Earnings Call Transcript - AGL Q2 2022

Operator, Moderator

Good afternoon. Thank you for attending today’s agilon health's Second Quarter 2022 Earnings Call. My name is Forum, and I will be your moderator for today’s call. All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end. It is now my pleasure to pass the conference over to our host, Matthew Gillmor, Vice President of Investor Relations. Mr. Gillmor, please proceed.

Matthew Gillmor, Vice President of Investor Relations

Thank you, Forum. Good evening, and welcome to our 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 in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. With that, let me turn the call over to Steve.

Steve Sell, CEO

Thanks, Matt. Good evening, and thanks for joining us. We’ve had a very strong first six months of the year. And our performance demonstrates rapid progress against our vision to transform health care in communities across the country by empowering primary care doctors. The new primary care model we have created with our partners aligns physician outcomes with improvements in the quality, experience, and cost of their senior patients’ total care. As a result, senior patients are living longer, healthier lives, and primary care doctors are enjoying greater satisfaction as they share in the success of a more holistic and effective approach to patient care. We have now created a true national network of like-minded physicians, and with the record class of 2023, we will have 2,200 primary care doctors and nearly 500,000 senior patients on the platform, which will make agilon one of the largest organizations in the country supporting full-risk care for senior patients. As we have recently announced with our local partners, this class will include four new states: Maine, Minnesota, South Carolina, and Tennessee. By being first in these states with a scaled multi-payer full-risk model, we will shape the evolution of value-based care in these markets for decades. The combination of agilon's partner success and macro forces at the national level has created a material acceleration in physicians seeking a new primary care model. Now to the focus of today’s call. I will cover three areas in my remarks. First, highlights from our second quarter and key performance drivers. Second, an update on the implementation for the class of 2023 and new partner development for 2024. And third, a quick comment on our upcoming Pod leadership retreat in Maine and how we leverage our growing physician network. Our second quarter results were strong. Membership, revenue, and adjusted EBITDA all came in above the high end of our guidance. This was driven by in-line MA medical margin performance which included dilution at the unit level from higher than forecasted membership growth. Direct contracting results were ahead of expectations with strong underlying trends in revenue and medical margin. Most importantly, when considering the combined Medicare Advantage and direct contracting results, the value of a primary care physician being on the agilon network continues to increase. Ultimately, this is helping to fuel our growth and ability to improve patient care in more communities. Our growth continues to benefit from the embedded membership in our physician partners' practices. In our established position as a first mover, introducing multi-payer full risk models in our markets, MA and direct contracting live membership on the platform reached 352,000 members, an increase of 114,000 members year-to-date. This growth is a function of outsized performance in new year one geographies, continued strong same geography growth in year two-plus markets, and the expansion of direct contracting from six to 10 geographies at the beginning of the year. From a margin perspective, our MA medical margin increased by 49% to $82 million or $103 per member per month in the second quarter, up from $95 per member per month a year ago. Medical margin performance was consistent with our expectations, with strong performance in our partner markets offsetting dilution at the unit level from higher membership growth. As we have discussed, our ability to grow membership and profitability at the same time is a hallmark of our capital-efficient partnership model. Importantly, we share these economics with our physician partners and the local communities we serve. Year-to-date, we have reinvested over $80 million back into our local communities. This reinvestment is helping to sustain and grow access to primary care and transform health care delivery. Our medical margin performance reflects positive momentum within our 16 partner markets. In our 10 partner markets that have been live for more than a year, medical margin per member per month on a year-to-date basis increased by 26% from $108 to $136. This is a key metric for our business, and this increase was entirely driven