Bright Health Group, Inc.

Good morning and welcome to the Bright Health Group second quarter 2021 earnings conference call and webcast. A question and answer session will follow Bright Health Group's prepared remarks. As a reminder, this call is being recorded. Leading the call today is Bright Health Group President and CEO Mike Mikan and Chief Financial and Administrative Officer Kathy Smith. Before we begin, we want to remind you that this call may contain forward-looking statements under U.S. federal security laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the risk factors included in our current and periodic filings. This call will also reference non-GAAP amounts and measures. A reconciliation of the non-GAAP to GAAP measures are available on the company's second quarter press release. Information presented on this call is contained in the earnings release issued this morning and in our form 8K dated August 3rd, 2021, which can be assessed from the investor relations page on the company's website. I will now turn the conference over to the chief executive officer of Bright Health Group, Mike Mikan.

Good morning, and thank you for joining Bright Health Group's inaugural earnings call. I couldn't be more excited to share details on our business, our year-to-date performance, and our continued growth and momentum at Bright Health. After a few remarks, I will pass it to Kathy, who will cover a more detailed review of our performance, as well as our outlook for the year, before we take your questions. I wanted to start by touching on our mission and vision. We are a healthcare company at our core, and because of that, our mission is central to what we do at Bright Health each day. Making healthcare right together is built on the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, we can deliver better outcomes at a lower cost for all consumers. Bright Health Group is well on its way to building the national integrated system of care needed to change healthcare in the United States. Both Bright Healthcare and new health are demonstrating significant growth and diversification. And at a Bright Health Group level, we are forecasting 2021 revenue of greater than $4 billion. As we enter the second half of 2021, Bright Healthcare has seen tremendous growth and currently serves a diverse customer base with nearly 663,000 total consumers across our commercial and Medicare Advantage lines of business. Our new health business has also seen remarkable growth with 131 total owned and affiliated primary care clinics and nearly 170,000 patients served under value-based arrangements through our own clinics. As we discuss the current state of our business, I'd like you all to keep five key themes in mind. One, we have demonstrated unmasked growth. Bright Healthcare ended 2020 with 207,000 members served, approximately 145,000 commercial members and 62,000 Medicare Advantage members. As of the end of the second quarter of 2021, Bright Healthcare served nearly 663,000 consumers, an increase of 220%. Two, we have delivered consistent performance. Critical to our model is our ability to price to our underlying capabilities and cost structure in each market. Even with our explosive growth, we have been able to demonstrate an adjusted medical cost ratio below 80% across our enterprise during the first half of 2021. Critical to this measure is our model's ability to drive in-network utilization within our integrated systems of care. Three, we are driving differentiation through new health. We have been building our new health business since the beginning of Bright Health. However, we are now starting to see it come to life. Focused on serving all populations, new health builds and operates local, integrated systems of care that clinically, financially, and with data and technology align all stakeholders in a local market. Today, New Health directly manages care for approximately 170,000 value-based patients through our 44 owned primary care clinics. This represents over 700% growth from the 19,400 patients we managed at the end of Q2 2020. Four, we are building one technology platform. Core to our model is a single technology platform, purpose-built for the aligned model of care. This platform, which leverages our provider and consumer-facing tools, branded as DocSquad, connects our consumers and patients to their personalized care teams. We are also moving to a single operating system that spans our care financing and care delivery businesses, which will enable us to continue demonstrating differentiated performance and outcomes. And finally, five, continued future growth. Bright Health Group has significant near and long-term growth prospects as we plan to offer Bright Healthcare products in four new states during the 2022 open enrollment period and expand our new health integrated care delivery footprint in Texas, North Carolina, and beyond. With that, I'll turn to a brief business update to guide everyone on how these themes connect to our day-to-day operations. The Bright Health Group business model is centered around aligning the financing of care with the delivery of care. Healthcare is not one size fits all, and neither is the way we approach it. Our business is purpose-built to meet the needs of each local market. That is why we have created two interdependent and market-facing businesses. New Health focused on personalized care delivery, and Bright Healthcare focused on financing and