Conference Transcript - AGL 2025-09-30

Jack Slevin, Analyst — Jefferies

All right, let's kick this off. Thanks, everyone, for joining. I'm Jack Slevin, Vice President and Healthcare Services Research Analyst here at Jefferies. Really excited to be joined for a fireside chat with Jeff Schwanake here, CFO of Agilon Health, a value-based care company that operates in MA risk across a number of different states. Jeff, thanks for joining us. Maybe it helps if you turn it on.

Jeff Schwaneke, CFO

Yeah, there we go.

Jack Slevin, Analyst — Jefferies

Thank you.

Jeff Schwaneke, CFO

Glad to be here.

Jack Slevin, Analyst — Jefferies

And so maybe just to kick it off, I'll just sort of open the floor to you and say, look, a lot of things have been moving on in health care services broadly, regulatory, various other things, a lot of things moving for Agilent right now. Just leave the floor open for you to sort of give us a state of the union and tell us a little bit about what's going on from your perspective.

Jeff Schwaneke, CFO

First, let me just, for those that aren't familiar, maybe start out with kind of who Agilent is, right? but we're a primary care-centered, value-based care company, and really, the partnerships with our primary care doctors is really at the center of our business model. We enter into 20-year partnerships with our primary care physicians, and ultimately, we believe healthcare benefits when the primary care doctor is in charge of all of the healthcare needs for their members. And by empowering these primary care doctors, we're really improving quality patient outcomes and ultimately lowering costs. We are currently partnered with around 2200 primary care physicians around the country in 12 states, 30 markets. And then how we do this is we entered into capitated arrangements with the payers. So we take a percent of premium and ultimately we're responsible for all of the healthcare costs for our members. There's some things that we've carved out, which I'm sure we'll get into here a little bit later, specifically on part d but generally we're responsible for the total health care costs of our of our patients and then any savings that our model generates we share with our primary care partners we also participate in the aco reach program we serve roughly 117 000 members in the reach program program it's been a good program for for us we have generated consistent high quality and overall cost savings for the program i think 2023 was the the last year of data that's public we saved gross savings dollars of 150 million and our our cost trends were 300 basis points below the the medicare benchmark so generally what we see in our model is anywhere from a 20 to 30 percent reduction in admits per thousand lower er admissions lower inpatient stays and in the majority of our markets we are delivering high quality so our star scores are greater than four and four point two five for the majority of our partnerships so we're we're delivering high quality which is obviously important for our payer partners spent a lot of time on the data pipeline so I'm sure we'll get into that a little bit later but an enhanced data pipeline that we went live on in q1 is going to be a meaningful meaningful driver for us and And then last but not least, clinical programs in late 2024 and early 2025, we rolled out a bunch of new clinical programs, really integrating clinical evidence with evidence-based guidelines to identify high-acuity conditions and get those members to treatment earlier. So we rolled some of those out late 2024, piloted more in 2025, and ultimately looked to enhance those as we head into 26. Okay, awesome.

Jack Slevin, Analyst — Jefferies

No, it's a great sort of way to frame things and then maybe pulling it a little more near term. MA's been a challenging environment. You know, that hasn't, you've been exposed to that like anyone else that's, you know, involved in MA risk of any manner, whether it's managed care or any sort of provider organization. At 2Q, you know, another sort of hit of PYD, announced the leadership transition. I can say, you know, from my impression of speaking with you and with Ron, right, the strategic pillars, some of which you just touched on, and we'll get into a little bit more here after this question, haven't really changed, at least that's my impression. And it's more that with this office of the chairman and the leadership transition, as you look for a new CEO, it's more about sort of just ramping up the intensity on the work you're doing. I'd love to hear just a little more as we're a few weeks past that, you know, how that's going. Is that the right impression? If you could speak a little

