Earnings Call Transcript - PRVA Q4 2024

Operator, Operator

Thank you for standing by. My name is Loela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Privia Health Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Robert Borchert, SVP of Investor and Corporate Communications. Please go ahead, sir.

Robert Borchert, SVP of Investor and Corporate Communications

Thank you, Loela, and good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed in the Investor Relations section of priviahealth.com, along with today's financial press release and slide presentation. Following our prepared comments, we will open the line for questions. And we ask that you please limit yourself to one question only and return to the queue if you have a follow-up, so we can get to as many questions as possible. The financial results reported today are preliminary and are not final until our Form 10-K for the year ended December 31, 2024, is filed with the Securities and Exchange Commission. Some of the statements we'll make today are forward-looking in nature based on our current expectations and view of our business as of February 27, 2025. 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 along with the cautionary statements 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. Reconciliation of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. Now, I'd like to hand the call over to our CEO, Parth Mehrotra.

Parth Mehrotra, CEO

Thank you, Robert, and good morning, everyone. Privia Health had a very strong 2024 on many fronts, as we continue to execute well and drive growth across all our markets. This morning, I'll cover our 2024 performance and business highlights, then David will discuss our recent financial results, capital position and our 2025 guidance outlook before we take your questions. Privia's momentum extended across all aspects of our business, as we exceeded the high end of all guidance metrics for 2024. Our growth team once again delivered an exceptional year of new provider signings in existing markets, which underpins our strong visibility through 2025. Implemented providers increased 11.2% year-over-year, which drove fee-for-service collections growth of 13.6%. Healthy growth in attribution and a continued focus on clinical performance improvement led to better-than-expected value-based results despite the challenging Medicare Advantage environment. Adjusted EBITDA was up 25.2%, with operating leverage driving margin expansion of 230 basis points year-over-year, despite continued investments in non-U.S. markets. Privia also generated a record $109.3 million in free cash flow in 2024, converting 121% of adjusted EBITDA. We ended the year with $491 million in cash and no debt. Our balance sheet positions us with significant financial flexibility to deploy capital and take advantage of opportunities in the current market environment. Our business development pipeline is robust, and we are committed to pursuing disciplined growth that complements our organic sales engine in existing markets. Privia's outstanding performance in the current healthcare and regulatory environment is a testament to the strength of our unique business model, strong execution by our operating teams and most importantly, exceptional performance by our physician partners in our high-performing medical groups and risk entities. We are well on our path to building one of the largest primary care-centric delivery networks in the nation. Our large-scale, high-quality, community-based medical groups and risk entities have demonstrated proven success across 14 states and the District of Columbia. In these geographies, our footprint now comprises 4,789 implemented providers caring for over 5.2 million patients in more than 1,200 care center locations. Gross provider retention of 98% highlights the stickiness of our model and our provider satisfaction with the Privia platform. Likewise, our patient's Net Promoter Score of 87 underscores the excellent patient experience being delivered by our medical groups. Privia now serves over 1.26 million attributed lives across commercial and government value-based care programs. The breadth of our contracts and geographic reach positions us as one of the most balanced and diversified value-based care organizations. Total attributed lives estimated as of January 1 increased more than 11% from a year ago, driven by new provider growth, as well as new value-based care contracts in certain programs. Commercial attributed lives increased 15.2% from last year to reach 782,000. Medicare Advantage and Medicaid attribution both increased almost 8% from a year ago. We continue to expect headwinds in Medicare Advantage over the next few years, given pressures from elevated utilization trends, phase-in of V28 through 2026 and changes in Star Scores among other factors. However, the diversification of previous value-based care contracts gives us confidence in our ability to build scale and profitability across the business despite challenges in any one particular program. We remain highly focused on generating positive contribution margin in our value-based contracts as we pursue attribution growth, manage risk and implement clinical and operational enhancements in our partner practices. Ultimately, our goal is consistent and sustainable earnings growth for all medical groups and shareholders year after year. Privia has delivered consistent growth and profitability and free cash flow across economic, healthcare, regulatory and political cycles over the past seven years. The power of our business model and consistent execution is evident in how we have compounded all key metrics, including free cash flow over time. Since 2018, we have consistently expanded EBITDA margins and converted 105% of EBITDA to free cash flow on average. The midpoint of our 2025 guidance metrics demonstrates our expectations for another year of strong EBITDA growth despite significant headwinds in the current healthcare environment for value-based care. Now, I'll ask David to review our recent financial results and discuss our capital position and 2025 guidance outlook in more detail.

