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spk05: Good afternoon, and welcome to KNO Health's fourth quarter 2021 earnings call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. Hosting today's call are Dr. Marlo Hernandez, Chairman and Chief Executive Officer, and Brian Coppe, Chief Financial Officer. The KNO Health Press Release webcast link and other related materials are available on the Investor Relations section of KNO Health's website. These statements are made as of March 14, 2022 and reflect management's views and expectations at this time and are subject to various risks, uncertainties, and assumptions. As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the fiscal year 2022. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in section 27a of the securities act and section 21e of the securities exchange act we caution you that the following forward-looking statements reflect our best judgment as of today based on factors that are currently known to us and actual future events or results could differ materially during the call we'll also discuss non-gap financial measures The non-revenue financial measures we will discuss today are not prepared in accordance with GAAP. A reconciliation of the GAAP and non-GAAP result is provided in today's press release and are on the website at the investor relations section. With that, I'll turn the call over to Dr. Marlo Hernandez, Chairman and Chief Executive Officer of Gaino Health. Please go ahead.
spk07: Thank you and welcome to the call. We appreciate your joining us this afternoon on short notice. Kano Health reached important milestones and delivered strong results during the fourth quarter and throughout 2021. I want to start by thanking the entire Kano Health team. Together, we've continued to make great strides in the company's growth while improving quality during the worst pandemic of the last 100 years. You lived up to our values, what we call Kano Strong. Over the course of 2021, we more than doubled the size of Kindle Health, both in terms of revenue and membership. This expansion brought the Kindle Health model to five new states and added more than 100,000 new patients. We did all this while adhering to Kindle Health's core mission to provide patients with high-quality, high-touch care while producing better outcomes at lower cost. I'm particularly proud of our model benefits underserved patients, those who would otherwise not be able to receive high quality care. We're saving lives and transforming communities. And with each passing day, we're reaching more patients through our differentiated approach to growth. And as a product of our mission, we are creating value for all of our stakeholders. In 2021, we expanded our own medical center footprint substantially, adding 50 medical centers across the country, ending the year with 130 owned medical centers and over 1,000 affiliates in eight states and Puerto Rico. We're growing fast in markets outside of Florida. In Texas, for example, we now have 11 medical centers located in San Antonio, Corpus Christi, and Rio Grande Valley. In Nevada, we ended the year with eight centers in Las Vegas. By employing our unique build, buy, manage strategy, We are quickly achieving scale and density in these communities and positively impacting the health of our patients, improving access, quality, and wellness. In Las Vegas, where we've been operating for approximately one year, we have reduced admissions per thousand APTs from 287 in the first quarter of 2021 to 209 in the fourth quarter, with a readmission rate below 11%. We have become an integral part of the community with a staff comprised entirely of local professionals who reflect the population we serve. Powered by Canon Panorama, our population health platform, these providers and clinical support staff members are transforming healthcare and redefining primary care in their community. Our strong financial performance is a result of core fundamentals of providing better patient experience and healthcare quality. We measure patient experience using Net Promoter Score, or NPS, which is 83, and we measure quality by our average star rating, which is 4.7. In our Texas and Nevada markets, our early results show NPS scores at or above our company average, solid quality ratings, and better than expected medical cost optimization. This early success demonstrates the scalability of our model. At the end of 2021, we proudly served approximately 227,000 members across eight states in Puerto Rico, a 115% increase from our membership at the end of 2020. Further, we're already seeing strong membership growth across our markets in 2022. We expect to have a total membership at the end of March 22 of 265,000. up from 253,000 members as of January 1st. That expected increase in membership at the end of March represents approximately 127% year over year growth, including 59% organic growth. I should note that acquisitions were an important source of growth for us in 2021. These included the acquisitions of University Healthcare in June and Doctors Medical Centers in July. Performance of these acquisitions has so far exceeded our expectations, and we expect even stronger contributions to revenue and earnings in 2022. Let me now turn to the technical accounting change we implemented over the last two weeks. This was related to a change in the timing of recognizing Medicare risk adjustment revenue. As a result, we have restated our