Good day, and welcome to the P3 Health Partners Second Quarter 2024 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Ryan Halsted Jr., Investor Relations, Gilmartin Group. Please go ahead.

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 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 used. These non-GAAP financial measures are in addition to and not a substitute for 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. I will now turn the call over to Aric Coffman, CEO of P3 Health Partners.

Good afternoon, everyone. Let me start by expressing how thrilled I am to be at the helm of P3 as CEO from our first quarter. P3 Health Partners is a scaled capital-light platform comprising 2,900 primary care physicians in five states across 27 counties, and we are taking full risk at scale on 128,100 lives. I would first like to emphasize some key aspects of P3 that give me confidence that we’re in a great position to deliver value to our patients, providers, payers, along with our investors over a multi-year time horizon. First, we are operating in a large and rapidly growing market with our total addressable market approaching $1 trillion, further accelerated by CMS’ goal to have 100% of Medicare fee-for-service beneficiaries in value-based care arrangements by 2030. Our core focus is the Medicare market, of which Medicare Advantage represents approximately 51% of the overall market or nearly 31 million Medicare eligible lives in 2023. Less than 15% of contracts in the Medicare space are full risk today, which means we have tremendous opportunity to expand our reach through new contracts and geographies over time. Our unique business model is built on a fully delegated risk strategy, which offers three key advantages. First, it directly links our company to the daily operations of our health plans, creating avenues for collaboration and building strong partnerships. Secondly, it facilitates meaningful interactions with clinicians, essential for success in value-based care. Lastly, it provides early upstream insights into requested services, ensuring consistent and best practice protocols are followed for a superior patient experience. Next, our diversified payer mix puts us in a position of strength. Today, no one payer makes up greater than 20% of our revenue. We’re partnered across local, regional and national health plans, and we’re seeing a clear trend in this volatile MA market. Health plans are turning to P3. They value our expertise in managing senior populations and our proven ability to help primary care physicians succeed in value-based care. This positions us as a key partner to their continued success. Similar to our strong position with the top health plans in our markets, we enjoy excellent relationships with many of the leading independent primary care groups that serve our patients. One of the key aspects I’ve identified early on is the dedication among the clinicians in our network. We partner with 2,900 primary care physicians, but our reach goes well beyond that with thousands of additional clinicians such as specialty physicians to round out the entire patient care continuum, and all are motivated by their own independence and ability to provide excellent value-based care to their patients. Building on these key strengths, I have identified several initiatives during my first 90 days as CEO that will further enhance our capabilities and drive sustainable profitability. First, we are intensifying our focus on star ratings performance. We are targeting care quality gaps, such as improving medication adherence, increasing preventive screenings and enhancing chronic disease management. At the same time, we are ensuring patients with chronic conditions are being linked back to their primary care physician to ensure that they get the care that they need. We know what the unique needs of our patients are. They have geographical nuances that allow us to develop targeted interventions to address needs and get them the care that they need. Next, upon evaluating our existing risk contract portfolio, I’ve identified substantial opportunities to better align our agreements with payers. Our goal is to ensure these contracts accurately reflect our enhanced value proposition, which has significantly evolved over the past two years. In doing so, we are ensuring better care for our members while improving the financial prospects of our business. Transitioning to our provider network performance. While our provider network is an incredible asset we enjoy, we have identified opportunities to elevate our provider partners to an even higher level of differentiated patient outcomes. We’ve always focused our efforts on those provider groups that show the most potential for improvement, and we will continue to put energy and effort behind our partners. However, going forward, when those best efforts don’t lead to improved performance, we will adjust these network relationships with underperforming provider groups accordingly. We’ve already begun addressing these provider groups, and we’ll be further scrutinizing our partnerships in the coming quarters. Next, we’re pursuing smart growth strategies with a particular focus on increasing member density within our existing primary care physicians. For example, in ACO Reach, we are enhancing the depth of our existing practices by adding Medicare ACO Reach membership to capture more mindshare of the providers we serve. This quarter, we recorded 1,700 new voluntarily aligned ACO lives, bringing our total ACO lives to 12,700, up from 7,400 at the end of last year. Additionally, we submitted 200 primary care physicians in ACO Reach in this last cycle for a January of 2025 start date. One of the first principles of my management team is to deliver the highest level of service to our partners, providers and patients and to do so profitably. The company has worked hard over the past quarters to make our operations more efficient, and I expect a continued evolution of our business. We are seeing an increasing amount of momentum with medical cost reduction initiatives. I’m looking at every part of our operations across people, processes and technology for opportunities to improve efficiency. We will employ an even higher level of rigor, accountability, and focus on return on invested capital in the future. Turning to our second-quarter financial performance, we reported strong Q2 results, which were in line with our expectations. Starting with the top line, our revenue for the second quarter 2024 grew approximately 15% year-over-year, supported by a strong pipeline and increased retention rate of our PCPs at 96% and an improving persistency rate at 90% of patients. Turning next to our medical cost ratio. Medical cost per member per month were $869, a decrease of 6% sequentially, supporting our view of a normalizing utilization trend and reflecting strong execution. Moving on to adjusted EBITDA. We continue to show improvement on a quarter-over-quarter basis, improving our adjusted EBITDA loss by approximately 50%. For the second quarter, our adjusted EBITDA loss was $9 million. The improvement in our medical cost ratio was offset by a conservative reserve approach. Atul will expand on this in his section. Overall, we are on track with the initiatives set forth and acknowledge the work that needs to be done to be able to drive us towards sustained profitability. Accordingly, we are reiterating our previous full-year guidance of adjusted EBITDA in the range of positive $20 million to positive $40 million. With that, I would like to turn it over to our CFO, Atul Kavthekar.