David Mountcastle, CFO

Thank you, Parth. Privia executed very well through the fourth quarter of 2024. Our implemented providers grew 147 sequentially from Q3 to reach 4,789 at December 31, an increase of 11.2% year-over-year. The growth in implemented providers, along with continuation of solid ambulatory utilization trends and value-based performance led to practice collections increasing 4.7% from Q4 a year ago to reach $792.5 million. Excluding revenue from the renegotiated Medicare Advantage capitated agreements, practice collections increased approximately 12.4% year-over-year in the fourth quarter of 2024. Adjusted EBITDA, which is reconciled to GAAP net income in the appendix, increased 44% over Q4 last year to reach $24.9 million, representing 23.1% of care margin. This is a 420 basis point improvement from a year ago as we generated operating leverage across both cost of platform and G&A while investing across all markets. As Parth noted, we exceeded the high end of guidance for all key operating and financial metrics for full year 2024. Practice collections increased 4.5% to $2.97 billion. Care margin was up 12.4% and adjusted EBITDA grew 25.2% to reach $90.5 million. The free cash flow generation of our business model further strengthens our healthy balance sheet as we ended 2024 with approximately $491 million in cash and no debt. With de minimis capital expenditures in 2024, free cash flow for the year was $109.3 million or 121% of adjusted EBITDA, higher than previous guidance due to the timing of certain outgoing cash payments as well as prudent working capital management. Our initial guidance for 2025 is built upon strong 2024 provider signings and the diversity and resiliency of our operating model in the current health care environment. In 2025, we expect to focus on the same core priorities that have driven our business to date. First, provider growth to increase density and scale in existing and new markets. Second, attribution growth and performance in value-based arrangements. And third, operational improvements and efficiencies that impact the bottom line. Using the midpoint of our 2025 guidance, implemented providers are expected to increase 9.6% year-over-year to reach 5,250 by year-end and attributed lives growth is expected to be approximately 7.5%. We expect practice collections growth of approximately 7.8% at the midpoint. This guidance assumes minimal increase in shared savings accruals year-over-year, given the ongoing challenges in the Medicare Advantage environment. We expect care margin growth of 8.9% at the midpoint given minimal increase in shared savings accruals. We are also guiding to adjusted EBITDA growth of approximately 19% at the midpoint. EBITDA margin as a percentage of care margin is expected to expand approximately 200 basis points year-over-year as our operating leverage in more mature markets more than offset new market entry costs. While we are maintaining a robust pipeline of existing market expansion and potential new market opportunities, our initial 2025 guidance assumes no new business development activity or capital deployment. Finally, we expect capital expenditures to be de minimis again this year as part of our capital-light operating model and are assuming an effective tax rate of 26% to 28%. We are nearing the end of our net operating loss carryforward, so we expect to pay more for cash taxes in 2025. This should still lead to at least 80% of our full year adjusted EBITDA converting to free cash flow. Privia Health remains focused on building one of the largest primary care-centric delivery networks in the nation. We look forward to continuing to serve our physicians, providers and health system partners and their patients while creating value for our shareholders for many years to come. Operator, we are now ready to take questions.

Operator, Operator

Your first question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Sameer Patel, Analyst

Hi. This is Sameer Patel on for Elizabeth Anderson. Congrats on the strong quarter and the solid guidance here. I just wanted to ask about the OpEx line. It looks like you're increasing OpEx based on your guide by only about $300,000, year-over-year. Can you just help us understand and break out the leverage between sales and marketing and G&A? Is sales and marketing expected to be maybe down year-over-year just given the fact that there's no new market entry costs? Or how should we think about this?

Parth Mehrotra, CEO

Yeah. Thanks, Sameer. I think you're seeing the scaling of the cost structure. We added one new market last year. And the sales infrastructure spend happens right at the outset. So I think our guidance does not assume any new markets, or any business development activity. If that happens, we'll update the guidance. But other than that, our job is to continue to scale the cost structure between G&A and sales and marketing. We are in our fifth year as a public company, and you should expect that. And so you're seeing the operating leverage play out really nicely. So that's one of the key levers to drive EBITDA growth.

