LifeStance Health Group, Inc.

Ladies and gentlemen, welcome to the LifeSense Health fourth quarter 2022 earnings call. Please note today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at this time, simply press star followed by the number one on your telephone keypad. At this time, I will turn the conference over to Monica Prokocki. VP of Investor Relations, you may begin.

Thank you. Good morning, everyone, and welcome to LifeSense Health's fourth quarter 2022 earnings conference call. I'm Monica Prokoczki, Vice President of Investor Relations. Joining me today are Ken Burdick, Chief Executive Officer, Dave Borden, Chief Financial Officer, and Danish Koreshi, Chief Operating Officer. We issued the earnings release and presentation before the market opened this morning. Both are available on the investor relations section of our website, investor.lifestance.com. In addition, a replay of this conference call will be available following the call. Before turning the call over to management for their prepared remarks, please direct your attention to the disclaimers about forward-looking statements included in the earnings press release and SEC filings. Today's remarks contain forward-looking statements, including statements about our financial performance outlook, business model, and strategy. Those statements involve risks, uncertainties, and other factors, as noted in our periodic filings with the SEC, that could cause actual results to differ materially. In addition, please note that we report results using non-GAAP financial measures. which we believe provide additional information for investors to help facilitate comparison of prior and past performance. A reconciliation to the most directly comparable GAAP measures is included in the earnings press release tables and presentation appendix. Unless otherwise noted, all results are compared to the prior year comparative period. At this time, I'll turn the call over to Ken Burdick, CEO of LifeStamps. Ken?

Good morning. and thank you for joining us today. I would like to start by highlighting the tremendous opportunity ahead. LifeStance is leveraging our nationwide, market-leading outpatient platform of over 5,600 clinicians with the mission of increasing access to trusted, affordable, and personalized mental health care. Our diverse mix of clinicians offers a multidisciplinary approach that allows us to treat all types of mental health diagnoses through our hybrid model of virtual and in-person care. We remain focused on reinforcing the strategic advantages offered by our hybrid model, which gives both our providers and patients highly desired flexibility. Importantly, as the Public Health Emergency, or PHE, ends in May of this year, we are well-positioned to support patients by compliantly providing care both virtually and in our centers. We are continuing to expand access to affordable, high-quality care by providing mental health services through in-network commercial reimbursement. In 2022, our clinicians treated over 680,000 unique patients with approximately 5.7 million visits. Through the company's early years of tremendous growth, we've been in an all-out sprint. Now, we're focused on building scalable processes and systems, not only to support the level of growth we've already attained, but to prepare LifeStance for the huge opportunity in front of us. As previously shared, we are committed to enhancing our operational performance and sustainable growth. To that end, we continue to focus on execution, the blocking and tackling required to operate a growing business at scale. In our last earnings call, I highlighted several areas that will receive greater emphasis at LifeStance going forward. First, we will focus on long-term profitability, capital discipline, and generating free cash flow. For example, to improve our operating leverage and cash generation, we are in the process of evaluating LifeStance's over 600 physical centers to optimize our real estate spend. We expect to further moderate de novo growth and consolidate approximately 30 to 40 offices with minimal to no disruption to our clinicians or patients due to the close proximity of some of our offices. Second, We will make strategic investments in enterprise-level scalable infrastructure over the next few years, beginning this year. As a reminder, when we refer to scalable infrastructure, we mean strengthening our underlying platform through end-to-end process optimization, standardization, and automation to reduce manual processes. Third, As we focus on simplifying administrative complexity, our payer strategy will become more selective. As a reminder, the bottom 50% of our payer contracts represent less than 6% of our visit volume. By the end of this year, our goal is to reduce our number of payer contracts by approximately 25%. This will reduce administrative burden while allowing us to better align with payer partners who share and invest in our vision and mission of expanding access to high quality, affordable mental health care. Fourth, we continue to shift toward organic growth versus acquired growth. In 2022, over 80% of our gross clinician ads were hired rather than acquired. Acquisitions were absolutely crucial to building scale and life stances early years. But with a broad footprint now in place across 34 states, we are hyper-focused on the organic growth opportunity in this massive market. Finally, I'd like to highlight an encouraging data point that reflects initial progress in strengthening our operational performance. In the fourth quarter, we saw benefits to our free cash flow as a direct result of the investments we made in our revenue cycle management process. The eight-day improvement in Days Sales Outstanding, or DSO, brought this quarter's DSO to 40 days, down from last quarter's 48 days.

