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spk09: Good morning or good afternoon all, and welcome to the Bright Health Group Q2 2022 earnings call. My name is Adam, and I'll be your operator today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to Stephen Hagen to begin. So Stephen, please go ahead when you are ready.
spk04: Good morning, and welcome to Bright Health Group's second quarter 2022 earnings conference call. The question and answer session will follow Bright Health Group's prepared remarks. As a reminder, this call is being recorded. Leading the call today are Bright Health Group's President and CEO, Mike Mikan, and CFO and Chief Administrative Officer, Kathy Smith. Before we begin, we want to remind you that this call may contain forward-looking statements under U.S. federal securities 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 in our current and periodic reports we file with the SEC. Except as required by law, we undertake no obligation to revise or update any forward-looking statements or information. This call will also reference non-GAAP amounts and measures, a reconciliation process, of the non-GAAP to GAAP measures is available in the company's second quarter press release, available on the company's investor relations page at investors.brighthealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our form 8K dated August 10, 2022, which may be accessed from the investor relations page of the company's website. Before we start the call, I would like to note that Bright Health Group will be participating in the Morgan Stanley Conference on Wednesday, September 14th. With that, I'll now turn the conference over to Bright Health Group Chief Executive Officer Mike Mikas.
spk12: Thank you, Stephen. Good morning, everyone, and thank you for joining Bright Health Group's second quarter 2022 earnings call. I'll open my remarks with an update on the business, discuss the progress we've made on our strategic actions, and then I'll turn the call over to Kathy to give additional details on our second quarter results. We always start with our mission. At Bright Health Group, we are focused on making healthcare right together. Our model is built on the belief that by connecting and aligning the best local resources and healthcare delivery with the financing of care, we can deliver better outcomes at a lower cost for all consumers. In the year since we became a public company, our business has matured dramatically in scale, diversification, capabilities, and consistency in performance. We have achieved scale across some of the largest markets in the country, specifically in Florida, Texas, North Carolina, and California. We continue to demonstrate diversification across both our commercial and rapidly growing seniors business. We have significantly grown our new health business while demonstrating the differentiated performance of our fully aligned care model. And as important as that growth, we have made substantial progress on improving our underlying operating performance, developing our proprietary BIOS technology, and driving integration between our Bright Healthcare and new health businesses. These pieces together all drive key points of differentiation for Bright Health Group. In the second quarter, our team continued to deliver solid performance in the underlying business while making significant progress on our fully aligned care model and our operational improvements. We have generated strong growth in our core market while effectively managing medical costs across all of our markets. With the improved performance of our business, the cost actions we have taken and our disciplined pricing strategy for 2023, we are confident in our path to adjusted EBITDA breakeven in 2024. Furthermore, to support the growth and execution of our business, we've always planned for more capital, and we are well underway in satisfying this need. Kathy will provide additional details on our capital position in a moment. Our solid performance so far this year has led us to reiterate our key 2022 guidance metrics. We are delivering on the focused actions and operational improvements that we previously laid out. Through our medical cost management efforts, we are achieving cost savings in line with our expectations, on track for greater than $300 million in savings relative to our 2022 planned pricing changes. Additionally, we are experiencing significantly lower COVID costs so far this year. Overall, utilization across our entire business is lower and has been stable through the second quarter. And we are seeing the benefits of a higher percentage of our member base being retained members from last year. And this has resulted in an enterprise medical cost ratio that's in line with our expectations and better year over year on a restated basis. Our risk adjustment performance is meaningfully better this year due to the higher retained member base, more stable special enrollment period, and the operational investments we've made. In Florida, for example, our own data corroborated by the initial weekly national risk adjustment reporting, WINRAR, shows we are achieving a 25% improvement and risk adjustment on a per-member basis. Our member engagement efforts are much further along this year. We attributed members faster to our owned and affiliate care providers and are identifying members with complex health conditions who would benefit from care interventions earlier. Importantly, we are doing this not just for members in Medicare Advantage, but also members in our individual and family plans. Our efforts around identifying higher risk members supports our patient outreach, allowing us to better direct members to in-network care, as well as helping us accurately capture the risk of the patient population we serve. Our technology development and operational capabilities advance considerably this year. Our new PRISM and Panorama claims and care management platforms, respectively, are performing well, and we are achieving our target benchmarks for prompt pay, age claims, and appropriate denials. While the claims platform in our legacy markets continues to require additional manual work, we have made progress on claims processing in these markets, and the median age of claims has continued to come down throughout this year. Overall, we have significantly more data informing our forecasting and the predictability of our business is improving. We are also upgrading our provider-facing systems, adding more automated and electronic processes for care providers, which increases provider satisfaction, improves the efficiency of our business, and drives better site of care selection to help lower medical costs. The operational improvements we've made in 2022 set us up well as we look out to next year. We expect to continue our 2022 efforts on medical cost management, including implementing new contracts that reflect the scale of our business, driving lower medical costs for consumers. We expect further improvement in our engagement with members and accurately capturing the risk coding of these members across our markets. We also expect to benefit from the markets we entered in 2022 going into their second year. where we will have significantly more data on our members, and we expect to drive a meaningful improvement in the accuracy of risk adjustment. We've driven a strong improvement in the medical cost ratio in both our commercial and Medicare Advantage businesses this year, and expect to continue to improve our performance in 2023. We will also drive further profitability in our direct contracting business in the new ACO REACH program, building on our expected strong first year performance we view the market as being in a disciplined pricing environment into 2023 that supports the positive pricing actions we have taken these pricing actions take into account our underlying unit cost structure and our objective to move our business closer to our targeted long-term margins overall We do not expect these pricing actions to meaningfully alter our competitive positioning and are positive on the potential benefit of the APT subsidies extension in the inflation reduction act as passed in the Senate last Sunday. We will also continue to advance our fully aligned care model and drive medical cost benefits from the combined strength of our bright healthcare and new health businesses. The net results of pricing next year across both commercial and Medicare Advantage, combined with our medical cost efforts, are expected to drive a significant improvement in gross margin and allow us to move meaningfully closer to profitability in 2023, which gives us further conviction in our target of break-even adjusted EBITDA in 2024. I'll now hand it over to Kathy Smith, our CFO and Chief Administrative Officer, to go over our second quarter performance and provide some additional updates on the business.
