agilon health, inc. Q4 FY2022 Earnings Call

Hello, everybody, and welcome to the agilon health Fourth Quarter 2022 earnings call. My name is Sam, and I'll be coordinating your call today. I will now hand you over to your host, Matthew Gillmor, Vice President of Investor Relations, to begin. Please go ahead.

Thank you, operator. Good afternoon, 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 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. And with that, I'll turn the call over to Steve.

Thanks, Matt. Good evening, and thank you for joining us. 2022 was a very strong year for agilon and our physician partners, and we have entered 2023 with incredible momentum. We have made significant progress against our vision to transform health care in 100-plus communities by empowering primary care doctors to accelerate the transition to a value-based care system. The research analysis we published in mid-January highlights the success of our model, specifically in patients with diabetes. As many of you know, diabetes affects about 30% of the Medicare population and if not properly managed, can have significant long-term health consequences for seniors. Our analysis found that diabetic patients cared for by agilon Physician Partners when compared to Medicare Advantage and Medicare fee-for-service benchmarks saw a 2x greater improvement in A1c control, a 19% lower total cost of care and a meaningful improvement in health equity access and quality. Consistent results like these are simply not possible in the legacy fee-for-service model, which is prevalent in the vast majority of communities in this country. With our early success in managing diabetics, we see a multi-decade opportunity for agilon and our partners in addressing significant variability in the way complex patients are managed, ultimately driving better outcomes at lower cost. To that end, we are making meaningful strides in addressing the access, cost and quality variability that defines the fee-for-service system. Our distinctive platform is rapidly unlocking for more primary care doctors, a care delivery and payment model that allows them to operate an outcome versus transaction-driven business model. This new primary care model delivers consistently better outcomes across our network and creates an infrastructure for additional doctors and communities to make the transition to a value-based model. What is good for our physician partners and their patients is ultimately good for agilon, and you can see it in the incredible results of our business. Today, we are serving 25 diverse geographies with 2,200 primary care doctors in nearly 500,000 senior patients. These figures include the record 130,000 new senior patients we will add in 2023. And today, we are pleased to share that in 2024, we will add at least another 130,000 new members with the opportunity for that number to grow. For context, our 2024 total Medicare Advantage membership will be approximately double the membership in the 2022 period, which we are reporting today on this call. Our accelerating momentum in both new and current markets comes from our ability to drive meaningful reductions in wasteful health spending, generating a surplus that we call medical margin, and we reinvest roughly half of that surplus back into local primary care. Our medical margin for 2023 is projected at nearly $550 million, making agilon and our partners an incredible catalyst for stabilizing and growing primary care nationally. The rapid inflection in membership and maturation of earnings across a large and diverse set of markets highlights that the agilon platform can be the standard for how primary care doctors operate in this changing health care landscape. We believe this latest step change in the business is also reflective of the power of a large and growing number of physicians winning together on a common platform. Now to 2022 performance. The overall momentum in our business was evident as our fourth-quarter results closed out a very strong year. Performance across Medicare Advantage and direct contracting was in line or better across all key metrics, enabling a full year adjusted EBITDA of $4.3 million, even as we made substantial platform investments in technology and infrastructure to scale our organization for the future. For the full year, our core MA business performed extremely well with membership increasing 45%, medical margin increasing 67% and medical margin per member per month increasing 15%. On one of the most important metrics in our fast-growing subscription business, our 10-year 2-plus partners improved their medical margin by 33% from $93 to $124, which accounted for 90-plus percent of the full year $43 million improvement in adjusted EBITDA. Similarly, for the quarter and the full year, our direct contracting or reach business came in ahead of expectations and contributed modestly to adjusted EBITDA. We continue to demonstrate the power of our model to deliver strong cost and quality performance as costs for our direct contracting patients were 1% better than the national trend, and we are on track to achieve a 100% quality score, reflecting excellence in areas such as post-hospital discharge and timely follow-up visits. Our performance in 2022 drove an estimated $20 million in savings back to the Medicare program as well as positive surplus to our physician partners. The combination of 2 years of experience in this program and an increased level of transparency on the revenue calculations