong retention, patients within existing panels choosing Medicare Advantage or new physicians joining our anchor partners on the platform. This quarter's strong growth was amplified as investments in technology and tighter operational alignments with health plan partners accelerated the pull-through of attributed senior patients in our partner practices. We have added a record number of members to the agilon platform in 2021, and we now support more than 280,000 senior patients. This includes 33,000 members added January 1 of this year from new geographies in Hartford, Buffalo, and Toledo; 20,000 members to existing partners in our Same Geographies; more than 50,000 attributed direct contracting beneficiaries added on April 1; and finally, 49,000 Medicare Advantage members currently in implementation for January 2022. This compares to approximately 115,000 live and implementing members on the platform at the end of 2019. This incredible growth reflects the flexibility of our purpose-built platform to onboard and serve, at scale, a diverse set of groups and geographies and the demand among health care stakeholders for innovative primary care-centric delivery models. At the same time, our partners are growing their Medicare Advantage membership. We are seeing a strong trend of growth in underlying medical margin. With our Q2 results, medical margin has advanced to $100 per member per month year-to-date in 2021. This is down from last year due to COVID, which significantly depressed utilization, particularly in Q2 of 2020, but overall medical margin is up from the same year-to-date period in 2019. We have made this progress despite the temporary dilution from the new members on the platform, indicating a very strong improvement from our earlier cohort patient groups. Additionally, over the same period, we've driven substantial leverage against our platform support, resulting in improvement in our adjusted EBITDA. Turning now to the launch of Primary Care for America. In late June, we partnered with 10 leading health care organizations, including the American Academy of Family Physicians and American College of Physicians, to form this new group intent on influencing government health policy. This collaboration is focused on demonstrating the value of primary care and the need for increased investment in innovative payment models. The recent report from the National Academies of Sciences outlines primary care as the only discipline of medicine where a greater supply results in better health outcomes, along with longer life expectancy and lower costs. In the coming months, Primary Care for America will engage policymakers through a series of briefings, recommendations, and roundtable discussions. Now, let me turn to our progress on driving growth in new markets for 2022 and 2023. As we have previously discussed, the class of 2022 includes 6 physician partner groups with 49,000 Medicare Advantage members, including the 2 groups in East Texas I mentioned earlier. As a reminder, these members are on our platform but won't start generating revenue until January of next year. The class of 2022 includes a diverse set of geographies, both in terms of new and existing states as well as different levels of MA penetration and plan mix. We've made strong progress implementing these new geographies by hiring local leadership and completing the initial technology and data integration with multiple new electronic medical record and payer systems. Annual wellness visits are tracking in line with our plan, and we continue to make strong progress on contracting with new health plans in the 6 markets. With respect to the pipeline for new partners in 2023, our business development team has made great progress in the last couple of months. The pace and tempo in this work is very encouraging with signed letters of intent or advanced dialogue with multiple groups in new markets, both in existing and new states. This development work will continue through the back half of this year. And while we will share more holistic details in future calls, we remind you that implementation for signed letter of intent groups will begin in the coming months. Within the class of 2023, we are seeing higher levels of interest in operating an integrated Medicare line of business, encompassing both Medicare Advantage and Direct Contracting. And each of these groups is compelled by the opportunity to shift their senior patients to a subscription-based total care model. With the additions from the class of 2022 and the strong 2023 prospects, our network continues to grow at impressive rates. And we are leveraging this breadth to share best practices, accelerate onboarding, and improve outcomes for senior patients, our partners, and agilon. In late July, we gathered with 60 physician partners for 3 days in Traverse City, Michigan for a retreat. We were hosted by 1 of our new partners, and the gathering included all of our existing partners, the entire class of 2022, as well as potential members of the class of 2023. The energy and enthusiasm from our partners for transforming senior care in their communities was palpable. Let me close by providing an update on Direct Contracting. We have been pleased with our initial performance in this new program. While it's still early, our launch has gone relatively smoothly. And attributed membership and adjusted EBITDA came in modestly above our initial expectations. Importantly, our physician partners are already noticing the benefits of operating consistently across the entire Medicare line of business. Over the past several months, we've been able to spend time with the Medicare Innovation Center as well as members of Congress and other interested stakeholders to discuss the program. We've been encouraged with the dialogue and hope to advance policies that could improve the sustainability and predictability of the program. As I've said on prior calls, government programs change over time. But we continue to believe Direct Contracting is fundamentally aligned with the administration's goals of improving equity and access to primary care delivery models. Over the next few months, we will formalize our plans for participating in the Direct Contracting Program with new and existing partners in 2022, and we expect to update you on those decisions in our next call.

