InnovAge Holding Corp.

Good day, and thank you for standing by. Welcome to Innovate's second quarter 2025 earnings conference call. At this time, all participants are in a 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. 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 Kubota, Director of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you all for joining the Innovate 2025 Fiscal Second Quarter Earnings Call. With me today is Patrick Blair. CEO, and Ben Adams, CFO. Michael Scarborough, President and COO, and Dr. Rich Pfeiffer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal second quarter results. You may access the release on the investor relations section of our company website, Innovate.com. For those listening to the rebroadcast of this call, We remind you that the remarks made herein are as of today, Tuesday, February 4th, 2025, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. Reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also be making forward-looking statements, including statements related to our 2025 fiscal year projections and guidance future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare rate increases, census headwinds, 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 annual report on Form 10-K, for fiscal year 2024, and any subsequent reports filed with the SEC, including our most recently quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I'd like to start by expressing my sincere appreciation to our colleagues, participants, government partners, and the investor community for their continued support of Innovate. Your commitment and collaboration remain essential to our mission, and we value the trust you place in us. The company's second quarter results were in line with our expectations and were reaffirming our fiscal 2025 guidance set in September. We continue to make meaningful progress in strengthening the business, driving top-line growth and margin improvement in alignment with the multi-year roadmap we outlined at Investor Day last year. This quarter included some one-time adjustments, which while not unusual for a company of our size, impacted our financials. Given our scale and ongoing transformation, some quarter-to-quarter variability is expected as we true up revenue and expenses against prior estimates. Ben will provide further detail on these adjustments in his remarks. Looking ahead, we enter calendar year 2025 with positive momentum. On the reimbursement front, we were pleased to see Medicaid rate increases in California and Pennsylvania for 2025 that appropriately reflected cost trends. Additionally, our core medical cost trends remain in line with expectations, driven by the success of our clinical initiatives. As our more mature clinical value initiatives reach full impact in the back half of the fiscal year, we see potential for additional financial upside. Taking a step back, we continue to see strong momentum in the PACE industry, with steady growth in demand for services that enable seniors to remain safely in their homes rather than transitioning to institutional care. PACE remains a proven, high-value, community-based, integrated care solution for seniors with complex care needs, and we're encouraged by the continued expansion of the model nationwide. Over the past three years, approximately 50 new PACE centers have opened across the country, a 16% increase from the roughly 300 centers operating in January of 2022. We believe this sustained growth reflects the increasing recognition of PACE's value among policymakers, healthcare providers, and the communities we serve. Importantly, PACE has long enjoyed bipartisan support, and we believe the incoming administration will continue to champion its role in high-cost senior care. As an industry leader, we remain actively engaged with our national association and federal and state officials to shape policies that further enable PACE expansion. ensuring more seniors can benefit from this model of care. Turning to our quarterly financials, we reported revenue of $209 million for the quarter, a 2% increase compared to the first quarter. Center-level contribution came in at $37.1 million, representing a 17.7% margin and a 7% sequential improvement. Adjusted EBITDA was $5.9 million, and census grew to $7,480. reflecting approximately 4% quarter-over-quarter census increase. Our results demonstrate continued progress across key areas, including top-line growth, medical cost management, center-level staffing cost, and SG&A, but for one-time adjustments, which Ben will touch on in his section. This performance reflects the inherent seasonality of our business, and as we continue to recapture margin, I'll remind everyone that our fiscal year guidance remains somewhat back-in-weighted. Overall, we are executing on our strategy and remain pleased with the trajectory of our business as we move through the second half of the fiscal year. I recently marked my third anniversary with InnovAge, and it's been a moment of reflection on both how far we've come and the important work that still lies ahead. In many ways, the first 18 months were about stabilization, aligning the organization around urgent priorities, addressing critical compliance gaps, strengthening our quality and regulatory functions, and restoring trust with our government partners. It was a challenging and intense period, but we emerged stronger. The following 18 months, ending this past calendar year, were focused on foundation building and optimization, reinforcing core business processes, elevating talent in key roles, enhancing financial discipline, and positioning the company for long-term success. This wasn't just about fixing the past. It was about rediscovering our identity as a great company and proving that we could operate with consistency, excellence, and confidence. Today, Innovage is in the strongest position it has been in years. But we are not content with simply maintaining progress. The next 18 months will be about transformation, setting a bold vision for the future, challenging ourselves to work smarter, collaborate more effectively, and scale in ways that drive sustainable, profitable growth. This is about reimagining how we operate, how we deliver value, and how we fulfill our mission to provide exceptional care to seniors who rely on us every day. On the organic front, we continue to see steady progress. Our census increased to approximately 7,480 participants, representing over 10% year-over-year growth compared to the second quarter of fiscal 2024. Our sales and marketing teams are strengthening workflows to better identify and engage prospective