InnovAge Holding Corp.

Ladies and gentlemen, thank you for standing by, and welcome to the N of H first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today. Ryan Cabuto, you may begin.

Thank you, Operator. Good afternoon, and thank you all for joining Innovate's fiscal 2022 first quarter earnings call. With me today are Maureen Hewitt, President and CEO, and Barb Gutierrez, CFO. Today, after the market closed, we issued a press release containing detailed information on our quarterly results. You may access the release on our company website, innovage.com. For those listening to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Tuesday, November 9th, 2021, and have not been updated subsequent to the initial earnings call. During this call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our fiscal first quarter 2022 press release, which is posted on the investor relations section of our website. During the call, we will be making forward-looking statements, including statements related to our growth prospects, regulatory, and other expectations, and our outlook on fiscal year 2022. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K Annual Report for Fiscal Year 2021 and subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our President and CEO, Maureen Hewitt. Maureen?

Thank you, Ryan, and thank you all for joining us this afternoon. I am pleased to report that we have a strong start to our 2022 fiscal year and that we are reaffirming the guidance that we provided on our last earnings call in September for fiscal year 2022. As of the end of the quarter, Innovate served approximately 6,990 participants This represents an increase of approximately 7.2% compared to the first quarter of fiscal year 2021, when including Sacramento Census, which was not consolidated in the first quarter of fiscal 2021. We reported strong first quarter revenue of approximately $173 million, an increase of nearly 13.5% compared to the previous fiscal year as a result of census growth and an increase in rates. We also reported a center level contribution margin of more than $42 million and corresponding center level contribution margin ratio of 24.5%. I will now provide an update on our growth strategy. We remain on track with the three de novo centers we expect to open in fiscal 2023, two in Florida, Tampa, and Orlando, and one in Louisville, Kentucky. All three of the sites that we have selected are in the process of being renovated, and we continue to work diligently through the development process. While currently on track, as with every development, there are factors beyond our control that may impact our expected timeline. We also continue to evaluate locations for two additional centers, and our current plan is to have those two additional centers operational in fiscal year 2024, subject to factors beyond our control. Regarding acquisitions, we continue to pursue acquisition opportunities in new markets with experienced community partners who have established footprints and where the economics make sense. We are also continuing to look for joint venture opportunities that provide strong strategic value. Regarding vaccinations, last week, the Biden administration announced that COVID-19 vaccinations will be required for healthcare facilities that participate in the Medicare and Medicaid programs, and that all eligible employees must be fully vaccinated by January 4th, 2022. I am pleased to announce that we continue to increase our employee and participant vaccination rates. As of November 1st, 98% of our employees and 89% of our participants have been fully vaccinated. We are pleased that we continue to increase our vaccination rates, and we are targeting a 90% vaccination rate for our participants, as we did with employees. During the quarter, we also began flu vaccinations for our employees and participants, and we are targeting a 90% vaccination rate for the flu vaccine as well. We continue to carefully monitor COVID trends in each of our markets and centers. All of our 18 centers are open with the appropriate COVID safety protocols in place. If COVID cases rise to a level where it is no longer safe to operate a center, We have the protocols in place to close the centers fully or partially and deliver our comprehensive care model in the home and virtually and ultimately reopen centers in a phased approach. Participant health and safety remain our primary focus, and we believe we have the appropriate protocols should any of our staff or our participants test positive for COVID. Enrollment growth continues to improve and has surpassed pre-pandemic levels. Our participants continue to serve as ambassadors for the InnovAge brand, and referrals we receive from our own InnovAge participants have historically made up approximately 25% of census growth. In addition, our recently launched digital marketing strategy has continued to grow our referral base. In the first quarter, digital referrals grew 65% compared to the previous quarter, and we continue to invest in this channel and refine our strategies to maximize the impact on census growth. I now want to briefly discuss labor and wage inflation as we continue to receive questions about this topic. As we mentioned on the last call, it is no secret that the healthcare sector has historically faced a shortage of licensed practical nurses, registered nurses, certified nursing assistants, and other frontline healthcare workers, like drivers. And the COVID pandemic has not helped the situation. The historical shortage of healthcare workers has long required us to think outside the box, to fill our recruiting needs, and that adaptability is a strength that we continue to use as we grow our business. To mitigate potential labor disruption, we have made wage adjustments for key positions throughout our centers, which we have factored into our fiscal