agilon health, inc. (NYSE:AGL) Q4 2023 Earnings Call Transcript

agilon health, inc. (NYSE:AGL) Q4 2023 Earnings Call Transcript February 27, 2024

agilon health, inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $-0.28. AGL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. I would like to welcome you all to the agilon health Fourth Quarter 2023 Earnings Conference Call. My name is Brika, and I will be your moderator for today. All lines are on mute for the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Matt Gillmor, Vice President of Investor Relations, to begin. So Matt, please go ahead.

Matt Gillmor: Thank you, operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I’d like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note, that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. Please note that Steve and Tim will be referencing a slide deck posted to our Investor Relations website during their prepared remarks. And with that, let me turn things over to Steve.

Steve Sell: Thanks, Matt. Good afternoon and thank you for joining us. On today’s call, I would like to walk you through the following elements. Our final results for Q4 2023; our updated guidance for 2024; an update on our member and market unit economics; a progress update on our 2024 performance action plan; and finally, our growth outlook for the Class of 2025. Before I get into the quarter, let me provide some context. agilon and the Medicare Advantage industry are navigating through a complex transition period, and we are taking significant steps to help mitigate the impact of this evolving environment on our business, including strengthening our reserves as well as focusing on the targeted actions we outlined in early January.

While the near term dynamics are negatively affecting our financial results, demand for our platform has never been stronger. As we continue to deliver significant value to patients, payers and our PCP partners. The underlying fundamentals of our business model remain intact, reflected in member economics, member growth, quality outcomes and physician NPS scores, and we are well positioned to accelerate performance over the medium and long-term. Let’s now turn to the quarter. Our medical margins for the fourth quarter in 2023 were $51 million below the midpoint of the guidance range we provided in early January. This was driven by $38 million from costs and revenue attributable to the fourth quarter and $13 million of development attributable to previous periods.

Relative to our guidance from January, the higher costs in our final ‘23 results were driven by two factors. First, as we completed our financial closing process in February, we received updated data, including relatively complete claims data from our largest payers, as well as additional information such as seasonality factors and census data. Completed our analysis of this data in mid-February, which indicated that medical costs for our members were higher than our previous estimate for 2023. Second, in light of this new information and the dynamic utilization environment, we have strengthened our reserves as we close 2023. Our team developed a range of reserve scenarios and we reserved at the high end of our estimates. The completion factor assumptions used in our 2023 close are significantly lower compared to the actual completion factors from 2022.

We believe this is a prudent approach given the environment and expect to carry this forward. Turning to the ‘24 guide, we have also lowered our 2024 medical margin guidance by $155 million to $425 million at the midpoint and lowered our ‘24 adjusted EBITDA guidance by $87 million to negative $38 million at the midpoint. Our updated guidance assumes the $38 million medical margin shortfall attributed to the fourth quarter ‘23 is not seasonal and will persist into 2024. It should be noted that our revised guidance assumes a gross cost trend of 7.9% less the impact of our strategic action items and a net cost trend of approximately 6.6% in 2024. This is 250 basis points above our prior ‘24 expectation and on top of the 7% medical cost trend we observed in 2023.

Despite our higher utilization assumption, we expect to grow our medical margin by 40% in 2024 and drive meaningful gains in adjusted EBITDA. As I noted before, agilon and the Medicare Advantage industry are navigating a challenging transition period during 2023 and 2024. Healthcare costs among the senior population are rising faster than contemplated in CMS benchmarks and planned bids, which may be driven by post-COVID pent-up demand. We do think it’s important to recognize a few things. First, Medicare Advantage has a relatively short repricing cycle and the program is designed to adjust to changes in utilization. Over the next 12 to 24 months, we expect CMS benchmarks will reset to reflect the rise in utilization, and many of our health plan partners will adjust bids and benefits to recapture margins.

We expect this repricing cycle will benefit our financial performance in future periods. Second, we have a strong balance sheet with approximately $500 million in cash and short-term investments. Even with the further moderation in our 2023 performance and 2024 outlook, we have significant resources to support our growth and ongoing actions to drive performance. Now to a refreshed view on the unit economics of our business, as outlined in the slide presentation on our Investor Relations website. For this commentary, I’ll be referencing Slides 9 through 13 of the deck. As we have consistently shared, our business model is driven by member growth and the ongoing maturation of member and market cohorts. While the macro environment has clearly impacted our overall unit economics in 2023, there are some very important takeaways from the data.