from the innovation center has increased our level of confidence in reach and the overall opportunity that we see to drive future performance. Turning to 2023. Our guidance reflects the momentum in our business as membership revenue, medical margin and adjusted EBITDA are all projected to grow even faster than they did last year. Our adjusted EBITDA guidance of $75 million to $90 million reflects a year-over-year increase of approximately $78 million at the midpoint where we are sustaining 50% MA membership growth. Just like in 2022, the inflection in our 2023 adjusted EBITDA is powered by our year 2-plus markets, which generate substantial operating leverage at the market and corporate level. This step change in earnings is being delivered while 44% of our membership is in year 1 or 2 markets versus 37% in 2022. And highlighting the long-term embedded earnings being created, but we continue to drive significant improvements in the current period. These results also highlight the operating leverage inherent in setting up the infrastructure for full risk in a local market as the flow-through of incremental medical margin dollars to adjusted EBITDA is significant. The takeaway is that the maturation of our markets and members is accelerating our adjusted EBITDA gains in 2023 and beyond. Looking to 2024. As I mentioned earlier, the success of the agilon network is both improving our collective performance and driving our growth. The class of 2024 will reflect that momentum as we will onboard at least 6 new groups, 2 new states, 80,000 members and 500 primary care physicians. This class will be at least double the size that we predicted last March at our Investor Day and reflects the accelerating demand for a new primary care model driven by the success of our partners and powerful dynamics with senior demographics, physician practice challenges and payer demand for a move away from fee-for-service. The class of 2024 partners are very diverse and include primary care, multi-specialty and both independent and employee groups affiliated with health systems. Of note, the class of 2024 represents a meaningful step forward for the organization in tapping the unique power of the large and growing local addressable market. We have highlighted in the past the power of transforming the payment model in a local market to full risk. Once our value-based care infrastructure is established, other physician organizations, including health systems, can confidently and quickly move into full-risk value-based care, leveraging the infrastructure and learnings of that local market. As we have purposely expanded to 14 states and 30-plus markets over the past 6 years, we have established for ourselves an in-market total addressable market of 33,000 primary care doctors and 10.5 million senior patients. This year's class includes particularly large new partner organizations within our existing markets and states driving outsized in-market growth for next year. As I mentioned in our last call, our sales cycle has accelerated, and this will allow for a longer implementation period for new partner groups in 2024. This, coupled with the increasing scale of our platform positions our new partners to generate outcomes much earlier in their life cycle, including a higher starting point for quality performance and medical margin. Performance of our new partners will be further supported by the acquisition of mphrX, which we completed yesterday. The company's Minerva platform uses fire-based standards to aggregate, access and exchange data across health care delivery networks. We have known their team for some time and piloted their technology during our 2022 new market implementation process. The integration of this technology into agilon's existing technology platform will enable faster onboarding of our partners and more rapid integration with EMR systems. This improvement in speed, particularly with complex EMR integrations, will support our ability to scale and enter additional communities, especially with distributed physician networks and health systems. Every incremental week is important during our implementation process, and this technology will effectively buy us time and accelerate our ability to drive outcomes for both patients and physician partners, and continued investment in our platform to accelerate the success of current and new partners should allow us to further strengthen our leadership position. Let me close with some perspective on the macro environment. The tailwinds for the move to agilon's new primary care model have never been stronger. And in that assessment, I would include the recent advanced notice from CMS and the final RADV rule. It is increasingly clear that the challenges of the fee-for-service system are too great. Both health plans and CMS are looking to a health care system that emphasizes the relationship between a senior patient and their primary care doctor and rewards health outcomes rather than the volume of visits. Agilon has been solely built for success in that type of environment, and these developments only increase our opportunity. When I look more immediately at the levers in our business, by getting members on the platform earlier, delivering a more effective implementation period with improved starting points for new partners and accelerating quality and medical cost performance in our more mature markets, I feel extremely bullish on 2023, 2024 and beyond. With that, let me turn things over to Tim.

