Hello, and a warm welcome to today's agilon health Third Quarter 2022 Earnings Call. My name is Candice, and I will be your moderator on today's call. I would now like to pass the conference over to our host, Matthew Gillmor, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good evening, and welcome to the call. With me 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 on 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.

Thanks, Matt. Good evening, and thanks for joining us. Momentum across our business remains strong. And the success of our aligned partnership model is enabling agilon to make rapid progress against our vision to transform healthcare in communities by empowering primary care doctors. Agilon's platform, partnership model, and network create the local infrastructure that enables physician organizations to access a new and sustainable model for primary care. One that aligns physician outcomes with improvements in the quality and experience of their senior patients. As a result, patients are receiving higher quality, comprehensive care from their trusted physician. And primary care doctors are enjoying greater satisfaction as they share in the value created from a more effective approach to care delivery. In 2023, our national network will include 2,200 primary care physicians and 500,000 senior patients across 12 states, making agilon one of the largest organizations in the country supporting full risk value-based care for senior patients. Our growth is a function of the value that agilon's platform delivers to physicians, patients, and communities and the value we are delivering continues to expand. Year-to-date, we have reinvested over $130 million back into local communities through surplus sharing from reductions in wasteful spending and quality incentives to doctors for spending more time with their most complex patients. This reinvestment is helping to sustain and grow access to primary care and transform healthcare delivery. Turning to our results for the quarter. Membership, revenue, and medical margins were above the high end of our guidance ranges, and adjusted EBITDA was in line even with a modest drag from direct contracting. Our core Medicare Advantage business performed better than forecasted on all key measures. Year-over-year, MA membership grew 45%, medical margin increased 74%, and medical margin PMPM increased 19%. This reflects strong performance across our 16 partner markets, inclusive of higher-than-forecasted membership growth. This year, we are driving substantial growth in medical margin, PMPM, even as the proportion of members in year 1 markets has increased from 19% to 22%. This dynamic is powered by our more mature markets, accelerating their year-over-year performance, as evidenced by our 10 year-2 plus partners, increasing year-to-date medical margin 24% from $1.04 to $1.28 per member per month. At the same time, for the 6 year-1 partners that went live in January, medical margin PMPM has been trending towards the higher end of our expectations, as these new partners are benefiting from the platform getting smarter and the learnings of our mature markets. Our powerful same-store performance measured in this meaningful improvement to medical margin unit economics while generating same market growth of 14% has been driven by: one, the local scale we leverage to improve care delivery; two, the ability to leverage common data and learnings on our purpose-built platform; and three, the embedded membership growth that comes from working through existing physician capacity in our partners' practices. These factors are all reinforcing our growing first-mover advantage as we introduce multi-payer full risk in more geographies across the country. Direct contracting was a modest but manageable drag to our adjusted EBITDA this quarter due to the impact of an updated retro trend adjustment that Tim will walk through. Importantly, the program remains profitable on a year-to-date basis, and our underlying cost and quality performance remains strong. For our direct contracting patients, our healthcare costs are significantly lower on a PMPM basis versus national benchmarks. And our year-over-year trend is 1% lower in 2022 versus the national reference population. Additionally, we are driving strong quality performance in areas such as post-hospital discharge and timely follow-ups. We continue to view the program as highly strategic as direct contracting creates a single full risk experience for our primary care partners across their entire senior population. We remain engaged with the innovation center on potential program adjustments to create greater visibility and predictability for all participating groups and their senior patients. From a guidance perspective, we are raising our full year 2022 outlook for MA membership, revenue, and medical margins and tightening our adjusted EBITDA. This reflects strong performance in our MA business and an appropriately cautious approach in forecasting direct contracting. Looking forward to 2023 and beyond, we continue to make great progress in fundamental areas that drive future performance such as renewing payer contracts, onboarding our new markets for 2023 and supporting our physician partners for a successful annual enrollment period. For payer contracting, we are on track to complete important renewals that are in line with our base case assumptions. This renewal activity with 10 different health plans constitutes a significant portion of our membership, revenue, and earnings. The overall positive tenor and success of this fall's renewal season reflects the significant value health plans enjoy with a scaled first-mover partner like agilon that moves the entire market to value while providing best-in-class member growth and consistently strong quality and member experience. Next year, with the addition of several new health plan partners, we will have full risk contracts with nearly 30 different payers. Pivoting to the class of 2023, the onboarding of our largest class to date has gone quite well in terms of integrating with our partners' various electronic medical records, synthesizing payer and clinical data, negotiating value-based contracts, hiring and training local market staff, and most importantly, increasing the level of access and volume of high-quality visits for senior patients. In short, we are creating the building blocks for these partners to shape and control value-based care in these markets for decades. The significance of successfully onboarding partners in 4 new states cannot be overstated. While Medicare is a national program, healthcare ecosystems are effectively built at the state and local level. The ability to expand within a state and add additional doctors and senior patients in full-risk models is far easier once we have deployed local infrastructure and connected the ecosystem. Similarly, the ability to actually change care delivery and reduce wasteful healthcare spending while improving quality is materially improved when you are able to scale around a trusted medical group. Our experience in Ohio, Texas, and now Michigan are excellent examples of this phenomenon. In these states, we have added approximately 450 doctors and 190,000 senior patients since our initial year-1 anchor partnership. Our growth in these states reflects both success within our partners' local geographies and the expansion with new partners into other cities or markets within these states. The concentration and scale within these markets has allowed agilon with our partners to make substantial infrastructure investments to improve care delivery with enhanced care team resources, including nurse practitioners, pharmacists, embedded nurses at high-volume ERs, and in-home care teams for our most complex patients, including those with complex kidney disease or end-stage renal disease. These investments and the resulting improvements in patient quality and cost have allowed the newer partners in these states to enjoy accelerated performance immediately in year 1 and which creates even more satisfaction and engagement for our partners. We will have the opportunity to replicate this performance across more and more states over time. Before updating you on our future growth in the class of 2024, I wanted to highlight our performance on quality and STARS measures and how that connects to better patient health. Our partnerships continue to generate quality outcomes that are well above national benchmarks, which reflects the alignment between PCPs and their patients supported by agilon's platform. For 2023 STAR ratings, a significantly higher percentage of agilon members will remain in 4+ STAR-rated plans compared to the national average. Additionally, drilling down to agilon's specific performance, we have maintained 4+ STAR performance across all of our partner markets, and our mature markets performed meaningfully above this average. We continue to excel in areas such as preventative cancer screenings, medication adherence, and diabetes management. For these measures, we are at 5-STAR performance levels across the entire network. Additionally, we have consistently demonstrated year-over-year improvements in quality gap closures well in excess of national trends. As an example, for diabetic patients, our PCP partners had driven a 2x greater improvement in A1C control compared to the national MA average. We know that patients with better controlled diabetes spend less time in the ER and hospital, and in the long run, they are less likely to lose their vision or a limb, go on dialysis or suffer a heart attack or stroke. Preventing these long-term potentially debilitating complications and keeping our patients well is really the goal of our model and why our PCP partners are so deeply committed to our mission. Looking ahead to 2024, our business development team has made significant progress over the past few months. The breadth and depth of the pipeline for 2024 remains very strong and includes diverse partner types and geographies, including independent groups and health systems in both new and existing states. The acceleration in demand we are seeing reflects both the success of our partners and powerful macro forces, including payer demand for value and the growing senior population. These dynamics have also shortened our sales cycle. I'm pleased to report that we have now signed 4 new partners for the class of 2024. These 4 new partners include groups in existing states and new states and include primary care only, multi-specialty, and network organizations. We are excited to have made this much progress at this point in the cycle for 2024. The longer implementation for these groups along with their quality and strong governance will position our new partners to generate outcomes earlier in their life cycle. With that, let me turn things over to Tim.

