Astrana Health, Inc. Q2 FY2023 Earnings Call

Hello and welcome to the Apollo Medical Holdings' Second Quarter 2023 Financial Results Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Carolyne Sohn, Vice President, Investor Relations. Carolyne, please go ahead.

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing Apollo Medical Holdings Inc.'s results for the second quarter ended June 30, 2023, is available at the Investors section of the company's website at www.apollomed.net. To provide some additional background on its results, the company has made a supplemental deck available on its website. A replay of this broadcast will also be made available at ApolloMed's website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future plan, outlook, and will and include, among other things, statements regarding the company's guidance for the year ending December 31, 2023, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, operational focus, strategic growth plans, and merger integration efforts. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in ApolloMed is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to Slide 2 of the conference call presentation for further information. For those of you following along with the accompanying supplement, there is an overview of the company on Slide 3. On today's call, the company's Co-Chief Executive Officer, Brandon Sim, will discuss second quarter 2023 highlights and the latest operational developments. Chief Financial Officer, Chan Basho, will follow with a review of ApolloMed's results for the second quarter and six months ended June 30, 2023. Brandon will conclude the remarks with an update on the company's outlook and long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ApolloMed's Co-Chief Executive Officer, Brandon Sim. Please go ahead, Brandon.

Thank you, Carolyne. We were pleased to deliver another strong quarter, achieving 29% growth on the top line and 44% growth in adjusted EBITDA compared to the same quarter in 2022. Revenue growth was primarily driven by strong organic membership growth and a more favorable payer mix in our Care Partners business. We continue to execute on our three key operational goals: One, growing our membership in core and new geographies; two, empowering our Care Delivery and Care Partners providers to successfully move along the glide path towards value-based care; and three, enabling our providers to deliver excellent patient outcomes in order to manage that risk effectively. On the first goal, growing our membership in core and new geographies, we continue to see strong growth as a result of the strength and quality of our Care Partners business as well as the technology, operational, and care management support we bring to bear in our Care Enablement business. Our core business in California continues to demonstrate robust growth, both organically in our partner groups, as well as the new partnership signed. We recently formed a long-term partnership with a primary care group in California with a network of over 50 providers joining our newly signed class of partners in 2023. We expect to onboard this group onto our Care Enablement platform by September 1 of this year. We also want to highlight what we believe is our ability to replicate our success in Southern California and other markets. As previously communicated, our playbook for empowering providers in a new market includes: First, entering a market in partnership with a high-quality anchor group for our risk-bearing Care Partners business; second, investing in local operational and care management teams to ensure successful onboarding onto our Care Enablement platform for these providers; and finally, partnering with additional groups in the market who would benefit from joining our platform. This flywheel accelerates as we reach critical mass in each market. And we believe that the enabling platform we've built and proven to generate great patient outcomes and profitability in Southern California will allow us to demonstrate this progression rapidly in each new market we enter. In Texas, for example, we entered with the acquisition of Valley Oaks Medical Group last October. As we build out our local market leadership in Texas, we are pleased to share that Jaime Melkonoff, a healthcare executive with over 20 years of experience in the industry, has joined us as President of Apollo Care Enablement of Texas and Senior Vice President of Business Development. Jamie is expected to play a key role in expanding our Care Partners network across the country and further building out our Care Enablement platform's capabilities, empowering providers to advance along the value-based care glide path responsibly in Texas. We are thrilled to welcome Jamie to our leadership team and look forward to his contributions to our expansion efforts. Next, we continue to partner with groups across the region to empower their providers to provide high-quality value-based care. Firstly, we recently announced the acquisition of certain assets related to Texas Independent Providers or TIP. Through its network of 120 primary care providers, TIP is expected to be an anchor for a high-quality care partner segment in Houston. And we expect to onboard TIP's providers onto our Care Enablement platform by the end of 2023. We are pleased that we will continue to benefit from the leadership of TIP's President, Dr. Carlos Palacios, who will join ApolloMed as Chief Medical Officer for Texas to spearhead clinical initiatives for local providers; and TIP Executive Director, Vincent Roth, who will join us as Group Vice President of Operations for Texas and lead the continued growth and development of our Texas network. We also announced a partnership with IntraCare to advance value-based care in Dallas, Fort Worth, El Paso, Austin, and Oklahoma City. Through a network of over 425 primary care providers, IntraCare manages the care of over 40,000 members. And through this partnership, IntraCare's providers are expected to join our Care Partners business in these regions and be onboarded onto our Care Enablement platform by the end of the year. We are thrilled by the continued strong momentum we've been seeing in terms of the excitement around our Care Partners and Care Enablement offerings in both California, Texas, and beyond. Our next strategic pillar is in empowering our Care Delivery and Care Partners providers to successfully move along the glide path towards value-based care. In California, we shared during our previous quarterly call in May that we had closed on the acquisition of For Your Benefit or FYB, and received regulatory approval for the change in control of FYB's full-service Restricted Knox-Keene licensed health plan. We are working closely with the Department of Managed Health Care to expand the RKK to other counties within California and to add more members within existing counties, and we believe that the process is on track relative to our expectations. Finally, the most important strategic pillar is ensuring that we are successfully empowering our providers to deliver excellent patient outcomes, thereby managing that risk effectively. We continue to closely monitor utilization trends and did not see an increase in utilization in Q2 compared to Q1. Based on prior authorization data, however, we do see a slight uptick in utilization for Q3, but do not believe that this will significantly impact our overall performance or guidance for 2023. With regards to Medicaid redetermination, a bulk of our Medicaid members and value-based arrangements reside in California, which began disenrollments in July. We have not yet seen a significant impact on either our membership or mix, but we continue to monitor and assist in the redetermination process for our members to ensure they have access to care. With these recent developments and our solid financial performance through the first half of 2023, we are pleased to be reiterating our previously provided guidance for full year 2023. We continue to grow membership in our core California markets and in our new Nevada and Texas geographies through organic growth, new partnerships, and inorganic activities. We continue to responsibly accelerate providers towards a value-based aligned future, and we continue to make ongoing strategic investments in our business, our teams, and our technology, which we believe are necessary to support growth in the years to come. With that, I'll turn it over to Chan to review our financial results.

