Privia Health Group, Inc. Q3 FY2021 Earnings Call

Good morning, and welcome, everyone, to the Privia Health 2021 Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session. Now, I would like to turn the call over to our first presenter for today, Mr. Robert Borchert, SVP of Investor and Corporate Communications. Sir, you may begin the conference.

Thank you, Henry, and good morning, everyone. Joining me on today's call are Shawn Morris, our Chief Executive Officer; Parth Mehrotra, President and Chief Operating Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed through the Investor Relations section of priviahealth.com. Today's press release highlighting our financial and operating performance as well as the slide presentation accompanying our formal remarks are posted on our IR website pages. Following Shawn and Parth's opening comments, we will open the line for questions. We ask that you please limit yourself to one question and one follow-up, so we can get through the full queue in a timely fashion. The financial results reported today and in the press release are preliminary and are not final until our Form 10-Q for the third quarter ended September 30, 2021 is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature based on our current expectations and our view of our business as of November 8, 2021. Such statements, including those related to our future financial and operating performance and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered in conjunction with the cautionary statement in today's press release and the risk factors described in our company's most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. Reconciliations of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. Now, I'll turn the call over to Shawn.

Thank you, Robert, and good morning, everyone. This past weekend, I had the privilege of spending time with more than 60 of our physician leaders from around the country. They came together to learn and share ideas with one another. They were all engaged and invigorated by their mutual desire for autonomy and to truly align with a partner that helps them deliver cost-effective, high-quality care to all their patients. Our Privia platform rewards them for this great care they deliver, no matter the reimbursement structure, and I am honored to be a small part of the opportunity. Today, I'll provide an update on our combined business momentum and summarize our recent financial performance. Then, Parth will offer an in-depth review of our Value-Based Care strategy and framework and close with an update on our financial outlook for 2021 before we take your questions. We continue to see tremendous growth and momentum in our business. We delivered better-than-expected performance in our third quarter and year-to-date and are raising our guidance on all key metrics for 2021. We've also set new records for signed providers this year, both in existing markets and new markets. As Parth will discuss later, our updated guidance for implemented providers at year-end implies a year-over-year growth rate of approximately 30%, driven by these new additions. This is a leading indicator of an acceleration of our top line as we implement these providers in the coming months. We are also seeing record-high provider retention year-to-date as we continue to demonstrate our ability to optimize workflow, reduce administrative burden, successfully transition to Value-Based Care, and increase profitability for our physician partners. This supported our strong same-store growth in the third quarter, which was driven by the strength in ambulatory utilization across all our markets. On a seasonally adjusted basis, in-person visits were at or above our pre-COVID baseline, and virtual visits were approximately 10% of total visits. This volume, as well as an increase in both implemented providers and value-based attributed lives, helped deliver top-line performance and solid margin expansion ahead of expectations this quarter. Ambulatory access utilization is also a critical component in managing patient outcomes and driving success across our Value-Based Care platform. Our balance and revenue diversity is a valuable attribute to our model. Another key component of our growth strategy is our active business development pipeline in which we are in advanced discussions with many provider groups and health systems. In mid-October, we entered California with one of the San Francisco Bay Area's leading healthcare multi-specialty groups. BASS Medical Group has more than 400 providers, spanning 42 specialties in over 125 locations. We are very excited about our opportunity in California, a state with more than 28,000 primary care physicians and over 115,000 specialists. Our affiliation with BASS highlights Privia's ability to replicate our operating model in uniquely differentiated markets as we look to build scaled, high-performing provider networks nationwide. We also expanded our footprint in Texas through a partnership with the Abilene Diagnostic Clinic, a multi-specialty group with more than 30 providers. With the launch of Privia Medical Group West Texas, we now have a presence across the state, including our established markets in North and South Texas, which comprise over 600 providers today. Parth will dive deeper into our Value-Based Care programs. But I wanted to highlight that our proven Value-Based Care model continues to deliver excellent performance and results. With approximately 760,000 attributed lives and more than 70 at-risk contracts across all types of programs, the Privia network is one of the largest Value-Based Care platforms in our sector today. Over the last seven years, we successfully built a care delivery network with deep clinical operations capabilities in partnership with physicians to maintain a high degree of influence over our Value-Based Care operations at scale. This gives us confidence that we will continue to be able to move providers and lives into at-risk contracts profitably for Privia as well as for our physician partners. We are also excited to share that Privia Care Partners will be formally launched on January 1, 2022, with more than 25,000 attributed lives. This is in partnership with over 300 providers in about 100 care center locations. Privia Care Partners increases our total addressable market as we now have flexible and scaled solutions for health systems, IPAs, other independent providers, and ACOs as well as clinically integrated networks who wish to remain on their existing EHR for the time being. This is exclusively a Value-Based Care option for providers who will be supported by our integrated technology solution and clinical operation capabilities as they successfully transition to at-risk arrangements. Moving on to our third-quarter performance. Our operating momentum has continued to drive strong results. Our growth in newly implemented providers and value-based attributed lives, combined with ambulatory patient volumes, led to an 18.1% increase in practice collections compared to the third quarter a year ago. Care margin was up 31.5%. Our top-line outperformance and operating leverage drove margin expansion, with adjusted EBITDA growth of almost 52% in the third quarter compared to the same period a year ago. On a year-to-date basis, practice collections were up more than 17%, care margin increased 24.5%, and adjusted EBITDA grew almost 46% over the first nine months of 2020. Our strong year-to-date performance and provider metrics position Privia Health very well for the remainder of the year and into 2022 as we work to capture a larger share of the almost $2 trillion physician market and growing Value-Based Care opportunity. This momentum also gives us confidence that Privia's partnership model continues to gain traction as a clear alternative for providers across the country looking to maintain autonomy and improve outcomes for their entire patient populations. We intend to continue to drive growth and profitability by increasing same-store growth in attribution and risk-based contracts, adding new providers, opening new markets, and identifying opportunities to expand our platform. Now, I ask Parth to provide an update on Value-Based Care as well as details on the outlook for the remainder of 2021.