distribution, both working in tandem, leveraging technology to optimize the healthcare experience for all. What drives and powers our company is the Bright Health Intelligent Operating System, or BIOS, and its proprietary DocSquad provider and consumer-facing tools that connect consumers, payers, and providers while delivering real-time insights to support better clinical and financial outcomes. Across Bright Health Group, we have been able to demonstrate growth across all measures. Our Bright Healthcare business has seen 220% year-over-year membership growth, while our new health business continued to add to its capabilities, driving over 775% growth in the number of patients served under value-based contracts. This tremendous growth was primarily the result of four drivers. First, strong AEP-OEP organic performance, especially in Florida and North Carolina, with organic growth contributing 84% of our year-over-year membership growth. Additionally, that organic growth included a 29% organic growth rate in our Medicare Advantage business. Second, strategic acquisition activity provided additional depth, capabilities, and geographies. Third, special enrollment period growth in all but one state in which we offer IFP plans. with 47,000 net new consumers since March 1st. And fourth, both organic and inorganic investment in our new health business, including strategic acquisitions in key markets. Equally important, this growth did not come at the expense of performance. Critical to the BrightHealth model is our ability to price to the underlying capabilities and cost structure in each market and manage membership within our integrated systems of care. Our consistent performance starts with effective pricing that is built on both our unit cost advantage gained through our care partner networks and our integrated systems of care that allow us to effectively manage medical costs by driving improved in-network utilization and accurately capturing membership risk. Our most recent data indicates that even with our growth, our population is consistent with our targets and pricing expectations. We are seeing consistent membership demographics between our new 2021 membership and our broader book of business with age and gender mix in line with our mature markets. Also, non-COVID utilization trends are tracking at or below expectations year to date. across both commercial and Medicare Advantage. And our IFP metal mix favors silver plans across our markets, consistent with our underlying capabilities and pricing strategy. I'd like to spend a minute discussing our Medicare Advantage business, which we've built into a significant contributor with over 110,000 consumers and nearly $1.4 billion in run rate revenue today. Over the past 18 months, we've developed the infrastructure for future Medicare Advantage growth through key investments to develop capabilities internally and acquire strategic accelerators. Our foundation is built upon three key factors. First, we capitalize on the relationships we've developed in local markets from our proven IFT market expansion model. We've built valuable care partner relationships and brand awareness that allow us to add new products to existing markets. In the 14 states in which we currently operate, there are nearly 13 million Medicare Advantage members, providing a multi-year growth opportunity. Additionally, over 11% of our IFC membership is between the ages of 60 and 65. representing a key age and growth opportunity. Second, we leveraged differentiated capabilities at Acquired Assets. Brand New Day helped us become the third largest provider of CSNIP plans in the country, a growing market driven by increases in life expectancy and better treatment options for seniors with chronic conditions. We've managed to drive organic growth in B and B's membership of 35% since we acquired it in April, 2020. Similarly central health plan provided us a model of culturally relevant care with plans tailored to the needs of specific ethnic populations. And third, we partner with new health to accelerate growth. Our integrated systems of care include a comprehensive model of senior care through our own clinics, which we currently serve 17,000 non-bright healthcare-related Medicare patients through value-based arrangements. This foundation has set us up for growth of our offerings in 2022 and beyond. We plan to capitalize on the IFP aging opportunity, our differentiated special needs plan platform, and our go-deep strategy tailored to specific populations. We're deploying this approach by increasing the market depth of our offering in five key states, California, Florida, Colorado, Arizona, and New York. And we believe our MA business will continue to be a core driver of bright healthcare performance. New Health operates local, integrated systems of care in every market we serve. We know every market is different. with the need to match the system of care to the population and capabilities of that specific market. That is why we have a model that leverages different market approaches built on three core delivery vehicles with a common set of principles. First, in all markets, we assemble and align with high-performing care partners to improve healthcare delivery. We enable providers to succeed under value-based arrangements. And third, our most aligned and integrated value-based care delivery comes from our own medical centers. Each market leverages these new health capabilities in different