Turning to financial results for the fourth quarter of 2022,

Revenue of $229 million and center margin of $63 million exceeded our expectations. Adjusted EBITA of $10 million was at the high end of our guidance range for the fourth quarter. While we are encouraged by these recent results, we recognize that there is much more work to do before we achieve meaningful and sustainable improvement in our operational and financial performance. In terms of our outlook, As we have commented previously, the next two years will be focused on making strategic investments in our business to fortify our operating platform. This important but unglamorous work to standardize and simplify our end-to-end processes will enable us to introduce tools that will improve the consistency, efficiency and capacity of our operations. In his prepared remarks, Dave will outline our 2023 expectations and provide specifics on the strategic investments that will begin this year. Consistent with what we committed to last quarter, Dave will also share our multi-year guidance, which serves as a bridge to our future profitability and cash flow generation. We will strengthen the foundation in 2023 and 2024 to set up my stance for success in the long term. In closing, I remain bullish about the opportunity in front of us. I am also realistic about the amount of enterprise-wide focus and effort that will be required to fundamentally improve our business. I am confident that our newly launched Business Transformation Office will drive the change management processes required in an organization of our size. I have led this type of transformation previously in my career, and I am confident that we have the right people, strategy, and multi-year plan to effectively position LifeStance for the robust opportunities that lie ahead.

I will now turn it over to Dave to provide additional commentary on our financial performance and outlook. Dave? Thank you, Ken.

