InnovAge Holding Corp.

Hello, and welcome to N of H fourth quarter fiscal 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 this 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, Ryan Cabuto. Sir, you may begin.

Thank you, operator. Good afternoon, and thank you all for joining the N of H Fiscal 2023 Fourth Quarter Earnings Call. With me today is Patrick Blair, President and CEO, and Ben Adams, CFO. Dr. Rich Pfeiffer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market close, we issued a press release containing detailed information on our quarterly and annual results. You may access the release from our company website, innovH.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 12, 2023, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. The reconciliation of these measures to the most directly comparable GAAP measures can be found in our fiscal fourth quarter 2023 earnings release, which is posted on the investor relations section of our website. We will be making forward-looking statements, including statements related to our guidance for fiscal year 2024, future growth prospects, Florida and Downey-Denovo Centers, potential acquisitions, our payer capabilities and clinical value initiatives, 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 could cause our actual results interiorly from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K Annual Report for Fiscal Year 2023 and our subsequent reports filed with the SEC. 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 want to begin by extending my deepest appreciation and gratitude to our InnovAGE employees, participants, government partners, and investors who continue to support us. Today, we'll provide several updates, results for fiscal year 23 of the fourth quarter, initial guidance for fiscal year 2024, a brief regulatory update, and progress in our key focus areas. Let me start with fiscal year 2023. For the full year, we reported revenue of $688.1 million, a decline of approximately 1.5% compared to fiscal year 2022, and center-level contribution margin of $101.3 million, which represents a 14.7% margin. Consolidated adjusted EBITDA was negative $1.3 million for the fiscal year. While not reflective of our go-forward potential, these results were in line with our expectations in a period that was negatively impacted by enrollment restrictions in Colorado and Sacramento. Moving to the fourth quarter, we reported revenue of $176.9 million, a sequential improvement of approximately 2.5% compared to the third quarter, and center-level contribution margin of $28.5 million, which represents a 16.1% margin. Consolidated adjusted EBITDA was $700,000 for the quarter. Overall, the year demonstrated considerable progress in our core focus areas and positions us well to build on this momentum. Second half of fiscal year 2023 center-level contribution margin was $57.3 million, an increase of approximately 30% relative to the first half center-level contribution margin of $44 million. Importantly, we still have approximately 50% center capacity across our portfolio, excluding the Florida de novos we were hoping. Utilizing the SLAC center capacity in each of our centers to serve additional seniors is a top priority. But more broadly, I want to acknowledge what we accomplished in fiscal year 2023. We resolved compliance audit deficiencies and had all enrollment restrictions lifted. We improved the core operational processes in every center, We strengthened our relationships with our federal and state regulatory partners. We implemented a pay-specific instance of EPICS EMR in 14 of our 17 centers, which will make us more efficient and bolster our compliance capabilities. We built essential payer capabilities that we believe will better position us to manage medical costs. And we weathered the negative financial impacts of the sanctions and are now entering a phase of growth and margin recapture. The last 18 months have been a difficult period in every sense. but we are pleased with our progress and now have a solid foundation for improving performance. I'm proud of our team for rising to the challenges with grit and humility, all while keeping our participant care our top priority. Turning to fiscal year 2024 guidance, we project a census range of 6,800 to 7,400. Member months of 79,000 to 83,000. Total revenue of $725 to $775 million. and consolidated adjusted EBITDA of $12 to $18 million. It is important to note that this guidance includes some conservatism given where we are in our journey and does not reflect our long-term optimism for the business. Fiscal year 24 guidance is by no means a destination. It is a waypoint to stronger financial performance as we resume growth, reach targeted staffing ratios, and continue filling the excess capacity in our centers. As a result, we anticipate seeing improvement in our profitability as the year progresses and exiting the year at a higher run rate. Further, we expect the rate of change in profitability to continue to increase until we reach mature margins. We appreciate that the initial adjusted EBITDA range is wider than most precedents. As we better understand how growth is going to impact our cost and our performance improvement