Operator, Operator

Your next question comes from the line of Andrew Mok with Barclays. Please go ahead.

Andrew Mok, Analyst

Hi. Good morning. The cash on the balance sheet is now approaching $500 million. Hoping you could provide a bit more color on the M&A pipeline? And are you diligencing a lot of opportunities and passing on them, or just haven't seen any opportunities within there, thus far? And then relatedly, are there any limitations with building cash, if not M&A? Thanks.

Parth Mehrotra, CEO

Yeah, I appreciate the question, Andrew. So yeah, you could expect us to look at everything in the space. We have 23 analysts covering us. You can expect we have 23-plus bankers covering us as well. And so given our strong financial position in this environment in our space, we're looking at all transactions that come across the table. As we noted, the pipeline is really robust. However, we're going to be disciplined. It's been a pretty tough environment out there for value-based entities. And a lot of revisions and estimates and performance, both publicly as you've seen, but also in the private markets. So I think it's just finding the right opportunities. We'll continue to be very aggressive, but very disciplined in how we pursue those and take advantage of the situation. But you should expect us to deploy the capital, enter new states, increase density in existing states. We've said previously, we're looking at medical groups, risk entities, MSO entities, given our model, I think we can be very flexible. So we'll continue to look for opportunities to deploy capital to create shareholder value, and that remains the primary focus. Obviously, the strong balance sheet also helps us have sufficient capital to prepare for any unseen risks that might come, regulatory changes and so on and so forth to support our medical group and risk entities. So that's a big part of the capital we have. So I think it puts us in a very strong financial position overall. And then ultimately, if the stock price deviates fundamentally from what we think is intrinsic value, we have the option to return capital to shareholders as well.

Operator, Operator

Your next question comes from the line of Josh Raskin with Nephron Research. Please go ahead.

Josh Raskin, Analyst

Yeah. Thanks. Good morning. So it seems as though other companies in the sector are looking to evolve their business models and take less risk, especially in their initial contracts with providers and plans. I heard one competitor speak to a glide path to risk. Now, it sounded very familiar. So I guess my question is, does that help Privia, as plans and providers are getting more used to this glide path to risk methodology, or do you think that puts competitors on sort of better footing now? And then I just wanted to make sure, did you say you were generating positive contribution margin from your MA risk contract still? And if so, how is that?

Parth Mehrotra, CEO

Yes. I appreciate the question, Josh. So I'll take them in order. On the first one, look, I think we've been very consistent since five years that we've been public that you have to distinguish between the willingness to take risk and the ability to take risk. We've always had the ability to take risk. We do so at the highest level in MSSP as you know. We do capitation in MA with a small book. I don't think providers wake up every day saying they want to do full risk. I think there's a lot of noise in the space by entities that jumped into full risk. And I think it's a misconception that to perform well in value-based care, to perform well in MA, you necessarily need to take full risk. We've always said we perform models where the payer has skin in the game, an entity like Privia that's enabling has skin in the game and the doctors have skin in the game or the medical groups and the risk entities have skin in the game. We share upside and downside, and I think that keeps everybody honest. I just think it doesn't change our position in the marketplace. I can't speak for competitors. I think they've learned a hard lesson. Ultimately, our job is to take as much risk that pays us and pays our medical groups and risk entities by the payers to assume that risk. We're not trying to do venture capital in public markets. You don't need to lose money to do all this good work. If we don't come across a fair contract from a payer that compensates our medical groups for the work they're doing, we're not going to take downside risk. It's pretty much simple. I think the providers appreciate that and actually respect that glide path. So I don't think it changes our position; in fact, I think it validates our approach and makes our position much stronger. Secondly, on the MA book, yes, as you can see from the disclosure on our press release, we made a small gross margin of about 2% on the capitated book. We had renegotiated a couple of contracts at the beginning of last year, much ahead of the curve. The contract that will remain; we were hoping that we'll make money, and we're glad that we performed really well. It was better than expected, and that led to some of the outperformance in the results that you see. That's our hope: if you're taking downside risk, the objective is to do it to make money. It's pretty binary at the end of the day.