I'm very pleased to participate in my first LifeStance earnings call. I joined this company because of its unique market position, compelling mission, significant growth opportunity, and talented team. I look forward to working with our team to increase our financial discipline and improve our annual and multi-year planning processes so that we can consistently deliver on our commitments. Now turning to our fourth quarter performance. LifeStance delivered strong top-line results. Revenue of $229 million increased 21% year-over-year, with the outperformance in the quarter primarily driven by higher than expected clinician count and productivity. Visit volumes of 1,487,000 increased 16% year-over-year. Total revenue per visit increased 4% year over year to $154. Our revenue is a function of visit volumes and total revenue per visit. Therefore, we look forward to reporting these metrics on a quarterly basis going forward. Historical information, beginning with the first quarter of 2022, is provided in the earnings materials posted to our website. For the full year, we delivered revenue of $860 million, up 29% year over year. Additionally, the better than expected top line results flowed through to center margin. Center margin of $63 million in the quarter increased by 16% year over year. Full year center margin of $237 million grew 18% year over year. Adjusted EBITDA of $10 million in the quarter was at the high end of our guidance range and included investments across the business, such as growing our revenue cycle management team. These investments were accelerated, and as a result, G&A was higher than previously expected. For the full year, adjusted EBITDA was $53 million, representing 6.1% of revenue. Turning to liquidity, in the fourth quarter, we generated positive free cash flow of $26 million and $36 million in cash from operating activity. As Ken mentioned, these positive improvements in cash flow were driven by improved collections. We are encouraged by this progress and see it as a tangible return on our investment in this team. Our DSO fell by eight days, quarter over quarter. and I'd like to highlight that each one of these days represents roughly $2.5 million. Additionally, capital expenditures were consistent with our strategy of moderating the pace of de novo center openings. We exited the quarter with cash of $109 million and net long-term debt of $225 million. We have additional debt capacity from a delayed draw term loan of $66 million as well as a $50 million revolving debt facility, providing us with sufficient financial flexibility. In terms of our outlook for 2023, we expect full-year revenue of $980 million to $1,020,000,000, center margin of $270 to $290 million, and adjusted EBITDA of $50 to $62 million. Our annual guidance assumes year-over-year revenue growth driven primarily by higher clinicians and visits combined with a modest increase in the total revenue per visit. Otherwise, we are assuming generally consistent operational performance year-over-year. Our guidance also contemplates a revenue split of roughly 50-50 in the first and second half of the year due to seasonality. We expect G&A to grow at a higher rate than revenue as we invest in strengthening the business, which is depressing margins year over year. For the first quarter, we expect revenue of $242 to $252 million, center margin of $62 to $69 million, and adjusted EBITDA of $7 to $12 million. We expect first quarter adjusted EBITDA margins to be down sequentially due to payroll taxes and seasonality related to some of our services due to the reset of patient deductibles. We also expect incremental G&A expenses in the first quarter, driven by additional investments to support the business. We then expect margins to improve for the remainder of the year, resulting in modestly more earnings in the second half versus the first half of the year. Additionally, we expect stock-based compensation expense of approximately $90 million to $110 million in 2023, including approximately $25 million from the new 2023 grants. For the year, we are expecting M&A spend of approximately $40 million, inclusive of up to $20 million in earnouts from prior year's acquisitions. We continue to have a strong balance sheet and do not anticipate the need to raise capital in 2023. We expect to have negative free cash flow in the first half of the year, primarily driven by two factors. First, compensation costs such as higher payroll taxes, bonus payments, and the funding of the 401 . And second, temporarily higher DSO driven by an increase in patient responsibility as deductibles reset in January. We expect to generate positive free cash flow in the second half of the year with the absence of these first half costs, along with DSO improving from first quarter levels. As Ken highlighted, we believe it's imperative to make strategic investments in those areas which will deliver significant long-term benefits that enable LifeStance to better serve our patients, clinicians, and team members. while achieving operating leverage as we continue to grow. We have identified three critical investments that will occur over the next 24 to 36 months. These investments are, one, implementing an HRIS system to effectively manage the entire life cycle of our employees, two, implementing a technology platform that enables credentialing and onboarding of clinicians, and three, enhancing our electronic health record or EHR experience. We will identify the non-recurring spend for these strategic initiatives as a discrete ad-back item to calculate adjusted EBITDA.

Once implemented, the ongoing costs will come through as G&A.

We are in the planning and implementation phases of the HRIS and the technology platform that supports credentialing and onboarding. We expect those to be completed in the next 12 to 18 months with a cost of approximately $6 to $8 million. Of this, $2.5 to $3.5 million will be recognized as G&A expenses with the remainder in CapEx. We anticipate that the majority of the investment will be incurred this year. The EHR initiative is in the very early stages of discovery. We expect to use most of 2023 to evaluate a range of options, from collaborating with our current vendor to implementing an alternative vendor solution. We will update you when we provide 2024 guidance on our path forward, estimated costs, and timeline for the EHR initiative. All in all, 2023 is going to be a busy year. We are ambitious, we are committed, and we are going to execute on our key initiatives. We know there is significant growth ahead, and we are building this company for a long and bright future. We will make the necessary investments along the way to ensure we fully capture that opportunity. In regards to our outlook through 2025, we expect organic revenue to deliver mid-teens annual growth for the next two to three years, with potential future M&A being incremental to that level of growth. We expect material adjusted EBITDA margin expansion in 2024 and 2025 with a trajectory to double-digit margins by the end of 2025. The improvement from current levels will be driven by rate improvement with payers, operating leverage, and growth of higher margin mental health offerings such as neuropsych testing and group therapy. We expect to be free cash flow positive for 2025 to fund both organic as well as moderate M&A growth. With that, I'll turn it over to Dhanush for additional color with respect to operations.