initiatives are going to mature, we will evaluate refining guidance for the year after the end of the second quarter. We also plan to use this mid-year inflection point to refresh the investor community on the critical drivers of our business. As such, we'll be hosting our first investor day after second quarter earnings to review the business in detail. Regarding leadership, we continue to enhance the organization with additional high-impact talent. Ben Adams, our new chief financial officer, is the latest addition to the leadership team. Ben brings decades of operational finance experience and strategic expertise within the healthcare sector. I also want to take a moment to thank Barb Gutierrez for her innumerable contributions to the organization over the last six years and wish her all the best in her future endeavors. We also welcome Teresa Sparks to the board and to the audit committee. Teresa's public company health care and finance expertise will serve us well in the years ahead. We're enthusiastic to enter fiscal year 24 unencumbered to pursue our goals of responsible growth and to expand access to the many deserving seniors who would benefit from the PACE program. As we've methodically strengthened our business, I believe we begin this new year with the strongest foundation of the company's history, which we believe will result in consistent, responsible, profitable growth. Simply put, this is a year of laser focus on execution, margin recapture, and operational excellence. On the regulatory front, let me begin by expressing my appreciation to our government partners for their confidence in us and for the ongoing spirit of partnership, notably I'm happy to report we were released early from post-sanctioned monitoring in Sacramento by CMS and the state because of our strong and consistent audit results. We take the trust CMS and our state partners have placed in us with the utmost seriousness, and we will endeavor to continue to deliver highly compliant care at each of our centers. Our near-term priorities remain unchanged. to sustain a highly compliant, operationally excellent business that delivers exceptional patient care while executing a responsible, profitable growth strategy. Regarding existing center growth, we continue to experience sequential improvements in prospect lead volumes in gross enrollments in almost every market. Specific to sales qualified leads, we've seen this metric increase by approximately 90% over the last six months. We're also making significant strides in the productivity of our enrollment team. effectiveness of our digital marketing campaigns through the lead volumes coming from our digital channel and referral partners. We're also investing in a small internal sales team that will enable us to pre-qualify the increased lead volume in a cost-effective manner to increase our conversion metrics. In time, this will enable our field-based enrollment specialists to focus on moving prospects through the enrollment process more quickly. The enrollment ramp in Colorado and Sacramento, our formerly sanctioned markets, is tracking to our expectations. We're currently at pre-sanctioned levels of gross monthly enrollments in Colorado and trending positively in Sacramento. At the same time, the rest of our portfolio continues to perform with growth at or above pre-sanctioned levels in almost every market, reflecting our improved execution in this area. It is important to remember that enrollment is a joint effort between InnovAge and our state partners who process the applications and activate a new enrollment. We have observed some recent delays in the processing of enrollment applications, and we attribute this to state resource constraints, which may become further exacerbated by the ongoing Medicaid redetermination processes in some states. While this does not impact the eligibility of our prospective participants, it can delay enrollments and potentially cause eligible participants to seek other solutions. We continue to challenge ourselves to improve each stage of the enrollment funnel to be more productive, consistent, and efficient each month. As we pivot to new center growth, building a strong pipeline of new centers that will provide a sturdy base of embedded future earnings is paramount. In Florida, we continue to make progress on the administrative requirements to open centers in Tampa and Orlando. We recently completed the on-site state readiness review inspection in Tampa. In Orlando, we have received our adult daycare license and are working with the state to schedule the state readiness review. We continue to hold ourselves accountable to get these two centers operational as quickly as possible. Depending on the timeline of the remaining administrative steps, which can fluctuate, we anticipate that both centers will be open around the end of the calendar year. These two centers will expand our total center and census capacity by over 20%, and we're excited at the opportunity to meaningfully increase our visibility into double-digit top-line growth over the coming years. We are also pleased to announce that we have worked with the California Department of Health Care Services to resume our application