by efficiency within our health care claims expense. One of the clinical drivers behind this performance is our ability to increase access to primary care services, including touchpoints with complex high-risk seniors. To be clear, greater access for high-risk patients is made possible by two things that are fundamental to our model. First, our primary care partners are now in a business model that rewards them for creating time in their schedule for complex seniors. Second, through the agilon platform, our PCP partners better understand who their high-risk patients are and when a proactive visit would be most valuable. Physicians in traditional fee-for-service or even partial risk don’t have a business model that rewards this type of investment. We are also encouraged by the early performance of our six year one market. These new partners are achieving results typically seen in more mature markets as they benefit from implementing best practices from across the agilon network. As I noted earlier, direct contracting performance was positive during the quarter and included strong gains in margins and 63% year-over-year membership growth. Direct contracting allows our physician partners to have a single full risk model across their entire Medicare panel and leverages existing investments we have made into Medicare Advantage. In terms of profitability to agilon, our strong performance in Medicare Advantage and direct contracting, combined with platform support cost leverage translated to adjusted EBITDA of $7 million during the quarter and $20 million year-to-date, which is nearly a tenfold increase from $2 million last year. Tim will provide some additional color in his remarks. Let me turn now to an update on our implementation work for the class of 2023 and new partner development for 2024. For our seven new partners starting in 2023, we are currently focused on two key areas for the back half of the year. First, establishing clinical processes that will support our performance in year one, which includes expanding access for members so they can do things like see their primary care physician for an annual wellness visit. These processes also help us to identify high-risk members that will need more proactive support from the care team over the coming months and years. Our second focus area is completing contracts with health plans, both national and regional. We are making strong progress on both fronts, and our new partners continue to benefit from the broader agilon network. As we complete the payer contracting into year-end, we will update you on a refreshed class of 2023 membership outlook just as we have done in the past with prior classes. With respect to new partners for 2024, our business development team has made great progress in the last couple of months. The breadth and depth of the pipeline remain very strong, and we are seeing significant opportunities across diverse partner types and geographies. This includes all types of physician organizations, including independent groups and health systems in both new and existing states. I’m pleased to share with you that we have already signed two letters of intent for 2024, and we will begin implementing these partners in the coming months. The inflection in demand we are seeing reflects macro drivers, namely payer demands for value and the growing senior population and the level of success that our partners are seeing on the platform. We believe all 200,000 primary care physicians in the United States will need a new business model for their senior patients over the next decade. Our success will be determined by the value we create for these PCPs, their patients, and their communities. We believe our approach has clear advantages, and this is becoming increasingly visible every day. I wanted to close by highlighting an example of how we reinforce and leverage the power of agilon’s growing network of over 2,000 primary care doctors. Tomorrow, we will kick off our Pod leadership meeting in Portland, Maine, which will bring together over 100 physicians from across the agilon network. These pod leaders serve as mentors to smaller groups of PCPs within their respective practices, which helps to reinforce clinical best practices. We have found that these smaller physician pods are highly effective in driving outcomes and reducing variability, especially in areas like high-risk member touches, which we talked about earlier. Over the weekend, we will examine several case studies from across the network and how our pod leaders can become even more effective. Our ability to share best practices between our partner groups is getting stronger and stronger. This is reinforcing the sense of empowerment primary care physicians gain from being a part of the agilon network and helps to drive performance for both new and mature partners. With that, let me turn things over to Tim.