Thank you, Dave. As mentioned on our last earnings call, we've aligned our teams around two business priorities. One, clinician growth, and two, clinician productivity. In terms of clinician growth, we saw 200 net clinician adds in the fourth quarter, bringing our total to 5,631, an increase of approximately 18% year over year. Importantly, this growth was approximately 80% organic. Regarding productivity, we saw our clinician capacity, or the time clinicians make available to see patients, trend relatively in line with the previous quarter. In terms of utilization, or our ability to fill clinician time with patients, we continued driving operational discipline with a focus on the top, middle, and bottom of the patient funnel. At the top of the funnel, we made enhancements to our primary care referral team, organic search traffic, internal clinician referrals, and enterprise referral partnerships. These actions delivered improvements in attracting new patients. Second, at the middle of the funnel, in terms of converting patients to scheduled appointments, we continued to leverage our digital capabilities to improve patient matching via our online booking experience, OBE. By 2022 year end, OBE was live in 20 states, and we remain on pace for a full national rollout by mid-year. Additionally, we enhanced our overall user experience through better online provider profiles, reduced scheduling complexity, and enhancements to our phone intake processes, all of which have led to improvements at the middle of the funnel. Finally, at the bottom of the funnel, In terms of scheduled appointments converting to completed visits, our cancellation rates improved by a half point in the fourth quarter. All of these improvements at the top, middle, and bottom funnel contributed to better-than-expected productivity in the fourth quarter. Turning to our hybrid model, as Ken mentioned, the PHE is ending on May 11th, and we expect this will further magnify the competitive differentiation of our hybrid offerings. LifeStands can seamlessly provide services even as PHE winds down and in-person requirements resume. To avoid disruption in our patients' care, our Chief Medical Officer has set forth a plan that meets the in-person requirements for the prescribing of controlled substances. We believe our hybrid model positions us well to capture patient preferences for both in-person and virtual visits, including increasing demand for in-person care. We provide our patients with the highest degree of flexibility, and our NPS score of 78 in 2022 reflects the quality of our patient experience. Turning to real estate, physical centers remain a core part of our hybrid strategy. However, we see opportunities to optimize our existing footprint. We looked at factors like in-person usage of each center and proximity to other locations, to allow us to leverage our occupancy costs and allocate resources in a thoughtful and efficient way. As a result, we plan to consolidate 30 to 40 of our existing locations while slowing our pace of de novo openings to 40 to 45 in 2023, down from 90 last year. Importantly, these efforts will allow for continued clinician ads and cause minimal to no disruption to clinicians and patients. In closing, I wanted to thank all the operations, shared services, and clinical team members that have helped drive improvements across the foundation of our business. I'm pleased at some of the early progress we've made together in my two quarters as Chief Operating Officer. However, I'm fully aware that there is much more opportunity for improvement ahead as we continue to remain focused on our top priorities. With that, I'll turn it back to Ken for closing remarks.

Thank you, Dhanush. In closing, We are pleased that we concluded the year on a positive note. We are encouraged by the early signs of improvement, but fully recognize that we have much work ahead. Our focus remains on streamlining and standardizing our business over the next two years, which will pave the way for profitable and sustainable growth and long-term value creation for our shareholders. I would also like to take a moment to thank the employees of LifeStance for their dedication and commitment to our patients, to our operational transformation, and to our mission to improve access to high-quality, affordable mental health care.

We will now take your questions. Operator?

As a reminder, if you would like to ask a question, simply press star 1 on your telephone keypad. To allow time for all participants to ask questions, you will be limited to one question and one follow-up. Your first question comes from the line of Craig Hettenbeck with Morgan Stanley.

Yes, thanks. It's encouraging to see the footprint optimization steps. Ken, can you maybe just talk about the competitive advantage of having brick and mortar, but at the same time, kind of how you envision operating more efficiently the next few years and what that might mean for kind of margins and free cash flow?