Thanks, Steve, and good morning, everyone. I'll review some highlights from our financial statements and provide some additional details on our guidance for the third quarter and full year 2021, starting with membership. Membership increased by 45% on a year-over-year basis during the second quarter to approximately 182,000. Membership growth was driven by a combination of same geography growth and the impact of 3 new geographies that went live in January. Same geography membership growth was 17% for the second quarter. Similar to last quarter, same geography growth was broad-based across markets with all of our Same Geographies growing at or above the national growth rate for Medicare Advantage enrollment. Average membership was approximately 194,000 during the quarter, which was up 57% from last year. It's important to keep in mind that our average membership metric includes 13,000 retroactive members attributed to the first quarter. This retro impact reflects the large group contract we mentioned on the last call. Additionally, as Steve referenced, average membership benefited from faster member attribution during the quarter, which drove some additional retro impact. Revenues increased 70% on a year-over-year basis to $499 million. Year-to-date revenues increased 56% to $912 million. Second quarter results include $35 million in retro revenue associated with the first quarter. Excluding this, revenue growth would have been 58% in the quarter. Revenue growth was primarily driven by membership gains from new geographies and Same Geographies. On a per member per month basis, or PMPM, revenue increased 8.5% during the second quarter. The increase to revenue PMPM was primarily driven by updates to CMS county benchmarks, changes in member acuity or burden of illness, and 1 extra month of sequestration suspension relative to the prior year. Additionally, revenue PMPM was also impacted by a few year-to-date true-ups and the mix impact from retro members. Revenue PMPM growth would have been closer to 6% normalized for these true-ups, retro mix and the sequestration benefit. Medical margin was $55 million during the second quarter compared to $72 million in the prior year. On a year-to-date basis, medical margin was $107 million compared to $114 million during the same period last year. The year-over-year decline in medical margin reflects the lower utilization in the prior year due to COVID, which more than offset the positive impact from clinical programs and the maturation of numbers on the platform. Medical margin on a PMPM basis was $95 during the second quarter compared to $195 in the prior year but was roughly consistent with $106 in the first quarter of 2021. Network contribution, which is defined as medical margin after surplus sharing with our physician partners, was $24 million during the second quarter compared to $39 million in the prior year. On a year-to-date basis, network contribution was $54 million compared to $63 million last year. The year-over-year decline in network contribution primarily reflects the COVID impact on prior year medical margin. Platform support costs, which include market and enterprise level G&A, increased 22% to $31 million. On a year-to-date basis, platform support costs increased 21% to $59 million. The growth in our platform support cost remains well below our revenue growth, which highlights the light overhead structure of our partnership model. As a percent of revenue, platform support was 6% during the second quarter, down from approximately 9% in the prior year. On a PMPM basis, platform support declined approximately 20%. Adjusted EBITDA for the quarter was negative $2 million versus positive $14 million in the prior year. On a year-to-date basis, adjusted EBITDA was positive $2 million compared to positive $16 million last year. The year-over-year change to adjusted EBITDA reflects dynamics we previously discussed for medical margin. This was partially offset by leverage against platform support costs and contributions from direct contracting, which is included in other income. Turning to our balance sheet and cash flow. We ended the quarter with $50 million in debt outstanding and $1.1 billion in cash, which reflects proceeds from the initial public offering we completed in April. Cash flow from operations was negative $39 million in the quarter, which included a $12 million premium payment for public company D&O insurance, $10 million in geography entry costs and capital support, $8 million in annual incentive comp, as well as $4 million in severance expense triggered by the IPO. Turning to our financial guidance for the third quarter and full year 2021. For the third quarter, we expect ending membership in a range of 183,000 to 184,000 and revenue in the range of $450 million to $453 million. The sequential decline in revenue from second quarter results to third quarter guidance is primarily due to the revenue from retroactive membership that we recognized in the second quarter. For the full year 2021, we have increased our ending membership outlook to a range of 184,000 to 185,000 and our revenue outlook to a range of $1.81 billion to $1.82 billion. We continue to expect adjusted EBITDA loss of $41 million to $38 million. We expect the adjusted EBITDA loss will be somewhat weighted to the fourth quarter. This is due to normal seasonality and our expectation that utilization will approach pre-COVID levels as we move through the year. Additionally, our adjusted EBITDA outlook reflects the temporary dilution from higher membership growth and an unchanged view of full-year profitability for Direct Contracting. With that, we're now ready to take your questions.

The first question we have comes from Stuart Hill from Deutsche Bank.

And that's George Hill from Deutsche Bank. I guess, could you talk a little bit more about attribution as a driver of the strong membership number in Q2? And then a quick follow-up question would be, the other medical expense kind of came in a little higher than we expected. I know it's kind of a small number, but would just love any incremental color that you can provide around that.

Sure. Thanks, George. I'll take the first one, Tim, and you can take the second one. So George, I think we're really pleased with our strong growth in the quarter. Attribution, I think, is something that we do really well and is a distinctive part of our model. It allows us to work very closely with health plans and get more members attributed to our partners. We are making investments in technology and working on operations with our health plan partners to do that. And so the biggest driver of the step-up from the 15% same geography growth to the 17% that you saw in Q2 really was around attribution. These are members that typically we might have expected to bring on the platform in the back half of the year. But by getting a better process and the technologies, we were able to pull them into the first half of the year. And as Tim shared in his remarks, they are retroactive to January 1 of this year. I think that was about 3,100 of the members that you see within the retro activity. So area of strength, one that we think we're getting better at all the time. Disproportionate amount of those numbers are PPO, which is an area of strength for us. So hopefully, that gives you context.