Thank you, Aric. I’ll begin today by reviewing our recent quarter and our progress towards achieving our full-year guidance. Following that, I’ll share updates on our liquidity position as of the end of the quarter. Second-quarter top line results were in line with our expectations with capitated revenue of $374 million and total revenue of $379 million, reflecting a growth rate of 15% compared to the previous year. The two key drivers of our revenue growth include our member growth, which increased approximately 23% year-over-year to over 12,000 members, along with our funding, which was up approximately 2% year-over-year. A few notes around this: first, that level of membership already exceeds the low-end of our guidance range for the full year. And second, the second quarter of 2023 included the benefit of a recognition of sweeps revenue in that quarter, which impacts our year-over-year comparison. Our medical margin was $41 million or $107 on a PMPM basis. This reflects a 6% sequential improvement to our medical cost ratio. We consider this a clear demonstration of the impact of our medical expense initiatives and a precursor of continued improvement in our profitability this year and going forward. For added context, this includes a modest increase to our reserves in the quarter, reflecting our continued prudence in accruing for potential anticipated claims. We will continue to work with our actuaries and auditors to ensure our reserves are adequately aligned with actual claims paid over the rest of the year. Regarding our operating expense trends, these decreased 14% year-over-year to be 6% of revenue in the current quarter. This is a continued demonstration of our ongoing focus on expense management. We continue to investigate new opportunities to harvest cost efficiencies, including leveraging technology where appropriate and are confident in our ability to deliver on smart efficiencies that still support our profitable growth. Adjusted EBITDA loss for the quarter was $9 million or $23 PMPM. Again, this illustrates strong momentum from the first quarter with a 56% sequential improvement. During the quarter, we successfully completed a capital raise of approximately $42 million in gross proceeds. This infusion of capital significantly strengthens our balance sheet, providing us with additional financial flexibility to support our path to cash flow positivity and sustainable growth. We ended the quarter with $78 million in cash while cutting our net cash used in operating activities to approximately $10 million, which represents a roughly 50% reduction from Q1. Turning to the full year, we are reiterating our full-year 2024 guidance. We expect membership to range between 125,000 and 135,000 members with revenue projected between $1.45 billion and $1.55 billion. Our anticipated medical margin will be between $230 million and $250 million or $165 to $175 on a per member per month basis, and our adjusted EBITDA guidance is $20 million to $40 million in 2024. We are confident in reiterating our guidance for several reasons. First, as you know, our revenue recognition policy enables us to recognize revenues related to final sweeps once we’ve received appropriate documentation from our health plan partners and from CMS. At this time, we have received documentation for most of our health plans and are currently working with them to determine these final revenue amounts. We anticipate completion of this work in the second half of the year and expect to recognize this revenue as each plan is finalized. Second, we’ve talked about our efforts around medical cost management and recorded a nearly 6% sequential reduction in our medical claims expense from PMPM between the first and second quarter of the year. We continue to see traction in important operating metrics, as Dr. Bacchus will elaborate on in a moment, and anticipate further improvements as we continue through the year. Finally, we are committed to capturing additional cost efficiencies in the second half with several new initiatives already underway. These efficiencies are under the principle of reducing waste without any adverse impact on our members. While this is not an exhaustive list, we see these as major factors driving our optimism for the second half and look forward to reporting our initiatives as they progress through the year. Thank you again for your time, and I’d like to turn it over to Dr. Bacchus to provide some important updates on our clinical operations.