Thanks, Steve, and good evening, everyone. I'll review highlights from our third quarter results and our guidance for the full year 2022. Starting with our membership growth for the third quarter, consolidated Medicare Advantage membership increased 45% to approximately 267,000 above the high end of our guidance range. Direct contracting membership increased 71% to approximately 89,000. Total members live on the agilon platform, including both Medicare Advantage and direct contracting increased to 356,000. Our Medicare Advantage membership growth was driven by the addition of 6 new geographies in January and 14% same geography growth in existing markets. Direct contracting growth was also driven by the addition of 4 markets that joined the program in January as well as growth within existing markets. Revenues increased 52% on a year-over-year basis to $695 million during the third quarter. Year-to-date, revenues increased 47% to $2.02 billion. Revenue growth was primarily driven by MA membership gains from our new and existing geographies. Third quarter revenue included a modest benefit associated with member retroactivity. On a per member, per month basis, or PMPM, revenue increased 3% during the quarter, which primarily reflects benchmark updates, market and member mix, along with year-to-date true-ups with health plans. Medical margin increased 74% year-over-year to $76 million during the third quarter. Year-to-date, medical margin increased 62% to $244 million. Even with the dilution from our membership growth, along with a higher proportion of members in year-1 markets compared to last year, medical margins increased as a percentage of revenue and on a PMPM basis. Medical margins were 10.9% of revenue during the third quarter compared to 9.5% last year and medical margin PMPM increased 19% to $93 compared to $79 last year. Medical margin growth was primarily driven by the maturation of our year-2 plus partner markets. For these markets, medical margin PMPM increased 24% from $104 to $128 on a year-to-date basis. Additionally, as Steve mentioned, we have also seen stronger performance across our year-1 market this year. Utilization trends were consistent with our expectations. Inpatient services remain below pre-pandemic baseline levels, while outpatient utilization is now in line with pre-COVID levels. Physician office visits have seen a strong rebound among our members as we actively promote preventative visits, particularly for high-risk patients. Network contribution, which reflects agilon's share of medical margin, increased 84% to $32 million during the third quarter. Year-to-date, network contribution increased 53% to $110 million. This year-over-year increase in network contribution reflects the gain in medical margin as well as the relative contribution of medical margin across our geographies. Platform support costs, which include market and enterprise level G&A, increased 4% to $35 million. On a year-to-date basis, platform support costs increased 13% to $105 million. Growth in our platform support cost continues to trend well below our revenue growth and highlights the very light overhead structure of our partnership model. As many of you know, agilon incurs de minimis sales and marketing costs as our partnerships leverage existing PCP patient relationships and member churn is very low. As a percentage of revenue, platform support costs declined to 5% during the third quarter compared to 7% last year. Our adjusted EBITDA was negative $4.7 million in the quarter compared to negative $14 million last year. On a year-to-date basis, adjusted EBITDA was positive $14.9 million compared to negative $11.9 million last year. The increase to our adjusted EBITDA reflects the gain in medical margin and network contribution combined with leverage against platform support. This more than offset the negative adjusted EBITDA contribution from direct contracting in the quarter. Adjusted EBITDA from direct contracting, which is reflected on a net basis within other income, was negative $3 million in the quarter. This was below our expectation of positive low single-digit adjusted EBITDA for direct contracting, primarily due to ongoing updates to the retrospective trend adjustment. While our guidance incorporated an estimate for the retro trend adjustment, we increased our estimate during the third quarter based on updates from CMMI with respect to observed expenditures for the national reference population. On a year-to-date basis, adjusted EBITDA from direct contracting is positive $6 million. As Steve referenced, we continue to outperform national benchmarks from a cost and quality standpoint. Turning to our balance sheet and cash flow. As of September 30, we had $959 million in cash and marketable securities and $45 million in outstanding debt. Cash flow from operations was positive $2.6 million for the quarter and consistent with our expectations. As I mentioned on the last call, the timing of risk pool settlements within our health plans normalizes in the back half of the year, which benefits our cash flow. We remain extremely well capitalized and do not anticipate needing any external capital to drive our future growth. Turning now to our updated financial guidance. For the full year 2022, we have raised our membership, revenue, and medical margin outlook to reflect the strong performance in our Medicare Advantage business, both in terms of growth and profitability. We are also tightening our adjusted EBITDA outlook to incorporate an appropriately cautious view in forecasting direct contracting. We now expect total membership on the agilon platform will grow over 50% year-over-year to 353,000 to 357,000 with revenue growth of 46% to a range of $2.67 billion to $2.68 billion. We continue to expect significant gains in medical margin and adjusted EBITDA. We now anticipate medical margin in the range of $300 million to $309 million and expect adjusted EBITDA in the range of positive $2 million to positive $7 million, which represents a year-over-year gain in adjusted EBITDA of approximately $40 million to $45 million. With that, we're now ready to take your questions.