year 2022 guidance. We are also continuing to evaluate our recruiting competitiveness on an ongoing basis. We are experiencing longer lead times for recruiting new talent. As a result, we are focused on expanding our employee referral program. and we have developed our own pilot program in Colorado to train certified nursing assistants that we can then employ. Our top priority is ensuring that we are appropriately staffed to care for our participants. In markets where recruitment has been slower than anticipated, we have been able to supplement with temporary labor in order to maintain appropriate staffing levels. Importantly, our guidance for fiscal year 2022 reflects our expectation that the labor market continues to remain tight. I will now provide a brief update on the regulatory environment. We continue to see positive federal and state legislative activity reflecting bipartisan support of PACE. Regarding the current federal legislative activity, the pending budget reconciliation package is still being discussed in the House and Senate The package could provide additional funding for PACE providers through home and community-based services known as HCBS and beneficial policy changes that would increase access to PACE. The House Committee on Energy and Commerce has recommended $190 billion of HCBS funding. We believe this increase in funding will ultimately benefit the PACE program, and we remain strong advocates for program support that will help increase market awareness and participant access for PACE beneficiaries. On October 20th, the Centers for Medicare and Medicaid Innovation, or CMMI, published its Strategy Refresh Plan that charts a path for the next 10 years. The first objective in the strategic plan is to drive accountable care. CMMI cites PACE specifically as a program that could be included as an accountable care entity. We also believe the PACE model of care lines up well with CMMI's key priorities as we provide a more holistic approach to care, incorporate social determinants of health in participant care plans, empower beneficiaries as consumers, and improve outcomes. As we prepare for new programs from CMMI, we have begun to work with the National PACE Association, or NPA, and other PACE organizations to evaluate models that may fit within the key themes that CMMI is looking for. Also, in late October, the Federal Department of Health and Human Services announced each state's plan for how they will spend the additional 10% increase to the state federal match for Medicaid home and community-based services. This announcement, which is part of the American Rescue Plan Act, is expected to add approximately $12.7 billion nationally and provide additional funding to encourage states to expand home and community-based services and strengthen their Medicaid programs. Regarding state legislation, in Michigan, Pending Senate Bill 203 remains active and is pending committee vote, and they have until the legislature adjourns in December 2022 to vote on it. I will now provide a brief update on the status of our audits in Sacramento and Colorado. We have worked and continue to work collaboratively with our regulators as we seek to constantly improve our processes and outcomes to better serve our participants and their families. In Sacramento, we submitted our corrective action plan last month, and we received an additional request for information in early November. We expect to provide the requested information in the next few weeks, and at that time, the corrective action plan will be under review by CMS and the state. We began implementing the proposed corrective actions even prior to submitting the plan. If and when CMS accepts the corrective action plan, they will then begin monitoring its execution, and if satisfied, will then allow the center to run unmonitored for an unspecified amount of time. Once and if CMS is satisfied that the issues raised have been remediated and are not likely to reoccur, they may lift the freeze. While we can provide a general overview of the expected process, there is no standard timeframe for these events to occur, and there is no guarantee that CMS will be satisfied with the corrective actions or will not impose additional sanctions. For context, there were less than 200 participants in our Sacramento Center as of the beginning of this month. In Colorado, as previously indicated, The state and CMS completed their audit work in July, and in October, we received validation results from CMS. In conjunction with the validation results, the agencies referred our case to the Compliance and Enforcement Division of CMS for review and possible further action. With respect to the Colorado audits, to date, we have no indication of whether the agencies intend to freeze or otherwise curtail our program or impose other sanctions. Additionally, given the recent referral to the compliance and enforcement division, we do not have an indication of what further action, if any, the division may take. We cannot guarantee the outcomes of these audits. Finally, we will begin a routine audit in New Mexico that will be handled remotely. We are committed to the quality improvement and comprehensive care coordination in each of our centers We believe the audit process is important to the integrity of the program, and each audit we undergo is an opportunity for us to improve the PACE program, improve our services, and ultimately the outcomes of our participants. These audits will continue to make our program better over the long term, and we are taking lessons we have learned from these audits and applying them as we continue to grow. And before I turn the call over to Barb to review our financial performance in more detail, I want to thank all of our employees for their hard work and dedication providing high-quality care for the participants that we serve every day. Barb?

