agilon health, inc.

Hello and a warm welcome to today's Agilon Health third quarter 2022 earnings call. My name is Candice and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. If you'd like to ask a question, please press start followed by one on your telephone keypad. I would now like to pass the conference over to our host, Matthew Gilmore, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good evening and welcome to the call. With me is our CEO, Steve Sell, and our CFO, Tim Bensley. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8K filed with the SEC. With that, I'll turn the call over to Steve.

Thanks, Matt. Good evening, and thanks for joining us. Momentum across our business remains strong, and the success of our aligned partnership model is enabling Agilon to make rapid progress against our vision to transform healthcare in communities by empowering primary care doctors. Agilon's platform, partnership model, and network create the local infrastructure that enables physician organizations to access a new and sustainable model for primary care, one that aligns physician outcomes with improvements in the quality and experience of their senior patients. As a result, patients are receiving higher quality, comprehensive care from their trusted physicians. And primary care doctors are enjoying greater satisfaction as they share in the value created from a more effective approach to care delivery. In 2023, our national network will include 2,200 primary care physicians and 500,000 senior patients across 12 states, making Agilon one of the largest organizations in the country supporting full-risk, value-based care for senior patients. Our growth is a function of the value that Agilon's platform delivers to physicians, patients, and communities. And the value we are delivering continues to expand. Year to date, we have reinvested over $130 million back into local communities through surplus sharing from reductions in wasteful spending and quality incentives to doctors for spending more time with their most complex patients. This reinvestment is helping to sustain and grow access to primary care and transform healthcare delivery. Turning to our results for the quarter, membership, revenue, and medical margins were above the high end of our guidance ranges, and adjusted EBITDA was in line, even with a modest drag from direct contracting. Our core Medicare Advantage business performed better than forecasted on all key measures, Year over year, MA membership grew 45 percent, medical margin increased 74 percent, and medical margin PMPM increased 19 percent. This reflects strong performance across our 16 partner markets, inclusive of higher than forecasted membership growth. This year, we are driving substantial growth in medical margin PMPM. Even as the proportion of members in year one markets has increased from 19 percent to 22 percent. This dynamic is powered by our more mature markets accelerating their year-over-year performance, as evidenced by our 10 year two-plus partners increasing year-to-date medical margin 24 percent from 104 to 128 per member per month. At the same time, for the six year one partners that went live in January, medical margin PMPM has been trending towards the higher end of our expectations as these new partners are benefiting from the platform getting smarter and the learnings of our mature markets. Our powerful same store performance measured in this meaningful improvement to medical margin unit economics while generating same market growth of 14% has been driven by one, the local scale we leverage to improve care delivery. Two, the ability to leverage common data and learnings on our purpose-built platform. And three, the embedded membership growth that comes from working through existing physician capacity in our partners' practices. These factors are all reinforcing our growing first-mover advantage as we introduce multi-payer full risk in more geographies across the country. Direct contracting was a modest but manageable drag to our adjusted EBITDA this quarter due to the impact of an updated retro trend adjustment that Tim will walk through. Importantly, the program remains profitable on a year-to-date basis, and our underlying cost and quality performance remains strong. For our direct contracting patients, our healthcare costs are significantly lower on a PM-PM basis versus national benchmarks. And our year-over-year trend is 1% lower in 2022 versus the national reference population. Additionally, we are driving strong quality performance in areas such as post-hospital discharge timely follow-ups. We continue to view the program as highly strategic, as direct contracting creates a single, full-risk experience for our primary care partners across their entire senior population. We remain engaged with the Innovation Center on potential program adjustments to create greater visibility and predictability for all participating groups and their senior patients. From a guidance perspective, we are raising our full year 2022 outlook for MA membership, revenue, and medical margins, and tightening our adjusted EBITDA. This reflects strong performance in our MA business and an appropriately cautious approach in forecasting direct contracting. Looking forward to 2023 and beyond, we continue to make great progress in fundamental areas that drive future performance, such as renewing payer contracts, onboarding our new markets for 2023, and supporting our physician partners for a successful annual enrollment period. For payer contracting, We are on track to complete important renewals that are in line with our base case assumptions. This renewal activity with 10 different health plans constitutes a significant portion of our membership, revenue, and earnings. The overall positive tenor and success of this fall's renewal season reflects the significant value health plans enjoy with a scaled first mover partner like Agilon that moves the entire market to value while providing best-in-class member growth and consistently strong quality and member experience. Next year, with the addition of several new health plan partners, we will have full risk contracts with nearly 30 different payers. Pivoting to the class of 2023, the onboarding of our largest class to date has gone quite well in terms of integrating with our partners various electronic medical records, synthesizing payer and clinical data, negotiating value-based contracts, hiring and training local market staff, and most importantly, increasing the level of access and volume of high-quality visits for senior patients. In short, we are creating the building blocks for these partners to shape and control value-based care in these markets for decades. The significance of successfully onboarding partners in four new states cannot be overstated. While Medicare is a national program, healthcare ecosystems are effectively built at the state and local level. The ability to expand within a state and add additional doctors and senior patients in full-risk models is far easier once we have deployed local infrastructure and connected the ecosystem. Similarly, the ability to actually change care delivery and reduce wasteful healthcare spending while improving quality is materially improved when you are able to scale around a trusted medical group. Our experience in Ohio, Texas, and now Michigan are excellent examples of this phenomenon. In these states, we have added approximately 450 doctors and 190,000 senior patients since our initial year one anchor partnership. Our growth in these states reflects both success within our partners' local geographies and the expansion with new partners into other cities or markets within these states. The concentration and scale within these markets has allowed Agilon with our partners to make substantial infrastructure investments. to improve care delivery with enhanced care team resources, including nurse practitioners, pharmacists, embedded nurses at high-volume ERs, and in-home care teams for our most complex patients, including those with complex kidney disease or end-stage renal disease. These investments and the resulting improvements in patient quality and cost have allowed the newer partners in these states to enjoy accelerated performance immediately in year one, which creates even more satisfaction and engagement for our partners. We will have the opportunity to replicate this performance across more and more states over time. Before updating you on our future growth in the class of 2024, I wanted to highlight our performance on quality and STARS measures and how that connects to better patient health. Our partnerships continue to generate quality outcomes that are well above national benchmarks, which reflects the alignment between PCPs and their patients supported by Agilon's platform. For 2023 star ratings, a significantly higher percentage of Agilon members will remain in four-plus star-rated plans compared to the national average. Additionally, drilling down to Agilon's specific performance, we have maintained four-plus-star performance across all of our partner markets, and our mature markets perform meaningfully above this average. We continue to excel in areas such as preventative cancer screenings, medication adherence, and diabetes management. For these measures, we are at five-star performance levels across the entire network. Additionally, we have consistently demonstrated year-over-year improvements in quality gap closures, well in excess of national trends. As an example, for diabetic patients, our PCP partners had driven a two times greater improvement in A1C control compared to the national MA average. We know that patients with better controlled diabetes spend less time in the ER and hospital, and in the long run, they are less likely to lose their vision or a limb, go on dialysis, or suffer a heart attack or stroke. Preventing these long-term, potentially debilitating complications and keeping our patients well is really the goal of our model and why our PCP partners are so deeply committed to our mission. Looking ahead to 2024, our business development team has made significant progress over the past few months. The breadth and depth of the pipeline for 2024 remains very strong and includes diverse partner types and geographies. including independent groups and health systems in both new and existing states. The acceleration in demand we are seeing reflects both the success of our partners and powerful macro forces, including payer demand for value and the growing senior population. These dynamics have also shortened our sales cycle. I'm pleased to report that we have now signed four new partners for the class of 2024. These four new partners include groups in existing states and new states and include primary care only, multispecialty, and network organizations. We are excited to have made this much progress at this point in the cycle for 2024. The longer implementation for these groups, along with their quality and strong governance, will position our new partners to generate outcomes earlier in their life cycle. With that, let me turn things over to Tim.