Operator, Operator

Your next question comes from the line of Whit Mayo with Leerink Partners. Please go ahead.

Whit Mayo, Analyst

Hey. Thanks. I just wanted to hear more about the factors influencing the flatness this year in Shared Savings. I don't know if this is all just V28, the respectfulness that you have around the utilization cost trend. But are there any other changes with benchmark methodology that's concerning you? And then I'm wondering, in the event that ACO REACH doesn't get extended and sunsets, is this a thing that could be potentially good for you with new groups that may be looking to affiliate with your platform?

Parth Mehrotra, CEO

Yes. Thanks for the question, Whit. Look, I think we've taken a pretty prudent approach over the last couple of years, just given all the factors we outlined, whether it's utilization trends, V28, Star Scores, benefit design changes, and so on and so forth. It's across the book. I think our guidance assumes prudence that we won't grow shared savings meaningfully year-over-year. We were able to do so; we had the same assumption last year and then we outperformed, leading to better than expected results. I think we are adopting the same approach. This guidance does not assume any meaningful step-up in shared savings. If we are wrong, we hope that there's upside and downside as we've consistently seen with our results over the past five years. It's across all the programs. Utilization hurts us if you're taking risk. We've said you got to manage that risk. So I think it's more prudent across the board versus any one particular program from that perspective. To your second question, yes, as you know, CMS obviously allows a risk entity or a tax ID medical group to choose between MSSP or ACO REACH today. We think there will be convergence over time in some of these programs. MSSP has done really well, REACH is in its initial stage. If that sunsets, I just think providers ultimately are managing patients and their spend and would like to get paid for doing that good work irrespective of the program. So ultimately, I think if there's convergence, we'll hopefully tend to benefit or capture some of that volume. We don't do REACH today because we think we performed really well in MSSP. In all our ACOs or states, we've chosen to continue to add attribution in MSSP because we think that's the better outcome to save dollars for the government and taxpayers and perform well for our medical groups and risk entities. If there's convergence, I think it will just validate our position even more.

Operator, Operator

Your next question comes from the line of Jailendra Singh with Truist Securities. Please go ahead.

Jailendra Singh, Analyst

Thank you and good morning, and thanks for taking my questions, and congrats on a good quarter. I wanted to follow up on higher-than-expected EBITDA to cash flow conversion in 2024. You guys called out certain outgoing cash payments. Can you provide a little bit more color there? Is this the reason why you are expecting the conversion at 80%, this year compared to like 90% you expected heading into 2024?

David Mountcastle, CFO

Yes. Thanks for the question. Yes, it's really just sort of the timing of payments and where the liabilities and the cash ended up at the end of the year. I would say next year is really driven more based on the fact that we run out of some of our NOLs, and we're going to have to start paying some taxes next year, and that's really going to decrease the percentage. So might it next year have been a little bit higher than 80% without the great year this year, perhaps. But we feel very confident in our 80% guidance.

Operator, Operator

Your next question comes from the line of A.J. Rice with UBS. Please go ahead.

A.J. Rice, Analyst

Hi everybody. When I look at your guidance, EBITDA, you're expecting with the range of sort of 16% to 22% growth. I know every year, there are puts and takes. I wondered if you would comment on what do you see as some of the key variables that would move you around within that range? And is there anything that's different because you're heading into '25 from what you normally see? And if I could squeeze in a variance on that. Anything in Washington with all the uncertainty, I don't perceive you got a lot of things at risk there. But anything you're looking at that they're discussing that could be an opportunity or a challenge for you?

Parth Mehrotra, CEO

Yes, I appreciate the questions, A.J. On the first one, look, for context, our guidance is very, very narrow. It's a $5 million range that underscores the predictability and the consistency of our model. It's not a big range from a dollar perspective. And then there's nothing new this year; it's pretty much rinse and repeat. The variables are the same. We have a very predictable fee-for-service book. We've sold a lot of the providers that will get implemented already. As you know, there's a five-, six-month lag. The fee-for-service book is extremely predictable. The only source of variability is the value-based book, and that's actual performance versus our accruals. As you've seen from our track record, you can see Slide 7; we've been pretty consistent with our accruals, and we follow the same methodology as I alluded to in the answer to the previous questions. That's going to be the only source, and that's why you have the range. If the value-based book performs better than expected than like last year, hopefully, we'll be at the high end of the range. If not, then we have the range. So that's pretty much underscores that narrow guidance. On your second question, I don't think there's anything specific with our model, supporting community-based physicians. It's the lowest cost of setting in healthcare. The administration in its first term was really supportive of all the programs we are in. We don't expect them to change that. So there's nothing currently that we've heard that impacts our results. If something changes, obviously, we'll let you know. But I think we'll continue to get good support from CMS here for all the programs that we participate in.

