Good day, everyone, and welcome to today's Astrana Health First Quarter 2024 Earnings Call. Today's speakers will be Brandon Sim, President and Chief Executive Officer of Astrana Health; and Chan Basho, Chief Operating and Financial Officer. The press release announcing Astrana Health Inc.'s results for the first quarter ended March 31, 2024, is available at the Investors section of the company's website. The company will discuss certain non-GAAP measures during this call. Reconciliations to the most comparable GAAP measures are included in the press release. 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 Astrana Health'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, 2024, 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 Astrana Health 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. With that, I'll turn the call over to Astrana Health's President and Chief Executive Officer, Brandon Sim.

Thank you, operator. Good evening, and thank you all for joining us today. We began 2024 with a strong first quarter here at Astrana Health as we expand our innovative care model and technology platform to empower entrepreneurial providers and improve health care in local communities throughout the country. We continue to deliver against our strategic roadmap and are proud to announce compelling financial, operational, and clinical results to start the year. I'll start by highlighting our financial performance for the first quarter of 2024. Total revenue at Astrana reached $404 million, a 20% increase compared to the prior year period, and adjusted EBITDA rose to $42.2 million, up 42% compared to the prior year period. This resulted in an adjusted EBITDA margin of 10.4%. Both growth and profitability metrics were driven by robust membership growth across all our lines of business, coupled with ongoing success in managing the total cost of care for these members and value-based risk-bearing arrangements. We also continued investing in our teams, our technology platform, and our new market entry operations. We believe these investments are critical towards our ongoing commitment to building a sustainable business even as we continue to expand rapidly. As a reminder, we have consistently talked about the four pillars of our business, which we feel our platform is uniquely positioned to execute on: one, expanding our membership base across existing and new geographies; two, increasing the level of accountability and risk we are responsible for our value-based care contracts; three, empowering our providers to achieve superior patient outcomes; and four, executing strategic acquisitions to further accelerate our growth trajectory. On the first pillar, we experienced robust growth in membership in both core and new regions. We now manage approximately 1 million lives driven by robust organic growth and strategic acquisitions. Our membership grew organically by around 10% year-to-date, a number that is net of Medicaid redetermination and does not include any strategic acquisitions. On the second pillar, we continue to take on greater responsibility for the total cost of care of our members as we promised we would do. As of April 1, our full risk business makes up approximately 60% of total capitation revenue, and we anticipate continuing to grow that percentage while consistently delivering high-quality care as the year progresses. In addition, we also began taking on full risk allocation in the state of Nevada. We believe that we are uniquely positioned to capture the embedded growth that this pillar represents because of the high level of visibility and consistency that our proprietary technology and clinical infrastructure affords us. I'd like to continue emphasizing a key aspect of our business that distinguishes Astrana Health from other providers and peers. We have always committed to serving all segments of our communities in value-based care arrangements, covering all payer types from original Medicare, Medicare Advantage, managed Medicaid to commercial. And we continue to forge ahead in our transition to risk and being truly accountable for our members' whole health across those diverse business segments even as others have shied away. The infrastructure, technology, and team that we have built allows us to do this well, resulting in our ability to serve a wider patient population, make our providers’ lives simpler and more efficient, diversify our business, and better manage risk and support our payer partners across their entire business. With regards to the third pillar of our business, Astrana is focused on providing high-quality care and access to all members. We have noticed continued outperformance compared to historical years in terms of HEDIS, HCC, and other quality-related outcomes. We also continue to focus on making sure members receive the right care in the right setting, leading to our continued strong performance on clinical utilization metrics. Our bed days per thousand and admits per thousand improved in the first quarter when compared to previous periods. This improvement is consistent across all business segments with Medicare, Medicaid, and commercial authorizations for inpatient and outpatient services mirroring this trend. Moving on to the fourth pillar of the business, strategic acquisitions. We successfully closed the second and final part of our Community Family Care acquisition this quarter, as we had previously guided. This acquisition marks the largest in Astrana's history and serves as a successful example of a care enablement client, deepening its relationship with Astrana Health and moving into the Care Partners segment. The integration of CFC was seamless as we were already powering the CFC business with our care enablement platform prior to the acquisition, showcasing the value and synergy of leveraging our care enablement tech-enabled services business. The completion of this transaction allows us to take on greater responsibility for the outcomes of the patients we serve with CFC's full risk, Medicaid restricted Knox-Keene license. It also further strengthens our commitment to managing medical costs and providing quality care in our communities. Looking ahead, we expect to transition the majority of our Medicaid members to full-risk arrangements in the next 6 to 12 months. This quarter, we also completed the acquisition of Prime Community Care of Central Valley or PCCCV, a risk-bearing provider organization with over 150 primary care and multispecialty care providers, which serve around 26,000 primarily Medicaid members in the Central Valley of California. Prior to this, our organic growth and partnership efforts in the Central Valley have been robust. PCCCV joining our Care Partners business will be a further accelerant for our efforts to deliver high-quality, high-value care to communities in the Central Valley and also represents our entry into San Joaquin County. Over the next 12 months, we anticipate continuing our strategy in the region with PCCCV in the fold, taking greater accountability for total cost of care for these members and further integrating with our care enablement platform in order to advance patient outcomes and empower community providers in the region. And outside of California, we continue to see a rich pipeline of both organic and inorganic opportunities in both Texas, Nevada, and beyond. We believe that the strong growth and consistent execution of our strategic roadmap demonstrates the uniqueness of our platform for care model and technology capabilities. Our well-established value-based infrastructure and long track record of managing total cost of care and patient outcomes in value-based arrangements across all payer types gives confidence in the ongoing growth and profitability of our platform. To conclude my prepared remarks, I want to express my gratitude to our teammates, providers, and partners for their belief in our vision to transform health care and local communities nationwide. The rapid growth and positive outcomes of the business would not be possible without your passion, dedication, and support. With that, I'll hand it over to Chan to review our financial results.

