Astrana Health Inc.

Good day, everyone, and welcome to today's Astronis Health fourth quarter and full year 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session, and instructions will be provided at that time. Today's speakers will be Brandon Simp, President and Chief Executive Officer of Astronis Health, and Chan Basso, Chief Operating and Financial Officer. The press release announcing Astronis Health Results for the fourth quarter and full year ended December 31st, 2024 is available at the investor section of the company's website at www.astronahealth.com. The company will discuss certain non-GAAP measures during this call. Reconciliations to the most comparable GAAP measures are included in the press release. To provide some additional background on its results, the company has made a supplemental deck available on its website. A replay of this broadcast will also be made available at Astronis Health's website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements, within the meaning of the safe harbor provision of the Private Security Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook, and will. and include, among other things, statements regarding the company's guidance for the year ending December 31, 2025. Continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, operational focus, strategic growth plans, and acquisition integration efforts. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, Those statements are subject to risk and uncertainties that could cause the actual results to differ materially from those projected. There can be no assurance that those expectations will provide to be correct. Information about the risk associated with the investing in Astronis Health is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market condition, or otherwise except as required by law. Regarding the disclaimer language, I would also like you to refer to slide two of the conference call presentation for further information. With that, I'll turn the call over to Astronauts Health President and Chief Executive Officer, Brandon Sin. Please go ahead, Brandon.