Thank you, Brandon. We continue to deliver strong results, reporting total revenue of $348.2 million in the second quarter of 2023, a 29% increase from $269.7 million in the prior year quarter. This was primarily driven by increased revenue from our Care Partners segment. Quickly reviewing results in each of our business segments for the second quarter versus the prior year quarter, our Care Partners segment reported revenue of $325.2 million, an increase of 32% compared to the second quarter of 2022, primarily driven by organic membership growth in our consolidated risk-bearing entities and a more favorable payer mix. Segment operating income increased 250% to $27.8 million for the period. This was primarily driven by a larger midyear MA risk adjustment payment this period and the retrospective trend adjustment related to the CMS DCE program in the prior year period. Moving to our Care Enablement segment, revenue increased 18% to $35 million in the second quarter of 2023. Segment operating income was $7.6 million for the period compared to $7.3 million in the prior year period. We continue to make investments in infrastructure, technology, and people to support our operational growth in new geographies and capabilities surrounding our RKK. We expect these investments to result in additional revenue and margin expansion over time as we onboard incremental clients. Membership under management within our Care Enablement segment was approximately 1.3 million managed lives at the end of the second quarter ended June 30, 2023. Approximately 650,000 or half of these members were also within our Care Partners business. Finally, our Care Delivery segment revenue increased 14% to $26.7 million during the period. This was primarily driven by increased volume in patient visits at our primary multi-specialty and ancillary delivery entities. Segment operating income was $0.6 million for the period compared to $3.4 million in the prior year period. The decrease was a result of our ongoing investments in expanding our care delivery footprint in Nevada and Texas. As you may recall, in the past, we highlighted our commitment to invest up to an incremental $10 million in 2023 to scale new geographies across all lines of business. Due to this reason, we view the results in this segment as in line or better than guidance we provided last quarter. In aggregate, income from operations, including corporate expenditures, was $27 million, an increase of 75.7% from $15.4 million in the prior year period. Adjusted EBITDA was $35.8 million, up 44% from $24.9 million in the prior year period. Net income attributable to ApolloMed was $13.2 million, an increase of 10% from $12 million in the second quarter of 2022. Earnings per share on a diluted basis were $0.28, up 8% from $0.26 in the prior year period. I want to note that our tax rate this quarter is 45%. Earlier this year, in my capacity as the new CFO, the finance team and I completed an inventory of our tax filings and with the assistance of outside consultants determined we did not appropriately account for the income tax impact associated with certain intercompany dividends and also neglected to include certain loss-generating entities in certain consolidated tax filing groups between 2019 and 2022. Specifically, income tax expense was appropriately accrued for the income generated by the entity that made the intercompany dividend. However, the additional tax associated with the dividend itself was not accrued. This resulted in a decrease to previously reported net income of $8 million, with a net cash impact of $7.7 million for the period 2020 to 2022. Today, after the market closed, we filed an 8-K with additional information about the restatement. To be clear, this restatement has no impact on historically reported GAAP and non-GAAP measures, which include revenue, gross profit, pretax income from continuing operations, EBITDA, or adjusted EBITDA. We do not believe the tax-related restatement will have any impact whatsoever on the strength of the business, our ongoing operations, our ongoing liquidity, or our need to raise capital. Going forward, we are evaluating changes to our tax structure to reduce the current effective tax rate and the amount of cash taxes. We expect to have this put into place by the fourth quarter, which we believe will result in a normalized tax rate going forward. Again, this has no impact on the measures the company reports such as revenue, gross profit, pretax income from continuing operations, EBITDA, or adjusted EBITDA. Turning over to the balance sheet. We remain well-capitalized and well-positioned to execute on our growth initiatives. We ended the second quarter with $294 million in cash and cash equivalents compared to $288 million at the end of 2022. Our working capital was $284 million compared to $288 million at the end of 2022. Also, total debt at the end of the second quarter was $208 million. I wanted to reiterate our 2023 outlook. We continue to be on track for total revenue between $1.3 billion and $1.5 billion, adjusted EBITDA of $120 million to $160 million and EPS of $0.95 to $1.20 per share. Despite the elevated tax rate for Q1 to Q3, we expect to still be within guidance for EPS, though it will most likely be in the lower half of the range.