Tim Bensley, CFO

Thanks, Steve, and good evening. I’ll now review highlights from our second quarter results and our guidance for the third quarter and full year 2022. Starting with our membership growth for the second quarter, total members live on the agilon platform, including both Medicare Advantage and direct contracting, increased to 352,000, with Medicare Advantage membership coming in above our previous guidance for the quarter. Our consolidated Medicare Advantage membership increased 44% to 261,000, and our direct contracting membership increased 63% to over 90,000. Our Medicare Advantage membership growth was driven by the addition of six new geographies in January and 13% same geography growth in existing markets. Direct contracting membership benefited primarily from the addition of new markets joining the program. Revenues increased 34% on a year-over-year basis to $670 million during the second quarter. Year-to-date, revenues increased 45% to $1.32 billion. Revenue growth was mostly driven by membership gains from our new and existing geographies. Normalized for the timing of a large retroactive group contract in the prior year, revenues would have grown 42% in the second quarter. On a per member per month basis, or PMPM, revenue declined 2% during the quarter, which primarily reflects market and member mix as well as the expiration of the sequester moratorium. Medical margin increased 49% year-over-year to $82 million during the second quarter. Year-to-date medical margin increased 57% to $168 million. Even with the dilution from our membership growth, medical margins increased as a percentage of revenue and on a PMPM basis. Medical margins were 12.2% of revenue during the second quarter compared to 11.1% last year, and medical margin PMPM increased 8% to $103 compared to $95 last year. Medical margin growth was primarily driven by the maturation of our year two-plus partner markets and member cohorts, which offset the dilution from stronger membership growth. On a year-to-date basis, medical margin PMPM in our 10 partner markets that have been live for more than one year increased 26% from $108 to $136. Utilization trends were consistent with our expectations and remain near 2019 baseline levels. Utilization for inpatient services continues to run below historic baseline, while outpatient utilization is modestly above baseline. COVID-related utilization was relatively modest in the quarter and similar to the prior year. Network contribution, which reflects agilon's share of medical margin, increased 50% to $37 million during the second quarter. Year-to-date network contribution increased 44% to $78 million. The 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 18% to $36 million. On a year-to-date basis, platform support costs increased 19% to $70 million. Growth in our platform support cost continues to trend well below our revenue growth and highlights the light overhead structure of our partnership model. As a percentage of revenue, platform support costs declined to 5% during the second quarter compared to 6% last year. Our adjusted EBITDA was $7.5 million in the quarter compared to a negative $1.7 million last year. On a year-to-date basis, adjusted EBITDA was positive $19.5 million compared to a positive $2.1 million last year. The increase in adjusted EBITDA reflects the gain in network contribution and leverage against platform support as well as a positive $6.2 million contribution from direct contracting. Direct contracting performance during Q2 was solid, reflecting positive trends in both revenue and claims expense. Medical margins for our DCEs increased over 100% in the quarter to $21 million and increased 12% on a PMPM basis to $79. Results from our direct contracting entities are reflected on a net basis within other income. Turning to our balance sheet and cash flow, as of June 30, we had over $950 million in cash from marketable securities and under $50 million in outstanding debt. Given the strength of our balance sheet and low capital requirements, we invested $285 million of our cash into U.S. treasuries and high-quality corporate debt during the quarter. These investments are reflected in the marketable securities lines in our balance sheet. Cash flow from operations was negative $60 million for the quarter, which was consistent with our expectations. The increased use of cash this quarter primarily reflects the timing of risk pool settlements with our health plans, which we expect will normalize in the back half of the year. We remain extremely well capitalized and do not anticipate needing any external capital to drive our future growth. Turning now to our financial guidance for the third quarter and full year 2022. For the third quarter, we expect ending membership live on the agilon platform will grow 50% at the midpoint to a range of 348,000 to 356,000. This includes Medicare Advantage membership of 263,000 to 266,000 and direct contracting membership of 85,000 to 90,000. We anticipate revenue in the range of $645 million to $655 million or 42% growth at the midpoint. We expect continued progression with our medical margin and adjusted EBITDA as members and markets mature on the platform. For the third quarter, we expect medical margin in a range of $65 million to $70 million, representing 55% growth and adjusted EBITDA of negative $2 million to negative $5 million compared to negative $14 million in the prior year. We estimate direct contracting will contribute low to single-digit EBITDA in the third quarter and for the second half of 2022. For the full year 2022, we have raised our membership from revenue outlook to reflect greater pull-through of commercial agents and year one market membership while largely maintaining medical margin and adjusted EBITDA as these members generally start with lower than average margins. We now expect total membership on the agilon platform will grow over 49% year-over-year to 345,000 to 355,000 with revenue growth of 43% at the midpoint to a range of $2.615 billion to $2.635 billion. We continue to expect significant gains in medical margin and adjusted EBITDA. We now anticipate medical margin in the range of $292 million to $305 million and continue to expect adjusted EBITDA in a range of breakeven to positive $10 million, which represents a year-over-year gain in adjusted EBITDA of approximately $40 million to $50 million. With that, we’re now ready to take your questions.

