InnovAge Holding Corp.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1-1.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the InnovAge first quarter 2023 earnings conference call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Ryan Kubota, Director of Investor Relations. Please begin, sir.

Thank you, Operator. Good afternoon, and thank you all for joining Innovage's fiscal 2023 first quarter earnings call. With me today is Patrick Blair, President and CEO, and Barb Gutierrez, CFO. Dr. Rich Pfeiffer, Chief Medical Officer, will also 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 call, we remind you that the remarks made herein are as of today, Tuesday, November 8th, 2022, and have not been updated subsequent to this 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 first quarter 2023 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 remediation measures, including scaling our capabilities as a provider, expanding our payer capabilities, and strengthening our enterprise functions, future growth prospects, the status of current and future regulatory actions, 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 2022 and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for our fiscal first quarter of 2023. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I wanted to start by thanking our employees for their dedication to the care of our participants and perseverance during these challenging times, our government partners for their ongoing collaboration, and our investors for their continued support. While it has only been two months since our last call, we've continued to make solid progress over the past 60 days. On the regulatory front, we are at a critical inflection point in our sanctioned markets and now have greater visibility into the timing and next steps of the validation audits, which is the final step in the audit process before sanctions can be released by our agency partners. At the same time, our operational excellence initiatives have also progressed well, and we remain on track to have these largely complete by the calendar year end. We continue to make critical center-level hires to drive these improvements, which have infused new energy and momentum. We are also beginning to see the impact of our clinical value initiatives, or CVIs, on our external provider cost. As I previously discussed, we've been singularly focused on strengthening our operations to earn the right to be released from sanctions and to position the company to serve a growing number of participants for years to come. As a result of the investments in people, process, and technology, we believe we are consistently delivering high quality and compliant care. As we look out over the rise in post-sanctions, building on this strengthened foundation, Responsible growth will become our top priority. Our company's mission is to provide more nursing home eligible seniors access to independent living solutions under the PACE model of care. To deliver on this mission, we need to ensure we can expand access to care within our existing and de novo centers. With this in mind, we've begun to formulate plans to fuel new participant growth by rebuilding momentum in currently sanctioned markets and to accelerate growth in others. Update our projected opening timelines for de novo centers and identify new referral partners that can help increase PACE awareness and enrollment, all while maintaining a laser focus on delivering high-quality, highly compliant care at every center, every day, to every participant. As has become customary over the last two quarters, my comments will encompass our latest regulatory updates, recent progress in provider operational excellence and payer capability development, and perspectives on the quarterly financial results. I'll begin with the regulatory updates. Before jumping into the market-specific updates, I want to spend a moment on the overall progress we've made. Most notably, we have invested in a permanent infrastructure to self-audit every center, enabling us to regularly and proactively identify and remediate gaps and ensure all centers are held at the same high standards. This includes tracking and monitoring a host of internal compliance measures on a digital dashboard, including the nine measures we are tracking as part of our current corrective action plans. Given our performance, pace of improvement, and monthly consistency, particularly in our sanctioned markets and in the measures related to clinical quality and safety, we believe we are ready to be assessed for readiness to be released from sanctions by our regulators. Our government partners have been highly engaged and collaborative regarding next steps and timing of validation audits. In Sacramento, we have attested to CMS and the California Department of Healthcare Services that we believe we are ready to begin the validation audit process based on six consecutive months of achieving 95% or better on all internal compliance measures. CMS and DHCS accepted our attestation, and the CMS validation audit began on November 7th. We are in active discussions with DHCS regarding next steps and timing for the state validation audit. Similarly, in Colorado, we've experienced comparable operational momentum in our internal compliance measures, as each of our six centers were at or above an average accuracy score of 95% in September. As a result, we attested to CMS and the Colorado Department of Healthcare Policy and Financing, HCPF, that we believe we are ready to begin the validation audit process. CMS accepted our attestation, and the federal validation audit is expected to begin on December 5th. We are in active discussions with HCPF around next steps and timing for the state validation audit. In both instances, it remains difficult to predict the precise timing of when the sanctions will be released and when we will be approved to begin enrolling new participants in these markets. And to be clear, audit validation timing and determinations will be made independently and in the sole discretion of our federal and state regulators. In our non-sanctioned markets, we received the final audit results for San Bernardino and New Mexico and a clear line of sight into corrective actions which are already in motion. In Pennsylvania and Virginia, markets where we have not received a formal request for audits, we are self-auditing our centers and seeing strong performance across all internal compliance measures. As previously discussed, we remain relentlessly focused on sustainably improving the way we deliver care and doing so in a highly compliant manner. I stated that we are tracking to our internal goals by calendar year end, and I'm pleased to report that we continue to progress along that timeline. I'm proud of