Thank you, Brandon. Moving into this quarter's performance. We began 2024 with total revenue of $404 million, a 20% increase from $337 million in the prior year quarter. This was primarily driven by increased capitation revenue, resulting from organic membership growth in our core IPAs as well as the addition of CFC IPA on January 31, 2024. Care Partners revenue increased 26% to $397 million during the period. Along with the organic and strategic growth, Partners revenue increased due to the conversion and addition of full-risk membership. As of April 1, 2024, we expect our full-risk business to account for approximately 60% of capitated revenues relative to 49% as of January 1, 2024. Adjusted EBITDA was $42.2 million, up 42% from $29.8 million in the prior year period. In the first quarter of 2024, adjusted EBITDA excluded certain one-time items, including a $4.7 million expense related to a financial guarantee via a letter of credit that we provided two years ago in support of two independently operated local provider-led ACOs. Despite the removal of these ACOs from the CMS program, the shared losses for that year were recorded, and we are working with those two providers to recoup the funds that were spent. As I mentioned, this is not a recurring item nor do we believe it reflects the operations of our ACO business. Net income attributable to Astrana Health was $14.8 million, an increase of 13% from $13.1 million in the prior year quarter. Earnings per share on a diluted basis were $0.31, up 11% from $0.28 in the prior year. Now turning to the balance sheet. Our financial position remains well-capitalized with $335 million in cash and cash equivalents and total debt of $393 million as of Q1 2024. This compares to $294 million in cash and cash equivalents and total debt of $282 million at the end of 2023. We are steadfast in our ability to execute our growth strategy by expanding our membership through both organic means and strategic acquisitions as well as transitioning our contracts to full risk. Further, we remain confident that full-year projections align with expectations given our diverse payer mix and ability to manage cost of care. As a result, we are reaffirming our full-year guidance for revenue, adjusted EBITDA, and earnings per share. Looking ahead to the coming quarters, the successful completion of the second part of the CFC acquisition is projected to contribute a single-digit uplift in Q2 revenue relative to Q1. This will be reflected in the full quarter's impact of CFC on our financials. Historically, Q3 has been our strongest quarter in terms of profitability due to sweeps and ACO-related payments. Our sustained participation in the ACO program has enhanced our capabilities around real-time data gathering and forecasting. Due to the enhanced clarity, we are comfortable this year booking ACO earnings based on the quarter of their contribution. As a result, Q3 will be slightly lower in terms of EBITDA contribution percentage versus historical years. In closing, we're extremely pleased with our performance in the first quarter, which has set a positive tone for the remainder of the year. Our strong organic membership growth, strategic acquisitions of CFC and PCCCV, ongoing transition to full-risk arrangements, and the stability and improvement of our utilization metrics represent strong momentum for our business. We have confidence in our ability to continue our long track record of successful execution. We will continue in our commitment to deliver the utmost quality of care to focus on industry-leading patient outcomes and to serve more communities across the country. Thank you for your time today.

Ladies and gentlemen, the floor is now open for questions. We'll take our first question from Ryan Daniels from William Blair.

I'm curious if you could speak a little bit more to your pipeline, either for new partnerships or M&A, especially as we contrast your strong performance versus what some other peers are seeing in the market? Meaning, is that opening up some opportunities? Is there pressure with provider groups to get new partnerships, et cetera? Just any color there would be great.