Thanks, Steve, and good evening, everyone. Our review highlights from our third quarter results and our guidance for the full year 2022. Starting with our membership growth for the third quarter, consolidated Medicare Advantage membership increased 45% to approximately 267,000 above the high end of our guidance range. Direct contracting membership increased 71% to approximately 89,000. Total members live on the Agilon platform, including both Medicare Advantage and direct contracting, increased to 356,000. Our Medicare Advantage membership growth was driven by the addition of six new geographies in January and 14 percent same geography growth in existing markets. Direct contracting growth was also driven by the addition of four markets that joined the program in January, as well as growth within existing markets. Revenues increased 52% on a year-over-year basis to $695 million during the third quarter. Year-to-date, revenues increased 47% to $2.02 billion. Revenue growth was primarily driven by MA membership gains from our new and existing geographies. Third quarter revenue included a modest benefit associated with member retroactivity. On a per-member, per-month basis, or PMPM, Revenue increased 3% during the quarter, which primarily reflects benchmark updates, market and member mix, along with year-to-date true-ups with health plans. Medical margin increased 74% year-over-year to $76 million during the third quarter. Year-to-date medical margin increased 62% to $244 million. Even with the dilution from our membership growth, along with a higher proportion of members in year-one markets compared to last year, medical margins increased as a percentage of revenue and on a PMPM basis. Medical margins were 10.9% of revenue during the third quarter compared to 9.5% last year. And medical margin PMPM increased 19% to $93 compared to $79 last year. Medical margin growth was primarily driven by the maturation of our year two plus partner markets. For these markets, medical margin PMPM increased 24% from $104 to $128 on a year-to-date basis. Additionally, as Steve mentioned, we have also seen stronger performance across our year-one markets this year. Utilization trends were consistent with our expectations. Inpatient services remained below pre-pandemic baseline levels, while outpatient utilization is now in line with pre-COVID levels. Physician office visits have seen a strong rebound among our members as we actively promote preventative visits, particularly for high-risk patients. Network contribution, which reflects Agilent's share of medical margin, increased 84 percent to $32 million during the third quarter. Year-to-date network contribution increased 53 percent to $110 million. This year-over-year increase in network contribution reflects the gain in medical margin as well as the relative contribution of medical margin across our geographies. Platform support costs, which include market and enterprise-level G&A, increased 4 percent to $35 million. On a year-to-date basis, platform support costs increased 13 percent to $105 million. Growth in our platform support costs continues to trend well below our revenue growth and highlights the very light overhead structure of our partnership model. As many of you know, Agilon incurs the minimum sales and marketing costs as our partnerships leverage existing PCP patient relationships and member churn is very low. As a percentage of revenue, platform support costs declined to 5% during the third quarter compared to 7% last year. Our adjusted EBITDA was negative $4.7 million in the quarter compared to negative $14 million last year. On a year-to-date basis, adjusted EBITDA was positive $14.9 million compared to negative $11.9 million last year. The increase to our adjusted EBITDA reflects the gain in medical margin and network contribution combined with leverage against platform support. This more than offset the negative adjusted EBITDA contribution from direct contracting in the quarter. Adjusted EBITDA from direct contracting, which is reflected on a net basis within other income, was negative $3 million in the quarter. This was below our expectation of positive low single-digit adjusted EBITDA for DC, primarily due to ongoing updates to the retrospective trend adjustment. While our guidance incorporated an estimate for the retro trend adjustment, We increased our estimate during the third quarter based on updates from CMMI with respect to observed expenditures for the national reference population. On a year-to-date basis, adjusted EBITDA from direct contracting is positive $6 million. As Steve referenced, we continue to outperform national benchmarks from a cost and quality standpoint. Turning to our balance sheet and cash flow, as of September 30th, we had $959 million in cash and marketable securities and $45 million in outstanding debt. Cash flow from operations was positive $2.6 million for the quarter and consistent with our expectations. As I mentioned on the last call, the timing of risk pool settlements within our health plans normalizes in the back half of the year, which benefits our cash flow. We remain extremely well capitalized and do not anticipate needing any external capital to drive our future growth. Turning now to our updated financial guidance. For the full year 2022, we have raised our membership revenue, and medical margin outlook to reflect the strong performance in our MA business, both in terms of growth and profitability. We are also tightening our adjusted EBITDA outlook to incorporate an appropriately cautious view in forecasting direct contracting. We now expect total membership on the Agilon platform will grow over 50% year-over-year to $353,000 to $357,000, with revenue growth of 46% to a range of $2.67 billion to $2.68 billion. We continue to expect significant gains in medical margin and adjusted EBITDA. We now anticipate medical margin in a range of $300 million to $309 million and expect adjusted EBITDA in a range of positive $2 million to positive $7 million, which represents a year-over-year gain in adjusted EBITDA of approximately $40 to $45 million. With that, we're now ready to take your questions.