Operator, Moderator

Forum, I think we’re ready for Q&A. Absolutely. Our first question comes from the line of Lisa Gill with JPMorgan. Lisa, your line is now open.

Lisa Gill, Analyst

Thanks very much, and thank you for taking my questions. I have a couple, if I can. Steve, let me start with comments around entering four new states. Obviously, we knew about Maine and the Analyst Day. But how are you thinking about the opportunities in some of those other states? I think you talked about Tennessee, South Carolina, Minnesota, what are you seeing around the physicians, the opportunities, the class size opportunities? Anything that you can give us around that would be my first question.

Steve Sell, CEO

Yes. Well, thanks, Lisa. I really appreciate the question. We’re really proud of the class of 2023, as we’ve talked about before. It’s a significant accomplishment for us to be able to enter new states. There are limited entry points, and to be first in terms of full-risk value-based care and then do it with a partner at scale that’s highly respected and understands those communities is a huge advantage. As I said in my remarks, we believe this gives us the ability to shape value-based care in these communities for decades. Each one of these groups is wrestling with the challenges of a growing senior population and the Medicare fee-for-service economics, and they’ve seen the success that our other partners are driving and they recognize the value of a primary care physician on our platform, and they see opportunities to grow. So let me walk through these just a little bit. In Tennessee, we have a great partner in Jackson, Tennessee. This is a rural underserved market with 40-plus PCPs, giving us a real scale position. This is a high-growth market, growing about 13% a year in MA, which is well above the national average. What we’ll be able to bring in terms of investment and access around primary care and enhanced care team resources will be transformational. In Charleston, South Carolina, we’ve got two great groups representing about 35% of the independent primary care physicians within that market. That market is also experiencing significant growth. As we talk about the value for PCPs, they see a real opportunity to grow with other PCPs that can join in. Finally, in the Minneapolis St. Paul area in Minnesota, I was there last week; I’m originally from that area. We see a real opportunity to change the trajectory in that market, working with both regional and national players. It’s a market with large health systems, and these groups are incredibly well respected, having great relationships with these systems. We think they can drive exceptional success for us. This is a real positive for us, and we see it driving further growth and very strong performance.

Lisa Gill, Analyst

And then, Steve, we saw the nice membership growth that you had in the quarter. But how do I think about the impact on MLR from that higher membership? And how does that impact your full-year outlook and your ability to manage those costs for those patients?

Steve Sell, CEO

Sure, Lisa. I’m very proud of our quarter and the growth. Our extra growth was about 5,000 members above the high end of our Medicare Advantage membership guidance, and around 8,000 above the average. That’s a function of strong same geography growth. The dilution in the quarter was about 30 basis points from that extra membership. And Tim can walk you through how that carries forward into the second-half guidance. I’m really proud of the performance we’ve seen in our year two-plus markets, where the performance step-up year-over-year from $108 PMPM to $136 has allowed us to grow year one markets even more, absorbing the growth and driving strong performance. This is the first quarter that we’ve had a year-over-year comparison in direct contracting, showing solid performance from $71 PMPM a year ago to $79, and achieving a 63% growth as Tim mentioned. Those two things will carry forward into the second half forecast.

Tim Bensley, CFO

Yes, Steve, a couple of things. That was great. A couple of things I would add is that incremental membership that we grew over our guidance range, and on average, about 5,000 members, which drove the lion's share of the incremental revenue. We were about $18 million higher than the high end of our guidance on revenue. But that incremental revenue flows through to very little medical margin initially because a lot of those members are either agents coming in at a very low medical margin or we’re actually seeing growth from our newest year one markets, which start at a lower medical margin. Overall, the medical margin dollars we delivered of $82 million were at the high end of our guidance. The overall MLR we delivered of 87.7% is still a substantial increase over a year ago. We’re pleased with that number, which also includes some prior period development in them. Looking forward, we saw a notable improvement in MLR in the first half of this year. Once you adjust for some of that prior period development, it was about a 190-basis points improvement. In the second half of the year, we’re forecasting a similar improvement.