Thank you. As Shawn noted, Privia Health has one of the largest and highest-performing platforms in our sector today across commercial, Medicare Shared Savings, and Medicare Advantage programs. The Privia Medical Group and ACO are the center of our Value-Based Care operating structure. Our ACOs are the risk-bearing entities that hold Value-Based Care contracts, while our physician-led governance drives decisions for the Medical Group on a local, market, and national level. The Privia platform provides our technology solution, payer contracting, and actuarial analytics among other core clinical operations capabilities. Our providers enter into professional service agreements in which we agree to share both upside benefits and downside risk in performance-based arrangements typically 60% to the providers and 40% to Privia. Our next-generation care delivery network is structured such that alongside our physician partners, we have substantial influence over outcomes despite not owning the individual care centers or employing the primary care physician. The single tax ID medical group and contracting ACO entity align around a common risk pool. Once a practice is implemented on our technology solution, we manage all workflows, data, and drive insights to help improve care protocols and outcomes. Furthermore, the operations of the practice integrate with our comprehensive suite of clinical operations capabilities and our staff, which I will elaborate on shortly. An important element of our model is our clear financial alignment with our physician partners. It is critical for us to share both upside and downside risk with our providers, and our providers are incentivized to learn and perform Value-Based Care at the highest level and profitably across their entire patient panel. As a result, we believe the Privia model is highly differentiated in its structure to achieve success at scale across the spectrum of value-based arrangements and across different geographic markets. Our physician partners ultimately want to provide cost-effective, high-quality care across their entire patient panel no matter what the reimbursement structure is. The first two boxes on this slide are the foundational elements we believe all physician practices need to do well regardless of the reimbursement method. As we progress towards the right and our providers move deeper into value-based programs, Privia supports them with a broader suite of clinical operations capabilities, which correlate with the level of risk we are taking. We continue to invest heavily in our clinical operations and have already developed capabilities for supporting all types of risk arrangements. For practices just starting out in Value-Based Care, we want them to engage with our physician-led governance structure and to become fluent in clinical documentation, quality metrics, and performance reporting. As they move into more extensive at-risk arrangements, they will be able to leverage our comprehensive capabilities for care coordination, various disease-specific clinical programs, and network management. Finally, in an advanced Value-Based Care model that takes capitated risk, care coordination and network management take on greater importance with additional network capabilities. We have an extensive clinical operations team behind all capabilities that I just laid out, supporting every physician practice to succeed in Value-Based Care. Our platform is deeply integrated and drives the everyday workflows of the practices, whether helping to see patients off hours, building practice-level, same-store growth plans, and driving execution, or providing data analytics support on how to improve performance. So when a practice joins Privia, they are joining a larger medical group and participating in governance that revolutionizes the way they operate, grow their practice, and succeed in value-based arrangements. This is why we are confident in our ability to influence Value-Based Care outcomes with our providers while preserving their autonomy and ownership structure. With 760,000 attributed lives, Privia Health truly has a unique platform that allows us to be successful across all cohorts of patients. We have proven over the past seven years that we can succeed in more than 70 at-risk value-based contracts across commercial, the Medicare Shared Savings Program, Medicare Advantage, and Medicaid with the support and expertise of our clinical operation structure and deep value-based capabilities. This proven success across multiple types of value-based programs is a highly differentiated value proposition being sought by both providers and payers today. Privia already successfully manages downside risk in many