Thank you. If you'd like to ask a question, please put one on your telephone keypad. If for any reason you'd like to remove your question, it is start followed by two. Please remember to limit your questions to one question and one follow-up only. So our first question comes from the line of Lisa Gill. of JP Morgan. Your line is now open. Please go ahead.

Thanks very much. Thanks for all the detail. Just really two areas I wanted to start with, and one would be just around medical costs as we go into the fourth quarter. You talked about the third quarter coming in roughly in line with your expectation, inpatient below, outpatient in line. How do we think about how you're thinking about the trend into the fourth quarter? And Will flu play any part of this? I mean, we're kind of watching the southern hemisphere, and different parties are saying different things around flu. So that would be my first question, and then I just had a quick follow-up.

Yeah, Lisa, I'll start. I think that from a medical cost perspective, we feel like our high-touch model is really helping us manage within kind of the ranges that Tim talked about. We are seeing a real uptake in terms of flu shots in this period, similarly to how we saw high vaccination rates around COVID boosters, and so we think that that is going to help us. As we've thought about kind of our guidance, I think we're looking at sort of a regular flu season and what we've laid out through Q4 based on those dynamics. Tim, any guess?

Yeah. Hey, Lisa. Thanks for the question. The only other thing I would say is, you know, we have seen kind of on a year-to-day basis a pretty nice pickup year-over-year. And however you want to look at this, either across an MLR basis, I think year-to-date we're up, you know, like 110 basis points or something year-over-year. Or on a PMPM basis, you know, we talked about our medical margin PMPM obviously being up significantly year-over-year as well. As we move into the fourth quarter, I think everybody understands in our model now that the absolute numbers fall off a little bit as we move through the year, as our mix of members gets less profitable, more agents, as well as kind of the older patients falling off that are the most profitable. But in terms of improvement versus a year ago, we didn't continue to expect to see the same kind of trends and improvement. You can see that if you look at the midpoint of our guidance for the fourth quarter of the full year.

That's really helpful. And then just as a quick follow-up, I just want to go back, Steve, to your comment on the renewal of the payer relationships being on track or in line with expectations. Is there anything that's new or unusual as to what payers are looking for? And when we think about capitated rates, are they roughly in line with what we've seen historically? Just any incremental color would be really helpful. Thanks.

Yeah. Lisa, I mean, I think we're extremely pleased with – the renewal season that we've just come through, and we're finalizing the new contracts for the groups that will go live on January 1st. But all in, it's been a very successful season. I think that what we're finding is payers see extreme value in working with our partners. They are scaled within their regions. They have excellent retention and management with their their folks and payers see real value within that. And so I think when we think about the payer renewals, what we've heard from them is they're really valuing the scale that our partners are bringing, the quality. You know, I talked about the four and five stars that we're seeing, and I think that will serve us very well. And then just the retention. You know, a key thing with the senior population is the year in, year out management of complex conditions. And so the ability to have strong retention really helps around that. So we're first to value in these communities and move them that way and pay or see value in that, but all of the things we provide along the way.

All right, great. Thank you.

Thank you. Our next question comes from the line of Justin Lake of Wolf Research. Your line is now open. Please go ahead.

Thanks. I'm going to apologize up front, guys. I'm going to ask you about RADV and how this might impact you. So I know it's a painful topic, but getting a lot of questions on it. So maybe first you can tell us the two questions I get the most often. How do your contracts work in terms of if there is an audit and there is some payment back to the plan or the plan has to pay CMS, I should say, if it's for your patient or your patient is a patient or a certain percentage of the panel, would you be on the hook for some percentage of that? And then secondly, we all know that you guys do a good job on coding. Do you have any feedback from the plans in terms of how the plans are doing their own audits of their population, just to see how they're doing? Do you have any feedback? for how you're performing in those audits relative to their more generalized population. Thanks.

Yeah, sure, Justin. So on the first one, for our contracts, if there was sort of a retro adjustment back on that payback, we would be on the hook for that. I think the periods that are being looked at are earlier than, except for our very earliest market. So right now, the window we're in, there's probably not as much of an issue on that. But obviously, as it would roll forward, as they roll these audits forward every year, that's how it would work if there was a clawback, as you said on that. And then feedback from plans on the audits. I think we work very closely with them on those audits. I think they feel like the information that we're providing to them and sort of the back and forth in terms of what we go through before they actually do that submission is a fairly tight process. So that's how I'd answer both those questions.