our progress and excited how it positions us to resume responsible and sustainable growth post-sanctions reliefs. To that end, I wanted to share a few highlights of some recent investments in people, process, and technology. Since January and as of September 30th, We have hired over 250 employees and increased full-time center-level FTE headcount by approximately 11%, while reducing critical open positions by approximately 76% to help ensure we deliver effective, highly compliant care. We have been intentional about growing our headcount and staffing our centers for the future, despite temporarily lower census due to sanctions. We believe this investment positions us well to efficiently absorb new enrollments as we resume growth. We have welcomed five new executive leaders who bring not only deep subject matter expertise, leadership experience, and energy, but they are also furthering a culture of excellence that will serve us well in the years ahead. Most recently, we welcomed Kara Babachikos as our new chief information officer, who comes with decades of experience in healthcare technology focused on enhancing patient and provider experiences, scaling clinical technology, and making day-to-day work more efficient. We launched a five-pillar performance management framework, which defines operational success using key performance indicators across the pillars of people, service, quality, growth, and financials. This framework will be used to communicate what we're trying to accomplish, to align our day-to-day work, to prioritize projects, and to measure and monitor progress. We have started rolling out a new triad leadership model, which is a dynamic joint leadership model between the center administrator, the center medical director, and the center nursing director, designed to drive strong accountability for performance against the five pillars. As noted above, we've invested substantially in our compliance processes, most notably the permanent self-audit process for all centers. These improvements give us more robust compliance surveillance and proactive risk identification capability across the company. We overhauled our interdisciplinary care team processes. which is central to the PACE care delivery model to make it simpler, more impactful for participants, and standardized across every center. We are implementing a new cloud-based hiring platform, which helps us to attract diverse talent, engage job seekers and candidates, and hire at scale with speed, underpinned by a great candidate and hiring manager experience. We've implemented a leading home care EMR and care management software, which has been a powerful tool in driving better documentation, streamlining operations, increasing care compliance, and enhancing communication across care delivery teams. And we're making the most important technology investment in our company's history, Epic. We have spent the last 18 months co-developing with Epic the first ever PACE-specific instance of its EMR platform that is purpose-built to support core PACE workflows and streamline care delivery. We have successfully implemented Epic in two Virginia centers and expect to roll it out to the remaining Virginia and Pennsylvania centers over the next four months, with the goal of rolling it out across our full portfolio in the coming 12 months plus. We believe Epic gives us the tools we need to operate more efficiently, to ensure standardized, compliant processes, and to capture the clinical information needed to deliver more targeted care interventions. To wrap up the provider operations section, I'm proud of the team and what they've accomplished. Their work will enhance our care and service to participants, better support our people, and drive improved quality and performance. Taken together, this transformational work has also jump-started the flywheel that will position us to drive future growth and margins. Last quarter, we discussed the conclusion of an external assessment on our risk-bearing payer capabilities. Recall these primarily encompass provider network management, evidence-based site of care management, resource management of third-party care delivery, claims payment, and risk payment accuracy. At this stage, we have identified quick wins, taken actions, and are beginning to see the fruits of our labor as a leading indicator in our external medical cost PMPM trends. Precise attribution of cost reductions to specific initiatives is complex, and we're mindful of seasonality considerations. But we're pleased to see our PMPM participant expense trend decrease from approximately 3,850 on average in the fourth quarter to approximately 3,700 in the month of September. and believe these intentional initiatives are a meaningful contributor. A few quick examples. We have driven short-stay skilled nursing utilization lower by making improvements to our monitoring process. This has resulted in a decrease of approximately 120 basis points to 2.1% in September when compared to the fourth quarter average of 3.3%. Given the frailty of our participants, these movements can have a material impact on PMPM expense. Our inpatient admits have also declined by approximately 70 basis points to 4.9% in September relative to a fourth quarter average of 5.6%. We believe we've made this impact by adding several clinically appropriate triaging interventions to avert unnecessary emergent admissions. Regarding average daily center attendance, I referenced a 50% improvement last quarter in the three months since we made it an explicit initiative. We continue to make progress and improve by an estimated 10% through September. Additionally, you'll recall last quarter we discussed the importance of enrolling new participants who are in earlier stages of frailty to maintain a balanced risk pool. Because we've been unable to enroll new participants in our sanctioned markets, we have not been able to offset the higher average costs of longer tenure, higher frailty participants. When we are approved to resume enrollments post-sanction in Sacramento and Colorado, We believe new participants will help to rebalance our pool of participants, which we expect to result in a lower average PMPM expense than we experienced in the last three quarters. Over time, we will continue building out an enterprise framework and programmatic approach to managing the portfolio of clinical value initiatives to maximize impact. While we have leaders dedicated to making the CDI process successful, it involves building new organizational muscles that will take time. For instance, in developing and evaluating new initiative business cases and continually launching, assessing, and rebalancing initiatives. That said, you can trust we intend to pursue it with the same discipline and attention to detail that