Thanks, Steve, and good evening, everyone. I'll review highlights for our financial statements and provide some additional details on our guidance for 2023. Starting with our membership. Medicare Advantage membership increased 45% to approximately 270,000 at the high end of our guidance range. Direct contracting membership increased 72% to approximately 89,000. Total members live on the agilon platform, including both Medicare Advantage and direct contracting increased to 359,000. Our MA membership growth was driven by the 6 new partner geographies that went live in January 2022 and 13% growth within our existing geographies. Revenues increased 49% on a year-over-year basis to $690 million during the fourth quarter. For the full year, revenues increased 48% to $2.7 billion. Revenue growth was driven primarily by MA membership gains from our new and existing geographies. On a per member per month basis or PMPM revenue increased approximately 2% for the quarter and for the full year, which primarily reflects benchmark updates and market and member mix. Medical margin increased 93% year-over-year to $61 million in the fourth quarter. For the full year, medical margin increased 67% to $305 million. Even with the dilution from our strong membership growth and a higher proportion of members in our year 1 markets, medical margin increased as a percentage of revenue and on a PMPM basis. For the full year 2022, medical margins were 11.2% of revenue compared to 9.9% last year, and medical margin PMPM increased 15% to $96 versus $83 last year. Medical margins benefited from stronger performance in our year 1 markets and significant gains in our year 2 plus partner markets. As Steve mentioned, in our 10 year 2-plus partner markets, medical margin PMPM increased by 33% to $124 in 2022, up from $93 in 2021. Network contribution, which reflects agilon on share of medical margin increased 74% to $22 million during the fourth quarter. For the full year, network contribution increased 56% to $132 million. The year-over-year increase in network contribution reflects gains in medical margin as well as the relative contribution of medical margin across our markets. Platform support costs, which include market and enterprise level G&A, increased 35% to $42 million in the fourth quarter. For the full year, platform support costs increased 19% to $146 million. Platform support costs were higher than our internal forecast during Q4, largely due to investments to help scale our business in 2023 and beyond. The growth in our platform support cost continues to trend well below our revenue growth reflecting the efficiency of our partnership model. For the full year, platform support cost declined to 5.4% of revenue compared to 6.7% last year. Our adjusted EBITDA was negative $10.6 million in the quarter compared to negative $26.7 million last year. On a full year basis, adjusted EBITDA was positive $4.3 million compared to negative $38.6 million last year. The $43 million year-over-year gain in adjusted EBITDA for the full year was primarily driven by higher medical margins in our year 2 plus partner markets, which generate significant operating leverage against market and enterprise G&A. Adjusted EBITDA contribution from direct contracting, which is reflected on a net basis within other income, was positive $8 million in the quarter and positive $14 million for the full year. Our underlying performance in direct contracting from a cost and quality standpoint remains strong and continues to outperform benchmarks. During the quarter, CMS provided updated estimates for the retro trend adjustment, which positively impacted our revenue benchmarks. This drove modest upside to adjusted EBITDA contribution and offset the platform support investments I mentioned previously. Turning to our balance sheet and cash flow. As of December 31, we had $909 million in cash and marketable securities and $43 million in outstanding debt. We remain extremely well capitalized and do not anticipate needing any external capital to drive our future growth. Additionally, we continue to anticipate generating positive cash flow as we move into 2024. Our strong balance sheet position and adjusted EBITDA progression gives us significant flexibility to make targeted investments to further strengthen our scale and scale our platform, including both internal and external investments. From an external perspective, we continue to evaluate targeted capabilities that can leverage our growing membership base. To that end, we are pleased to complete the acquisition of mphrX. As referenced in the accompanying press release we issued this afternoon, we expect the integration of mphrX into our existing technology platform will accelerate the onboarding and performance of our new partners through faster data integration. While the acquisition will contribute to our adjusted EBITDA in 2023, we do expect modest levels of accretion in 2024 and beyond. From an internal perspective, we can continue to focus our investments in technology and growth. In 2022, we stepped up our geographic entry costs going from $33 million last year to $68 million in 2022. The increase in geographic entry costs relates to 2 factors, which we view as key positives. First, the class of 2023 new partners included over 100,000 members, which went live in January of this year. This is almost double the size of the class of 2022 and compared to our original estimate of 80,000. Second, given the shorter sales cycle, our 2022 financials include some costs associated with implementing the class of 2024 new partners, which will go live in January of next year. In total, our member acquisition costs, including both new geographies and same geography remain in the $400 to $600 range. This is incredibly efficient and considering our high member retention and improving unit economics will generate very attractive returns. Before turning to our guidance for 2023, I want to note that we did identify 2 material weaknesses in our internal controls, which we have disclosed in our 10-K filing. These were identified during our first Sarbanes-Oxley audit as a public company and did not impact our financial statements. We are committed to maintaining strong internal controls and are implementing procedures to remediate this as soon as possible. Turning now to our guidance. For the full year 2023, we expect ending membership live on the agilon platform will grow to a range of 485,000 to 500,000 members including 50% growth in MA membership to approximately 405,000 and steady ACO reach membership at approximately 88,000 at the midpoints. We expect revenue in the range of approximately $4.28 billion to $4.37 billion or 60% growth at the midpoint. At the same time, we anticipate our adjusted EBITDA will continue to inflect higher to a range of $75 million to $90 million. This is driven by continued progression in medical margins across our maturing partner markets, along with platform support cost leverage. This more than offsets dilution from new members and markets as we are accelerating our EBITDA growth while also accelerating our membership growth in 2023. For the first quarter, we expect MA membership growth of 385,000 to 390,000, revenue of $1.07 billion to $1.09 billion and adjusted EBITDA of $32 million to $37 million. As you can see in the guidance table from our press release, we expect normal seasonality in our medical margins will drive moderating adjusted EBITDA throughout the year. This reflects the higher mix of agents in the latter part of the year. Three other items to call out as it relates to our 2023 guidance. First, we expect direct contracting will generate modest adjusted EBITDA contribution in 2023 in a range of $5 million to $10 million. We also expect this will be weighted towards the back half of the year as we plan to take a prudent approach in estimating the retro trend adjustment and other factors. Second, we expect the mphrX acquisition will contribute approximately $6 million in revenue for 2023 with an immaterial impact on our adjusted EBITDA for the year. Finally, I'd note that our same geography growth will likely trend in the low double-digit range during 2023 across our partner markets. This reflects our decision to push several new partners within our existing geographies into the class of 2024 and provide for a longer implementation period. With that, we're now ready to take your questions.

