agilon health, inc.

Good afternoon and thank you for joining the Agilon Health third quarter 2024 earnings conference call. My name is Kate and I will be the moderator for today's call. At this time, all lines are in a listen only mode and will be until the question and answer portion of the call. If you would like to queue up for a question, you may do so by pressing star followed by a one on your telephone keypad. I would now like to turn the call over to Leland Thomas with Agilon Health. Leland, you may proceed.

Thank you, operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell, and our CFO, Jeff Schwanake. Following our prepared remarks, 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 in Form 8-K filed with the SEC. And with that, let me turn things over to Steve.

Thanks, Leland. Good afternoon, and thank you for joining us. On today's call, I would like to walk you through the following. One, an overview of our third quarter financial results and updated 2024 guidance. Two, the key actions we are taking to drive improved profitability, improve execution, and further strengthen our business. despite the challenges of the last year, the underlying strength of our core business fundamentals and demand from payers and physicians. And four, the factors impacting our jumping off point for 2025, including an improved business mix exiting 2024. Before I dive in, let me provide some context. We are clearly disappointed with the results we are sharing today. and expect to drive meaningful improvement in the future. But we believe our core business is strong, and we are taking the necessary actions to continue to strengthen the platform, improve execution, and manage through a challenging environment against the backdrop of long-term demand for improved cost and quality performance led by primary care doctors. Our Q3 report and updated guide reflect additional information from our payers and a new perspective from our new CFO with the goal of capturing known risks and providing a solid foundation from which to build. Against this backdrop, we believe in the value proposition for our network and platform to be a sustainable performance vehicle for physicians and payers in full-risk value-based care. Pursuing this long-term vision has required some tough near-term decisions to exit selected partnerships and narrow the footprint of health plans we will work with in 2025. Our positioning for long-term sustainability includes a current cash position and cash flow management levers. intended to allow us to weather the storm even as we take actions to accelerate the path to profitability and positive cash flow. Finally, we see recent events like an increased set of STARS cut points that raise the bar on the importance of quality performance and another reduction in the physician fee schedule that pressures doctor practices as indicators that the move to value will only increase in the coming years. Now turning to our third quarter results. MA membership continued its growth trend, increasing 37% year over year to 525,000 members, driven by stronger than expected same geography growth in the continued expansion of our new partner class. Total revenue grew 28% to $1.45 billion albeit on lower than forecasted premium yield. We are raising our full-year membership guidance from 519,000 to 527,000 members and increasing our full-year revenue guidance from $6.025 billion to $6.057 billion. and I will provide you with the projected end of year impact on membership and revenue from the decision to exit selected partnerships and payer contracts. Third quarter medical margin was a loss of $58 million or minus $36 per member per month, which was below our expectations due to three factors. Prior period revenue settlements with payers primarily tied to risk adjustment and Part D, a reduction in expected 2024 revenue from lower than projected risk adjustment, and higher than forecasted medical expenses. Our reported Q3 medical costs reflect an updated view on trend and seasonality across the year, with Q1 developing more favorably, unfavorable development from Q2, and an increased Q3 cost trend estimate We continue to take a prudent posture on in-quarter cost trends until our leading indicator census data indicates otherwise. In terms of medical margin guidance, we are lowering our 2024 medical margin guide to $225 million compared to our previous guidance at the low end of the $400 to $450 million range. Of note, we have recognized approximately $100 million of negative medical margin through the third quarter from 2023 and earlier periods. Accordingly, we believe the medical margin step-off point for next year is now about $325 million before the impact of the strategic actions that we are announcing today and other in-process actions. Adjusted EBITDA loss for the third quarter was minus $96 million due to lower MA medical margin. For the full year, 24, we are lowering our adjusted EBITDA guidance range, reflecting Q3 results and a Q4 forecast of lower risk adjustment revenue and an elevated medical expense environment. While the environment is challenging and the results for the current period are disappointing, A deeper look at our performance