Yeah, and Justin, the only thing that I would add is I think, you know, we've said this a few times on previous calls, we do risk adjustment we believe the right way. We have a very tight process at the end of – and, you know, almost all of our risk adjustment is done in the office through annual wellness visits or through the provider themselves, through the PCP. You know, at the end of the day, those risk adjustment items have to be – the conditions themselves, of course, are validated and agreed to by the primary care physician that sees the patient. And we do it the right way in terms then of both, you know, when there are new conditions, we obviously capture them. And that's not only important for risk adjustment, but also important for the plan of the patient. But also, of course, as conditions fall off, you know, at the least we handle that very well. And I think all of that shows up in the fact that, you know, when you look at our overall average risk adjustment score, you know, our average RAP, it's not really meaningful above a one. I mean, we're not really pushing the envelope in terms of, you know, having really out of bounds risk adjustments. So I think, you know, across the board, we feel pretty comfortable also that we just have a very tight process.

And Justin, I'll just add, I think it's really important as part of our partnership that we do do this the right way. And we have a very tight process. To Tim's point, we delete codes as well as add codes based on a constant review process. So I think, you know, integrity around this process is something that we pride ourselves on. Our partners pride themselves on working with somebody that does this in the right way. And so we feel good about our approach.

And if I could just go one layer deeper, Steve, on your contract structure. I just want to make sure I understand it from the perspective of the – we know that they're only ordering a few hundred, you know, a couple of hundred, uh, members in a contract. Right. So the likelihood that they're actually ordering your member becomes, you know, infinitesimal, right. Especially at this point, given your size at the moment. So how does it work in terms of, is it just, if there's a hundred thousand patients and your patients have to be happen to be, I'm just going to pick a number, a thousand. right, so 1% of the membership are sitting, that the contract is in, if you have 1,000 patients out of 100,000, do you have to pay 1% of whatever they're asked for? Is that the way it works?

So I think, you know, without getting into the specifics of each of the individual contracts or each of the individual ways that this could come out, I mean, generally speaking, if there is a RAD-V audit and there is a direct line that, you know, we can say, hey, that RAD-V audit applies to our members that we have capped data from that payer, then, yeah, I mean, we're ultimately, we're going to be on the hook, you know, for our portion of that. Having said that, you know, depending on what the actual content of the audit is and how that comes out and how we talk to the fair about it, you know, we'll see on a case-by-case basis, case-by-case basis how it works out. But, you know, obviously if there is, you know, demonstrative line of sight to, yes, you know, this should apply to us as part of their population, then we'd be on the hook for it. All right, guys.

Thanks for the call. I appreciate it. Sure, absolutely.

Thank you. Our next question comes from the line of Kevin Fitchback of Bank of America. Your line is now open. Please go ahead.

Hey, this is Adam. I'm for Kevin. I saw an interesting release in the quarter that one of your Anchor Partners in Ohio started doing an onsite clinic with JP Morgan and some sort of value-based construct arrangement. And given the interest from such a large client to do value-based care outside of Medicare, I'm curious, why not just support them yourselves? Or I don't know if there's interest from such a large client, if that changes your view maybe about, you know, expanding beyond Medicare.

So thanks, Adam. Yeah, very familiar with... It's Central Ohio Primary Care, our partner in Columbus, and J.P. Morgan, who are doing their work on this together. They have another partner who works with them on that that we know very well. And, you know, they're doing an excellent job around that. I think our focus has really been focusing on that over 65 population population doing great work on that and really solving a major challenge for our groups. The optionality obviously is there down the road for that commercial business, but today we feel very good about the focus on the Medicare population. And there's just, you know, to what we shared in the call, there's tremendous value and impact that we can have by focusing on that population.

If I could just ask one quick follow-up, the direct contracting the ongoing refinement. That was related to what happened last quarter on the retro trend. And then is anything, is any of your conversations with CMS changing how you view, I guess, like the sustainability of direct contracting?

Yeah, well, let me answer the macro and then Tim can kind of walk through the mechanics because we literally get monthly updates on this. And so you're constantly sort of refining that. But You know, one is I think we believe direct contracting is extremely strategic for our partners and for us in that there's a single experience for their primary care physicians and there's one care model that gets applied across the entire senior population, which reduces variability and allows for much better care and less sort of variation. The second would be were profitable year to date. As Tim said, we have $6 million of EBITDA, so that program is still profitable, even given the adjustments that Tim talked about. And then the third that I tried to call out in my prepared remarks is we are beating national benchmarks in terms of utilization trend. If we continue to do that, That should drive increased profitability over time, and that's sort of the construct in which the program is laid out. We're working with them on adjustments that can be made to the program to take out some of the volatility to improve the predictability and the sustainability, but that's sort of the macro view. Tim, you want to talk about it?