Operator, Operator

Your next question comes from the line of Jack Slevin with Jefferies. Please go ahead.

Jack Slevin, Analyst

Hi. Thanks for taking the question and congrats on the really strong print. Pretty simple one for me here. I guess I just want to zero in on the Care Margin guidance and running quick numbers. It looks to me like it's taking in a 6% drop in a sort of simplified view if you just look at Care Margin per average implemented provider, and I know that doesn't take all these moving pieces into account. But maybe just considering that, what are the scenarios you guys think you have to look at to upside the Care Margin and the EBITDA guidance for the full year? Thanks.

Parth Mehrotra, CEO

Yes. Good question, Jack. It's predominantly the flat assumption in value-based care shared savings. That's one factor. The other is the mix between physicians and ABBs and nurse practitioners. That impacts it a little bit given our scale, but not too much. The mix between primary care, pediatrics, obstetrics, and then specialists and then how that flows down into Care Margin from practice collections. So I think overall, we're looking to increase operating leverage down to EBITDA and free cash, and you can see that increasing pretty well. But I think that's mainly driven by the first factor, which is if shared savings assumptions are flat, and as you know, our take rate is 40% on every dollar of shared savings, that is leading to that outcome. Hopefully, we'll get leverage in future years as that improves.

Operator, Operator

Your next question comes from the line of Jeff Garro with Stephens Inc. Please go ahead.

Jeff Garro, Analyst

Yes. Good morning. Thanks for taking the questions. I thought maybe we'd check in on the Care Partners program. I'm just curious how provider interest has trended in that model. Similarly, what is the level of interest in not requiring providers to switch electronic health record systems to join the Privia platform?

Parth Mehrotra, CEO

Yes, I appreciate the question. I think that's progressing well. As you know, we bought Community Medical Group in Connecticut, which was one of the largest IPAs. That's a state where we're starting to implement providers on the same technology stack. A large portion of those are not on the platform yet. I think over time, our hope is we'll migrate as many of our providers onto the same tech stack into our medical groups. But that's a good lever for us to continue to expand, get attribution, perform in value-based care and over time, get providers on the integrated stack. So I think it's performing pretty well as we had expected. It's all embedded in the results. We don't break it out. It's part of the core business. So I think it's gone pretty well as planned.

Operator, Operator

Your next question comes from the line of Matthew Gillmor with KeyBanc. Please go ahead.

Matthew Gillmor, Analyst

Hi. Good morning. Thanks for the question. I wanted to ask about the physician fee schedule. I don't think Congress addressed the cut that started this year at this point. There's obviously a lot of bipartisan support to get that addressed hopefully in the next couple of weeks. I was curious how you were thinking about that from a guidance perspective. Is that even something that's material enough to move anything either way? And if it doesn't get addressed, is that something that actually helps drive additional providers onto the platform?

Parth Mehrotra, CEO

Yes, I appreciate the question, Matt. We've embedded our best estimate into the guidance with whatever puts and takes. I think we have offsetting factors in there, too. It's nothing material that we'd like to call out. If it's better, it's better, I think. Look, our fundamental value proposition does not change with that particular variable. If anything, all of these pressures further validate the need for providers to join a very large integrated medical group risk entity and the value proposition that Privia has to offer. So I think nothing fundamentally changes either way.

Operator, Operator

Your next question comes from the line of Richard Close with Canaccord Genuity. Please go ahead.

Richard Close, Analyst

Yes, congratulations, and thanks for the question. Maybe digging into Washington a little bit more. Specifically, Parth, how do you think about the level of uninsured increasing if subsidies go away and then the potential changes in Medicaid? How does that impact your business? Obviously, it would be more 2026, but just thoughts there.