Lisa Gill, Analyst

That’s really helpful. Just a point of clarification, Tim. One of your competitors talked about direct contracting having a retroactive adjustment of roughly 7.5%. Did that not impact you? Or were you able to just kind of work through that as you talked about the increase on a PMPM basis?

Tim Bensley, CFO

That’s a great question. So just two seconds on how the model works. The CMLI comes out at the beginning of the year and tells you what they expect your trend to be, which drives the revenue number. They originally said that 2022 trend would be a 16.1% increase over the 2019 baseline. But that has adjusted down this year, and we’ve been preparing accordingly.

Lee Gill, Analyst

Okay, great. Thanks for all the details, and congrats on the quarter.

Tim Bensley, CFO

Sure.

Operator, Moderator

Thank you for your question. Our next question comes from the line of Justin Lake with Wolfe Research. Justin, your line is now open.

Justin Lake, Analyst

Thanks. Appreciate the questions. First, just following up on what you just talked about on direct contracting. When you’re looking at the comparisons over the past few quarters, it seems like the supposed trend in 2022 is around 16%, and now it's adjusted lower. How should we think about that?

Tim Bensley, CFO

No. So just to clarify, they quote the trend number of 2022 over 2019, which was about 16.1%. If you look at it as 2022 over 2021, that would imply over a 10% improvement in 2022 over 2021, which is a bit suspect. They’ve adjusted those numbers and their announced interim retro trend adjustments down in their May update. But for us, personally, we accounted for a retro trend adjustment in our Q1 earnings. When we booked our Q2, we were already in line with that kind of number, so we’re not seeing that swing back and forth quarter to quarter.

Steve Sell, CEO

Justin, just a quick add. I mean, we’re up to 90,000 members in direct contracting now. It’s about 25% of our membership. We spent a lot of time with the innovation center. We’ve certainly learned a lot through the first year. I think what Tim just described is a prudent approach to what we’re doing and it gives us confidence around our strategy. Our partners, on average, have 400 senior patients across direct contracting and Medicare Advantage, and they’re now seeing the real power that’s being driven off of that. We believe the shift to a new business model for primary care is seeing increased uptake from physicians, and we're also seeing rapid growth with our partners. That’s creating great stability and performance so we’re very hopeful for what’s to come.

Justin Lake, Analyst

Thanks for all the detail. I appreciate it. Then a couple of the numbers questions. One, can you tell us what the drivers of the negative development have been this year?

Tim Bensley, CFO

Yes, that’s a great question. First and foremost, we always seek to be correct. It would be ideal to be correct with a touch of conservatism. However, this time around we’ve had some negative prior period development that’s driven by a couple of anomalous factors. I’ll close by saying our guidance for the second half of the year includes adjustments based on our learnings, adhering to an ongoing commitment to efficient operations.

Justin Lake, Analyst

Got it. And last quick one. You mentioned you have two physician groups signed up for 2024. Where does that measure up against last year in terms of timing?

Steve Sell, CEO

Yes, we’ve never had groups signed up this early. When we talk about an inflection in demand, it reflects groups understanding the value of our platform over time. In fact, at this point last year, we had zero signed groups. These upcoming partnerships will have 16 to 18-month implementations, which should give us a considerable head start going forward. Overall, the remainder of the funnel for 2024 looks extremely robust.

Operator, Moderator

Thank you for your question. Our next question comes from the line of Stephen Baxter with Wells Fargo. Stephen, your line is now open.

Stephen Baxter, Analyst

Hi, thanks. I wanted to ask a big-picture question on the medical margin performance. We’ve generally heard from your health plan partners that the utilization environment, especially for Medicare and Medicaid, is pretty benign, running below baseline levels. I know you’re characterizing that closer to baseline levels. Would love your insight into what could be holding back the medical margin dollar guidance from improving this year?

Tim Bensley, CFO

Yes. Our forecast for medical margin in the second half of the year tightened up, reflecting performance. Utilization remains in line with our previous guidance, but we did see some growth in outpatient services.