Good afternoon, and thank you all for joining us today. Our fourth quarter and full year results reinforced the strong momentum we continue to build as we scale the nation's leading patient-centered, pair-agnostic healthcare platform. We are proud of what Astrana has accomplished this year, advancing our mission to deliver high-quality, high-value, and accessible care to communities nationwide. In 2024, we expanded our footprint significantly while delivering strong financial performance across both the top and bottom lines. Our ability to execute and sustain rapid growth, even amid a complex macroeconomic environment, challenging reimbursement dynamics, and shifting utilization trends, underscores the strength of our model and the discipline of our execution. Our success is built on the consistent execution of the four key pillars in the Astrana playbook, quarter after quarter. First, we are sustainably growing our membership and patient-served. expanding access to high-quality care for more Americans. Second, we are deepening our alignment with patient outcomes through responsible risk progression in our value-based contracts. Third, we are delivering excellent patient outcomes and improving care quality while effectively managing costs. And fourth, we are driving operational excellence across our organization through our proprietary care enablement platform. To bring our playbook to life, I'll begin by sharing a recent patient story. Then I'll highlight some of our financial results for the year, which reflect our success in executing on these four strategic pillars. After that, I'll provide a review of our progress and provide key business updates before handing the call to Chan, who will go into more detail on our financial performance and guidance outlook. While today's call is focused on our financial performance, The true heart and soul of our business, what drives everything that we do is the impact that we have on the lives of our patients. So with that in mind, I'd like to share an anonymized patient vignette, one of many, which illustrates the meaningful difference our technology-enabled care model is making for our members each and every day. Recently, one of our dual eligible members, Amy, was identified as a patient requiring highly personalized support by the risk stratification model we built in our homegrown care management tool named Pathways. This determination was made due to the complex set of health challenges that Amy faces, including COPD, diabetes, hypertension, high cholesterol, and serious mental illness. To make things worse, upon checking in with her, our care management team discovered that previously unreported cataracts were significantly impacting her daily life. and that the patient did not want to seek surgery due to her fear of anesthesia. Our team stepped in with a personalized and holistic care plan created in Pathways, which addressed not only Amy's physical and mental health needs, but also tackled food insecurity and aimed to ease her anxiety about the cataract procedure. Pathways also helped the care team coordinate with our team of community health workers who kept her engaged, connected her to essential community resources, and even explored the possibility of her utilizing a service animal to help address her anxiety. Our utilization and care management teams worked closely with specialists in our care partners network to coordinate her cataract surgery in a comfortable outpatient setting, a key advantage of our fully integrated delegated care model. They also worked to make sure that she could afford her medications, take them as prescribed, and adhere to the appropriate treatment plan. Amy's heartfelt words to our team, I can see again, serve as a powerful reminder of the impact of our model, allowing her to live in independence going forward. Amy's story is one of many that showcase how closing gaps and driving coordination in our complex healthcare system isn't just a moral imperative. It also creates meaningful business value as we make investments in our patients' health today that prevent costly and unnecessary inpatient utilization later in their lives. I'll now segue into covering key highlights of our financial performance in 2024. In the fourth quarter, we delivered total revenue of $665.2 million, an 88.4% increase over the prior year period, and adjusted EBITDA of 35 million, reflecting 20.8% growth year over year. For the full year of 2024, Astrana generated $2.03 billion of total revenue, a 47% increase from the prior year, while adjusted EBITDA reached $170.4 million, up 16.2% year-over-year. Growth was driven primarily by our care partners segment, which grew 52% year-over-year to $1.95 billion. These strong results were achieved even as we made significant strategic investments in our growth initiatives and integration capabilities, which caused an approximately $13 million drag to earnings. With that, let's take a deeper dive into the four pillars of the Astrana playbook. We continue to make significant headway in our first pillar, sustainable membership growth. In 2024, we saw 55% membership growth in our care partner segment, driven primarily by the conversion of CFC from our care enablement client business to our care partners business, the acquisition of CHS, and our organic growth efforts. We also made significant progress in the second pillar of our strategy, responsible risk progression in our value-based contracts. By the end of 2024, approximately 73% of our total capitation revenue came from full risk arrangements. We anticipate this percentage will continue to grow year over year in the short to medium term. We have taken a disciplined approach to inpatient care management as we transition more of our membership from shared risk to full risk arrangements. As a result, inpatient utilization in our full risk business has remained flat to slightly down on a mix and seasonality adjusted basis, reflecting our disciplined approach to care coordination and cost management. Turning to the third pillar, we remain focused on driving quality and patient outcomes while managing cost trends. We are proud of the meaningful work we have done in improving care quality across our membership. In 2024, approximately three quarters of our senior members received an annual wellness visit. Based on the insights from these visits, patients were proactively referred into the appropriate care management and disease management programs supported by our clinical teams and care partners network to help manage chronic conditions more effectively, as in Amy's story earlier. We continue to leverage our care platform to increase gap closures across our membership, yielding improvements in closure rates and star ratings across key metrics, including but not limited to blood pressure control and hemoglobin A1C. And further underscoring our commitment to quality, eight of Astrana's affiliate provider groups were recognized with the highest elite five-star status in all categories in the 2024 Standards of Excellence Survey by America's physician groups. Moving on to medical cost trend. Like the rest of the industry, we experienced some utilization headwinds in 2024, but were able to mitigate much of their impact. In aggregate, across all lines of business, we ended 2024 with a 5.3% utilization trend, approximately half the national blended average trend across Medicare, Medicaid, and commercial. We avoided double-digit expense trends in all of our lines of business, maintaining a low single-digit trend in Medicare, a mid single-digit trend in commercial, and a high single-digit trend in Medicaid. These results reflect our continued commitment to providing members with high-quality care while leveraging technology-driven care management, disease management, and care coordination programs that now serve over a million members nationwide. Closing with our fourth pillar, we continue to expand our proprietary care enablement platform to better serve physicians and providers while driving operational excellence across the organization. Late last year, we began a care enablement partnership with Provider Health Link, or PHL, a provider network in Georgia. We will support PHL in serving approximately 10,000 Medicare Advantage members, and we expect the group to be successfully onboarded onto our platform in the first half of 2025. We have made significant investments in automation and AI-driven enhancements within our platform to improve efficiency and scalability. We plan to continue these investments in 2025 as we position ourselves for sustained growth and M&A integration activity. We anticipate realizing approximately $10 million in operational efficiencies from these investments by early 2026. I'll conclude my prepared remarks by highlighting our recent organic growth in M&A activity, which took place against the backdrop of a more cautious approach from many of our peers. While we were relatively less aggressive in M&A activity during 2022 and 2023, we shifted to a more strategic and assertive approach in 2024 for several key reasons. First, based on our analysis of publicly available data, our expectations for Medicare Advantage rates were more favorable than the industry average. And early indications from the 2026 Medicare Advantage advanced rate notice suggest that outlook is materializing. Second, due to our longstanding care model and disciplined execution, we believed we were less exposed to sector-wide headwinds, such as risk adjustment changes and utilization trends. This positioned us to scale rapidly given our uniquely profitable financial profile. Finally, our proprietary and flexible technology platform allows us to scale and integrate large-scale acquisitions more efficiently. After carefully evaluating hundreds of deals over the past several years, we announced two acquisitions that we believe are most strategically aligned with Estrana's mission. First, we announced Collaborative Health Systems, or CHS. We anticipate integration for CHS will be substantially completed by Q2 of 2025. In the fourth quarter of 2024, CHS delivered approximately $170 million of revenue, aligning with our expectations. Looking ahead, we expect CHS to contribute approximately $350 to $400 million of revenue for the full year of 2025 and approach break even late in the year with profitability coming in 2026. We also announced our plans to acquire Prospect Health, a move that aligns strategically and operationally with Estrada. With over three decades of experience serving communities in Southern California, Prospect operates a payer agnostic line of business agnostic risk bearing business just like our care partner's business. Importantly, Prospect's delegated operational model aligns very closely with our own, presenting a compelling opportunity to drive operating leverage through our technology platform. We also see significant potential to enhance care quality and access, particularly in California, where Prospect's network is highly complimentary to ours, especially in Orange County, which is geographically adjacent to our Los Angeles headquarters. Tom will provide more detailed updates on Prospect later in this call. In closing, we are proud of the impact we've made and our disciplined execution against our playbook throughout 2024. We remain excited about the opportunities ahead, and we look forward to continuing to drive long-term value for patients, physicians, payers, and shareholders. With that, I'll hand it over to Chan.

