P3 Health Partners Inc.

Good day and welcome to P3 HealthPartners third quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the comments over to Ryan Halstead. Please go ahead.

Thank you, operator, and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward-looking statements under the U.S. federal securities laws, including statements regarding our financial outlook and long-term target. These forward-looking statements are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports file with the SEC. The forward looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise these forward-looking statements. We will refer to certain non-GAAP financial measures on this call, including adjusted operating expense, adjusted EBITDA, adjusted EBITDA per member per month, medical margin, medical margin per member per month, medical margin per member per month for persistent lives, and cash used. These non-GAAP financial measures are in addition to and not a substitute for or superior to the measures or financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Information presented on this call is contained in the press release that we issued today and in our SEC filings, which may be accessed from the investors page of the P3 Health Partners website. I will now turn the call over to Eric Kaufman, CEO of P3 Health Partners.

Thanks, Ryan. Good afternoon, and thank you for joining us. Today, I'll cover several key topics, the broader Medicare Advantage landscape, our third quarter 2024 results, and why I'm excited for 2025. We'll go through the tangible steps we are taking to advance the initiatives we outlined in August, and this will set up P3 for success going forward. Before addressing this quarter's results, I want to provide some perspective. As you have heard from our peers and MCOs, we are in a unique time. It won't persist forever, and it will pass. What we do now to set up P3 for success coming out of this environment is a key focus of mine and our leadership team. We have a plan in place and are executing on it now. It includes $130 million plus of initiatives that will positively impact EBITDA and cash flow. The benefits will begin to be seen in Q4 and more prominently in 2025 as it is phased in. The overall sector is facing pent-up demand post-COVID for healthcare services. It is in this type of environment that value-based care is in most need by our health plan partners. The demand for P3's value-based care platform is there. and I am a strong believer that value-based care is the answer to bending the cost curve long-term and solving our societal issues. Our Q3 report includes updated insights from our payers and a fresh perspective from our new CFO, Lake Peterson. Regarding elevated medical utilization, we haven't seen it across the board, whether at the provider or health plan level. It's isolated whether in Part B or certain health plans that experience adverse selection via benefit design. During the quarter, we actually saw improvements in Part A costs, but like our peers in the sector, we faced headwinds in Part B expenses and significant retroactive adjustments, which added to the complexity of our quarterly results. Retroactive adjustments added up to $35 million, and this was the majority of the EBITDA miss. We did see elevated medical utilization of approximately 5 to 10 million versus historical trends, particularly tied to benefit design, which we expect to be mitigated in 2025 through benefit design changes indicated by our payer partners. Now is the time to maintain our competitive edge, improve performance, and move toward profitability. Over the past six months, we've had the opportunity to conduct a thorough assessment of the entire organization. We've already set several initiatives in motion, and we have concrete plans to guide our business towards sustainable growth. As we look ahead to 2025 and beyond, There are several reasons for optimism, and I'm enthusiastic about our path forward. Although we are not providing a formal outlook today, Leif and I will provide directional comments. The $130 million plus of improvement opportunities are in four key areas. Number one, contracts. We are enhancing our payer and provider networks and terms to strengthen collaboration and expand opportunities. Number two, operating model. We are elevating operational discipline and enhancing visibility to drive better outcomes and quality documentation as well as utilization. Number three, operating efficiency. These measures will enhance service delivery while saving on operating costs. And finally, number four, data and analytics. We are advancing our capabilities to better support decision-making and outcomes through changing our structures and adding new capabilities such as innovator. As we look ahead, we see several favorable dynamics. The Medicare Advantage repricing cycle and benefit design changes are expected to serve as a catalyst for P3's profitability in 2025. Medicare Advantage has a built-in mechanism for adapting to market shifts with a relatively short repricing cycle. We expect CMS's benchmarks will be recalibrated to reflect the ongoing elevated utilization. In addition, many of our health plan partners have taken actions during the 2025 bid process to target margin recapture. As part of this, it is expected that plan benefits will be less robust in 2025, which we anticipate will result in decreased utilization. We are working closely with our payer partners to quantify the impact of the benefit design changes for 2025. Additionally, it's clear that the introduction of a broad set of star rating cut points