quarterly financials for the first three quarters of 2021. Brian will provide more detail about this accounting change, but it's important for you to know that it has no impact on our cash position or the strong fundamentals of our business. Our long-term opportunities are truly exciting. Primary care and population health management are essential to providing the best quality care while bending the cost curves. These services are not wants, they are needs. Market demand is large and growing. The care we provide is primarily paid for by the federal government, state governments, and employers. And they increasingly want to ensure that their funds are being spent effectively and equitably. Given the importance to national goals, the Centers for Medicare and Medicaid, or CMS, is working to further accelerate the shift to value-based care with an increasing focus on health equity. As an example, CMS recently announced a redesign of the Direct Contracting Entity or DCE program. The new ACO REACH program will begin in January 2023. We are pleased with what we have learned about the new program, and we expect to participate in 2023 and beyond. Despite the tremendous demand for value-based primary care, clinical capacity remains scarce, which means there is a large space to fill. We believe the companies who can step up to serve this demand at scale, improving quality while reducing costs, will become the largest and most influential healthcare companies in our country. In short, our performance and growth prospects continue to reinforce our confidence in Kindle Health's national care platform, designed to improve access, quality, and wellness, and our growth strategy of building, buying, and managing medical centers. We are proud of the critical role account of health plays in the care of underserved populations, and we are committed to becoming America's primary care provider. Now I'll turn the call over to our CFO, Brian Coffey, who will walk you through additional details on our financial performance and the outlook, as well as the impact of the recent accounting change.
spk08: Thank you, Marlo, and thanks, everyone, for joining us today. To start, I would like to express my appreciation to our team for their quick response in addressing the recent change in our revenue recognition accounting. I am proud of the diligent work they did to provide our shareholders with our restated results today. As we have stated, our goal is to achieve consistent growth and operating results as we rapidly increase scale and density in new and existing markets. This quarter's results and our outlook for 2022 affirm our confidence in our ability to do just that. Membership increased 115% year-over-year to approximately 227,000 members in the fourth quarter. This represents an increase of more than 121,000 members from a year ago. In the fourth quarter, 56% of our members were Medicare, 29% were Medicaid, and 15% were ACA. Additional information about our membership mix and our PMPM, our per member per month revenue, by line of business is available in our press release and updated financial supplement slides posted this afternoon on our website. Let me briefly discuss the restatement results due to the change in revenue recognition. While we finalized our order for fiscal year 2021, we and our independent order identified certain non-cash adjustments to revenue under accounting standard ASC 606. Previously, the company recognized Medicare risk adjustment, or MRA, as a change to Medicare PMPM at the date of service. In other words, when we saw the patient. Under this approach, when identifying a member's chronic conditions, such as diabetes, we would accrue the MRA revenue to match the timing of that revenue with the timing of the corresponding patient care costs. With the accounting change, most of the MRA is now recognized as a change to Medicare PMPM in the period of collection. That is, in the year after we documented their health condition. The adjustments only impact the timing of revenue recognition, delaying recognition of current year MRA to the subsequent year. Importantly, the adjustments do not impact Canal Health's cash from operations, cash position, or the estimated collectability of MRA receivables. The impact on 2019 and 2020 financial results were not material. The reason the change in revenue recognition was material in 2021 is the significant membership growth in 2021 and the deferred care due to COVID-19 in 2020 that artificially reduced MRA payments in 2021. Our fourth quarter results are detailed in our press release and 10-K file today. I'd like to spend time walking through what we think investors are most interested in learning about. That is the impact of the accounting change on our 2021 revenue and adjusted EBITDA and our 2022 guidance. So for this portion of the discussion, it may be helpful to refer to slides 12 and 13 in our financial supplement available on our investor relations website, where we illustrate the impact of these changes. As a result of the restatement, approximately $122 million of MRA revenue related to care provided during 2021 that would have previously been recognized in 2021 is now expected to be recognized in 2022. This reduces revenue that would have been reported under our previous accounting methodology by approximately $122 million. This $122 million reduction is partially offset by $10 million in MRA revenue that was previously recognized in 2020 