P3 Health Partners Inc. Q1 FY2024 Earnings Call

Hello, and welcome to the P3 Health Partners First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would like now to turn the conference over to your host, Mr. Ryan Halsted. You may begin.

Thank you, operator, and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements being made during this call are forward-looking statements under the U.S. federal securities laws, including statements regarding our financial outlook and long-term target. These forward-looking statements are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward-looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise these forward-looking statements. We will refer to certain non-GAAP financial measures on this call, including adjusted operating expense, adjusted EBITDA, adjusted EBITDA per member per month, medical margin, medical margin per member per month, medical margin per member per month for persistent lives, and cash utilization. These non-GAAP financial measures are in addition to and not a substitute or superior to the measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Information presented on this call is contained in the press release that we issued today and in our SEC filings, which may be accessed from the Investors page of the P3 Health Partners website.

Thank you, Ryan. Good afternoon, and welcome, everyone, to our first quarter 2024 earnings conference call. I am joined today by Aric, Amir, Bill, and Atul. We would like to begin by providing an update on the tremendous progress made in the first quarter. We just reported a strong Q1, which exceeded our internal expectations on our top line, but fell short on our adjusted EBITDA target. Overall, we are quite pleased with the start of the year, and therefore, we're reaffirming our previous full-year guidance of positive $20 million to positive $40 million of adjusted EBITDA for the year. Starting with the top line, our revenue for the first quarter of 2024 grew approximately 29% year-over-year, supported by a strong pipeline. As we previously indicated, our per member per month funding was up approximately 8% year-over-year despite the headwinds of substantial membership growth along with the V28 and V24 changes and the benchmark reduction. Our Medicare lives have grown to approximately 126,800 lives or 23% growth year-over-year, which really exceeds the low end of our guidance range for the full year. This includes approximately 11,000 ACO REACH lives, up from 7,400 at the end of last year. As we said before, our percentage of persistent lives is a key driver of our pathway to profitability in 2024. I'm pleased to report on the success of our member renewal in the new year. Approximately 90% are now persistent as defined by lives from December 2023 that remained with us in January 2024, up from 86% last year. To date, we have launched in 6 new counties, adding 8,000 to 10,000 new lives with an existing payer partner, expanding our total number of counties served to 27. Operating expenses improved to $26.2 million versus $35.6 million during the first quarter of 2023, representing a 26% year-over-year decrease and robust operational efficiencies. Our medical expense in the quarter was approximately 12% lower sequentially, which reflects our view of normalizing utilization trends consistent with the commentary we made on our last quarter call. While we agree with the principle of conservatism in the current environment, we also believe that we are overly conservative by around $20 to $30 PMPM based on the actual claims run out we've experienced year-to-date for 2023 data service. Atul will go into much more detail, but we will continue to work with our actuarial auditor to align our reserve with actual paid claims. With that as a context, our adjusted EBITDA was a loss of $19.8 million, roughly flat to the first quarter of 2023. On a PMPM basis, we were approximately $86 better than Q4 of last year and approximately $11 better than the first quarter of 2023. Lastly, we are thrilled to announce our strategic partnership with Innovaccer to leverage their advanced AI platform. Through this partnership, we will advance P3 in the areas of predictive modeling, accelerate quality, gap closure, and provide our clinicians with actionable data at the point of care. With that, I'd like to turn it over to our CFO, Atul Kavthekar.