of our value-based arrangements today. We will continue to take a deliberate approach to enabling our providers to transition profitably into increased risk and expect this to include capitated arrangements in Medicare Advantage over time. An example of our success is the Medicare Shared Savings Program where we take significant downside risk today. In 2020, across our ACOs in four markets, the publicly available results show that we lowered utilization and cost significantly below that of peer ACOs. This performance was even better when compared to fee-for-service Medicare while achieving a quality score of 97% or greater across all of our ACOs. In the Mid-Atlantic region, we operate one of the country's largest ACOs with 69,000 patient lives in the MSSP enhanced track where we shared significant downside risk with CMS and our physician partners and delivered over 9% savings, the highest rate of the largest 100 ACOs in the country. Our performance over the last seven years is key to our collaboration with CMS as well as with other payers that offer value-based arrangements across commercial, Medicare, and Medicaid programs. It is important to understand that Privia Health recognizes only our share of shared savings in our top line today. This will change meaningfully when we begin to move lives into capitated risk contracts. In this illustrative example using MSSP performance data for 2020, Privia Health's ACOs managed more than 121,000 lives, representing over $1.1 billion in medical spend. However, we only recognized our share of the gross shared savings in our practice collections and GAAP revenue, which was approximately $56 million. If our MSSP lives were converted into a capitation arrangement, then our top line would capture the underlying spend rather than just our share of the savings. This example illustrates the breadth of our at-risk arrangements today under various Value-Based Care contracts given the large medical spend underlying these arrangements. This also highlights how our current revenue recognition significantly understates the scale, performance, and capability of Privia's Value-Based Care platform. In summary, our Value-Based Care platform has delivered proven results across more than 70 contracts and all payer entities with very large pools of attributed lives, and we have generated more than $576 million in shared savings since 2014. Privia Health is uniquely positioned to enter into value-based arrangements across the risk spectrum based on market dynamics in each state and more importantly, a proven ability to influence outcomes in partnership with physicians to generate results. We see a significant opportunity to increase our top line as we move into capitated arrangements in Medicare Advantage over time as part of our thoughtful, deliberate, and sustainable approach to transition to increased risk. Turning to our financial update for the full year 2021. We are very pleased to see the progression of our guidance during the course of this year. This quarter, you can see we are meaningfully increasing our guidance across all of our operational and financial metrics. In fact, if you exclude the impact of our new market entries into California and West Texas, each metric is expected to be above the high end of our previous guidance ranges with implemented providers near the high end. This reflects our better-than-expected performance in existing markets. It is also important to note that our full-year adjusted EBITDA guidance includes new market entry and development costs in the third and fourth quarters. We expect to enter new markets as part of our ongoing operations and do not add back these costs to arrive at adjusted EBITDA. Capital expenditures are expected to be less than $1 million for the full year. With our strong positive cash flow, cash of approximately $330 million, and outstanding debt of $33.5 million at the end of the third quarter, we have sufficient capital and liquidity to invest in our business and pursue our growth initiatives. In closing, Privia Health is a next-generation physician organization, partnering with independent providers, health systems, and health plans with large-scale medical groups and delivery networks in each state. Our proven model supports all providers and all patients across all reimbursement models, and we are directly aligned with providers' financial success while facilitating their autonomy and ownership structure. We believe Privia is highly differentiated with accelerating growth, expanding margins, strong positive cash flow, and a scalable integrated care delivery model with deep Value-Based Care capabilities. With that, operator, we're now ready for the first question.

