Greetings and welcome to the Nutex Health First Quarter 2024 Financial Results Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Rodriguez. Thank you, Jennifer. You may begin.

Hello and good morning. Welcome to the Nutex Health first quarter 2024 earnings conference call. Today's call is being recorded. With me this morning is our Chairman and CEO, Dr. Tom Vo; CFO, Jon Bates; President, Dr. Warren Hosseinion; and COO, Josh DeTillio. Our team will provide some prepared remarks and then we'll take questions. Before I turn the call over to Dr. Vo, let me remind everyone that today's call may contain forward-looking statements that are based on management's current expectations, numerous risks, uncertainties, and other factors that may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed on Wednesday's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing the supplemental information on adjusted EBITDA and reconciling net loss attributable to Nutex Health Inc. is included in the press release and Form 10-Q filed earlier this week. This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Dr. Tom Vo, our Founder and Chief Executive Officer.

Jennifer, thank you, and good morning everybody, and thank you for joining the call. The past two years have been very challenging, both from a healthcare industry standpoint as well as from a macroeconomic standpoint. However, we remain committed to our core mission of providing improved accessibility as well as exceptional concierge level patient care. In fact, all of our hospitals are open 24/7 and we are the medical safety net for the communities that we serve. While we have faced many hurdles, I'm happy to report that our team have been very diligent in overcoming many of these hurdles. We believe our effort over the past twelve months are beginning to pay off. This momentum has generated improved financial results driven by volume growth year-over-year, improved collections per visit, and solid operating margins. In 2023, we implemented several initiatives to increase ER volume, increase inpatient volume, and increase outpatient volume. In addition, we opened four new hospitals in 2023, all of which have ramped up either faster than expectations or within expectations. System wide quarter-over-quarter from 2023 to 2024, ER volumes increased by 21%. Of this 21% increase, 5.3% are from mature hospital growth, defined as hospitals being opened by December 31, 2022 to provide one full year or more of comparable results. Most of the remaining increases are from our ramping hospitals, defined as being open for less than one year. From a revenue per patient perspective, we have also made some gains. Selection percentages have consistently increased monthly since January 1, 2022, when the No Surprises Act was implemented, and we are making great strides in understanding as well as navigating through all the nuances of the No Surprises Act. On the population health side of the business, we are also seeing growth. In addition to our IPA in Los Angeles, which has been consistently profitable, we have recently added an IPA in South Florida as well as an IPA in Houston. As a result, the number of MA lives, or Medicare Advantage lives, have increased by 78% quarter-over-quarter. From a cost perspective, our operating costs across most categories have started to come down due mainly to our cost cutting measures, which we have announced earlier this year. As we move through the remainder of the year, we will maintain our disciplined approach of managing our cost while continuing to invest appropriately in our strategic growth areas, which we believe should position the company favorably to meet our long-term objectives of being a long-term, sustainable and profitable company. With that, I will turn the call over to Jon Bates, our Chief Financial Officer, for more financial information for the first quarter. Jon?