participants, while also expanding referral channels to enhance the durability and predictability of future growth. This year, we've invested in technology to track and manage lead submissions in real time, providing greater visibility into our pipeline. Additionally, we've developed new tools that improve the accuracy and efficiency of assessing financial eligibility, helping to streamline the enrollment process. Regarding our de novo centers, our Tampa and Orlando centers continue to grow monthly enrollment, and we are encouraged by the shared mission of our exclusive joint venture partner in Orlando, Orlando Health. And in Crenshaw, we eclipsed 100 participants this month, a significant increase from the 20 participants at the time of the acquisition a year ago. While still early in its growth trajectory, Crenshaw is an example of our ability to successfully acquire smaller pace organizations transition them to our operating model, and scale them effectively. That said, as I've mentioned in prior calls, state-driven enrollment processing delays, both for new enrollments and Medicaid redeterminations, continue to impact certain markets. These delays can affect both our gross enrollment when applications are stalled and our net enrollment when Medicaid disenrollments and redeterminations take longer than expected. In California this quarter, These delays led to higher allowances against accounts receivable and corresponding write-offs. The state has been a good partner, and we're making every effort to reduce future exposure. We remain confident in our ability to drive sustainable census growth while managing variability in our financial results. A brief note on regulatory compliance activities. In California, the state audit processes remain open in Sacramento and San Bernardino. We intend to provide updates as they become available. Operationally, our new president and COO, Michael Scarborough, has hit the ground running, bringing fresh thinking and a heightened level of rigor to our operations. His leadership is already driving momentum, and I strongly believe his approach will translate into stronger operating and financial performance over time. Michael's arrival has reinforced our confidence in the next phase of our transformation, enabling us to take on higher impact initiatives over the next 12 to 18 months, Specifically, he's been evaluating ways to reimagine key operational areas through a technology-first mindset, such as sales and marketing, call center management, appointment scheduling, and transportation. By leveraging innovative tools and empowering our staff, we aim to create a fully integrated ecosystem that connects participants, staff, and providers more effectively across these functions. While we have not yet fully quantified the impact, we expect to incorporate these improvements into our fiscal 2026 guidance. As we continue optimizing our operating model, we are thoughtfully evaluating which capabilities to insource and where it makes sense to leverage external partners. Great companies strike the right balance, owning mission-critical functions that drive quality and efficiency while leveraging third-party expertise in areas that are not core to their strategic value proposition. In line with this approach, we recently acquired a small pharmacy in the Denver area, marking an important step in bringing critical capabilities in-house. By assuming direct control over pharmaceutical packaging and distribution, we believe we can enhance compliance, improve participant outcomes, and increase satisfaction, while also reducing costs previously paid to third parties. Over time, we expect to unlock further value by integrating pharmacy services more seamlessly into our clinical care model. creating an integrated end-to-end system from prescribing to last-mile delivery. Another key area of focus is provider network management, where we have recently added an experienced, dedicated leader to drive external network development and optimization. While we directly manage approximately 35% of our healthcare spend within our centers, the remaining 65%, more than $400 million in fiscal 2024, is spent on care and services outside our center. Given the scale of this spend, we see opportunity to improve quality, enhance care coordination, and reduce costs by becoming a more sophisticated data-driven partner to our providers. Beyond these specific initiatives, we remain laser-focused on cost discipline across the organization. We see additional opportunities to drive efficiencies and standardization within our centers while better leveraging our corporate G&A infrastructure as we scale. Ultimately, all these efforts contribute to building a differentiated and highly scalable platform in the PACE market, one that will not only strengthen our ability to grow organically, but also enhance our competitive position for future M&A opportunities. With PACE continuing to expand nationwide, we believe there will be compelling acquisition opportunities over time. Our goal is to position InnovAge as the strategic partner or buyer of choice, leveraging our platform to accelerate growth, enhance compliance, improve participant experience, and drive incremental contribution margin. Turning to clinical performance, we continue to demonstrate strong management of external provider cost. Compared to the first quarter, external provider cost increased by 0.7%, which was driven by an increase in member months and, importantly, a decrease in cost per participant. Given the seasonal pressures of flu, localized COVID resurgences in select communities, and persistently high utilization across the broader healthcare system, our ability to contain cost growth reflects the strength of our proactive individualized care model. By staying ahead of these challenges, we are effectively mitigating cost variability while ensuring high quality care for our participants. I'm pleased with the steady progress we've made and the momentum we continue to build quarter over quarter. As we enter this next phase of our journey, we are not just fine tuning the business, We are fundamentally elevating it. We will challenge old ways of thinking, sharpen our execution, and push ourselves to operate at a higher level. Our vision is clear to build the leading PACE platform, one defined by best-in-class people, processes, and technology. We're committed to delivering meaningful value to our participants, caregivers, regulatory partners, and investors, and we will execute relentlessly to achieve our full potential. With that, I'll turn it over to Ben to walk through our quarterly financial performance.