Thank you, Maureen. Before we open the call to questions, I want to provide some highlights from our first quarter fiscal year 2022 performance. Given the impact on our results of decreasing COVID transmission rates during the period, in some cases, I will refer to sequential comparisons to our fourth quarter of fiscal 2021 in order to provide a more meaningful picture of our performance. We produced strong financial results in the first quarter and ended the period with 18 centers and a census of approximately 6,990 participants as of September 30th, 2021. Compared to the prior year period, when including Sacramento census, which was not consolidated in the fiscal first quarter of 2021, this represents an ending census increase of approximately 7.2%. Compared to the fourth quarter, this is an increase of over 2% and in line with the guidance we provided last quarter. We reported over 20,900 member months for the first quarter, a 7.8% increase over the prior year when including Sacramento Census in the first quarter of fiscal 2021, and an increase of over 2.5% over the fourth quarter of fiscal 2021. During the first quarter, we continue to grow referrals and census following the favorable trends we experienced in the fourth quarter of fiscal 2021. We believe our digital marketing efforts are key to driving additional census growth, and we continue to optimize these strategies to reach those searching for senior care alternatives. In addition to the nearly 65% growth in referrals from our web qualifier tool, our digital lead conversions grew more than 20% compared to the fourth quarter of fiscal 2021. Revenue of $173.1 million in the first quarter of fiscal year 2022 increased by 13.4% compared to the first quarter of fiscal year 2021. The drivers of this growth are an increase in census coupled with a healthy increase in Medicaid rates. Regarding Medicaid rates, as we mentioned on our last call, we received a combined rate increase of just over 5.3% in Colorado, Pennsylvania, and Virginia for fiscal year 2022. And we are still working with the state of New Mexico to finalize those rates. External provider costs in the first quarter were $90 million. a 22.2% increase compared to the first quarter of fiscal 2021. While some of this variance is due to census growth, we experienced higher per participant costs in inpatient, housing, outpatient, and specialist care as medical costs in the current quarter normalized post-COVID. As we mentioned on the last earnings call, We continue to see elevated utilization levels as participants catch up on services that were delayed as a result of the pandemic. Compared to the fourth quarter of fiscal 2021, external provider costs increased 5.8%, primarily due to higher housing costs associated with an annual increase in rates in Colorado and Virginia, coupled with an increase in housing utilization. The increase in housing rates is determined by the states and incorporated in their rate setting methodologies when establishing our pace rates each year. Our cost of care, excluding depreciation and amortization, was $40.7 million for the first quarter, a 6.4% increase over the first quarter of fiscal year 2021, driven by an increase in census. and a 5.8% increase over the fourth quarter of fiscal 2021, primarily due to an increase in cost per employee associated with annual merit and market increases, coupled with an increase in overtime, contract services, and temp labor. Center level contribution margin, which we define as total revenue less external provider costs and cost of care, excluding depreciation and amortization, was $42.3 million for the first quarter compared to $48 million in the previous quarter and $40.6 million in the first quarter of fiscal 2021. As a percentage of revenue, center level contribution margin for the quarter was 24.5% compared to 28% in the previous quarter and 26.7% in the first quarter of fiscal 2021. As we mentioned on the last earnings call, we continue to see elevated utilization levels as participants continue to catch up on medical services delayed as a result of the pandemic. This medical cost normalization dynamic is the primary driver of the year-over-year decline in center-level contribution margin as a percent of revenue. While the normalization of medical costs that we are seeing began in the fourth quarter of fiscal 2021, our center level contribution margin in that period benefited from a revenue adjustment due to risk score and Part D bid true ups and a rate estimate adjustment, and slightly lower cost of care due to gradual reopening of centers, which are the key drivers of the quarter over quarter decline in center level contribution margin as a percent of revenue. Excluding the impact of those revenue