Yeah, and Adam, not to belabor it, but I think everybody understands that the way this works is CMMI puts out an expected trend number at the beginning of the year, and after the year is over, they will say, hey, based on the actual observed trend for the full Medicare fee-for-service population, they will adjust that up or down depending on what they see. They provide interim updates during the year on how that's going. They don't actually tell you what the retro trend adjustment is going to be, but they do tell you how trend is looking at various points in the year. And what you're referring to last quarter was the first update came out in May, and there was a pretty substantial indication the trend was way lower than what they had put out initially, like as much as eight points lower. And so a lot of people in the industry at that point, you remember saying, wow, we just had to take a big adjustment to revenue in our second quarter results because of that. Now, you remember at the beginning of the year, we had said, hey, we anticipated there would be a pretty sizable retro trend adjustment because our analysis said that the trend that CMMI was guiding to at the beginning of the year was very aggressive or high to begin with. So when that second quarter update came out in May or the first quarter update that came out in the second quarter in May, We had to take a small adjustment last quarter, but it wasn't anywhere near probably what a lot of other people in the industry were taking if they hadn't already pre-assumed a retro trend adjustment. Now, another update came out in August, and then a few subsequent data feeds have come to us from CMMI as they're providing us some incremental data on a monthly basis. We've reassessed it and said, hey, there is another, we think, small movement down in what we assume the retro trend, or movement up in what we assume the retro trend adjustment would be, or movement down in our revenue. That caused us to take a smaller adjustment in Q3 as we closed. And since this retro for the full year is, you know, has an impact from adjusting the full year to date, then we ended up with, you know, a $3 million negative impact to adjust the EBITDA versus our going into the quarter expectation that would be low single-digit positives. Now, as we move through the rest of the year, of course, there's less year left, so the chances that that number will move a lot more or less and less because there's just less months ahead of us that can drive that number up or down. Right now, just to make sure that we're being completely cautious in how this is moving, we're being pretty cautious about our full-year guidance and saying, you know what, in Q4 we're not expecting direct contracting to really be accretive to our fourth quarter adjusted EBITDA. Sorry, I didn't mean to belabor that, but I think that's the full story, yeah.

Thanks.

Thank you. Our next question comes from the line of Ryan Daniels of William Blair. Your line is now open. Please go ahead.

Yeah, guys, thanks for taking the question. Wanted to talk about the new partner pipeline with a focus on 24. Great to hear you added two more to the class. I'm curious, number one, if you can discuss what this looked like a year ago for the four-year basis. So is this an acceleration, I think, from what you've seen? And then number two, you talked a little bit about macro trends driving this, but I'm curious if you think – the pending U.S. recession or global recession is actually helping your partner pipeline because providers can move to more recurring revenue models and see more income upside with your model than they otherwise would. So is this type of environment actually beneficial for you relative to kind of a more stable market?

Yeah, Ryan. Well, I think the headline is there is a tremendous inflection in demand. We've been seeing it for a while. It is accelerating. I think it's a combination of macro, CMS pushing more towards full risk value and looking by 2030 to have all seniors in a total care relationship with the PCP, individual health plans pushing on that in a really significant way. But then I think the success that we're having for virtually every medical group in the country, you can find an Agilon partner that kind of looks like you, is organized like you. And so that referenceability is just a huge asset for us. Two is, I think that more and more of these groups have come to the conclusion that they really need to make this move into full risk value-based care. And so the combination of the success and the desire is really shortening this sales cycle. And so it's your question about, to compare it to a year ago, we are well ahead. To have four groups signed, to have implementations that will be greater than 12 months, that puts us in really great stead for 2024 and how these groups should start. And so that's really encouraging to us. You know, the fact that you have a mix of primary care only, multispecialty, and distributed networks. Partners within that is also really encouraging to us. And as I said in my prepared remarks, health systems remain very actively engaged with us in talking about partnerships. So I think what we've done with MaineHealth, which is going really well, I think the ability for people to be able to pick up the phone and talk with them about that experience really helps. And I think a number of health systems are feeling the need to make this move into value and get the benefits from that. And so all of that is sort of leading to the momentum that we're seeing and sort of being ahead of where we've been in prior years in the cycle.

Okay, that's very helpful. And then, Tim, one for you. I should probably know this nuance, but if we look back to the end of last quarter, I think you had about 261,000 MA lives, a little bit above, and ended this quarter at 266.6. But you referenced the average being over 270,000. So what's the nuance there that the average for the quarter is so much higher than the starting and ending period? Thanks.

Yeah, any time that you see that, Ryan, what's going on is we have some retro members that we've got attributed to us or we have members that have been attributed to us that really should have been attributed as our members from the beginning of the year or near the beginning of the year. And in this quarter, it was about 1,000 or so members. So, you know, 3,000 members kind of above the ending time period, but really retro back over three full quarters gives you about 3,000 average members higher is the way that it works out. I mean, it's really an important part of our model that we're able to do that. Essentially, if you think about this, there's two different ways that we have members attributed. One is through members that are in an HMO. Couldn't be more straightforward, right? They have to actually name who their PCP is, you know, officially. On the PPO side, which is now more than half of our business, that's often not the case or generally is not the case. And so we have to go through other attribution methods that we have worked out with the payers And often cases it's related to how many times has that patient seen the PCP in the last six months, 12 months, or 18 months. We often have backup plans where we do things like recorded phone calls with a member to make sure that that's their PCP, et cetera. But we have a really good established process to do that. But what happens is at some point we tend to pick up members that maybe should have been attributed to us early and now we catch later in the year. That's particularly true of new markets. And in fact, of the, let's say, 1,000 or so retro members that we picked up driving that difference in the quarter, I think the majority of them were actually in a couple of our newer markets with newer payers.

Got it. Thank you so much. Very helpful.

And by the way, we're switching to the next question I just threw in. It's really important that we are able to do that and that, you know, half of our business being – more than half of our business being in PPO membership is a big deal because it means we can essentially go into a market and bring – and see if you can comment on this better than me – bring full risk to a market regardless of whether it's heavy PPO or HMO, unlike, you know, other markets that may be very heavy HMO that are very easy to get that attribution. Our TAM is wide open for PPO, HMO. We can go basically anywhere and bring full risk across that membership.

Yeah, I think the feedback from the national payers is that we're fairly unique in our ability to take full risk on a PPO product. And that's the fastest growing product. It's roughly half. It'll be more here as you see further growth. And so we think we're set up well.

Our next question comes from the line of Whit Mayo from SVB Securities. Your line is now open. Please go ahead.