Our first question comes from Lisa Gill of JPMorgan.

You got through a lot of detail here. I wanted to hone in on the revenue number for next year. Is that substantially here? I know you gave a few of the metrics at our conference just a little over a month ago. But Steve, if I think about the revenue being higher, can you maybe just talk about the components to that. One, is it risk scores? Are the acuity levels higher? Two, I know that we had a nice rate, MA rates were better for 2023. How do I think about the revenue and then how that translates to medical margin?

So 23 unit revenue has a nice step-up. I'll let Tim kind of dimensionalize that for you, Lisa.

Yes. In fact, of course, the first pickup in revenues because we have this very large increase in membership coming in. Then when you look at, I think, revenue, at least on a PMPM basis, that's going up around which, of course, is a big number. But the benchmark increase itself is your kind of blended across our markets and members is in that 4% to approaching 5% range to begin with. And then on top of that, I mean, we would expect especially in our kind of year 1 and year 2 sort of younger markets that we would get some continued wrap improvement as well, and that kind of tops you out to that sort of 6% or so range on a revenue PMPM basis. So that in combination with a very strong membership growth gets us to that overall revenue number.

And Lisa, one thing I would add to Tim's comment is, if you think about what we do, we love going to these markets and being first. They're 100% fee for service, and we want to move them to value. I think we've found that there are markets out there with higher health care spend and therefore, higher starting points on rates as part of our mix that are really attractive for us, and we've been able to demonstrate success within them. And when you realize how large this class is with those year 1 markets that have a higher baseline plus the factors that Tim talked about, that accounts for that higher composite revenue number you referenced.

Our next question is from Justin Lake of Wolfe Research.

I have two quick questions. First, regarding the ACO reach membership, which has remained flat year-over-year, what trends are you observing with physician groups? I understand that not all physician groups are included. Are there any entering or exiting the program? What changes are you noticing in the underlying membership? I’m trying to get a clearer picture on that. Second, Steve, you mentioned positive comments about rates, but a major question I receive is about the new risk model. I would appreciate your insights on your experience during the last significant change in the risk score model in California and how you think this might impact Agilon.

Sure. Thanks, Justin. Two fulsome questions. So real quickly on ACO reach, same partners in '23 that we have in '22, and that's sort of the year-over-year relatively flat. As we shared early in January, we did have some partners that could have gone in '23. We pushed to '24 because we're very focused on having a strong implementation and a good starting point. And so we see an opportunity in '24 and beyond for additional ACO reach membership. We continue to see it as a very strategic program. I think we're really pleased with our results from a cost and quality perspective. The value that we get both in direct contracting and Medicare Advantage of having that concentration within the practice and with the community is really very strong. So we're bullish on direct contracting and now with 2 years of visibility and experience and better transparency and almost a full runout on 2022. You can see in our results that there was some upside within that, which is encouraging for us as we go forward, although we are being cautious. Yes, anything to add?

