agilon health, inc.

Hello, and welcome to the Agile on Health Fourth Quarter 2024 Earnings Conference. My name is Elliot, and I'll be coordinating your call today. If you'd like to register a question during today's event, please press star 1 on your telephone keypad. On our left, I'll hand over to Evan Smith. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to the call. With me is our CEO, Steve Sell, and our CFO, Jeff Schwanagee. 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 measures is available in the earnings press release in Form 8-K filed with the SEC. And with that, let me turn the call over to Steve.

Thanks, Evan. Good afternoon and thank you for joining us. On today's call, I will provide you with an overview on one, our fourth quarter and full year 2024 financial results and our 2025 guidance. Two, investments we are making to further enhance our clinical strategy and capabilities. And three, actions and programs we are implementing to reduce certain business risks that lie outside our control enhance our operational execution, and drive improved performance going forward. But I'd like to begin with some context on the trajectory of our business as we continue to take actions to manage through the third year of a difficult Medicare Advantage rate and utilization cycle. While the 2025 macro environment continues to be challenging, we enter this year with a laser focus on strengthening our business for near-term improvement, success, and profitability. In 2024, we took actions to, one, reduce our underwriting exposure to costs outside our control, such as a reduction in Medicare Part D exposure to less than 30% of our membership. Two, pursue profitable and measured growth aligned with current payer and provider dynamics, which is reflected in both our reduced 2024 membership step-off and a smaller revised 2025 partner class. Three, strengthen our core clinical and operational capabilities to reduce variability and enhance quality outcomes. And four, maintain operating cost discipline by further leveraging our scaled infrastructure and technology investments. We intend for this focused approach to continue in 2025, and despite the near-term headwinds, our goal is to beat cash flow break-even by 2027. With respect to those 2025 headwinds, the Medicare Advantage market continues to experience an elevated cost trend, while managing through the ongoing transition to V28, changes related to the Inflation Reduction Act, and increased quality bonus thresholds. all of which are embedded in our 25 outlook. Our ability to weather this down cycle in Medicare Advantage and differentiate on the management of medical costs and quality outcomes relative to the fee-for-service alternative should position us well with health plans and physicians as the rate and cost spread ultimately corrects. With that said, the recent favorable trends in payer bids and the 2026 advance notice from CMS make us optimistic that we will see a more favorable overall environment for 26 and beyond. Now, let me provide a quick overview of our fourth quarter and full year results and our guidance for 2025. Note that Jeff will provide more details in his remarks later in the call. For the fourth quarter, MA membership continued its growth trend. and was in line with our expectations, increasing 36% for 138,000 members year over year to 527,000 members, driven by the continued expansion of our 24 partner class and 4.1% same geography growth. ACO model membership was 132,000 members, slightly ahead of our expectations. Total revenue grew 44%, to 1.52 billion in the quarter and 6.06 billion on the year. Growth was primarily driven by the class of 24 and organic growth in our existing classes, partially offset by higher costs associated with Medicare Part D and lower risk adjustment revenue related to unfavorable prior period development for the full year. Medical margin was 1 million in the quarter and 205 million for the year. which when adjusted for a $5 million reserve for estimated 2025 losses from partnerships we intend to exit this year, was at the low end of our guidance range. In the quarter, we also recorded elevated Medicare Part D prescription drug and supplemental benefit costs, partially offset by favorable medical cost development from Q1 and Q2. It should be noted that $6 million of the higher Medicare Part D costs in the quarter are tied to payer contracts in which Part D risk is carved out starting in 2025. Adjusted EBITDA was minus $84 million for the quarter and minus $154 million for the year, which came in at the low end of our guides. The quarter reflected lower medical margin due to the aforementioned items, lower ACO model contract performance isolated to one partnership that we will be exiting for 2025, and favorable operating cost leverage. Now turning to full-year 2025 guidance. Based on current market dynamics, we have made a strategic decision to constrain our 2025 MA membership to balance near-term risk and opportunity and we now anticipate a full year MA membership decline of approximately 4% or 22,000 members to a range of 490 to 520,000 or 505,000 at the midpoint. This year over year change includes adding 20,000 members in a smaller class of 2025 from three new partners. Same geography growth of 3% or 13,000 members and a reduction of 54,000 members from previously disclosed partnership exits, multiple December 2024 payer contract terminations, and tighter attribution management with health plans. Similarly, our ACO model business, which has been an area of strength, will see 2025 membership projected at 110,000 members as we exit one underperforming MSSP partnership. Revenue is forecasted to decline 2% to $5.925 billion, driven