under the previous accounting methodology for a net negative impact to 2021 revenue of approximately $112 million. Importantly, absent the change in accounting, our $1.72 billion in revenue was in line with our November 2021 revenue guidance of approximately $1.7 billion. Turning to 2021 adjusted EBITDA. As a result of the restatement, approximately $101 million of 2021 adjusted EBITDA related to the change in MRA revenue described above as well as other non-cash items is now expected to be recognized in 2022. The $101 million reduction in 2021 is partially offset by $10 million that was previously recognized in 2020 under the prior accounting methodology for a negative impact to 2021 adjusted EBITDA of $91 million. Again, absent the change in accounting, our $118.2 million in adjusted EBITDA was in line with our November 2021 adjusted EBITDA guidance of approximately $118 million. Now turning to the impact of the change on our 2022 guidance. For revenue, the net positive impact from the restatement is expected to add $59 million in revenue to the midpoint of our prior guidance of $2.65 billion. The $69 million change consists of $122 million of MRA revenue related to care provided in 2021, net of $53 million of revenue included in previous 2022 guidance that is now expected to be recognized in 2023. This revenue recognition timing change has the impact of bringing our 2022 revenue guidance midpoint up from $2.65 billion to $2.72 billion. However, incremental to this accounting adjustment, we are now expecting an additional $80 to $180 million of revenue related to improved organic growth. As such, we are further raising our full-year 2022 revenue guidance to a range of $2.8 to $2.9 billion. The accounting change also impacts the reported medical claims ratio, or MCR, in 2021 and our expectations for 2022. In 2021, the restated MCR was 80.5% and would have been 74.9% under the prior accounting methodology. This increase is driven by the change in MRA revenue recognition, which reduced 2021 revenue by $112 million and increases 2022 revenue by $69 million. For 2022, we are projecting an MCR in the range of 76.0% to 76.5%, reflecting the MRA-related accounting change and operational improvements partially offset by higher DCE memberships. And seasonally, the MCR for the first half of the year should be higher than the second half of the year. For 2022 adjusted EBITDA guidance, the net positive impact from the restatement is expected to add approximately $58 million to the midpoint of our prior guidance of $170 to $175 million. The $58 million change consists of $100 million of adjusted EBITDA that will now be recognized in 2022 partially offset by $43 million in adjusted EBITDA included in previous 2022 guidance that is now expected to be recognized in 2023. Once again, this increase is related to the change in the accounting methodology. Also, because of the improved fundamentals of our business, we are further increasing our 2022 adjusted EBITDA guidance to a range of $230 to $240 million. We view our updated 2022 adjusted EBITDA guidance as our new baseline, and we fully expect to further grow from this level in 2023. Now let me turn to our cash flow and liquidity. We ended the fourth quarter with about $163 million in cash, and our $120 million revolving line of credit was undrawn. Total debt at the end of the fourth quarter was $953 million and includes long-term debt, capital leases, and payments due to sellers. Our total net debt was $790 million, defined as total debt less cash. During 2021, cash use and operating activities was $129 million, an increase of $36 million sequentially due to working capital needs and our growth. For the full year of 2022, we expect the strength of our existing operations and the recent acquisitions to generate positive operating cash flows that will continue to drive growth. We ended 2021 with 130 medical centers and more than 1,000 affiliates. This included 20 de novos completed during the year in line with our guidance. In addition, we expanded our square footage at a number of our centers, expanding additional clinical capacity to serve our growing membership base. Our strategy is to continue to build scale and density in our targeted markets. Creating capacity and taking market share in a timely and capital-efficient way is paramount to our growth plans. We utilize each of our three growth avenues, building, buying, and managing, either individually or in combination, depending upon the opportunities available. This results in the most efficient use of capital, which we believe allows us to manage the greatest number of patients in the shortest amount of time with the least amount of risk. We believe this, in turn, ensures sustainable, profitable growth and market leadership. Our growth strategy provides our market leaders with the necessary tools to grow their markets as efficiently as possible. What do I mean by this? As we discussed in the past, we do not have a one-size-fits-all strategy for growth. We allow the local market leadership to determine the best course of action to grow profitably. All healthcare is local, and our leadership in the markets have P&L responsibility. That means as market dynamics change, particularly in relation to the cost-benefit trade-off between building a medical center and purchasing small medical practices as tuck-ins, local leaders can make a business case for adapting their growth strategy and deploying