Thank you, Brandon. And thanks everyone for joining us today. I'll dive into our 2024 financials in more detail. We delivered another year of strong performance, generating $2.03 billion in total revenue for 2024, an increase of 47% from $1.39 billion reported in 2023. This growth was fueled by gains across all three of our core business segments. Collectively, adjusted EBITDA reached $170.4 million, reflecting a 16.2% rise from $146.6 million in the previous year. As Brandon discussed, new market and integration costs related to Astrana's strategic growth efforts resulted in approximately $13 million of drag to profitability in 2024. As for utilization, we experienced a mid-single-digit total expense trend, which included a 2% to 3% change in unit cost and a 3% to 4% utilization trend in aggregate, with variations across lines of business. We closed the year with a solid liquidity position, ending with $288.5 million in cash and cash equivalents. This reflects our strategic initiatives, including the acquisition of CFC, CHS, as well as the buyout of the remaining equity interest in GMG. On the debt side, total debt, including lease liabilities, stood at $471.8 million compared to $475.8 million in the prior quarter. Our strong liquidity profile continues to support our commitment to long-term sustainable growth. In 2024, We announced the acquisition of the physician assets along with the businesses and assets of Prospect Health Systems. We remain enthusiastic about the potential for the prospect acquisition to significantly expand our provider network and enhance our ability to offer high quality accessible care to our members. On January 11th, 2025, the non-physician assets within Prospect Health Systems filed for bankruptcy under Chapter 11. We're working closely with the Prospect team to ensure this filing does not impact our close timing. We still expect this transaction to close in 2-2-2025. Prospect has been performing in line with our expectations since the transaction was announced. We have received their fiscal year 2024 audited financials. For the calendar year 2024, Prospect generated $1.2 billion in revenue and $94 million in adjusted EBITDA. To give us financial flexibility ahead of the prospect acquisition, we have successfully replaced our previously committed 364 bridge with a new, upsized credit agreement, supported by an expanded and highly supportive lender group. This new facility includes a $300 million revolver, a $250 million term loan aid, and a $745 million delayed draw TLA for prospects. We were able to secure a reduction in pricing, extended maturity date through 2029, and enhanced financial covenants, giving us further flexibility as well as strengthening our capital structure. As we have previously discussed, our best estimate of pro forma net leverage based on 2024 financials for Prospect and Estrana is approximately 3.4 times that close. We remain committed to deliver below the three times range within nine months post-close. I'll wrap things up here by sharing our guidance for the full year 2025, guidance for the first quarter of 2025, and for the medium term. For the full year of 2025, we expect revenues to be in the range of $2.5 billion to $2.7 billion, with adjusted EBITDA projected between $170 million and $190 million. For the first quarter of 2025, we expect to generate between $600 million and $650 million of revenue, with adjusted EBITDA ranging between $32 to $37 million. Finally, we want to reiterate our previously stated medium-term adjusted EBITDA guidance of at least $350 million in 2027. Despite the current environment, we remain confident in our ability to drive sustainable, profitable growth. I wanna share several assumptions that we are making in providing 2025 guidance. On the cost trend, we are expecting mid single digit cost trend, similar to 2024. We're also including approximately 15 million in costs associated with continued strategic investments in integration, automation, and AI. In line with our commitment to risk progression we anticipate approximately 75% to 85% of our revenue to be from full risk arrangements in 2025. In addition, the guidance we have shared today does not incorporate contributions from the anticipated close of prospect. However, it does reflect ongoing and expected integration costs associated with prospect. We will update our outlook to include prospect after the transaction closes, likely in the latter half of the year. Lastly, I want to inform you that we will be filing a Form 12-B25 to extend the deadline for our annual report due to delays in finalizing certain financial information related to the closing of an acquisition during Q4 2024. We plan to file our 10-K within the 15-day extension period. We continue to make strategic decisions that we believe will deliver on long-term value for Astrana and its shareholders. We're pleased with the year and quarter and feel that Astrana is on a strong position for continued growth. We look forward to keeping you updated as the year unfolds. With that, operator, we can open it up for Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Ryan Daniels with William Blair. Please proceed.

