InnovAge Holding Corp.

Hello, and thank you for standing by. Welcome to InnovAge second quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker for today, Ryan Kubota, Investor Relations. You may begin.

Thank you, Operator. Good afternoon, and thank you all for joining the Innovate Fiscal 2023 Second 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, February 7th, 2023, 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 gap measures can be found in our fiscal second 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, Florida de novo centers, 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 the fiscal year 2022 and our subsequent reports filed with the SEC. including our quarterly report on Form 10-Q for our fiscal second quarter 2023. After the completion of our prepared remarks, I 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 want to begin by expressing my gratitude to my InnovAge colleagues for everything they're doing to support our businesses, our communities, our participants who are a daily reminder of our higher purpose and each other. I'd also like to share my appreciation for the investors who have stuck with us through a very challenging period. On behalf of all InnovAge employees, thank you. A lot has happened in the last 16 months. We have simultaneously navigated a pandemic and its associated disruptions, as well as federal and state compliance-related enrollment restrictions in Colorado and Sacramento, California. It is with great enthusiasm and responsibility we begin the next chapter at InnovH. As you may have seen in our press release on January 23rd, we have been released from sanction in the state of Colorado by both CMS and Colorado's Department of Healthcare Policy and Financing, which represented approximately 44% of our total census as of December 31st. Although it has been an extraordinarily challenging 16 months, We've spent this time rebuilding the foundation of our business to improve standardization, quality, and compliance in each of our centers. We have added staff and meaningfully upgraded talent across the organization and expanded our compliance capabilities, applying the audit lessons every day at every center. We have invested in tools and technologies to help our employees function more efficiently, effectively, and compliantly. Culturally, it has brought us together as one team, which we refer to as OneInnovate, and are committed to a mindset of continual improvement to which we are holding ourselves accountable. The release of the sanction in Colorado is both the end of a difficult period and the beginning of the next chapter in this company's bright future. Simply, we are a different company than we were 16 months ago. And while our focus on compliance won't change, we're poised to help even more seniors live safely in an independent setting as long as possible. And now more than ever, we believe there are meaningful tailwinds for the PACE model of care nationally. Over the last 15 years, we have seen rapid growth in managed Medicare plans and value-based primary care centers, the best of which make use of a sophisticated primary care model in care management strategies. However, the front end of the baby boomer population is now approaching the average age of PACE participants, which is about 77. We believe this population will require a more intensive, coordinated, community-based, geriatric model of care that combines the best of both Medicare and Medicaid services like PACE. All that said, our focus and progress remain consistent with what we shared last quarter, and my comments today will encompass a regulatory update, focus areas in progress, and perspectives on the quarterly financial performance. I want to begin the regulatory update by acknowledging and thanking our government sponsors for the continued partnership and solution-oriented approach as we work through the sanctions together. They have rightly pushed us on our thinking and on our commitment to ensure that compliance remains at the forefront as we resume growth in Colorado. As I have shared with them, we are committed to responsible growth, and we will remain vigilant to ensure that our rigorous compliance focus remains bedrock. As discussed in our press release, we have been released from the enrollment sanctions in Colorado by CMS and the state agency, which means we are free to begin enrolling new participants. Practically speaking, we don't expect to see our first new enrollee in this market until March. In conjunction with the sanction release, and as is typical in processes such as these, we will still have corrective actions to fulfill and post-sanction monitoring requirements, including an annual audit conducted by the state for the next couple of years. Regarding Sacramento, recall we were released from the enrollment sanction by CMS in late November 2022. We continue to await word from California's Department of Healthcare Services and expect resolution soon. Though we expect to continue to work closely with our state and federal partners in existing markets, we also believe the conclusion of these formal audits is a meaningful catalyst for us. In addition to reopening organic growth in Colorado, It brings us an important step closer to opening our existing de novo sites in Florida, reengaging with other states on de novo opportunities, and becoming more intentional in