Ryan, thank you so much for the questions and for tuning in. I think we're seeing a very strong partnership and corporate development pipeline as we speak. As you mentioned, there is a huge desire, especially given cost pressures, margin pressures, and utilization trends that some of our peers are seeing to find a partner that is going to be stable and present a long-term opportunity to provide value back to providers and ultimately back to the patients. I think we're absolutely seeing a strong pipeline. I think there was an acquisition that we announced during our Care Partners segment this quarter and the close of the CFC transaction. I believe we are still planning to fulfill our guidance of at least one or two new markets per year as the year progresses here.

Okay. That's helpful color. And then as my follow-up, good new data on the total cap revenue being at 60%, up from 49% in January. I guess my question is now that you have both the Medicare and Medicaid risk, how might we see that trend towards year-end? So where might you end the year in 2024? And then what would your goals be for 2025 and 2026 because I know that's a nice kind of revenue and really a care management accelerator as well. And congrats on the strong performance.

Thanks, Ryan. In terms of our year-end target, as we've discussed before, we still expect to be at about two-thirds by year-end in our transition to full risk. As we work through 2025. We see us continuing to move our membership into a full-risk arrangement, and we do believe we will be able to get the majority of our contracts into full risk by the end of 2025.

Thank you. And we'll take our next question from David Larsen from BTIG.

Congratulations on the quarter. I was positively surprised at the EBITDA. Can you maybe just talk about claims trend, how that's tracking for your book of business? Some of your peers were hearing sustained high MA utilization, fairly high single-digit claims cost trend. I mean what are you seeing? How did your caution come in relative to your own expectations? And I guess, what is your secret sauce? Why is your trend perhaps better than others?

David, it's great to hear from you. Thank you for your question. Regarding our utilization perspective, initially, for flu, we noticed potentially more cases, but with a lower level of severity. As for the overall claims trend, we have comprehensive insights into our utilization management and care management capabilities, which allows us to have a clear understanding of authorizations and the medical cost ratio. We are observing positive trends across the board, as Brandon pointed out during the call. Additionally, we are seeing an uptick in certain Medicaid-related cases due to regulatory changes that now include genetic testing. Overall, we are continuing to experience medical cost ratios that are consistent or better compared to historical periods.

Okay. And then can you put a percent number on your perimeter per month trend line? Is it below 5%? Is it between 5% and 10%, below 3%? Any number you can put on that?

Dave, thanks for the question. This is Brandon. I don't think we've disclosed the exact trend line, especially because it differs by line of business. I would say that across all lines of business, Medicare, commercial, and MA, I would say it's coming in a few percent lower than we had anticipated at the beginning of the year prior to this year, prior to this quarter. It is still early in the year, I would say. So we're here in May, and we had a conservative reaffirmed guidance, but I do think early results, starting off the year here are promising.

Okay. And then can you maybe talk a little bit about your approach to managing inpatient services? I mean, it's my understanding that you actually have Astrana hospitalists that manage care to an extent within inpatient facilities. So should we be worried about a spike in claims cost for hospitals once you start sort of bearing more full risk?

There will be increased claims costs, which will be balanced by higher claims and capitation revenue as we transition to full risk, and we're already beginning to observe this with about 60% of our capitated revenue in full-risk arrangements. While this may temporarily pressure our overall EBITDA margin, from a raw EBITDA perspective, it remains additive. We believe we are well equipped to accept full risk and maintain our desired medical margins, thanks to our hospitals' operations, our post-discharge care teams that assist patients after inpatient visits, and our strong integration of specialists and primary care providers across the care spectrum. As we expand into new markets, we are effectively contracting with hospitals and applying strategies we successfully implemented in California to manage care costs in both outpatient and inpatient environments. This is something we continue to consider as we engage in full risk delegated contracts in Nevada, Texas, and beyond.

Okay. That's great. Very helpful. And then just last one, like CFC integration, how is that progressing? Just any thoughts or color there would be very helpful.

Sure thing. Yes. The CFC integration, as I mentioned in the prepared comments, is going very well. All the providers are now are already on our Care Enablement platform. Obviously, given that it powered CFC even prior to acquisitions from a regulatory standpoint, things have been settled, leading to the successful close on March 31, and the second part of the CFC transaction and throughout the remainder of the year, most of the CFC members already in forward contracts dating back to the middle of 2023, and there are additional synergies with our existing business that we look to capitalize on for the remainder of the year.

Okay. Congratulations on a great quarter. I'll hop back in the queue.