Yeah, hey guys, this is Jack Stampton for Ryan. Thanks for taking the questions and congrats on the strong year and quarter. First, maybe just on the adjusted EBITDA guide, it looks like the margin is down, but also kind of flattish on a dollar basis. Can you guys just dive a little bit deeper into this, maybe on the bridge, just kind of what the puts and takes are and, you know, what kind of gets you to the Low end of the adjusted EBITDA guidance range and maybe the higher end.

Thanks. Thanks so much. In terms of our guide for 25, we're assuming a consistent 4.5% trend. We're also assuming our continued investments next year. And then in terms of overall margin, the margin was down because of CHS next year. Gotcha.

Okay. Okay. Perfect. Thank you. And then maybe if I can just add a quick follow-up in here too. You guys have a goal to de-lever to a little over two times within the two years. I think you said nine months after the close of the acquisition. And I think a chunk of this was supposed to come from the free cash flow conversion. So Can you just give us, like, high-level comments on, you know, what you expect free cash flow to look like this year and then kind of, like, what levers you have to kind of drive the increased cash flow, you know, this year and then post-acquisitions as well? Thanks.

Yeah, you – free cash flow is a bit odd in 24 due to some one-time items. One related to post-CHS that there's some – one-time related items, probably in the $10-ish million range, which will be recouped in 25, so you'll see that bump in free cash flow there. There's also an item around some licenses around software that ran through one time also. you will see that revert next year. And we've guided in the past, free cash flow comes in about 45-ish percent of adjusted, and you'll see that as a higher percentage in 25.

Okay, awesome. Thank you again, guys, and congrats. Thanks much.

Thank you. Our next question comes from the line of Michael Hoff with Baird. Please proceed.

All right. Thank you. So I understand your Medicaid trend has been running hotter this year. Think about four to 5% versus your original expectations. I think it's mainly driven by a proposition 35 and redeterminations, but then as we head into next this year, 25 with opposition 35, now past redetermination headwinds subsiding as you get, as states reflect better rates, wouldn't that imply a pretty visible sizable, even a bridge component here as this excess trend declines. If so, how should we think about the magnitude of that benefit? Because optically, super high level, 5% excess trend on your Medicaid revenue, I'm getting something like $30 million of embedded earnings, which is pretty significant. So just wondering if this is baked into guidance at all or if it could represent an upside driver.

Hey, Michael. Thanks for the question on Medicaid especially. You're right. The Medicaid trend, as we mentioned on the prepare to mark section of the call, was a lot higher than it was in prior years. It was in the 8% to 9% trend. And certainly Medicaid reimbursement did not improve by that much year over year from 23 to 24, which caused a much higher MLR in our Medicaid business, which did impact earnings from the Medicaid segment, as you had mentioned. You're right that Prop 35 has now passed. The state is still in a negotiation in terms of how that's going to be resolved with the large MCOs and then downstream of that with us. None of that is, no rate relief is contemplated in the guidance, which is intended to be conservative. We'll update given the flux of where Medicaid is today. We didn't want to bake in anything uncaged. that we'd have to walk back later. So the intent there is to just assume a similar trend in 25 as in 24 without any renegotiations of contracts or additional reimbursement from Medicaid in the 170 and 190.

Got it. Okay. So it sounds like it would be an upside driver once you're able to recognize it. And then I guess that my next question would be a couple on costs. I think you mentioned CHS approaching breakeven late in the year. Here's what you have embedded in guide for full year CHS dilution. Also the 15 million expected loss. I was wondering if you could help us sort of break out the buckets. And lastly, for prospect accretion, I know it's 94 million. The closing mid-year, is it fair to assume half of that comes through? Or I know you mentioned ongoing costs for prospect. How much would we expect for you guys to be making on that. Thank you.