the execution of our growth strategy, which we've been able to refresh during this period. Our compliance commitments to CMS and our state partners go beyond our existing centers. We are committed to bringing this dedication, recent investments in technology and operations, and lessons learned to each center and state going forward. We believe that we are the only large, multi-state PACE program that has gone through such an expansive compliance audit, and we're better for it. Frankly, we believe it should strengthen our value proposition to new states and potential partners, and it has positioned us to be a more thoughtful acquirer in the future. Consistent with my remarks last quarter, our number one near-term priority is responsible growth, and I can't express how enthusiastic we are to be at this inflection point. The hard work continues now as we shift our focus from closing important compliance gaps to achieving operational excellence and delivering consistent, responsible, profitable growth. Our action plan for accelerated growth, margin recapture, and sustainability has five dimensions. First, increase same center and de novo enrollment growth rate over historical levels. Two, increase revenue per participant through more effective rate-setting discussions to ensure fair rates based on actuarial soundness and ensuring our risk scores accurately reflect the acuity of our population. Three, strengthen payer capabilities to better manage utilization and external provider costs. Four, run center operations more efficiently and effectively. And five, enhance discipline at the corporate level to better leverage our fixed cost base. Starting with same center growth, I wanted to take a moment to highlight where we sit at this moment regarding center capacity. We currently have 6,460 participants across 18 centers as of December 31st. While the growth runway varies by center and market, in the aggregate we have embedded capacity of almost 50%. Job one is to start filling this capacity responsibly. We have used this time under sanctions to improve our marketing messages and educational content, expand our go-to-market channels, train and onboard high-caliber enrollment talent, redesign our compensation plans, and add new referral channels to expand our access to eligible seniors. Restarting growth in Colorado and accelerating growth in other markets will be a dial, not a switch, meaning we expect it will take a few months to ramp up our enrollment teams, marketing partners, and new referral partners before hitting our stride. Switching for a moment to DeNovo's. Our two Florida centers have the capacity to serve 2,600 participants combined, and the capital investment is behind us. With the sanctions lifted, we are ready to resume the application process to become operational. Though it is still too early to comment on the exact timing of opening, we expect to begin the administrative process this quarter and aim to be operational as early as possible in fiscal year 24. Next, we're focused on ensuring premium rate adequacy for each participant. Like Medicaid managed care plans, we are more of a price taker than we are a price setter. While rate methodologies vary by state, In general, states determine how much they would have paid for our participants if they were enrolled in an alternative Medicaid program and then establish a PACE rate that reflects a discount from what they would have otherwise paid. We need to improve at this actuarially driven process to ensure we can partner effectively with states and that we're paid a fair amount that reflects the true cost we've been experiencing caring for our participants. We're already making great progress and plan to continue expanding our talent in preparation for the next rate cycle. The second dimension is ensuring our Medicare risk scores accurately reflect the acuity of our population. This is an area we have focused on over the last six months, and I'm very pleased with the progress we've made. I believe our risk scores have lagged the underlying acuity of our population, particularly since the onset of COVID, and we're working hard to document all Medicare risk adjustment factors more completely and accurately. We have already executed on process improvements, which have increased our chronic condition recapture rate. As it relates to strengthening our payer capabilities, I continue to believe that we have a big opportunity to leverage the fundamentals used by the best managed care payers to improve quality and to lower the total cost of care. We're coming at this from both the utilization and unit cost perspective. On the utilization side, we're taking steps to avoid unnecessary hospital admissions and readmissions and reducing skilled nursing facility admissions and length of stay by delivering more care in the center or the home. We are also refining our claims payment logic to identify overpayment opportunities that represent lost money that can be recovered and avoided going forward. On the unit cost side, we're reviewing the size and composition of our external provider network relative to the needs of our population to ensure we balance the mutual goals of access to quality of care with network cost efficiency. The near term impact within our portfolio of clinical value initiatives, or CVIs as we call them, is only a few million dollars today. And while