Yes. Before we address the advanced rate notice question, I want to express that we are quite satisfied with our overall performance following the transition to ACO Reach. Our focus is on reducing costs, meeting cost benchmarks, and maintaining high quality, and we are successfully achieving both of these goals. We continue to exceed cost benchmarks and have achieved a 100% quality score, which has contributed to a performance that is somewhat better than we anticipated for DC in 2022. For 2023, we aim to be very prudent. We anticipate that ACO Reach will likely contribute in the range of $5 million to $10 million, considering both the planned reductions and the adjustments in the global discount.

Justin, regarding your second question about the 24% rate notice and the recalibration of the risk adjustment model, we have conducted our initial analysis on a market-by-market basis, examining the HCCs and proposed changes. The key takeaway is that we believe it is very manageable for us. The overall composite aligns with the 3% impact that has been noted nationally. Considering our targeted markets and the populations we serve, this makes sense. We are focusing on markets that are entirely fee-for-service and are in the early stages of development, with 44% of our membership in year 1 or year 2 markets. We are actively working to reduce variability in cost, quality, and risk adjustment. Our prevalence numbers show we can be below those benchmarks. Therefore, the impact for us is not as significant as it might be for clinic models that serve more complex patients, like duals. My confidence in 2024 and beyond, as well as 2023, stems from the strategies we are implementing, which we believe will enhance our performance in 2024. We plan to double our membership in Medicare Advantage compared to what we reported for the close of 2022, with the potential for 2024 to exceed this projection. Additionally, we have year 1 markets that typically reach breakeven but are currently dilutive on a medical margin level. Our longer implementation cycle from this exciting acquisition will improve that starting point. Over time, we expect to manage cohort migration effectively. We are currently participating in the comment period and engaging with organizations like APG and BMA on this issue. Others may be more heavily affected than we would be, and we support a phased implementation of such significant changes. Ultimately, we find the situation manageable. Lastly, I believe there is a broader trend moving towards value over fee-for-service, driven by challenges for physicians, growing senior demographics, and payers seeking greater value. This recent notice will likely accelerate that trend. Most of the national membership in Medicare Advantage is still based on fee-for-service, and there will be a push to transition away from that variability. Agilon stands out as the solution for payers, as well as for physicians. From a volume perspective, we believe we will succeed, and we will see the final outcome in a month. The main point is that it is manageable.

And just one clarification. Steve mentioned new markets being dilutive on a medical margin basis. I think you probably meant EBITDA.

I'm sorry.

It's okay, but just to clarify. Operator, we can move to the next question, please.

And our next question comes from Jay Andresen from Truist Securities.

Actually, my question is related to what the clarification, Matt, you just gave. So on this Clearly, class of '22 performed well compared to your medical margin PMPM target of $30 to $60. How should we think about year 1 medical margin guidance in terms of class of '23 does the unique nature of this year's class impact your view, how you think about year 1 medical margin this year?

This is Tim. I'll take that. I don't think so. I believe we are still maintaining that the range of $30 to $60 will be our starting point for the class of 2023. It's a very large class this year, and we have some figures on both ends of that range. However, that range remains suitable for the class of 2023 for this year.

Can you provide an update on your discussions with health systems? Are you actively exploring those partnerships for the class of 2024, or do you see a wait-and-see approach depending on how Main Health develops?

Yes, I can provide an update on that. It's a great question. As I mentioned earlier, part of the class of '24 includes health systems and the physicians associated with them, both employed and independent. We plan to share much more detail at our Investor Day about our class of '24. We see this as a significant growth opportunity. Health systems are facing many challenges from the fee-for-service model, such as changes in reimbursement and rising labor costs, similar to what our physician partners are experiencing. They also have a great chance to leverage their primary care physicians for the senior population and shift towards value-based care. We will revisit this topic with more details at the end of the month.

Operator, why don't we move on. If we could just keep it to one question just so we can get to the full queue.

And our next question comes from Kevin Fischbeck from Bank of America.

Great. I just wanted to get a little more color on this implementation time frame that you guys talked about with mphrX. Are you thinking about this is more about being more prepared when you go live because of faster implementation? Or does this potentially accelerate your ability to bring someone on faster where you would have had to wait 12 months implementation, I can do it with only 10 months of advanced warning?