Sure. We expect around $5 to $10 million of integration costs that we've assumed will be hitting our books, hitting our P&L, and will be fully expensed, regardless of if and when the prospect transaction closes, whether that's in the middle of the year or slightly before that. And so I think the 170 to 190 guide includes those expenses, $5 to $10 million in integration, and around $5 to $7 million in automation and building out the platform and technology investments, regardless, again, of when that closes. And we're booking those, we're expensing those costs in the P&L in anticipation of the close of the transaction. In terms of the transaction itself, based on the audited financials and the unaudited financials for the stub period, because their fiscal year ends is not aligned with the calendar year, That's where the $94 million of adjusted EBITDA comes from. We don't expect necessarily that the 2025 contribution will be $94 million. As we had guided before, we thought that $81 million was a better launch point. We wanted to share the $94 million number because it is based off of the audited financials that we've now received for Prospect, and we wanted to share that so that it's out there. On a go-forward basis, assuming that it closes, let's say, at the end of the first half of the year, we would expect the run rate going forward to probably be closer to the $81 million number that we had formerly guided towards based on our accounting and how we would present the results to the investor community.

Thank you. Our next question comes from the line of Dalyard Singh with Truist Securities. Please proceed.

Yeah, hi, this is Jalendra Singh from Truist Securities. Thanks for the color on the Medicaid rate acuity mismatch you talked about, which could be a potential upside hopefully in this year. But I also wanna talk about the Medicaid, like the new administration seems to be focused on reimbursement cut there? Any comments on how some of these discussed possible cuts could impact your business? Or does being in California insulate you, like kind of protect you in any ways?

Hi, Jalendra. Thanks for the question. This is obviously an ongoing situation. A couple of weeks ago we heard that Medicaid would not be touched. Obviously that may or may not still be the case. We do believe that having almost all of our Medicaid membership in California does insulate us partially, although obviously federal funding is still going to be an important part of the puzzle in terms of reimbursement in 2025 and go forward. I don't really want to comment or speculate at the moment, given I think it's unclear to probably the most what the administration will do in terms of the funding for Medicaid and Medicaid expansion. I think what we're going to do is ensure that We are taking care of the Medicaid patients that we do have. We're not assuming any reimbursement increases in our guidance, and we do believe that hopefully will prevail at the end of the day, and a very important part of the healthcare system is going to be preserved in terms of funding to Medicaid. In terms of California itself, again, we're not including any incremental reimbursement due to Prop 35 or including any renegotiations that may occur throughout the year of 2025.

Okay. A quick follow-up, clearly a very unfortunate event around California wildfires, but any sort of impacts you can talk about? Did you see in a business in Q1? Did that perhaps lead to any impact on utilization worth calling out? Any cause? And then also on the flu activity, just maybe you can combine like what you're captioning your Q1 comments.

Sure. Sorry, one last point on Medicaid. We do believe that the flexibility of the business model, as it has in the past with other disturbances to Medicaid, such as redeterminations, will allow us to partially offset some of the impact, if any. But again, we're waiting to see how this plays out as well. In terms of the wildfires, and then we'll tackle the flu afterwards, certainly the wildfires deeply affected our community less than five miles away from our headquarters. here in Los Angeles and displaced many families as well as families of our teammates. We had to close a few clinics, around six or seven clinics, for a few days to a week, depending on the location. But we don't anticipate this to have a meaningful impact on care delivery revenues in Q1. In terms of utilization, we're not seeing material differences in inpatient utilization either. related to the fires, thankfully. So I don't think there's going to be a material impact there either. In terms of the flu, some of you may remember that we called out a couple quarters ago that we believed this flu quarter was going to be, or this flu season rather, would be quite bad. And it turns out it has been maybe one of the worst in recent memory. And at the time we had thought so because of, you know, the very bad flu season in the southern hemisphere. that we were seeing early on in their winter season we accrued for some of this in our trend and we came in as john mentioned earlier around where we expected to come in so given where we accrued and where we are continuing to accrue in 2025 in terms of our claims reserve we feel comfortable with with where uh trend will be with related to the flu thank you thanks longer

Thank you. Our next question comes from the line of Ryan Langston with TD Cowen. Please proceed.

Great. Thanks. Good evening. Just want to go back to the guidance. The midpoint seems to assume, I believe, a 6.9% margin, and you guys finished the year with 8.4, so 150 delta. I think the 15 million you called out might be worth around 60 basis points if we assume ECHS is running around sort of a 10 million drag. That might be another 40. So that leaves you another 50 basis points of decline. So if my math is right, can you maybe just give us a sense on what that other 50 basis points is, or maybe just kind of an overall picture of what's driving that EBITDA margin decline year to year?

Hey, Ryan. Great to hear from you. Thanks for the question. And that The thoughtful analysis, I think the main item is that we have Med-X trend that is increasing faster than, I guess, our revenue. And so that's making up for that 50 basis points.