and downing. large market southeast of Los Angeles. Recall, the state suspended our application when the Sacramento sanction was issued two years ago. While the timing of the application process remains entirely in the state's control, we believe this could enable us to open the center in mid-calendar year 2024. The addition of Downey would increase our census capacity by approximately 500 participants in this highly strategic California market. We couldn't be more excited to support the state of California in their mission to deliver affordable, integrated, high-quality healthcare. Lastly, we are also seeing increased state interest in the PACE model of care across the country. Increasingly, PACE is viewed as the gold standard in community-based care for dual eligible struggling to remain independent. We believe these models serving high-cost dual eligibles are the most compelling, forward-looking source of government program growth over the foreseeable horizon. In addition to the focus on our existing center and new center opportunities, We continue to observe a healthy pipeline for new partnership and tuck-in acquisitions as well. While the timing of transactions is difficult to predict, the level of activity we're seeing in the market gives us confidence that the inorganic opportunities can remain a key facet of our multi-program growth strategy. Healthcare delivery remains hyper-local, and we believe that partnerships can also unlock significant value in some of our markets. We will be opportunistic and focus on collaborating with organizations that share our commitment quality and participant-centric care. Regarding rates, I'll let Ben walk you through what we're expecting, but our overarching goal is to be more proactive and data-driven in our rate negotiations with states. We believe that the PACE model drives meaningful savings for our government partners when compared to alternatives. It is incumbent on us to empirically demonstrate the value we are delivering and to be paid a financially suitable rate for the services we offer. Turning to medical costs, our portfolio of clinical value initiatives is building momentum, and we're getting better every day at executing on the fundamentals of medical cost management. You'll recall that we stood up this foundational capability in fiscal year 2023 to manage core medical trend in a more professionalized and impactful manner. We have set up the analytics, team structure, and accountability models to continuously identify trend mitigation opportunities and to track our execution from ideation to P&L impact. To provide a few examples, we are improving the quality of our external provider networks while reducing our costs. We anticipate our current initiatives will deliver more than $4 million of annualized run rate improvement in the long term. We've reduced our short-stay skilled nursing utilization rate, which ended the fiscal year at 2%. This is a 60 basis point improvement, or approximately 23% reduction over fiscal year 2022. We estimate that every 10 basis points of improvement saves approximately $1 million. We are also expanding our case management capabilities to support the needs of our most complex participants to reduce the risk of avoidable emergency room admits and inpatient utilization. While our core medical trends have remained at elevated levels relative to pre-sanctioned periods, we believe our portfolio of initiatives will begin to mitigate the elevated trends we have observed. As context, our external provider costs were approximately 54.4% of revenue in fiscal year 2023. well above pre-sanction level results of 48.5% in fiscal year 21. Clinical priority number one is to get these costs back in line with historic levels while improving quality of care where possible. On an annualized basis, we estimate that a 1% improvement in external provider cost as a percentage of revenue represents almost $7 million of incremental profitability. You will recall from my comments last quarter, these will be dials, not switches. And while we are pleased with our progress, significant work remains. Lastly, we now have 14 of our 17 centers live on the new Epic EMR. As we have discussed previously, we view Epic as a chief enabler of increased operational productivity, efficiency, compliance, and clinical staff satisfaction going forward. As I mentioned last quarter, it will take months to achieve full adoption and the expected benefits of the new system. That said, we're highly encouraged by the operational efficiencies that are emerging and the positive feedback from our administrative and clinical teams. In closing, our team has moved mountains over the last 18 months to transform the business and position us to unlock our full potential. I am humbled by the privilege to lead this group as we enter the new year with an intentional balance of a caregiver's heart and an owner's mindset. We look forward to continuing to demonstrate incremental improvement quarter over quarter in each of our focus areas while we seek additional catalysts to deliver breakthrough impact and value to the organization over time. With that, I'll turn the call over to Ben for additional insight on the financials. Ben?