adjustments in the prior quarter, our center-level contribution margin as a percent of revenue expanded approximately 130 basis points in the first quarter. Sales and marketing expense for the first quarter was $6.3 million, an increase of $2.2 million compared to the first quarter of fiscal 2021, primarily due to an increase in headcount to support growth and costs associated with new advertising campaigns to raise PACE awareness. Corporate general and administrative expense for the first quarter was $21.1 million, a decrease of $50.5 million compared to the first quarter of fiscal 2021, primarily due to $58.5 million in fees incurred as a result of the Apex transaction in fiscal 2021. Excluding the APAC fees, the year-over-year increase of $8 million is primarily due to company growth and the addition of costs associated with becoming a publicly traded company. Net income for the first quarter was $7.6 million compared to a loss of $49.8 million in the first quarter of fiscal 2021. and up from $6.3 million in the fourth quarter of fiscal 2021. We reported earnings per share for the first quarter of six cents on both a basic and diluted basis. Our fully diluted share count was 135,516,513 shares for the first quarter ending September 30th, 2021. Adjusted EBITDA, which we calculate by adding interest, taxes, depreciation, and amortization, and one-time adjustments for transaction and offering-related costs, and other non-recurring or exceptional costs to net income, was $18.2 million for the first quarter, a 5.7% decrease quarter over quarter, and a 21.2% decrease year over year. Our adjusted EBITDA margin was 10.5% for the first quarter compared to 11.3% for the fourth quarter of fiscal year 2021 and 15.1% for the first quarter of fiscal year 2021. The year-over-year change in adjusted EBITDA and adjusted EBITDA margin is a reflection of three primary dynamics. One, as discussed earlier on the call, The impact of medical cost normalization on center level contribution margin as COVID transmission declines. Two, higher sales and marketing expense as a result of our investment in digital marketing and other sales initiatives. And three, higher corporate general and administrative expenses, partially as a result of the costs associated with being a publicly traded company. The quarter-over-quarter change in adjusted EBITDA and adjusted EBITDA margin is primarily a function of one, the revenue adjustments recorded in the fourth quarter of fiscal 2021, two, increased housing utilization coupled with higher cost of care, as mentioned previously, and three, partially offset by a reduction in SG&A as compared to the fourth quarter of fiscal 2021. We do not add back any losses incurred in connection with our de novo centers in the calculation of adjusted EBITDA. De novo center losses, which we define as net losses related to pre-opening and startup ramp through the first 24 months of de novo operations, were $0.2 million for the first quarter. This includes our Tampa and Orlando centers in Florida and our Louisville center in Kentucky. Turning to our balance sheet, we ended the quarter with $215.5 million in cash and cash equivalents and had $83.3 million in total debt on the balance sheet, representing debt under our senior secured term loan plus capital leases and other commitments, and a secured net leverage ratio of 0.82 times as calculated pursuant to our credit agreement. For the first quarter ended September 30th, 2021, we had $3 million of capital expenditures and we generated $20.6 million of cash from operations. Turning to guidance for fiscal year 2022. We are affirming the guidance for fiscal year 2022 that we provided on our last earnings call in September. We expect our ending census to be between 7,500 and 7,750 and member months to be in the range of 86,500 and 87,800. We are forecasting total revenues in the range of 712 to $725 million and adjusted EBITDA in the range of 60 to $72 million. In estimating adjusted EBITDA for fiscal 2022, we did not add back any expected losses associated with our de novo centers. De novo losses for fiscal 2022 are expected to be approximately $10 million. Finally, we did not include any potential acquisitions in our guidance for fiscal year 2022, given the timing of acquisitions can be hard to predict. In summary, we had a strong start to fiscal year 2022. We are affirming the guidance for fiscal year 2022, which does not reflect any potential acquisitions, and we continue to consistently generate positive cash flow from operations. We believe interest in the PACE program will continue to grow as we build market awareness among eligible participants. That concludes our prepared comments. Operator, we'll now open the call to questions.