Your first question comes from Jailendra Singh of Credit Suisse.

Parth, following up on your last comment about 2021 guidance going up even after excluding these new markets, but when I look at the implied fourth-quarter outlook across various metrics, it seems like your guidance reflects some step-down from third quarter to fourth quarter. I understand you called out some incremental market entry costs. But anything else we should be aware of from puts and takes for fourth quarter versus third quarter?

Yes. Thanks, Jailendra. I appreciate the question. I think there are two or three key elements. As you noted, number one, we are increasing full-year guidance on adjusted EBITDA to $39 million to $41 million. At the high end, that implies a $7 million Q4, and I think there are two or three key components. One is, as we noted, there are new market development costs that we're not adding back. So if we were to add those back, implicitly, what we are saying is the guidance would have been higher than that $39 million to $41 million number range. Secondly, if you look at the difference between Q3 and the extent of the beat, it's mainly in the Value-Based Care line. Some dollars in certain programs moved up from Q4 to Q3 from just a recognition perspective as we got the data, so there was a little bit of that movement from Q4 to Q3. Finally, I would say, there is still utilization and performance in some of the remaining value-based programs. We'll see how we close out the year. It's tough to predict utilization, but if the trend continues the way we are seeing, we should see some tailwinds.

Okay. And then my follow-up on the Privia Care Partners. You called out in slide deck 25,000 attributed lives in VBC programs effective January 1. Can you provide some more details there? Is this one provider group or multiple? And can you remind us how should we think about VBC PMPM and margins on this book of business compared to your traditional VBC PMPM margins? Any color there would be helpful.

Jailendra, this is Shawn. I'll kick it off and let Parth kind of touch on that last part of the question. We're not providing details on the breakout of specific states or payers at this time. We expect to be in new states as we grow this. The initial lives as we spoke in our prepared remarks are 300 providers, and it's balanced over commercial and kind of government beneficiaries, primarily skewed towards the Medicare Shared Savings Program. Just like our other business, we'll move into higher levels of risk as we get to know these providers, organize them, and build in the foundational services to get our tech implemented. Parth, do you want to address the last part?

Yes. And Jailendra, to be clear, these are separate provider groups. This is not one big group with 300 providers. These are independent multiple groups. Regarding your last part, the economics to Privia would be the same. It's going to be the 60-40 shared savings split that we have in our Privia Medical Group value-based programs.

How about margins? Especially when you think about they're not using your tech stack platform, are they any better than your traditional margins?

Yes. They'll progress over time. They will be implemented on a version of our tech stack, data analytics capabilities, and operations, clinical operations capability. There will be a layer. The underlying EMR might be different. But over time, as we perform in these contracts, as we've seen with our existing book of business, this is a multiyear journey. The mix of payer contracts, types of arrangements, and markets influence our ability to increase risk over time. As we work with these providers, it also increases our ability to get higher shared savings, both on a percentage and an absolute basis. You'll expect to see margins increase over time, reaching similar levels to our traditional margins.

Your next question comes from Ryan Daniels of William Blair.

Parth, maybe one for you. You spent a lot of time in your comments talking about the Privia Value-Based Care platform. There are a lot of differentiators here, whether it's the broad coverage across different payer types, whether it's the recognition revenue, the different partnership models, etc. I'm curious if there's one thing as you talk to investors as a newer company that you think is kind of underappreciated or maybe the one big differentiator you'd point out versus your peers given all the nuances you laid out earlier?