capital in the most efficient manner. As we executed on our strategy throughout 2021 and now into 2022, we are seeing interesting market dynamics as we analyze our build strategy compared to some of the many small tuck-in opportunities that come our way. As it relates to de novo's built from the ground up, we are seeing higher construction costs and longer construction lead times due to labor and supply chain challenges. Conversely, more small medical practices are becoming available. And importantly, the valuations of these tuck-in medical practices are lower than a year ago. As a result, when we look at the deployment of capital, in some areas the risk-reward tradeoff is skewing more favorably toward adding small tuck-in practices versus building de novos from scratch. The basic math we look at is that it typically costs approximately $1.5 to $2 million to build out a medical center, and that center will lose approximately $1.5 million in the first two years. for a net CapEx and OpEx cost of $3 million to $3.5 million. However, we are finding many attractive tuck-in practices that we can officially add for less than this sum. Notably, these practices will come with physicians and staff who know and understand the patient population, along with membership, revenue, and adjusted EBITDA. In addition, we get greater speed to market and more rapid access to scarce clinical capacity and market intelligence. So as we move into 2022, that more of our new medical centers will come from tuck-ins than we had previously anticipated. It's important to note that at the end of the year, we still expect to have approximately 184 to 189 medical centers. we believe that our flexible growth strategy of buying, building, and managing will allow us to achieve the planned medical center count more efficiently. Now let me summarize our 2022 outlook for you. We expect membership for 2022 to be in the range of 290,000 to 295,000 from the previous estimate of 280,000 to 285,000. Membership as of March 31, 2022 is expected to be approximately $265,000. Total revenue is expected to be approximately $2.8 billion to $2.9 billion. For the full year 2022, we expect our MCR will be in the range of 76% to 76.5%. Our adjusted EBITDA is expected to be $230 million to $240 million, which we view as our new baseline for expected growth in 2023. Our own medical centers at the end of 2022 are expected to be in the range of 184 to 189, up from 130 at the end of 2021. Additionally, we expect interest expense of 65 to $70 million, stock-based compensation expense of 60 to 65 million, and capital expenditures of 40 to $60 million. And as noted in today's earnings release, we expect to be able to achieve our 2022 guidance without the need for additional financing. With that, I'll ask the operator to open the call to your questions.
spk05: Thank you. At this time, to ask a question, you will need to press star 1 on your telephone. To withdraw the question, just press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jason Casorla from Citi. Your line is now open.
spk04: Great. Thanks for the questions. Just wanted to ask a question on 22 guidance. So putting aside the dynamics around the risk adjustment, the $80 million to $180 on the incremental revenue growth, but the flat to slightly positive EBITDA growth for 2022. Is that largely given the incremental DCE membership coming in at call it break-even margins, or how should we think about the puts and takes around the operational revenue and EBITDA updates to 2022 guidance? Thanks.
spk08: Yeah, thank you. And, yeah, certainly the DCE membership is providing a nice lift in the revenue and that, you know, We take an early position of margin neutral to slightly positive with that business. But we also are seeing some additional upside in our base business from incremental membership. So mainly DCE, but also some nice core business membership growth that we're expecting for 2022 to drive that revenue.
spk04: Got it. Okay, thanks. And then I just wanted to go to your prepared remarks around the risk-reward tradeoff between M&A and de Novo. So is this change in de Novo expectations kind of geographically concentrated or broad-based in terms of a higher cost to build and a better argument for M&A? And then would the argument be that any incremental M&A around this front be upside the 22 guidance, or how would you frame that? Thanks.
spk08: Yeah, I think we are seeing it more broad-based. Certainly different geographies have higher construction costs and other costs, but we are certainly seeing a lift pretty much across all geographies on different levels, of course. So I think that's the way we're thinking of it. And then as far as your second point around M&A, it's certainly incremental to anything that we would do going forward. But, you know, generally, you know, our guidance assumes that we can build the capacity we needed in order to hit the growth that expected within our business.
spk04: Okay, got it. Thanks for all the call.
spk05: Your next question comes from the line of Gary Taylor from Calvin. Your line is now open.
spk06: Hi, good afternoon. I wanted to go back to just a few things. One, just on the CapEx, Brian, that you just mentioned, the 40 to 60, that would be inclusive of some de novo range, which if I kind of look at what 21 looked like, I mean, would imply, I don't know, 20 to 25 de novos? Should we be thinking about it that way, just looking at the CapEx guy?