Thank you, Patrick. Today, I will provide some highlights from our second quarter fiscal year 2025 financial performance and insight into some of the trends we are seeing in the current quarter. Starting with Census, we served approximately 7,480 participants across 20 centers as of December 31st, 2024. which represents annual growth of 10.3 percent from the second quarter of fiscal year 2024, and sequential quarter growth of 3.7 percent. We reported 22,200 member months in the second quarter, an increase of approximately 10.3 percent compared to the second quarter of fiscal year 2024, and an increase of approximately 3.8 percent over the first quarter. Total revenues of $209 million increased 10.6 percent compared to $188.9 million in the second quarter of fiscal year 2024, primarily driven by an increase in member months largely due to growth in our existing California and Colorado centers, and to a lesser extent, the addition of our two de novo centers in Florida and the Crenshaw Center acquired from Concerto in California. Rates increased slightly when compared to the second quarter of fiscal year 2024 due primarily to the annual increase in Medicaid capitation rates. This was partially offset by an out-of-cycle Medicare Part C risk or true-up payment received in the prior year, coupled with a change to our reporting methodology, which we previously disclosed in the fourth quarter of fiscal year 2024, where effective July 1st, a portion of what was recorded as bad debt in previous years is now recorded as revenue reserve. Compared to the first quarter of fiscal year 2025, total revenues increased 1.9%, primarily due to the sequential increase in member months, partially offset by a decrease in Medicare rates associated with decreasing risk scores as new patients are entering PACE with lower risk scores and disenrolling participants are leaving PACE with higher risk scores. We also continue to experience delays and increased gaps in eligibility with enrollment and redetermination applications, particularly in the state of California, as a result of state and county agency processing delays and other enrollment and redetermination procedures. While these delays have not had a material impact on our financial results or operations during the first two quarters of fiscal 2025, we continue to assess the situation. Despite these continued delays, we are pleased with our results for the first half of fiscal year 2025. We incurred $107.9 million of external provider costs during the second quarter of fiscal year 2025, an increase of approximately 6.8 percent compared to the second quarter of fiscal year 2024. The increase was primarily driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in inpatient, assisted living, permanent nursing facility, and short-stay skilled nursing facility utilization, coupled with a decrease in external hospice care associated with the transition of this function to internal clinical resources. This was partially offset by an increase in inpatient unit costs an annual increase in pharmacy costs, and an annual increase in assisted living and permanent nursing facility unit costs. Compared to the first quarter, external provider costs increased 0.7 percent. The sequential increase was primarily driven by the increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was due to pharmacy expense timing, coupled with lower utilization in permanent nursing facilities, short-stay skilled nursing facilities, and assisted living facilities. Cost of care, excluding depreciation and amortization, was $64.1 million, an increase of 17.9%, compared to the second quarter of fiscal year 2024. The increase was primarily due to an increase in member months coupled with an increase in cost per participant. The increase in expense was primarily driven by higher salaries, wages, and benefits associated with increased headcount and higher wage rates, increased software license fees, an increase in contract provider expense in California associated with growth, and de novo occupancy administrative expense associated with opening centers in Florida and the two centers acquired from Concerto in California. Cost of care, excluding depreciation and amortization, increased 1.1 percent compared to the first quarter. The increase was primarily due to an increase in headcount to support growth, including contract providers in California, partially offset by lower recruiting costs, supplies, and administrative expense. This was partially offset by a decrease in cost per participant. Central level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, was $37.1 million for the quarter, compared to $34.5 million for the first quarter of fiscal year 2025. As a percentage of revenue, central level contribution margin of 17.7 percent increased by approximately 90 basis points in the quarter, compared to 16.8 percent in the first quarter of fiscal year 2025. Sales and marketing expenses of approximately $7.7 million increased 31.5 percent compared to the second quarter of fiscal year 2024, primarily due to increased headcount and marketing to support growth. Sales and marketing expenses increased by approximately 18.7% compared to the first quarter of 2025 as a result of increased media investment, the introduction of a new retention-focused direct mail