Parth Mehrotra, CEO

Yes, I appreciate the question, Richard. We don't have a big Medicaid book. We have about 97,000 lives in some value-based programs. Our mix represents the demographics in each state across our 14 states and D.C. It's pretty diversified. Same with the uninsured. We went through the whole Medicaid redetermination. We saw we can capture some of those patients and lives into other parts of the book, whether it's commercial, MA, duals, or the individual exchange. It depends on how it all plays out, what the impact is, and whether patients actually move in a particular direction, and that will be, again, state by state. So, it's tough to predict, but we don't have big exposure to Medicaid or to the uninsured yet.

Operator, Operator

Your next question comes from the line of Ryan Daniels with William Blair. Please go ahead.

Unidentified Analyst, Analyst

Hey, guys. This is Jack Santon on for Ryan. Congrats on the strong year. I know you called out the cash balance where you can use some of that to help enter new markets and build density. But your guide does not include the new market entries. Is there any one area that you're targeting more or that you should see more growth from, whether it is entering new markets versus same-market growth? Just kind of curious what your mindset is kind of parsing out the difference there. Thanks.

Parth Mehrotra, CEO

Yes. Thanks, Jack. Look, I think all the sales and marketing expenses for existing markets are fully expensed in the P&L. You're seeing the power of the platform in that we can continue to grow organically in existing states pretty well without deploying capital. In existing states where we could use capital is to double down or increase density, if there are opportunities that arise, and that's very value accretive because we already have an infrastructure. A lot of capital, predominantly for business development, is getting into new states, which we've consistently done over the past. If we deploy significant capital, they'll come with incremental collections, care margin, EBITDA; some will flow this year, some will flow next year. We'll see when we can get those deals done. If that happens, we'll update guidance. This guidance does not include any impact.

Operator, Operator

Your next question comes from the line of Matthew Shea with Needham. Please go ahead.

Matt Shea, Analyst

Hey. Thanks for taking the questions and congrats on a strong close to the year. I guess kind of as a follow-up to the last question, it was great to hear earlier this year that 70% of the new provider pipeline is coming from referrals pushing down tax and payback periods. So now that referrals have reached this level, is this changing your philosophy at all in new market expansion versus stepping on the gas to grow more in existing markets? And as a follow-up, as we think about new markets like Indiana, how long does it take for the referral flywheel to get going?

Parth Mehrotra, CEO

Yes, I appreciate the question, Matt. On the first one, look, we're going to be aggressive everywhere, existing states, new states, given the business model is very proven. The unit economics are really proven. We know what to do and how to do it. We have the capital. You'll see us pursue both. We're going to step on the gas in every way to continue the flywheel. Each market evolves, so those conversion rates are in the most mature markets, as you would expect. Some of the new markets take time to develop. I think we can have referrals across markets to bigger groups join us as they hear about the success story of their colleagues in other states. We're pursuing all aspects, all levers to continue to grow and scale the business. We're continuing to grow, grow EBITDA, and grow free cash all the way down the P&L. I think that's just reflective of how this is playing out, and we're proud of the accomplishment.

Operator, Operator

Your next question comes from the line of Ryan Langston with TD Cowen. Please go ahead.

Ryan Langston, Analyst

Thanks. Good morning. In the 2025 guidance, providers are expected to grow around 10%, but lives around 7.5% year-over-year, despite the strong 2024 provider pickup. For 2024, the lives growth was over the provider growth. I guess I'm wondering if that's an expectation of a slower ramp-up of lives once you get those providers onboarded or anything else going on there. Thanks.

Parth Mehrotra, CEO

Yes. I appreciate the question. I mean it's a wider range this year, from 1.3 million to 1.4 million lives. At the high end, it's 11.5% growth. We'll see how it plays out. It's a law of large numbers that's playing out. The numbers reflected were at the midpoint. It's influenced by us building multi-specialty groups. Primary care to specialty mix influences that a little bit, as the attribution predominantly happens with PCPs. It’s also influenced by other specializations and could lead to variation. But I think it's a broader range, so we'll see how it plays out. It's usually pretty consistent growth.

Operator, Operator

Your next question comes from the line of David Larsen with BTIG. Please go ahead.