So, our first question comes from Lisa Gill of JP Morgan.

Just really 2 areas I wanted to start with and one would be just around medical costs as we go into the fourth quarter. You talked about the third quarter coming in roughly in line with your expectation inpatient below, outpatient in line. How do we think about how you're thinking about the trend into the fourth quarter? And will flu play any part of this? I mean we're kind of watching the Southern Hemisphere and different parties are saying different things around flu. So that would be my first question. And then I just had a quick follow-up.

Yes, Lisa, I'll begin. From a medical cost perspective, we believe our high-touch model is effectively helping us manage within the ranges Tim mentioned. We're noticing a significant increase in flu vaccinations during this period, similar to the high rates we experienced with COVID boosters. We think this will benefit us. As we consider our guidance, we're anticipating a regular flu season and have outlined our expectations through Q4 based on these factors. Tim, do you have anything to add?

Yes, Lisa, thank you for the question. I’d like to mention that we have experienced a significant improvement on a year-to-date basis compared to last year, whether you measure it by medical costs or on an MLR basis. Year-to-date, we’re up around 110 basis points or so compared to last year, or on a PMPM basis. Our medical margin PMPM has also increased significantly year-over-year. As we approach the fourth quarter, it's important to note that the absolute numbers tend to decrease as the year progresses due to a shift in our member mix becoming less profitable, with more agents and the older, more profitable patients dropping off. Nonetheless, when it comes to improvements over the past year, we continue to expect to see similar trends and advancements, which can be observed in the midpoint of our guidance for the fourth quarter and the full year.