Well, I think we're going to continue to take as many months as we can on an implementation period. The example I'll give you, Kevin, is in our 2022 pilot, we utilize this in a market that took us 4 months doing it the old way. And using the technology of the nerve technology, we were able to do it in 4 weeks. It's 75% faster in that example. Each month is worth a lot in terms of our ability to get patients scheduled, get them in for visits and get clinical programs set up earlier, the ability to stratify that population. And so what I would say, when I said it buys us time is it gives us more time to get into the really the heart of that implementation which is getting that patient in getting that assessment and getting them the resources that they need around that. And so that is the most immediate and powerful impact. This will improve our clinical quality over time should help us on the medical expense because we're getting there. The quality of our data through this was improved to versus the way we were doing it. Some of that variability came out. So I think it's a combination of those things, Kevin, that leave us pretty excited about the acquisition.

I believe it’s crucial for our strategy to continue diversifying the types of partners we engage with, including large organizations that operate multiple electronic medical records systems. This expansion increases our ability to serve a wider variety of partners, making these partnerships significantly impactful for us.

Operator, why don't we move to the next one.

Our next question comes from Sean Dodge from RBC.

Yes. The class of 2024, 130,000 members, Steve, you made the point that's much larger than you had initially contemplated. Should we think about 2024 being fully based now? Or do you expect there will be more to be added there? I guess I would point you start to kind of shift over to building out 2025.

Sean, we'll provide you with more details at our Investor Day at the end of the month. I believe I mentioned it's going to be at least that, right? The new partners and markets joining the composite, when considering our current initiatives in the same geography, could reach that $130 million, or even exceed it. Furthermore, there are additional partners with letters of intent that we might include in the class of 2024, which we could also push to the class of 2025 like we did last year. The estimate regarding those six partners I mentioned has some room for additional membership as well. We're careful and strategic about our approach. With some of the technologies and quicker implementation timelines, there may be some contributions to 2024 as well. We will provide an update at the end of the month during our Investor Day. Overall, we feel optimistic about the class and the potential it holds.

Our next question comes from George Hill from Deutsche Bank.

Yes, Steven, I think you addressed this question well, although it started with a long introduction. Looking at what you have already signed for the class of '24, FCP in Pennsylvania seems like it could contribute 30,000 to 35,000, assuming national averages apply. Additionally, with the Lexington clinic, it appears you might have up to 60,000 MA lives. You mentioned that end market growth could likely exceed 30. My follow-up question is about when you will close the class of '24, and at what size would it be too large for you to ramp up '24 and then shift people into '25?

Thank you for the question, George. First, I want to highlight that FPC and Lexington are two partners from the class of '24 that have released their information. We'll provide updates on the others and discuss everything in detail at our Investor Day at the end of the month. Both are excellent partners and exemplify the strength of this class. FPC is the largest independent primary care group in Central Pennsylvania. We've previously discussed how some groups in certain states or regions didn't feel it was the right time to partner. However, a few years later, when they decided to move towards value, agilon became the right partner for them, which is the case for FPC. They are truly an outstanding group, and we're thrilled to have them on board. Lexington Clinic is also impressive, being the largest and oldest multi-specialty group in Central Kentucky. We're eager to partner with them as well. We have a longer implementation period with them, and together we decided to place them in the class of '24 instead of '23 for mutual benefit. We'll provide more updates at the end of the month. We're approaching a time in about a month where we may need to begin considering candidates for the next class of '25, allowing us to establish a solid foundation and ensure a smooth start.

Our next question comes from Ryan Daniels from William Blair.

Congrats on the announcement. Tim, a lot of data but I want to hone in, again on your comments on medical margins. They were interesting looking at the year 2 cohort. So I'm curious if you could give us any color on how that contrasts to what that year 2 cohort may have looked like a year or 2 ago? And then second, do you think that's due to more rapid and better implementation, so starting at a higher point or is it more to do with kind of the operational speed to value as you move into the second year of those performance metrics?

Yes, that's a great question. We'll provide an update in about a month on the cohort data, which will give you a clearer picture. Looking back at the cohort data we shared at last year's Investor Day, you can see that our year 2 market performance has remained consistent across cohorts over time. We're not seeing a quicker progression but rather the same steady advancement for each cohort as they continue. Over the last couple of years, we haven't observed a higher starting point; we've consistently been in the $30 to $60 range. The key takeaway is that when we bring someone in at that range, we quickly move them up the maturation curve and improve medical margins, as we illustrated in last year's cohort analysis from year 1 to year 2 and year 3. They are quickly achieving figures in the mid-100s, and by year 3, some markets are already pushing between $150 and $200 in medical margin per member per month. It's not necessarily about a higher starting point; rather, it's our ability to rapidly elevate these markets in years 2 and 3. This acceleration stems from the tremendous physician variability we're getting from the system and strong compliance with our clinical programs, which enhances quality and reduces costs.