Thank you so much, Dave.

And we'll take our next question from Adam Ron from Bank of America.

Super quick ones. So the 60% number that you're talking about for capitation that you're using, I want to make sure I understand it. So you're saying for 60% of what you're reporting as capitation revenue, that number that you're reporting is some capitation rate, let's call it, 85% of whatever the benchmark that you're managing is. And if that's true, that I'm understanding that correctly, on the remaining 40%, what is roughly the capitation rate that you're doing today? And can that go to 85% to that could give us like a sense of like what the dollar opportunity in revenue is from here.

Question. You're absolutely correct in your understanding. 60% of the capitated revenue that we report in the Care Partners segment comes from an arrangement in which, call it, yes, approximately 85% of the premium dollar is being given to us in a capitated value-based arrangement. Of the other 40% of the dollars, I would say that those are mostly coming from arrangements in which we have outpatient risk only, which would be illustratively, call it, around 35% to 40% of the premium dollar. So there is additional opportunity we anticipate capturing some of it over the remainder of this year, some of it into 2025 in terms of converting some of those contracts into approximately 85% of premium contracts.

Okay. No, that's perfect. And then in terms of MLR, it seems pretty significant to your point, a trend was a couple of percentage lower than what you thought it was, which on a 10% margin business is pretty substantial. So, yes. Just curious, one, why you didn't raise the guidance? And two, what are the big factors versus expectations that are coming in different? And three, somewhat unrelated, but in the 2025 rate notice, one of the surprising aspects was in Los Angeles, the rate for growth rate of trend was 5%, while the rest of the industry got like 2.4% or something. So curious, it's like CMS' view of what's happening in L.A. County is different from yours, where potentially they're saying trend is accelerating? And then on the other hand, into '25, is that a tailwind for you? Or is it entirely offset by what the payers are doing with benefits. I appreciate the answer to the multifaceted question in advance.

Yes, that's correct. I'll address each point one at a time, Adam. Just to clarify my earlier comments regarding the 60% of capitated revenue that is related to risk as of April 1, which is right after the end of the quarter. Regarding the utilization trends we're observing, as Chan mentioned and I discussed, I'm optimistic about the trends we are seeing in terms of utilization. We are noticing widespread support for an overall decrease in utilization trends across various lines of business and different areas. There are a couple of areas mentioned by Chan earlier that may be performing better than expected, but overall, the trend is quite positive. The reason we are not adjusting our guidance at this point is that it is still early in the year. While we remain cautiously optimistic, I believe we will likely stay within the anticipated range. There is some increased investment in teams and new market entry that we believe is on track, and we will provide more updates as the year goes on. As for the inquiry about the benchmarks in Los Angeles, overall, we were somewhat disappointed, as others were, with the MA rate notice, particularly the final notice. The L.A. benchmark came in a bit higher than we expected or compared to other regions, which we see as a potential advantage. However, it's still early in the year. We are continuing negotiations and discussions with payers, collaborating with our partners on the benefits planned for '25 and how the plan will be structured. All of this will likely contribute to the final economic outlook we expect moving forward. We will have more guidance on this for you in the coming months.

We will take our next question from Jack Slevin from Jefferies.

Congrats on the quarter. I wanted to do a bit of a double click on the Nevada contract. Can you give a little more color on maybe what payer class that risk contract represents? And sort of what you're seeing that made you want to flip that on immediately in Nevada is sort of the infrastructure and the market entry costs you've been building up over the last year are there and ready to hit the ground running on it?

Jack, yes. So in Nevada, we've been in some shared risk arrangements or partial risk arrangements for about a year, maybe a little more than a year at this point. The risk contract that we turned on was the Medicare Advantage contract? And it's one in which we actually have delegated payer responsibilities. So we have utilization management, care management, claims, credentialing contracting, etc., which very much looks similar to the infrastructure we built in California. We felt comfortable turning it on after looking at some of the results while participating under a shared risk arrangement as well as the confidence in the infrastructure we've now built in Nevada over the last, call it, 12 to 18 months. So it's something that, while still a fairly small book of business, relatively speaking, we're excited to continue to prove the model scales outside of some of our core regions.

Understood. Regarding the full risk transition, there are many factors at play, especially from MA plans, and concerning cost trends in general. I'm aware that you have considerable insight into the opportunities available due to your current role. As you contemplate adding inpatient risk, particularly in the California region, how are you evaluating the various elements related to cost trends and the potential changes in plans' bidding strategies for the upcoming year? Are you still focused on pushing forward as rapidly as possible, or do you need to be more discerning given the current circumstances?