spk06: Thank you, Mike, and good morning, everyone. I'll start with a review of our second quarter and year-to-date results, provide a balance sheet update, and then go over our 2022 outlook. Our second quarter top-line results reflect solid year-over-year member growth and member attrition in line with expectations from the first quarter. We ended the quarter with over 970,000 commercial consumers and 120,000 Medicare Advantage consumers, as well as approximately 500,000 new health value-based lives. Bright Health Group consolidated revenue increased 42% year-over-year to $1.6 billion in Q2. Bright Health Care segment revenue grew 34% year-over-year to $1.4 billion this and new health segment revenue of $422 million compared to $114 million in the prior year. Consolidated and segment revenues were negatively impacted by $93 million due to final settlement of the 2021 risk adjustment payables across our marketplace states, as well as impacts from an increased forecast for 2022 risk adjustment payables and our revised direct contracting forecast based on a reduction in the CMMI trend benchmark for direct contracting. Our 2021 Marketplace risk adjustment coding was in line with our expectations, but the final market benchmarks for our states were on average higher than expected and resulted in a higher risk adjustment payable. It is important to note, with this healthier population in both 2021 and 2022, we are seeing lower medical expenses, offsetting the risk adjustment estimate changes. Our second quarter adjusted EBITDA was a loss of $195 million, which excludes market-to-market investment gains and losses on equity securities we hold, a $16.2 million loss in the quarter. Adjusted EBITDA was negatively impacted by the 2021 risk adjustment settlement, which was partially offset by favorable 2021 medical expense reserve development in the quarter of $38 million and $53 million year to date. Additionally, the healthier population we are seeing in 2022 in certain markets results in lower medical cost offset by higher risk adjustment, but approximately neutral to both gross margin and adjusted EBITDA. Adjusted EBITDA was also negatively impacted by an in-year $37 million net increase in our premium deficiency reserve, recognized in operating expenses. This in-year PDR primarily reflects the accounting treatment for our new market, as we have more claims data and actuarial experience to support our forecast. To be clear, the PDR increase does not reflect a change in our expectation for 2022 performance, but rather is an acceleration of the estimated full-year losses into the second quarter. Our second quarter 2022 gap medical cost ratio at the enterprise level was 88.8%, up from 86.8% in the second quarter of 2021. The net impact to our second quarter MCR from the final 2021 risk adjustment payable true-up and the partial offset from medical expense reserve development added 270 basis points to our enterprise MCR in Q2. The change in revenue associated with the revised DC benchmark was offset by a revision to our forecast for GCE medical expenses, and the net impact to our year-to-date enterprise MCR was minor. The increase in MCR from the first quarter to the second, when looking at adjusted MCRs for each quarter, reflects a few factors. Typical seasonality has members start to utilize their health benefits more, members progressing through their deductibles, and an increase in utilization in new markets with members becoming appointed with their benefits and provider networks. Our year-to-date medical cost ratio of 86.6% reflects strong performance in our medical cost management initiative and improved operational performance, as well as the success of our fully aligned care model. I'll note again this quarter that in looking at the comparison to the prior year, recall that in the first half of 2021, We had limited visibility to the future impacts from COVID or SEP and were behind in claims processing. Therefore, looking at the first half of last year, if restated for medical costs and risk adjustment that subsequently transpired, we would have experienced a much higher MCR. I would also remind you that in looking at a comparison to 2021, our 2022 MCR is impacted by DCE revenue booked at 98% MCR. Without DCE, second quarter enterprise MCR would be 90 basis points lower, and the year-to-date MCR would be 110 basis points lower. With respect to COVID, second quarter COVID costs declined meaningfully compared to the first quarter. Q2 COVID costs of $20 million were down nearly two-thirds from Q1, adding approximately 130 basis points to second quarter MCR but down from the 320 basis points impact in the second quarter of 2021. The $78 million year-to-date COVID costs are approximately in line with our expectations and create a favorable impact given the pricing adjustments we made for COVID in 2022. While reported results reflect the impact of the 2021 risk adjustment of payable true-up and the net PDR increase driven by our newer IFP markets, Our second quarter operational results were in line with our expectations and reflect solid progress on our operational and medical cost efforts. The commercial MCR in the second quarter was 89% and was negatively impacted by 430 basis points due to the 2021 risk adjustment true-up I noted earlier. Adjusting for this impact, the commercial MCR in the quarter would have been 84.7%. The year-to-date commercial MCR of just under 83% reflects the strong performance in risk adjustment and medical cost management. The second quarter Medicare Advantage MCR was 90.3% and the year-to-date MCR was 93.5%, demonstrating the substantial work the team has done in improving the overall profitability of the business while continuing to build a differentiated Medicare franchise. Both our commercial and Medicare Advantage businesses are performing as expected year to date. As we detailed last quarter, our forecast for this year reflect our learnings from last year, including a prudent approach to our risk adjustment payable expectations and our medical cost forecast. Our operational improvements and our increasing claims processing efficiency results in significantly greater visibility this year. and we are confident in our MCR forecast for the year. Turning to