Thanks, Tom, and good morning everyone. So we believe our first quarter performance represents a strong start to the year and we continue to combine solid operational performance with a disciplined and balanced allocation of capital to increase shareholder value over time. We had very strong top line growth in total revenue and visits for the first quarter of 2024 compared to the first quarter of 2023. Regarding total revenue, we had an increase of 20%, or $11.2 million, to $67.5 million for the first quarter of 2024 versus $56.3 million for the first quarter of 2023. Of the total revenue increase, mature hospitals, which are hospitals that were opened prior to December 31, 2021 and therefore provided one full year of comparative results, increased its revenue by 6.7% for the first quarter 2024 versus the first quarter 2023. Additionally, the population health division revenue grew by 5.4% in the first quarter of 2024 from $7 million in the first quarter of 2023 to $7.4 million in the first quarter of 2024. With regard to those hospital division visits, we also grew, as Tom mentioned earlier, had a solid increase of 21% quarter-over-quarter, with those mature facilities growing at 5.3% for the first quarter 2024 to first quarter 2023. So in addition to that revenue improvement we have seen year-over-year, the company's focused operating cost control efforts that were started toward the end of 2023 continued to be a focus in the first quarter of 2024 and began to see a positive impact from these initiatives during the quarter. One of those areas where we see this is in the 2024 first quarter gross profit as it grew to $10.2 million, or 15.1% of total revenue as compared to $4.8 million, or 8.6% of total revenue in the first quarter of 2023, which is a 113% increase quarter-over-quarter. Additionally, first quarter 2024 operating income was a positive $1.4 million compared to an operating loss of a negative $4.4 million in the same quarter of 2023. So net loss attributable to Nutex Health Inc. improved by $4.8 million from a loss of negative $5.1 million in the first quarter of 2023 to only a very small loss of a negative $364,000 in the first quarter of 2024. Adjusted EBITDA increased $2.2 million, or 92%, from $2.4 million in the first quarter of 2023 to $4.6 million in the first quarter of 2024. With regard to cash flow, you will see that the net cash from operating activities was $3.1 million in the first quarter of 2024, which is an increase of $2.1 million from the first quarter of 2023. Finally, on our balance sheet, cash and cash equivalents at March 31 of 2024 was $30 million, up $8 million from $22 million at December 31, 2023. And on the liability side, we have long-term debt of $26.3 million, which is a relatively reasonable amount for a company that has 21 separate hospital locations. And a majority of this debt is related to, as you would imagine, equipment loans related at our hospitals for such things as MRIs, X-rays, ultrasounds and CT machines. So with that, I will turn the call over to Jennifer to open it up for Q&A, as we look forward to your questions.

Thank you, Jon. We will now open the call to take questions. In the queue, we have Bill Sutherland from The Benchmark Company. Bill?

Thank you. And good morning everybody. Nice work in the first quarter. I just appreciate you taking the questions. So, Tom, to date, I think you added one hospital on April 1. How are you thinking about additional growth in terms of hospital facilities?

No, thank you, Bill, for the question. No, we believe in future growth. And for 2024, we do have a pipeline of four hospitals that we can open anytime after the third quarter of this year. I am sorry, during the third quarter or after the third quarter of this year. However, as previously disclosed, we have placed a delay on the opening of any further new hospitals in 2024 until certain financial metrics have been achieved. So in particular, we're slowing down openings until we could fund new hospitals, either through internal cash collections or through alternative financing that is not prohibitively expensive nor dilutive. So on a weekly basis, we continue to evaluate our cash and potential timing for opening new hospitals this year. As far as looking forward to – oh, go ahead, Bill.

No, you finish, sorry.

And I was just going to say that beyond 2024, looking forward to 2025 and beyond that, we do get a fair number of requests from all over the country weekly to open these micro hospitals in their community. And so we'll continue to evaluate these opportunities and balance the high cost of developing these hospitals versus the big need and demand for accessible healthcare. The good news, though, is that there is no lack of demand for our services. These micro hospitals are very popular around the country. Sorry, Bill, go ahead.

Oh, no, I was just going to say to follow on to, you've also done some pruning of some underperforming hospitals. Is that process largely complete? Or is there more to go?

Oh, there's more to go. And so we're a portfolio company, as you know, and we are constantly reviewing every single hospital in our portfolio on a monthly basis to make sure that they are performing. Currently, there are a few hospitals that are not performing as expected. And so what happened with the No Surprises Act was that with the decrease in reimbursement, the hospitals that were performing well three years ago may not be performing as well this year. And so we are always looking to improve the performance of these hospitals. And so our plans for these hospitals are to initiate all the revenue growth protocols, as well as all of the cost cutting measures, and give them a period of time to turn around. And so if that still doesn't work, then the next step would be to do an analysis to either sell that facility to another operator or shut the facility down. So once again, this is a continuing process, not just for the underperforming hospitals, but for all our hospitals in our portfolio.

Just a continual process of optimization. It sounds like it doesn't sound like you've got like a list that you're concerned about to not continue with for the foreseeable future.

That's right. Of the 21 hospitals, I would say that there are a few that we're trying to turn around, but for the most part, most of the hospitals are doing well.

Got it. Warren, maybe over to you. In terms of the population health side, how do you see the growth outlook there for the remainder of the year and into next year?