Our next question comes from Brian Tanquilut from Jefferies.

Tim, just a quick question on the EBITDA to cash flow conversion. So obviously, a strong outlook in EBITDA growth. But how should we be thinking about cash flows this year and into next year as well?

Yes. One of the reasons our cash flow often lags behind our EBITDA is due to the timing of how we reconcile our risk pools with the payers, which means we receive cash for our EBITDA performance after we report it. Additionally, we are investing in larger markets, so the implementation expenses for these markets are increasing as well, and we won't see any revenue or cash from those investments until the following year. Typically, this results in cash flow trailing behind EBITDA. For example, in 2023, we anticipate a significant portion of our cash flow improvement year-over-year will stem from 2022. In 2022, the substantial increase in our EBITDA compared to cash flow was influenced by these same factors.

Our next question comes from David Larsen of BTIG.

Can you talk about any conversations you might be having with your base around the RADV rule or the final rate notice? It seems to me like physician practices will need basically all of the assistance they can get in terms of like coding and implementing restricted and effective narrow networks. Is that driving up demand for your platform or not? Just some thoughts there would be helpful.

Yes, David, I appreciate your question. This weekend, we will be meeting with 200 physicians in Florida. The discussion will focus on the regulatory environment and how it is accelerating value. We believe there is an opportunity for us to enhance our performance in this area, and we plan to collaborate closely with them to ensure high accuracy in coding. We have achieved good results so far and will continue to seek improvements, which we will address during our meeting. The physicians are keen to ensure we are operating correctly. Considering the potential $550 million in medical margin for 2023, roughly half of that will be reinvested back into these practices. This serves as a significant boost for them and their communities, and we aim to proceed intelligently. Additionally, we are discussing the impact of the advanced notice, which varies by market, but it is not the final notice. In a month, we will have more clarity, allowing us to make initial plans and adjust as necessary once we have the final details.

Our next question comes from Jamie Perse from Goldman Sachs.

Just wanted to follow up on the platform cost I think you said those were higher than expected due to infrastructure to scale over 2023 and beyond. Can you elaborate on what these investments are a little bit more? And should we think about them as accelerating growth, accelerating profitability or just necessary investments to support what's already in place?

Yes. We're very pleased with our ability to manage platform support costs effectively. We mentioned that in 2022, these costs as a percentage of revenue decreased by more than 100 basis points, and we anticipate continued improvement year-over-year. Achieving leverage on platform support costs is essential to our model. In Q4, we had the opportunity to enhance our platform forecasts, which is evident when comparing the higher spending levels in Q4 to the first three quarters. This increase was primarily to support the large incoming class of 2023. As a result, we proactively upgraded our technology infrastructure and data storage to ensure we could accommodate this substantial class and position ourselves for future growth. I don't see this as a sign of future challenges; rather, we will continue to gain great leverage from our platform support costs, and we are well-prepared for that. Additionally, the increased direct contracting EBITDA flow helped offset the higher expenditures in Q4.

And Jamie, if I can just add to that. I think just the macro is we are investing heavily in our business in a variety of ways. I think we are the solution out there. I think we have a lead. We are trying to invest in a period of dislocation and frankly, advance that lead. And so meaningful step-up in terms of the platform support costs, a lot around technology, the amount of data that we are taking in and providing to our partners on a daily basis to help do the things that we talked about for better cost and quality has escalated dramatically when you have a much larger class, getting in front of that is a key part of it. The geo entry costs that Tim talked about. Now that's just a function of the double the class size, but that's a substantial investment. And then this acquisition that we talked about. So in a variety of ways, we are trying to do things that are going to put our partners in a position to really extend their lead in their communities and attract other doctors and other patients.

Our next question comes from Whit Mayo of Bravo Securities.

Tim, I was just wondering if you guys are making any changes in your patient attribution initiatives or process. It's just anything new with the systems to ensure that you're matching with the plans given the materiality of the membership growth in front of you? And maybe do you find that the plans are getting better with this as well. They obviously have some huge incentives to match alongside you.

