Good day and welcome to P3 Health Partners Third Quarter 2024 Earnings Call. This event is being recorded. I would now like to turn the conference over to Ryan Halsted. Please proceed.

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 U.S. federal securities laws, including statements regarding our financial outlook and long-term targets. 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 can 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.

Thanks, Ryan. Good afternoon, and thank you for joining us. Today, I'll cover several key topics: the broader Medicare Advantage landscape, our third quarter 2024 results, and why I'm excited for 2025. We'll go through the tangible steps we are taking to advance the initiatives we outlined in August, and this will set up P3 for success moving forward. Before addressing this quarter's results, I want to provide some perspective. As you have heard from our peers and MCOs, we are in a unique time. It won't persist forever, and it will pass. What we do now to set up P3 for success coming out of this environment is a key focus of mine and our leadership team. We have a plan in place and are executing on it now. It includes over $130 million of initiatives that will positively impact EBITDA and cash flow. The benefits will begin to be seen in Q4 and more prominently in 2025 as it is phased in. The overall sector is facing pent-up demand post-COVID for health care services. It is in this type of environment that value-based care is most needed by our health plan partners. The demand for P3's value-based care platform is there, and I firmly believe that value-based care is the answer to bending the cost curve long-term in solving our societal issues. Our Q3 report includes updated insights from our payers and a fresh perspective from our new CFO, Leif Pedersen. Regarding elevated medical utilization, we haven't seen it across the board, whether at the provider or health plan level. It's isolated in Part B or certain health plans that experience adverse selection via benefit design. During the quarter, we actually saw improvements in Part A costs, but like our peers in the sector, we faced headwinds in Part B expenses and significant retroactive adjustments, which added to the complexity of our quarterly results. Retroactive adjustments accumulated to $35 million, and this was the majority of the EBITDA miss. We did see elevated medical utilization of approximately $5 million to $10 million versus historical trends, particularly tied to benefit design, which we expect to be mitigated in 2025 through benefit design changes indicated by our payer partners. Now is the time to maintain our competitive edge, improve performance, and move toward profitability. Over the past 6 months, we've had the opportunity to conduct a thorough assessment of the entire organization. We've already set several initiatives in motion, and we have concrete plans to guide our business towards sustainable growth. As we look ahead to 2025 and beyond, there are several reasons for optimism, and I'm enthusiastic about our path forward. Although we are not providing a formal outlook today, Leif and I will provide directional comments. The over $130 million of improvement opportunities are in four key areas. Number one, contracts. We are enhancing our payer and provider networks and terms to strengthen collaboration and expand opportunities. Number two, operating model. We are elevating operational discipline and enhancing visibility to drive better outcomes and quality documentation as well as utilization. Number three, operating efficiency. These measures will enhance service delivery while saving on operating costs. And finally, number four, data and analytics. We are advancing our capabilities to better support decision-making and outcomes through changing our structures and adding new capabilities such as Innovaccer. As we look ahead, we see several favorable dynamics. The Medicare Advantage repricing cycle and benefit design changes are expected to serve as a catalyst for P3's profitability in 2025. Medicare Advantage has a built-in mechanism for adapting to market shifts with a relatively short repricing cycle. We expect CMS' benchmarks will be recalibrated to reflect the ongoing elevated utilization. In addition, many of our health plan partners have taken actions during the 2025 bid process to target margin recapture. As part of this, it is expected that plan benefits will be less robust in 2025, which we anticipate will result in decreased utilization. We are working closely with our payer partners to quantify the impact of the benefit design changes for 2025. Additionally, it's clear that the introduction of a broad set of star rating cut points is elevating the importance of quality performance while the recent reduction in the physician fee schedule is placing increased pressure on medical practices. We continue to see demand for P3's capabilities as evidenced by the recent signing of an agreement with the largest health system in Southern Nevada to create a clinically integrated system of care in Q3. Finally, our value-based care enablement platform and affiliate model remains intact. For example, a highly engaged partner in Oregon has seen a 40% improvement in coding and documentation accuracy while doubling its membership. We are confident in the underlying value that P3 provides and our focus on execution, albeit with a more measured and narrowed focus given the macro environment and its impact on our results. An analysis of our fully matured market performance shows we have half of our markets in which there are greater than 80% of membership with positive medical margin. The other half of markets have less than 50% of membership with a positive medical margin. Part of the network and payer rationalization measures we've taken are related to these differences. I will now pivot to highlight the progress on our initiatives, which will accelerate our path to profitability and cash flow generation. With a focus on sustaining long-term relationships with our value-based care network, we are in discussions with multiple regional and national payers to provide P3 and our partners with a series of adjusted favorable economic terms. In the cases where the path to sustainable profitability has become too elongated, we expect to exit those underperforming relationships. Our close collaboration with payers and physicians provides us with the flexibility to adapt in situations where both P3 and our physician partners are not achieving success. In some cases, we can mutually decide to wind down our operations. Overall, we are pleased with the progress we've made with the payers and are pursuing additional contract enhancements for 2024 and 2025, as appropriate. After careful evaluation, we've trimmed 63 of our provider tax ID numbers or TINs to help us enhance profitability and ensure sustainable margins. We have also trimmed our payer network by 20%, which will simplify our operations. For these markets where our internal targets were not met, we are adjusting our strategy to focus on increased density within existing markets and existing practices, where we have higher-performing networks. Next, we are focusing on providing our physicians with adequate resources to engage our members and standardize care delivery practices through an enhanced evaluation of disease burden. We are also working to curb utilization in high-cost areas, which we believe is essential for improving outcomes and optimizing costs. In 2024, we launched a new program to enhance the awareness of palliative and hospice benefits for our patients. We moved from less than 1% enrollment in 2023 to 2.3% today with a goal of 4% of the total population in 2025, consistent with a well-run population health approach. By expanding these care programs, we are providing comprehensive, patient-centered support that addresses the needs of individuals with serious illnesses leading to higher satisfaction and reduced hospitalizations. From a data visibility standpoint, our partnership with Innovaccer is on track for full implementation in 2025. We plan to lean further into these tools to better serve our payer partners. The advanced analytics and data platform enables the aggregation and unification of disparate health plan data. We can then identify the most complex patients and efficiently benchmark these patients relative to the clinical care guidelines and best practices. Additionally, the engagement tool is a sophisticated solution for our physicians to seamlessly close care gaps and improve coding accuracy at the point of care. Another important area of focus is enhancing operating efficiency. We've strategically adjusted our approach to geographic expansion, aligned with our emphasis on expanding density within existing markets. By concentrating our efforts in established areas, we're able to foster strong provider engagement and implement more effective utilization management. In closing, I want to highlight a few key takeaways. First, P3 is proactively navigating a transition period that is affecting the broader Medicare Advantage industry and our company. However, P3 and the industry, including CMS and our health plan partners, are actively adjusting to this new environment. Many of our health plan partners have emphasized more than ever before the demand for more value-based care alignment with providers to better control medical costs and preserve margin. Our conviction remains high that our value-based care platform is well positioned to capitalize on these opportunities, albeit with a more measured approach. Second, we're taking decisive steps to elevate our performance in this dynamic landscape. Our strategy is two-pronged. On the financial front, we've ensured appropriate reserves as we exit 2024 and have recalibrated our step-off point to reflect the misalignment between the timing of high utilization and the benefit design changes anticipated in 2025. On the operational side, we're implementing initiatives with a focus on achieving best-in-class execution in areas directly under our control. Finally, I would like to formally introduce Leif Pedersen, our CFO. We previously worked together at a value-based care predecessor company to P3 Health, and I look forward to continued collaboration. Leif?