ways, but they are all built upon a set of common alignment principles, clinical alignment, financial alignment, and data and technology alignment. powered by our DocSquad tools and capabilities. This approach of delivering local integrated systems of care has enabled us to be the national leader in delivering value-based care to the IFP population. To date, our integrated care delivery footprint has been focused in South and Central Florida, serving approximately 170,000 patients under value-based contracts. In Florida, we built a hub and spoke model with larger centralized clinics offering multi specialty care, lab, pharmacy and dental services, as well as wellness centers and urgent care. We have surrounded these hubs with smaller clinics in the community, which enable convenient access to core primary care services. We have also developed an infrastructure around our core clinical capabilities with bilingual call centers, non-emergent medical transportation, and other ancillary service offerings. Additionally, our own clinics are tailored to the markets they serve. In Central Florida, our clinics serve the largest retirement community in the U.S. with a comprehensive model for senior care, creating an opportunity to partner with Bright Healthcare, on Medicare Advantage offerings. In South Florida, our clinics are designed for multiple populations, as we are one of the only providers in the country taking risk on the IFP population at scale, while also managing Medicare and Medicaid patients under value-based contracts. These own care delivery assets are supported by our affiliated providers and our high-performing care partner network. This model allows us to serve all consumers across their entire life journey in an effective way, not just a single population. Through our growth in Florida, we have established a replicable, differentiated integrated care delivery model, which we plan to leverage as we expand into new states. In 2022, we are deploying this model in both Texas and North Carolina, with over 20 de novo clinic launches plan during the year. In addition, we continue to evaluate additional organic market entries as well as strategic inorganic opportunities to deploy capital to enhance our capability set. Expanding our integrated care offering will allow us to serve all populations while enhancing the level of alignment of the local care delivery infrastructure, improving patient outcomes, and driving performance for both Bright Healthcare and other payers. Core to our model is our technology platform that enables our differentiated market performance. Purpose built for the lined model of care, we have made strides in its development and are excited for where we are going. BIOS, our intelligent operating system, is focused on two key areas, creating a single administrative platform and developing our external consumer and provider-facing platform, DocSquad. We are developing a single administrative platform built around the consumer. We operate with a 360-degree view of the consumer and have rolled out a differentiated integrated payer-provider workflow panorama to our clinical teams. We are also migrating our health plan offerings, including acquired assets, to a common platform with 2022 new markets launching on our desired end state solution and with existing markets transitioning in 2023 and 2024. We are also rolling out DocSquad, our consumer and provider facing solution that connects individuals to their personalized care team with an active rollout underway across new health owned clinics. Year to date, we have delivered over a quarter million virtual visits through this platform. As we look to the future, Bright Health Group is positioned to continue driving measured growth with a value proposition that resonates with both consumers and care partners. Our 2022 plans in existing states call for robust product diversification across ISP, Medicare Advantage, and employer offerings. we will be entering our first county in IFP in California, the second largest IFP market in the country after Florida, with an addressable statewide market of approximately 1.6 million lives, and are the first new IFP carrier to enter the state in five years. Just as we are bringing our IFP capabilities to California, we are also leveraging the experience and capabilities from our California Medicare Advantage business to grow in other states. We are expanding our market depth in five existing states with opportunities across both traditional Medicare Advantage products as well as in special needs plans. We are also entering new states in 2022. Of the new states, Texas is a core priority with a similar market opportunity and provider dynamic as Florida, currently our largest state in terms of membership. We expect to use our integrated delivery approach, which I mentioned previously, to effectively manage care and create a unique consumer value proposition. And finally, we are expanding our new health integrated care delivery model into Texas and North Carolina, building upon the successful platform we have put together in Florida. We expect future new health growth to come from both de novo builds as well as continued investments in strategic opportunities as we enter new markets. I'd like to thank our team, our care partners, and all the frontline workers across the country. And now I'll hand it over to Kathy Smith, our Chief Administrative Officer and CFO, to take us through the numbers.