new health, the business continues to perform well in managing fully capitated members. Total value-based care patients as of the end of Q2 were approximately 500,000, including approximately 400,000 from Bright Healthcare, 47,000 from direct contracting, and the remainder from value-based external payer relationships. Second quarter revenue for New Health was $422 million, with a sequential decline reflecting revised risk adjustment estimates for 2021 and 2022 that flow through to the capitated New Health lives, as well as direct contracting member attrition in line with expectations and a reduction in the year-to-date direct contracting benchmark recognized in Q2. The New Health second quarter revenue was additionally negatively impacted by $16 million due to an unrealized mark-to-market investment loss. The impacts to revenue are largely offset by realized medical expense performance below our prior forecast and lower book DCE medical expenses on the benchmark reduction and member attrition. The net result was a solid new health medical cost ratio performance in the quarter at 92.2% despite the lower than expected revenue. We continue to expect approximately break-even gross profit from direct contracting for the full year. The main takeaway on new health Q2 performance is that with the improved BHC commercial performance, new health is beginning to contribute to improved enterprise performance. New health adds diversification as well as eventually enhanced margin potential while providing better, more affordable care. Turning to our balance sheet, as of June 30th, 2022, We had over $138 million in non-regulated liquidity, including $74 million in highly liquid cash and equivalents and $64 million in a passive equity investment classified as short-term. We had about $3 billion of additional cash and short or long-term investments held by our regulated insurance subsidiaries. On our $350 million creditability, we had $300 million available at the end of Q2. Subsequent to the quarter, we have drawn $154 million on the credit facility while we pursue a more permanent solution to our capital needs. As Mike said, we are actively working to satisfy our capital needs, which will require additional financing in the next year. We have formed a special committee of the board and are working with outside advisors to raise sufficient capital to reach profitability and self-sustaining cash flows. we have received significant interest from and are in advanced discussions with third parties and current investors to finalize the capital raise. Apart from our financing efforts, we have improved our financial performance and taken actions to reduce our incremental capital needs by exiting several markets in 2023, as well as taken strong pricing actions for 2023. Our business is now in a much more capital efficient stage, And we continue to focus on balanced growth while driving improvements in profitability to reduce the amount of capital needed. In our earnings release this morning, we reaffirmed the Bright Health Group full year 2022 outlook while making modest adjustments to our new health segment forecast. Specifically, we have maintained our expectation for enterprise revenue to be in the range of 6.8 to 7.1 billion dollars. But I would note that due to the prior year risk adjustment payable change recognized in Q2, a slightly more conservative view on 2022 risk adjustment, and a lower DCE benchmark, we now expect to be in the lower half of the range. Given the moving pieces between the first and second quarter, I would point to the average quarterly revenue over the first half as the run rate and then factor in normal marketplace and DCE attrition rates. partially offset by in-year Medicare Advantage member additions. We continue to expect our enterprise medical cost ratio to be in the range of 90 to 94%, and full year 2022 adjusted EBITDA to be in the range of a loss of $500 to $800 million, which, consistent with prior guidance, excludes any impact from mark-to-market investment gains and losses. We expect an operating cost ratio of approximately 22%, We continue to watch our operating expenses closely and are focused on efforts to control external vendor expenses. On a segment basis, we are maintaining our end-of-year Bright Healthcare member forecast for approximately 1 million members. Full year 2022 new health revenue is expected to be approximately $2.2 billion, taking into account the changes to our risk adjustment forecast and the DCE benchmark. We have also lowered our expected intercompany revenue elimination estimate to approximately $1.2 billion, the lower end of our previous forecast. We expect new health value-based care patients to average between $450,000 and $500,000 during the year. We continue to expect approximately 40% of new health revenue generated from external sources. This includes a revenue contribution from direct contracting of greater than $600 million. Our performance through the second quarter has been strong and we have made significant progress on managing medical expenses and on our operational initiatives, supporting our view that the midpoint of our NCR and adjusted EBITDA guidance ranges are the appropriate targets for the year. While the first half performance has been strong and we are optimistic for the full year, we are maintaining our guidance ranges to reflect a prudent view on the second half. As Mike discussed, Our operational actions in 2022 and the pricing for 2023 sets us up well for a meaningful improvement in profitability in 2023. Let me double-click into 2023 a little more. We have taken pricing action on our 2023 products in excess of expected medical cost trends, inclusive of medical cost management initiatives, to advance toward our long-term margins. We expect these actions to yield a gross margin improvement of approximately $400 to $500 million across our commercial, Medicare Advantage, and new health businesses. This gives us confidence we will be well on our way in 2023 to our break-even adjusted to EBITDA target for 2024. Before I turn the call back to Mike, I 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 fully aligned integrated system of care for the consumer retail market. Now, here's Mike for some final comments.