Thank you, Patrick. I'm excited to be here, and I look forward to speaking with all of you in the near future. Having been in the healthcare space for over 25 years, what excites me the most about joining InnovAge is the opportunity we see in front of us and the population we have the privilege of serving each day. Today, I will provide some highlights from our fourth quarter and fiscal year-end 2023 financial performance. As you probably saw in our press release this afternoon, we are pleased to reestablish our practice of providing annual guidance. So I will also go through a few highlights on our fiscal 2024 outlook. We ended the fourth quarter in fiscal year 2023 with 17 centers and approximately 6,400 participants as of June 30, 2023. Compared to the prior year, This represents an ending census decline of 3.9% and a 1.4% increase compared to last quarter. We reported approximately 77,370 member months in fiscal year 2023, a 6.6% decrease compared to the prior year. Total revenue decreased by 1.5% to $688.1 million for the fiscal year 2023. The decrease was primarily due to lower member months as a result of the sanctions, partially offset by the annual increase in Medicare and Medicaid capitation rates, which are net of the full reinstatement of sequestration in July 2022 and the ramp-up of new enrollments in Colorado and Sacramento. Compared to the third quarter, revenue increased 2.5 percent, primarily as a result of higher than anticipated Part C and Part D Medicare risk score true-up payments, coupled with the calendar year 2022 rate true-up in California. We incurred $374.5 million of external provider costs during fiscal year 2023, a 2.2 percent decrease compared to the prior year. The decrease was driven by lower member months, partially offset by an increase in cost per participant. The cost per participant increase was primarily due to higher assisted living and nursing facility utilization and unit costs, partially offset by a reduction in inpatient costs per admit associated with fewer COVID admissions compared to fiscal year 2022. External provider costs increased by 5.8%, primarily as a result of increased assisted living and short-stay nursing facility utilization. Additionally, and as we mentioned last quarter, we recorded a larger than anticipated pharmacy rebate in the third quarter, which contributed to the higher external provider costs this quarter. Cost of care, excluding depreciation and amortization of $212.3 million, was 17.8% higher compared to the prior year. Similar to our experience over the last several quarters, the primary cost drivers include, one, salary, wages, and benefits, which accounts for approximately two-thirds of the total variance, increased due to higher headcount as we filled key vacancies, higher wage rates, and increased labor costs associated with ongoing audit remediation and compliance efforts. Third-party audit and compliance support as we work through the audits and proactively perform self audits in our non sanctioned markets. Three, fleet and contract transportation driven by higher average daily attendance in our centers and an increase in external appointments and higher fuel costs. Four, increased building maintenance and security costs associated with growth in average daily attendance. five, increased supplies, travel, and mileage, and six, de novo rent expense. Cost of care decreased 1% compared to the third quarter of fiscal 2023, primarily due to decreased wage rates associated with lower benefit expense and a reduction in third-party audit remediation expense. The decrease was partially offset by an increase in fleet and contract transportation. Center-level contribution margin, which we define as total revenue less external provider costs and costs of care, excluding depreciation and amortization, was $101.3 million for the year compared to $135.4 million in the prior year. As a percentage of revenue, central-level contribution margin for the year was 14.7% compared to 19.4% in the prior year. Sequentially, our fourth quarter central level contribution margin of $28.5 million declined slightly compared to $28.8 million in the third quarter. On a percentage basis, central level contribution margin decreased sequentially 60 basis points to 16.1% compared to 16.7%. Sales and marketing expense was $19.6 million. a $4.6 million decrease compared to the prior year. The decrease was mainly due to a reduction in marketing spend and lower sales headcount as a result of the sanctions, and a reduction in sales commission expense due to the deferral of those commissions. Compared to the third quarter, sales and marketing expense increased by $800,000 to $6.1 million, primarily due to increased marketing spend and sales headcount following the Colorado sanction list. Corporate general and administrative expense was $115.6 million, a $14 million increase compared to the prior year. This was primarily due to increased headcount to support compliance and bolster organizational capabilities, increased