Thanks, Sherif. I will start today by discussing our recent quarter and how we are progressing towards our full year guidance. Then I'll provide updates on our liquidity position at the end of the quarter. Top line results for the first quarter were in line with our expectations with capitated revenue of $384 million and total revenue of $388 million, both representing growth of 29% compared to the prior year. In the first quarter, our medical margin was $36.6 million or $96 on a PMPM basis. There are two noteworthy factors that impacted our medical margin in the quarter. The first is the general approach of conservatism around our incurred but not reported (IBNR) and medical expense accruals. As an example, as we look back at last year's activity with the benefit of having time for the claims from that period to present themselves, we have confirmed what we suggested at that time and now estimate that we had a cushion at that time of between $20 to $30 on a PMPM basis. We will continue to work with our actuaries over the next few quarters to observe the actual paid claims experience in 2024. Specifically, we will work to reevaluate our reserve estimates in light of the easing of utilization over the first quarter of 2024, around which Dr. Bacchus will provide further details. The second item worth mentioning is the impact of a timing difference related to our Part D exposure. Essentially, we recognized the full expense in the quarter, but we do not recognize any credit for the rebates until subsequent quarters when these amounts are typically provided by the health plan. The impact of this in the quarter is approximately $8 million. As it relates to operating expense trends, our corporate, general, and administrative expenses decreased from over 12% of revenue in the first quarter of 2023 down to just below 7% in the current quarter. This is a sequential improvement from 8% of revenue from the fourth quarter of last year and is consistent with our guidance for high single digits. We remain committed to continually improving our operating efficiency and continue to monitor spending. Adjusted EBITDA for the quarter was a loss of $19.8 million compared to a loss of $19.1 million in the first quarter of 2023. On a per member per month basis, adjusted EBITDA was a loss of $52, an improvement of $11 PMPM compared to the first quarter of 2023 as we successfully improved margins and lowered costs on a per member basis. We anticipate showing improvements as benefits from medical cost reductions, operational efficiencies, and potential positive true-ups flow throughout the year. These will create a contour rather than a straight line spread of results. Our net loss in the first quarter of 2024 improved by 5.7% compared to the same period in the prior year, in part due to the improvement in corporate and general expenses. For the remainder of the year, we expect these expenses to continue to taper. As for liquidity, we ended the quarter with approximately $32 million in cash. Additionally, at the start of the second quarter, we received approximately $15 million in regular cash capitated premiums and an additional $15 million of capital on our new note. To that end, we are reaffirming our full-year 2024 guidance. We still expect Medicare Advantage (MA) members to be between 125,000 and 135,000 and remain confident that our 2024 revenue will be between $1.45 billion and $1.55 billion. Medical margin will range between $230 million and $250 million representing $165 and $175 on a PMPM basis. And finally, adjusted EBITDA ranging from positive $20 million to positive $40 million. We're confident in our ability to achieve our EBITDA guidance for multiple reasons. First, we have the possibility of a significant reserve release with our 2023 actual claims almost complete and showing strong improvement from previously booked expenses. Second, we started the year with strong membership growth, increased persistency, and overall increased funding. Third, we expect an increase in our accrual of sweeps this year. And finally, our daily key indicators point to utilization being more on par and even below what we saw in 2023. And with that, I'll turn it over to Dr. Bacchus.

Thanks, Atul. In our last earnings call, I stated that we had early indications of decreased medical expenses from December '23 to January '24. Now that data is more mature, I can indeed report that December '23 to quarter 1 2024 continues to show a downward trend in utilization. For admits per 1,000, we saw a decrease of 2%. For emergency department visits per 1,000, they decreased by 6%. In addition, despite the two-midnight rule change, we continue to see improvement in our observation rate per 1,000, decreasing by 10%. During the first quarter, medical expense was $918 PMPM, improving from $1,042 sequentially, a 12% decrease. In addition, P3 has continued to bend the cost curve for high-risk members by accurately projecting and implementing appropriate care plans without incurring additional costs. We continue to proactively manage utilization for cost avoidance as well as conduct concurrent claims reviews for recoveries where we are delegated. Our effectiveness in high-risk populations has been a key driver in P3's ability to effectively manage medical cost trends. Our care model continues to be effective in reducing costs, working in tandem with our high-risk population through an improved focus on palliative and hospice care, increased enrollment into the COPD program, and continued provider and patient engagement. We remain focused on improving utilization management to reduce unnecessary utilization and wasteful spending while improving the patient experience. Lastly, as Sherif mentioned, we're excited to have partnered with Innovaccer to ignite our AI and data capabilities. We will use InNote, Innovaccer's EHR-agnostic physician engagement solution, to seamlessly close coding and care gaps and use the company's population health analytics suite to achieve quality and cost goals, and we will use Innovaccer's patient engagement solution to drive omnichannel patient outreach to improve the patient experience. Thank you. And with that, back to you, Sherif.