Sure. So, Craig, appreciate your comments and your question. The real estate optimization, I think, is a great example of the way in which we're trying to run the business with greater operational discipline. What we found is that the combination of de novo operations bills and acquisitions that we made created an opportunity for us to take a hard look at the way the centers were being utilized. And as we said in our prepared remarks, we think roughly 30, 35 of those centers can be consolidated with little or no disruption because of the close proximity of the offices. We are seeing, and this is important, we are seeing increased demand and preference from our patients for in-person visits so we're going to be really careful to make sure that we find that that right balance having convenience and accessibility to our patients is critical the overlying sort of theme of much of our prepared remarks sort of speaks to the second part of your question which is that you know after call it five so years of explosive growth which certainly positioned us with a great platform that covers it really allows us to cover about 90% of Americans given our 34 state footprint but now we are pivoting to a a focus on both operational and financial discipline as Dave said that will lead to a positive cash flow in the second half of this year. And we are absolutely committed to the double-digit margin as we exit 25.

Got it. And then maybe just a follow-up for Danish. Can you comment on clinician retention? You mentioned some of the benefits of OB and reduction in cancellation rates. They're just looking for some more color in terms of productivity and how that's all shaping up.

Yes. In the fourth quarter, we did see improvements in productivity, as I mentioned in the prepared remarks. We really saw it across the full funnel, meaning top, middle, and bottom. And so we were pleased with that result and kind of our focus on discipline around utilization and ultimately how that plays out in productivity. As far as retention goes, we did see an improvement in the fourth quarter. This is something that, as we've talked about in the past, a permanent and consistent improvement in retention is going to be something that takes multiple quarters and really a full lift of everything around the company to ensure that we're delivering the best experience for our clinicians. So we're encouraged by that improvement. We don't at this point have any reason to believe that we need to reset our plans and how we think about retention on a go-forward basis as far as providing guidance goes.

Your next question comes from the line of Lisa Gill with JP Morgan.

Thanks very much. Good morning. I just first wanted to start with virtual versus in-person. Can you talk about where you exited 2022 and then the expectations for 23? And I heard you talk about more people wanting that in-person experience. I'm just curious, you know, you're talking about consolidation. How much capacity do you have within your current network of centers?

Yes, I'll take that. When we look at our overall point of care where clinicians and patients are providing service, in Q4, 78% of our visits were virtual. That was a sequential kind of change from the previous quarter and continued trend back towards in-person. we are seeing an increase in the demand from patients calling in looking for in-person appointments. So because of that, as Ken mentioned, we'll remain focused on ensuring we have the right balance of in-person availability through our physical locations as well as continuing to offer telemedicine appointments across kind of our network of 5,600 clinicians. believe that our optimization project right now that will take about 30, 35 legacy centers offline will help to optimize the current capacity that we have for in-person because of the close proximity of other locations. But we'll continue to look at this every quarter and every year to ensure that we are striking the right balance, including where and how many de novos that we open in any given year.

And what's your expectation for virtual in 2023?

I don't think that we have a hard view on what percentage of the total business will be virtual as of this point. We do expect it to continue to trend down But where that will settle out is something we'll just have to see where the market and patient demand takes us. For us, because of the hybrid model, we're really agnostic and are comfortable with wherever it shakes out, and we'll continue to optimize our physical footprints and our delivery of digital tools to ensure good quality of virtual care wherever patients and clinician preferences shake out.

Right. And then just as a quick follow-up, Dave, thanks for the Q1 guidance. The midpoint of the margin is 3.8%. If I look at the guidance for the year, the midpoint is like 5.6%. Can you maybe just talk about the ramp and the margin over the course of the year and how we should think about it progressing and if there's any key variables that we should think about?

Yeah, sure, Lisa. So in my prepared remarks, I talked about the first quarter margins being down, and that was the resumption of payroll taxes for highly compensated employees. And then to a lesser extent, we also saw lower utilization of high-margin services like neuropsych testing, and that's primarily due to the reset of patient deductibles. So as we look to the rest of the year, the reduction in payroll taxes, that's obviously going to help. The increase in the higher margin products as we get into the later quarters. And then we'll also see some modest pay rate increases. So those three things will contribute to higher margins from Q2 through Q4.

Your next question comes from the line of Ryan Daniels with William Blair.