Thanks, Atul. Let me start by addressing the macro environment that investors follow closely, and how P3 operations are different. We haven’t experienced the same level of medical cost inflation as some payers have been reporting. As Aric mentioned earlier, our diversified payer base prevents us from having any meaningful overexposure to a single payer. Turning to metrics, our overall admits per 1,000 decreased sequentially, as did our emergency room visits per 1,000. Admits per 1,000 decreased to 11.7%, and emergency department visits decreased 10.3%. In addition, we continue to improve on observation rates, demonstrating our ability to execute around the two-midnight rule. Observations per 1,000 sequentially decreased by over 22%, and readmission rates for the company also decreased by 4% to 5% sequentially. Additionally, we continue to see increasing utilization in our delegated plans for Part D costs around unnecessary procedures, oncological drug utilization and using appropriate places of service. Our care management and transition of care programs are consistently enhancing the health of our most critically ill patients and contributing to a reduction in our overall medical expenses, including through the use of hospice care where appropriate. Furthermore, our ability to connect and touch more patients is allowing us to improve in both our quality gap closures and in understanding the acuity of our patient mix, thus leading to better acknowledgement of their conditions and hence, better management. As we look forward into the second half of the year in 2025, our strategy will center on collaborating with our highly committed medical groups and directing patients towards providers with more extensive experience. We plan to complement this approach by integrating enhanced clinical awareness tools directly into providers’ EMRs and partnering with enablement specialists. This comprehensive strategy will allow us a greater scope to achieve our goals. With that, I’ll pass it back to Aric for closing remarks.

Thanks, Amir. In closing, I’m confident in the future of our sector and the healthcare industry, the compelling P3 business model, our clear path to profitability and our experienced team. We have a growing total addressable market, a push by CMS to move all seniors into value-based care by 2030 in a market that reflects the opportunities of value-based care with less than 15% of contracts for seniors in a full risk model. As you heard from Amir, P3 is showing improvement across key metrics in Q2, and I believe at my core, we are on sound footing and positioned for success. We’re not just participating in the healthcare transformation; we’re leading it. Thank you for your time, and I look forward to sharing more about our progress in the near future.

The first question comes from Brooks O’Neil with Lake Street Capital Markets. Please go ahead.

Thank you very much and good afternoon, everyone. Thanks for your comments and prepared remarks. I have a couple of questions. I’d like to first start by asking, Aric, if you could give us a quick sense for how affiliated providers have responded to the change at the CEO level?

Hey, Brooks, Aric here. Thanks so much for the question. I’ve had the chance to get out into the markets and meet with partners. I would say, generally, very positive, and it hasn’t really created waves at all. I think Sherif, as my successor, was a great partner during this transition over the last 90 days and continues to be.

Great. Let me ask you a different question. So, when you and I had dinner together a couple of weeks ago, we talked at some length about the opportunity you have to go deeper in terms of getting access to more Medicare Advantage members per doctor and how that might have a profound impact on your results. Could you just refresh my memory exactly what you said and why you view that as a significant opportunity for P3?