I'd like to now turn it back to Brandon for closing comments. Thanks, Chan. In closing, we are pleased with the progress we've made thus far in 2023 and look forward to taking advantage of the positive momentum we built in the first half of the year. We believe the recent partnerships announced with the group in California, TIP, and IntraCare, demonstrate the enthusiasm and need in the market for our physician-centric value-based care platform. We remain laser-focused on delivering excellent growth, improving quality of care and clinical outcomes and accomplishing those goals sustainably by continuing our strong track record of profitability. With that, operator, let's open it up for Q&A.

Our first question is coming from Ryan Daniels from William Blair.

This is Jack Senft on for Ryan Daniels. First, in your prepared remarks, you noted the RKK expansion. Can you just elaborate on this and kind of what specifically this involves? And then two, if you can, just provide any possible timing on this expansion.

Hello, Jack, this is Brandon. Thank you for joining the call today; I appreciate it. It's a busy time. Regarding your question about the Restricted Knox-Keene license, as mentioned in the prepared remarks, we are collaborating with the Department of Managed Health Care in California to extend the Restricted Knox-Keene license to additional counties within the state. Once this occurs, we will be able to enroll more members into that Restricted Knox-Keene licensed health plan. The process involves entering contracts with payers, as well as agreements with provider groups and institutional entities. We believe that this process is progressing well according to our expectations.

As a quick follow-up, adjusted EBITDA showed sequential improvement. How should we evaluate the quarterly cadence going forward for the rest of the year, considering the increase in preauthorization mentioned in your prepared remarks? How will this affect third quarter adjusted EBITDA? I want to ensure we are correctly thinking about this and accurately modeling it.