Thank you. Ladies and gentlemen, as a reminder, to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Vikram Kasavahola with Baird. Your line is open.

Yeah, thank you for taking the questions. My first one is on Sacramento. You mentioned some of the progress that you've made around the corrective action plan there. Just curious if you can give us some more color on what some of those corrective actions are and any more color on the specific steps that you're taking there to address the issues. And just as a follow-up to that, I'm curious to know how your recent observations in Sacramento and Colorado are influencing your strategy around future de novo launches, and in particular, Is there any reason to think that the ramp in census or margins as the upcoming de novos in fiscal 23 and 24 might be different from what you previously thought before these recent audits came up? Just any color on how all this is informing your execution strategy would be great. Thank you.

Sure. Thank you, Vicar. Mrs. Maureen, I'll do it. I'll kick it off, and then I'm going to ask Melissa Welch, our Chief Medical Officer, to to give a more specific update regarding the audit and some of the primary areas that we focused on. We're continuing to work collaboratively with our regulators, and we are continuing to be focused, obviously, and committed on commitment to quality. We have submitted our corrective action plan to CMS, and that's currently in process. Melissa, would you like to identify and discuss some of the areas that we're using to remediate some of the issues?

Yes, sure. Good afternoon, everyone. So we really tried to focus on the primary areas that were under review in the audit and that we have been now working on for our corrective action. They include closing our network and provider contracting gaps, in particular making sure that we can secure contracts with some of those critical specialty providers. as well as obtaining backup providers for some of those specialties. We focused on staffing, both in terms of ensuring that we're staffing up, particularly on schedulers, medical assistants, and the like, as well as staff training has been a huge focus across all of our staff roles with primary care and home services of particular attention. And then we've been working on two other areas, one documentation, ensuring that we do audit oversight reads of all of our charts in primary care as well as in home care, and then making sure that any consults or referrals that we had to defer or delay during the pandemic that we got those scheduled. So the staff is going to be working really hard on all of those areas, and we do believe that this will help us with regard to the corrective actions.

Thank you, Melissa. Oh, sorry. Go ahead.

Yeah, I was just going to jump in and answer the third part of that question, and that was, you know, Vic, we have not made any adjustments to our assumptions as it relates to our de novos, whether that be the ramp, you know, or any of the enrollment assumptions. So I think, you know, Maureen said early on that we're incorporating the all of these lessons learned in our planning for the de novos, but we have not made any changes to our assumptions.

Okay. Thank you.

Thank you. Our next question comes from the line of Ralph Jacoby with Citi. Your line is open.

Hi. Good afternoon. This is Jason Casola on for Ralph Jacoby. So thanks for taking my questions. But I guess first, It looks like, you know, census came in line with your 2% sequential growth expectations, but did COVID have an impact in that growth at all, including perhaps better underlying census than that was originally expected, maybe partially offset by any COVID impacts, or how did that dynamic play out in the quarter? Thanks.

Hi, Jason. It's Barb. Thanks for the question. You know, COVID really hasn't had any impact on those projections. It really was as expected for the quarter. As we announced in our annual call in September, that's what we expected for this quarter, given the ramp in referrals and enrollments. We also noted, however, in our remarks that we're seeing some very high levels of referrals from our digital campaigns. We're very pleased with that. And we also noted that that level of referral activity is well back to the pre-COVID levels. So it's really what we expected for this quarter.

Got it. Okay. That's helpful. Thanks. So I guess, and just my follow-up here, I guess with guidance unchanged and then maybe outside of the potential impact from the audits, can you help frame maybe what the largest swing factors that could impact trends moving throughout the year are? you know, maybe anything along the lines of COVID flare-ups. I mean, you've talked about labor trends or anything that you're seeing that you could think worth delving into at this point. Thanks.

Bob? Yeah.

Yeah. So, you know, as we mentioned, we're keeping very close tabs on labor trends, and we have a lot of efforts underway to to mitigate some of those labor trends, including the, you know, the CNA program that Maureen talked about, you know, various types of other recruiting functions. So keeping close tabs on that, and so far we're managing that quite well, but certainly if, you know, that deteriorated, that could have an impact. You know, certainly another outbreak of COVID would have an impact for everyone. So, you know, we are We are, you know, fingers crossed that doesn't happen. We talk about our vaccination rates, so we're quite pleased with that. So I think those would be, you know, a couple of the big swing factors. In our guidance, we indicated early on that we have factored in the Sacramento enrollment freeze. We had already factored that into our guidance. So that's already factored in.

Got it. Okay. Thank you.

Thank you. Our next question comes from the line of Matt LaRue with William Blair. Your line is open.