Thanks, Aric. Before diving into third quarter results, a few thoughts on my transition into the organization. First and foremost, I'm thrilled to be part of the P3 leadership team. P3 is a great company with extraordinary people and tremendous upside. I was drawn to P3's affiliate model because I've seen it work well. It's a proven model to bend the cost curve. The company's smaller size and entrepreneurial culture, along with the chance to make a significant impact in transforming health care delivery, were extremely compelling. Additionally, my previous experience working with Aric and Bill and knowing the deep experience of Amir and the rest of the P3 leadership team have helped to facilitate the move. I've now been in this role for just over two months, and my focus during that time has been centered around three areas: one, gaining a comprehensive understanding of P3's financials; two, ensuring continuity across operations; and three, identifying opportunities for efficiencies. Moving to the financial information. Our third quarter top line performance was in line with our expectations, with capitated revenue of $357.7 million and total revenue of $362.1 million, representing a 26% year-over-year growth. This growth was primarily driven by two factors. First, our member base expanded significantly, growing by 22% compared to last year and now exceeding 128,900 members. Second, we saw a notable increase in our funding, which rose by approximately 6% year-over-year. Our medical margin was $540,000 or $1 on a PMPM basis while our adjusted operating expenses were flat on a year-over-year basis. Adjusted EBITDA loss for the quarter was $71 million or $184 on a PMPM basis. Our third quarter medical margin adjusted EBITDA results were driven by an incremental $5 million to $10 million in medical claims costs and approximately $35 million in retroactive adjustments. Let me take a moment to provide additional information on the retroactive adjustments. Firstly, during Q3, we had an opportunity to review year-to-date revenue expectations associated with risk adjustment accruals. Based on current risk factors and lower-than-expected performance, we thought it was appropriate to write down midyear risk adjustment receivables, contributing $15 million of negative adjusted EBITDA. Secondly, similar to the challenges highlighted by several of our managed care and value-based care peers, healthcare utilization was elevated in the third quarter. As a result, our medical expenses for the quarter experienced headwinds associated with negative prior period development that was not previously anticipated. The uptick in utilization we experienced was primarily within our Part B medical claims, whereas Part A utilization trends have been stable. Negative medical claims development contributed about $10 million in additional expenses during the quarter. We expect this elevated utilization environment to be mitigated in 2025 through favorable benefit design changes and other factors. Lastly, third quarter 2024 results experienced approximately $10 million of negative impact within our network and operating expenses. The increase in costs was related to unexpected prior year and in-year retroactive adjustments, revision of current year run rates, and increased operating expenses associated with higher professional fees supporting our operations as a public company and a non-income-based tax adjustment. Turning to the balance sheet, P3 ended Q3 with approximately $63 million in cash. Cash flow from operations for the quarter was approximately negative $20 million. As we think about the remainder of 2024, we expect the increased medical cost drivers to continue through the end of the year. Directionally, when adjusting for any prior year impacts, we believe the adjusted EBITDA step-off point for the business is closer to an annualized quarterly $30 million loss run rate versus the $70 million that was reported in Q3 before the impact of our strategic initiatives flow through. We are currently building our detailed 2025 financial operating plan, and we'll share that in early 2025. Establishing credibility and earning your trust is one of my top priorities as the new CFO of P3. The leadership team and I are focused on setting reliable targets that reflect the current market landscape and are predictable and achievable while also providing opportunities for outperformance. We are highly focused on executing in key areas that we reviewed to capture over $130 million of incremental opportunity. Approximately 60% of the total identified opportunities are related to enhanced evaluation of chronic disease burden; another 25% of the total opportunity is identified through payer and provider network rationalization; and the remaining 15% of opportunity lies in operating efficiencies, which are currently underway. As we execute on our value opportunity roadmap, we want to underscore that 2025 is poised to be a transformative year for the company.