Ryan, thanks for the question. I appreciate it. There are three key interrelated aspects that may be slightly underappreciated as the education process continues with a lot of the new public companies in our space. First is fundamentally our operating structure. We are very unique in that we have a medical group, a risk-bearing entity, and a tech-enabled clinical and operations platform all as part of one entity here at Privia. This combination is the special sauce and allows us to have real influence on outcomes and generate the results we've proven to generate over the last many years. Second, the sheer scale of our Value-Based Care book of business is probably underappreciated. There's a lot of focus on full cap MA. We think that's an important part of the market. It's a small segment, but growing and important part with the highest per capita spend. Payers and providers are really looking for us to provide a solution across the patient panel and move a lot of those patients into value-based arrangements. I think our book of business is spread across commercial, MSSP, MA, and Medicaid. We don't think anybody else approaches it to the extent that we do. Lastly, from a peer company comparison perspective, the revenue recognition becomes important as we highlighted with an example here. If you're comparing top line for a lot of these companies, the underestimation of our top line is pretty key and stark given what the GAAP financials project today.

Okay. That's super helpful. My question to follow up is a little bit different. If we think about the market entry in both Texas and California, another unique nuance is that those are multi-specialty groups versus just a pure focus on PCP. Can you talk a bit about some of the advantages that gives you by latching on to multispecialty? Does that allow you to go and find more PCP groups and then define referral networks more effectively? Just talk a little bit about the uniqueness of that market entry.

Thank you for the question. Regarding BASS, from the very beginning, it was clear that we shared a strong vision after my initial conversation with Inez. They are set to be a valuable partner as we launch in California. Their commitment to providing a seamless patient experience along with their providers aligns perfectly with our approach to organizing providers and foundational services, which will lead to profitability. The same goes for West Texas, where Dr. Heads is highly involved and eager to establish a scalable medical group using the Abilene clinic. We are enthusiastic about these two opportunities. They are multi-specialty but are actively engaging with primary care and looking to implement a similar strategy as we have in our other markets.

Your next question comes from Josh Raskin of Nephron Research.

I guess the first question is just on implemented providers and how much of that was sort of timing, closing those partnerships earlier than expected? And maybe how much of that was just the increasing interest in Privia and the conversations you guys are having?

Josh, it's Parth. There are two components to implemented providers: the existing markets and the new markets we entered. As we stated in our prepared remarks, we would have been at the high end of our previous guidance range, which is about 2,900 implemented providers in our existing markets. That reflects the record sales and implementation we've seen in our existing markets, a lot of momentum, and just organically growing the medical groups we have today. For California and West Texas, these were ahead of our expectations from a timing perspective. We did not expect to enter any new markets this year, so that's a significant step up from a timing perspective and helps accelerate that growth. I think that reflects the broader momentum we are seeing in our business development pipeline and discussions with medical groups, health systems, and payers to launch the Privia model in many states.

Got you. And could you speak specifically to BASS in California? One of the bigger groups out there, I'm interested in terms of timing as you talk about this pipeline growing. When did the conversation start? How long does it take to implement? What really resonated with them? It sounds like everything moved a little bit faster than you expected.

Yes, sure. The structure of our arrangement in California is no different than other markets. We'll have the medical group entity and risk-bearing entity there and the management services entity that provides the platform. From that perspective, it's pretty similar. Shawn talked about the alignment of interests and the meeting of minds with the BASS Group, a great set of physician leaders. INS is an excellent operating leader. When that alignment happens, the beauty of our model is that things can move quickly. It's very capital-efficient, and getting a relationship off the ground and launching the market does not take much time. Deals usually take anywhere from six to 12 to 18 months depending on the nature of the relationship, market size, and alignment of interest. This one came together quickly.

Next question comes from Lisa Gill of JPMorgan.

Parth, I want to go back to your comments around utilization. You talked about utilization being at pre-pandemic levels and virtual still being roughly 10% of visits. Can you talk about what your expectations are going into the fourth quarter of this year? Do you feel like that concern around pent-up demand, you're just not seeing that in your practices? Is it where you are from a geography perspective that didn't have a big impact from the delta variant?

Thanks for the question, Lisa. Predicting utilization is challenging, as many companies have pointed out. We are observing this trend carry on into October. Schools and businesses are open, and this applies across all our markets, including Florida and Texas, where there were higher instances of the delta variant. A key aspect is that our utilization consists of ambulatory care within community physicians. People are much more comfortable visiting their doctor now. Protocols are established, and I believe that regardless of the variant or future developments in the pandemic, that part of the health care system is functioning well. We are still witnessing strong pent-up demand, and individuals are actively visiting their physicians. We are facilitating this from an access standpoint for both the fee-for-service and value-based segments. This trend is evident across the board, with no particular issues in any state.