That's really helpful. And then just as a quick follow-up, I just want to go back, Steve, to your comment on the renewal of the payer relationships being on track or in line with expectations. Is there anything that's new or unusual as to what payers are looking for? And when we think about capitated rates, are they roughly in line with what we've seen historically? Just any incremental color would be really helpful.

Yes, Lisa, I mean, I think we're extremely pleased with the renewal season that we've just come through and we're finalizing the new contracts for the groups that will go live on January 1. But all in, it's been a very successful season. I think that what we're finding is payers see extreme value in working with our partners. They are scaled within their regions. They have excellent retention and management with their folks and payers see real value within that. And so I think when we think about the payer renewals, what we've heard from them is they're really valuing the scale that our partners are bringing the quality. I talked about the 4 and 5 stars that we're seeing, and I think that will serve us very well. And then just the retention, a key thing with the senior population is the year-in, year-out management of complex conditions. And so the ability to have strong retention really helps around that. So we're first to value in these communities and move them that way and payers see value in that, but all of the things we provide along the way.

Our next question comes from the line of Justin Lake of Wolfe Research.

I apologize in advance, but I need to ask you about RADV and how it might affect you. I understand this is a sensitive topic, but I've received numerous inquiries about it. First, could you explain how your contracts are structured in the event of an audit, specifically regarding payments back to the plan or if the plan must pay CMS? Would you be liable for a portion of that if it's related to your patients or a certain percentage of the panel? Secondly, we know that your coding practices are strong. Have you received any feedback from the plans about how they are conducting audits of their populations to assess performance? How do you believe you are performing in those audits compared to their broader populations?

Yes, Justin. Regarding our contracts, if there were any retroactive adjustments to the payback, we would be responsible for that. The periods being reviewed are earlier than the current window, so there isn't much of an issue at this time. However, as audits progress year by year, if there were any clawbacks, that's how it would be addressed. As for feedback from the plans regarding the audits, we collaborate closely with them. They feel that the information we provide and the discussions we have before they submit their findings create a strong process. That's how I would respond to both those questions.

Yes. I would like to emphasize that we've mentioned this before in previous calls, but we believe our approach to risk adjustment is effective. We have a very strict process, and almost all of our risk adjustment is performed in the office during annual wellness visits or through the primary care physician. Ultimately, the conditions for risk adjustment must be validated and agreed upon by the primary care physician who treats the patient. We ensure that we capture new conditions, which is crucial not only for risk adjustment but also for the patient's care. Additionally, we manage the removal of conditions effectively. This is reflected in our overall average risk adjustment score; our average wrap score is not significantly above 1, indicating that we are not overstating our risk adjustment. Overall, we are confident in our rigorous process.

And Justin, I'll just add, I think it's really important as part of our partnership that we do it the right way. And we have a very tight process. To Tim's point, we delete codes as well as add codes based on a constant review process. So I think integrity around this process is something that we pride ourselves on, our partners pride themselves on working with somebody that does this in the right way. And so we feel good about our approach.

I would like to delve deeper into your contract structure, Steve. I want to ensure I understand it correctly. They are only auditing a few hundred members in a contract, right? This means the chances of them actually auditing your members are extremely low, especially considering your current size. How does it work? For example, if there are 100,000 patients and your patient count happens to be 1,000, which is 1% of the total membership, would you need to pay 1% of whatever they request? Is that how it operates?

Yes. I think without getting into the specifics of each contract, generally speaking, if there is a RADV audit that applies to our members for whom we have cap data from the payer, then we will be responsible for our share of that. However, depending on the details of the audit and our discussions with the payer, the outcome may vary on a case-by-case basis. If there is a clear link to our population, then we would be liable for it.

Our next question comes from the line of Kevin Fischbeck of Bank of America.

This is Adam Ron on for Kevin. I saw an interesting release in the quarter that one of your anchor partners in Ohio started doing an on-site clinic with JPMorgan and some sort of value-based construct arrangement. And given the interest from such a large client to do value-based care outside of Medicare, I'm curious why not just support them yourselves? Or I don't know if there's interest from such a large client, if that changes your view maybe about expanding beyond Medicare?

Thank you, Adam. Yes, we are very familiar with Central Ohio Primary Care, our partner in Columbus, and JPMorgan, who are collaborating on this initiative. They have another partner that we know well, and they are doing an excellent job. Our primary focus has been on the over 65 population, where we are making significant strides in addressing a major challenge for our groups. While there is potential for expanding into the commercial sector in the future, we are currently optimistic about our efforts with the Medicare population. As we mentioned in the call, there is tremendous value and impact we can deliver by concentrating on that demographic.