by the impact of the above-mentioned membership decline, offset by a better revenue yield, inclusive of improved payer contracts, member mix changes, and 2025 payer bid impact. Medical margin is expected to improve 46% to $300 million at the midpoint. which reflects a slightly lower jumping off point from what we communicated in November and our view of an elevated cost trend continuing in 2025. Finally, 2025 adjusted EBITDA guidance is expected to be minus $75 million at the midpoint, which assumes a gross medical cost trend of 6.3% in line with our 24 experience and a series of offsetting strategic actions noted above. Jeff will provide more specific details on the impact of our actions, market trends, and growth priorities embedded in our 25 guide. While the outlined actions are anticipated to provide incremental benefit in 2025, we expect they will be more fully reflected in our 26 performance. supporting a potential reacceleration of medical margin and adjusted EBITDA growth. Now let me provide some color on the focused investments we continue to make in what we see as a differentiated set of clinical and quality programs. Our ability to manage cost trends relative to a benchmark and deliver top-tier quality performance fully relies on our ability to leverage the strength of a PCP's relationship with the senior patient. Current MA results show our readmission, hospital admission, and ER visit rates 20 to 30% better than the local fee-for-service benchmark and quality scores for each year 2-plus market approaching or greater than 4.25 stars. This level of quality performance reinforces our value to payers and is reflected in 2025 payer with increased incentives tied to delivering four-plus stars performance. Similarly, ACO REACH results show our network as a top performer in terms of quality and medical cost management, with the most recent period delivering $150 million, or 13%, in gross savings, beating the national overall cost trend by approximately 280 basis To extend our impact on these key metrics and drive stronger, more consistent performance, we continue to advance our clinical strategy. Specifically, with our physician partners, we are better connecting opportunities across our burden of illness, quality, and care delivery programs to drive best-in-class medication adherence, further address advanced illnesses like palliative care, and target significant high-acuity chronic disease categories like heart failure, dementia, and COPD, in which the primary care physician is positioned to intervene earlier with the goal of preventing disease progression, alleviating symptom burden, and avoiding unnecessary ER and inpatient utilization. In addition to continuing to invest in our clinical strategy, we continue to be tightly focused on the block and tackle elements of our business to improve operating performance and reduce variability around the following key components. First, we are focused on measured growth as a controllable lever across existing and new geographies with a smaller 20,000-member class of 2025. In addition, for certain new partners in 2025, we have taken a glide path approach with select payers via year one agreements with a no downside and care coordination fee structure. Second, our payer strategy is focused on minimizing risk for elements outside our control, like Part D and supplemental benefits, and maximizing reward for areas within our control, like quality performance and Part C medical cost management, where we perform well. For January 2025, We successfully repriced 40% of our membership with improved percentage of premium economic terms, including incentive dollars tied to our partner's quality performance, while reducing our Part D exposure to less than 30% of our 25 membership. Third, we are enhancing our core clinical strategy and capabilities to improve quality outcomes and accelerate performance. This includes leveraging our investments in software and AI technology, physician education and coaching content and practice, and the expanded team of regional medical directors. And fourth, we continue to maintain cost discipline while investing in technology and clinical programs to further support medical margin and patient outcome improvements, as well as strengthen our position with payers and PCPs. All these actions are supported by our enhanced data and analytics capabilities that benefit our geography, practice selection, contracting, and day to day operating visibility. Jeff will talk more about these important improvements. In closing, and before I turn it over to Jeff, there are a few points I want to underscore. First, we see 25 as both a transition year in terms of membership and financial performance, and an inflection year in terms of focused quality, clinical program, and payer underwriting work to further position our platform and network as the scaled solution for physicians and health plans in full risk care for senior patients. Second, the scaled platform we have built across 615,000 senior patients, 2,200 PCPs, 30 markets, and 12 states has yielded more favorable payer economic contract terms while delivering consistent outperformance relative to the MA and ACO quality and clinical cost benchmarks. Third, we believe the actions we took in 24 and our continued focus on reducing our exposure to things outside our control, pursuing measured growth due to current market dynamics, Enhancing our core clinical and operational capabilities and maintaining cost discipline will further strengthen our network and support improved and sustainable performance for all stakeholders. And fourth and finally, while early, the advance rate notice is a positive signal that MA rates will