First, as we show you on Page 10, despite the negative 2023 utilization environment, our members that came on the platform from 2018 to 2020 are sustaining medical margin performance at attractive levels of roughly $150 per member per month. In our 2021 and 2022 member cohorts are showing positive margin progression. By comparison, our 2023 member cohort, representing approximately one-third of our membership, shows the impact of higher utilization and starts off at $25 per member per month. Second, as we show you on Page 11, while we have repeatedly talked about our member and PCP growth and its impact on margin progression, we are separating out the impact of compounded mid-to-upper teens same-store growth on the performance of our market cohorts.

What the data shows, is that our three earliest market classes, with annual growth rates of 12% to 24%, have seen between a $36 to $86 per member per month reduction in medical margin due to new member dilution. This is not dissimilar from the impact that new markets have on the platform as they also take time to mature as risk adjustment and our medical cost management levers improve. Said differently, our strong same-store growth has created an embedded opportunity in our earliest markets to focus on new doctors and their senior patients to drive performance of those markets. This data aligns well with our ‘24 performance action plan as it is fully within our control. Finally, our growth algorithm of growing markets, growing members and growing medical margins remains intact, albeit with a more measured and narrowed focus given the macro environment and its impact on our results.

Pivoting to our performance action plan that we discussed with you in early January. We continue to make progress against our plan, which will position us to accelerate our path to profitability and cash flow generation. As a reminder, our plan includes the following four elements, one, expanding support for primary care doctors joining the platform in mature markets. Two, leveraging our strong payer relationships. Three, addressing our data visibility gaps. And four, boosting our operating efficiency. Today, I wanted to provide you a brief update on our progress. Let’s start with PCP, onboarding and education. As a reminder, we provide structured training to primary care doctors during our implementation process with new groups, but we historically have not provided the same training to new physicians joining veteran practices.

As outlined in our newly released cohort data, the strong same-store growth with doctors joined the platform in our earliest markets has created variation in these new physicians understanding and performance in our partnerships. We are on track to deploy this training to 90% of the doctors in our targeted mature markets during the first half of 2024. We expect these efforts will improve our BOI performance and clinical program enrollment in the back half of the year, supporting our financial performance in 2025 and beyond. Next, payer strategy. We have been encouraged with the dialogue and level of engagement with our payer partners in recent weeks. As many of you know, we partner with the leading physician groups that typically represent 20% to 30% of the independent primary care capacity within each local community.

Payers rely on our partners to offer a comprehensive network and benefit and our consistent track record of quality and cost performance. From a visibility standpoint, we are now receiving detailed data for supplemental benefits from most of our large national and regional payers. We believe this will enable agilon to understand and better forecast these costs, which was a source of volatility in 2023. Additionally, we have been able to negotiate targeted changes in our percentage of premium rates in key markets. This reflects that payers want to partner effectively with agilon and our groups over the long-term. We expect to make continued progress, deepening our engagement with payers during ‘24 and for 2025. For data visibility, this month, we began onboarding data from our largest payer into our new financial data pipeline and we will begin ingesting data from other large payers over the next several months.

We expect to onboard data for over 55% of our membership during the first quarter and 75% of our membership during the second quarter. This data pipeline will enable our internal teams to process and analyze payer data faster and with much more detail, which will improve our forecasting and operations. We are also expanding the use of the Minerva platform we acquired in 2023 to support clinical program enrollment and we will better leverage HIE and ADT data to impact transitions of care. Final area of focus is operating efficiency. We have taken targeted actions to reduce our platform support to 3% of revenue in 2024. Additionally, we have reduced our geographic entry costs by $10 million in our updated 2024 guidance to reflect a measured approach to our growth.

Now, let’s turn to growth with the Class of 2025. Given the current environment, we are taking a measured approach to our growth. This is reflected in the quality of groups we are bringing on the platform and the longer implementation cycle we have been able to achieve in recent years. I’m pleased to share that the Class of 2025 new partners will include at least five groups with more than 60,000 new MA members. This will expand our network to include 36 physician groups and 3,000 primary care doctors. And as I mentioned, we have lowered our geographic entry costs to a range of $55 to $65 million, which is down from our prior ‘24 estimate of approximately $70 million. It’s important to note, that this lower range still contemplates the potential for additional senior patients in the Class of ‘25 to come on the platform or for incremental onboarding costs associated with the Class of ‘26.