Okay, got it. And then just one follow-up, if I could. I don't believe you were booking any profits on the MSSP side in 2024. Can you give us a sense on what's built into the guidance in terms of MSSP for 2025? And I'll hop back in the queue. Thanks, guys.

Big trend. We did get further clarity around MSSP in terms of our data. and we felt we were in a good place to book MSSP-related revenues, so we did book $5 million in Q4. And so that five was for 24, and then for 23, we booked another between five to six. And then in terms of guidance for 25, we're booking five to six. Very helpful. Thank you. And sorry, just to clarify, we didn't book anything for 23. We weren't in the program in 23.

Thank you. Our next question comes from the line of Adam Ron with Bank of America. Please proceed.

A little redundant, but I'm also going to ask about the guidance. So, you know, if I take out the new market costs you mentioned and integration costs you mentioned in 2025 and 2024, I come up with 5% EBITDA growth on a, let's call it, same market basis, even though revenue is up 28%. And so this is effectively the margin question, but it seems like a very, very wide difference between 28% revenue growth and 5% EBITDA growth. And I understand that probably the main factor is trend, but trend was really high in 24 as well. And so that implies a lot of these new revenues coming in at like no margin. And so if you could just give more detail on what you're expecting for trend and You know, the rate notice in L.A. is pretty strong for Medicare, and it seems like alignment is talking about benefiting from that. So I'm curious why you're not seeing more of the M.A. rate notice, and specifically, you know, why trend is coming in worse, if there's anything outside of Medicaid, I guess. Thanks.

Hey, Adam. Thanks for the question. You're right. My answer might be similar to the margin question. which is that the two main drivers of revenue, which are the CHS acquisition continued movement to full risk, are fairly low margin revenue drivers. As we noted earlier, CHS is coming in essentially at zero, close to breakeven, and the first year of full risk conversions typically don't add too much margin either because it takes time to renegotiate and improve the unit economics on the inpatient side of a four-risk contract. What we're focused on really is ensuring that we are doing enough. We'd rather do a little more than less, frankly, in terms of integration preparation for the anticipated close of the prospect deal. And we're really assuming very similar trends from a cost perspective to 2024. in terms of the 4.5% to 5% trend here in 25. We're not expecting rates to go up as much as we would like. If there are changes to that throughout the year based on renegotiations with payers or with the state, or if there's clarity on Medicaid, we would update the street as such. I think the final reminder is that we're really still reiterating the $350 million number in 2027. That hasn't changed at all. We're trying to be a little more conservative this year. And I would also note that because of the base of adjusted EBITDA that we already had and reported in 2024, I would maybe just say that it's very different to improve off of a base that high relative to peers in a challenging macro environment and an uncertain macro environment than to go from a small number to a slightly, you know, larger number.

If I could fall on one thing you said, and so you mentioned race. So if you could talk about, I guess, like capturing race or like on Medicaid, it has to do with like the state has to give you money. But in terms of like the payers, like, are you talking about how they're under pressure and they don't want to, and they're like cutting back on cap rates or something? Like if you can go into more detail, what you mean by not getting rates that you need to offset trend, that'd be helpful.

Sure. It's not necessarily cutting back on cap. It's more there are certain – there are rates that we have locked in for a period of time that don't contemplate the extraordinary trend that we're seeing, especially in Medicaid, where trend is very high single digits percentage. The payer contracts that we have are not – reimbursement is not going up anywhere near, you know, 8%, 9% a year. So every year that that continues on in terms of trend – where reimbursement doesn't catch up, almost by definition margin declines as a result. So that combined with integration costs really make up some of the impact that you're seeing on the guidance.

Okay. That's helpful. Appreciate it. Sure.

Thanks.

Thank you. Our next question comes from the line of Craig Jones with Steeple. Please proceed.

Hey, yeah, thanks for the question. So I was really hoping to get an update on the Houston and Las Vegas markets. I think you're exiting year two and entering year two, or sorry, exiting year three in the middle of year two in those markets. Just wondering, yeah, how they're trending. Thanks.

Hey, good to hear from you. Thanks for the question. On slide five of our supplemental deck, we did provide a couple of updates on both Nevada as well as our Texas markets. They continue to ramp within expectations. For example, Nevada provides some highlights. Care delivery visits year-over-year grew by 58%. We're at around $200,000 a month loss at the moment. And we expect to be breakeven to profitable in early 2025, probably. in a couple months here. In Texas, similar story, maybe even a little faster. We're on track to break even already in 2025 and start turning a profit late 2025, early 2026. Non-California business will represent around 15%, 1.5% of revenue in 2025, and that number appears to grow given the rate of growth in those non-California markets.