Yes, no. Sorry, Chan, go ahead.

No, no. So, Jack, in terms of our contracts, I don't want you to think we're moving contracts over if actuarially post-analysis, it doesn't make sense for us to do so. So we are looking at our claims trend. We are looking at overall medical trend. We are looking at the unique capabilities we can bring to that market in terms of our medical management capabilities, our care management capabilities, and the technology that we can offer in that local marketplace. And as that links together and in many markets, we have amount of risk already, we then move forward in a very prudent fashion.

Got it. Appreciate the color. And congrats again on really strong quarter.

And next, we will go to Jailendra Singh from Truist.

First question on the care delivery business, I saw around $8 million sequential decline. I understand that last quarter, in Q4, you had some true-ups, so that probably was expected. But anything you can highlight there in terms of trends you saw in the business? And is Q1 the good run rate for the rest of the year for that business? Just trying to understand if there was any impact from changing health care disruption on that business?

Jailendra, thanks so much for your question. In terms of the change from Q4 to Q1, Q4 and Q2 usually see annual quality bonuses as well as any one-time true-ups that happened on the delivery side of the business. So that's the change that you see. In terms of change and the impact, we have very minimal change related business in terms of our delivery assets so that there's not an impact there.

Okay. Use Q1 as a good run rate for the rest of the year, right, from a revenue point of view.

Yes, we will see some enhanced profitability in Q2 and Q4 from those bonuses as they come in.

Right. Then my follow-up, a managed care company, I mean, players last we called out pressure in the ACO business driven by some data they received from CMS impacting their '23 reserves and also their '24 assumptions. With you guys entering MSSP this year, and I believe you are accruing towards breakeven margins. Just curious what you have seen in data, I understand it's clearly limited, but just curious if for anything to flag from your experience point of view. And similarly, outside of the $4.7 million adjustment you called out in ACO reach, can you talk about your experience in that program in general?

Thank you for your question. The first question seems to be about MSSP, and our experience so far has been early in the process. We are currently accruing close to breakeven in the first year of our participation. In MSSP, we are still aiming for breakeven this quarter due to the limited large experience in that program. I would estimate that profitability from MSSP, which operates on a 15- to 18-month cycle, will likely appear in our 2025 financials rather than this year, and we have not factored any profitability from ACO into this year's financial projections. Regarding the ACO reach business, where we have more experience, I want to clarify a couple of points. The $5 million adjustment mentioned by Chan was fully charged this quarter. It's a one-time occurrence and is not related to ACO reach but rather to separate ACO reach businesses, as Chan explained. On the performance of our ACO reach, we are seeing encouraging results and have booked some profitability this quarter, thanks to the increased visibility and our confidence that medical cost trends are looking quite positive in the ACO reach program.

We'll go to Christian Borgmeyer from TD Securities.

This is Christian Borgmeyer on to Gary Taylor. So as we think about the Medicaid retermination period winding down, what are you seeing lately in terms of reenrollment through exchange and commercial products? Are you noting any disruptions in care for patients as they navigated through any reenrollment? And if there's been a lapse in care, what tools is Astrana to deploy to reengage the members that may have not been seeing their PCPs lately.

Thank you for the question. As I mentioned earlier, we have observed around 7% growth in Medicaid year-to-date, even after accounting for redetermination. The commercial class exchange business has performed even better, exceeding 16% growth in the commercial segment due to some recaptures from Medicaid members. I would say that our efforts have been largely successful. Medicaid continues to grow despite the challenges from redetermination, and we're not experiencing higher activity levels among remaining Medicaid members compared to before. The redetermination period is coming to an end soon, and from our perspective, the associated headwinds are mostly managed. In regard to member engagement and continuity of care, we believe this is a key differentiator for our model. Patients may switch to different insurance plans or payers, including Medicare Advantage, but they still have access to the same care teams, social workers, planning, technology platform, and primary care providers, with 60% of this also covering their institutional network. This continuity allows us to maintain care in the same manner the patient has previously experienced, fostering a long-term relationship and enabling us to invest more in their health over time. We see this diversity in how we serve patients as a significant advantage, particularly as we navigate the Medicaid lease termination process.

And there appear to be no further questions at this time. I'd like to turn the floor back to Brandon Sim for closing remarks.

Thank you, everyone, for tuning in this evening to our first quarter 2024 earnings results. As always, we are around in our offices in both Alhambra, California, and Las Vegas, Nevada. If you're in the area, please don't hesitate to e-mail us if you'd like to meet. We look forward to discussing our results next quarter and see you again. Thank you, and have a good evening.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.