Could I ask a quick follow-up? Regarding direct contracting and its ongoing refinement related to the retro trend from last quarter, have any of your discussions with CMS changed your perspective on the sustainability of direct contracting?

Yes. Well, let me answer the macro and then Tim can kind of walk through the mechanics because we literally get monthly updates on this. And so you're constantly sort of refining that. But one is, I think we believe direct contracting is extremely strategic for our partners and for us in that there's a single experience for their primary care physicians, and there's one care model that gets applied across the entire senior population, which reduces variability and allows for much better care and less sort of variation. The second would be we’re profitable year-to-date. As Tim said, we have $6 million of EBITDA. So that program is still profitable even given the adjustments that Tim talked about. And then the third that I tried to call out in my prepared remarks is we are beating national benchmarks in terms of utilization trend. If we continue to do that, that should drive increased profitability over time. And that's sort of the construct in which the program is laid out. We're working with them on adjustments that can be made to the program to take out some of the volatility, to improve the predictability and the sustainability, but that’s sort of the macro view. Tim, do you want to talk about?

Yes. And Adam, not to belabor it, but I think everybody understands that the way this works is CMMI puts out an expected trend number at the beginning of the year. And after the year is over, they will say, 'Hey, based on the actual observed trend for the full Medicare fee-for-service population,' they will adjust that up or down depending on what they see. They provide interim updates during the year on how that's going. They don't actually tell you what the retro trend adjustment is going to be, but they do tell you how trend is looking at various points in the year. And what you're referring to last quarter was the first update came out in May and there was a pretty substantial indication that trend was way lower than what they had put out initially like as much as 8 points lower. And so a lot of people in the industry at that point, you may remember saying, 'Wow, we just had to take a big adjustment to revenue in our second-quarter results because of that.' Now you remember at the beginning of the year, we had said, 'Hey, we anticipated there would be a pretty sizable retro trend adjustment because our analysis said that the trend that CMMI was guiding to at the beginning of the year was very aggressive or high to begin with.' So when that second-quarter update came out in May or the first quarter update that came out in the second quarter in May, we had to take a small adjustment last quarter, but it wasn't anywhere near probably what a lot of other people in the industry were taking if they hadn't already pre-assumed a retro trend adjustment. Now another update came out in August. And then a few subsequent data feeds have come to us from CMMI as they're providing us some incremental data on a monthly basis. We've reassessed it and said, 'Hey, there is another, we think, small movement down in what we assume the retro trend or movement up in what we assume the retro trend adjustment would be our movement down in our revenue.' That caused us to take a smaller adjustment in Q3 as we closed and since it’s retroed for the full year it has an impact from adjusting the full year, year-to-date. Then we ended up with a $3 million negative impact to adjusted EBITDA versus our going into the quarter expectation that would be low single-digit positive. Now as we move through the rest of the year, of course, there’s less year left. So the chances that, that number will move a lot more or less and less because there’s just less months ahead of us that can drive that number up or down. Right now, just to make sure that we’re being completely cautious in how this is moving, we’re being pretty cautious about our full year guidance and saying, you know what, in Q4, we’re not expecting direct contracting to really be accretive to our fourth quarter adjusted EBITDA. Sorry, I didn’t mean to belabor that, but I think that’s the full story, yes.

Our next question comes from the line of Ryan Daniels of William Blair.

I wanted to talk about the new partner pipeline with a focus on '24. Great to hear you added 2 more to the class. I'm curious, number one, if you can discuss what this looked like a year ago for the forward year basis? So is this an acceleration, I think, from what you've seen? And then number two, you talked a little bit about macro trends driving this, but I'm curious if you think the pending U.S. recession or global recession is actually helping your partner pipeline because providers can move to more recurring revenue models and see more income upside with your model than they otherwise would. So is this type of environment actually beneficial for you relative to kind of a more stable market?

Yes, Ryan. Well, I think the headline is there is a tremendous inflection in demand. We've been seeing it for a while. It is accelerating. I think it's a combination of macro, CMS pushing more towards full risk value and looking by 2030 to have all seniors in a total care relationship with a PCP, individual health plans, pushing on that in a really significant way. But then I think the success that we're having for virtually every medical group in the country, you can find an agilon partner that kind of looks like you, is organized like you. And so that referenceability is just a huge asset for us. Two is, I think, that more and more of these groups have come to the conclusion that they really need to make this move into full risk value-based care. And so the combination of the success and the desire is really shortening the sales cycle. And so to your question about to compare it to a year ago, we are well ahead to have 4 groups signed to have implementations that will be greater than 12 months, that puts us in really great stead for 2024 and how these groups should start. And so that's really encouraging to us. The fact that you have a mix of primary care only, multi-specialty and distributed networks, partners within that is also really encouraging to us. And as I said in my prepared remarks, health systems remain very actively engaged with us in talking about partnerships. So I think what we've done with MaineHealth, which is going really well. I think the ability for people to be able to pick up the phone and talk with them about that experience really helps. And I think a number of health systems are feeling the need to make this move into value and get the benefits from that. And so all of that is sort of leading to the momentum that we're seeing and sort of being ahead of where we've been in prior years in the cycle.