David Larsen, Analyst

Hi, congrats on the good quarter and the great year. Did I hear you say there's no new market entry costs in the guide for 2025? And why not? You usually enter a couple of markets, you get a bunch of cash on the balance sheet. And also, did I hear you say that the gross margin for cap revenue is 2%? It's great that it's positive, but that still sounds kind of low, right? I would assume a negative EBITDA margin if the gross margin is 2%. Why not exit those contracts?

Parth Mehrotra, CEO

Yes. Thanks, David. So on the first one, yes, to correct, the guidance assumes no incremental new markets. We've obviously entered a few new markets over the last couple of years. Those are still we are investing in those; as we noted in our prepared remarks, all of those costs are fully embedded in the guidance. If you refer to Page 10 of the press release, you can see we break out the capitated revenue and then the total claims incurred. We've generated a positive contribution margin in that book; that's what we were alluding to.

Operator, Operator

Your next question comes from the line of Adam Ron with Bank of America. Please go ahead.

Adam Ron, Analyst

Hey, thanks for the question. I'd like to unpack more of the shared savings commentary you gave, particularly on MSSP. You mentioned in 2024, you had initially expected minimal accrual increases for shared savings, but then it ended up coming in better. So first, was that more so on the 2023 true-up? Or was that based on what you're accruing for 2024? And it would be helpful if you could share somewhat directionally what you're seeing on trend for MSSP in 2024 and how that compares to what people are saying and ACO REACH is like a high single-digit trend? And if that continues in 2025, what are you assuming for that?

Parth Mehrotra, CEO

Yes, I appreciate the question. We don't obviously give guidance by year and by accrual versus actual. But in general, it's a combination of both. In every year, we are truing up accruals versus actual performance for the previous year. As the results come in, we adjust our accruals in the current year based on the data we see, and that's fundamental to the question you asked. Our methodology is the same. Our assumptions are the same: we want to be very prudent with the trends we witness. If we are wrong, we hope there’s positive upside versus negative downside, that's how we look when we guide. I think the outperformance was again a mix of 2023 versus 2024: some prior period stuff balance it out. It’s a pretty dynamic exercise, and we’re continuing to see good results. Our healthcare economics and data analytics teams does a fantastic job with a large book; we've been consistent with our results for the last seven years. We’ll keep following the same approach and see how it plays out. The diversification of the book really helps us mitigate puts and takes in specific states or programs.

Operator, Operator

Your next question comes from the line of Michael Ha with Baird. Please go ahead.

Michael Ha, Analyst

Thank you. I just wanted to follow up on that last question. On MSSP, CMS published their prospective trend for 2023 to 2024. I know everyone is saying it's significantly below emerging trend, but you sound very confident based on what you're seeing internally. Does that mean what they published for the ACPT is in line with what you're actually seeing for your own ACOs? And how does that impact your 2024 performance accruals? Is there any potential go-forward risk if rates do remain understated versus trend?

Parth Mehrotra, CEO

Yes. It's important to recognize the ACPT impact is on newer ACOs, not older ACOs. We have been in the program for 10 years, and I think we just have a methodology that we follow. We look at the blended book, embed data in the guidance, and hope we are right. The track record from a market perspective is great, and I think we will continue performing better over time.

Operator, Operator

Your next question comes from the line of Constantine Davides with Citizens JMP. Please go ahead.

Constantine Davides, Analyst

Thanks. Parth, there's a number of competing medical group strategies out there in the marketplace that just haven't been as successful as yours. How much is technology a differentiator enabler for you in supporting your growth in terms of just leveraging the athena backbone, and I'm assuming now being one of their largest partners, in terms of driving your ability to scale quickly, but efficiently at this pace across, as you mentioned, a pretty diverse set of providers, states, payers, etc.

Parth Mehrotra, CEO

Yes. It's a great question, but it's much broader than just the tech stack. We've said this for five years since we went public. Not too many entities create integrated medical groups, risk entities, and a full tech and services platform altogether in one shop. Having providers join an integrated medical group on the same platform with a governance structure where we are deeply embedded in the workflows, from a technology standpoint, is unique. It allows us to influence performance. I think it's all those factors that we have fundamentally built into our business model in a thoughtful manner from day one, and you're seeing the fruits of that in empirical results over seven years. A lot of companies went public; there are many private companies that got funded. It's easy to take risk for a few lives and support practices lightly. Our method of deeper investment and performance management is proven.