Jeff Schwaneke, CFO

about sort of like what the day-to-day looks like right now yeah yeah sure intensity is is a good is a good word definitely have the intensity and the focus um i guess the way i would think about it is you have to go back to 2024 and in 2024 we doubled the size of the company right so massive growth that year really focused on scaling the platform um and then obviously the macro the macro cost trends and rates, which are pretty much flat, had an impact on the overall business. And so we have narrowed the focus to really drive profitability. So as you think about 2025, we had membership growth, but it was primarily, or the majority of it, was under no downside care management fees. So we have intentionally slowed growth. We're focused on profitability. And our primary care partners are focused on profitability as well. And so I think you're right, a lot of the levers are the same, but we've narrowed that focus to really what's going to drive near-term profitability. And the things that I would point you to that are the same are contracting, for example. So from a contracting perspective, we're trying to ensure that we're getting adequately compensated for the risks that we're taking and the value that we're delivering to our payer partners. Part D risk. From 2024, two-thirds of our members had Part D risk. Now, in 2025, less than 30% have Part D risk. We expect to make more progress on that as we head into next year. We're in the middle of the contracting season for us right now, so we'll have to see how that plays out, but we do expect to make more progress on that. Another important piece. Obviously, in the first quarter of this year, we moved over to our enhanced data pipeline, completely changed our reserving methodology to align with that new data pipeline. And now we have a solid foundation with which to use that data to predict not only medical costs but also risk scores. Costs, you know, I mentioned that we scaled the business significantly in 2024. Obviously, we had a different growth plan then than we do now. And so we're really focused on, you know, what does it take to run a business that has half a million members? And so I think you'll see a focus on cost control later this year and probably early into next year as far as right-sizing the platform for the membership that we have. And then last but not least, BOI and the clinical programs are paramount to what we do and our success. And so continuing to enhance those and ultimately get the care that the members need. Yeah, okay.

Jack Slevin, Analyst — Jefferies

Super interesting. Maybe just to start to pick on a couple of those points, right? So the data pipeline's been a big discussion. Cost visibility has been a challenge for really anyone in the value-based care environment. And that data pipeline was sort of your response to how do we get things better. Maybe if you could just touch a little bit on the nuts and bolts of what it's taken to build that up, what it looks like. And then if you have anything quantifiable in terms of, you know, how much faster are you getting visibility to cost trend now than you were 12, 18 months ago. So I'd just love to get sort of some framing around that.

Jeff Schwaneke, CFO

Yeah, so we went live in the first quarter. At the end of the second quarter, we had roughly 72% of our members on the data pipeline. Obviously, we're working on more in Q3. We'll have some more in Q4, but it's kind of diminishing returns. We started with the largest payers first, and so we're going to continue to move the needle, but it's going to be a longer progression. And so I think the biggest differentiator for us on the data platform is really the detail, the level of detail of the data. And I'll just give an example. So prior to the data platform, we would get medical costs and revenue information from our payer partners through a PDF statement. So it would, you know, it's literally just a summarized version in PDF form. It's one page. It has total medical costs and total revenue. now with the data platform we are getting member level revenue bifurcation and member level cost detail down to the line item and so that is extremely important for somebody in my position to obviously estimate medical costs understand what your RAP scores your risk adjustment scores are on a member level basis you know setting here today you know what we will be able to calculate our member level risk scores and so when January comes we'll actually be able to calculate our member level RAF scores and what our paid RAF scores should be for January 26 we did not have that capability setting here a year ago so I would say it's more of the detail that matters not necessarily the timing has there been an acceleration of timing from our payer partners I would say the large payers that were pretty good at providing data not really much acceleration It's really the bifurcation of the revenue and the claims that matters. For some of our payer partners that were maybe a little more delayed, there has been an acceleration. So for some of those, I would say maybe a month, month and a half acceleration. So we'll take that. That's good news. But really, it's the level of detail and the revenue and the claims that matters. Okay, awesome.

