InnovAge Holding Corp.

Good day, and thank you for standing by, and welcome to the N of H third quarter 2023 earnings conference call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Kubuda, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining the N of H Fiscal 2023 Third 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, May 9th, 2023, and have not been updated subsequent to this call. During our 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 third quarter 2023 earnings 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 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 2022 and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for our fiscal third quarter 2023. After the completion of our prepared remarks, we'll 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 start by expressing my ongoing gratitude to our InnovAge colleagues, participants, government partners, and the investor community who support our organization. Let me begin by humbly sharing what the InnovAge team has accomplished in the last 19 months. We resolved audit deficiencies across half our centers while simultaneously building trust with our federal and state regulatory partners. We closed mission-critical people, process, and technology gaps, identified its causes of the audit deficiencies, and strengthened our operations. We implemented Epic at half our centers and have a path to being fully operational at every center by year end. We made a healthy down payment on a set of essential payer capabilities that we believe will better position us to manage medical costs going forward, and we reversed the negative trends of financial performance and are now in the phase of growth and margin recapture. These accomplishments were made possible by the efforts of literally thousands of InnovAge employees. Thank you all for what you have done to make this happen. As many of you know, one week ago, we reached an important milestone in our transformation by being released from enrollment sanctions in Sacramento, California by the Department of Health Care Services, which was the last remaining sanction. With the support of CMS in the state of California and our unwavering commitment to sustainable improvement, We're now able to enroll new participants across all 17 Innovate Centers, as well as responsibly pursue opportunities in new markets. This moment can be viewed as the end of one chapter and the beginning of a new one. Our centers have been focused on closing compliance gaps and building the infrastructure, business processes, talent, and culture to consistently achieve operational excellence. The chapter in front of us will build on the shoulders of the last. and will concentrate on aspiring to deliver best-in-class quality and participant satisfaction, which we believe will result in consistent, responsible, profitable growth. The hard work of performance improvement begins now. On the leadership front, we continue to augment the organization with additional high-impact talent, most notably and recently the addition of our Chief Operating Officer, Chris Bent. Chris has decades of multi-site care delivery operations experience. Her experience will be essential to not only building on the team's great work over the last 19 months, but also to creating a more scalable infrastructure to support the significant opportunities ahead. We also saw a few encouraging operational milestones this quarter. Perhaps most notably, census is now increasing on a sequential basis, albeit modestly, for the first time since November 2021. Also, our financial trends are improving as we reported adjusted EBITDA of $3.8 million this quarter. Barb will spend some time dimensionalizing both the results and the underlying trends, which are expected to impact future quarters. Additionally, as I noted briefly, we're midway through implementing our industry-leading pay-specific version of EPIC in all of our centers. That all said, I don't believe our progress will be a straight line up and to the right. There will be inevitable surprises ahead, and gearing up the organization for growth will take some time. We also need to acknowledge that our risk mix has been negatively impacted primarily by the inability to enroll new participants in our largest market until recently. This dynamic can understandably take significant time to rebalance itself. Our focus and progress trajectory remain consistent with what we shared last quarter, and so my comments today will encompass a regulatory update, progress in our focus areas, and perspectives on the quarterly financial performance. Let me begin the regulatory update by expressing my sincere appreciation to our government partners for their confidence in us and for their ongoing partnership. As I mentioned last quarter, we are committed to remaining fully vigilant to ensure that a rigorous compliance focus is bedrock to InnovAge's way of doing business. As I just noted and discussed in our May 1st press release, we have been released from enrollment sanctions in Sacramento by the California Department of Healthcare Services and can begin enrollment again To be sure, this is good news for our ability to pursue our broader desired footprint in California. While Sacramento currently has only a small census of about 130 participants today, we believe it's an attractive market and has the potential to drive meaningful organic growth, especially with our JV partners, Adventist Health and Eschaton. In the state of Florida, we're also excited to share that we resumed the administrative process to open centers in Tampa and Orlando. Recall we began construction on these facilities in mid-2021 and intentionally hit pause to focus on remediating the Colorado and California audit findings in 2022. We aspire for these two centers to meet