improve for 2026, but it renews the call for rates that keep pace with increased costs and Medicare advantage. With that, let me turn the call over to Jeff. Thanks, Steve. Good evening. Before I discuss the fourth quarter results and 2025 guidance, I want to highlight the actions we have taken to improve the performance of the business. Over the last six months, we have exited two unprofitable partnerships and underperforming payer contracts, substantially improving our bottom line profitability and cash firms. We've improved our back-end processes and data and analytics capabilities designed to enhance our visibility and reduce volatility around risk adjustment and medical costs. We've reduced our exposure and risk in areas outside of our control, such as Medicare Part D. We've implemented new training and clinical programs designed to improve practice performance and increased our ability to more closely align incentive payments and percentage of premium to Agilent performance. These actions will help mitigate most of the cost trend headlines and regulatory changes impacting our 2025 outlook and establish a stronger foundation for the future while we continue to navigate a rate environment that has not kept pace with underlying cost trends. Early indications from the Advanced Rate Notice, combined with greater potential contribution from our actions, gives us confidence in our ability to deliver improved financial performance in 2026 and beyond. Now let me start by reviewing our overall financial performance for the fourth quarter and full year 2024 results. And then I will discuss our guidance for the first quarter and full year 2025. Overall medical margin and adjusted EBITDA came in at the lower end of our previously communicated guidance range driven by several items. First, we recorded $5 million of additional medical expense associated with projected 2025 losses on a contract we intend to exit at the end of this year, and we reported higher Medicare Part D and supplemental benefits expense in the fourth quarter based on updated information from our payer partners. Walking through the line items, our Medicare Advantage membership increased to approximately 527,000 members at the end of the fourth quarter of 2024, representing a year-over-year increase of 36%. ACO model membership was approximately $132,000 at the end of the fourth quarter, representing 48% year-over-year growth. MA membership growth was driven by the Class of 2024 and 4.1% same-geography growth. Total revenues increased 44% on a year-over-year basis to $1.52 billion for the fourth quarter. For the full year, revenues increased 40% to $6.06 billion. Growth was primarily driven by the class of 2024 markets and continued organic growth in our existing classes, partially offset by higher costs associated with Medicare Part D and lower risk adjustment revenue related to unfavorable prior year development that we recorded in the third quarter. Fourth quarter medical expense increased to $1.52 billion compared to $1.16 billion last year. The 31% growth compared to last year was driven by the expansion of the 2024 class and continued elevated cost trends. Additionally, as mentioned earlier in my prepared remarks, in the fourth quarter we also recorded additional reserves of $5 million for lost contracts that we expect to exit at the end of 2025, as well as additional medical expense primarily related to supplemental benefits. For the full year, medical services expense increased 46% due primarily to average membership growth of 38% and the continued impact of elevated medical cost trends and unfavorable prior year reserve development. The fourth quarter and full year 2024 cost trend was 4.6% and 6.8% respectively. The full year also includes the lost contract that I previously mentioned. Medical margin for the fourth quarter was $1 million compared to a negative medical margin of $102 million in the fourth quarter of 2023. The full year 2024 medical margin was $205 million compared to $299 million in 2023. Medical margin for the full year 2024 was negatively impacted by prior year development that we recorded in the third quarter and the continued impact of elevated medical cost trends. General and administrative expense or G&A expense for the fourth quarter of 2024 was $60 million compared to $65 million in the fourth quarter of 2023. For the full year, G&A expense was $269 million compared to $286 million for 2023. G&A expense for the fourth quarter and the full year 2024 reflect lower geography entry cost, capital support, and stock compensation expense. This was partially offset by costs related to exited markets resulting from business optimization initiatives. Lower geography entry costs for 2024 are driven by continued cost discipline, lower capital support funding needs, and as Steve mentioned, a more measured market expansion strategy to balance growth and performance in the current cost trend and rate environment. Platform support costs were $40 million compared to $37 million for the fourth quarter of 2023. For the full year, platform support costs were $169 million compared to $164 million for 2023. Platform support costs remain in line with our target and demonstrate our cost-discipline efforts while continuing to invest in the business. The adjusted EBITDA loss for the fourth quarter of 2024 was $84 million, which compares to a loss of $137 million for 2023. For the full year, 2024 adjusted EBITDA was negative $154 million compared to negative $95 million for 2023 and is attributable to the continued elevated medical cost trends and unfavorable prior year development as previously discussed. Adjusted EBITDA for our ACO model markets for the fourth quarter