InnovAge Holding Corp.

Good day, and thank you for standing by. Welcome to the InnovAge second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ryan Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining Innovage's fiscal 2022 second quarter earnings call. With me today is Patrick Blair, the new president and CEO who joined the company on December 1st, Barb Gutierrez, CFO, and Dr. Melissa Welch, chief medical officer, who will be joining the Q&A portion of the call. 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, Wednesday, February 9, 2022, 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 physical second quarter 2022 press release. which is posted on the investor relations section of our website. We will also be making forward-looking statements, including statements related to our growth prospects, regulatory, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that 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, will we open the call to take your questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

Thank you very much, Ryan. I'd like to start with a warm welcome to everyone on the call. And before jumping in, I first want to express my gratitude to our InnovAge employees who have persisted bravely and selflessly pursuing critically important work in the face of some unprecedented obstacles, and to our federal and state partners for their partnership during one of the most challenging times any of us have ever faced, and to our shareholders and investment community for their continued commitment, support, and interest in the company. Although my understanding of the organization is still evolving, I've already come to realize what our employees and participants already know. Innovatage is a special organization working tirelessly and heroically to help some of the nation's most vulnerable Americans As many of you know, this is my first conference call as Innovate's CEO. I joined the company as president on December 1st and was appointed to CEO on January 1st. This is a pivotal and important time for the company, and I'm genuinely proud, excited, and prepared to be here today. I'll say more momentarily, but you could say I've been preparing my whole career for this particular role at this particular time. It's truly a privilege to be a part of something so important with an organization that has so much to offer our participants and government partners. We're going to take a slightly different approach to the call today. I will begin with opening remarks and then hand it off to Barbara, who will provide a more detailed review of our quarterly results. I will then provide remarks on our path forward before moving to Q&A. You can expect this new agenda going forward. Before briefly describing my background, and what I've been up to in the last couple of months, I'd like to share the key reasons why I joined Innovage, and in doing so, touch on the opportunities we have in front of us. I'm here for the same reason I think most people join companies like Innovage, to have a transformational impact on people's lives, and to embrace the doctrine of doing well by doing good in such an important arena. Having seen firsthand the fragmentation in healthcare and the vexing challenge of helping our most vulnerable seniors to live healthy and independent lives, and the difference well-run integrated models of care can make, I feel strongly we have a responsibility to bring the PACE model to more seniors across the country. While I'm still coming up the learning curve on PACE, it's clear we are fortunate to operate in a large and growing market with a steady tailwind and to be positioned at the intersection of where the federal and state governments increasingly need us most, offering lower cost, better quality, value-based home and community care. Despite our challenges, I believe InnovAge possesses the elements to continue to lead the way. The people, years of operational experience, distinctive capabilities, and a commitment to high-quality care have allowed InnovAge to become a market leader, and those things are still very much intact. What's more, we're fortunate to possess a strong balance sheet, undergirded by an attractive operating margin that produces strong cash flow, allowing us to invest robustly in our leaders, workforce, processes, tools, infrastructure, and to innovate our offerings. In other words, the company has a sturdy foundation and great potential. I also want to clearly acknowledge that while I fully embrace the company's advantages and potential, My principal focus right now must be on addressing the deficiencies identified in the recent CMS and state audits. While the situation we find ourselves in is a serious one, and one I'll be laser focused on, from what I've witnessed in my last 60 days, I believe the deficiencies and opportunities for improvement identified by our regulatory partners are addressable. Before I provide some second quarter highlights, I'd like to share my fondness for programs focused on frail seniors and people with disabilities on both the acute and home and community sides of the house. I've had a few times around the track with these types of businesses, having spent the last years leading government-sponsored health plans and the nation's largest nonprofit home health care provider. These experiences have given me many opportunities to work closely with federal and state officials, frail seniors, their caregivers and advocates, community-based organizations, medical providers, and investors. I've drawn genuine inspiration from these experiences, and it has fueled a career-long passion for improving the lives of our most vulnerable seniors. What's perhaps most distinguishing is that I pursued this mission by building passionate, high-performing teams and continually striving for peak clinical and operational performance, which naturally leads to attractive financial results. Since joining the company, I've spent my first two months getting the lay of the land, visiting our centers, meeting with hundreds of employees across the company to get a diverse front-line input around our biggest opportunities and challenges. As part of getting grounded, I've also been diving deep into the recent survey results to specifically understand employee perspectives on a broad range of issues. And as absolutely essential, I've been actively engaging with state officials in each of our existing states and in active expansion states to convey the seriousness of our commitment to be a model partner, as well as details around our approach and progress. To share a few initial observations from the first 60 days, I've been impressed with our people and our model of care. We're committed to improving quality of life and increasing the autonomy and dignity of seniors by helping them live in their own homes, their own communities, and in many cases, preserving the integrity of their family units. The care delivered by our physicians, nurses, social