So Whit, it's Steve. I can chime in on this one. We are spending a lot of time with our plans right now. We are on the phone with the Humana National team on Monday we collectively have a goal to really accelerate that period. So there's not as much retroactivity. And so both of us are saying, what do we need to do earlier. When you have a mix shift, like you talked about between plans. Obviously, there's more work around that. And so it's what I would say, it's a lot of logic, it's a lot of process. It's a lot of data that's going on to make that work happens. There's still going to be some retroactivity through this first quarter, given the magnitude of some of those shifts. But it's just kind of table stakes in this business. And we've got a great relationship with the plans, and we're working on it.

Yes, I think that's fair. We are not introducing anything new, but it's a key strength of our model and one of the advantages we offer our partnerships with both payers and provider groups. Our strong attribution logic and process is effective, especially for HMO membership, but the ability to apply this to our significant PPO membership mix is what truly makes our model successful. While we aren't necessarily doing anything new, leveraging our core expertise makes it much easier for us to expand with both national payers and emerging regional payers.

Our next question comes from Sandy Draper from Guggenheim.

Many questions have been posed and addressed, but I’d like to follow up on the comments regarding platform support costs in the same region. Given the robust pipeline and the outlook for 2024 and beyond, is it reasonable to expect that this is not just a one-time occurrence for one quarter, and that we won’t see a decline? It appears we are moving up to a new level because the visibility for long-term growth is present. I just want to ensure I am considering this correctly.

Yes. I would address this in a few ways. Regarding platform support costs, we had the opportunity to increase these costs in advance of 2023, especially following our strong performance in both M&A and direct contracting. Therefore, our forecast for platform costs in the fourth quarter aligns with what we expect our 2023 run rate to be. As we enter 2023, the increase in platform support costs is significantly driven by the addition of new markets and members. This makes sense, but we are still seeing a noticeable decrease in platform support costs as a percentage of revenue, which means we are achieving leverage from it. As for implementation costs, these remain in a very good range of $400 to $600 per member. The investment of $400 to $600 to onboard a new member yields a quick return, as we account for the lifetime value of medical margins and network contributions generated from that membership, along with the strong retention rates we have. We expect a lifetime value to customer acquisition cost ratio of around 10 to 12 to 1, which is very encouraging. The increase in implementation costs this year is mainly due to the fact that we onboarded double the number of members compared to the previous year, with over 100,000 new members going live at the beginning of 2023 compared to about 57,000 the year before. Even though there is a larger number, the cost per member remains favorable. We view this investment positively; onboarding as many members as possible positions us well to achieve our future goals for membership, medical margin, and EBITDA.

And our final question comes from Stephen Baxter of Wells Fargo.

I was hoping you could talk in a little greater detail about your ability to manage margins and margin progression in a more challenging rate environment inclusive of that risk model headwind, not to harp on it too much, but the risk model change alone that you size is larger than the average annual EBITDA margin expansion that's implied to reach your long-term guidance target. So I'm just trying to understand why this would it be a bigger setback for you in 2024 absent some kind of mitigation in the final rule.

So, Stephen, I would summarize by saying it's manageable, staying in the 3% range. This is due to the strategies I mentioned, such as increasing the number of members on the platform sooner and the fact that we are doubling our MA membership from 2022 to 2024, which is significantly more than we anticipated a year ago. Additionally, the year-over-year improvements are driven by the earlier rollout of clinical programs and enhanced quality. Our diabetes research shows we're performing 20% better than Medicare Advantage on a national level concerning total cost of care, especially for complex patients, and we are seeing substantial progress there. I'm not even factoring in potential changes on the benefit side, as we are actively discussing this with plans, where adjustments might occur. The past few years have focused on increasing benefits, but this year could involve reviewing areas where we may need to adjust some benefits based on the market. It's part of the normal cycle. Also, considering the initial conditions we discussed, if we think about the first-year markets possibly being dilutive at the adjusted EBITDA level, every additional dollar we can generate through a better implementation period significantly aids our situation.

And there are no further questions. I would like to hand the call back to the management team for any closing remarks.

We're obviously excited about our performance in '22 and what's ahead in '23 and '24. And we look forward to seeing all of you at the end of the month at our Investor Day here in New York. I think it's going to be a great discussion. So see you then.

This concludes today's call. Thank you, everyone, for joining. You may now disconnect.