Thank you, Mike, and good morning, everyone. I'll begin by walking you through our Q2 and near-to-date results, and then we'll provide guidance for our 2021 full-year outlook. We are pleased with our second quarter results and the momentum we are seeing across the business. At the Bright Health Group level, after adjusting for intercompany eliminations, revenue increased 275% year-over-year to $1.1 billion in Q2. We saw robust growth in our growth margin as well, with year-over-year growth of 229%, resulting in total growth margin of $209 million. Of note, our gross margin was positively impacted by a $58.5 million mark to market gain on a passive investment. On a non-GAAP basis, our adjusted EBITDA declined year over year to $35.3 million, primarily due to increases in operating costs from new market entry and unplanned marketing and selling expenses related to the special enrollment period in our commercial business. Managing medical costs as efficiently and effectively as possible for the members we serve is critical. Internally, we look at our underlying operational performance without prior period adjustments and unusual items, like the impact of COVID-related expenses. Given the newness of our book of business and variability of scale across our market, we thought it would be useful to share our view of operational performance. Over time, as our business matures, we strive to stick to reported performance while noting unusual items. In Q2, our adjusted medical cost ratio at the enterprise level was 82%, in line with the prior year. On a reported basis, our Q2 21 NCR was 86.8%, with the adjustments primarily driven by COVID impact and prior period developments. I will provide additional color on the bridge between reported and adjusted MTR in my comments on year-to-date performance in a moment. In our Bright Healthcare business, second quarter membership came in at $663,000, a 220% year-over-year increase. The increase was driven primarily by organic growth in our IFP business, including the special enrollment period. as well as both organic and inorganic growth in our Medicare Advantage business. Our new health business also continues to experience significant growth. With the acquisition of Central Medical Holdings, which closed on July 1st, we now serve approximately 170,000 patients under value-based arrangements across our 44 new health-owned clinics. In addition, our affiliate strategy continues to gain traction. with New Health supporting 87 additional clinics. One key metric I'd like to highlight, which demonstrates progress to the most comprehensive vertical integration of the financing and delivery of care, is that 132,000 of the 170,000 total value-based patients served by New Health are through an integrated relationship with Bright Healthcare. As we step back and look at year-to-date 2021 compared to the first half of 2020, our growth and performance is truly remarkable. Our first half revenue has more than quadrupled since last year, all while maintaining a consistent adjusted medical cost ratio below 80%. This is in large part due to our aligned model, which focuses on driving in-network usage through our integrated systems of care. Year-to-date 2021, we are currently at an end network keepage rate of 87% across our business and have been able to demonstrate an ability to accelerate the improvement of this metric as we refine our market entry model. In North Carolina, for example, we were able to drive an 18.5 percentage point increase in our end network keepage year over year. As promised, I'll now walk you through the bridge between our adjusted and reported MCR. For reference, the appendix of our earnings release and investor presentation both include the detailed bridge. The 4.4 percentage points difference between our reported and adjusted MCR for the first half of 2021 is comprised of direct COVID cost impact to our MCR of 360 basis points and non-COVID prior period development, representing an unfavorable impact to NCR of 90 basis points. With respect to the non-COVID prior period development, this was impacted largely by one-time items in our Medicare Advantage business, a significant portion of which are from Brand New Day and related to time periods prior to our acquisition. The total net non-COVID prior period gross margin impact to MA was unfavorable by $19.1 million. Our ISP prior period impact was minimal as performance was broadly in line with expectations with offsetting favorable and unfavorable developments. The total net non-COVID prior period gross margin impact to ISP was unfavorable by $2.8 million and was comprised primarily of two items. First, we experienced favorable non-COVID ISP medical cost prior period development of $21.7 million, driven by a population