Okay, great. Thanks. And then just to follow up on an answer you just gave on the Medicaid contract, I think you said the rates are locked in for a certain period of time. How frequently are those renegotiated and how fast could you sort of try and adjust for the higher trend?

Typically it takes, it really depends on the contract. You know, two to three years typically and they're all kind of staggered. So it really is a continual process that we're engaged in. If TREN were to abate, if we're able to get any kind of relief from the state, there's some of the regulatory overhang on Medicaid that goes away. I think that really helps, but that's just an ongoing process that we're engaging in. Okay, great. Thanks, Daphne. Thank you.

Thank you. Our next question comes from the line of Brooks O'Neill with Lake Street. Please proceed.

Thank you very much. So Brandon, you just alluded to slide five. I want to ask you about slide six in the supplemental deck. And you mentioned that the transition to full risk arrangements in year one has very little impact. But I see the increasing trend on slide six. And I guess it was my assumption that that would be a potentially very favorable a transition for you guys. So maybe you could just talk a little bit about the underlying economics in those arrangements, maybe why you're pursuing those and what the longer term opportunity might be.

Thanks so much for the question, Brooks. As you highlighted, we continue in our pathway to expanding to full risk contracts. We are focused on this because we truly believe that with these incremental dollars, we can differentially continue to invest in our members. As you can see, it's not an immediate impact in terms of year one. Over time through these investments, we will start seeing through high quality and access to care we we will see trend change and that that is why we're embarking on this journey for the last few years and and that is why we'll continue to do so and you can see in slide six the improvements beyond that two-third level that we had discussed in the past the bottom line is you think over time you can

reduce, I guess I'd say, utilization on the inpatient side of the business?

Yeah. Through preventative care, we will be able to right-size utilization and help members get care before it turns into a larger event.

Yep. Great. Okay. Thank you very much.

Thanks, Brooks.

Thank you. Our next question comes from the line of David Larson with BTIG. Please proceed.

Hi. Can you talk about the completeness of data for 2024? It looks like a 5.3% trend for the year, and you're guiding, I think, four and a half. Quite frankly, that sounds very good to me. Some of your peers were like in the 7% to 9% range for the first three quarters of 24. I guess I just worry about being surprised with additional claims files from health plans. Just any sort of comfort you can provide around that would be great. Thank you.

Hey, Dave. Thanks for the question. claims reserves that we have, the IBNR reserves that we have, are not based just on our claims triangles necessarily, but also include some of the initial information that we have in terms of authorizations and other leading indicators of usage or utilization, as we had mentioned before. So I think that's something that we feel fairly confident about. We also pay the vast majority of our own claims, which gives us quick visibility into how claims are developing. So we feel fairly confident that that trend is very close to what it will be. Going forward, again, I think this is maybe what you're getting at, which is that the trend seems decent relative to the industry and the challenges that are being faced. Keep in mind this also includes V28 impact, which still is phasing in in 2025. And so I think the question is, Why is there not a larger increase at the midpoint in guidance? And I really want to reiterate that there are some large integration costs. We'd rather be safe than sorry on integration and do things correctly. There are investments we're making so that we can smash through the 350 number that we put out in the medium term. Frankly, we're not trying to optimize for the 2025 year. We're optimizing for long-term value creation, and we believe that this is what needs to be done to not only meet but surpass the $350 million that we promised for 2027. The path there doesn't necessarily look up and to the right, but it does mean that we are making investments now for the future, even if that means we're taking on relatively lower margin pockets of business. I would also argue that there are Because of the trend that we're seeing, 5.3% in 2024, 4.5% to 5% maybe in 2025 in the guidance, that is why our adjusted EBITDA is where it is. And again, I think it's much more challenging to be growing at this space while putting up $170 million of adjusted EBITDA for 2024. I'm not sure if that answers your question, Dave, but I just wanted to mention that.

It does answer my question. Thank you. For Prospect, at maturity, what would you expect the margin to be? I think you're being conservative with break even. What's interesting is, fine, 93% of the revenue is capitated, but that's only 33% of members, which means you have a lot of runway to go to basically grow your fully capitated revenue book. What would you expect the prospect margins to be at maturity, let's call it, in three years?