our high expectations for participant experience. Each center is approximately 35,000 square feet, has a potential mature census of 1,300 participants, and incorporates numerous historical best practices to optimize care delivery. The opening of these two centers is expected to expand our total census capacity by over 20%. As I've noted in the past, the administrative process will likely take months. We're holding ourselves accountable to execute everything within our control to get them operational as quickly as possible, which we anticipate will be later this calendar year. And you can be sure that our commitments to CMS related to quality, compliance, and operational excellence extend to our Florida centers as well. I also wanted to touch on the ongoing corrective action plan in Colorado. Our partners at CMS and the state have continued to hold us to a very high standard post-sanction, appropriately so. And while we are aligned, I want to acknowledge that the overall time, effort, and scope of the post-sanction monitoring continues to be significant. As a result, these efforts are expected to create a modest but ongoing headwind to our local staffing costs and the rate of staffing ratio improvement for the remainder of the calendar year. Consistent with my comments over the past few quarters, our near-term priorities remain straightforward. We need to ensure a highly compliant and operationally effective business while executing a responsible growth strategy. Our key objectives have also not changed. We want to increase our same center and de novo enrollment growth rate, increase our revenue per participant through more effective state rate-setting discussions to ensure rates are fair and actuarially sound, strengthen our payer capabilities to better manage unnecessary utilization and provider costs, run our center operations more efficiently and effectively, which enables our staff to focus on what matters most, the health and well-being of our participants, and enhance discipline at the corporate level to better leverage our fixed cost base. On the growth front, we've been focusing on adding the right talent, ensuring the team has the right tools for the job, expanding our referral channels, and improving forecasting effectiveness. In the last few months, we've seen more lead volume than any other time across both field and digital channels. We're focused now on qualifying these leads and on enrollment conversion. This is a team effort between us and our state partners who ultimately process the enrollments. We continue to challenge ourselves to improve each dimension of the enrollment funnel to be more productive, consistent, and predictive each month. In Colorado specifically, I wanted to spend a minute detailing the shape of the anticipated enrollment over the coming months. Recall we were released from sanctions at the end of January. We enrolled our first group of new participants on the first available date of March 1, consistent with required PACE enrollment processing timelines. At the same time, we are actively developing a pipeline of potential PACE participants who have expressed an interest in enrolling. We are facilitating the necessary third-party approvals to satisfy Medicare and or Medicaid requirements to join PACE, which can take on average between 60 and 90 days. And critically, we have been intentional within our centers to gradually reintroduce new enrollments. As it's a muscle in mindset, we have not flexed in over a year. It's been a deliberate ramp up in Colorado over the last few months, and we anticipate it will take at least another quarter to have confidence in our enrollment run rate. In addition to the organic focus, we're pleased with the level of activity in the market for tuck-in acquisitions and new partnership opportunities. That said, we're resolved to let nothing distract us from our compliance focus in filling the existing center capacity. We will continue to be opportunistic and will focus on organizations that share our commitment to quality and participant-centric care. Last quarter, I mentioned the importance of using the rate-setting process, both on and off-cycle. as an opportunity to work closely with states to ensure we receive actually sound rate adjustments that properly consider the acuity and underlying risk of our participants, as well as the inflationary factors inherent in our business. Primarily as a byproduct of sanctions, our risk mix now comprises a disproportionate share of participants with greater healthcare and supportive housing needs, like assisted living. And as we have discussed before, our population was also disproportionately impacted by COVID, Now more than ever, it is incumbent on us to empirically prove out our medical cost experience to our state partners, which we believe to be higher today than is reflected in the historical data that can be used to set future rates. To support our work here, we recently hired Randy Brock as Senior Vice President of Medical Economics. Randy brings decades of experience from Anthem and Amerigroup working to ensure rates for Medicaid managed long-term care and dual eligible programs reflect the true cost of serving these high needs populations. BARB will provide an update on the current rate setting activity and timing of when new rates will go into effect. Our portfolio of clinical initiatives, or CVIs, continues to progress. We now have a strong perimeter around the near-term opportunities and accountable leaders to drive these initiatives forward. However, as I've mentioned in the past, These will be dials, not switches, and we do not expect the financial impact of these initiatives to materially contribute to our financial results until next fiscal year. I would also note that the current portfolio of initiatives is