Thanks, Leif. As Aric alluded to, in many ways, we have been seeing a perfect storm of overall medical costs and utilization increases, whether due to increased demand for clinical services post-COVID, plan benefit changes leading to higher costs, significant increased usage of Part B medications, and CMS rule changes making it harder to manage costs. With this backdrop, let me spend a little more time discussing some of the main cost drivers and corresponding metrics. Over this last quarter, we have indeed seen an increase in medical expenses, especially around Part B utilization. This was driven by many factors: increased Part B drug utilization; increased outpatient specialty costs, oncology and ophthalmology to name just two; pockets of increased emergency room use and observation utilization, especially in rural Arizona; and higher unit costs for observation status seen in all markets due to the reimbursement changes related to overnight stays, commonly referred to as the two-midnight rule. In fact, we've seen a 40% increase in emergency department costs related to the two-midnight rule while also seeing higher pass-through costs from our health plan partners for supplemental benefits like dental. Despite the pockets of increased utilization, both emergency department admits per 1,000 and observation per 1,000 have remained relatively flat through the first half of 2024 at approximately 380 per 1,000 and 44 per 1,000, respectively. Part A utilization has also been flat, with an admit per 1,000 rate of 153 for the first half of 2024 versus 159 for 2023. High-cost claims greater than $50,000 rose 23% year-over-year, with Part B oncological medications and treatment leading the way. Part D expenses have increased 13% during the first half of 2024, but this is in part due to the delay in receiving Part D rebates from our plan partners. In regards to quality, our health plan partners have suffered from the new CMS star rating changes, with many of them being vocal about the impact. This has led to significant increases in CMS quality thresholds. But despite these changes, P3 has mitigated the impact through increased month-over-month GAAP closures from 2023 to 2024. Because of these performance issues, cost increases, and headwinds for quality coding documentation, P3 will narrow and rationalize our PCP networks to focus on those that are more engaged to perform in value-based care. For example, in our internal UM and claims recovery departments, we will continue to strive for increased delegation with more plans to manage our networks more comprehensively. For our providers, they will see more boots on the ground to improve visit access, aid in comprehensive evaluations, and education on appropriate documentation of disease and quality gap closures while also having the data necessary to know their high-risk patients' preferred specialists and overall performance. From a technology standpoint, we now have the ability to directly work within our PCP electronic health record to help guide them for more comprehensive care, making their work easier and more expeditious. Lastly, we have new focused programs to help our providers with palliative and hospice care for our most seriously ill patients and new pharmacy interventions for our high-risk and polypharmacy patients. Clinically, we continue to see significant upside with our engaged providers, and we look forward to an improved fourth quarter and a strong start to 2025. With that, I'll pass it back to you, Aric, for closing remarks.