reveals a strong core business with solid fundamentals, an increasingly relevant value proposition, and a significant total addressable market in need of a better solution. We are encouraged by a number of factors. First, greater than 80% of our year one plus partnerships are producing positive market level MA adjusted EBITDA on an incurred basis. despite the macro headwind and producing meaningful distributions to our partner practices. Notably, our class of 2024 is performing at the high end of our typical year one market medical margin range as these newer partners benefit from platform maturation and network learnings. We see high demand from payers and partners reflected in our consistent quarterly additions, of new doctors and members, and our class of 2025 should add approximately 45,000 members. The recently released star scores for 2025 reinforce our value to payers, as every partner minus one on the platform in measurement year 2023 scored above the critical four-star threshold, and a majority of our partners were above 4.25 stars. Our ACO reach results show our network as a top performer in terms of quality and meaningful gross savings to CMS, driven by an overall cost trend nearly 300 basis points better than the benchmark average. Despite these strengths, we have areas of exposure to factors like Part D and supplemental benefit risk, and we have a small subset of partnerships in need of meaningful improvement. With this assessment and against the backdrop of a challenging environment, we are announcing the following actions in process. One, to exit two partnerships and approximate 10% of our payer contracts. Two, to reduce the data on elements outside our control by narrowing our 2025 exposure to Part D risk. And three, to delay the onboarding of one class of 2025 physician partner given local payer dynamics. First, across a network of 26 partnerships and a year-end projected 527,000 MA members and 128,000 REACH members, we have mutually decided to exit two partnerships experiencing substantial adjusted EBITDA losses in 2024. In addition to the payer contracts associated with the exited partnerships, We will also be non-renewing several unprofitable payer contracts in continuing partnerships. These actions will reduce our projected end of year 2024 membership by roughly 45,000 to 75,000 members and our annualized revenue by approximately $470 million to $785 million. We are working to exit each of these contracts as of December 31st, 2024, although a few of them may continue through 2025. These were not easy decisions, but in this challenging environment, we concluded these partnerships would take too long to reach profitability and we needed to consider the health and future success of the broader network. As always, these decisions were made in close collaboration with our physician partners. Second, against our long-term goal of reducing the beta in our business. We now expect for 2025, more than 50% of our membership will have some type of risk mitigation for Part D through carve-outs, corridor, or other risk mitigation strategies. Our recent discussions reinforce the unique value levers that Agilon's network brings payers in terms of quality scores above, and Part C medical trends below their broader fee-for-service network. With the evolving environment, we believe that how we manage Part D risk in partnership with our payers is a critical decision. Third, in close collaboration with a 2025 physician partner, the decision was made to delay the onboarding of this group until financial data exchange with three regional payers in that market improved. we will continue to work closely with this partner and the regional payers to monitor the local dynamics and reassess inclusion in our 2026 partnership class. The net effect of these actions is that we have improved our baseline market mix exiting 2024, both in terms of run rate and reduced beta, which should yield a stronger jumping off point for 2025. As indicated earlier, we believe the membership step-off for 2025 will be 452,000 to 482,000 MA members before the addition of 45,000 MA members from the class of 25. And based on our revised guidance, the medical margin step-off point for next year is now about $325 billion before the key actions I have described. The investor materials on our website provide more information on the impact of these actions on membership, revenue, and our market mix, and we will be dimensioning the expected margin lift in more detail early next year. In addition to these actions, we see a series of factors and execution opportunities that will impact our 25 performance. These include repricing 40% of our membership for a January 2025 renewal. Across multiple markets and payers, we are seeing an improved percentage of premium economic terms, as well as additional incentive dollars tied to our partners' quality performance. Payer bid information. We have received updated payer bid information for 90 plus percent of our membership. Well, each bid varies by market and payer. The composite indicates these bids will be a blended tailwind for next year. Improved burden of illness assessment. We see a clear execution opportunity for improvement among our