Operator, Operator

Your next question comes from the line of Daniel Grosslight with Citi. Please go ahead.

Daniel Grosslight, Analyst

Hi, thanks for taking the question. On your capitated book for 2025, are you still assuming around a 2% contribution margin? Or should we expect some improvement there? As we think about capitation, booked cap in 2026 and beyond, it does seem like rates the event rate was good and maybe some room for improving that going to final. It seems like bids have been a bit more rational this year. How are you thinking about capitation also in 2026 and beyond?

Parth Mehrotra, CEO

Yes, I appreciate the question. We don’t break out guidance for any specific program. As we've consistently said, we’re looking for positive contribution margins. It’s tough to predict whether it will be the same repeat this year. We’re going to be prudent in that book, as the environment continues to be challenging. We'll see how it plays out; if we're in it, we hope we'll make money. Our preference is to share risk with the payer across all aspects of the book and take as much risk that pays us and our medical groups. If contracts don't offer fair compensation, we're not going to take the downside risk. It’s a binary outcome at the end of the day.

Operator, Operator

Your next question comes from the line of Jessica Tassan with Piper Sandler. Please go ahead.

Jessica Tassan, Analyst

Hi guys. Thanks for taking the question. This is maybe for David. Can you just help us understand why the 4Q upside to the high end of the implied platform contribution guide? Did it see more of a kind of complete flow through to adjusted EBITDA upside in 4Q? Were there any one-time items in OpEx? And I guess, just why wouldn't the platform contribution upside be really high incremental margin and drop straight through to the EBITDA?

David Mountcastle, CFO

Thanks, Jess. It's relatively complicated. What you’re asking is why is the EBITDA increasing greater than contribution margin? If that's the case, it's due to how our sales costs and G&A costs run through for the year. Both of them were positively or negatively impacted depending on how we did for the year. So I don't know if I 100% answered your question, you asked a lot in there. But if not, we can follow up after.

Parth Mehrotra, CEO

Yeah, Jess, we had a great sales year. The sales cost in Q4 were higher as we true up commissions. The company did pretty well, so some of the bonus accruals were higher than originally anticipated. That all just gets factored into EBITDA versus platform contribution.

Operator, Operator

Your next question comes from the line of Tao Qiu with Macquarie. Please go ahead.

Tao Qiu, Analyst

Hey, thank you. Just to continue on the point about your willingness to take risk. Looking back in 2024, you renegotiated some MA contracts and your BBC share of total collection came down 7% versus the previous year. Parth, I think you mentioned the BBC environment remains challenging, and MSSP is expected to be flat. Any changes contemplated to any of the risk MA contracts you have today? Should we expect the mix shift to further decline towards FFS? If so, it will be helpful to size that any potential decline in mix, active or passive. Thank you.

Parth Mehrotra, CEO

Yeah, I appreciate the question. We don't anticipate any changes. We renegotiated whatever we had to at the beginning of last year. We are continuing with the capitated book we have. It’s a small piece of the business, and we're solving for positive contribution margin. When going from full risk to partial risk, it influences revenue recognition. The doctors and lives don’t go anywhere, and our ability to manage those lives doesn’t change. But we still prioritize positive contribution margins, EBITDA, and free cash flow.

Operator, Operator

Your last question comes from the line of Craig Jones with Stifel. Please go ahead.

Craig Jones, Analyst

Thanks, guys. I don't have too many questions here. I wanted to hit on free cash flow conversion. You've been over 100% for the last handful of years here. You're guiding to 80%, I think, through a combination of working capital maybe and then starting to pay cash taxes. As you look at a more normalized year, where your full cash tax and let's just say, no working capital, where does that conversion kind of shake out? Thanks.

David Mountcastle, CFO

Yes. It's going to shake out close to 80%. As we run out of our NOLs, it's probably going to come out a little lower than that. If we don't take into account any working capital adjustments, I'd probably say in the 70% to 80% range is sort of a final resting place assuming the working capital adjustments.

Operator, Operator

We do not have any more questions at this time. Gentlemen, you may continue.

Parth Mehrotra, CEO

Thank you all for listening to our call today. We appreciate your continued interest and support of Privia and look forward to speaking with you again in the near future.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.