Yes, thank you for the question, Bill. We are continuing to grow that side of the business. We currently have three IPAs that are operational: one in Los Angeles, one in Houston, and one in South Florida. All three of these had a strong annual enrollment period at the end of 2023, resulting in Nutex Health almost doubling our Medicare Advantage lives under management. Looking forward, we are launching our IT in Phoenix, Arizona this year, and then we plan to launch one to two more new IPAs each year going forward around our other facilities.

Got it. So you provided a same store number this quarter, which is helpful. How are you kind of focusing on expanding that same-store number going forward? Because I think there's some service enhancements that you guys have started to put in place.

Yes. So, Bill, absolutely. So we definitely believe in growth both internally as well as externally with new locations. So internally, over the past 12 months, we have put several initiatives that we think will be very beneficial to the company. We have protocols in place for all the hospitals in our network to, number one, increase ER volumes, and that's through marketing and patient referral, physician referral, and so on. Number two, is once a patient goes into our ER, we want to keep them at our hospital. So, we want to increase the observation status of those patients and from there increase the inpatient as well, because we want to maximize the use of our inpatient service lines. And then we also have outpatient service lines such as imaging, so CT, X-ray, MRI, ultrasound, and labs. So we want to increase those service lines also. For about six of the hospitals, we actually have a pretty robust initiative for medical treatment of behavioral health conditions, such as alcohol intoxication, alcohol detoxification, or benzodiazepine addiction as examples of these treatments. And then for about four hospitals, we're starting to do some outpatient procedures, such as interventional pain procedures or interventional radiology procedures. And so far we're seeing some positive results from a lot of the initiatives. And so hence, that's why you see the 5% to 6% quarter-over-quarter growth from both a volume as well as a revenue side. So that’s on the revenue side. On the expense side, we have also implemented a few cost cutting initiatives. And with that, I’d like to ask our Chief Operating Officer, Josh, to describe some of the things that he’s working on, both from a hospital level as well as a corporate level. Josh, are you on?

Yes. Good morning, everyone. Yes. So, as Tom said, on the cost side, we’ve been working very hard in the last number of months, both at the hospitals and at corporate. Our three biggest costs are our labor costs, our contract services, and our supplies. For labor, we’ve worked very hard with our teams to maximize productivity at the hospitals as well as corporate, and we’ve leaned down in certain areas. We put in some new tools like staffing matrices, and we’re looking at implementing some new scheduling and productivity software. And it’s always a balance with the significant volume growth that we’ve had over the last several months to ensure that we’re staffing appropriately. I would also add that we’ve not experienced the staffing shortages or turnover or increased labor costs like other health systems, as our teams are highly engaged and love our model and love their jobs. Contract services has also been a big improvement for us in cost, and there’s a lot more to come. We’re really working hard to leverage our size and scope with vendors. Historically, we’ve had 21 different contracts for certain vendors where we’re shifting to larger corporate contracts to take advantage of bulk purchasing and discounts. On the corporate side, we’ve had a number of consultants that we’ve eliminated, insurances that we’ve renegotiated, and we’ve continued to whittle down spending on temporary employees, staffing agencies, and our legal spend. On the supply side, we’ve been working very closely with our distributors and group purchasing organizations to ensure we’ve got the right contracts with the most advantageous pricing for medical supplies and pharmaceuticals. And again, in supplies, we’re leveraging our size versus 21 individual hospitals. The supply savings have begun, but there’s a lot more to come and it will continue to be material. We’re working closely with our corporate team and hospital teams, and they’re very familiar with our operational planning and cost saving initiatives that we put in place. And we’re very fortunate to have some of the best leaders in the industry at our hospitals, and they’re doing a great job executing on the cost side. Thank you.

Thanks, Josh. Thanks, Tom. If you don’t mind, I’ll sneak in one or two more questions. And because I’m curious about revenue per visit, patient revenue per visit bounced back dramatically last year. Pretty steady right now. Is that kind of a steady state number going forward?