internal teams, partners, and payers to ensure that the verified burden of illness or risk adjustment is appropriately reflective of the acuity mix of our population. This work involves tight integration with our partner's electronic medical records, the identification of new complex conditions, a thorough physician and care team review, and a tight payer data exchange and feedback loop. Our expanded payer data pipeline will be instrumental in strengthening our collective performance. Improved PCP engagement. The key performance driver for the class of 2024 is seen in the tight grouping of their primary care doctors across our partnerships, translating into improved medical costs, quality, and assessed burden of illness performance. The expansion of our quarterly active panel management reviews to 20 plus markets, reinforced by an expanded team of regional medical directors, should be a tailwind heading into next year. Data visibility, both in terms of leading indicators and detailed member level revenue and cost information, is such an important lever in our execution of a multi-payer market-based strategy. In 2024, we have made meaningful progress on both fronts with 85 plus percent of total members in our financial data pipeline with a detailed member view and 80 plus percent of members with payer census data that provides us a two-week lag view on inpatient utilization. In closing, and before I turn it over to Jeff, I want to reiterate that the value of our business model remains strong with both physicians and payers, and we continue to be confident in the progress we are making to enable primary care doctors in this volatile macro environment. We have made important decisions that strengthen our business, and we believe this will support near and long-term performance and the path to profitability as the macro environment improves. With that, let me turn the call over to Jeff. Thanks, Steve. Good evening. I'll start by reviewing our overall financial performance, review highlights from our third quarter results, and discuss our guidance for the full year 2024 while framing our thoughts on 2025. Now that I have been here for almost four months, I've had the opportunity to complete a comprehensive review of our organization, gaining valuable insights and observations into the business model, and identifying areas in need of improvement. These findings, in addition to the most recent data we've received detailing our performance and risk adjustment, prior period development, and higher continued utilization, have changed our view for the third quarter 2024 and the full year. As a result, we have recorded significant adjustments during the third quarter and accordingly have made revisions to our full year 2024 expectations. As Steve highlighted, The demand for the value we create for our payer and provider partners has never been higher. We have proven the business model drives higher quality healthcare and lower overall costs, even in a challenging macro environment. However, it is not without challenges. We continue to improve our backend process and invest in data timeliness and quality that will drive better visibility on our performance. We believe these improvements, in combination with contracting changes surrounding Part D, will enhance our ability to reduce volatility around risk adjustment, Part B, and medical costs. When excluding prior period development for 2023 and prior dates of service, we believe 2024 represents a solid foundation to grow the top and bottom line heading into 2025. Now for the financial details from the quarter. Medicare Advantage membership was approximately 525,000 members at the end of the third quarter representing a year-over-year increase of 37%. Year-over-year growth was driven by membership class of 2024 with strong same-geography growth. Total revenues increased 28% on a year-over-year basis to $1.45 billion during the third quarter. Year-to-date revenues increased 39% to $4.53 billion. This growth was primarily driven by the class of 2024 markets and solid organic growth in our existing classes. Third quarter medical service expense increased to $1.51 billion compared to $1.02 billion last year. The 47% growth compared to last year was driven by the expansion of the 2024 class and higher utilization compared to the third quarter of last year. Our first quarter 2024 cost trend estimate is now 7.4% down from the 8.2% that we reported last quarter. Our second quarter 2024 trend assumption increased to 8.2% versus our previous assumption of 7.3%. Our third quarter 2024 cost trend assumption is now 9.1% versus our initial assumption of 6%, recognizing that we don't have substantial paid claims data for Q3. Given the utilization environment we have seen this year, we have assumed higher costs for the fourth quarter and increased our cost assumptions by an incremental $25 million relative to our prior expectations. We now expect the fourth quarter cost trends to be 5.2% off a high cost quarter last year. Medical margin for the third quarter was a loss of $58 million compared to positive medical margin of $111 million in 2023. As mentioned earlier, medical margin was below our guidance range as a result of