Operator, let me make some closing comments, and then I'll turn it over to Aric. Today, we reaffirmed our 2024 guidance across all our metrics and shared with you that our membership was up 23%, our revenue was up 29%, our operating expenses were down 26%, and our funding per member per month was up 8%. Despite that, the EBITDA is lower than expectations, we shared with you information to affirm and give confidence to myself and the team that we will achieve the targeted EBITDA positive for 2024. With that, I would like to reiterate that now is the right time for P3 to transition to our new CEO, Aric Coffman. I believe he is a perfect fit to guide P3 through the exciting new chapter. As I reflect on how far our company has come since inception, I am thrilled to welcome Aric to the team. I am filled with a deep sense of confidence that P3 is on solid footing and poised for continuous success. So let me answer three questions: why now? Why Aric? And how we're going to do the transition? As I mentioned to you, as myself and the company mature from founding to operating to growing, it's time to put in fresh leadership. It's well known that the transition of founder into new CEOs and operators is a significant step in any growing organization. And I believe it is important for us to bring in fresh blood and a new set of eyes and skill set to continue to lead P3 under the same mission, vision, and values that we've built it on. Second is, why Aric? I have known Aric for over 10 years since around 2014. We first met at HealthCare Partners with DaVita, and I've continued to stay in touch with him throughout the last decade. Two years ago, Aric and I met as we launched in the Seattle area. I introduced the idea of him becoming my successor at P3, and since then we have been working on this, finally coming to the conclusion yesterday to make that decision. So I believe Aric is the right leader for the next chapter for P3. He checks all the boxes: doctor, great leader, strong brand, and great experience and value-based care. Finally, how we're going to do this transition? I will remain as an adviser throughout the transition period and will work closely with Aric, always available for any questions or support needed during this time. I will also remain on the Board to work with the Board of Directors to continue enhancing value creation at P3.

Thanks, Sherif. Let me start by saying how excited I am to join P3 and how impressed I am with the capabilities and trajectory. As it was mentioned, I met both Sherif and Amir many years ago while serving as a medical director and a practicing surgeon at a predecessor company to HealthCare Partners. They were early pioneers of value-based care, and we spent time together while at HealthCare Partners. I've learned a lot from them and will continue to do so as the CEO of P3. Following my initial time at HealthCare Partners as we transitioned to DaVita Medical Group, I then served as CEO of the Everett Clinic and Northwest Physicians Network in Washington State. While there, I worked closely with Bill Bettermann, who served as my COO. We both stayed for a few years after the acquisition by Optum. These experiences, along with my most recent role as CEO of Honest Medical Group, help me develop the necessary skills in transforming care delivery from fee-for-service to value-based care. As we are all aware, our healthcare system continues to face significant pressures. We have an aging population, a shortage of primary care providers, and high rates of physician burnout. We need scalable solutions that engage clinicians and patients to bend the cost curve while providing high-quality care. The P3 model of physician-led, scalable, capital-light value-based care platform is a clear advantage, along with the delegated functions, including claims and utilization management. P3 has demonstrated the ability to lower healthcare costs through physician and patient engagement in a growing market with significant white space. We will create depth in our existing practices by adding Medicare Advantage and Medicare ACO REACH membership to capture more mindshare from the providers we serve. P3 is also at an inflection point of achieving profitability, which will fuel our future growth. We look forward to expanding our footprint to capitalize on a tremendous opportunity. I am confident in our ability to drive long-term sustainable value for the entire healthcare system, our patients, and our stakeholders. I look forward to the opportunity to engage with many of the participants on this call over the coming months. It will be a pleasure to connect with our talented employees and associates across the organization as well. Thank you.