Let me just add. I think we can all agree that the increase in ambulatory utilization is about access. Access is one of the most critical components to managing at the highest levels of Value-Based Care contracts: getting people in, building that relationship with them, meeting them where they are, and getting that access. Our doctors spent Friday afternoon and evening with 60 of them, and it's that integrated model that drives success. They're feeling good about managing risk and growing deeper into capitated arrangements. That’s a critical attribute of a value-based care model that's going to succeed.

Great. As we think about geographies going forward and this large group BASS that you now have in California, does it change your outlook at all regarding how you're thinking about geographies going forward? Do you look at California and say, hey, we have an anchor here and will look to expand there or, do we have what we want in California and will look for other geographies? How do we think about that on a go-forward basis?

Yes. Thinking about California, it’s a brand-new state for us. We all know the importance of California for our economy. There are 28,000 primary care physicians and 115,000 specialists. Think about the model. We get an anchor, organize multiple doctors around there, build one of the largest medical groups in every state, provide foundational services, and move to risk. Then we expand into West Texas, which is an extension of an existing state into a market we didn't have access to. Additionally, we grow in existing groups with same-store growth and growing Value-Based Care arrangements by adding providers and expanding our national footprint.

The whole country is open for us. The unique aspect of our model is we don’t need to wait for the right dynamics to happen, given our focus on all patient cohorts. If you're focused on just one segment of the population, you might need higher MA penetration and duals, but our focus across all kinds of providers and patients allows us to operate in any state, prioritizing based on population density and market size. The flexibility of our business model is a key strength.

Your next question comes from Richard Close of Canaccord Genuity.

With the updated guidance, we have a good start in 2022. I know you're not providing formal guidance here, but can you give some high-level thoughts on how we should think about '22? You essentially pulled forward the new market you discussed you would do in 2022 into this year.

Richard, thanks for the question. Implemented provider growth year-end 2020 to '21 will be about 30%. This gives us a lot of momentum, so you should see acceleration in our top line. You'll see acceleration in practice collections. California is a corporate practice state, so we don't own the medical group, but it will be reflected in practice collections there. More importantly, you will see growth down the P&L, care margin, all the way through EBITDA. This business is growing the top line significantly and has real positive EBITDA and positive cash flow. If there are some puts and takes as we finalize our plan for next year, we will communicate that. Expect us to see increased EBITDA and practice collections next year.

As a follow-up, maybe flipping Ryan's question towards the physician practice side of things and the pipeline and competitive market. As you're out there having discussions, how noisy is the market with these new upstart companies in terms of the education process, talking with practices, explaining what you do and how you're different from some of these other models?

Yes. I think we occasionally come across some of the other companies but have to realize our customer, the physicians and the physician practices, are fairly sophisticated. They've seen over the last 20, 30 years different alignment versions. They know what works and what doesn't. There's a lot of self-selection. The beauty of our business model preserves their autonomy and ownership structure, whether they are independent or part of a health system. We're flexible and able to provide solutions across their entire book of business. There's a distinct difference between us and other entities focusing on just one segment.

Yes. Parth, that's right. Our goal is to exceed all patients, providing tools to manage them in a cost-effective, high-quality manner, improving the experience for the patient and the provider. Our physicians are sophisticated and self-selecting into a model like Privia.

Your next question comes from Whit Mayo of SVB Leerink.

Just the new groups that you're onboarding in '22, are you standing an ACO up for them? Any updates on views around new ACOs that you plan on introducing and launching in '22?

Yes, we establish the ACO, the risk-bearing entity in every state. Similar to other markets in California, we'll establish our risk-bearing entity. Some attributed lives from BASS will start in value-based programs from January 1, 2022. We continue entering new value-based arrangements in all our markets. Our objective is to establish an ACO entity in every state, transitioning as many lives into value-based arrangements and increasing attribution across our book.

So you plan on launching? Will you have more than four ACOs next year? When you mentioned there are some attributed lives with BASS, is that to indicate they're already participating?