spk08: I think the way we're approaching the markets very uniquely in terms of allowing the market leaders to decide what is the best course of action. So we're not focused so much on the number of de novas. We're really focused on the capacity built within each one of those markets. What we've done is we have a budget that we're going to work with within the markets, and that's how they're going to think about what their opportunities are and stay fiscally responsible, I'll put it. And as I mentioned, the business cases are coming in from each of the markets to decide what's the best avenue for growth. And so we're really trying to focus on the highest use and most efficient use of our capital to get that greatest return, not so much on a specific de novo count.
spk07: And Gary, this is Marlo. Let me add to what Brian just said. Historically, we have always had different types of new medical centers. And as you know, we acquire or build the boxes in different ways. And so they're going to be in different stages of development. Historically, we tucked in approximately 10% of our membership from affiliates, and that's part of our organic growth. What we're seeing this year is a greater number of our total new center count is going to likely come from tuck-ins than we anticipated. And it's because we're seeing higher construction costs. We're seeing longer construction timelines. We're seeing supply chains. disruptions, and ultimately less ROI than what we can get through having already built medical centers. Sometimes they are our own affiliates. Sometimes they're as-built medical centers that don't cost us as much but give us the square footage that we need, and we can get in there immediately and don't have lead time. And then, yes, sometimes we are building from scratch, ground up, but we're doing less of that than we initially anticipated because that is the responsible thing to do in the current environment.
spk06: It makes sense. Just as a quick follow on that tuck-in acquisition, is there CapEx that needs to be spent? Do you have to relocate and sort of create a bit of the retail concept? Can you work with the existing companies? square footage, or is that probably also just very much a market-by-market, case-by-case?
spk07: It is a market-by-market. The capex is generally really limited. We've historically budgeted somewhere around $30,000 to $50,000 to spruce up the place, if you will. But the way we look at it is in terms of what is the investment to get that medical center and then what's the lead time to get that medical center and to get the staff in a tight labor market. And so as you go from our history and our filings, we have acquisitions, but when referring to acquisitions or inorganic growth, we're talking about the universities and doctors' medical centers, platforms or medium-sized companies. We're not referring to the single practitioner or single medical practice. And that is what we're seeing a lot more opportunity in terms of arriving at a greater clinical capacity. In the past, what we would have done is generally relocate those into other centers, but we're seeing really good clinical capacity We're seeing multiples in smaller practices and, frankly, some mediums decreasing. And we certainly are going to be, you know, thoughtful about that. We are guiding to our total count as before, but a greater proportion will be those locally adjacent practice or affiliates that we have historically tucked in.
spk06: Just one more quick one, if I could. I'm pretty sure I know your adjusted EBITDA guidance excludes de novo losses. Now that you're not guiding to a specific de novo number because it's a little bit change of a growth avenue, then it probably means there's not a definitive de novo loss number. to give us for the year. I assume that's right. You can correct me if wrong. But just on the MLR guidance or the MCR guidance, those de novo losses were primarily contemplated coming out of G&A. So is there any impact on what you end up building versus buying de novo losses on that MCR guidance?
spk07: What I would tell you, Gary, is that first of all, the losses that are advex, as you know, is 12 months post. And there are some that are coming from 2021. As you know, we opened quite a number of the nobles. at the end of 2021, and still we'll be opening a significant number from scratch, you know, ground up de novos. The specific mix, the specific amount of ad back, that may be a bit difficult for us to comment on right now, but confident that our EBITDA guidance of 230, 240, and jumping from there into 2023, from a medical cost perspective or the MCR, we will generally see a headwind from those new members, whether they're in the nobles or new affiliates. So the ad backs don't affect medical loss in any way. They will give us a P&L adjustment so that you can compare base business to base business from a cash flow, an EBITDA basis, but your MLR will not be impacted in any way by ad backs. Understanding, of course, that MLR will have an impact, a headwind from new membership. And now, in particular, with a technical accounting change, that means we're having costs this year, and those premium rates, that acuity, we won't collect until the following. However, all that has now been calculated into our guidance as Brian went into detail, and I would encourage you you and everyone listening to visit our website, go through the investor materials. I think they did a great job in describing detail around all of those components.