we are approaching every other mission-critical initiative. What's more, we believe the recurring incremental external medical cost savings it will create over time will be material. Now turning to the court. We reported revenue of 171.2 million dollars a sequential decline of approximately 1% compared to last quarter, driven by census attrition in Colorado and Sacramento, which, as a reminder, represents approximately half of our total census. We ended the quarter serving approximately 6,540 participants. For the first quarter, we reported center-level contribution margin of $21.4 million and a corresponding center-level contribution margin ratio of 12.5%. compared to fourth quarter fiscal year 22, center-level contribution margin of $23.6 million, a decrease of $2.2 million. Financial performance this quarter is reflective of this moment in time and the impact of the sanctions. As we continue to work on earning back the trust of our government partners and demonstrating a high-quality, highly compliant delivery model, we're certainly also focusing on going back into our cost structure and accelerating the levers of margin recapture. Now I'd like to spend a few minutes on the expected path for financial progress and growth. Last quarter, I explained that additional investment in key operational areas as well as a deliberate decision to increase staffing levels despite declining census and sanctioned markets has created center-level contribution margin compression during the sanctioned period. Some of these costs will be permanent and others temporary. To accelerate audit remediation and to compensate for lost center-level employee productivity during the audits, we have brought in temporary labor at a premium cost and have been running above average overtime at the center level. Currently, this cost driver represents a mid-single-digit percentage of our overall full-time equivalent labor, resulting in a temporary suboptimal mix of W-2 employees, temporary labor, and overtime. As we look ahead, we have an opportunity to reduce costs by replacing higher-cost temporary labor, where possible, with full-time W-2 employees and reducing overtime relative to current levels, both of which will help to optimize our operating cost structure. We have been intentional about our staffing decisions to ensure we can simultaneously deliver high-quality participant care while managing the burden of the audits and absorb new census quickly post-sanctions. This has resulted in higher staffing ratios relative to our long-term targets, which was a drag on the quarter's results. However, it also means we have embedded capacity to serve more participants at some of our existing centers without having to increase staff. As such, we expect post-sanctioned census growth to have a higher marginal contribution until we have reached optimal staff to census targets. To summarize, though it will take multiple quarters to get back to a healthy margin, we have clarity and internal focus on the drivers. Primarily, remove temporary premium cost labor as soon as feasible. Accelerate census growth to improve participant mix and to optimize staffing ratios at the center level so we can benefit from operating leverage. Increase average daily center attendance to proactively support participant health care needs as efficiently and cost-effectively as possible. Execute and continuously identify clinical initiatives to improve participant care and reduce unnecessary costs. Grow organically and inorganically to better utilize the corporate fixed cost base. and enhance center productivity using advanced technology like Epic and optimize the care delivery model to ensure clinicians are practicing at the top of their license. Now turning to growth, our investments in people, process, and technology have created a stronger foundation for our business going forward. While the exact timing of sanction release can't be known precisely, we have begun preparations to resume growth. As a core part of our company's mission is to provide more nursing home eligible seniors across the country access to independent living solutions, we're compelled by a higher purpose to create that capacity, both within our existing centers and our de novo efforts. We've invested almost $30 million in the build out of two new centers in Tampa and Orlando, which will have the capacity to serve approximately 2,000 new participants at maturity, a more than 30% increase relative to our existing census. While we have committed to the regulatory agencies in the state of Florida to pause the remaining application steps for these two de novo centers, with the future support of CMS and our state partners, we hope to restart our efforts to open both centers as soon as possible. What's more, we're also beginning to evaluate RFPs in new states, either adopting or expanding PACE. As mentioned earlier, we made the decision to grow staff in Colorado and Sacramento despite declining census, resulting in low capacity utilization. Within these markets alone, we estimate that there is capacity to add 3,000 in additional census. As a result, we have in-place capacity to expand access to care for our participants and grow our same-store census once sanctions are lifted. On that note, it's worth mentioning we have also made significant efforts to re-engineer our enrollment processes to reduce friction for our participants and their families and improve efficiency of enrollment. Specifically, we have decreased the time from inquiry to enrollment by approximately 36% year-over-year for new participants and expect our growth will reflect this improvement over time. Finally, on the topic of growth, given the many positives to share about the transformation at InnovAge, we intend to engage in a carefully planned and executed post-sanction effort to strengthen our brand with key stakeholders. We're simply not the same company we were before the audits began, and we want to tell the story. In closing, We continue to work relentlessly to finish strong on the compliance front and the transformational initiatives we embarked on in January, not to mention simply challenging ourselves to be better every day. While I'm pleased and proud of our progress and we're getting closer to the other side of sanctions, we also clearly have more to do over the next several quarters to ensure Innovage is operating at full potential. I continue to be enthusiastic and optimistic about the company's next chapter. but will remain vigilant in our efforts until we have demonstrated to our key stakeholders that we are delivering on our commitments and are deemed ready to expand access to more deserving PACE eligible participants nationwide. With that, I'll turn it over to Barb to review the financial performance in detail.