Hey, guys. This is Jack Sencht. I'm for Ryan Daniels. Congrats on the quarter and the strong year. This is somewhat of a follow-up on Craig and Lisa's questions. When it comes to virtual versus in-person care, I know you're experiencing more demand from patients for in-person. So just off of that, do patients generally split between virtual and in-person, or is it pretty consistent for each patient? I'm trying to parse out, you know, how you get to that 50-50 level. Is it new patients coming on where you see that, I think it was 74% virtual come down? Or is it existing patients wanting to come back in person, possibly both? Or, you know, even if it's clinicians onboarding that desire, you know, more in person. Any commentary on that would help. Thanks.

Yeah, so this is Danish. So what you generally see with patients is there is a preference for in-person or virtual for the initial visit. However, even the patients that are selecting in-person for their initial visit, enjoy the flexibility of being able to move back and forth between in-person and virtual over the course of their treatment with their clinicians. And so that's one of the real positive factors of being able to operate. A hybrid model is it gives a significant amount of flexibility both for the patients and the clinicians as well as not just increases access But the consistency of patients adhering to their care plan by not skipping visits and being able to switch an in-person visit that for whatever's going on in their personal life may be difficult for them to get to, they can then convert to a virtual visit and continue with their care plan.

Great. Thanks. I appreciate that. As we think about the investments you discussed for 2023 and beyond, I want to focus on the second investment you mentioned, which is the credentialing piece. Just curious if this will help increase leverage when it comes to payers, especially with negotiations. If you can just comment on how that might impact the payer side. And then secondly, if this does have an impact, do you have any expectations on when to see the results flow through? Thanks.

So the investments in our credentialing processes and specifically the system that we mentioned, or Dave mentioned in the prepared remarks, is really about improving the speed and the quality of our onboarding experience for our clinicians and helping them to get to RAM faster over time. So that's the primary purpose there. It would not give us, the credentialing system would not give us any particular leverage with payers. However, as Ken mentioned in his section, one of the areas of focus that we have this year is pruning the bottom 25% of payers for us, and those bottom 25% contribute less than 1% of our total revenue. And so we're taking complexity out of the system, improving our administrative processes, as well as we can put our attention to the payers that are a more significant portion of our total business, as well as the ones that value our services and what we provide throughout the country.

Your next question comes from the line of Brian Tanquillette with Jefferies.

Hey, good morning, guys. Congrats on the quarter. I guess, Ken, my question for you, as I think about client or patient retention, obviously we've got the macro backdrop here and the normalization out of COVID and people going back to work in person. What are you seeing and maybe what differentiates you from what maybe some of your more virtual competitors or peers are seeing? And how do you view the defensibility of the business, especially given your insurance exposure?

Hey, Brian. I think, as Dhanush has referenced, the ability to meet our patients where they are. Sometimes they want an in-person. Sometimes they want a virtual. That creates a stickiness. And he also made a really important point, which is it also leads to a more regular cadence of visits. So sort of less skipping visits, which is so important. to the mental health treatment that our patients receive. So we think this is obviously the best model. We are seeing the increase in demand for in-person visits, but it's not dramatic. It's not drastic. Think of it in terms of maybe it's a point or two each quarter. We don't know where it's going to settle out. We reached a sort of a high point during the height of COVID at about 95% virtual. We're now getting towards the mid-70s, and we don't see a change in that slow but steady trend. So we like our positioning as a hybrid model.

I understand. And then I guess on the recruitment front, are you seeing any change or any maybe increased interest from some of the more traditional, you know, small solar practitioners as, again, COVID is normalizing and maybe some of the volumes from those people running pure hybrid models are changing. So just any color on recruitment would be helpful. Thank you.

Sure, yeah. So, you know, our organic recruiting engine continues to remain, you know, very robust. And like we mentioned in the prepared remarks, approximately 80% of our clinician ads in 2022 came through organic recruiting engine so we feel very good about where we're positioned there and continue to make investments in in scaling that team going into 2023 as far as kind of competition from mom-and-pops we're not really seeing any any difference in the market related to their increasing the amount of focus on recruiting than we've ever seen in the past. It's always been a competitive market and we've really built organic recruiting to position ourselves well there.