Yes, if you are referring to the MSSP program, we have four existing ACOs participating in that program. You will see us participate in more than four ACOs in 2022, covering California, Florida, and other markets.

And just a follow-up on that. Can you remind me the final share rate on an enhanced track versus a non-enhanced track model?

It's 75% to 25%, with 75% going to the party taking significant risks, such as Privia. We’re working our way up the spectrum from A, B, C to enhanced.

Your next question comes from Sean Wieland of Piper Sandler.

A couple of questions about the California market entry. Thanks for the early call. Where does the Knox-Keene license sit in all of this?

Sean, thanks for the question. Apologies. We'll try and do an afternoon one next time, maybe. Yes, you would expect us to take the Knox-Keene license. We're working towards that as we look to take risk in California, establishing a risk-bearing entity and going through that process.

So you don't have a Knox-Keene license in California yet. Does BASS have it?

Not today. Our model is to enter, organize the doctors, understand where they are, and move to increasing levels of risk across the market. The Knox-Keene license comes into play as we need it for higher levels of risk.

The Knox-Keene license doesn’t preclude us from adding lives in the MSSP program. We can add lives in California through an ACO that doesn't require a Knox-Keene. You'll see us enter that program with attributed lives on January 1, 2022.

Okay. So will you have the Knox-Keene license by January 1, 2022?

No, you don't need it for the MSSP program to our understanding.

When will you have the Knox-Keene license?

As it becomes apparent that we need it to move to higher levels of risk, we'll move to obtain that.

California is a massive market, and having an anchor tenant in the East Bay is far from San Diego. You said your strategy in California is similar to that of other markets, but could you articulate the differences of launching a strategy in California?

The best corollary is our Mid-Atlantic market, Virginia, Maryland, D.C. Our strategy has spanned over seven to ten years. We started with four providers in Western Virginia, and it's over 1,200 today. Each microgeography there is different, just like California. We get one anchor group in one area, and there are other large groups in the southern part of the state where we might enter arrangements in the Privia model. Our flexibility allows us to go statewide and run the plays we need to expand. BASS is at 400 plus, and we share a vision to expand to 1,000 and grow from there. This is a multiyear journey.

Your next question comes from Gary Taylor of Cowen.

I had a question about the development costs you mentioned for the fourth quarter. I appreciate the fact that you're absorbing those in your guidance when most new companies exclude all kinds of things. Can you give us a sense on what those costs are, ideally for the fourth quarter? I am thinking more about how 2022 looks given that you're accelerating market entry.

Gary, it's Parth. Our model is very capital-light. The spend isn't large, but it varies by market and opportunity. Usually, think about low single digit million dollars spend. Again, it depends on how accelerated we are. We've become profitable fairly quickly in many cases. While it could have a slight impact on EBITDA when we spend money to grow, the uniqueness is our model has significant positive EBITDA. We intend to increase EBITDA year-over-year. If there are rationales, we’ll be transparent about it, but you'll see us accelerate top-line growth and grow EBITDA.

Do the new market entry costs show up in sales and marketing or split between sales and marketing and G&A?

Yes, it will be split between sales and marketing, G&A, and some of the operations expense. We need capabilities on the ground to implement and manage performance ahead of signing new providers, so that affects costs in various areas.

Earlier, you talked about how net revenue would change as you took more capitation. I understand the ACO spend under management isn’t grossed up into revenue. Are you suggesting with capitation that you will see more revenue recognized on a grossed-up basis?

Thanks, Gary. That’s a great question. On a PMPM basis, in that example using MSSP data, if you do full capitation, it covers Part A and Part B but not Part D or some admin spend. The PMPM per life goes up in a capitation arrangement. We would start recognizing that full amount in our top line number, reflecting a considerable difference in terms of overall recognition.

There are no further questions at this time. Now, I would like to turn the call back to Mr. Morris. Sir, please go ahead.

I'd like to thank each of you for listening to the call today. Privia is a proven model that supports all providers and all patients across all reimbursement models. Our scalable, capital-light, highly integrated care delivery model, combined with the business momentum you're seeing, positions our company for accelerated growth in 2022. We appreciate your continued interest and support of our company and look forward to speaking to you again. Have a great rest of the day. Thanks.

This concludes today's conference. Thank you all for joining, and have a great day.