Thank you, Patrick. I will provide some highlights from our first quarter fiscal year 2023 performance and some insights into the trends we are seeing through the first quarter of fiscal year 2023. As with our previous earnings calls, I will refer to sequential comparisons relative to the fourth quarter in order to provide a more meaningful picture of our performance. As of September 30th, 2022, we served approximately 6,540 participants across 18 centers. Compared to the prior year period, this represents an ending census decrease of 6.4%. Compared to the fourth quarter of fiscal year 2022, This is a decrease of 1.8%. We reported approximately 19,740 member months for the first quarter, a 5.6% decrease over the prior year, and a decrease of 1.8% over the fourth quarter of fiscal 2022. Compared to the first quarter of fiscal 2022 and sequentially, the enrollment freeze in Colorado had the greatest impact on member months and census in the first quarter. Revenue declined by 1.1% to $171.2 million compared to the first quarter of fiscal year 2022 and declined by 1% compared to the fourth quarter of fiscal year 2022. The decrease in both periods is due to lower member months because of the ongoing sanctions, the impact of reinstating sequestration at 2%, and when compared sequentially to the fourth quarter, the impact of the fiscal year ending Medicare risk score true-up. Medicaid rate increases affected July 1st partially offset the decrease in revenue in the first quarter of 2023 compared to the fourth quarter and when compared to the first quarter of 2022. Additionally, when compared to the first quarter of fiscal year 2022, the revenue decrease was further offset by increased Medicare capitation rates as a result of increased risk score and county rates. The combined capitation rate increase for Medicare and Medicaid in the first quarter compared to the prior year was 4.9%. External provider costs were $96.2 million, a 6.9% increase compared to the first quarter of fiscal year 2022. The primary driver of the increase was increased cost per participant due to increased housing utilization A deconditioning of our participants has led to higher rates of long-term placement and increased housing rates as mandated by certain states. Sequentially, external provider costs decreased by 2.5% as a result of lower inpatient unit cost or cost per admit, which reflects some degree of seasonality coupled with a focus on our newly developed clinical value initiatives that we are implementing. External provider costs per member per month, excluding pharmacy, have declined 6% since the third quarter of fiscal 2022, which was the height of the recent Omicron surge. However, we expect costs to remain elevated compared to historical levels, in part due to the post-COVID acuity effect on our participants. which as mentioned last quarter, analysis indicates that participant expense was approximately 88% higher on average in the year post-COVID diagnosis. Our cost of care, excluding depreciation and amortization, of $53.6 million was 31.5% higher than the first quarter of fiscal year 2022. The primary cost drivers include the following four items. salaries, wages, and benefits, which accounts for 60% of the total variance, are increased due to higher headcount and temporary labor as a result of filling key vacancies, as well as increased labor costs associated with ongoing audit remediation and compliance efforts, some of which will be temporary in nature. This is coupled with higher wage rates to ensure we remain competitive in the current labor market. Two, third-party audit support as we work through the existing audits in our sanctioned and under-audit markets and proactively self-audit in our non-sanctioned markets. Three, fleet and contract transportation as a result of higher average daily attendance, increase in external appointments, and higher fuel costs. And four, pre-opening losses associated with de novo locations, primarily in Florida. Cost of care increased by 6.1% over the fourth quarter of fiscal 2022, primarily due to increased headcount and wage rates associated with the ongoing competitive labor market, which is showing signs of moderation during the quarter. Center-level contribution margin, which we define as total revenue less external provider costs and cost of care, excluding depreciation and amortization, with $21.4 million for the first quarter compared to $42.3 million in the first quarter of fiscal 2022 and $23.6 million in the fourth quarter of fiscal 2022. As a percentage of revenue, center level contribution margin for the quarter was 12.5% compared to 24.5% in the first quarter of fiscal 2022 and 13.7% in the fourth quarter of fiscal 2022. Our current margin reflects the transitory state of