campaign during the open enrollment period, and additional spending to support growth. Corporate general and administrative expenses of $28.1 million increased 11.3% compared to the second quarter of fiscal year 2024. The increase was primarily due to an increase in employee compensation and benefits as a result of greater headcount and wage rates to bolster organizational capabilities, an increase in consulting expense, primarily in support of the pharmacy acquisition, an increase in fees associated with claims payment integrity audits, an increase in software license fees, and higher recruiting costs. These costs were partially offset by a decrease in consulting expense associated with improving organizational capabilities, including the transition to a new electronic medical record system and a reduction in insurance expense. Corporate general and administrative expenses increased by approximately 2.1 percent compared to the first quarter. The increase was primarily associated with recruiting, consulting, travel, and administrative expenses. Net loss was $13.5 million compared to a net loss of $3.8 million in the second quarter of fiscal year 2024. We reported a net loss per share of 10 cents on both a basic and diluted basis, and our weighted average share count was approximately 135.4 million shares for the quarter on both a basic and fully diluted basis. Additionally, as we've called out in the earnings release, we recorded an impairment of right of use asset and construction in progress of approximately $8.5 million related to halting development on our previously planned de novo center in Louisville, Kentucky, that we are no longer pursuing. It is important to note that this, combined with the previously disclosed one-time Medicare true-up payment in the fiscal second quarter of 2024, heavily impact current and prior period net loss comparisons. Adjusted EBITDA calculated per our previously described methodology was $5.9 billion for the quarter compared to $6.9 million in the second quarter of fiscal year 2024. Our adjusted EBITDA margin was 2.8% for the second quarter compared to 3.2% in the first quarter of fiscal year 2025. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to pre-opening and startup ramp through the first 24 months of de novo operations. For the second quarter, de novo losses were $4 million and are primarily related to our Bakersfield and Crenshaw centers acquired from Concerto in fiscal year 2024 and our Tampa and Orlando centers in Florida. This compares to $2.2 million of de novo losses in the second quarter of fiscal year 2024 and $4.1 million of de novo losses in the first quarter. Turning to our balance sheet, we ended the quarter with $46.1 million in cash and cash equivalents. plus $40.8 million in short-term investments. We had $78.3 million in total debt on the balance sheet, representing debt under our senior secured term loan, convertible term loan, and finance leases. For the second quarter, we recorded negative cash flow from operations of $6.8 million and had $1.3 million of capital expenditures. We repurchased approximately 200,000 shares of our common stock for an aggregate of approximately $1.1 million under the company's share repurchase plan during the quarter. We are reaffirming our fiscal year 2025 guidance, which we laid out back in September. Based on the information as of today, we expect our ending census for fiscal year 2025 to be between 7,300 and 7,750 participants, and member months to be in the range of 86,000 to 89,000. We are projecting total revenue in the range of $815 million to $865 million, and adjusted EBITDA in the range of $24 million to $31 million. And we anticipate that de novo losses for fiscal 2025 will be in the $18 to $20 million range. Regarding the trends we are observing in the business as we head into the second half of the fiscal year, first, we received calendar year Medicaid rate increases in California and Pennsylvania in the mid to high single digits that went into effect January 1st. We are pleased with the results of the rate setting process this year and with the engagement of our respective state partners. Second, while still early, we are optimistic that our new retention focused efforts for the Medicare open enrollment period will prove beneficial and reduce patient churn as we continue into the fiscal third quarter. Finally, We are continuing to assess the enrollment and redetermination delays we are experiencing in California that we mentioned previously, and we are closely monitoring this situation as it develops through the remainder of the fiscal year. In closing, we are pleased with our results for the first half of fiscal year 2025. We remain focused on day-to-day operational execution and are mindful that our participants are at the core of our work. We believe that the comprehensive and personalized model of care PACE requires positions us to provide a level of service that is unmatched in traditional Medicare Advantage and enables us to have greater visibility and consistency in medical cost trends despite the level of frailty in the population we serve. That concludes our prepared remarks. Please open the call for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be 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 Purse from Goldman Sachs.