It's Chan. Thanks so much for the question. As we think about the rest of the year, I'd say Q3 is going to be in line with Q2, and then you'll see a drop in Q4 as we've seen in historical years.

And I just want a really quick final one. Can you just give us an update on the Medicaid redeterminations and kind of how that's progressed over the past few months? I think on the last call, you noted that you're just starting to see some developments in May. So I'm just kind of curious how the past few months have progressed.

Yes, we're closely monitoring the situation. Most of our Medicaid members in value-based contracts are located in California, which has been slower to start disenrollments. We noticed some changes beginning in July, but they haven't been significant so far. We have been collaborating with community organizations and payers to ensure that eligible individuals continue to access Medicaid and care, and we are making efforts to prevent disenrollment for administrative reasons. I want to emphasize that we haven't observed any substantial impact yet, but we anticipate it might occur in the upcoming quarter or two, and we've factored this into our guidance. This is part of what Chan referred to regarding a strong Q3 and a somewhat weaker Q4.

Our next question is coming from Adam Ron from Bank of America.

I have a couple of questions. Can you provide more details about what you're seeing in terms of prioritizations in Q3? Is it related to outpatient surgery specifically or MA? Any additional information on that would be helpful.

Yes, in Q2 so far, we haven't observed a significant increase in utilization compared to Q1. However, we are noticing a slight rise in inpatient Medicare Advantage utilization based on the prior authorizations we've received. This trend is factored into our guidance for Q3 and Q4.

I noticed that your tax rate is higher than other companies we typically cover, and I wasn't sure if this was due to being in California. It seems some of it is structural, and you see potential ways to address that. Most managed care companies typically have a tax rate in the mid-20s. Is this a target you consider achievable, or what would be a reasonable target?

Yes, I'd say it's closer to low to mid-30s.

And that's really the only thing driving down your net income guidance to the lower end of the range which is higher taxes than expected for the future?

That's correct.

And then one of your competitors had two interesting comments. One, saying that direct contracting was coming in better than they had expected based on data they were getting from CMS, I guess, like a positive retro trend adjustment or perhaps to its growth expectations. So is that at all factored in your guidance or results here that direct contracting is coming in better than expected?

For the guidance today, we're not assuming any positive incremental impacts for either direct contracting from last year or ACO reach for this year. That does remain a possibility, certainly. But in the spirit of conservatism, we have not accrued or incorporated any positive impact from those two programs, again, either from a true-up from 2022, which we'll know by August or ongoing operations in the ACO reach this year into our full year projections.

Is there any data from CMS that indicates a positive direction, or are you suggesting it's too early to determine that?

On the Direct Contracting Entity program from 2022, we have not got any information from CMS that would suggest any differences relative to information we already had at the end of the year. And that final report, we do expect to come sometime this month or early next from CMS relating to the final true-up for the DCE program last year. If you're asking about the ACO reach program for this year, we are getting monthly reports around the retroactive benchmark adjustment that has been around in line with expectations, not noticeably positive impact.

And another comment they made that was interesting was that they had got in discussions with payers now that the MA payers have submitted their base for 2024, they were able to see the supplemental benefit cuts. And especially they were larger than expected just because of the rate pressure that MA plans are seeing. And so I'm wondering if you were able to get visibility into your payer partners and what you're seeing in terms of supplemental benefits customer next year and how you think that will impact your numbers and if it gives you more confidence in your ability to manage through that rate headwind for next year.

Yes, I believe that's generally correct. Each plan may differ slightly, but overall, we are observing that trend due to the management of risk adjustment, changes in premiums, and alterations in star ratings by the payers. So, what you’re saying aligns with our observations as well. Given the longevity of our model and the services we already offer, which may not have been part of the supplementary benefits in some plans, we will continue to provide those services as we always have. We feel optimistic about our ability to navigate through these changes consistently, just as we have with decades of fluctuations in supplementary benefits. These adjustments have not affected our financials or our capacity to deliver care.