workers, physical therapists, occupational therapists, dentists, hygienists, and pharmacists is compassionate, comprehensive, and participant-centered. It's really been energizing to see us delivering a fully integrated end-to-end value-based model of care day in and day out across 18 centers for more than 7,000 participants that other providers, payers, and specialty companies try to replicate. There are, however, bona fide opportunities for improvement, specifically in the areas of care coordination and care documentation. Our regulators identified the need for better coordination of care between specialty providers and facilities. For example, we were inconsistent in our ability to transport participants, schedule follow-ups with coordinating entities, and communicate and exchange information between our care teams and third parties. Our government partners also identified documentation as another category for remediation. as we're expected to document all aspects of care in the medical record, consistent with standards of practice in the community and standards set forth by each state and CMS. We clearly need to do better here. That all said, I'll reiterate that I believe these deficiencies are addressable with strong leadership, focus, and execution, all of which we plan to supply thoroughly. I will now provide a brief update on the status of our office. As I mentioned earlier, I've been working closely with the compliance operations and clinical teams and collaboratively with our regulators as we seek to remediate the deficiencies that were identified in the audits. In Sacramento, our corrective action plans were accepted by the state and CMS in early January, and we've moved into the monitoring phase of the sanction process. Once the corrective action plans have been implemented, We will be allowed to operate independently for a period of time before our regulators retest our operations to ensure the deficiencies that were identified in the audit have been corrected. Once determined to be sufficiently corrected, only then will the sanctions be lifted. In Colorado, we're in the process of submitting and obtaining approval for each of our corrective action plans with state and federal agencies. Once the plans have been approved, we anticipate that the process to correct the deficiencies will be similar to the process we're undertaking in Sacramento. Given the nature of these processes, we cannot predict how long it will take to resolve the issues identified and to lift the sanctions. Last quarter, we mentioned that New Mexico would begin a routine audit initiated by CMS. The initial audit work, which preliminarily identified deficiencies similar to Sacramento and Colorado, is still underway and currently in the audit validation process. Lastly, In July of last year, we received a civil investigative demand, or CID, from the Attorney General for the State of Colorado under the Colorado Medicaid False Claims Act. We continue to fully cooperate with the Attorney General and produce the requested information and documentation. This month, we also received a civil investigative demand from the Department of Justice, or DOJ, under the Federal False Claims Act. similar in subject matter to the CID in Colorado. The federal demand requests information and documents in connection with all the company's PACE programs. We are fully cooperating with the DOJ to produce the requested information and documentation, and we're currently unable to predict the outcome of either investigation. The team and I are laser focused on working collaboratively with our regulators to strengthen relationships, to work diligently through our corrective action plans, and to regain trust. I'm committed to seizing the opportunity to strengthen our operations, and having been part of organizations that have done this successfully, I'm confident we are prepared to overcome these challenges. Not to oversimplify, but I strongly believe the quickest road to recovery begins with a renewed energy and focus on the basics, our people, quality, and service. If our employees are properly positioned to deliver high-quality care and service, financial stability and growth will naturally result. With that, I'll transition to review the second quarter business drivers. We ended the quarter serving approximately 7,050 participants. This represents an increase of 5.6% compared to the second quarter of fiscal year 2021, after including the Sacramento census, which was not consolidated in the same fiscal quarter from a year ago. We reported second quarter revenue of $175.4 million, an increase of nearly 11.5% compared to the previous fiscal year because of census growth, and an increase in rates. We also reported a center-level contribution margin of more than $41.4 million and a corresponding center-level contribution margin ratio of 23.6%. The Omicron variant has led to another surge in COVID infections among InnovAge employees and participants. This surge began in December and has continued into the fiscal third quarter of 2022. As a result of this new wave, we're seeing and anticipate seeing elevated participant cost trends, specifically inpatient medical and social respite costs related to skilled nursing facilities are increasing due to higher morbidity resulting from COVID. Increased morbidity is driving higher external provider costs, primarily related to specialty costs as COVID complicates underlying conditions. Since we reopened our centers in early spring of 2021, we have continued to see rising outpatient and specialist costs as would be expected due to the delays in care experience across the healthcare system seen throughout 2020. While a return to a pre-COVID baseline is an ideal scenario, we might not see a return to pre-COVID levels in the near term. As we look to the second half of fiscal year 2022, we expect that center level costs will remain elevated associated with the need for more durable medical equipment, oxygen, personal protective equipment, as well as incremental costs associated with COVID protocols at our centers as the surge continues. While we have continued to grow our census, we've started to see enrollment growth pressure, particularly towards the end of the second quarter, as a result of the recent surge of COVID. Specifically, COVID has impacted our ability to interact directly with potential new participants, for instance, to verify eligibility documentation, and has caused associated delays in the enrollment process. Despite the surge and elevated cost, we're not anticipating the level of disruption we experienced in the early days of the pandemic. All centers remain open and our employees are fully vaccinated. Labor will remain a key focus, though asymptomatic cases allow for employees to safely return to work sooner, consistent with CDC guidelines, and have helped us maintain more consistent staffing levels. Now I will turn the call over to Barb. provide some additional detail on our quarterly results. Barb.