the business under sanctions. As Patrick mentioned, we expect to see margins normalize over time once we can resume enrollments in our sanctioned markets, grow into our center-level staffed capacity, and we realize the value of our clinical value initiatives on participant expense. Sales and marketing expense was $4.4 million, a $1.9 million decrease compared to the first quarter of fiscal 2022, primarily due to lower marketing spend as a result of the sanctions. With the decline of our sales and marketing expense over the last several quarters, it is important to remember that we expect these costs to return to more historic levels once sanctions have been fully lifted. Corporate general and administrative expense was $30.2 million, an increase of $9.1 million compared to the first quarter of fiscal 2022, and an increase of $2.8 million compared to the fourth quarter of fiscal year 2022. The increase over both periods was primarily due to an increase in compensation and benefits as a result of increased headcount to support compliance, IT infrastructure, and the development of critical organizational competencies, and an increase in costs associated with third-party consultants as we implement our eight core provider initiatives, enhance our risk-bearing payer capabilities, and strengthen our enterprise expertise. Net loss was $13.7 million compared to net income of $7.6 million in the first quarter of fiscal 2022. We reported a net loss per share for the fiscal first quarter of 10 cents on both a basic and diluted basis. Our weighted average share count was 135,566,117 shares for the first quarter on both a basic and fully diluted basis. Adjusted EBITDA, which we calculate by adding interest, taxes, depreciation, and amortization, one-time adjustments for transaction and offering related costs and other non-recurring or exceptional costs to net income was a negative $3.8 million compared to $18.2 million in the first quarter of fiscal year 2022 and negative $600,000 in the fourth quarter of fiscal year 2022. Our adjusted EBITDA margin was negative 2.2% for the first quarter. compared to 10.5% for the first quarter of fiscal year 2022 and effectively zero for the fourth quarter of fiscal year 2022. The sequential quarter-over-quarter change in adjusted EBITDA and adjusted EBITDA margin is primarily a function of increased cost of care related to increased headcount and wages and increased G&A expense, partially offset by lower external provider costs and reduced marketing spend. 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 $800,000 for the first quarter, primarily related to centers in Florida. Turning to our balance sheet, we ended the quarter with $188.2 million in cash and cash equivalents and had $84.8 million in total debt on the balance sheet, representing debt under our senior secured term loan plus finance lease obligations and other commitments. For the first quarter ended September 30th, 2022, we recorded cash flow from operations of $13.1 million, and we had $7.7 million of capital expenditures. Finally, in keeping with my comments from previous quarters, I will provide some additional visibility around the following trends we are seeing in fiscal year 2023. First, regarding census. As we mentioned last quarter, we are continuing to enroll new participants in our non-sanctioned centers, resulting in net census growth in the mid-single digits in the non-sanctioned centers. and expect those trends to continue into fiscal year 2023. As a reminder, we lose approximately 2% of our center census on a monthly basis, primarily driven by involuntary disenrollment. Based on these dynamics, we expect net census to decline until sanctions are lifted and we can begin to offset the monthly decline with new participants. Also, regarding enrollment seasonality, We do not typically experience significant enrollment seasonality in our business. However, there are a few periods that create variability from time to time. Historically, toward the end of the calendar year, we have seen some enrollment and voluntary disenrollment volatility as a result of the Medicare marketing cycle, as well as the holiday months. Additionally, we may see increased involuntary disenrollment during the winter and into the spring. due to the inherent frailty of our participants. As Patrick highlighted in his remarks, we believe we are making measurable progress in our audit remediation efforts, and we are pleased to be entering into the validation phase of the process. While we continue to focus our efforts on compliance, we are now starting to plan for a post-sanction environment, and we look forward to sharing more as our plans develop. Operator, that concludes our prepared remarks. please open the call for questions.

Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Again, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Calvin Sternick from JP Morgan. Mr. Sternick, your line is open.

Yeah, hi, good evening. Just a quick question about some of the additional investments you've made at the center level. And you also talked about some efficiencies going forward. I mean, how should we think about the level of both the investments and offsets, potential offsets going forward from the first quarter?

I'm going to have Barb answer that.

Hi, Kelvin. It's Barb. Thanks for the question. So the nature of those investments are in a couple areas, primarily as it relates to staffing at the center level, as we've made great progress and been successful reducing our vacancy rate over the past several months. So that's one of our very big investments. Another would be as it relates to compliance resources, audit, remediation, and compliance resources. both internally and from a third-party perspective. And then additionally, as we mentioned in the prepared remarks, we're investing in Epic, which is a very big investment for us, which will help us in a lot of ways, from a lot of respects, from an efficiency standpoint, as well as from a lot of other providers' standpoints. Those would be the main investments.

Got it. And I know you talked about some of those labor costs being temporary? You know, at this point, you know, going into some of the readiness discussions with CMS and the states, do you have visibility on, you know, how much of the labor costs you've incurred so far could be temporary versus how much could be permanent? Or is it still too early to tell?

I would just say, Kelvin, this is Patrick. You know, I would just say that some of that's labor market dependent. We're certainly moving as quickly as possible to convert some of the higher cost temp labor to permanent labor. And we're making great progress on that in a number of areas. But I think the timing for how quickly we can convert that labor to a lower cost is a little bit dependent on the market itself. But we're doing everything in our power and making great progress. Barb, anything to add?

Yeah, the only thing I would add to that is, as I mentioned, we've made great progress in closing those vacancies. And at the same time, in our sanction market, you know, there's been a natural census decline. So this is where we're speaking about the fact that we've got capacity in those centers in order to resume growth when the time comes.

Okay, great. Thank you.

Thank you. Our next question or comment comes from the line of Matt LaRue from William Blair. Mr. LaRue, your line is now open.

Hi. This is actually Madeline on for Matt LaRue. Just thinking about your patient mix, and I know this is something you mentioned last quarter, is there any way you can quantify or give us just sort of a sense of how relatively how much more expensive or how much higher the costs are for the kind of legacy patients versus the cost would be for, like, newer, less frail patients.

I'll ask Barb to take that.

Yep. Hi, Madeline. It's Barb. Yeah. Hi. Yeah, just in terms of magnitude, you know, I'm not I'm going to try to give a good estimate in terms of magnitude, but definitely the newer participants have a lower cost, and depending on the tenure of their cohort over time, the costs are much higher. So I think in terms of magnitude, I would say roughly 20% or less. somewhere in that neighborhood in terms of the cost differential on average with the newer participants.

Great. Thank you. That's super helpful. And then just one follow-up.

Oh, sorry. One other thing I forgot. We do mention that because of COVID and the prolonged effect on our participants, the analysis that we had performed some time ago would indicate that the cost are quite high for the participants who have COVID. And the analysis actually indicated in the year post-COVID, they're still about 88% higher than average.

Yeah, one last thought I might make, Madeline, is also we like to look at the risk scores of people who have turned longer tenure patients against our overall risk score. And we see about a 2.82 on risk scores of our term members. And then our risk score overall is about 2.32. So it gives you a sense of just risk or differential between the two as well.

Oh, yeah, that's super helpful. Thank you. Very interesting. One other question just regarding the Florida Genovese. I know you mentioned that you'd spent like $30 million building them out. Can you give sort of an update on what the status of those would be? Is it they're fully built and you're just waiting for CMS? Or is there going to be like more investment required?

just curious what those how those are looking right now you know i would characterize um the two facilities as nearly complete especially our tampa facility and in you know terms of how to think about the the process from here uh going forward you know we really do believe our progress on the sanctions becomes the catalyst to restart the application process and If you think about some of the major steps in the process that we will have remaining, we'll have a state readiness review. There's an application for an adult daycare license. We need to get both CMS and state approvals and then sign a three-way agreement. So there's still steps in the process. We have a lot of experience with the process and we've got great relationships with in our considered view with the state. So I think we're all very eager to have the opportunity to proceed.