Yes, Brooks. I appreciate the question. It’s a really important part of how we think about value-based care transformation. As we discussed that night, whenever we had the chance to meet, the more repetition each clinician gets, the better they’re going to be able to practice the new things they’re learning and perform on those things. As we look at our network today, we already have efforts underway, even though it’s only been 90 days, in adding additional density within providers and doing so in a smart growth way. You’ll see that over time as we continue to evaluate both the network and the payer contracts, where we have opportunities to expand more deeply on a per provider basis. So that panel density is really important for us.

And Aric, refresh my memory, I think you told me that with many of your affiliated providers, you essentially only touch or have control over a small percent of the providers’ total Medicare Advantage enrollment base. Refresh my memory, roughly what is that number today? And what might you think it could go to down the road?

Yes, Brooks. What I’ll say is that we have lots of opportunity for growth in our existing networks with our primary care providers to add additional seniors into their panels. That includes a combination of both Medicare Advantage and programs like ACO Reach. The density is critical for us.

Great. And then let me just ask Atul, one quick one. Atul, I think I heard you mention something about sweep timing, but I confess it’s been a busy day, and my brain is a little bit scattered. So could you just rephrase that or say again whether you thought the impact of sweep timing had an impact on the year-over-year comparison here in Q2?

Yes. So Brooks, a couple of things. The nature of sweeps in our business, and this is just the reality of it, the timing can be a bit unpredictable, whether it falls into one quarter or another. In the last year, as you may recall, we had accrued sweeps for calendar 2022 final payment in the second quarter, which made that second quarter, and therefore, the year-over-year comparison a little bit higher. That’s all I was alluding to.

Okay, that’s really helpful. Thanks a lot. I will jump back in the queue. Thanks for taking my questions.

The next question comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. Good evening. Just want to start with – I want to make sure I got this right. Did you say observation stays were down 22% sequentially on a per 1,000 lives? And then I’m just curious, how are you – like, I guess, maybe year-over-year impact two midnight rule? It just seems incongruous with what we’re hearing from plans and what we’re seeing at the provider level?

Yes. Josh, this is Amir. Good to see you or good to hear you again. Yes, actually, we were surprised too, as we looked at the data and said, okay, and for us, as you know, we like to be delegated on as many plans or as many lives as we can. We directly work through a concurrent review and monitor that two-midnight rule. It doesn’t just come through the plan, and we just accept it. We’re actively working with the hospitals to see if those patients meet the two-midnight rule or deny the admission and/or deny the observation today. In doing that, we have the opportunity to reduce it. So for us, yes, after having what we saw in the fourth quarter of 2023, which was a significant increase, we were able to see that bend to 22% sequentially from quarter one to quarter two of 2024.

Alright. So you reacted to 4Q, but I assume 1Q, like you may still be running up year-over-year, if possible, right?

Say that again, Josh.

Your observation stays in terms of like the decrease there, like the 22% is versus 1Q, but I was curious if it was down year-over-year?

I can get back to you on that for sure and tell you what it is year-over-year. We can probably have that chat a little bit later or possibly tomorrow.

Alright. No worries. On the 2025 strategy, you’re talking about this increased density within the physician, I’m curious how you compare that against other growth opportunities, even for increasing density in, say, local markets by adding local physicians or even potentially new markets and maybe adjacent markets? How are you sort of weighing the pros and cons of those growth avenues?

Hey Josh, this is Aric. Good to hear from you. Thanks for the question. In terms of the strategy that we have, it’s really around smart growth. When we say smart growth is we want to bring in growth that’s going to be both profitable as well as cash flow accretive to the business. As we look at the underwriting for some of the opportunities that we have in front of us, what that means is we are going to try to go deeper in the markets where we are today rather than have something like a big geographic expansion into a new area because we know those opportunities exist.

Okay. That makes sense. And then just last one. Can you maybe give an update on working with health plans, and sort of where did you get to before they submitted their bids for MA for 2025, and maybe any contractual changes that you were keen on getting?