third-party costs associated with the implementation of our core provider initiatives assessment of our risk-bearing payer capabilities, and strengthening our organizational capabilities. The implementation of EPIC, an increase in software license and maintenance expense, and increased legal costs. Sequentially, corporate general and administrative expense increased $1.3 million, primarily due to costs associated with organizational realignment and normalized VAT debt. partially offset by savings in insurance renewal. Net loss for the fiscal year was $43.6 million, compared to net loss of $8 million in the prior fiscal year. We reported a net loss per share of 30 cents on both a basic and diluted basis. Our weighted average share count was approximately 135.6 million shares for the year, 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 negative 1.3 million for the fiscal year ended June 30, 2023, compared to positive 34.3 million in the prior year. Adjusted EBITDA for the fourth fiscal quarter was $700,000 compared to $3.8 million in the third quarter. Our adjusted EBITDA margin was negative 0.2% for the fiscal year compared to positive 4.9% in the prior year. For the quarter, adjusted EBITDA margin was positive 0.4% compared to 2.2% in the third quarter. 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 approximately $1.5 million for the fourth quarter, primarily related to centers in Florida. Turning to our balance sheet, We ended the quarter with $127.2 million in cash and cash equivalent, plus $46.2 million in short-term investments. We had $87.6 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 fourth quarter, we recorded cash flow from operations of $13.2 million, inclusive of 28.1 million dollars of deferred revenue and we had four million dollars capital expenditures turning now to fiscal 2044 guidance as we highlighted in our earnings release based on information as of today we expect our ending census for fiscal 2024 to be between 6800 and 7400 and member months to be in the range of $79,000 to $83,000. We are projecting total revenue in the range of $725 to $775 million and adjusted EBITDA in the range of $12 to $18 million. And finally, we anticipate that de novo losses for fiscal 2024 will be in the $10 to $12 million range. Also, we would like to provide some additional color on the following topics. Starting with revenue. As a reminder, our Medicare rates are based on county-specific rates that are determined each calendar year by CMS. These are coupled with prospective risk score adjustments that CMS makes in January and July. For Medicaid, our rates are contractually determined based on cost per pace or comparable populations in each state. For fiscal year 2024, we are expecting a combined mid-single-digit rate increase comprised of the following. A low single-digit Medicare Part C increase, a mid-single-digit Medicare Part D increase, and for Medicaid, a mid-single-digit rate increase inclusive of 13 percent in Colorado. which includes funding for assisted living and nursing facility unit cost increases effective July 1, 4% in Virginia, and an estimated low single-digit rate increase in California effective January 1, 2024. We do not anticipate a rate increase in Pennsylvania at this time, and we are in active rate discussions with New Mexico. Finally, some thoughts on cost of care, external provider costs, and overall center-level margins. In the midterm, we continue to believe that we can obtain margins similar to what we experienced before the sanctions, although the composition of our center-level costs are likely to look different. The investments that we have made, particularly in staff-related costs, have elevated our cost of care expense compared to historical levels. But as we have discussed, we are executing on initiatives designed to drive value, bend the curve, and deliver margin over time. Though it will take multiple quarters to return to more robust margins, our focus remains on the key drivers. Specifically, accelerating census growth, which also serves to rebalance the participant risk pool, as well as to unlock staffing capacity. Ensuring our participant risk pool aligns with risk scores to improve participant data management as we fully implement EPIC. Optimizing revenue per participant through proactive actuarial discussions with our state Medicaid agencies and executing on clinical value initiatives to improve participant care and reduce unnecessary costs. All of which we expect will drive a meaningful improvement in our margin profile. In closing, I want to reiterate my excitement about the opportunity we see in front of us. In my short time here, I can see how hard the team has worked to accomplish all that has been done to date, and I look forward to expanding access to PACE to the many seniors who could benefit from the program. Operator, that concludes our prepared remarks. Please open the call for questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jamie Pierce with Goldman Sachs. Your line is open.