Your next question comes from the line of Jamie Purse with Goldman Sachs.

Oh, thank you. Just wanted to spend a minute on the revenue growth guidance for 2023. You know, I think just with the organic hires from 2022 and the acquisitions from 2022, just the maturing of the new clinicians gets you, you know, pretty far along in terms of getting to the growth guidance for 2023. And so I'm trying to understand what's embedded in 2023 guidance for incremental new organic hires and then productivity, I think. On productivity, you said, slight increase in revenue per visit, but beneath that, what are you assuming for just incremental visits per clinician? Just trying to understand a couple of those drivers of the growth guidance for 23.

Yeah, I appreciate the question. This is Dave. As far as the full year guidance for 2023 from a revenue perspective, first thing, and I said in my prepared remarks, is we're not assuming any operational improvements. So from a productivity perspective, we're assuming 23 to be pretty consistent with 22. Second point I'd make is we're not going to guide on clinicians, but we are expecting clinician growth. As Danish mentioned just a minute ago, we do have a robust clinician recruiting engine. And so we are expecting clinician growth, and that will drive visit growth throughout the year. And we feel good about mid-teens organic growth coming from the business.

Okay. And then just on the center margin guidance as well, it looks like that's up as a percent of sales year over year. I get there's some benefits from the real estate optimization where I think rent's like 8% or 9% of center cost. But for the bigger piece, which is physician compensation, What are you seeing there? Is that stable, or are you seeing pressures there just given how much demand there is for these types of clinicians out in the market? And in that context, where can center margins go over time?

Yeah, so for the most part, our clinicians are not salaried. So we have less exposure from a wage perspective versus some of the other companies. And we're not seeing margin compression As you just noted, we are guiding to a little bit of margin expansion in center margin in 2023 as our rate increases help offset the wage increases that we're passing on to our clinicians.

Your next question comes from the line of Kevin Caliendo with UBS.

Hi, thanks for taking my question. talk a little bit about the impact of the payer contracting and how to think about it. If you're consolidating more at a – I'm guessing more at a national level with some of the payers or the like, and what does that end up doing in terms of overall rates? Do they become better or stronger if you're getting rid of some of the smaller, more regional payers? Can you just take us through sort of how this works and what the impact is? is with your relationship with the payers and on your reimbursement?

Kevin, even though it's a large percentage of the payer contracts, it's a de minimis percentage of our visit volume. So in Dhanush's response, he talked about we can take 25% of our payer contracts out and it represents less than 1% of our volume. So therefore, it's really not going to have much leverage on our rates. The leverage is in the administrative simplicity that it creates, and it's going to help. It'll be one of the things that will help contribute to running a more efficient business.

Okay, yeah, that part I understood. I was just wondering if this was sort of being done at more of a national level and In any way, it kind of leads to my second question, which is the relationship to the payers. Are they looking for anything additional from you? Any sort of data sharing or anything else in terms of strengthening the relationship between you and them and how it may impact pricing going forward? I'm just trying to think about how you might leverage the assets that you have with the payers.

Yeah, no, it's a great question. Let me respond to the rest of your first question, which is sort of by definition, the consolidation is really occurring with the small, local, and regional payers. National payers aren't going to be affected because we're really focused on that bottom quartile that only accounts for less than 1%. As it relates to the relationship with the payers, we are as interested as they are in really sharing data so that we can demonstrate the impact of well-managed mental health on things such as absenteeism, whether it's at school or at work, reduced visits to the ER and inpatient care. So they are interested, and we're doing some pilots That's something that we're pretty enthusiastic about over the next several years as we move toward a more value-based care and an integrated behavioral health environment where we're collaborating with those that provide physical care to really make sure that our patients and theirs are receiving holistic care. That is the vision for LifeStands. What you've referenced is absolutely a part of our playbook and it'll be an increasingly important part of our strategy in the years to come.

There are no further questions at this time. This concludes the Life Stance fourth quarter 2022 earnings call. You may now disconnect.