Yes. Another great question, Josh. Thank you for that one. The team has been working hard. There is a lot of work and a lot of wood left to chop in the rest of the year to get to our 2025 end point. We have several discussions that are currently ongoing. In terms of what we are hearing from the bid process and the bid cycle, a common theme is we are hearing a lot of discussion around rationalizing benefits to match the funding and the trends that people are seeing in the marketplace. As soon as we have full visibility into what those benefit changes are, we will have a better sense of exactly what we think the impact will be across multiple fronts, whether that’s AP growth or overall product performance.

Okay. Thanks.

The next question comes from David Larsen with BTIG. Please go ahead.

Hi. This is Jenny Shen on for Dave. Thanks for taking my questions. I just wanted to touch on – you mentioned some of your conversations that you are having with your auditors. I know that in Q1 of ‘24, they were asking you guys to reserve about 9% of your claims cost, which was up from the 3% to 5% historically. What is that trending at now? And just how are those conversations progressing?

Well, the conversations are progressing very well, but just one finer point. The conversations are really with our actuaries. The actuaries are the third-parties that are reviewing claims triangles, establishing risk levels and pad factors, and then assessing what they think our reserves ought to be. To answer your question, those conversations are going very well. We have been working with them since our last call, and we continue to work with them, and we will continue going forward, helping them understand some of the nuances with each of our contracts. Each of our contracts is just a little bit different in terms of the risk profile and the nature of some of the information. One of the things we are going to be stressing with them going forward are some of the excellent operational characteristics and KPIs that we are seeing, and having them factored into their calculus. In fact, we had a few of the plans where the actuaries determined that it was appropriate at the time in the quarter for us to actually reduce some of that pad factor, that safety factor that they apply. We will continue working with them as we go forward. Hopefully, that answers your question.

Yes. Is the 9% pretty similar to what it was in Q2, or has it gone down from there?

It has gone down. We would like to see that go down further, but we will continue to work with it on a plan-by-plan basis. It’s not an aggregated percentage factor. It is at a specific plan-by-plan level. Some of them have been reduced absolutely.

Okay. That sounds great. And just for a quick follow-up, just wanted to ask about V 28, any updates there. One of your peers recently said that they expected to have a 2% impact on 2024. I was wondering if you could help quantify what you think the impact will be for P3? Thanks.

Thanks, Jenny. This is Amir. Again, as we have had these conversations before with Version 24 adapt to 28, obviously, going into our last year of it – with our baseline, for us at basically around 1.0 overall for the company. We knew and we have always felt that we can continue to improve the RAF despite Version 28, and we have done that. I don’t have an exact number or percentage that I can give you right now today. However, we could tell you, as we just described in the call that we had an actual overall revenue lift based on what we saw from our RAF. I think, as Atul described earlier on, we had about a 2% increase in our overall revenue, which bodes well as we look at our current and continued medical risk adjustment activities. We are confident as we continue to move not only from what we have seen in the past, but where we are going towards in the future. We are continuing to improve that as we stand today.

Alright. Thanks for the question.

The next question comes from Ryan Langston with TD Cowen. Please go ahead.

Hi. Good afternoon. Thanks for the question. We have heard some insurers talk about simplifying contracts, maybe reevaluating footprints into 2025. Have you had any of those discussions with your payer partners or any, I guess, anticipated changes that you know of in 2025 that you would be willing to call out?

Hey Ryan. Thanks for the question. This is Aric Coffman. I will give it a shot and then have the team answer anything additionally. But absolutely, we have had these conversations with our payer partners. A lot of folks in the space on the payer side are taking a hard look at what counties work. We think about the business the same way. This is a county-by-county view of how the bids are built up, what their products look like, and the success they have or haven’t had. That will be a continuing process. As I mentioned earlier, we are in the early stages of getting to our completion for what 2025 will look like, so all that’s still in discussion. I think it’s a little premature for us until we get visibility into everything around benefit design and how that’s shaping out for the plans as to exactly what that will look like heading into 2025. But it’s a big priority for us, and we have got our attention on it.