Yeah. First question just on STARS. There's been a lot of noise about certain plans going from four to three and a half. Maybe just frame how you guys are thinking about it, and do your contracts have any contingency provisions that may protect you in the event that and each contract does slip to a three-and-a-half star rating.

Yeah, I mean, let me start by saying what I said in my prepared remarks, which is our own performance is extremely strong, four stars across the board and five stars in the areas that we talked about. Two is there's obviously been this step down across the industry as some of the COVID-19 provisions expired and the better of provision that went with that. You know, we're doing better than the industry average in terms of percent of members that are in four plus star plans. And that's a result of us really managing this extremely well. We do have, you know, one payer in particular that we have a decent chunk of membership with that has stepped down to three and a half stars for the majority of theirs. We believe that that's very manageable for us as we look at that in terms of what that could look like in terms of an impact from a PMPM perspective, kind of low single digits in terms of for 2024. So I think we believe it's really manageable. We're performing better than others across the industry. I think health plans would like to see more senior patients in Agilon Partners because of the strong quality performance. But specifically to your question, I think it's a very manageable impact for us.

Okay. Steve, you talked in your prepared comments about maybe this is new maybe it's not but I feel like you reference diabetes renal maybe more in the context of perhaps a specialty program and I think you've established a partnership with monogram not sure how new that is but is there anything to elaborate as you kind of think about this diabetes renal specialty program yeah I mean we have a really strong partnership

I think we're in six or seven markets to date, and I think we're expanding to two or three more by the end of the year. I think our early results in those programs are really exceptional, and in particular, the enrollment that we're seeing from patients, because it is an opt-in, is in the mid-80s. I think that's a function of this tight relationship that we have between the primary care physician and the patient, and when If the PCP makes that recommendation, the patient is very likely to agree with that. That is demonstrably different than what they've seen in other markets by working with payers. And so I think it just kind of speaks to the secret sauce that we've got on that. And I just think, you know, I called out sort of our strengths in terms of A1C control and the benefits that we've got around that, which really is extremely strong. That's what I call out.

Okay. Can I just ask one quick one for Tim? Just these new territory calls, geography calls, is this all 2023 go-lives or the implementations for 2024 too? Thanks.

It's almost very, very high, 90-ish percent 2023 still at this point. We are now just getting into starting to implement 2024. We haven't put in place a lot of infrastructure costs for that. We will have some in the fourth quarter that start to flow in because we are getting up and going with our implementation for 2024. But for right now, it's primarily going to be 2023 implementation costs. And remember, of course, very big class for 2023, very big complex class that we're implementing for 2023. Thanks. Thank you.

Our next question comes from the line of Sean Dodd of RBC Capital Markets. Your line is now open. Please go ahead.

Thanks. Good afternoon. On margins for new year one classes, Steve, you mentioned the platform's getting smarter and more efficient. You pointed to the current year one members trending toward the high end of your targets for medical margins. You're also building out classes now than you have historically. You referenced before already for 2024. which gives you more time to prepare for their launches. I guess when we think about the combination of the two, I think you alluded to it a couple of times, but can you maybe put some bookends around how much you think these can help elevate the launch trajectories for margins for future classes?

Yeah, no, I appreciate the question. So I think to your point, we are experiencing the benefits of learning from our platform that is allowing our newer partners to perform at the high end of our range, which is really fantastic and encouraging. And they're able to get the advantage of some of the programs, like we just talked about, complex kidney disease as an example, earlier in the life cycle. So I think that's kind of point one. Point two is every class, is a little bit different in terms of where they start. Did they have an ACO before? And so the starting points for each one of those is a little bit different and always takes us a little while with payer contracts and others as we understand what that starting point is. But I think in general, we feel like we're seeing an acceleration sooner for our year one markets in terms of the benefits of the high-touch model, and it's coming through in terms of better satisfaction, better health outcomes, and ultimately lower costs and better margins overall.

So those are the things that I would really call out. And one thing, Steve, maybe I would add is, you know, we've said for the last couple of years that we think the best time to look at that, although, you know, we can give you an indication, obviously, as Steve did and I did in our comment, that our year one markets are actually performing better than we thought they would this year, certainly at the high end of our expectation. The best time for us to talk about that and talk about that trajectory is when we have a full year of results. We did that at our analyst day and showed you, you actually saw it last year with some of our early markets were actually, you know, some of the best performing and fastest trajectory. And obviously, when we come back, once we have a full year of results this year, we'll show you, you know, updated cohorts and how that's working as well.

Yeah, and then just one last point I would make. The fact that for this class of 24 that we're talking about that we're this early and we're going to have that long of an implementation period, they should start in a very strong position as a result of that.

Okay, that's helpful. Thanks. And then as we think about the runway for medical margin in some of the older cohorts, you guys have talked before about there being a significant amount of other impactable spending that you could start to address. I think you've sized it at $98 per member per month. What are, what's kind of the biggest bucket there? And I guess if you started to make some inroads and try to tackle some of those cost opportunities.

Yeah. I mean, you, it's, it's stratifying the population and dealing with those most complex patients. And, and really it's, I mean, it's not, it's not hard to understand, but it's, Being able to maintain a multi-chronic and have them spend less time crashing into the emergency room and less time in an inpatient setting, it is moving to more time in the home. And I talked about, you know, that the home-based teams that we've got, I think, is a tremendous opportunity for us. COVID has really shifted kind of the site of care. in terms of what senior patients are comfortable with around that. You've seen it from inpatient to SNF and now much more to home. And so I think those are the things that we can really go after. And then the other would be really on the drug side in terms of medication adherence and just making sure that you're substituting sort of appropriate therapies. So those would be the big buckets that I think we'll go after.