Hi, good afternoon. I understand on the audits that there's maybe no standard timeframe or average outcome, but in your research, could you just maybe give a sense for what the high and low end of the timelines might look like and the range of possible outcomes you've observed in similar audits in the past?

Yes, this is Maureen. So first off, please note that we have not received a final report, for example, in Colorado, but we do expect to see something hopefully by the first of the year. You know, the ranges in regards to Sacramento, it really is under, it would be speculative to give you a time frame at this point because it's really up to CMS. I will say that we are working hard as Lisa described in many of the areas, the network, the provider agreements, the staffing, the training, referrals and consults, and ensuring that we're getting our documentation in line. And then once that plan of correction is finalized with CMS, which hopefully we hope it will be soon, but we can't say for sure the date, then they'll begin to really start to monitor things from that point. So hopefully in the next few months we'll have even more updates to give you as we progress through that process. A lot of this, too, with surveys, they can be, you know, there is some, you know, judgment that CMS is using and they want to evaluate. That's why it's so important that the staff are collaborating with the regulators because ultimately at the end of the day we both care about the patient. And that's what we have to work together. Melissa, did you want to add anything to this?

No, I think you really covered it, Maureen. We don't have any indication of what further action might be taken or when the corrective action will be finally accepted. And in Colorado, we're still waiting for our final reports.

Okay. The second part of my question actually is a follow-up to Vikram's question. A piece of what he asked about was the assumptions around revenue ramps from new to novos. The second part, which I don't think I had an answer to, was just around the margin ramp for future to novos. And again, just trying to understand the corrective actions you described for Sacramento all seem like things that would be sort of a sustainable higher level. cost profile for the center in terms of more staff, more documentation. So is it fair to assume that for future de novos, they are going to incorporate similar infrastructure in place and thus maybe have a different margin ramp than you'd anticipated?

Barb, do you want to take that and I'll jump in?

Yeah, absolutely. Hi, Matt. Thanks for the question. You know, at this point, we're not assuming any material change in the margins. And the reason for that is, you know, we do have staffing ratios in our centers, and we are reviewing that and, you know, are closely reviewing that. But the changes that we've made are not materially different. It's just really trying to get those positions filled and supplement them. So not material changes to those assumptions. Melissa can answer better as it relates to documentation, but that in large part is a workflow as opposed to, you know, any kind of investment in people or systems, although we are implementing a new EMR in the future, but that in large part is a workflow process improvement as opposed to a resource investment.

That's correct, Barb.

Okay. Thanks a lot for that, Barb.

Thank you. Our next question comes from the line of Jamie Pierce with Goldman Sachs. Your line is open.

Hi there. A couple questions for me. I wanted to start with the Colorado audit and just see what you can say about that. The referral to the compliance and enforcement division, can you just give us some sense of how normal that was? or sorry, how normal that is, if that was expected. Just, you know, any color on if this is sort of a normal part of the process or if there was something that caused it to be referred, you know, in CMS' review.

Sure. Hi, this is Maureen. So CMS has the ability to refer issues or surveys to this department. So they can do this at any point with enforcement. It's not unusual for them to utilize the departments within their agency to review matters. So that's not an uncommon practice per se. And we haven't been given, just so you know, there's been no information as far as the agencies are intending to suspend or otherwise, you know, curtail our programs or impose other sanctions. We just don't know at this point. So, you know, again, they have to go through their review process. They review our information. They may come back and ask us for more questions. They might ask us for additional information. And our job at that point is to provide that documentation to them to be able to substantiate. I do think Colorado is a little bit different than Sacramento, and I'm going to ask Melissa to touch base on that.

Yeah, thanks, Maureen. Just want to answer the other piece of the question I heard. I think you asked if we received any results. We did get some verbal communication from CMS in October that we had two of six areas under review and the validation. And validation is information we provide back and forth to them where they saw that we didn't provide some missing information. The information was available in our records and in other validation samples, but they were missing in the two samples that CMS looked at, so they could not validate our findings. So that was what was communicated to us. And, you know, the Colorado audit, you know, we think that what we provided was pretty sound information to CMS. You know, the missing information were minor items that we did have in the record. And, you know, at this point, I think Maureen is correct. We have no indication of what the agency is going to do. And we're going to continue to collaborate with them in providing the information that they ask us.