Our first question comes from Brooks O'Neil of Lake Street Capital Markets.

Welcome, Aric. It's an interesting time to join P3. Let me start by just asking you, obviously, the company took more or less the last year to slow growth, although 29% revenue growth is not exactly slow, but focused on existing counties, existing provider relationships, and existing members. As you think about the future, is now the time to resume growing in new markets? Or do you think the company needs more time to strengthen its base before beginning to look to a more aggressive growth posture again?

Brooks, this is Aric Coffman. Thanks so much for the question. I think we need to have measured growth as we move through the rest of this year and do it in a way where our underwriting is solid, and we're clear on how we're adding those lives into the portfolio.

That makes sense to me. Let me ask you this. Listening to commentary around the industry, particularly towards the end of 2023, it was clear that many Medicare Advantage plans faced significant utilization pressure that challenged their business model. My sense is that organizations with deep experience in value-based care, like P3, are in high demand in the Medicare marketplace today. Is that your perspective? Are you receiving significant outreach from Medicare Advantage plans indicating there is a major opportunity for you to expand and apply your knowledge and experience in markets beyond your current service areas?

Yes, Brooks. This is Amir. Absolutely. From what we see, the managed care organizations and Medicare Advantage plans continue to look for that solution in multiple areas. As Aric said, we want to make sure we're growing smartly. But the interest is very high in multiple areas and multiple states. As we continue to prove the model truly works and create the EBITDA that we want to create this year, not only driving deeper into the practices we are in because of the ACO REACH, but also looking to expand to other counties outside of the states we are in today.

Great. That makes total sense. Let me just ask one final one for Atul. I'm not sure, Atul, that I understood exactly what you were saying regarding the $8 million credit. Would you mind helping me understand that just a little bit better?

Yes. Yes, Brooks, thanks for the question. It's really pretty straightforward. We expense the costs associated with the drugs in the current quarter as they are incurred. The revenue that offsets that, i.e., the rebates, are given to us and administered at the end of the year when we receive all that information from the health plans. So it's similar to last year; there was a little bit more of a timing difference in the way we recognize sweeps, and we changed that. That hasn't happened yet for the rebates. Now that's something we'll work on over the course of the year, but it's really as simple as that.

The next question comes from Josh Raskin of Nephron Research.

I'll start with congrats to Sherif on all the success so far and the founding of the company. And I'll welcome Aric as well, good to hear your voice. My question is on the revenues. I think you said PMPMs were up sort of 8%. I'm calculating something a couple of basis points lower than that. So I'm just curious if that was sort of in line with expectations. And then I know you've talked about sort of having less risk than others around the impact of V28. But do you have a view on what the impact was this early in the year? Do you have to wait for the MA plans to kind of give you data or better sense on your membership risk?

Well, it will evolve over the year, as you know. But I think it's generally in line with what we expected, potentially a little bit better than what we expected. So we're very pleased to see that it came out that way, at least that's certainly what the documentation and the files are saying now. But we'll monitor it. And if you're coming up with a different calculation, we can work that offline to get you where we are.

Yes. And Josh, this is Sherif. Thank you very much for your kind words. We expected, if you remember last time, we said that membership would be in the middle single digits, and if you look at the RAV accrual, it's about the middle single digits. The rest of it is benchmark improvement. So it came out right or a little bit better than we expected. The entire is 8%. Some of it is benchmarked, but the RAV accrual is about 5% from the 8%. We still, like we said, our overall RAV is still about 1.046. So we still have a cushion and runway to continue to improve before we see a real impact of the V28.

Got you. And then a second question, just on discussions with your MA plan partners as you think about 2025. Your MLR in the first quarter is still over 100%. They know it will get down by the end of the year. But what sort of changes are you looking for, for 2025? Are you guys looking for a higher percentage of premium? Are there certain benefits that you're looking to carve out? I'm just curious as you go into those negotiations in front of bids due next month, how are you thinking about what you're looking for?