Jack Slevin, Analyst — Jefferies

That's super helpful, Collar. And then maybe you touched on it a little before, pairing back Part D risk also been a big initiative for you. I think I can broadly say from talking to privates to other publics that are in the space, I think the notion that capitated contract provider groups shouldn't necessarily have the Part D risk is pretty consensus at this point. But maybe you could just speak to sort of what's the progress you've made on that front in terms of pulling Part D exposure out of your contracts. And then is there anything, as you looked at 26 with some of the things that are up in the air, you know, other areas where you've been able to make progress in the last couple of months?

Jeff Schwaneke, CFO

Yeah, you're exactly right. I mean, the biggest struggle for us on Part D was really the timing delay. And so, and for example, we have visibility on the scripts, but ultimately we don't know the unit cost. And that's because things like manufacturer rebates and government cost share, those don't really get reconciled until six, seven, eight months after the year's over. And so what was happening is we would get statements from payers saying, this is what we think your Part D costs are. And then eight months later, you get the final answer, and it's substantially different. And that caused an extreme amount of volatility in our financial results, plus the fact that, in general, we were losing money on Part D anyway. And we don't control the formulary, and you're right, we're not issuing most of the prescriptions. And so for us, it was two things. We want to be held accountable for things that we can control and influence, and we want to get compensated for that. The other thing is we don't want to be at risk for those things that we don't control and don't influence. And so removing Part D was a strategic priority given the volatility and the magnitude of the changes. Again, we had two-thirds exposure in 2024. We're down to 30% in 2025. And we have had some small wins. I would say it will be below 30% for 2026, but we're in the middle of the contracting right now with our payer partners, and so how those get finalized will really determine how far or how

Jack Slevin, Analyst — Jefferies

much lower we go. Okay, got it. And maybe just to sort of close the loop on a little bit of the discussion around how the environment with payer contracting is developing. I guess to taking a step back from my perspective, right, there was this rush to get into value-based care, a lot of excitement around MA risk in particular, a lot of providers that were willing to sign contracts that were not particularly advantageous or, you know, good depending on what the pair relationship was if you date back to call it 2021, 2022. My impression is if you are a large-scale provider that brings real value through things like quality and other programs to payers, that there is an ability to get concessions from payers, whether it's on the actual rate, obviously Part D risk, something you've had a lot of success with, or things like saying, hey, you know, the data quality and depth of detail and speed need to be better. I guess I'd love to get your perspective on what you're seeing on that front and sort of the general tide of things in addition to some of the specifics we just talked.

Jeff Schwaneke, CFO

Yeah, yeah, you're exactly right. I mean, we are delivering exceptional quality and overall cost management to our payers, and I think they recognize that. I would say the demand for our model from our payers has been strong. They would love for us to be in more markets, and you're right. I mean, what we're looking for is the right economic construct that compensates us for the risk that we're taking and the value that we're delivering, and I would say they have been constructive, and these aren't conversations that are at lower levels. This is at the top of the house for these large national payers and even regional payers. And so we definitely have their attention, and I'm confident that we can get to a solution that adequately compensates us for the value that we're delivering.

Jack Slevin, Analyst — Jefferies

Makes a ton of sense. Maybe to zero in on some of the recent stuff, obviously some across the board in a few different categories, some hits on prior year or prior period development in the second quarter. if you can maybe just set the baseline on what those were. And then the big question I'm getting out of the quarter that we discussed, I know post-quarter I'm sure you've had a lot of these discussions, on the risk adjustment side, you had to redraw that. It only applied to a portion of your members in terms of what's now assumed in the financials at this point or what was recognized. I guess I'd love to get the detail on that remainder of patients where you didn't apply that same assumption, what the genesis was for it, if you can share that with the group.