spk12: Thank you, Kathy. We have made substantial progress across our business this year and continue to focus on delivering on our enterprise priorities for the year. We are seeing the benefits of these efforts in our year-to-date results and expect to continue our efforts on medical cost management, member engagement, and improving our operational performance. As we look forward to 2023, our successful execution this year against our targeted actions sets us up incredibly well. We will also see key benefits in 2023 as our markets mature, with our 2022 new states moving to year two and an additional year of experience and member relationships in our other markets. In developing our pricing for 2023, we have significantly more experience in each of our markets, more data on our ability to manage medical expenses and the trade-offs associated with risk adjustment payables. We expect pricing will be a key lever as we look to improve our margins next year while taking into account medical cost trends and expected changes in market pricing. Additionally, we're excited to have Michael Carson and Jeff Cook on board now to lead Bright Healthcare and New Health and to work with me and the rest of the management team to drive further clinical and financial alignment between the businesses as we continue to improve our fully aligned care model. With that, I'd like to thank our team and our care partners, Michael Carson, Jay Matuszak, And Jeff Cook are also on with Kathy and me for the questions. Operator, let's take the first question.
spk09: As a reminder, if you'd like to enter the question queue, please press star flood by one on your telephone keypad now. Participants were instructed to limit themselves to one question and one follow-up per person so we can get through the queue in good time. Star one to enter the queue. Our first question today comes from Lisa Gill from J.P. Morgan. Lisa, please go ahead.
spk05: Thanks very much. And thank you for all the detail. Kathy, I just want to go back to your comment around OpEx and talking about getting into 22%. As I look at this quarter, I know you talked about the reductions in revenue, but is there anything specific or one time that you would call out on the OpEx side as we think about this quarter?
spk06: Good morning, Lisa. Thank you. So year-to-date, we're at a 24% or so in the quarter 26. I would call out that PBR that we noted, the end-year PBR for $37 million. That adds 230 basis points to the quarter. So remember, that'll reverse out over the next two quarters, so I would pull that out. And then we're solidly on track for a 22% for the year.
spk05: Okay, great. And then just as a follow-up, Mike, you know, you talked about pricing for 2023. really helping to drive the margin. But just curious as to your thoughts around membership with the new pricing and how you're thinking about both sides of the business, especially as we think about Medicare Advantage bids, we think about the IFP market. Any incremental insight into how you're thinking about membership going into next year? Thanks.
spk12: Yeah, thanks, Lisa. I don't want to get too far ahead in our 23 expectations in terms of enrollment. Obviously, there's a lot of information that has yet to come out in terms of how the market is positioned, but we feel we're positioned well. We believe, you know, overall we're in a, you know, disciplined pricing environment with rates, so we took prudent actions and we think we're well positioned you know, in the majority of our markets next year. So we'll come out more with enrollment projections as we get closer to AEP, OEP, but at this point, you know, I think we'd stay with our kind of prepared remarks that we believe our positioning is well overall. Thanks.
spk09: The next question comes from Stephen Valiquette from Barclays. Stephen, your line is open.
spk03: Yeah, thanks. Good morning, everybody. The main question I wanted to ask on was around some of that membership growth outlook for next year. We've seen some other publicly traded companies take pricing actions in the exchange business to improve profitability. It led to some pretty wild swings in their membership. Some books down 60% plus year over year, but still growing profits. Investors seem to be comfortable with that and actually could view that more favorably. I know it's early, but I'm wondering... just from your planning and your corporate strategy right now, are you anticipating or bracing that your membership could be down next year? Or are you anticipating that there still will be growth? So just directionally growth or decline might just help us just for like a, you know, a large framework, just as how you're thinking about it internally, the way it stands right now based on your pricing action.