Yes. So absolutely. It's a great point, Josh. We're in serious conversation about modifying our exposure to the ancillary services or the benefits in excess of the medical benefits and also talking about negotiating or eliminating the pass-through from the health plans. We find actually receptivity and are considering moderating the benefits or flattening or even decreasing it to the point where exposure on medical costs becomes better. But you mentioned the MCR is over 100; we looked at it, including the network expense, we're right around 90.5% for the first quarter.

Got you. Just last one, I guess, on just the reserve methodology. I heard you talk about this conservatism that may play out as you sort of pay final claims for 2023 and what you've done with the run out, there's a chance that reserves could develop favorably. Are you reserving first-quarter reserves in sort of the same methodology? Are we getting sort of conservatism on conservatism? Is your view that you've got the same level of room for adjustment, the same methodology in your 2024 accrual?

Yes. So let me just address the methodology change, and then I'll pass it on to Atul. Up until the second quarter of last year, we calculated IBNR according to the triangle period, and there was no additional cushion. After that, we started adding 9% to 7.5%. So we take the claims paid, calculate the triangle, and then we add 9%. That is what we're calling the cushion. Atul?

Yes, Josh. The punchline of this is we suspected there may be some cushion larger than necessary. We had the opportunity to go back and actually study the numbers now that they have the run out, and that's indeed what we are finding with the data. So the process now is really, and again, just to remind everyone, we don't set these amounts and book them solely ourselves; we have a third-party actuary that does that. So right now, we've begun to corroborate all that analysis with that third-party actuary. Part of that is going to be agreeing on a reasonable and appropriate amount of cushion to enter into. And so that's something we'll work on over the next hopefully quarter, but certainly over the next two quarters.

The next question comes from David Larson of BTIG.

This is Jenny Shen, on for Dave Larson. I'll just echo my peers and say my congrats to both Sherif and Aric. Regarding the first question, EBITDA came in below our model. I just wanted to ask what gives you guys the confidence to reaffirm the full-year guidance? And can you talk a little more about your visibility into that EBITDA? How should we expect EBITDA to trend throughout the year?

Yes, those are great questions. This is Atul. Let me address a couple of points. When we discussed the rebate recognition, it is solely a timing issue. We expected it to be recognized this quarter, but it will actually occur later in the year. This is not a matter of questioning the rebate; it's just about timing. The other key drivers for us involve cost reduction and efficiencies in the business, especially in managing medical expenses. We have numerous initiatives underway that are gaining traction, and we haven't yet seen their full impact. We will as the year progresses. We also began recognizing the sweeps because we could predict them, and we will continue to work on this with our auditors. These are all fundamental aspects that boost our confidence in the outlook, independent of any potential adjustments related to the reserve. I hope that answers your question.

Yes. That's very helpful. And just a quick follow-up. I appreciate the detail on the 90% persistent lives. Could you remind us again what kind of greater visibility that gives you regarding their margin profile? Any additional color there would be helpful.

Jenny, this is Amir. Yes, obviously, the more persistent the lives are, the more we can help manage the chronic care of that patient. If indeed we see patients coming in at 1 year, that's fine. But when they start to stay for 2 years or 3 years, then with greater persistency, we have much better opportunity not only to gain their trust but to help them manage the significant chronic diseases that we see every day, whether it be COPD, congestive heart failure, diabetes, renal disease, etc. So it's building that relationship that takes time with our care management teams, especially on those high-risk rising-risk patient populations, to work directly with our clinicians to maximize their care and outcomes. That's why that persistency is always so important to us. I'm sure you've seen data that as we look at it before, and those cohort analyses show that patients who have been with us for a certain period of time see significant reductions in overall medical expense.

Our next question comes from Gary Taylor of TD Cowen.

I want to make sure I understood a couple of the numbers. First, on the Part D, the $8 million rebate you expected. It doesn't sound like that was typically recognized in the first quarter. Would you recognize those rebates in the first quarter historically?