Thanks, Amir. We acknowledge that 2024 has presented significant challenges across our sector, including P3. Many of our health plan partners have emphasized more than ever before the demand for value-based care alignment with providers in order to better control medical costs and preserve margin. I am a strong believer that value-based care is the answer to bending the cost curve long term in solving our societal issues. Underpinning our near- and long-term success will rest in our ability to seamlessly serve our physician partners and their patients by focusing our investments through stratification of the opportunities. Our partners will experience a refreshed approach to executing on the model across people, processes, and technology. As we covered today, we are making the tough decisions and taking the necessary steps to address these issues. Our team has implemented decisive measures this quarter, and we are continuing to execute in our key areas of focus. We are confident that these efforts will lead to improved performance versus our 2024 starting point, and we look forward to sharing updates on our progress as we finalize and implement these actions over the coming quarters. With that, let's turn to Q&A.

And our first question comes from Brooks O'Neil with Lake Street Capital Markets.

I guess I just have one basic question, which is I heard Leif describe $63 million of cash at the end of the quarter and about a $20 million cash flow deficit from operations. Can you just talk to us about how you see your capital availability to execute some of the things you've talked about doing on this call?

Yes, Brooks, thanks for the question. And just to reiterate, we ended the quarter with $63 million of cash, which supports our core operations and our strategic growth initiatives. As you mentioned, we did experience negative operating cash flow for the quarter of about $20 million, which is consistent with our 2024 run rate. We're continuing to actively monitor our cash burn rate and focus on optimizing working capital and driving towards cash flow positivity. As we think about the initiatives we laid out, that will impact how we look at cash moving forward and when the realization of some of those initiatives actually turns to cash. We're confident in our ability to maintain liquidity with access to potential credit facilities and/or strategic financing options, if required.

Next question comes from Josh Raskin with Nephron Research.

I'm going to ask a similar question to Brooks there. Just I heard at the end, you're confident in your ability to maintain liquidity, including strategic financing options. Are you pursuing an additional capital raise in the fourth quarter? Is this an immediate need?

No. Right now, we are not pursuing that immediately. We are in the process of just evaluating our overall cash position in light of the initiatives that I spoke about earlier.

Okay. And then second question, I heard an improvement in EBITDA off of the 2024 stepping-off point, which I believe you defined as a $30 million a quarter, so something better than a loss of $120 million next year. Could you just talk a little bit more about the top line? I heard a lot of conversation around reducing risk exposure, maybe even revenues. Do you think 2025 revenues are down next year? Is that the direction that we should be thinking about?

There are going to be a few puts and takes next year as we think about revenue. As you consider how we laid out our opportunities for 2025 across our payer and provider rationalization, there will be, as we rationalize that, a slight reduction in membership that will come associated with the reduction of revenue. But to correspond and to offset that will be increases from an operating perspective and our ability to execute on our chronic condition coding and documentation.

Yes. Josh, this is Aric. I would just say, I would expect there to be some revenue decrement from where we are today in aggregate because of the network and payer changes that we've made. We will further quantify that. And we won't have full numbers, obviously, until we get through open enrollment to see what growth we had in the practices and the payers we're continuing with. But ballpark, we're looking at probably 20,000 members who have been impacted by network rationalization, some of the changes we made with payers, if that helps.

Yes, that's very helpful. It makes more sense that you have around 130,000 members, with possibly 20,000 dropping off. It seems quite challenging to recover that in areas like care management and coding. Lastly, I heard about the $130 million in potential improvement opportunities, with approximately 60% aimed at enhancing chronic disease and 25% focused on eliminating poor provider rationalization and improving operational efficiency. Could you provide more details, particularly concerning the 60% linked to chronic disease? What are some examples of how you plan to reduce costs with immediate improvements, and how much of that will be realized in 2025, particularly for chronic disease, as it seems like a significant portion?

Yes. Josh, this is Amir. A number of things that we're looking to do and implement as we move forward, and a lot of it is, when we're talking about operational efficiency, to put more boots on the ground to directly work with those providers that are driving value. So when we look at the majority of our providers that are driving value, we know they need some more tools and/or information, whether it's from a care management standpoint, education from documentation and coding. Since you already know, our coding, as we've seen it, in P3 today is decent, but has a lot of opportunity to continue to grow. As you knew from the beginning of last year, we ran overall numbers of just slightly over 1.0, 1.02, things like that, that we have significant upside on that number. In addition to that, we have the opportunity to look at other people we're working with to launch information directly into the patients' charts. That will happen in about 15% of our population with the scaling we're looking to do. So all those things should bring that value in that 60%.