Hey, thank you. Good afternoon. I just wanted to start with Colorado and the trends you're seeing there in terms of re-enrollment and you talked about good progress in terms of restarting the various channels you have for finding those patients and converting them. And just get any more color on, you know, how that's tracking relative to expectations. You know, it sounds like you're back to pre-sanctioned levels of enrollment. Do you think there's more progress there just, you know, given you're at a lower base? Can you accelerate that further? And then as it relates to guidance, I mean, what's in... your guidance assumptions with regard to patient enrollment, particularly in those markets that were previously sanctioned, as well as Florida, if there's any kind of estimation you have in guidance for contribution to Florida this year. And I have one follow-up.

Hey, Jamie. It's Patrick. Appreciate the questions. Yeah, maybe starting with Colorado, I would say we're very pleased with your progress sort of out of the gate. You know, we knew it would take some time to ramp up, and I think we're, you know, tracking very closely our expectations. Please stand by. Jamie, I don't know if you got that. I might have gotten cut off there, but thanks for your question. Maybe I'll start with, you know, Colorado and just say that, you know, we're very pleased with the progress. Are we still on you?

No, we are not.

I can hear you just fine.

Thank you. We were struggling with that here in the room and apologize to the audience. Just starting with Colorado, we're really pleased with our progress. You know, we're really focused on sustaining it. But overall, I think we're pleased with the fact that we've gotten back to sort of what's called pre-sanctioned gross monthly enrollment sort of targets. And, you know, that's happened maybe a bit sooner than we thought we might get there. We're seeing a lot of interest in the program across the board. I did mention in my remarks some of the lead volumes and new channels. Every enrollment starts with interest in the program, and I think we've done a really nice job of increasing our lead volume over the last couple of quarters. We're looking at not only new channels, but we've taken the opportunity to just improve our marketing content, our creative campaigns, our media buys. So I think we're filling the top of the funnel very effectively. As you know in PACE, as things move through the funnel, there's a variety of sort of layers of qualification that have to occur. But I'm feeling very good about the work the team's doing to grow the interest in the program. And it's led to a great start post-sanctions. Our expectation is that continues. I think it's a little too early to tell whether that growth rate increases substantially. I think that's really factored into our range from a guidance perspective. I think all is good there. In Sacramento, it's a little different story because it was a new market to begin with and immature. We're not as focused on getting back to where Sacramento was, we're actually setting a higher bar for ourselves in Sacramento, and we're making good progress against that. In terms of the other markets, I would just say that all of the non-sanctioned markets are growing as expected. New Mexico is probably a market where we're maybe a click behind where we want to be, but for the rest, we feel very good about it. It's a bit early to share anything on Florida, and I don't think we've broken out Florida enrollment targets quite yet. But as we pointed out, we've got a lot of capacity there between the two centers and are already starting to ramp up, already starting to hire, already making a lot of progress in the community, and are excited about launching that.

Okay, great. And then I just wanted to go to external provider costs, maybe near-term and over the longer term. I know you mentioned the 1% improvement drives a $7 million improvement in profitability, which I get is kind of just simply the math, but what's the path to achieving that, again, just in the short term, what you think you can accomplish this year in terms of improvement against external provider costs as a percent of revenue? And then longer term, what are the longer term initiatives and how much progress do you think you can make on that front? Thank you.

Yeah. In terms of timing this year, we've got a robust portfolio. I think our guidance is reflective of those initiatives maturing over time and having an impact over time, predominantly in the last part of the year and going into fiscal year 25. When you think of those that are going to have the largest impact the soonest, it's really those around the provider unit costs. So, you know, I think we've said in the past, we've done a lot of diagnostics, you know, on our provider network and our reimbursement rates to our providers. And we found some areas across the country and provider types where we feel like there's opportunity to improve that. And so we've got a broad range of, let's call them re-contracting initiatives that touch core areas of our external provider cost. Hospitals, as well as a broad array of ancillary vendors, DME, lab imaging, you know, we're looking at every single driver of our medical cost. We're looking at our unit cost and building initiatives to ensure that in every market we're, you know, reimbursing providers at market rate. And, you know, over time it's easy for those things to kind of inflate And so you've got to be very diligent about it. And I think that sort of the provider network side is around $4 million right now is kind of what we're targeting in sort of annual savings. It all depends. The impact to 24 is just going to depend on sort of when we get the contracts negotiated. But overall, I feel very good about the unit cost initiatives. And then I might ask Dr. Pfeiffer just to say a few words about utilization. which is sort of the other side of the cost. And that's an area we've made a lot of improvement recently in. It just has sort of a longer timeline on it, because you're changing behavior rather than renegotiating the contract. And Dr. Pfeiffer and his team are just doing a really great job of building that expertise within the company. So let me ask Rich just to comment on a few areas, Rich, that you feel like are going to have an impact over time.