Jeff Schwaneke, CFO

Yeah, sure. First, let me just kind of walk through the Q2 prior year development. There were really three components is what I would highlight. The first was we had $20 million with exited markets, so these are markets that we've made the decision to exit and don't carry that risk going forward, but ultimately medical claims came in higher than we anticipated, and so there was some runout on that. That was roughly $20 million. The second is $13 million associated with one payer on Part D risk, And this is the phenomenon that I mentioned before, where when we closed the books for the end of the year, we had information from the payer. They said, hey, here's how much we think your Part D is. And then fast forward to the final answer, and it's $13 million worse, right? The good news is we carved out that risk for that payer in 2025. So we do not have that risk heading into this year. And last was really $37 million associated with 2024 risk adjustments. So the final year risk adjustment information comes from the government to the payers. We receive that as well. And ultimately, our midyear to final estimate that we had for 2024, the actual results just came in lower. And so what that does is that lowers your stepping off point for 2025. So the $37 million immediately lowered what our expectations were for 2025 because it's really growth in conditions that matter. because you're leveraging 24 into 25. And so then in the second quarter, we pulled down the 2025 risk adjustment information. Now, that was really driven by the data pipeline and the mid-years. So we had received some of the mid-year files from our payer partners, and that was highly correlated to our new data pipeline. So we wouldn't even have that capability a year ago. and so the correlation between those mid-year files and the data pipeline which we had 72 percent of our members on that gave us confidence that yeah that's the number and so ultimately we adjusted for that a lot of people are asking about well what about the other 28 percent why didn't you do some extrapolation math or something on the other 28 percent and the real reason is that in the 72 percent there was wide variability some were positive some were negative it was all over the board and it was different by pair and so ultimately we didn't really have any way to produce a different estimate than what we already had on the books and so uh we just took the position of we're going to wait until the mid-year data comes in we'll get that in q3 and q4 and ultimately true that up true that up when we get the information so you know i can't obviously tell you what that answer is today, but we have received a lot of those, not all, but we have received the data that we need to true up the risk adjustment. Okay, awesome. And maybe taking it off

Jack Slevin, Analyst — Jefferies

of the core MA business, talk a little bit about fee-for-service, something I think is a bit underappreciated about your business is the strength you've seen in those over 100,000 members in ACO reach. I was doing my little tidy up on some of the 2024 MSSP results and noticed you all had two small ACOs there as well. I guess just thinking about the Medicare fee-for-service ACO side of things, there's really two questions that come to mind. One, in my mind and reach, you've had differentiated performance versus the PAC. And I'm curious if you have a sense of sort of what you're doing there that's leading to all that success. And maybe I'll pause there and just give you that question before we get to the second one.

Jeff Schwaneke, CFO

Yeah, yeah. Certainly, you're exactly right. We've been, we're one of the largest scaled participants in the ACO REACH program. We delivered superior savings and quality results, but it's really based on our partnership model. And the unique part about us is we use the same model for the MA as we do for the ACO REACH. So all the things that I've talked about on care programs and all the tools and technology that we're giving to our partners, we do that same thing for the ACO REACH program. The great thing about the ACO REACH program is it takes a lot of the variability that causes us frustrations in the MA side out, right? So you don't have bids, you don't have supplemental benefits, you don't have a lot of these things that impact performance and have long tails. Medical cost trends are true to open year. There's a cap on risk adjustment. And so there's a lot of things to like about that program. But ultimately, what it shows is, you know, it's really a cost and quality program. and we've obviously delivered superior value there. And really, it's about the partnership model. We started in that program with our, I would say, our strongest partners who were well-established and decided to participate in that with us, and it's been very successful.

Jack Slevin, Analyst — Jefferies

Yeah, okay, interesting. You touched on it a little bit. I guess the question I have about it is the performance there has been really strong. It was a very hot space, a lot of EC-backed stuff that sort of went into ACO reach has maybe a lot of them not had the same level of success as you. The program technically ends at 2026 at this point, at least the way that it's currently on the books. And so there's a little bit of uncertainty around how things advance. Considering that, my question is really, when you think about the ACO reach or maybe just a general value-based care for the fee-for-service population business for you, is that something that you can press further on given the level of success you've had, or does it need to work with your MA model and a given partnership?