Hey, thank you. Good afternoon. Patrick, you mentioned in your prepared remarks that the next 18 months would be about transformation. You've obviously gotten through the bulk of the regulatory matters, but no major updates there. You've opened the Florida facility, started down the road on M&A, both facilities and you know, support facilities on the pharmacy side. So what are you alluding to in terms of the transformation? Is it more of, you know, opening of facilities and building these capabilities and M&A, or is it something beyond that that you're, you know, thinking about as you go through this transformation process over the next 18 months?

Yeah, well, thanks for the question, Jamie. You know, what I would say is is it really begins with kind of reimagining how we do what we do. It isn't about, it's not going to be about kind of optimizing kind of the traditional way of delivering services as both a provider and a payer. One specific example would be We now have Epic in across all of our markets. It's a very powerful tool with AI capabilities as well as some more sophisticated operational capabilities. And so driving greater productivity and efficiency in every aspect of our business is a big part of that. I would say there are a handful of foundational business processes that really make up the core of what we do. There are things like placing orders for services, scheduling those orders, transportation, customer service. These are all areas within the company that we've addressed regulatory issues deficiencies in them but now we see an opportunity with kind of a technology first mindset really to integrate them, strengthen the participant satisfaction with each of them and you know drive operating efficiency in the company and therefore you know pushing for margin you know expansion through these things. Another area which you probably heard me talk about in the past, this notion of payer capabilities. It's constantly reinforced in my mind that we're both a care delivery organization and a payer like any other managed care organization. And there are certain payer capabilities that we've got opportunity around and Michael Scarborough, who has a deep background in both provider and payer, is already identifying opportunities in areas like our network management. You know, whether that is optimizing the network itself, optimizing unit cost, optimizing the data that we're sharing in order to provide more efficient services, you know, how we pay claims, how we ensure we're not paying for anything that we shouldn't be, we're not being billed for anything that we shouldn't be. In some ways, it really is reimagining what the company's done in the past across all these key areas, not just sort of fortifying and removing deficiencies in kind of older traditional processes. And as I said in my opening remarks, it was not an overstatement. With Michael's arrival, I think the confidence in our ability to take these things on is very high. And so we're going to kind of put our shoulder into it. and we're going to spend the better part of the next few months really thinking through what are those opportunities, what's the value capture associated with them, what's the investment we would make, what's the return on that investment, what's the talent we need to pull it off, and we think all those things are really going to lead to us being an even stronger and better company over the next 18 months.