Sure, and some of them are going to have an impact sooner and some later. But of course, the areas we need to focus the most on impact utilization are the main drivers of low value, high cost impacts. So we're looking at ER utilization, inpatient utilization, hospitalizations. We're looking at skilled nursing facility, short stay or skilled days, and hospice costs. Those are four big buckets, ones where we can have a significant impact, not only in reducing avoidable costs, but in many cases improving participant and patient safety care and their overall experience. And so one example of how we're tackling that is ensuring that our clinics are available and accessible to our participants even longer in the day and frankly throughout the week so that they're accessible nights and weekends and we have after-hour coverage so that we can reduce the chance that a participant might seek to go to the emergency room on their own. And as we know, about 40% of emergency room visits from our population get admitted. So that's just an example of how we're tackling utilization, and we have a whole bunch of other initiatives to get at that.

Thank you, Rich.

Thank you. One moment for our next question. And that will come from the line of Jason Casorla with Citi. Your line is open.

Great, thanks. I wanted to ask about revenue PMPM development. You know, 24 revenue and census guidance ranges are pretty wide, but just directionally, would you expect a continued quarterly step up in PMPM in the first half of the fiscal year? There may be some rollover in the back half as the average acuity of your census decreases, the lower 24 MA rate kicks in. those January 1st kind of rate increases kicking for Medicaid or, you know, can you just give us a sense on how PMPM development should trend moving through fiscal 2024? Thanks.

I'm going to have Beam take a stab at that. Sure. Great to meet you virtually over the phone. I think in terms of, you know, revenue PMPM, you know, there'll be some variability from quarter to quarter over the course of the year. So I think if you take a look at what we've given in terms of revenue guidance and in terms of member months, you can figure out where we expect to get over the course of the year. We are expecting some reasonable rate increases from various states over the course of the year. And so I think if you look at the progression, it should be relatively logical over the course of the year.

Okay, got it. Thanks. And then just want to go back to your comments on Medicaid redeterminations. I would think the higher acuity nature of your census population in the PACE process would sort of insulate from perhaps procedural redeterminations, but it sounds like there could be pressure more on the enrollment side. I guess just any incremental color on the redeterminations impact within the outlook would be helpful. Thanks.

Sure. I think you've got it right that just generally speaking, we don't expect our population to be impacted much by redetermination relative to, say, other Medicaid managed care programs. I think the point that we're making is that it's a big initiative across all of our states, and they're actively pursuing redetermination, and sometimes the resource constraints can be felt in the PACE program. As we've said before, enrollment in PACE is sort of a partnership with our states. There's various steps in the enrollment process and in various areas where we share data. And if there are constraints from a resource perspective driven by redetermination, we can feel that in a bit of a slowdown. Thus far, we've been able to work through it in sort of every state through our relationships. We just point it out because it is sort of an overarching you know, macro initiative happening within Medicaid that can have a resource constraint within the enrollment processing but not impact, you know, the eligibility of our members or, you know, result in our members not being enrolled. It can simply be a timing question.

Okay, got it. Thanks for the clarity. And maybe just one last one here. You know, just with headlines over the past month or two indicating a new COVID variant and an uptick in COVID admissions, I guess, across the U.S., You know, have you started to see an increase in COVID incidents across your census population? And I guess last winter was a tough flu and RSV season. Just curious on what's embedded in guidance around kind of this upcoming winter COVID and perhaps flu season. Just any thoughts there would be helpful. Thanks.