of 2024 was breakeven. For the full year of 2024, adjusted EBITDA attributable to our ACO model markets was $33 million compared to $39 million for the full year of 2023. Fourth quarter and full year 2024 results include $5 million of additional medical costs for one of our Medicare Shared Savings Program contracts where we received additional performance data in the fourth quarter. This true-up is related to an underperforming MSSP market, which we expect to exit in 2025. Performance in our other ACO model markets was in line with expectations. Turning to our balance sheet and cash flow, Agilon ended the quarter with cash and marketable securities of $406 million and another $36 million of off-balance sheet cash held by our ACO entities. We added $7 million in cash during the fourth quarter and for the full year used 90 million, which is well below our previous expectations. About half of the favorable variance is timing related, which will now occur in 2025. Turning now to our 2025 guidance. We have provided our first quarter and full year 2025 guidance metrics in the press release and slides provided for you today. For the full year 2025, we expect year-end membership on the Agilon platform will be in a range of 595 to 635,000 members. This includes estimated Medicare Advantage membership of 505,000 and ACO model membership of 110,000 at the midpoints. As Steve mentioned, the year-over-year change includes adding 20,000 members in a smaller class of 2025 from three new partners and reduced same-geography growth of 3% for 13,000 members. Note that this is net of multiple December 2024 payer contract terminations, tighter attribution management with health plans, and the reduction of 54,000 members from previously disclosed partnership exits at the end of last year. Regarding these exits, an additional 29,000 members will exit at the end of 2025. Additionally, as mentioned earlier in my prepared remarks, we will exit one of our underperforming MSSP contracts 2025. For the full year, we expect revenues in the range of approximately $5.83 billion to $6.03 billion, which is down slightly at the midpoint of 2024. The slight decrease in revenue is due to the following. First, a decrease in members served as a result of the market and partnership exits in 2024, payer contract terminations, and more measured growth in 2025. This reduction has been primarily offset by favorable Medicare Part C percentage of premium rate adjustments, inclusive of additional incentives for quality tied to recontracting approximately 40% of our membership effective January 1, 2025. Medicare Part D carve-outs and caps, which reduced Medicare Part D risk effective January 1, 2025 to below 30% of our overall membership, which should reduce the performance beta in our business. For 2025, we have assumed that our Part D losses double on a p.m. p.m. basis from 2024 for the membership where we continue to take Part D risk. Targeted clinical programs supporting improved outcomes and quality scores of greater than 4.25 stars, which are heavily valued by our payer partners given the increased CMS stars cut points effective for measurement year 2025, and year-over-year risk adjustment improvement of a net 2% increase, which is roughly in line with 2024. We expect medical margin to be in the range of $275 million to $325 million in 2025, or $300 million at the midpoint. This reflects a lower starting point exiting 2024 than we previously estimated due to continued elevated medical expense and higher supplemental benefits recorded in Q4 and lower prior year development than we anticipated. Our 2025 medical margin guidance includes the benefit of the underperforming contract and market exits completed in 2024, premium increases in excess of 4% driven by payer bids of approximately 2%, and an incremental 2% net benefit from risk adjustment. Additionally, as Steve mentioned earlier, we expect to execute on $50 million of operating quality, and clinical initiatives in 2025. We expect these tailwinds to be more than offset by the continued high medical cost trend in 2025. Our cost trend for 2024 was 6.8%, which we estimate includes 50 basis points associated with the two midnight rule. For 2025, our estimated cost trend is 6.3% gross and 5.3% net. The 1% difference is due to the effect of payer bids, which we expect to lower medical expense in 2025. We expect our adjusted EBITDA to be negative $75 million at the midpoint. This is driven by the medical margin guidance I previously mentioned and assumes flat G&A costs, including platform support costs, as we maintain our cost discipline. We expect our ACO model performance to be between $35 and $40 million for 2025. In addition, we expect geoentry costs of between $35 and $40 million, based on our assumption that the class of 26 membership will be between 30,000 and 45,000 members, reflecting our balanced approach to growth. For the first quarter, we expect MA membership of $490,000 to $510,000, revenues of $1.48 billion to $1.52 billion, medical margin of $125 million to $140 million, and adjust the EBITDA of $10 million to $25 million inclusive of $18 million contribution from ACO REACH at the midpoint. Our expected use of cash for 2025 is approximately $110 million. We continue to believe we have adequate capital on the balance sheet to support the business and achieve our goal of cash flow breakeven in 2027. Our focus for 2025 is executing on our clinical and operational initiatives to drive better outcomes for our members and shareholders. We are confident that our investments, disciplined growth, and strategic actions will drive long-term profitability. This concludes my remarks. Operator, we are now ready for questions.