Yeah. I may have missed surgery, so I apologize, but I think when you mentioned margins being close to breakeven, you may have meant CHS, and maybe that's what you said, but CHS is breakeven. We do anticipate that to be in the, given the mix of ACO, REACH, and MSSP members versus Medicare Advantage members, probably in the low to mid single-digit percentages at scale for prospect, which is coming in at, you know, mid to high single digits. We expect that to be seven, 8% at scale, which is similar to our existing business, especially given the similarity of the delegated model and the, and the similarity of the geographic, um, uh, region of regions of the members and where they live. Um, and then in terms of the full risk conversion, you're right. Uh, even though 73% of the revenue comes from a forest Valley based contract, only a third of the members are in such a contract. And so your point is absolutely correct. There's still a lot of runway to go in terms of moving additional members into full risk arrangements. We continue to do that in cohorts even as we speak. There are additional members that went live one-one. There are additional members that will go live in February or in March. And that's a continual process. Of course, the percentage of revenue that is associated with full risk is going to, you know, asymptotically kind of taper off over time. but the number of members will continue to grow probably into the 50, 55% range. As I mentioned before, not all the members will end up in a full risk arrangement, just given dynamics around growth, not wanting to put members in a full risk arrangement day one, something we've never done, as well as the commercial line of business.

Okay, great. Thanks very much. I'll hop back in the queue. Looks like a very good, well-managed trend. Congrats. I'll hop back in the queue. Thanks. Thanks, Dave.

Thank you. Our next question comes from the line of Matt Gilmore with KeyBank Capital Markets. Please proceed.

Hey, guys. This is Zach on for Matt. Just on the 10 million annualized AI savings, wondering if you could quantify that in terms of incremental benefit in 25 and 26, and maybe just your longer-term thoughts on that opportunity going forward, especially as Prospect is integrated.

Thanks. Sure. Maybe I misinterpreted the question, so just let me know. We are spending around $15 million in integration and development for AI in 2025. We expect that to translate into approximately $10 million of savings in 2026 that will probably show up in the G&A line. And that will probably continue to grow into 2027. So that would be the approximate magnitude of the investments and then the approximate value of the savings. And all of that would flow through down to P&L or to EBITDA.

Okay, thank you. And then just on the newer markets, can you maybe just speak to the operational playbook that you use to achieve break-even in years one, two, and then beyond that? What are the big factors that you need to work on to bring a market to break-even and move beyond that?

Yeah, so it takes time to improve care margin in a population. It takes time to grow a population from zero to the scale that you need to support the infrastructure that you need to build to get into a new market. We typically think about getting to around 10,000 Medicare equivalent membership in a market. So you need some level of density that would approximately, the 10,000 comes from generating approximately $100 million of annualized premiums. You need to be able to operate in an OpEx level that supports that could be supported by $100 million of premium review. So if you assume 10% of gross margin, for example, you need to be able to keep OPEX below 10 million, essentially, to break even in a new market. And so those are really the levers that we're using. We have to go into a market, build enough density to attract membership, provide a differentiated enough product with the provider network and the technology platform so that we can attract additional providers and therefore additional patients. We need to be able to then use that differentiated network and differentiated outcomes that we're driving to receive payer contracts. We need to be able to drive operating leverage in the technology platform so that we can operate at that cost level. And over time, as we increase scale and get to that number, and if our OPEX is low enough, then you get to break even. Over time is when the preventive care that you provide, such as in the story of Amy that I mentioned earlier in the prepared remarks section, start to shine and you're starting to see decreases in MLR because of the longitudinal nature of the model and the length of time in which patients can be in the care model and be part of our risk-bearing ecosystem. So maybe succinctly, first two, one and a half to two years, it's really about growth and being operationally very efficient. Years two through five, you're continuing to do that, obviously, and you're also really bringing down medical costs as a percentage of revenue as well.

Great. Thank you.

Thanks.

Thank you. Our last question comes from the line of Dean Manheimer with Freedom Capital Markets. Please proceed.

Thanks. Hey, gentlemen, great year, great quarter. I appreciate the color around all the acquisitions, and did you or can you share the pro forma contribution to revenue from Prospect this year? And secondly, just based on your experience historically driving EBITDA synergies through your acquisitions, what might you expect for Prospect, say, after this year, given that it has such a similar profile and geography to your current business? Thanks.

Hey, Gene, great to hear from you. PROSPECT has not closed yet. I'm thinking you may be thinking about CHS.

Well, I am asking about PROSPECT, but understood that it isn't closed, so maybe you're not comfortable talking about it from a synergy standpoint.

Yeah, I think it's best to wait and see when close happens because that's really going to affect its run rate. And in terms of revenue and EBITDA, I would assume what we've shared, the revenue run rates about $1.2 billion. And in terms of EBITDA, it's that 81 that we have guided to historically. Okay. Thank you. Thanks.

Thank you. There are no further questions at this time. That concludes today's teleconference. You may disconnect your lines at this time. Thank you everyone for your participation.