spk06: Yep. Okay. Thank you.
spk05: Your next question comes from the line of Jay Landreth Singh from Credit Suisse. Your line is now open.
spk03: Thank you, and good afternoon, everyone. Just following up on the comment on this MLR, Dr. Marlowe, you just made about expectations for 2022. I know there are some more puts and takes here in this year versus last year. Just maybe flesh out a little bit about the quarterly cadence. Do you guys still expect Q1 to be like highest MLR, Q4 to be lowest MLR? Clearly, giant data on COVID cases might push MLR higher, but just curious about the quarterly cadence, how you think about the MLR trend this year?
spk07: Yes, Jalindra, yeah, that is exactly the same, although the absolute number is a bit different. The trend is the same, in which we will see a higher utilization in the first half of the year, and then towards the second half of the year, because of the holidays, but also because of membership stop loss, we will see a lower MLR. And thus, for the year, we're giving you that 76, 76.5% MCR guidance, but we do expect to be slightly higher in the first half than in the second half as per our historical averages.
spk03: Okay. Then I wanted to follow up on your thoughts around the implications of recent, essentially a redesign of the direct contracting program. Maybe talk a little bit more about the implications from your perspective and the company's positioning with respect to the REACH model. I was looking at the slide you have here. You're not expecting any impact on your Medicare PMPM in 2023 from any changes around this program. We're just curious around some additional thoughts around some changes being implemented there.
spk07: Yeah, DCE to become now ACO REACH is a big opportunity for us and for the country really applauding CMS efforts to make healthcare quality more and to do that while controlling cost. So what we have seen, albeit early, is that it presents upside opportunity beyond what we were already bullish on. To give specifics, I think it's hard and premature at this moment. The program will start in 23, but very much looking forward to participating. As you know, there are changes, and those have different puts and takes, but we believe that on par, they are very positive, and again, we applaud CMS for their efforts.
spk03: Great. Thanks a lot.
spk05: Your next question comes from the line of Josh Raskin from Nefron Research. Your line is now open.
spk01: Hi, thanks. Good evening here. First question, just on the 29 centers that you opened outside of Florida in 2021, I'm curious how those MLRs were progressing. I'm assuming just higher than what you've seen for your existing, but maybe directionally and sort of in terms of improvement. And I'd be even more specifically interested on the 10 that were in the new states of California, Illinois, New Mexico.
spk07: Yes. Well, appreciate the question, Josh. And I would point you to our VIE, or Variable Interest Entities, in which you can get a snapshot of performance in Texas and Nevada. It's rolled up there. Wouldn't be able to give you specifics on Illinois and California. We just started there. Just... a few months ago, but definitely something that we'll be talking about in the future. We have been very pleased with our medical cost optimization in our new markets, approximately, as I mentioned during my remarks, In Vegas, we've been there for a year, and I made specific references to the reductions in APTs, or emissions per thousand. Emissions per thousand, how that trends, that's generally how your medical loss or medical cost will trend. And we've been doing very well there, we've been doing very well in Texas, and overall, expectations have been exceeded in terms of our medical cost management in those new markets being effectively at or better than our averages in our home states and our original markets of Florida and Puerto Rico. And I would point you to the consistency across the enterprise in terms of APTs. And we have those for you as well on the website in which you can see the admissions per thousand over the months and in total and for COVID specifically. And that consistency is a result, sure, of our base of operations in Florida that continues to grow, but also a very good performance outside of Florida that has resulted in us being able to contain costs and continue to deliver value. And the last thing I'll say on this is that throughout this very tough period, we have been able to maintain very high NPS scores, which you see both in and outside of Florida, very comparable, as well as quality scores, here to start metrics, and a lower mortality rate, which we're particularly proud of, you know, given that the majority of our patients are underserved, are ethnic minorities, low-income individuals. And we have gone through a terrible time as a country and as a world, but in particular underserved communities have spiked their mortality rates. And we're very proud to have lowered not only those specific groups' mortality rate, but mortality rate overall compared to any group.