In closing, I want to offer three important takeaways. First, agilon is navigating through a transition period for our company and the Medicare Advantage industry. Medical costs are temporarily outpacing revenue benchmarks during 2023 and 2024. agilon and the industry, including CMS and our health plan partners, will adjust to this new environment, supporting our ability to return to a more normalized margin trajectory over time. Second, we are taking significant actions to improve our performance against this dynamic environment. From a forecasting perspective, this is reflected in the significant strengthening of our reserves, exiting 2023 and our reset guidance for ‘24 that assumes recent utilization remains elevated. From an operating perspective, we are executing against the action plan we have outlined, with a focus on best-in-class execution on factors we can directly control.

Third, and finally, our business model is working. Demand for our platform has never been stronger and we are delivering significant value to patients, payers and our PCP partners even in a difficult environment. This is reflected in the updated member cohort information we have shared, which is translating into significant economics to our PCP partners, reinvestment into local primary care and our ability to drive consistent improvement in quality measures across our network. We remain confident in the strength of our platform and physician network, as well as the long-term opportunity for agilon. With that, let me turn the call over to Tim for his comments.

Tim Bensley: Thanks, Steve and good afternoon. I’ll cover two items before we go into Q&A. First, additional details on our 2024 guidance. Second, balance sheet and cash flow expectations. I’ll reference several of the slides during my comments. Starting with guidance details. You can see our updated projections for 2024 medical margin on Slide 5 of the presentation. We now expect our medical margins to be in the range of $400 million to $450 million in 2024, which compares to our prior guidance midpoint of $580 million. The primary drivers of the change includes, first, the lower starting point in 2023 medical margins which Steve addressed. Second, our assumption that higher costs from 2023 will carry forward into 2024, including a reduced outlook for the Class of 2024.

Third, a partial offset from higher revenue associated with stronger performance in our Burden of Illness documentation efforts as we close 2023. We are now assuming a cost trend of 6.6% for 2024, which is 250 basis points over our previous 4.1% assumption. I wanted to note that these are net all-in trends after the impact from our clinical programs. Our gross trend assumption for 2024 excluding these programs is now 7.9% compared to 5.3% previously, and it’s in line with the trend we observed in the fourth quarter 2023. On Slide 6, I wanted to call out some of the adjusted EBITDA dynamics that impacted our 2023 results and how those dynamics work in 2024. During 2023, the relatively modest growth we generated in medical margins of $8 million created negative leverage to our consolidated adjusted EBITDA.

This was due to the prior year development we recorded in 2023, which lowered our medical margin. Additionally, we had a handful of markets in an EBITDA loss position, including several markets from the Class of 2023. Because of this, we had higher operating expense growth relative to medical margin growth. For 2024, we expect this dynamic will reverse, with medical margin growth driving more flow through to adjusted EBITDA. One key dynamic is that we expect the Class of 2024 will be profitable from a market EBITDA perspective and we don’t expect prior year development to recur. From a balance sheet perspective, as Steve mentioned, we have approximately $500 million of cash and investments and minimal debt. Our available cash and investments include $495 million that is consolidated on our balance sheet and another $21 million of off balance sheet cash associated with our ACO REACH entities.

Based on our updated guidance, we expect to use $125 million to $150 million of cash during 2024. For reference, our cash flow realization is offset from our medical margin and adjusted EBITDA performance by about 12 months because of the timing of our settlements with payers. Based on this, our 2024 guidance would result in 2025 use of cash of about $25 million with an expectation of positive cash flow in 2026 and beyond. With that, operator, we are ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] We have the first question from the phone lines, Lisa Gill of JP Morgan. Your line is open, Lisa.

Lisa Gill: Tell your overall views on when we think about utilization trends, it seemed that in some of your comments that maybe you think some of this is pent-up demand or is this the new normal and you feel that ultimately CMS and the health plans will adjust to this new normal when we think about bids? So that would be my first question. I just want to understand how you’re looking at the current environment as to whether you think this is the new normal or you think there’s some level of pent-up demand.