spk12: Thanks. Sure. Steven, I'll try to answer it again without, getting too far into expectations on 2023 as it's pretty early here as we sit in August. But if you exclude the exit markets, which we've disclosed is roughly 7.5% of our overall revenue, so relatively small. If you exclude that next year, we expect growth on a top line basis. We continue to expect growth. While it'll be more balanced growth than we've seen up to this point, We're still anticipating growth. Now, candidly, a fair amount of that's going to come through from yield, which is anticipated. But we're still looking forward to market growth in several markets. So we like how we're positioned overall. And then I would also note that, you know, part of our business model is a balanced model between our financing business, Bright Healthcare, and New Health. And we expect continued growth in New Health. which is, you know, partially offset any in-market, you know, degradation that we would have on Bright Healthcare where we'd have relationship with external third parties. So, and then on top of that, other opportunities like growth with, you know, the ACO REACH program that we've talked about. So we're well positioned for continued growth, although I would note it's more moderate growth from obviously what we've seen over the last three years, which has been robust growth. Thanks.
spk09: The next question is from Nathan Rich from Goldman Sachs. Nathan, please go ahead.
spk00: Hi, good morning. Thanks for the questions. I'll ask both up front. I guess first on the risk adjustment improvement, Mike, you called out the 20% to 25% in Florida and North Carolina. You know, how did that – it sounds like that compared favorably maybe relative to where your expectations were, but how much more room is there for improvement? And, you know, how do you kind of more accurately capture the risk of first-year members going forward? And then, Kathy, if I could just ask a follow-up on the –
spk12: financing needs that you had alluded to can you give any more details on what you think that looks like and what the timing of that that might be thank you great thanks Nathan so with you know risk adjustment performance we you know we meant obviously last year was very challenging for us and principally in Florida where we grew significantly coupled with extraneous very old variables kovat the special enrollment period that had a fair amount of switching of lives throughout the year. And then what we talked about, what Kathy talked about in her prepared remarks was, you know, we were behind significantly on claims processing as a result of that significant growth coming into the year and having to catch up with loading contracts and the like. And so The comparison last year is obviously difficult, but with that said, we've made the operational improvements, engaged earlier with our patients, attributed them to our care provider partners, our care centers, and our affiliates earlier in the year. And then we've got good claim data and clinical data to go after those patients that really need You know clinical interventions earlier so we're engaging earlier and that helps us with the second part of your question in terms of accuracy with first year. You know capture with the consumer, the sooner we can get to know them and engage with with our consumer base that we're serving the better off we're going to be and then, as the years go on. As a result of just having a greater retained membership, you know if you exclude our first year markets last year our retention was 80% or so some of our markets were approaching 90%. The higher retention, we have obviously the better performance we're going to be in terms of risk code capture and accuracy, given the risk that we take so over time we expect that reduction. I'm not sure I would characterize that Florida and North Carolina is better than our expectation. I think we, we believe we could do 20 to 25% improvement. I think we talked about that earlier. Um, we've done what we said we would do. So we're very pleased with the early results and, and believe they'll continue throughout the year and future periods. Um, you know, maybe I'll just take the financing question as well. You know, with respect to our financing, we've always talked about Nathan, that we're going to need additional financing to get to break even. You know, we've taken significant actions over the last, you know, 12 months or more to improve our operating performance and our cash burn. I'd also note that, you know, part of the process of building an enterprise in the insured risk business is you've got to capitalize, you know, your legal entities, your statutory entities, and you know, for the most part, when we get through 2022, We've capitalized our statutory entities. So our cash requirements going forward in terms of, you know, building the growth engine in these big states where we're an insured entity is going to decline significantly. So our outlook on cash has improved and is favorable. And we always knew we would need additional capital. We're just underway with talking with our existing investors, who we still have strong support from, and then new investors to raise the additional capital to meet our needs to get to adjusted break even in 2024. And given the actions we've taken, we've got a lot of confidence in achieving that. Thanks, Nathan.
spk10: The next question comes from Joshua Ruskin from Nefron Research.
spk09: Joshua, please go ahead.
spk01: Hi, thanks. Good morning. I've got a question and then a follow-up as well. I guess the first question would be, I'd be interested to hear about the progress at New Health on two fronts. So first, if you could speak to your ability to attract new physicians to your platform and how you're approaching that, the growth of the platform. And then second, how is the Bright Healthcare membership that's being cared for under New Health performing relative to the remainder of your membership that's being cared for outside of New Health?
spk12: Now, Josh, you know that's two questions, right?
spk01: I'm just kidding.
spk12: Yeah, that's right. I've known you a long time. So with respect to attracting physicians, yes, we continue to attract physicians and other care providers, ancillary providers, into our own care centers. You know, we're in competitive marketplaces for the most part. Obviously, there's some pockets where we've seen, you know, some challenges, but we've seen a very stable workforce within our physician groups we're very proud of. And I do think our model, you know, with value-based care and really focusing on quality and And the relationship with the consumer and consumer satisfaction and all the tools, the technology that we enable our physicians is a differentiator for us. So we've been able to do that and attract new physicians as we go along. We've been growing. So we're pleased with that. And with respect to Bright Healthcare lives being managed within New Health, you know, we look at it as New Health manages a population both with our own care centers And then what we call our affiliate care partners, which are partners that we share in the risk on the population. Overall, we continue to see the population compared to the non-managed risk population, you know, better within our peer centers and our affiliates by about somewhere around 10%, maybe north on an underlying cost perspective. So in other words, lower costs within our care centers and in our affiliates overall compared to the market 10% north. So we're pleased with that. We believe over time we can do better than the market by 10% to 20%. That's what we've targeted. And we're probably on the lower end of that now, but we believe we can improve upon that over time.