Jeff Schwaneke, CFO

I mean, we'll just touch quickly maybe on the MSSP examples that you mentioned. I said those were really unique situations for us. That was really year zero of our participation in the MSSP program, and so, you know, you don't get really credit for all the tools and capabilities that you bring to bear on those markets. And a matter of fact, you know, we had budgeted those roughly at breakeven. so the results were not outside of our expectations one of those has seen a substantial I would say improvement in performance and we will continue that one as we head into 2026 the other one the other one did not it showed improvement but not as much as we we really wanted and so ultimately we're going to exit that one for 26 but overall I would say we know how to be successful in the MSSP program but like you know right now where we are the ACO reach program is obviously it's been very successful for us and we're going to stay in that

Jack Slevin, Analyst — Jefferies

if it makes sense yeah okay that makes sense I guess maybe just to clarify my question like is that something you can have conversations with providers and say look maybe maybe you just want to do reach with us rather than than the full suite of offerings is that something that worked at this point or is it's all got to be together with the MA book I think it's I think it's possible

Jeff Schwaneke, CFO

but you know I think we've led with the MA book first right I mean that's been where we are but certainly i don't i don't i don't think it's uh it's it they have to be packaged together for sure they don't they you know they could be separated if if if that's a strategy we're going to go down okay got it and maybe we're starting to track down on time here um certainly

Jack Slevin, Analyst — Jefferies

not asking for any form of guidance on this but but 2026 is something people start to to wonder about we're still you know not all the information on bids is in there's a lot of different things that could be up in there but you got a lot of experience and history and managed care broadly I guess I'd love, you know, qualitatively, if you've got any thoughts on puts and takes as we're looking at 2026 for Agilon, sort of where we stand on that front.

Jeff Schwaneke, CFO

Yeah, certainly. I think obviously we're heading into a different macro backdrop, specifically, I'll just, for Medicare, with the final rate notice, right? The final rate notice is going to be helpful as you move into 2026, specifically because 2025 rates were just generally flat. and you have a cost trend between you know five and six percent or even north of that so um so ultimately you're underwater on the margin line in 25 that that reverses in in 2026 if you assume some consistent cost trend exiting exiting 2025 so certainly the rates are going to be helpful i think all those levers that i mentioned before that we are extremely focused on and we have daily meetings on contracting being one of them again making sure that we get adequately compensated for the risks that we're taking we're working on the contracting right now with our payer partners bid you mentioned the bid I know there's a lot of commentary around around bids and what that means I would say broadly from everything I've seen it seems to indicate that payers you know we're bidding for more margin improvement that would be obviously a a positive for us. You think about cost control. I mentioned, you know, we're really, we really are trying to right size our overall operating costs for the level of membership that we're serving, half a million members. We've dialed back on growth intentionally because, you know, growth is an investment generally. So we're dialing back on growth. Clinical programs, we, some of these were piloted in late 24, early 25, we would look to roll those out across the network heading into 2026. Risk adjustment, you know, the good news is we have visibility, we have the new data pipeline, so we will actually be able to calculate our member level risk scores. That's a capability we didn't have a year ago, and I would say based on the data that we see right now, we think that we're going to be able to offset the impact or more than offset the impact of v28 the final year of v28 heading into next year and then obviously quality we haven't touched on quality too much today but we are seeing payers put meaningful dollars into superior quality performance which we believe we can drive and so think about you know escalate as you move up the stars ladder more dollars available for us to earn for delivering superior performance. And so as I think about 2026, now, you know, cost trend, who knows? That's a component, right? We have to figure out what cost trend is. But as I think about heading into 2026, there's certainly a lot of tailwinds. Our performance will definitely improve. The question is how much, and it's going to be based on kind of how some of these things shake out.

Jack Slevin, Analyst — Jefferies

Okay, maybe just to dig in on two things you brought up there, because I think it's interesting. The V28 piece, your RAF scores were lower, so the exposure should have been lower. I guess maybe just to dig in and say like 2024, 2025, 2026, when engaging with providers, has that changed at all, and does it feel easier in a 26? And then maybe I'll just stop there and say yeah.