Great. Thank you. That's all for me.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Our next question or comment comes from the line of Jason Corlola from Citi. Mr. Corlola, your line is open.

All right. Great. Thanks. Good evening, guys. You know, just considering the significant investments you've made to remediate audits across the organization, you know, maybe, Patrick, I'd be interested in your thoughts around if these investments, you know, better position the company from a competitive perspective. And then perhaps if you think these investments could help accelerate the penetration of this pace outright across your current state footprint or, you know, how would you frame that construct?

Well, thanks for the question. In terms of our competitive positioning following the work we've done on the audits, I think that it is contributing a great deal to our ability not only to manage the quality and the cost of the care, but as we know, PACE is a very complex model. that requires us to be able to manage a lot of different services for the participants. And the audits themselves and the deficiencies that were identified really got to the heart of how to operate a PACE business effectively. And we've just improved month over month in all the areas of operations. It's compelled us to bring new technology and new automation into our normal operating rhythms. We've gotten, I think, much better at driving accountability for the work that's happening at the center level. We mentioned the triad operating model, which ensures we're operating as one cohesive team on a local basis. And I think all of those things are going to allow us to scale more quickly. If we pursue inorganic, acquisitive efforts, I think it's going to create an opportunity for us to get to profitability quicker than the company may have in the past. So I think there's been a lot of advantages in some ways from what we've been through. And I think going forward, there's still a lot that we're going to implement and a lot that we're going to continue to make progress on.

Got it. Great. Thanks. I want to go back to your commentary, Patrick, around the risk-bearing payer capabilities. It sounds like the benefits at the early stages are helping a bit on the margin side so far, and you've noted it's a complex runway to determine a total run rate benefit, but maybe can you help frame how you see these capabilities and the offsets there against perhaps a higher cost structure just amid the audit remediation investments? That would be helpful.

I think overall, like any risk-bearing entity, we believe there's always opportunity to improve access and enhance the care and the appropriate utilization of care and to address inefficiencies in the system. you know, we really do believe there's a material opportunity. You know, if you look at those external provider costs, they're roughly 50% of our, of our local costs, you know, relative to say our salaries, wages and benefits and the cost of care, which is, you know, say roughly 30% of our costs. So it's, it's a very powerful level lever, um, to our, to our business. And we're making progress, you know, every day getting better and better at, um, you know, managing all the dimensions of being a great payer. So I have a lot of confidence that it's going to be a really important part to our future and aspect to our future. And I think it is definitely going to contribute to offsetting some of the costs that we've incurred and to our sort of cost structure as a result of the audits. You know, I think there's a real opportunity here and we're going to pursue it hard.

Okay, got it. Thanks. And then just my last question. I just wanted to ask about managing costs, I guess, with the elevated levels of flu nationwide. I guess, first, are you seeing an uptick in flu activity within your patient and employee population currently? And then just thinking about the upcoming winter months, are there ways you'll be able to help mitigate pressures that perhaps a difficult flu season could encourage, any color around how you see flu impacting, you know, next quarter and so on?

Sure. Well, I'm going to pass that off to Dr. Rich Pfeiffer.

Sure. Jason, that's a great question. And, of course, we are seeing the emergence of flu in our population, just like society is seeing it in general. But at this point, we're only seeing sporadic cases. We have not seen a surge among our population at this point. but the season is early. And so what we need to do right now is to prepare and protect our population through maximizing vaccination rates. And actually we're doing a really good job at that. This point in the season, we already have a, vaccination rate of about 60% for our participants. That's going up week by week as we continue to really push and promote vaccination. And likewise for our staff, as it's required, we have very high vaccination rates. So protecting our population right now is the area of focus. It might be a tough flu season, just as we've heard about from the Southern Hemisphere. We're doing everything we can to prepare.

Awesome. Great. Thanks.

Thank you. I'm showing no additional questions in the comment at this queue. Ladies and gentlemen, thank you for participating in today's program. This concludes the conference. You may now disconnect. Everyone have a wonderful day.