Stephen Baxter, Analyst

Okay, I appreciate that. And then just on the managed care contracting side, what’s the current status of participation by national health plans in your markets? Has that seen any changes?

Steve Sell, CEO

We have deep partnerships with several national payers. We’re planning growth together. It's encouraging growth in a range of markets, and they've been receptive to moving into new areas as we engage them.

Tim Bensley, CFO

But our ability to contract with regional plans gives us differentiation, and we’re seeing opportunities from that gain traction in various markets. It sets us up for success.

Matthew Gillmor, Vice President of Investor Relations

Thanks, Forum. I think we can go to the next question.

Operator, Moderator

Okay, perfect. Next question comes from the line of Brian Tanquilut with Jefferies. Brian, your line is now open.

Taji Phillips, Analyst

Thank you. So you’ve got Taji Phillips for Brian. Thanks for taking my question. I’m curious as you approach providers for partnerships, can you clarify the incentive structure there, specifically on the gain share component?

Steve Sell, CEO

I think we got it. Let me tell you how it works. We enter a new market, as we talked about today. We’ve got a partner in each one of these markets. We enter into an exclusive joint venture. We bring the capital, processes, and people to the table, while partners provide the local know-how and infrastructure. Surplus is shared 50/50 on the upside. When we discussed investing $80 million back into the communities year-to-date, that reflects the surplus generated by taking out waste and improving overall costs. That’s how our incentive structure works.

Whit Mayo, Analyst

Thanks. Good afternoon. You guys have talked around this a little bit, but is there any way to quantify how much of the member growth you get annually comes from agents? And is this year tracking higher than normal?

Steve Sell, CEO

In the quarter, we had 13% same geography growth comprised of members from agents and organic growth. I would estimate roughly 80% or more of that growth comes from agents. We can provide more specifics offline.

Tim Bensley, CFO

It's vital to understand nearly all incremental membership seen this year is driven from agents or growth in year one markets which have lower medical margins initially.

Whit Mayo, Analyst

Do you feel like you are seeing a higher conversion of agents this year versus normal years?

Steve Sell, CEO

We’re encouraged by how quickly we have realized organically and through agents. Our health plans' connection to agents drives more senior patients choosing plans at a faster rate, due to the value these services offer.

Operator, Moderator

Thank you for your question. Our next question comes from the line of Kevin Fischbeck with Bank of America. Kevin, your line is now open.

Adam Ron, Analyst

Hey, this is Adam Ron on for Kevin. Going back to that gain share discussion. Other medical expenses came in higher than we were modeling. If you divide other medical expenses in live geography by medical margin year-to-date, you get about 54%, which is more than the 50%. So is that timing throughout the year, or how should we think about what’s in that line?

Tim Bensley, CFO

Yes, other medical expenses has two main components: partner sharing and other incentives given to physicians, primarily related to annual wellness visits. Part of the reason the partner sharing does not consistently hit 50% of medical margin is due to this other medical expense line being included as well. Naturally, certain timing nuances can affect the figures, particularly those AWB-related expenses that accelerate based on completion metrics.

Operator, Moderator

Thank you for your question. Our next question comes from the line of George Hill with Deutsche Bank. George, your line is now open.

George Hill, Analyst

Yes. Good evening, guys, and thanks for taking the questions. Steve, how is your strategy shifting with your entrance into larger markets like Minneapolis? What should we read into your ability to navigate more urban settings?

Steve Sell, CEO

Absolutely. We are excited about opportunities in larger markets maintaining partnerships with well-regarded local organizations that instill confidence among patients and physicians. We believe moving into larger markets enables scale benefits and drives market competitiveness.

George Hill, Analyst

Understood. Thank you. And just as a follow-up, are you seeing any competition in terms of member acquisition, especially from regional health systems? What strategies are you using to attract new beneficiaries?

Steve Sell, CEO

Yes, we are witnessing increased conversations with health systems. Our performance and results resonate with potential partners, and we continue to perform as the market demands change. Our success hinges on fostering trust and demonstrating tangible results in primary care delivery.

Operator, Moderator

Thank you for your question. This concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.