Yes. Thanks, George. And overall, the medical margin number on a PMPM basis that were reported in the quarter of $95, and as Steve said, the overall medical margin PMPM year-to-date of $100 is pretty much in line with where we expected it to be. And that $100 obviously is down versus prior year because of the...

Mention the other medical expense.

Other medical expenses were up. Overall, other medical expenses essentially include our AWV incentives that we pay to our physician partners. This can vary on a quarter-to-quarter basis depending on when those AWVs occur and when we pay those incentives. When the number is up, it indicates that, as Steve mentioned, we are actually in good shape so far in completing our AWVs earlier in the year and then disbursing those incentives. I can also discuss the medical margin year-over-year if you would like, George.

Thank you. The next question comes from Kevin Fischbeck of Bank of America.

This is Adam speaking for Kevin. Regarding your comment on medical costs, it looks like you exceeded EBITDA for the quarter, and while you don't provide guidance on MLR, it was slightly higher than our estimates and the consensus. Despite outperforming, you maintained your EBITDA guidance for the year, which raises my question about medical cost utilization patterns. By reiterating EBITDA, are you anticipating higher costs in the latter half of the year?

Yes, I can start and Tim can add to this. First, we are pleased with our current medical margin. The primary impact on medical margin is the dilution effect from new members joining the platform. We've experienced significant growth, with 53,000 new members, or 30% of our membership as of June 30, added since January 1 of this year. New members typically have lower medical margins than older cohorts over time. We are encouraged by the improvement we see in our earlier patient groups, as noted in our prepared remarks. Regarding EBITDA guidance for the second half of the year, despite exceeding expectations in Q2, we are maintaining our full-year EBITDA guidance, partly due to the Direct Contracting program, which we are not adjusting based on our Q2 performance. We'll gather more information on that in the coming months. Additionally, the dilution effect of new members is a factor as well. Tim, do you have anything to add?

Yes. If I can quickly quantify the impact of the first Direct Contracting, it contributed about $2.5 million to our adjusted EBITDA in the quarter. As Steve mentioned, we expect that for the full year, we will return to our original expectation of around breakeven. Therefore, we're not including that $2.5 million in our guidance for the second half.

We now have the next question from Justin Lake of Wolfe Research.

This is Harrison standing in for Justin. I have a question regarding Direct Contracting. Thinking about the upcoming year, do you typically anticipate new entrants from the program? I understand that most claims are aligned and tend to come in at the start of the year, but do you foresee any additions during the year from perhaps other alignment methods? Or would the expiration of participants lead to a general decline throughout the year?

I believe we may witness some modest additions throughout the year due to the voluntary attribution process that you mentioned, Harrison. Most of our members are being added through the claims-based approach that you discussed. I anticipate a progression that resembles what we see with Medicare Advantage as the year unfolds. Therefore, we expect growth for Direct Contracting to be relatively modest throughout the year, but it's still early, and we'll see how it develops.

And we now have a question from Ryan Daniels of William Blair.

Congrats on the quarter. Another one on Direct Contracting, obviously, the nice contribution for a short period relative to what you expected. And I'm curious other than conservatism, what could actually bring the EBITDA down to breakeven for the full year? So kind of turn that into a loss in the second half of the year. Are there investments or changes?

Yes. I think, Ryan, what we've got is early information from a claims and revenue perspective. We're going to be getting a lot more information here in the next month or 2. So I think it's really sort of better visibility on that, which would be the biggest driver that would drive it there. And then I think there's also just this seasonal progression that Tim talked about in his remarks, in which Direct Contracting will sort of follow the same path as MA, in which you see lower medical margin and therefore, obviously, lower overall EBITDA in the back half of the year.

And just to add to that, we do expect that utilization in the MA business will increase in the second half of the year compared to what we saw in Q2. Therefore, we anticipate that profitability from Direct Contracting will also contribute to the lower profitability in the second half of the year.

Okay. That makes sense. And then you mentioned in your pipeline conversations with new provider groups that they're looking for more integrated Medicare solutions with both MA and DC. Is that giving you an advantage given that you're already in the DC program, one of three dozen or so, such that those that want that integrated solution have a more limited set of potential partners, given that those that aren't already in can't go into it next year?

Yes, thanks, Ryan. I believe it provides us with an advantage. We currently have five active DCEs and four more expected to come online in 2022. We can incorporate new physician groups under these DCEs. The opportunity to offer a fully integrated Medicare line of business is very appealing to these groups, especially considering the varying MA penetration rates across different markets as we explore new states. Therefore, we see this as a significant advantage.

We have had no further questions, so I'll hand it back to Matthew.

Well, great. We appreciate your interest in the company. We look forward to speaking with you at future calls and future events. So thank you.

Thanks, everyone.

Ladies and gentlemen, that does conclude today's call. Thank you all again for joining. You may now disconnect your lines.