Okay. That's very helpful. Tim, I have a question for you. I should probably know this detail, but if we look back to the end of last quarter, you reported about 261,000 MA lives, and this quarter you ended at 266.6. However, you mentioned that the average for the quarter is above 270,000. Could you clarify why the average for the quarter is significantly higher than the starting and ending numbers?

Yes, any time that you see that, Ryan, what's going on is we have some retro members that we've got attributed to us or we have members that have been attributed to us that really should have been attributed as our members from the beginning of the year or near the beginning of the year. And in this quarter, it was about 1,000 or so members. So 3,000 members kind of above the ending time period, but really retro back over 3 full quarters gives you about 3,000 average members higher is the way that it works out. I mean it's really an important part of our model that we're able to do that. Essentially, if you think about this, there's 2 different ways that we have members attributed. One is through members that are in an HMO couldn't be more straightforward, right? They have to actually name who their PCP is officially. On the PPO side, which is now more than half of our business, that's often not the case or generally is not the case. And so we have to go through other attribution methods that we have worked out with the payers. And often cases, it's related to how many times has that patient seen the PCP in the last 6 months, 12 months or 18 months. We often have backup plans where we do things like recorded phone calls with the member to make sure that that's their PCP, et cetera. But we have a really good established process to do that. But what happens is, at some point, we tend to pick up members that maybe should have been attributed to us early and now we catch later in the year. That's particularly true of new markets. And in fact, of the, let's say, 1,000 or so retro members that we picked up driving that difference in the quarter. I think the majority of them were actually in a couple of our newer markets, with newer payers.

Thank you so much, very helpful.

It's really important for us that more than half of our business is in PPO membership. This is significant because it allows us to enter a market and take on full risk, regardless of whether it is predominantly PPO or HMO. This contrasts with other markets that are heavily HMO, which makes attribution easier. Our total addressable market is broad for both PPO and HMO, enabling us to operate in various areas and assume full risk across that membership.

Yes, I think the feedback from the national payers is that we're fairly unique in our ability to take full risk on a PPO product. And that's the fastest-growing product. It's roughly half. It will be more here as you see further growth. And so we think we're set up well.

Our next question comes from the line of Whit Mayo from SVB Securities.

Yes. First question just on STARS. I mean there's been a lot of noise about certain plans going from 4 to 3.5. Maybe just frame how you guys are thinking about it and do your contracts have any contingency provisions that may protect you in the event that an H contract does slip to a 3.5 star rating.

Yes. Let me begin by reiterating my earlier comments, which highlight that our performance is exceptionally strong, with four stars overall and five stars in specific areas we discussed. There has been a noticeable decline across the industry as some COVID-related provisions have ended, which affected overall ratings. However, we are performing better than the industry average regarding the percentage of members enrolled in plans rated four stars or higher, thanks to our effective management. We do have one payer, with a significant number of members, that has reduced their rating to 3.5 stars for most of their plans. We believe this is manageable, and we expect the impact to be minimal in terms of per member per month cost for 2024. Overall, we think this situation is quite manageable for us. We're doing better than others in the industry, and health plans may prefer to have more senior patients in agilon partners due to our strong quality performance. Specifically addressing your question, we consider the impact to be very manageable for us.

Okay. Steve, you talked in your prepared comments, maybe this is new, maybe it's not, but I feel like you referenced diabetes, renal, maybe more in the context of perhaps a specialty program. And I think you've established a partnership with Monogram, not sure how new that is. But is there anything to elaborate as you kind of think about this diabetes, renal specialty program?

We have a really strong partnership and are currently active in six or seven markets, with plans to expand to two or three more by the end of the year. Our early results in these programs have been exceptional, particularly the patient enrollment rates, which are in the mid-80s due to the opt-in nature of the program. This high participation is largely due to the strong relationship between the primary care physician and the patient; when the PCP recommends our program, patients are very likely to follow through. This contrasts with experiences in other markets where they've worked with payers. It highlights the unique advantages we have. Additionally, I want to emphasize our strengths in A1C control and the significant benefits we offer in that area.