Okay, thanks for that. I wanted to just move to the quarter for a minute. Not entirely clear just what the COVID impact in the quarter was from a cost perspective and ultimately EBITDA. Was that negative or positive in the quarter just as it relates to kind of your inpatient cost trends? I assume those, you know, were elevated and partially offset by, you know, non-acute utilization. But what was the net impact of COVID during the quarter that you can quantify?

Yeah, thanks for the question. So, you know, there's two comparisons, right? There's the comparison to the prior year quarter, and our external provider costs were up about 3.5%. quarter over quarter and on a on a p.m p.m basis a bit more than that and that is really related to the things that you mentioned as our centers got back to normal it's you know some inpatient some housing and some specialty and outpatient care as our participants get caught up on on their care so that's the dynamic there compared to the prior quarter it's up a bit primarily due to the housing rates and some housing utilization. So we noted in the comments that in FY22, in a couple states, primarily Colorado and Virginia, the rates for housing, ELF and SNF, were actually higher, but that is also built into our overall rates. So those costs were up about just under 3% as well.

Okay. That leads me to my last question, which is just on the EBITDA guidance for the full year. You know, if I take what you did this quarter and apply that to the revenue base for the full year, it implies, you know, close to the top end of the range, maybe some upside in terms of the EBITDA. So I'm curious just where you see margin compression for the rest of the year, if there's a fluid dynamic to call out, if housing was previously not contemplated or not a big factor in the first quarter, and that's supposed to be a bigger factor throughout the rest of the year? Just any color on where, you know, where that kind of implied margin compression comes from.

Yeah. So I think, you know, the margins for our first quarter were very, very solid and really right in line with where we typically see margins at that 24.5%. we do see some signs of those external provider costs coming down in the near term. I think we said that on our last call, and we are seeing signs of that. So we think that those costs will be coming down, which is actually helpful to our central level contribution margins. Where we'll see some compression, you know, as our de novo costs start to ramp up a bit, we'll see some compression there. But as it relates to the external provider costs, we're seeing some signs of that coming down. That housing rate increase was already included into our guidance. So the extent to which the rate impact, that's included in the guidance.

Okay. So just to be clear, it sounds like the biggest factor is probably those 10 million of the Nova Center losses that you expect. You only had $200,000 in this quarter, and those were rampant. That's correct.

Yep, that is correct.

Okay, great. All right, thanks for all the color.

Thank you. Our next question comes from the line of Sarah James with Barclays. Your line is open.

Thank you. I was hoping you could walk us through how the labor pressure is impacting the model. So are you guys seeing it impact census capacity and revenue or is it more just on the cost side? And then on the cost, are you seeing it in wages or is it more temporary items like retention and signing bonuses?

Sure. I'll start it off, and then, Barb, you can take it, because I know we've built these things into our modeling. But we have done some things. Obviously, staffing is something we care very deeply about, and we did do some across-the-board wage increases and have done that for some departments within our organization that make sense to do, and we're continuously monitoring that going forward. Barb?

Yep. Hi, Sarah. Thanks for the question. Exactly what Maureen said. In our overall model and in our guidance, we not only included those merit increases, but we included some definitely dollars in there for market increases that we have implemented in large part at the beginning of our fiscal year. So we've included that. We're not seeing so much the retention pressures as the recruitment pressures. So from a retention standpoint, very consistent from a retention standpoint, it's more just the recruitment as, you know, all healthcare industry is experiencing. And in some of my remarks, I noted that, you know, we have some additional overtime temp and contract, and that is really filling those gaps where we're having some challenges on the recruiting. But again, we're doing some hopefully creative things like the CNA program to fill those gaps as well. So from a cost perspective, it's primarily in that cost of care on the staff component. It's not affecting our enrollment, and it's, again, not really a retention issue.

Okay, great. And now that you have the plans from the states on the enhanced FMAP, does it offer you any insight on to how your rates and your payments may be changing in key markets? And what can you tell us about the correlation between changes in your rates and then your ability to recruit?

Barb, do you want to take the rates?

So we're just starting to work through that, Sarah, with a couple of the states. So we have yet to get the exact impact and just starting to work through that with many of the states. So we'll keep you posted. We do see that as positive, but we don't have any quantification of that just yet. And I think you had a second part to that question, was that?