several items. we lowered our year-to-date revenues by $65 million driven by lower than expected risk adjustment performance for 2024. This is based on mid-year risk adjustment information we received from our payer partners during the third quarter. Second, we recognized $60 million of unfavorable prior period development related to 2023 and prior dates of service driven primarily by updated statement data regarding Part D costs and final risk adjustment information for 2023. And lastly, we recorded additional medical expense of $25 million during the quarter driven by the continuation of elevated current year medical costs. Platform support costs were $42 million and consistent with the third quarter of 2023 and the second quarter of 2024 and represent about 3% of revenues in line with our target for the year. Geography entry costs were down 60% at $7 million compared to $18 million in 2023. Geography entry costs favorability was driven by continued diligence on operating expenses, lower capital support funding needs, and a delay of a market expansion from 2025 to 2026. Third quarter adjusted EBITDA of negative 96 million compared to positive 6 million in 23 is attributable to trends previously discussed weighing on medical margin. ACO model entities continue to perform well, and our quarter end membership was 132,000, which is slightly ahead of our expectations. ACO model adjusted EBITDA was $12 million versus $18 million in the third quarter of 2023. The year-over-year decline was driven by higher utilization experienced in the third quarter this year relative to the increased revenue. Turning to our balance sheet and cash flow, Agilon ended the quarter with cash and marketable securities of $399 million and another $113 million of off-balance sheet cash held by our ACO model entities. As a reminder, cash held by ACO model entities will fluctuate based on inflows and outflows related to operations of the program. This cash includes unsettled payments, which are expected to occur in the fourth quarter of this year. We used $9 million of cash during the third quarter consistent with our expectations, reflecting the seasonality of our annual wellness visits and distributions to physician partners and settlements with payers. Our expected use of cash for the year is now approximately $165 million, versus our previous expectations of $125 to $150 million. This is driven by the increase in prior period development we recognized this quarter, which has an in-year cash flow impact. As we have discussed previously, our cash flow from operations improves during the second half of the year as we settle with payers for performance from the prior year. Additionally, given the lower expectations for 2024 performance, We have updated our 2025 cash usage to approximately $110 million. We expect to end the year with approximately $365 million of cash on the balance sheet, inclusive of the off-balance sheet cash associated with the ACO model entities. We continue to believe we have adequate capital on the balance sheet to achieve break-even cash flow, which we now expect to occur in 2027. Turning now to our updated outlook for the full year of 2024. We have raised our MA membership guidance range to 527,000 members from 519,000 members at the midpoint, recognizing our growth through the third quarter. We have increased the midpoint of our total revenue guidance range by $32 million, which reflects lower risk adjustment offset by incremental membership for the year. Given the previously discussed third quarter 2024 medical margin headwinds and our updated fourth quarter 2024 assumptions, we are lowering our full year 2024 medical margin midpoint to 225 million compared to our previous guidance of the low end of 400 million to 450 million. Additionally, we are lowering our adjusted EBITDA guidance range to a negative 135 million to a negative 155 million. As we have demonstrated, we continue to make the appropriate adjustments necessary to improve profitability, which in the past has included exiting markets renegotiating unfavorable contracts, and optimizing operating costs. As we begin to think about 2025, when you exclude roughly $100 million of unfavorable development from prior years, we believe the 2025 step-off point for medical margin is around $325 million. This is before the impact of any of the measures we are taking to improve profitability, including the anticipated exit of two unprofitable partnerships and underperforming contracts. reduction in Part D exposure, and other strategic actions. Given the actions we are taking in 2024, we want to emphasize that 2025 will likely represent a turning point for the company. With that, let me turn it back to Steve for some closing comments. Thanks, Jeff. In summary, we readily acknowledge that 2024 has not unfolded as we expected, and we are taking the necessary steps to address that. We believe that the decisive actions we have taken this quarter, coupled with the continued execution of our targeted action plan, will result in improved performance versus our 2024 jumping off point. We look forward to updating you as these actions are finalized over the next few quarters. With that, let's turn to Q&A.