agilon health, inc.

Hello and welcome to the Agilon Health second quarter 2023 earnings conference. My name is Terry and I am the conference operator for today's call. You will have the opportunity to ask questions today and you can do this by pressing star followed by one on your telephone keypad. I would now like to hand the call over to Matthew Gilmore, Vice President of Investor Relations to begin. Please go ahead.

Thank you, operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell, and our CFO, Tim Bensley. 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. 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. The reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. During the Q&A session, we would ask everyone to please limit themselves to one question so we can get through the full queue in a timely fashion. With that, I'll turn the call over to Steve.

Thanks, Matt. Good evening, everyone, and thank you for joining us. We've had a very successful first half of 2023, and we continue to make rapid progress against our vision to transform healthcare in 100-plus communities by empowering primary care doctors. Our progress is made possible because of the trust our growing network of partners have placed in Agilent. I want to thank our 2,700-plus physician partners, and I want to thank my colleagues for their hard work and dedication to supporting our partners and their patients. I'll start with a few highlights from the quarter in year-to-date performance. Our overall momentum remains strong. Performance across our key financial metrics was in line or above our guidance ranges and further demonstrates the unique power of our model to inflect profitability while driving significant growth in membership and revenue. During the quarter, our MA membership grew 57% to 409,000 members and revenues grew 71% to $1.15 billion. This was above our guidance and was once again supported by the successful onboarding of new PCPs and faster pull-through of members in new markets. Even with our impressive membership growth, our profitability continues to inflect with adjusted EBITDA up six-fold on a year-to-date basis and coming in above the high end of our outlook for the quarter. This quarter's EBITDA performance was driven by the strength of our Medicare business across Medicare Advantage and ACO REACH. For MA, medical margins increased 69% to $138 million, while ACO REACH was even stronger with medical margins increasing 82% to $39 million. It should be noted that our medical margin for MA included a net $7 million headwind from prior year claims and revenue, with about half of this flowing to adjusted EBITDA, making our profitability gains even more outsized on an underlying basis. The quarter and year-to-date results also reflect our growing confidence with the ACO REACH program in terms of the predictability of Agilon's relative and absolute performance. Now in its third year, the program has reached a frequency and consistency of the data provided to better calculate and understand performance. This level of transparency is new as of 2023 and has confirmed that Agilon has differentially managed utilization. our cost performance in REACH is more than 300 basis points better year-to-date versus the national benchmark, which all participants are measured against. Now, looking forward from a guidance perspective, we have raised our membership, revenue, and adjusted EBITDA outlook for 2023. Importantly, the magnitude of the outperformance within REACH and underlying margin progression across our partner MA markets has allowed us to both absorb the negative prior year adjustment from 2022 and strengthen our MA reserving approach in 2023. This will set a strong foundation for our performance in 2024 and is intentionally reflected in our updated medical margin outlook for MA. One theme I would like to drive home, given all of the speculation on utilization trends, is that different models will yield different outcomes. Agilon's model is distinctively different and more durable and predictable in driving cost and quality results compared to the broad fee-for-service system which predominates across healthcare today. Let me highlight how we are producing such strong and predictable results and what drives our forward confidence in the business. First, at Agilent, we only take risk on patients that have an aligned, long-term relationship with a PCP who has both the resources to positively impact total cost and quality of care. We do not take risk on a broad set of patients in an unmanaged fee-for-service system. Our high-touch PCP-led model allows partner physicians to actively manage the health of a discrete set of senior patients they have often known for decades. While our platform provides doctors with a consistent set of clinical resources, like care managers, social workers, and pharmacists, supported by technology and data insights. This allows our network to deliver consistent results across 500,000 attributed senior patients, while our physician partners focus on the most complex 20% of patients that are driving 70% to 80% of total costs. We believe this high-touch approach has prevented a pent-up demand for care and insulated Agilent from any associated spikes in utilization. Second point on differentiation. For our members, our year-to-date composite utilization trend is in line or better than our expectations. Year-to-date, we have driven very moderate ER and inpatient trends, with utilization flat to down in the mid single-digit range, while primary care and outpatient utilization is up in the mid to high single-digit range. Given that we manage the full premium dollar in a total care relationship, we focus on the composite utilization trend and are comfortable and actively encouraging this mix shift. All of the clinical programs we shared with you at our investor day are oriented towards moving care closer to primary care while significantly reducing unnecessary ER and hospital utilizations. and they are tracking ahead of our expectations year-to-date. Third, our model has natural advantages in terms of leading indicators and visibility. From an operational standpoint, we are not just receivers of macro utilization trends. Our teams are actively managing utilization on the ground every day. This includes transition of care nurses, post-discharge follow-up visits, and high-risk case managers. Additionally, while MA claims data has some lag, our REACH claims data is very current. Through May, which is more than 90% complete, we have not seen any meaningful change in our expected cost trend, including outpatient procedures. Lastly, our 50-50 surplus sharing not only creates strong alignment in driving long-term positive patient outcomes, but it also buffers our financial results up and down. As a result, we are able to guide to relatively tight ranges on medical margin and adjusted EBITDA and absorb puts and takes that may arise during a given period. Ultimately, the durability and predictability of our models has enabled Agilon to raise our adjusted EBITDA outlook during 2023 and set a strong foundation for 2024, even as some health plans with broad fee-for-service networks are seeing pockets of higher costs. Our success in 2023 sets the table for strong performance in 2024, which should be another year of meaningful step-up in profitability. As we have discussed previously, we operate in a very forward-looking model, and our visibility on the key levers for driving next year's performance is quite high. As an example, the class of 2024 implementation of six new partners and 100,000-plus MA patients is going extremely well, and we will have another year of record membership growth. with at least 145,000 new MA patients and 25,000 new REACH patients. This class will benefit from multiple advantages as they come on our platform, including a 12-month implementation period, our newly acquired Minerva platform that shortens the period for integrating multiple EMRs, and the local value-based care infrastructure we have already built in multiple existing markets and states that several of these partners will leverage immediately. As a result, this class should have a higher starting point for medical margins in both Medicare Advantage and REACH and contribute to our adjusted EBITDA when we go live in January. Looking further ahead, We are making strong progress with the Class of 2025 pipeline, with several partners already signed and beginning implementation, and others progressing well. This class promises to be another strong mix of diverse physician organization types across both new and existing markets. Our confidence in 2024 is also bolstered by the combined strength of our run rate medical margin performance across MA and REACH in 2023. This is inclusive of the adjustment to our MA reserving approach, which was a proactive decision on our part and supported by the magnitude of the upside we are seeing in REACH. On a combined basis, our underlying margins for MA and REACH are tracking slightly better than our expectations. This is obviously important as you think about the stepping off point for 2024. Finally, we are increasingly confident in our ability to manage the new risk adjustment model starting next year. This is a function of our implementation work over the past few months and recent conversations with our health plan partners. We now expect most health plans in our markets will be disciplined and moderate their supplemental benefit offerings in 2024, which ultimately impacts our cost profile. This is not something we had previously factored into our calculus on our ability to successfully manage the new risk model changes. And this new information further underscores our confidence in 2024 and beyond. With that, let me turn it over to Tim.