Sean, as a good example, Steve, you might expand on this. These markets are all really early in their life cycle of moving to full risk. If you talk to any of our partners, they'll just say, there's a huge amount of opportunity in my market, even in the most successful partners that we have. But there was this Akron Summit event. the other week. I think it's just a great example of how the market evolved.

Yeah, I mean, now Akron is one of our more mature markets, and we have really exceptional, two exceptional partners within that market that have a really meaningful share of the adult primary care capacity, which is one of those real keys to success. But they were able to bring in leaders from more than 100 specialty groups on a Saturday morning. Everybody showed up and really talked to them about hey, we're not making the move into full risk value-based care, we're there. And we want you to come with us, but we need a few things in order for that to be possible. If you wanna stay in kind of a preferred network tier, you need to share quality and efficiency metrics. We need you to ensure access with expedited appointments. We need to make, have you use technology to assure that patient visits are actually getting completed And then we need all care decisions coming back to this primary care physician. So it's really kind of this shared partnership. And there was a tremendous amount of embrace around that and excitement around that. And you can just see that market really beginning to change. And you talk about just scratching the surface in terms of what we could impact from a specialty and facility cost perspective. Once you get, this is a primary care only group, both of them, to have the specialist that engaged around that is very exciting. And so I think we can see this happening in more and more markets as we build the scale. We always are building around those right partners. And it was just a great sort of evidence of what we're trying to do. Okay. I appreciate it. Thanks, Ken.

Thank you. Our next question comes from the line of Brian Tanquilly from Jefferies. Your line is open. Please go ahead.

Thank you. This is Taji Phillips on for Brian. Thanks for taking my question today. So as it relates to your 2022 guidance, just curious for Q4, I noticed in your guidance that you raised the floor for the full year, but also mentioned that you didn't account for upside from direct contracting. So, I just want to understand what's informing, I think, the RAISE floor for your 2022 guidance and if, you know, there's anything that we're missing, particularly for modeling purposes. Thank you.

Yeah, hey, Tasha, I don't think you're necessarily missing anything. I mean, I think the way this works is the midpoint of the range for adjusted EBITDA guidance did relatively constant rate. We're going from 0 to 10 with a 5 midpoint to 2 to 7, so I guess a $4.5 million positive midpoint. You know, the ins and outs in that are basically we are absolutely seeing better performance from our MA business, and you see that flowing through to the medical margin numbers, and we kind of upped the midpoint of our medical margin MA guidance by about $6 million, do you expect? That's actually probably helping us run a full year basis by about $3 million, so you can see that flowing through from Q3 and an expectation for a decent Q4 as well. The flip side to that and the reason we took the top end of the range down is a little bit more caution around direct contracting, also the fact that we just obviously booked a $3 million loss for direct contracting in the third quarter. We don't expect that to be contributing, and that's a retro adjustment, obviously. We don't expect that to be positive in the fourth quarter, but we don't expect it to be dilutive either. I think the common, and then we're probably seeing a little bit better performance, a little bit more leverage out of our platform support costs, you know, which is a huge component of our model. When you put all that together, we want to be a little, you know, cautious on the retro trend adjustments that we brought down to top end of the range. But certainly the really, really strong performance in MA, you know, it's giving us more confidence that we can tighten that up and bring up the bottom end of the range as well.

Great. Thank you.

Thank you. Our next question comes from the line of Stephen Baxter of Wells Fargo. Your line is now open. Please go ahead.

Hi, thanks. I just want to ask another one about direct contracting. I appreciate you guys have taken a cautious approach to how you forecast and accrue for the business. I think you said you're engaged with CMS to try to create increased visibility and predictability in the program. I guess what exactly would you be looking to see to achieve that outcome, and then what would the forum for any of those changes potentially to be made at some point down the road? Thanks.

Sure. Thanks, Stephen. I appreciate the question. We have a great partnership with the Innovation Center. These are pilot programs, and so they typically have adjustments that are made each year. And so we, in concert with a coalition through APG, have been talking to them about potential adjustments that could be made within it that would create more of the stability and predictability. I mean, it's a fairly technical calculation, but something that would smooth the revenue bounce, which really is what's happening with the retro trend adjustment that Tim talked about. There's like three or four factors that affect what that revenue number turns out to be. And so, you know, there's a lot of modeling going on and a lot of work around that. But I mean, I guess I would leave it there, but I think they are actively engaged. I think they too are surprised by the volatility that's occurring. And it's really a function of coming out of this, you know, hopefully once in a generation COVID type experience. And so, That really swings when you start to do year-over-year and baseline year comparisons. You can see pretty significant adjustments around that. And so that's what we're working with them on as part of a larger coalition.

Thank you.

Our next question comes from the line of James Purse of Goldman Sachs. Your line is now open. Please go ahead.

Hey, good afternoon, guys. First, one quick clarification, the upside on medical margin this quarter versus your guidance. To me, you mentioned there was a positive retro adjustment on MA. Can you quantify what the benefit there was or if all of the upside was underlying performance?

No, there's no retro trend adjustment or anything like that that applies to the MA business. That's specifically just related to the direct contracting business. The MA performance overall is just improving in the fourth quarter based on the overall improvement in the model. I mean, there are a lot of adjustments that you do in the third quarter. It's the quarter where we have the most data flowing in in the year from our payers. So, you know, we made, you know, all the adjustments that we have on the, you know, from the payers to make sure we got the right mix of members and the right bid rates and the right graph assumptions in there. And so all that helps. We actually got some help, obviously, in the quarter in terms of incremental medical margin dollars because of, you know, the retro members and being the top end of our membership range as well. And then on the flip side, you know, the same thing we did, you know, all the updates that we got from the payer data, obviously, on costs as well. But the net of that, yeah, is definitely demonstrating, you know, a stronger medical margin performance in dollars on a PMPM basis, an MLR basis, however you want to look at it. And I think that just reflects, you know, the continuing strength of the model to drive positive outcomes. But there's no formulaic retro trend adjustment or anything like that on the MA side.