Just if you've seen a relationship when your rates go up, if it makes a meaningful difference on your recruiting ability.

Yeah, recruiting ability for staff, you mean?

Mm-hmm.

Just to clarify? Yes. Okay. So I think what we've done is because being in health care there is, as we've mentioned, about the shortages of staff and have historically been that way for health care for many, many years, we try to be and forecast as much as we can as we're putting our budgets together and some of the things that we did mention here today as well. So certainly when we get increases, from the states, that's always helpful. Barb?

Yeah, I think it's helpful. I would say that, you know, it helps us make those increases more affordable, but at the same time, you know, we know what we need to do to recruit folks regardless of those increases or not.

Got it.

Thank you.

Thank you. Our last question comes from the line of Jeff Garrow with Piper Sandler. Your line is open.

Hi, good afternoon. Thanks for taking the questions. I want to ask about the digital marketing strategy. It's nice to see the success there, but I was hoping you could translate that success into a contribution on growth expectations either near or long term.

Well, as you may know, we just started really with our digital marketing approach, and we are seeing some improvement there. I think we'll be better able to quantify that as we begin to build out a call center in the future, and we'll be able to give you better projections with that. Barb?

Yeah, I would say that's the case. We've seen great success in the few quarters that we've reported, but we need a little bit more time to do some quantification and really identify the trends, but we are very We are very pleased. It's very, they're very positive results and it's starting to be very meaningful. And as we noted in our remarks that the referrals from those digital leads were up 20% quarter over quarter. For more in the future.

Excellent. All helpful there. Maybe a follow-up a little bit there. Just great to see that referrals are back to pre-COVID level broadly. And noted the different metrics on referrals maybe growing a little bit faster than conversions on the digital front. And I think no surprise that digital strategy creates a wider top of the funnel. But I want to ask how we should think about the efficiency of that channel as it grows and you build out the call center and how that ultimately impacts the margin and growth profile long term.

I think that's exactly what we're trying to achieve with some of the comments that you've just made. And I think as we begin to build this out and track it, we'll be able to show the success here. But we're very excited about it.

Great. Thanks again.

Thank you. We do have another question in the queue, and it's from Gary Taylor with Cohen. Your line is open.

Hi, good evening. Just a couple questions. Rena, I also heard you mention looking for JV opportunities, and I'm not sure I recall hearing that before. Maybe I've just forgotten, but Is that something new? Have I just forgotten? And when you think about that, are you just saying JV with a nonprofit PACE program that currently is in the market versus acquisition?

I don't think it's an either or. I think we're open to the opportunity of joint ventures. We have posed this before. We did one, obviously. in the Sacramento market with the Adventist Health System and another nonprofit where we formed the JV to provide a PACE program there. So I think we're open to that. We certainly, it is part of when we think about our three-prong approach of, of DeNovo's acquisitions, that acquisition could be, you know, could also mean a JV in the future as well. So.

Got it. And this might, Yeah, appreciate that. And then my last one, just going back to Colorado and the referral to the Compliance Enforcement Department, that was not a route that was taken in Sacramento. Is that correct?

So the Sacramento – are you talking about the audits again, just so I'm clear?

Yeah. Yeah.

So, yeah, the – The audit, as you may recall, in Sacramento was the first-year audit where that occurred. In Colorado, that was what we call a focus survey. And in this case, it was based upon a complaint, which we've disclosed before as well. Yeah. Maybe I'm not understanding your question. Yeah, it's a little different.

No, I think I appreciate it. It sounds like it's different origin, so sort of different pathway and progression through that process. I appreciate it. Thank you.

Thank you. I would now like to turn the call back over to Maureen for closing remarks.

Thank you. So before I close, I just would like to tell everyone today that our focus as an organization, of course, is quality compliance. people, talent, building of the infrastructure, and growth as an organization. I also want to just let you all know that in the very near future, hopefully, I will likely be announcing a new de novo in a new state. So look for a future release here soon. And with that closing comment, I'd just like to thank everyone on behalf of InnovAge, the management team as well. Thank everyone on today's call for your time. We're excited about our organization, excited about InnovAge and PACE, and we look forward to continued discussions with all of you and serving more seniors. Thank you again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.