spk10: The next question comes from Jeff Gower from Piper Sandler. Josh, you're loud as I can hear me.
spk01: Oh, I'm sorry. I'll follow up real quick. So the, uh, 400 to 500 gross margin improvement that Kathy mentioned, how should we think about, uh, I heard enterprise top line up, excluding the seven and a half percent had been from exits, but I'm just trying to figure out the GNA dollars. Does that mean we're going to see GNA dollars up except for the exits type of thing? Or should we expect total GNA dollars to actually be down next year?
spk12: Uh, again, we don't want to get it. I recognize, uh, uh, You know we're going to get into modeling but we don't expect to be sg and a to be up next year, obviously we'll come out with more specifics later josh but we're we're expecting the productivity improvements, you know we've talked about this in the past, as we built the organization we built. With a lot of vended relationships which we are now bringing in house we're achieving the productivity on those one of the biggest implementations. that will create significant productivity gains as we move off our legacy-bended claim system, which is about 70% of our ACA business today, and we move on to our more permanent PRISM system, which we get the productivity out of and will have significantly higher auto adjudication rates. Today, on our PRISM system, we're at about 75% auto adjudication. That's coming off our legacy system where we have no auto adjudication. So we have significant opportunities to improve our underlying cost structure. And that's a key contributor to ultimately getting below 15% in 2024 to get to adjusted break even. So that's the way I would answer the question, Josh.
spk06: Yeah, maybe I'd add on, Josh, just where Mike was just finishing up, which is we're guiding 22% this year. Mike just said by 2024, we need to be at 15% or better, so it's pretty easy to figure out what next year needs to be, and those are all the plans we're putting in place right now.
spk10: Thanks, Josh. Jeff?
spk13: Yeah, good morning. Thanks for taking the questions. I want to start off asking about the second half MCR guidance and just maybe a little bit more color on how we should think about balancing the typical seasonal headwinds your medical cost management improvements, and maybe some of the more one-time factors seen in the first half of the year normalizing?
spk12: Yeah, so we reiterated our guidance of 90% to 94%. And so given, obviously, we're at 86.6% mid-year, we've got some one-time items. We would assume a higher medical loss ratio on the second half of the year. We're cautiously optimistic. Um, you know, as we look to the remainder of the year, um, that we're going to continue to see very stable utilization subject to seasonality that we'll see in the remaining part of the year. Um, last year, uh, as you know, COVID hit, um, starting the summer for us, especially in the Southeast and, uh, and then was, you know, pretty rampant through the remainder of the year. So that's a big unknown. So I think if you, you kind of, as Kathy said, we, we're kind of, We believe in the midpoint of our range, and we're cautiously optimistic, and you can probably, I guess, interpolate to get to what the second half MCR could be to get you to that point.
spk13: Great. Very helpful. Paul, for me, maybe looking ahead a little bit, your comments on pricing and renegotiations with some of your network providers, one of the asks there, Is the renegotiating, is it contracts that are up for renewal? Is it finding new partners? And how do you balance the repositioning for scale with those providers versus them seeking to adjust rates for inflationary effects?
spk12: Yeah, so, you know, maybe I'll start. Jeff, do you want to add anything if I miss? But, you know, we view what we call our integrated system of care as a Aligned model with a set of care resources where we're all in partnership to improve the consumer experience, improve the health outcomes, the quality of care, and ultimately drive lower costs. And so since we're all in it together, we look at, you know, kind of the contract negotiations as is really a go to market together approach. And so it's really a partnership overall. And we don't just think of it as unit cost in it by itself. We also think about it as the levers of having a partnership together, how we can improve that experience. And one of the key points of our model or differentiation is the high referral we have into the network. And that drives significant volume to the partners where we want our members to be at for site of care. And so as a result of that, and just the sheer volume that we have in some markets with 25% market share or more in the commercial marketplace, in some markets, significant Medicare advantage in the marketplace, combined with our affiliate relationships from other payers, we've got strong relationships with our care partners, and we believe net-net we're going to continue to drive our underlying unit costs down. So that's the way we approach it. Jeff, do you have anything else? Okay.
spk10: So that's the way we think about it, Jeff. The next question comes from Michael Hart from Morgan Stanley.
spk09: Michael, please go ahead.
spk15: Thanks, guys. Appreciate all the financing-related commentary today. Just in terms of other potential cash levers, I think in the past you may have mentioned reinsurance, helping to reduce statutory capital needs might be one. So my question is, how many of your markets do you actually have reinsurance in place, and how much of a lever could that be?