Okay. Can I just ask one quick one for Tim. Just these new territory costs, geography costs. Is this all 2023 go-lives or the implementations for 2024 too?

It's currently very close to 90 percent implemented for 2023. We are beginning to work on the implementation for 2024, but we haven't established much infrastructure or incurred significant costs for it yet. Some expenses will arise in the fourth quarter as we start to implement for 2024. However, for now, most of the costs will be related to 2023 implementation. It's important to note that 2023 has a very large and complex class that we are implementing.

Our next question comes from the line of Sean Dodge of RBC Capital Markets.

On margins for new year-1 classes, Steve, you mentioned the platform is getting smarter and more efficient. You pointed to the current year-1 members trending toward the high end of your targets for medical margins. You're also building out classes now than you have historically. You referenced the 4 already for 2024, which gives you more time to prepare for their launches. I guess when we think about the combination of the 2, I think you alluded to it a couple of times, but can you maybe put some bookends around how much you think these can help elevate the launch trajectories for margins for future classes?

Yes, I appreciate the question. We are seeing the benefits of learning from our platform, which enables our newer partners to perform at the high end of our range. This is fantastic and encouraging, as they can take advantage of programs we've discussed, such as complex kidney disease, earlier in the lifecycle. Additionally, each class is unique regarding their starting points, especially if they had an ACO previously, which means it takes time to understand where each one stands concerning payer contracts. Generally, we believe we're noticing an acceleration sooner for our year-1 markets in terms of the high-touch model's benefits, reflected in increased satisfaction, improved health outcomes, and ultimately lower costs and better margins overall. These are the key points I want to highlight.

And one thing I would add is that, as we've mentioned over the last couple of years, the best time to assess this is when we can provide a full year of results. However, it's worth noting that our year-1 markets are performing better than we anticipated this year, particularly at the high end of our expectations. We plan to discuss this trajectory in more detail once we have complete results for the year, similar to what we did at our Analyst Day, where we highlighted that some of our early markets had the strongest performance and growth trajectories. When we return with a full set of results this year, we will present updated cohorts and their progress as well.

Yes. And then just one last point I would make. The fact that for this class of '24 that we're talking about that we're this early, and we're going to have that long of an implementation period, they should start in a very strong position as a result of that.

That's helpful. As we consider the potential for medical margin in some of the older cohorts, you've mentioned before that there is a significant amount of other spending that could be addressed, which you estimated at $98 per member per month. What is the largest category in that spending? Have you begun to explore and tackle some of those cost-saving opportunities?

Yes. It's about identifying the right patient groups and focusing on those with the most complex needs. The goal is to reduce the time these patients spend in emergency rooms and hospitals while increasing their time at home. Our home-based teams present a significant opportunity for us. The COVID pandemic has changed where seniors prefer to receive care, moving from inpatient settings to skilled nursing facilities, and now much more frequently to their own homes. These are the areas we can target for improvement. Additionally, we need to focus on medication adherence and ensuring that patients receive the appropriate therapies. These are the main areas we will pursue.

Sean, as a good example, Steve, you might expand on this. These markets are all really early in their life cycle of moving to full risk. If you talk to any of our partners, they'll just say there's a huge amount of opportunity in my market, even in the most successful partners that we have, but there was this Akron Summit the other week. I think it's just a great example of how the market evolves.

Yes. Akron is one of our more mature markets, and we have two exceptional partners there who hold a significant share of the adult primary care capacity, which is crucial for success. They managed to gather leaders from over 100 specialty groups on a Saturday morning. Everyone participated and discussed our readiness to transition to full risk value-based care and the necessary steps to achieve that. To remain in a preferred network tier, they must share quality and efficiency metrics, ensure access through expedited appointments, utilize technology to complete patient visits, and direct all care decisions back to the primary care physician. This reflects a shared partnership that has generated considerable enthusiasm and commitment. We can observe the market starting to change, and there's immense potential for impact on specialty and facility costs. With these primary care-focused groups engaging specialists, it's truly promising. I believe we will see similar developments in more markets as we increase our scale and continue to build relationships with the right partners. This recent event clearly demonstrated what we aim to accomplish.

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

This is Taji Phillips on for Brian. So as it relates to your 2022 guidance, just curious for Q4, I noticed in your guidance that you raised the floor for the full year, but also mentioned that you didn't account for upside from direct contracting. So I just want to understand what's informing, I think, the raised floor for your 2022 guidance and if there's anything that we're missing, particularly for modeling purposes.