Jeff Schwaneke, CFO

Yeah, yeah, yeah. certainly you're on one model now for 25 it's all be 28 and so there's no bifurcation um so certainly it has narrowed the focus you know um which has been which has been helpful we made a lot of changes to our boi program exiting 2024 uh and we're using you know ai and enhanced data and a lot of these things uh to move the ball forward in that area and plus the clinical program's work has also been, I would say, impactful for identifying, you know, high acuity disease states earlier. So that's been helpful as well. So we made a lot of changes there. But as you think about 24 and 25 together, we more than offset the impact of V28, the V28 change. And so, you know, we feel pretty good that we can do that for the final year as well.

Jack Slevin, Analyst — Jefferies

Okay, that makes sense. And maybe one more piece to dig. You mentioned the clinical programs. I It was something that was discussed a little more broadly a couple years ago. It sounds like there's been progress on that front and things are running well, but maybe it's lost a little bit of the spotlight here among other issues. I'd love to hear just a couple anecdotes or things about how the clinical programs are moving forward right now.

Jeff Schwaneke, CFO

Yeah, sure. So we have, there's a host of these new programs that we rolled out. You know, heart failure was one of them, you know, early diagnosis of congestive heart failure. we've been really successful at that we have a palliative care program dementia so i'd say all of these programs some of them were piloted i think the results have been promising and it they're really showing the ability to drive value and cost saving these cost savings you know avoided er admissions avoided inpatient stays and so some of these that we piloted i think we're looking to roll out more extensively across the network in the back half of 25 and early 26 and and you're right if you think about the levers that we have to improve near-term financial performance it's you know con contracting right it's the boi program risk adjustment that includes the clinical care programs and cost and cost management would be you know heavy in that clinical care programs

Jack Slevin, Analyst — Jefferies

yeah okay we've got two minutes left here and and maybe to close out i'll frame it this way to say you know you've you've already sort of dictated what you you think the priorities are and how you're achieving that but with an open floor again to close out for you you know what are the things you think investors need to be focused on with the agile on story as as you're pushing forward into 26

Jeff Schwaneke, CFO

yeah i i think the the biggest thing people have to recognize is and you probably already know this but we're in a we're in a long cycle business and so we have made a lot of changes and pulled a lot of levers to create financial value in the last 12 months and in our industry a lot of that work the financial value of that work doesn't really show up until later. So just take the BOI program. You know, you're really working on it this year, but the financial value shows up in 2026. Quality, you know, two years, right, before quality shows up. So I guess what I would say is all of these things that we've talked about and how we're creating, you know, to improve the financial picture for Agilon, we've executed on all of these levers and because we're in a long cycle business the fruits of that that work don't show up until later and you know i've kind of walked through the macro 26 i do think we have net tailwinds from a macro perspective and that in combination with all the actions that we've done in 25 and late 24 i think we're going to see a meaningful step up in profitability

Jack Slevin, Analyst — Jefferies

and maybe you know 30 more seconds left and it's all good on the timing just to say that that's 26 as you look at 27 no no more b28 presumably to your point long cycle business we'll see where payers end up on on where the pricing goes but my notion would be like i don't think things are going to get really aggressive again if i had to make an early guess um looking at the longer term ma environment overall still something you guys feel good about and sort of easier to get through

Jeff Schwaneke, CFO

with that yeah yeah certainly certainly i i think listen we're going to we are looking for a meaningful progression and profitability year over year from 25 to 26 and 26 to 27. And I think you're right. You know, ultimately the government has to recognize the underlying cost trends in the Medicare business. And I think, you know, the rates that we have for 2026 is probably that

Jack Slevin, Analyst — Jefferies

first step. Awesome. Well, that's time. Jeff, thanks so much. Really appreciate having you here and hope everyone, you know, got a lot out of the meeting. Thank you. Appreciate it.