And Josh, this is Aric. Just to add to that, some of these things are already in motion. And so the 15% of the population that Amir was referring to there, those are patients that we've actually gotten through with a new tool, with a point of care solution that's actually integrated into the EMR and taking data from claims as well as through an algorithm to help those clinicians, not only on chronic conditions but also closing additional gaps in care and quality measures. So that's live, and that launched a couple of months ago. We're now up to 13 clinics that we've launched that through, and we have a scaling plan with the partner that's helping us with that work to get out into the broader marketplace. And that's ongoing. That will be through 2025. But we feel confident with their support and what we're doing here that we'll hit a substantial proportion of the patients.

And the next question comes from David Larsen with BTIG.

It's Jenny Shen filling in for Dave. First, regarding the MCR, we've observed it decrease sequentially since the fourth quarter of last year. The higher costs related to Part B are understandable to us. However, could you clarify why there was such a significant spike in the quarter instead of a more gradual change? Any insights you can share would be appreciated.

Yes. I believe part of it is due to delayed information we received, particularly from the end of Q1 to Q2. The delay was a result of not having the necessary data from our plans, which left us somewhat unaware of how certain costs were rising. This situation primarily affected our non-delegated plans, as we were better informed regarding our delegated plans. Consequently, we did not witness a significant increase in our delegated lives, unlike the surge observed in the non-delegated sector. This discrepancy helps to clarify why the Medical Care Ratio worsened more rapidly during that timeframe than we had anticipated as we progressed from the end of the first quarter.

Okay. Got it. And then just on Q4. So we're about 1.5 months into it. And I think you also mentioned your expectation that plan benefits will be less extensive in '25, which will lead to less utilization. Just on the MCR, I'm assuming that you'll expect it to remain elevated in Q4. But in Q1 of '25, will there be a sudden step down that we should expect?

So thanks, this is Aric. So the way we look at this, we have information from the plans on how they bid and what the impacts are on a PMPM basis, and that's complete for nearly every plan that we work with. Now what we don't know yet, to be able to give you specificity as to exactly what we see in terms of the numbers, is where those patients ultimately end up after open enrollment when they have a chance to make the choice every year about what plan to join. So we'll have a lot more clarity about exactly where and to the magnitude that we expect that to have an impact. However, we do expect those benefit design changes to have immediate effect, writ large across the industry from the benefit design changes that would begin in January.

Our next question comes from Ryan Daniels with William Blair.

This is Jack Senft on behalf of Ryan Daniels. You mentioned plans to enhance payer and provider contracts. Could you elaborate on this? I'm curious if a significant portion of your contracts will be negotiated or if it's just a few that account for 80% of your business. Also, would you consider exiting relationships with payers that aren't working well during negotiations, or do you have a fixed mindset going into those discussions?

Thanks so much for the question. This is Aric. So a couple of things that I would address here. One is that, in terms of the payers themselves, there's a lot of movement around Part D. And so we are looking to change our position in Part D across the majority of our contracts and have good traction to do so. So that's number one. Secondly, we've had good responses from the plans on some of the changes that we want to make. It combines things from changes in the percentage of premium as an example of how we're getting better terms. We reduced the overall number of contracts that we have on the payer side. We had subscale contracts that we have with payers, and so those have already been exited. And then we had some plan partners that were exiting particular markets. Again, these were small plans overall, but they weren't necessarily strong performers, and those plans exited as well.

Okay. Perfect. Understood. And then just to follow up here, just given the shortfall this quarter and higher utilization trends, and I think you maybe just noted it in the previous answer here, but are you looking to exit certain markets? I know you said that you're looking to exit certain relationships with providers and payers. But would you look to exit a market in its entirety? Or is it kind of a one-off basis? I'm just kind of curious about your approach there.

Yes. I would like to mention Florida. For us, it was the smallest market by a significant margin. Located in an area where we primarily operate on the left side of the United States, we did not see it as a viable place for investment in our business at this time. Therefore, we plan to withdraw from the Florida market.

No further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Aric Coffman for any closing remarks.

Yes. I just want to thank everyone for their participation today. We certainly look forward to follow-up calls and getting together with you again sometime soon. Thank you very much.

The conference has now been concluded. Thank you for attending today's presentation. You may now disconnect.