that was slightly healthier than our expectations. And second, this healthier than expected population resulted in an offsetting unfavorable risk adjustment impact to revenue of $22.3 million. We expect the impact of MCR adjustments to decline in the future as our contribution from existing membership increases as a percentage of our overall book of business. The final point I'd like to make on year's date results relates to our operating costs. While we recognize we have a long way to go to achieve our target operating cost structure, we have been able to demonstrate a 940 basis points improvement in our operating cost ratio across the enterprise. The year-over-year improvement is a result of operating leverage from the additional scale of our business, combined with efficiencies from critical vendor insourcing and improved contracting. As we look at our membership growth, I want to highlight five key themes. One, we continue to operate a diversified business with consistent growth across both our commercial and Medicare Advantage business. Over the past year, we saw 63% of our total growth coming from new markets, with the remainder coming from existing markets and our 2021 acquisitions. Three. Overall, as Mike mentioned earlier, 84% of our total growth came from organic activity, driven by four states, Florida, California, North Carolina, and Colorado. Four. Medicare Advantage grew to 30% of our Bright Healthcare premium revenue in the first half of 2021 and is currently an approximately $1.4 billion revenue business based on the Q2 21 run rate. And five, while seeing this explosive growth, the overall composition of our new 2021 membership is consistent with our broader book of business and is in line with our pricing expectations. Within our new health business, we have seen rapid growth and expansion compared to the first half of 2020, driven both by inorganic growth in Central Florida and the expansion of our integrated care delivery offering in South Florida. During the first half of 2021, we generated approximately $163 million of new health revenue, a more than 800% year-over-year growth rate from the prior period. This includes approximately $63 million in investment income because of a mark-to-market gain on the passive investment I referred to previously. Excluding that mark-to-market gain, our year-over-year growth would have been 459%. With the closing of Central Medical Holdings and their 17 clinics, along with the continued organic growth, we are expecting approximately $425 million of full-year 2021 revenue from that segment. Now I'd like to speak for a moment about our balance sheet and operating cash flow. The successful completion of our initial public offering resulted in net proceeds of $887 million. We had approximately $528 million in non-regulated cash and cash equivalents on our balance sheet as of June 30, 2021, after adjusting for the acquisition of Centrum, which we completed on July 1st. This figure does not include $746 million of additional cash and equivalents held by our regulated insurance subsidiaries, which will be sufficiently capitalized at levels above regulatory minimums to allow for continued growth. In addition, during the first half of the year, we generated nearly $500 million in operating cash flow, which strengthened our balance sheet. Given our strong balance sheet, robust operating cash flow, and $350 million undrawn credit facilities, we are confident in our ability to meet near-term liquidity needs and support the continued growth of the business. I'll wrap up my comments today by discussing our outlook for the full year. We expect enterprise revenue to be $4 to $4.2 billion, depending on risk adjustment factors, and anticipate an enterprise medical cost ratio of 86% plus or minus 200 basis points. While there are a variety of items that can impact NPR, both positively and negatively, we have demonstrated we can manage within a reasonable range of outcomes, considering the maturity of our business and of our membership population. Within our segments, we expect Bright Healthcare end-of-year membership of approximately 650,000, and our forecasting continued growth at New Health to drive 2021 revenue of approximately $425 million. To bridge our enterprise revenue, we are also providing an expectation of intercompany revenue, which we expect to be approximately $275 million. Before I turn the call back to Mike, I want to appreciate our amazing BrightHealth team across the country. Working together, we are changing healthcare. Additionally, I want to thank our shareholders for their continued support as we build a national integrated system of care. Thank you for sharing our mission of making healthcare right together. Now here's Mike for some closing remarks.