spk06: Good morning, Michael. Looking forward to you picking up coverage with us. With regards to reinsurance in the markets, we currently have quota share type arrangements in a couple of our markets. We're currently pursuing another, or actually we have them in three or plus more of our markets right now, and we're pursuing another. It's a great way to leverage someone else's balance sheet, as you know. I would also point to the other cash levers we've talked about. We're continuing to work on our operating costs as we've talked about before. And then, you know, those exit markets will be able to eventually think about some capital there as well. So we've got a few other levers we're continuing to work.
spk15: Thanks, Kathy. Really appreciate it. Just one more quick follow-up. I know risk adjustment items may have impacted revenue this quarter, but I'm also noticing membership is a bit light versus the street. ISP attrition seemingly a little bit higher. MA was unchanged. So it didn't seem like they're in-year member additions quarter over quarter. And New Health looks like there's a bit of attrition. Wondering if you could comment on those components.
spk12: Yeah, I think, you know, I'm not exactly sure what the street estimates were. I mean, it's pretty typical attrition in the second quarter as as we true up those who have made premium payments for their portion and what have you or effectuate. And so it's pretty much in line with what we expected. And if you just look at where we were starting from and our end year estimate of a million of total lives, we're well within that kind of estimate. And that would flow through, by the way, Bright Healthcare, given the large portion of their business new help having with Bright Healthcare. Obviously, they're going to degrade or decline with them. So, we didn't see anything out of the normal there, and it was pretty much in line with our expectation. Thanks, Michael.
spk09: The next question comes from Jason Casola from Citi. Jason, please go ahead.
spk14: Great. Thanks for taking my questions. I was just hoping you could give us an update on how trends have developed for the 20 or so new health clinics in Texas specifically. I know it's early after entering into Texas' IFP market this year, but perhaps if you could also detail how performance in Texas so far is helping to inform you of your future new health clinic build-out or any other considerations at this time, that would be helpful.
spk12: Yeah, thanks, Jason. So, you know, it's early, of course, but overall we're pleased with the performance of the clinics that we built out. It's a core part of our strategy to enter new markets with You know, as we build out the fully aligned integrated systems of care, it includes, you know, care centers where it makes sense, especially in high, highly competitive, highly dense markets where we can build access points for an underserved community. So we're really pleased with the results so far, but overall in Texas, part of the reason why risk adjustment was impacted in 2022 and our outlook is utilization is lower. well below our initial estimates and just a slightly healthier population. But overall, where we're managing the population within our care clinics, we're seeing similar trends, albeit early, as we did in Florida. And that's a strong indication of the future performance of our model. So we're excited about it.
spk14: Okay, thanks. And then just quickly on a follow-up here, I was just hoping you can give us an update on your relationship with Cigna and how discussions there have progressed, perhaps around Cigna's Evernorth capabilities and the new health or otherwise. Thanks.
spk12: Well, as we've said before, we're really pleased with our relationship with Cigna as a capital partner and a strategic partner where it makes sense. And we continue to look for ways to work together, but I don't have anything to add beyond what we discussed earlier. previously it's uh you know it's a it's a good it's a good partnership and i think it benefits both of our organizations um obviously much more to us just given our size but uh we're pleased overall with the relationship the next question comes from just justin lake from wolf research justin your line is now open
spk11: Thanks. Good morning. Just a couple of quick follow-ups. One, you got asked about capital. Is there a, you know, I know you don't want to box yourself in, but is there at least, you know, kind of a minimum number that you're looking that you kind of have investors think about you would want to raise next year?
spk12: Justin, I don't want to get into specifics on the capital raise. We said we're pleased with the interest level and the work that's underway. This has been normal course for us. This wasn't an immediate type action. We've been planning capital since we built the business from day one, and so this is very part of our normal routine course, and we just consider it that. So I just assume not get into specifics, but we're well underway.
spk11: Okay, and anything on timing there when you expect to announce that for the next year?
spk12: Yeah, I mean, obviously, as we said, it's underway. I don't want to get into a specific date, but we are in the, you know, call it near to intermediate term. We do expect to conclude our financing efforts.
spk11: Okay, great. And then just a follow-up. You gave us a couple of useful pieces for 2023. On the way to breakeven, I think you said $400 million to $500 million in gross margin improvement. I think you said operating costs flattened down on a dollar basis for next year. Obviously, one would think $400 million to $500 million, maybe more, of operating profit, kind of EBITDA improvement. Any other moving parts you want us to consider there, or is that a reasonable kind of trajectory to that in 2023 to breakeven in 2024?
spk12: I think those are reasonable assumptions. I think when you go back just into 21 and what we said we would do in 22, and you just build to where we've kind of set the range for 22, we've executed on what we said we would do, $300 million of incremental medical cost initiatives, improved risk adjustment in Florida and North Carolina. you know, another 150 to $200 million of improvement. And obviously COVID we didn't price in for 21, but we did price in for 22 at 125 million and we're seeing lower COVID costs. So we believe we've executed on our plan, which is really around fixing a lot of the challenges we had in 21, but also moving towards, you know, the way we believe we can manage a million live book of business or more. For 22 in 23, we're going to continue those enterprise initiatives continue to refine and improve Building on our scale our deep local relationships higher retention, but we're also believe we're in a discipline pricing You know market that it's not just us. It's a market competitive discipline pricing market and when you take those together you know, that's how we we believe we're going to be moving more closer to our targeted margins and at an individual product line or business line, and ultimately enterprise profitability or break even in 2024. So those are reasonable assumptions, Justin.