I apologize for all these questions, but my last question is regarding the IntraCare deal. You mentioned that there are 425 providers and 40,000 patients. Generally, I would expect a primary care provider to have a patient panel in the hundreds, if not exceeding 1,000. I'm curious why the number is below one patient per provider. Is it possibly a Medicare Advantage only situation? Additionally, could you provide some context on how many patients the three deals announced this quarter might add to the total and whether those patients are all considered risk lives?

The 40,000 members are not exclusively seniors, so the ratio of primary care providers to seniors is likely somewhat elevated. However, not all of these members are Medicare Advantage patients. Overall, it is still early to determine the precise number of patients and the exact distribution among Medicaid, commercial, and Medicare Advantage, as our model includes risk across all three segments. I would prefer not to offer a specific number at this time, but we do anticipate that the revenue impact will be significant, likely in the tens or possibly higher.

Our next question is coming from Brooks O'Neil from Lake Street.

I'm curious about what Brandon mentioned regarding elevated risk adjustment payments. Can you discuss what's driving that? Also, do you think this trend is sustainable into the end of the year and beyond?

So on the elevated risk score relative to last year, that drove some of the incremental outperformance for this quarter relative to the same quarter last year. That was related to our efforts in more accurately capturing the kind of conditions of our senior population, which is something that we've been focused on as part of the operational and technological platform that we've been deploying into our provider offices over the last 12 to 24 months. As you all know, it takes quite a bit of time for risk adjustment payments to catch up with the actual act of coding the chronic condition. And so some of the results and uplift from the kind of platform we've deployed over the past couple of years are now starting to come to bear. We also noted before that our aggregate RAF score for our senior population was quite low, under 1.0. And we believe that at the time, that was inappropriately low relative to the actual acuity of the chronic conditions of the patients. And so we're seeing some of that come into fruition in terms of these RAF payments.

But do you think you can probably keep seeing additional improvements as you implement your systems? Is that a fair way to characterize it?

I think related to the performance year with which these payments were related, I think that is actually it for that payment year. Of course, in future payment years we do think that there is future improvement to be had as we continue to roll out the platform to all of our providers.

Let me ask just one other one. I'm curious Jack was asking you about the Knox-Keene license, and that's a particular fascination of mine. I was hoping you might go just a little bit deeper in talking about not just the timing and the fact that you're on pace. But just what exactly do you think the impact of having that license will be on your business in terms of what does it mean for your provider networks? What does it mean in terms of the premium or the dollar capture you can have on a per patient basis?

Brooks, thanks so much for the question. We're very excited about our expansion of the RKK into new counties. It will allow us to quickly deploy our risk-based ecosystem into new counties as well as geographies. It will allow us to differentially capture the premium dollar as well as really expand our enablement services. In terms of timing, we are working quickly with the DMHC to expand to our current counties as well as counties where new partners are in. As you know, this takes time in terms of the regulatory efforts, and we'll keep you apprised as we get further traction.

Let me ask one more question. I'm curious about the Knox-Keene license and whether it allows you to accept global capitation, including the hospital portion. If I'm correct, the premiums you have historically received don't cover that, but the hospital portion could be quite significant for you. Is that accurate?

Definitely, yes, you brought up a great point. With the RKK we will now be able to take on the hospital risk along with the professional risk in terms of our revenues. And we are looking forward to moving down this path. Essentially, we will be recognized in revenues for 85-ish percent of the premium dollar versus the 35% to 40% that we are recognizing today.

Do you believe you can ultimately expand your services to all patients across California? Is that correct?

Yes. We will start with our Medicare Advantage population. The goal is to expand it across multiple lines of business. Of course, this does take time, and it's not going to be overnight. But yes, that is the long-term expansion.

I'll leave it at that. Good quarter, good outlook. I'm excited for you guys.

Thanks so much, Brooks. Great to hear you.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Well, thank you all for your time today. We are always open to a dialogue with investors and welcome visitors to our offices at Alhambra, should any of you be in the Los Angeles area. Please feel free to reach out to us with any additional questions. We look forward to speaking to you all again on our next quarterly call. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.