is elevating the importance of quality performance, while the recent reduction in the physician fee schedule is placing increased pressure on medical practices. We continue to see demand for P3's capabilities, as evidenced by the recent signing of an agreement with the largest health system in Southern Nevada to create a CSOC, or a clinically integrated system of care, in Q3. Finally, our value-based care enablement platform and affiliate model remains intact. For example, a highly engaged partner in Oregon has seen a 40% improvement in coding and documentation accuracy while doubling its membership. We are confident in the underlying value that P3 provides and are focused on execution, albeit with a more measured and narrowed focus given the macro environment and its impact on our results. An analysis of our fully matured market performance shows we have half of our markets in which there are greater than 80% of membership with positive medical margin. The other half of markets had less than 50% of membership with a positive medical margin. Part of the network and payer rationalization measures we have taken are related to these differences. I will now pivot to highlight the progress on our initiatives, which will accelerate our path to profitability and cash flow generation. With a focus on sustaining long-term relationships with our value-based care network, we are in discussions with multiple regional and national payers to provide P3 and our partners with a series of adjusted favorable economic terms. In the cases where the path to sustainable profitability has become too elongated, we expect to exit those underperforming relationships. Our close collaboration with payers and physicians provides us with the flexibility to adapt in situations where both P3 and our physician partners are not achieving success. In some cases, we can mutually decide to wind down our operations. Overall, we are pleased with the progress we've made with the payers and are pursuing additional contract enhancements for 24 and 2025 as appropriate. After careful evaluation, we've trimmed 63 of our Provider Tax ID numbers, or TINs, to help us enhance profitability and ensure sustainable margins. We've also trimmed our payer network by 20%, which will simplify our operations. For these markets where internal targets were not met, we are adjusting our strategy to focus on increased density within existing markets and existing practices where we have higher performing networks. Next, we are focusing on providing our physicians with adequate resources to engage our members and standardized care delivery practices through an enhanced evaluation of disease burden. We are also working to curb utilization in high cost areas, which we believe is essential for improving outcomes and optimizing costs. In 2024, we launched a new program to enhance the awareness of palliative and hospice benefits for our patients. We moved from less than 1% enrollment in 2023 to 2.3% today with a goal of 4% of the total population in 2025. consistent with a well-run population health approach. By expanding these care programs, we are providing comprehensive, patient-centered support that addresses the needs of individuals with serious illnesses, leading to higher satisfaction and reduced hospitalizations. From a data visibility standpoint, our partnership with Innovator is on track for full implementation in 2025. We plan to lean further into these tools to better serve our payer partners. The advanced analytics and data platform enables the aggregation and unification of disparate health plan data. We can then identify the most complex patients and efficiently benchmark these patients relative to the clinical care guidelines and best practices. Additionally, the engagement tool is a sophisticated solution for physicians to seamlessly close care gaps and improve coding accuracy at the point of care. Another important area of focus is enhancing operating efficiency. We've strategically adjusted our approach to geographic expansion aligned with our emphasis on expanding density within existing markets. By concentrating our efforts in established areas, we're able to foster strong provider engagement and implement more effective utilization management. In closing, I want to highlight a few key takeaways. First, P3 is proactively navigating a transition period that is affecting the broader Medicare Advantage industry and our company. However, P3 and the industry, including CMS and our health plan partners, are actively adjusting to this new environment. Many of our health plan partners have emphasized, more than ever before, the demand for more value-based care alignment with providers in order to better control medical costs and preserve margin. Our conviction remains high. that our value-based care platform is well positioned to capitalize on these opportunities, albeit with a more measured approach. Second, we're taking decisive steps to elevate our performance in this dynamic landscape. Our strategy is two-pronged. On the financial front, we've ensured appropriate reserves as we exit 2024 and have recalibrated our step-off point to reflect the misalignment between the timing of high utilization and the benefit design changes anticipated in 2025. On the operational side, we're implementing initiatives with a focus on achieving best-in-class execution in areas directly under our control. Finally, I would like to formally introduce Leif Peterson, our CFO. We previously worked together at a value-based care predecessor company to P3 Health, and I look forward to the continued collaboration.