Okay, great. That's helpful, Color. And maybe one just on the funding model. I wanted to get a better sense of, you know, within the revenue per member per month, how much is funded by Medicare and Medicaid and what's driven growth historically between those two components. And then within Medicaid, can you remind us the funding mechanisms, just how much is funded by states versus federal matches? And You mentioned the favorable backdrop you've been in, you know, with rate growth and, you know, sounds like the PACE program growing overall across the country. You alluded to that continuing under the new administration. Is there something specific, you know, you can point to that gives you confidence in that? Or, you know, how are you assessing the new environment we're in?

Well, there's a lot there. I think I'll let Ben prepare his thoughts in terms of the mix between how we're paid. But roughly speaking, I'd say you're looking at probably a $3,000 Medicare Part C, maybe a $1,000 Medicare Part D, and then about $5,000 for Medicaid. That kind of gets you to that $9,000 per member per month gap. I don't know that I can speak to the federal match for the 5,000 because it varies by state. The match does itself. But let's just say 50-50, you know, is sort of a baseline. Then it can be maybe more or less, you know, by state. But I think that's sort of the mix there. As it relates to the broader market, I think that, you know, you know we've made some investments in sort of the government affairs function within the organization. We brought on John Kern, who's got a deep background in government programs and government relations. And as we engage with states, as we engage with the federal government, as we, you know, frankly begin to foreshadow, you know, the leadership and the new administration, we're consistently hearing the question, you know, Can PACE serve more people? You know, is there more that can be done to support PACE growth? And, you know, fundamentally what we talk about, without giving you like kind of the specifics, Make it easier for PACE to grow and expand into new markets. Make it easier for individuals to enroll in PACE. Make it as easy to enroll in PACE as it is Medicare Advantage. Remove that disparity that exists today between those two programs, for example. Rate adequacy. You know, I wouldn't describe the rain environment overall as overly favorable, you know, given the three years that I've been here. But I would say this rain cycle, I think the team and the industry have done a nice job getting the states to really understand what's driving our cost and ensure that we're receiving financially suitable rates to cover our cost of care and to cover the delivery of that care. So those are some of the things that I would say. I think it's just a real, I think, enthusiasm about case and where it can fit into the continuum of care. I think some of the maybe the headwinds in the Medicare Advantage world, I think, have probably catalyzed, you know, some of those discussions, you know, about, you know, can PACE be more of a solution than it is today? And, you know, InnovAge isn't the only PACE program doing a great job, you know, demonstrating the value of the program. Ben, anything you want to come back and add to the right side of things?

No, I think you pretty much hit it all. I would just say on the Medicare-Medicaid breakout, it's disclosed in the queue. So if you take a look at page 12 and 13 of the queue, it'll give you the breakout. It doesn't get into the match, but it gives you the breakout.

Okay, great. I appreciate the perspective. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Jared Hasse from William Blair and Company.

Yeah. Hey, guys. Thanks for taking the questions. Maybe I'll ask one on the Medicare Advantage environment. Just thinking about All the disruption there is plans kind of scale back their offerings and supplemental benefits. Just curious if anything changed in terms of, I guess, your messaging strategy in the market and how you communicate the value proposition of paid services kind of relative to a lot of that disruption.

Yeah, thanks for the question. You know, I wouldn't say anything has fundamentally changed as a result of the Medicare Advantage headwinds in terms of in somehow advantaging PACE as a result. I mean, the reality is Medicare Advantage organizations have a lot of levers to pull to deal with headwinds. You know, they have a variety of plan designs that they can adjust and pull back on. They have a variety of, you know, participant or patient cost sharing that they can adjust. They operate in various counties and jurisdictions and they can make slight adjustments there in terms of which plans are offered in which jurisdictions which can help them address headwinds. I think last year, one of the fundamental headwinds that we faced was the notion of these cash value or cash benefit cards that Medicare Advantage plans were offering that allowed participants to have access to funds to pay for a variety of services. That became a real challenge in our sales cycle last year, and I'd say probably caught us a little off guard. This year, while those offerings are very much still in the market and in pockets very much at the levels they were before, I'd say there has been some reduction in what we're seeing in the market, but we were very proactive. I think Ben mentioned in his prepared remarks that we had some marketing and advertising spin that was really intended to do what you said, which was get out into the market very early, well in advance of annual election period, begin educating our prospects and people that we had sort of in our pipeline and funnel on how PACE is different, you know, what are the unique services we offer, how not to confuse them with, you know, similarly sort of labeled or characterized services within the Medicare Advantage market. And we think that helped us. I think that was a good investment. I think it, you know, put us in a strong position going into it. We've seen slightly stronger retention this year during AEP of existing participants as well as, I think, you know, laudable improvements in our enrollment itself through that period. So I think those were kind of the primary Medicare Advantage, you know, of the dynamics at play.