Yes, Taji, you're not missing anything. The midpoint for our adjusted EBITDA guidance remains fairly stable. We transitioned from a range of 0 to 10 with a midpoint of 5 to a new range of 2 to 7, reflecting a positive midpoint of $4.5 million. We're definitely witnessing improved performance from our Medicare Advantage business, which is evident in the medical margin figures. We increased the midpoint of our Medicare Advantage medical margin guidance by about $6 million, contributing roughly $3 million to our full-year expectations. This improvement is reflected in Q3, and we anticipate a strong Q4 as well. However, we adjusted the upper end of the range due to increased caution surrounding direct contracting and the $3 million loss we reported in that area for the third quarter. We do not foresee a positive contribution from direct contracting in Q4, but we also don't expect it to detract from our performance. Additionally, we're observing slightly better performance and increased leverage from our platform support costs, which are significant to our model. Considering all these factors, we opted to be cautious regarding the retro trend adjustments, leading to the reduction of the upper range. Nonetheless, the outstanding performance in Medicare Advantage gives us greater confidence to tighten our guidance and potentially raise the lower end of the range as well.

Our next question comes from the line of Stephen Baxter of Wells Fargo.

I just wanted to ask another one about direct contracting. I appreciate you guys have taken a cautious approach to how you forecast and accrue for the business. I think you said you're engaged with CMS to try to create increased visibility and predictability in the program. I guess what exactly would you be looking to see to achieve that outcome? And then what would the forum for any of those changes potentially to be made at some point down the road?

Sure. Thanks, Stephen. I appreciate the question. We have a great partnership with the Innovation Center. These are pilot programs. And so they typically have adjustments that are made each year. And so we, in concert with a coalition through APG, have been talking to them about potential adjustments that could be made within it that would create more of the stability and predictability. I mean it's a fairly technical calculation, but something that would smooth the revenue balance, which really is what's happening with the retro trend adjustment that Tim talked about. There's like 3 or 4 factors that affect what that revenue number turns out to be. And so there's a lot of modeling going on and a lot of work around that. But I mean, I guess I would leave it there, but I think they are actively engaged. I think they too are surprised by the volatility that's occurring and it's really a function of coming out of this, hopefully, once in a generation COVID-type experience. And so that really swings when you start to do year-over-year and baseline year comparisons, you can see pretty significant adjustments around that. And so that's what we're working with them on as part of a larger coalition.

Our next question comes from the line of Jamie Perse of Goldman Sachs.

First one quick clarification. The upside on medical margin this quarter versus your guidance. Tim, you mentioned there was a positive retro adjustment on MA. Can you quantify what the benefit there was or if all of the upside was underlying performance?

No, there is no retro trend adjustment that applies to the MA business; it is specifically related to the direct contracting business. The MA performance is improving in the fourth quarter due to the overall enhancement in the model. A lot of adjustments occur in the third quarter when we receive the most data from our payers. We made the necessary adjustments from the payers to ensure we had the right mix of members, correct bid rates, and appropriate RAF assumptions. All of this contributes positively. We also saw an increase in medical margin dollars in the quarter due to retro members and being at the high end of our membership range. Additionally, we updated our cost data from payers. The net effect clearly indicates a stronger medical margin performance in dollars on a PMPM and MLR basis, reflecting the continuing strength of our model. However, there is no formulaic retro trend adjustment on the MA side.

Yes. I meant the patient attribution piece, but I think you...

Yes. On the patient attribution side, we have picked up about 1,000 members, retroactively. This is not really an adjustment; these are members who are seeing our primary care providers and should be attributed to us. We have identified them and confirmed with the various health plans regarding their attribution. Typically, this process begins to decline as we move further into the year. However, later in the year, we still have some new plans in new markets where this attribution process is unfamiliar. Most of those 1,000 members are spread across some of those payers in those markets.

Okay. And then just on MaineHealth, how is the integration going? And do you feel like you're ready for next year? You mentioned that's a complex one and different from your historical partnership. So anything to call out there just in terms of how you're going and how you're feeling in terms of getting that ready for year 1? And any economic considerations you should factor into our models versus your typical year-1 performance for traditional markets?

Yes, it's going incredibly well. The engagement from the MaineHealth medical group, along with Andy and the entire team, has been excellent. We have integrated effectively with their electronic medical record system, and the payer contracting is progressing very well. It takes time to finalize the starting points, especially since they are a large group across the entire state. Overall, I would say things are going smoothly, and their engagement is strong. The integration with their electronic medical record will be beneficial. They have extensive care team resources available that can significantly enhance performance over time. We feel optimistic about this, and we'll provide updates on the class of '23 and its starting point as we progress. Currently, we believe it will fall within our historical ranges and should yield positive results.

As that's all the questions we have time for, I'd now like to hand the conference back over to the management team for closing remarks.

Great. Thanks, everyone. We really appreciate it. Hope everyone has a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.