No. We’re continuing to make progress with the No Surprises Act, and as you know, and this is industry wide, when the No Surprises Act was implemented back in 2022, we saw roughly a 30 to 35 percent decrease in revenue. And that’s just not us, that’s everybody else. And so we had to make some serious adjustments very, very fast. Over the past two years, we have learned a great deal about the process and have put together a very competent team to work these claims. What we’re finding is that, unfortunately, we have to resubmit about two thirds of our claims back to the No Surprises Act portal in order to get a better payment. In other words, insurers are paying us below market on two thirds of those claims. As you can imagine, that’s a lot of claims that we have to reprocess, which requires a lot more work, but we are doing it. When we resubmit these claims, there are two ways to do it through what’s called the independent dispute resolution, or IDR. You can either negotiate with the insurers directly through what’s called an open negotiation, or you can go through a more formal process called arbitration. Historically, we’ve been doing mainly open negotiation, and we’re getting good results, as you can tell from our previous financials. However, at the end of 2023, the arbitration portal was upgraded to make it a lot more streamlined as well as cost effective. So we are basically ramping up to start to process more claims through the arbitration process of the No Surprises Act in 2024. Our goal is to get the insurance company to pay us fairly. We don’t need any more than that. We don’t have any data yet on the arbitration process because we’re just starting that process. However, based on public data that we see out there, providers win about 70% to 80% of the time when they go through the arbitration process. So we’re hopeful for a good outcome. In addition to the arbitration, in 2024 the insurers, through the No Surprises Act, are mandated to increase their payment by about 5% to adjust for cost of living increase. So, in summary, we're closely monitoring our collections, but we remain very optimistic about both the 5% cost of living increase as well as the arbitration process to help increase our collections. More to come as we get more results over the next few quarters.

So, just to follow up, Tom, on that, I think that in May or this month, I should say, the payers are now using a higher, what's called qualifying payment amount, the QPA. Is that the 5% increase you're talking about, or is that separate?

No, that's separate. The QPA basically stands for qualified payment amount, and is essentially tied to what's called the median in-network. The median in-network is based on the median in-network rates of the hospitals around our hospital. There is a fair amount of controversy remaining about this so-called QPA, or median in-network. Unfortunately, there has been a lack of clarity on what the insurance company used as a median in-network. There have been several court cases challenging this median in-network, and so far it looks like the court has sided with providers on this calculation. Going back to the QPA that you referenced, yes, this QPA is separate from the 5% cost of living increase. In fact, because the No Surprises Act also mandates that if the insurance company had not done a cost of living increase since 2019, the actual cost of living increase since 2019 should be closer to 21%. So that 5% is only the year-over-year from 2023 to 2024. We're monitoring our collections to see if that has been implemented.

Okay.

That is basically the law of the land — a mandate.

Are the payers now forced to — not forced but — I thought that whole QPA thing was going to improve because they were going to start out with a higher QPA. Is that in the works? I can't remember if that's happened or not.

Yes. Basically, the whole premise of the QPA is that they have to use the median in-network calculation, and in using the median in-network calculation, they have to exclude any hospitals or providers that do not provide a similar level of service. For example, if in a region there are 10 hospitals and only three hospitals provide emergency services, which is similar to our model, then they should only use the median in-network rate of those three hospitals that provide emergency services. The other hospitals that do not provide emergency services may have much lower rates. The court in 2023 ruled that in calculation of the QPA or the median in-network, insurers cannot use so-called ghost rates, which are the inclusion of rates for hospitals that do not provide similar services. They can only use hospitals that provide similar services. There was a lack of clarity on this earlier, and I think that contributed to reductions in revenue. Whether or not the insurers follow that precisely in every case is hard to say.

Yeah, so they're now abiding by that structure you just talked about with like-for-like to create the median.

That's right.

I think that's all I've got. Appreciate all the color, guys. Take care.

Thank you, Bill, for the excellent questions.

Thanks, Bill.

Great. Are there any additional questions for the Nutex team? Okay. On behalf of the Nutex management team, we appreciate everyone for dialing in and listening to our first quarter earnings report. A recording of this call will be available on our website for a limited time. If there are any additional questions, please send an email to [email protected], and we will do our best to answer in a timely manner. Thank you for joining, and take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.