Okay, great. I appreciate all the context there. Maybe I'll ask one follow-up. Just on the impairment with the facility in Louisville, just was curious what drove that decision, I guess. Was that sort of a market-specific dynamic going on there or just a matter of reprioritizing to other opportunities in the pipeline?

Yeah, thanks for the question. You know, what I would say is if you recall Innovage was awarded a Louisville opportunity, I think, in 2020. So it's been out there for a very long time, and then as a result of the sanctions, our geography in Louisville was awarded to another PACE program. So another PACE program has been operating in that territory for over a year now. And as we began working with the states to find a path into the market, we, of course, looked at Louisville and would they be willing to allow competition in Louisville. And we looked at other markets that they were interested in, you know, having a PACE provider participate. And ultimately, we determined there wasn't a viable path to reenter the market after our slot was awarded. We naturally then explored opportunities for joint ventures. We looked at opportunities to sell the assets that we had in the market. And then ultimately we decided that the best thing to do was to exit it and to take the charge on the lease that we had there. And, you know, it's really, I think, cleaning up a legacy issue for the company going forward. We still think Kentucky is a very attractive market and we'll continue to look for opportunities, but we just don't see one in the short term. Anything you want to add technically on that?

No, I don't think so. I mean, Patrick said we looked at a lot of different alternatives for the asset. All those things kind of wrapped up towards the end of the last quarter. At that point, the decision was made.

Okay, makes sense. That's very helpful. Thank you.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our next question comes from the line of Matthew Gilmore from KeyBank.

Hey, thanks for the question. Maybe asking about the out-of-period risk adjustment true-up that you mentioned. I appreciate there can always be some puts and takes there on your accrual as you get more data and close things out. I was hoping you could maybe size it up just so we could understand how that impacted your revenue and EBITDA in the quarter.

Yeah, you're talking about the year-over-year comparison because the out-of-period adjustment you're talking about happened last year, I think it was in October of last year, and that was actually really an out-of-period adjustment related to 2022. And it was effectively a Part C true-up where we had an additional opportunity post-COVID to go back and resubmit, which we did, which gave us a big one-time benefit in Q2 of fiscal 2024 And we didn't disclose it at the time, so we're not disclosing that because we don't, you know, we have so many puts and takes on the risk score side that we don't go through the process of disclosing them. But if you look at the progression quarter over quarter, if you were to take that out of the prior period adjusted EBITDA, you'd see a nice progression year over year. I think you can get a better sense of what the trend is. if you take a look at the six-month comparison numbers, period over period, and again, the six-month numbers from last year still include that final, final 2022 risk or true-up. It will give you a better sense of the forward trend in the EBITDA.

Got it. Fair enough. Thank you. And then on the pharmacy operations, I think you mentioned that you made an acquisition there, and you had mentioned last call that you were assessing some opportunities I was just hoping you could unpack that a little and give us a sense for sort of the prior approach to pharmacy and how this acquisition will change things going forward and the benefit you might expect over time.