Steve Sell: Lisa, thanks for the question. I guess I’d start by saying I think we’re operating in a very dynamic utilization environment and what we’ve communicated today sort of tries to demonstrate the respect for that environment. We obviously have seen an acceleration in trend in Q4, stepping up to a Q4 trend level of 7.7%. Our assumption into ‘24 is that utilization continues at that level. And so, we see it persisting. And looking at the data that Tim talked about, we didn’t see a tremendous set of seasonality within that, but concluded that this will persist. And that’s been reflected within our guidance for 2024. We do expect, as we said, that benchmarks will catch up with this. We’ll see what the final notice looks like when we get that later in Q2.

And we have been encouraged, as we’ve talked with some of our plan partners about their plans for 2025 in terms of their bids and specifically that they will be focused on bidding for margin. And that’s obviously material as it flows through to us. So, our belief is that it is ongoing and it’s going to be at this elevated level at least through 2024.

Lisa Gill: And then if I just think of some of the elements in the ‘24 guidance, I just want to better understand the impact of v28, the two midnight rule, and then the comments that you made around supplemental benefits. So, is the comment around supplemental benefits that you have less risk around some of the supplemental benefits based on negotiations with managed care? And if you can just help me to understand those three, that’d be great. Thanks.

Steve Sell: Sure. Our revenue guidance for the year includes the impact of v28, which has that rough 2% impact we’ve talked about, offset by our actions and the other elements in revenue. The two midnight rule is factored into our in-patient assumption in ‘24 and is part of that trend that Tim and I laid out for you in 2024. And then supplemental benefits, as we look at the relative change from ‘23 to ‘24 across the mix of our payers, we do not see nearly as great an escalation as we saw ‘23 over ‘22. And our payer conversations right now are focused on our ability to mitigate those things we can’t control, like supplemental benefits, whether that’s through a carve out, whether that’s through a corridor or capping that. So it’s a combination of those things, Lisa. Tim, anything you’d add to that?

Tim Bensley: I think that’s right. Right on. And by the way so –

Lisa Gill: Great.

Tim Bensley: We are – yeah, go ahead.

Lisa Gill: No, no, you go ahead. I just denoted, that’s great. Go ahead –

Tim Bensley: No, I was just going to say, just to tag on, just to quantify the supplemental benefit issue. We do expect to be like a slight headwind in 2024 with 20 basis points or so, but that’s coming off a very big headwind that we had in 2023 so.

Lisa Gill: Okay, appreciate the comments.

Operator: Thank you. We now have the next question from Justin Lake of Wolfe Research. You may proceed with your question.

Justin Lake: Thanks. Wanted to first kind of go through this bridge that you laid out for us today versus the January 5th, specifically on the medical cost side. So you have $250 million a year of medical cost PMPM kind of headwind versus $141 million before. So you had $38 million of incremental new costs in the fourth quarter, is the way to think about it? And did you just multiply that by another three quarters to annualize it, to kind of drive that delta? Is that what I’m looking at here [inaudible]?

Tim Bensley: Yeah, that’s a great question. And I think the change of $38 million is total medical margin. We had a little bit of incremental revenue. I think the full change. So the way we look at it is, we essentially went into the fourth quarter looking at all the things that Steve just went through and how we essentially have been refining our process and making sure that we get to a number that we feel we’re going to be adequately reserved for the end of the year. We actually added $68 million of medical expense to our final close versus what we were guiding to in early January. Of that $68 million, about $13 million of it, is actually for some incremental membership that we realized. So we’ve added about $55 million of actual cost to our reserves.

To get to your point, and I think you are pretty close to the number. In the fourth quarter, we added about $40 million of that $55 million with the other $15 million in the previous quarters. That $40 million incremental – that total incremental with the $40 million going into the fourth quarter leaves us with a trend on base medical expense that is accelerating in the fourth quarter. And Steve talked about some of these numbers. Our full year base medical trend, so without supplemental benefits, is 7% now for 2023 for the full year, the fourth quarter accelerated to about 7.7% for the full year. We’ve taken that 7.7% base medical expense and essentially assumed that slightly higher than that for our full year 2024. So essentially, yes, we’ve taken that fourth quarter step up and flowed that through into 2024 guide.