Yes. And Ryan, this is Bill Bettermann. I would just add that in addition to looking at payers, we also, as I have talked in the past, are looking at our providers as well, right. Are they performing at the level that we would expect? So we were evaluating not just our payers, but also the providers that we are working with.

Got it. And then just one quick one for me, how should we think about maybe free cash flow for the rest of the year? I don’t think I heard anything in the prepared remarks, but it looks like the loss narrowed a bit – actually, I should say a bit, a pretty decent amount at least for the first half of this year to last year. But just curious anything on cadence of that or maybe where we might end the year on free cash? Thanks.

Yes, Ryan, this is Atul Kavthekar, first welcome. I’m glad you are part of the team here. We are expecting really the second half of the year to look a lot like the first half of the year in terms of cash burn. One of the potential uptick factors is with regards to the time lag that some of the cost reductions that we are expecting in the third and fourth quarters will actually show up through the claims lag and surface themselves within the delegated plans that we have. That’s a direct reduction in the cash outflow for paying claims that we hope to see in the year. It’s really a factor of timing. There are a lot of other factors that go into it as well. I don’t want to oversimplify it, but I think the takeaway should be something along the lines of the second half will be very similar to the first half.

Okay. That’s very helpful. Thank you very much.

The next question comes from Ryan Daniels with William Blair. Please go ahead.

Hey guys. This is Jack Senft on for Ryan Daniels. Thanks for taking the questions. The first half medical margin totaled around $78 million. So, your full-year guide implies a pretty solid improvement in the back half of this year. Can you just talk about the visibility you have here in achieving that? And just your confidence level of hitting this metric; should we think about this as a function of the expected revenue coming in that you mentioned?

Expectation on revenue improvement; one other thing that we talked about is the expectation and again, it’s a matter of timing when we settle with the health plans on an individual basis, what any adjustments related to the sweeps accrual will be and when they show up. We expect those in the second half of the year. Those are the things that we have increasing visibility into. Another big factor is the medical cost reduction. We saw a pretty significant movement from Q1 to Q2. Our expectation, given everything that we see here in the field and seeing the data suggests that we should be able to get at least that much of an improvement going into the back half of the year. Those factors together give us increased confidence in our ability to hit.

Okay. Thanks. If I can ask another quick second question. In your prepared remarks, I think you noted that you guys identified provider groups that could be elevated, which I presume are some that are underperforming on average. What does the process look like to elevate those providers? Is it easy to encourage them to perform more efficiently, or just kind of what are the puts and takes here before exiting the relationship?

Thanks for the question. As Aric described earlier, getting density into those practices is very important. The more you get into their mind share of what they need to be doing, then they will practice more efficiently. We are having conversations with them to see if we can concentrate some of the patients into more experienced providers. Creating better results is part of the conversation. Those are some of the things we are starting to have with some of our large groups in the different markets to help them improve even beyond where they stand today. The incentives that we align with them and the share in the surplus savings aligned with that, along with our back-end care management programs, work directly with those practices to achieve those results, all working hand in hand. We are confident, especially with the enthusiasm we have with our providers to move in that direction rather than some of the practices that may have very minimal lives that are not used to and want to do Medicare Advantage risk. So those types of conversations are the ones we are having today.

And I will add – this is Aric, a couple of finer points. We have made specific investments in the network and in our capability set that will enhance their ability to perform. We have also stratified groups to understand that it’s not just about people that are underperforming. We are also focusing on those that might be in the middle and moving the middle up a bit as well. Those tactics have deployed will give them better access to more information about their performance and will allow us to address anything that arises, whether it’s misunderstanding or the need for more education. One of the things we emphasize is that this is a relationship-heavy business. Those relationships, combined with a 96% persistence rate among providers and a 90% persistence rate among patients, lead to many efficiencies in how we think about provider panels and networks.

Okay. Perfect. Understood. Thanks guys.

This concludes our question-and-answer session and the P3 Health Partners second quarter 2024 earnings call. Thank you for attending today’s presentation. You may now disconnect.