Yeah, I meant the patient attribution piece, but I think you... Yeah, so on the patient attribution side, we picked up about... Yeah, we picked up about 1,000 members, I think, retro.

That's not really an adjustment. It's just, hey, these are members that are seeing our PCPs. They should be attributed to us. We've identified them and worked out with the various health plans that they should be. It's typically... You know, that starts to wind down as you get further through the year. But later in the year, we still have some of our new plans and our new markets that this whole attribution process is new to. And so, you know, most of those 1,000 members were across some of those payers in those markets. But, yeah, so that was a pickup of, you know, essentially the difference between average membership and ending membership is those retro members.

Okay. And then just on Maine Health, how's the integration going and do you feel like you're ready for next year? You know, you mentioned it's a complex one and different from your historical partnership. So anything to call out there just in terms of how you're going and how you're feeling in terms of getting that ready for year one and any economic considerations you should factor into our models versus... your typical year one performance for traditional markets?

First off, I'll tell you it's going incredibly well. The engagement from the main health medical group, who is our partner there, and Andy and the entire team, who's the CEO of the system, has been first rate. I think we've been able to integrate very well with their EMR. I think the payer contracting is going extremely well. You know, it takes a little while as you go through these to sort of finalize exactly where you're going to start. And they are a extremely large, they're a very large group across the entire state. And so I think I would say it's going very well. The engagement from them is quite strong. I think the integration with their electronic medical record is going to help quite a bit. They have extensive care team resources. that are available that can really sort of help to drive performance over time. So I think we feel very good about that. And we'll, you know, we'll update on kind of the class of 23 and what that looks like in terms of a starting point as we get a little further on our progression. But right now, I think we believe it'll be within our historical ranges and should be good.

Thank you.

Our last question comes from Gary Taylor of Cowen. Your line is now open. Please go ahead.

Hey, just coming in at the finish here. A couple questions. One, you beat your revenue guides by $45 to $50 million, and I just wanted to understand the components of that. I think enrollment was at the high end but not materially above. I think the retro-retribution was maybe higher. $8 or $9 million, so I guess most of it was per member per month and just wanted to understand. It seems like a really significant magnitude revenue beat versus your guidance and wanted to understand that.

Yeah, absolutely, Gary. I think the components are how you're calling it out. Probably the biggest, not the biggest, but the first thing is the retro membership that we're showing up that thousand members, but over the first full three quarters of the year. Plus I think we beat the high end of the guidance by not quite a thousand other members within the quarter. So both of those are contributing to definitely a double digit millions of dollars of incremental revenue. And then the rest of it is really just syncing up our member level data with the health plans which we get the most up to date information on in the third quarter. And it's a combination of factors including just getting the appropriate final files on things like do we have the right bid rates in, you know, for the plans that our members are in and updating all that as well as, you know, any interim, you know, mid-year updates to our expected risk adjustment scores. And that made up the rest of it.

And then, you know, you beat your medical margin guide by $6 to $11 million. It sounds like DCE was – Negative $3 million, you thought it might be low single digits, so maybe that was $5 or $6 million swing, and EBITDA came in at the low end. So anything on G&A, or how should we think about that? I guess given the $11 million medical margin, even with DCE coming in below, would have thought maybe a touch higher on EBITDA?

Yeah, I think platform support cost continues to be in the range that we expect. You can see it running at about 5% of revenue, kind of quarter in and quarter out right now. I think that'll continue to be the case for the full year. I mean, it's a big improvement over a year ago, but it's not, you know, it's not a quarter to quarter huge driver of variance to our EBITDA guidance. You know, as we go into the full year, you know, there's probably a million or two upside versus what was in our original expectations, but it's not a big driver. I mean, within the quarter itself, you know, the medical margin be flowing through the network contribution was obviously positive and, you know, we ended up, you know, kind of in the low end but within our guidance range then rather than at the top end of the range or above the range because of the, as you said, you know, $5 million or so difference in our expectation on direct contracting adjusted EBITDA.

And just last one on DCE, I've kind of been following this. So, you know, nearly 8% retro adjustment in April. You guys were already conservatively accrued for that. It looked like another 2% retro in August. You said there was a little bit of a hit there. But my understanding was in September there was another interim update that swung three or four, the full year, three or four points to the positive to maybe full year only trending down six or seven points. So is that just incorrect, or is there some nuance in your regional benchmarks versus what we might be seeing nationally?

Yeah. First of all, the retro trend adjustment is national, so the same retro trend will apply to all players in it. There's no regional retro trend adjustment. It is the full 30 million-plus Medicare fee-for-service members benchmark that applies to everybody. I think you're right. The original May adjustment was down about 8%. Definitely came down further in August. They're giving us interim data updates, which we have seen another two of since that August update, which is indicating that it may be kind of trending back in the same direction. We're not seeing anything that would say it would be another, whatever you said, three or four points back. The other thing is when the numbers come out, You know, they're basically just giving us raw data that says, hey, here's what the experience is year-to-date, and right now we have it through September, I think, for the D.C. population. But we still have to go through and do our own analysis of what does that mean in terms of seasonality in the fourth quarter, and so what might that really mean for the full year. But right now, and so obviously when we came down a little bit further in the third quarter, we wouldn't expect that the full year would be, you know, rebound from what we saw that by two or three points by any stretch.

Okay. Thank you.

As that's all the questions we have time for, I'd now like to hand the conference back over to the management team for closing remarks.

Great. Thanks, everyone. We really appreciate it. Hope everyone has a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.