spk10: The next question comes from Kevin Fishbeck from Bank of America.
spk09: Kevin, please go ahead.
spk02: Great, thanks. I was wondering if you could give a little more color on the $400 to $500 million improvement that you're looking for next year. I think you mentioned pricing. um above trend but that trend number includes cost savings that you're trying to uh effectuate so can you maybe help us break down maybe into two parts like how much of it is kind of pricing above core trend and how much of it is is actually you going out there and getting the medical cross management savings thanks yeah thanks kevin uh you know we'll get more into specific into this as we get closer to the year and put out full year guidance for next year that's that's a little more detailed than we're prepared to
spk12: to offer but uh you know it's safe to say that the initiatives that we've put in place for this year um some of those initiatives they're they're they roll over in the next year and have favorable impact in next year that weren't impacted in time this year and then we've got obviously more initiatives that we put in place that we believe will effectuate uh next year uh incrementally to this year and uh our our focus on medical cost initiatives is becoming a real strength of ours And with our integrated model, we believe we can only improve upon that. So we'll get more into that, but we believe we're, we feel confident that the pricing will be above and beyond, you know, our underlying medical trend and then include additional upside as a result of medical cost initiatives, which yield the four to $500 million of incremental gross margin next year. And just incidentally, that includes both improvement in IFP as well as Medicare Advantage. We continue to see significant improvement in our Medicare Advantage book of business. As you know, Medicare Advantage for the second quarter had a 90.5% MLR. We continue to bring that down year over year and improve our path to profitability. So both of our major lines in the Bright Healthcare business, we're seeing improvement. And it's a direct relation to a lot of the initiatives we put in place starting last year that we've talked about previously.
spk02: Okay. And then I guess, you know, your MLR guidance, I appreciate that you're focused on the midpoint of that, but it is, you know, given that we're halfway through an extremely wide range and you guys have spent a lot of time talking about improved visibility and claims and systems and data, you know, so why is it prudent to keep such a wide range and not narrow it a little bit if, in fact, you feel like you've got that confidence in improved visibility?
spk12: Yeah, I appreciate the question, Kevin. And, you know, we're coming off of obviously a very challenging year in 21. And while we really have strong confidence in the improvements that we've made, you know, given the potential for COVID and other things, you know, we just want to make sure that we're, while we're optimistic, we want to stay prudent in our estimates.
spk10: And so that's the best way I can answer that question. Our final question today comes from Ben Hendrix from RBC Capital Markets.
spk09: Ben, please go ahead.
spk08: Hi, thank you, everyone. I think you've touched on this a little bit, but can you go into more detail about the investments and progress you've made with the legacy claim management platform? Where are we from a timing perspective in the transition process to getting the whole enterprise to an electronic submission and audit adjudication? Thanks.
spk06: Hey, good morning, Ben. So as we've shared with you before, we're really well underway. We're excited about the progress the team has made across the company. We've moved all of our new markets, remember, this year and onto our PRISM platform for our new claims platform in all of 2022. That's executing really well, Mike shared. We're seeing a really great first-pass yield or first-pass value out of adjudication on that platform. Really pleased with its performance. And so that's the all new markets, about 30% of our business. All remaining IFP markets or commercial markets will move on that same platform on 1-1-23. So we're preparing right now to move the rest of the book from the commercial book. And then we're debating on what the right answer is for MA as we move forward. So those will move on the remainder of this year. This year, though, the other 70% that's on the legacy platform from previous, we've done a ton of work to improve its ability to process timely and accurate claims and our insight and visibility into that performance has been tremendously different from last year. So we're managing that with all of our team and the vendor's team and feel really good about its performance this year, but we're excited to move into our next environment. As we think about reducing our operating expenses, we have to move from multiple claims platforms to one. We're moving all of our clinical programs clinical efforts on to Panorama, which Mike shared. So I'm very, very excited about what that does for our members and our providers, but also for our cost structure.
spk12: Yeah, and we're focused on not just the core claim platform that we've vented out. We're really focused on building out tools that will be part of the prison BIOS environment going forward. So as we mentioned, provider-facing tools, authorizations we rolled out. an online tool, significant increase in online authorization. So we're reducing manual workarounds and interventions and moving to more online streamlined capabilities, which is a big driver of the expected productivity going forward. So all of that together, we're really excited about where we're at, noting that we still for 2022 remain on a legacy system that has been inefficient and we're working our way through it. We're much better We have much better knowledge, and the work that we've done has been favorable, but we're, as Kathy said, we're more excited about where we're going, and that's, you know, on our new system starting in 23, or, you know, addition in 23. Thanks, Ben.
spk09: Thank you. So we have no further questions. This will conclude today's Q&A session, so I'll hand back to the management team for any closing remarks.
spk12: Great, we appreciate your interest in the company and we look forward to future updates next quarter.
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