primarily prophylactic in that we're looking for improvement to offset currently elevated costs until we have added enough new participant growth to balance the risk pool. As an example, our focus on resource management led to the identification of short-stay skilled nursing facility, or SNF, utilization as a top priority. We launched an initiative to determine where and when this service is clinically needed for participants and defined alternative care settings for times when it is not necessary. As a result of these efforts, we have achieved a meaningful reduction in monthly short-stay SNF utilization over the last 12 months. Furthermore, for those participants needing a SNF for short-stay medical care, our average monthly short-stay SNF days has dropped approximately 25% over the fiscal year to date. This is great progress on an important cost driver, but we have other cost categories, like inpatient admissions, that are stubbornly higher than our current expectations. In addition to our initiatives discussed last quarter, we're kicking off a new effort focused on lowering external provider unit costs when out of line with benchmarks. We'll also be streamlining our assisted living facility network to match our capacity to provide compliance oversight and to better meet the needs of our census. We believe this initiative will help lower our external provider cost and improve the participant experience. Turning to center operations, as I mentioned earlier, we have nine of our 17 centers live on EPIC, with the remainder scheduled for the first half of fiscal year 24. we've made the decision to pull forward the Colorado market go-live to early fiscal year 24. Pulling forward the six centers in Colorado earlier than originally anticipated will likely create modest G&A headwinds in fiscal year 24, but we believe the expected benefit will more than offset the incremental investment. Though it takes many months to achieve full adoption and the expected benefits of a new system, we're encouraged by the operational efficiencies that are emerging. and the positive feedback our administrative and clinical teams are sharing. We expect the EPIC investment to be a powerful enabler to drive better compliance, productivity, and clinical staff satisfaction. We also continue to make meaningful progress implementing our new triad operating model, which focuses on the partnership among the center directors, nursing directors, and medical directors at the center, regional, and national levels. The triad model is predicated on driving better participant care, making faster operating decisions, and improving center-level contribution margin. We're starting to see the impact of forming this tight-knit team with aligned incentives and joint accountability. Regarding corporate costs, we continue to maintain discipline to hold corporate staffing costs constant as we grow back into our fixed cost base. The hiring controls we put in place six months ago have helped us better match our hiring pace and volume to our financial targets. We continue to focus on actions to ensure our G&A relative to revenue is aligned. while using savings as a funding mechanism for tools and technology that will improve efficiency and effectiveness. We believe there is a virtuous cycle behind these efforts in which our employees can be more productive, satisfied, and scalable. Additionally, we've also looked beyond the P&L and found opportunities to optimize our working capital, which we believe will drive approximately $10 million of benefit once fully implemented by the start of fiscal year 24. Turning to financial performance, We reported revenue of $172.5 million, a sequential improvement of approximately 3% compared to last quarter. We ended the quarter serving approximately 6,310 participants. For the quarter, we reported center-level contribution margin of $28.8 million and a corresponding center-level contribution margin ratio of 16.7%. Compared to second quarter fiscal year 23, center level contribution margin of $22.6 million, an increase of $6.2 million, and margin improvement of 320 basis points. The quarter overall demonstrated incremental progress in our core focus areas. However, as I mentioned at the outset, it remains too early to take the results of the quarter and extrapolate them into the future. We had the benefit of a few one-time tailwinds, which Barb will discuss, and we continue to face medical cost pressures from our deconditioned participant risk mix, which will take some time to normalize. To help contextualize that point, our consolidated RAF score as of March 31st was 2.53, which is up approximately 5% relative to our year-to-date average. To accelerate rebalancing of our risk pool, we will continue to focus on employing the SLAC capacity at our existing centers. Particularly in the Colorado market, resuming enrollment growth will drive better labor utilization in our centers and help rebalance our mix of new and tenured participants, which can improve participant expense PMPMs. In closing, the team's collective dedication to our participants and hard work through this last chapter, along with numerous investments and new processes, is beginning to unlock the full potential of the organization. I greatly appreciate their tireless efforts and continued commitment. and the ongoing support of our valued government partners. We look forward to continuing to demonstrate incremental improvement quarter over quarter in each of our focus areas and are seeking additional catalysts to deliver breakthrough impact and value to the organization over time. I know I speak for the entire organization that we are thrilled to be returning to our core mission of expanding PACE to the many deserving underserved seniors across the country. Now I will turn it over to Bob.