each of these initiatives will individually be additive, collectively we believe they will become much more material with time. While we expect it will take a year or more for this capability to mature, it is critical that we develop these muscles systematically as sophisticated managed care organizations do every day. You may recall that we identified 10 areas of operational excellence that were foundational to our success in resolving the audit deficiencies. I'm pleased to report that we are near complete with these initiatives, and they have driven strong improvement in participant experience and employee productivity, but we are by no means done. We will approach operational excellence with the same continuous improvement mindset that we are applying across the business. Recall, we made a conscious decision to retain and even augment our participant-facing staff in sanctioned markets despite census in those markets declining roughly 20% relative to December of 2021. During this period, we invested in hiring additional staff at the clinical and local leadership levels to ensure that we emerge from sanctions stronger and retain the staffing capacity to serve more participants. We expect to grow back into this excess capacity, but it's going to take some time for us to fully understand and have confidence in a new baseline for center-level cost structure and contribution large As growth increases post-sanctions, we plan to redouble our G&A focus and discipline going forward. In particular, expect us to be intentional about achieving leverage on our fixed cost. I anticipate our corporate headcount to look very similar for the foreseeable future as we scale the business. Additionally, there are several tools we are leveraging to help the centers become more efficient and more productive. The most prominent example is our recent implementation of the first-ever pay-specific instance of the Epic Electronic Medical Record. now live in two Virginia centers, with the remaining Virginia and Pennsylvania centers expected to be live by the end of the quarter. We anticipate full implementation across all our sites in the first half of fiscal year 24. As mentioned last quarter, this is the most important technology investment in our company's history, and we're very enthusiastic about the clinical and financial value this will unlock over time. We believe Epic will be a cornerstone to operating more efficiently ensuring standardized, compliant processes at the point of care, and capturing the clinical information needed to deliver more targeted interventions. We expect these five focus areas, enrollment growth, revenue per participant, payer capabilities, center operations, and corporate costs, which we call our five to drive, to be key drivers of earnings growth moving forward. Now turning to the quarter, we reported revenue of $167.5 million a sequential decline of approximately 2.2% compared to last quarter, driven by census attrition in Colorado and Sacramento, which together represent approximately 45% of our total census. We ended the quarter serving approximately 6,460 participants. For the second quarter, we reported center-level contribution margin of 22.6 million and a corresponding center-level contribution margin ratio of 13.5%. compared to first quarter fiscal year 23 center-level contribution margin of $21.4 million, an increase of $1.2 million. As expected, the current quarter's financial performance is unremarkable. The inability to enroll in almost half of our center portfolio, coupled with the intentional investments we've made at the centers, has pressured both our margins and growth. However, we believe strongly this financial moment is more reflective of the conditions behind this than in front of us. as we begin the exciting work of serving more seniors. It is worth emphasizing that growing participants within our existing centers from currently depressed census levels will have two primary, disproportionately accreted impacts to the bottom line. It will first employ the slack capacity. As I noted earlier, given the current census levels at approximately 50% of potential capacity, each incremental participant will drive center-level contribution margin above our overall average. And this will be true until we reach our optimal staffing ratios, which we don't expect to reach until sometime in our next fiscal year. Additionally, you'll recall that I've stated we want our participant risk mix to mirror the communities we serve. A second-order impact of the sanctions is that our risk pool has become frailer with time, as we've been unable to balance it with newer, healthier members. We anticipate that as the participant composition naturally rebalances, we'll see our participant expense improve. In closing, I'm extraordinarily proud of the team and the work we've accomplished to enable us to control our own destiny going forward and to continue to pursue our mission. It is a responsibility we assume with the utmost seriousness and focus. That said, our journey and the worthwhile hard work ahead has just begun. I'm more energized than ever to expand PACE to the many deserving seniors in need who would benefit from this amazing program. Know we will continue to work tirelessly to execute on the strategy discussed and to unlock the full potential of this great organization. Now I'm going to turn it over to Barb.