Sure. I'm going to ask Rich to weigh in on that.

Yes, we already are seeing an increasing number of cases, whereas for the last few months before this month, things have been really quiet. We have a couple of outbreaks. They're relatively minor, just clusters of cases involving participants and staff. But so far, we're not seeing severe cases. Remember, we have a generally highly vaccinated population of participants and staff. They likely have residual immunity. And we will be focusing on giving them the new monovalent vaccine, which was just recommended today by the CDC. We'll be focusing on giving them boosters this fall to ensure that that level of immunity continues. So yes, it's an issue, but no, it's not adversely affecting our population or our economics much at this point.

Anything in your guidance or expectations around that, or would you just kind of assume that it goes forward?

There's nothing specific in guidance included about that. I think we've looked at the totality of our costs going forward, and then we've used those to look at guidance. We obviously look at and consider these types of scenarios in conjunction with Dr. Pfeiffer and others, but there's nothing specific in guidance related to that item.

Fair enough. Thank you for all the calls today.

Thank you. As a reminder, if you would like to ask a question, please press star 1-1. One moment for our next question. That will come from the line of Matt LaRue with William Blair. Your line is open.

Hi, this is Madeline Millman on for Matt. I just wanted to say, I think you said that the Sacramento post-audit monitoring period had been lifted earlier than expected. But just to clarify, are you still in the post-monitoring period in Colorado, and what do you anticipate the sort of impact on total cost to be from that in 2024?

Yes, this is Patrick. So in Sacramento, both CMS and the state have released us for monitoring, and we're just sort of going through the remaining steps to sort of close that out. In Colorado, I don't want to try to predict what the outcome will be there, but what I can say is we are having consistent month-over-month positive results in Colorado, but we're expecting that to continue through the end of the year. It'll be a surprise if it's shortened, and we welcome that, but the team's doing a great job in Colorado, so feeling really good about that. In terms of cost, It's still a bit early to tell. The fact that Sacramento ended early really hasn't had much of an impact in terms of our cost associated with the audits because we've just pivoted a small team of people to the Colorado side. But I think once Colorado ends, there definitely are going to be areas where we expect some improvements in our staffing cost. We use a lot of third parties just to support augment our team when it comes to audits. And those will cease once the monitoring is done. And then we'll be looking for other areas to sort of pick up some cost savings as a result of the monitoring slowdown. But I don't know that we have a target number quite yet.

Great, thank you. And then with the new enrollment, the patients that are being enrolled in the sort of unfrozen centers, have you seen any initial trends in terms of age, acuity, et cetera, compared to the existing patient population that you had?

In the non-sanctioned markets, I wouldn't say that we've seen any significant differences from what we've experienced historically. Our goal is always to have Our population reflect the population in the community, and the community has a mix of people that are living independently and those that are receiving some type of supportive housing. And so that continues, I think, in all of our markets. So there's nothing remarkable that I would point out in terms of that. I think the key is we don't have any more sanctioned centers, and we're growing everywhere now.

Great. Thank you so much.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Patrick Blair for any closing remarks.

Thank you for your continued interest in the company. We're excited to be unencumbered by the sanctions. We worked hard to address those in the last fiscal year. We're growing our top line consistent with historical standards. We're getting reasonably good rates from our states in CMS and improving risk adjustment. We have some de novos that are coming online and with more in later years and we're really pleased with our progress. I think, you know, I would sum it up as, you know, it's a question of not when, or excuse me, not if, but when. We're really confident in the profile of the company going forward, and it's just a question of timing, you know, on a lot of fronts, and that's what we're doing our best to predict each quarter, and we look forward to bringing folks into our investor day sometime after second quarter, and we'll take people through the drivers of the business. So really appreciate everyone's support, and we'll look forward to the future.

Thank you all for participating. This concludes today's program. You may now disconnect.