Yeah. Maybe just to kind of set the context a bit, I would say that this notion of looking at our vendors and suppliers across our business and determining whether These are services that we have the capabilities to do in-house as well as a third party can do it for us. It's been an important part of what we've been doing over the last, you know, I'd say year plus. We've done this successfully with hospice. We've done this successfully with fleet management within our transportation. We've done this with behavioral health. You know, this has been done in the past with dentistry. So there's a lot of examples. You know, this wasn't sort of a one-off. But, you know, the reality is we got to a place where we said, let's take a hard look at kind of the division of responsibilities that exist between us and third parties and said, with pharmacy in particular, we said that there's an opportunity here for us to take on the day-to-day fulfillment oversight, the packaging and distribution of the drugs and medication, and some of the other logistics that go along with that, we felt confident that we could take that on and do it well. If we were to identify the right asset to pick up, and we've done that, We're still in the transition period, so we're just now beginning to move our participants onto the new platform. There remains a set of services that are still provided by a third party, and there are things that we think, frankly, they're best suited to do. The call center, inventory management, the pharmacy network management, You know, those are some things that we're very comfortable with third party doing on our behalf. And we think as a result of this, we're going to improve the participant experience. We're going to have more control over, you know, the means of production, as it were, to support our compliance efforts. And, you know, naturally with any insourcing, there's always some economic considerations that go along with that. And we think that there's sort of favorable economics associated with this as well. And over time, we'll have a better sense of what those could be. But, you know, this in some way is a little bit of foreshadowing, you know, the kinds of, you know, bolder moves we want to make to really build our platform.

Got it. Thanks a lot.

Thank you. One moment for our next question. Our last question comes from the line of Benjamin Rossi from JP Morgan.

Hi. Thanks for taking my question here. So first one here just on the back half EBITDA progression. So just in the context of your year-to-date adjusted EBITDA performance, my math here would by a pretty strong back half EBITDA ramp at about maybe 60 bps at the midpoint, presumably as your clinical and operating value initiatives contribute some lift. Can you just walk us through how you're thinking about EBITDA progression for the rest of fiscal 2025? Yeah.

I mean, I guess a couple of things. You know, I guess I would say in general, when you think about our EBITDA progression, it should be pretty linear throughout the course of the year. With one exception, as we talked about in some of the prior calls, which is that the third quarter often has some seasonal softness to it. And that's related to the fact that, you know, we often have slower enrollment in the third quarter because of the competition for Medicare Advantage and other things in the open enrollment period. And then the other thing, too, is we can have some seasonal softness, too, from increased utilization related to cold and flu season. But if you think just in general about our quarters is kind of progressing steadily over the course of the year, it's probably a reasonable way to do the models. The CVIs, as you mentioned, you know, they do start the year at zero. This year, as you know, we have OVIs on the operational side as well as CVIs on the clinical side. Those tend to build pretty steadily through the course of the year, but obviously they're more impactful in the back half of the year. than the first half of the year. We don't really break those out and size them specifically, but if you sort of look at where are we running for the first half of the year, look at the guidance range that we put out there, you can sort of, and some of the comments I made before about how the quarters progressed, you can sort of back into how we think the rest of the year might shake out.

Gotcha. Thanks. This is a follow up on the pharmacy. I appreciate the additional details as you build out that pharmacy platform. But just thinking about drug utilization within your Medicare populations, the Part D out-of-pocket maximum now down to $2,000 a year. How are you thinking about the potential impact here to pharmacy costs as you roll out this new model?

I can't claim that I've got the answer offhand on that one. I think that one might be one we need to get back to you. But let me ask Rich if he just has any broader thoughts about our pharmacy management program in that context.

Yeah, thanks Patrick. Look, we're really excited about having even better integration between our care teams in our centers and the pharmacy. Our prior pharmacy experience was solid, but the more we can integrate, the more we can look for opportunities to improve service, satisfaction, quality, and also savings because there are plenty of opportunities where we can look to improve to choose more cost-effective medications, and we're looking at that across the board, whether it's part of Part B or even medications that roll into Part C. So there's opportunity on the horizon. We're discovering more each and every day. We haven't really sized all of it yet, and so there'll be more opportunity as time goes by. Got it. Thanks.

Great to get back with you on, I just, you know, we're fully capitated for our pharmacy benefit. Some of the typical stacking of corridors and things like that on Part D don't apply to us. And so let's just make sure we understand your question and we'll be sure to answer it.

Got it. Sounds great. Follow up.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.