We did not historically recognize them in the quarter. We sort of followed the same pattern. Our anticipation was that they were going to be recognized in the first quarter. That's something we're going to work on with the auditors regarding our policy and documentation.

Got it. So had you recognized those, EBITDA would have been like negative 12%, that would have been more in line with what you thought the quarter would look like?

Correct. That is correct.

And then on the reserve release, in that $25 to $30 per member per month, are we multiplying that by 3? If it's mostly coming out of Q4, are we multiplying that by 12 when we think about what could get released? I know in the fourth quarter, I think you said there was a $23 million reserve addition. So 3 or 12 kind of put us in the $10 million to $30 million range, almost suggesting all of that could come back to you. I just wondered how we should think about the per member per month.

We're thinking about that on sort of a 12-month basis on a full-year basis. Again, we're not speculating on what amount of that is actually going to be recovered because there is certainly an appropriate amount of conservatism to have in the business. But that's something we're going to determine alongside the analysis the actuaries are going to do. There's a process of corroboration. Our position is that we've had a chance to look at the hard numbers, and this is what we're seeing over the course of the year.

The next question comes from Ryan Daniels of William Blair.

This is Jack Dunston, filling in for Ryan Daniels. In your 10-Q filing, and mentioned in your prepared remarks, you indicated that you borrowed the last $15 million from the promissory note. However, your cash burn this quarter was around $20 million. Given this, how should we view your liquidity position moving forward? Additionally, what is your overall comfort level with the cash balance for the upcoming quarters?

Yes, look, I think a couple of things. One is, as I mentioned, right after the quarter started, we received a fairly substantial premium payment. Had that happened literally 24 hours earlier, you would have seen a $15 million better cash flow from operations. There is some timing sensitivity, so I wouldn't read too much into any single quarter regarding cash flow from operations. We feel like we are in a good position from a capital standpoint, as we've said in the past. But as we've also said in the past, we are positioning ourselves for more rapid growth, which simply requires more capital. That's something we think about continually.

Okay. Perfect. Understood. And then also, in your prepared remarks, you mentioned the partnership with Innovaccer. Can you just talk a little more about the reason for going with the partnership route versus in-house? As a second part to this, can you remind us what you were doing previously before the partnership for the capabilities they're bringing in?

Yes. So this is Sherif. What we've done before, we had an algorithm for predictive modeling, and we had a tech stack that was doing the job. The main shift in our strategic partnership with Innovaccer is leveraging their AI platform and having those tools to enhance our ability to do modeling. It provides us with notifications and is an EHR-agnostic tool that can communicate with providers at the point of care. So that's what we're doing with it. It's accelerating closure, improving predictive modeling and communication at the point of care. It will take 12 to 18 months to implement the full partnership, and it will be cost-neutral for us. Enhancing the AI and all the benefits I mentioned, that's what attracted us to Innovaccer.

Okay. Perfect. That makes sense. And if I can just sneak one final one. In terms of the ACO REACH contribution, can you talk about your longer-term vision for the program? How will ACO REACH eventually contribute to your results?

Yes, thanks so much. This is Bill. As you've heard in previous calls with us, the ACO REACH program is something that we're going all in on this past year. We've grown substantially from '23 to '24 in all our markets. With that being said, as Dr. Coffman alluded to, we'll approach this carefully using our data analytics to look at where we're having success and where we have opportunities for growth in this platform. We're excited about where we're at, and we've had some nice successes over the past year and into this year.

The only thing I would add is, Jack, as you've heard us talk about before, with our providers that we have about 2,700 or so providers and the MA lives that we have with them, the ACO REACH gives us a much bigger opportunity to go into each of those practices for more mind share with those clinicians. So as those clinicians, instead of having 100 or 200 with us, now we have 300 or 400 with us, it just creates a better mousetrap to drive better performance for their understanding of value-based care overall.

This will conclude today's conference call. Thank you for attending.