spk01: Yeah, that's perfect. And then just a follow-up question, you know, I guess an opportunity on a public call here to respond to a recent letter that you guys received suggesting, you know, a sale isn't the best interest to shareholders. I'm curious in your response and maybe how you think about your long-term plan and what that provides to shareholders, you know, versus the relatively obvious benefits of a short-term sale.
spk07: Josh, we have a robust and active dialogue with our shareholders, and we thoroughly evaluate and consider suggestions. Not going to comment on any particular conversations or engagement, but as you heard during my remarks, we're incredibly proud of Kano's success during 2021 and how well the company's positioned for continued long-term success. We believe we are the best independent operator in the sector, both financially and clinically. Never been more excited about the future of counterhealth than I am right now. So we, management of the board, remain focused on delivering long-term value for our shareholders.
spk01: That's perfect. Thanks, Marlon.
spk05: Again, to ask a question, please press star 1. To ask a question, please press star one. Your next question comes from the line of Justin Lake from Wolf Research. The line is now open.
spk02: Thanks. First question, I just want to confirm. You're talking about doing less to no of those more tuck-in acquisitions. None of those tuck-in acquisitions are in your guidance right now? Is that correct?
spk08: no no that's no what what we refer to is a trade-off between a de novo or a tuck-in we kind of think of them as more call it sort of purchases or transactions versus a a true m a as marlo was saying we think of m a as much larger deals more transformational or are providing larger scale and size in a particular market when we look at a uh tuck-in The de novo, we're talking the same zip code street even often when we're looking at opportunities. And so we're trying to make that tradeoff from a use of capital within the organization. So that's in our center account that we provided the guidance on, that 184 to 189. It's kind of thinking through. growth in centers of that 54 to 59. It will either be through a ground-up de novo or it's through some of these one-center, two-center tuck-ins that we can do. And the best part about it, as I mentioned, it's a better use of our capital. It's more efficient, lowers the cash usage, but also comes with that clinical capacity as We've talked a lot to you guys on the phone and others about the need to rapidly get clinical capacity, and that's a quick and easy way to do it. And with valuations coming down, that speed to market that enhances our scale and density is the right strategy. And we're not so hyper-focused on one strategy that we're going to ignore what's happening around us. So that's the focus that our market leaders have on how to drive their business, which I think is the right way to do it.
spk02: Okay. And I understand you don't have a specific number to share with us, but, you know, some kind of ballpark would really be helpful. Like if we assumed that it was 50-50, would we be very far off for now?
spk07: Justin, we're going to do what makes the most sense market by market. And if 80% from scratch ground up makes sense, and that's what we would do. If it's 50-50, that's what we would do as well. And we will continue to do what we've always done. And as you see in our filings for organic growth, which is growth-based business, plus our locally adjacent practices and and what we anticipated uh to do in uh 22 is uh perhaps uh uh build uh more uh from scratch uh type uh centers uh but with plenty of uh real estate uh capacity attractive pricing in light of everything that we all know about that is going on in the marketplace uh and the labor shortages, we're just grabbing, you know, more of that opportunity coming from our affiliates or just from adjacent practices, given that Cattle Health is an employer of choice. And we see so much opportunity in our markets to do just that. But it is market by market.
spk02: Okay. I mean, I guess maybe one way to look at this is, you know, you're basically through the first quarter, give or take. Can you tell us what you've done year to date in terms of acquisition versus DeNova on your way to getting to that, you know, 55 or so?
spk07: Frankly, I don't even have those numbers exactly because I look at it as just adding clinical capacity. We're investing effectively the same amount of money. I just want to make sure that we're able to serve more patients, you know, grow the bottom line and, you know, continue to create shareholder value.
spk02: Okay. Last question then. Like these acquisitions that you would be doing would theoretically come with, you know, with patients and I assume some EBITDA. Would that be correct?
spk07: That's right. Yeah, some of them do because some of them are new to Kano, whereas a significant portion, and again, I can't give you a specific, are coming from our own affiliate base for patients that we're already counting, revenue that we're already counting. So, again, different ways of getting to a de novo. Sometimes you just relocate that practice and put them into a medical center. Sometimes you expand practice rather than building one from scratch. And, again, you look at the current market dynamics to make a call as to what makes the most sense.
spk02: Okay, I guess what I'm getting at is wouldn't there be more EBITDA and more patients coming from, you know, all that 55 centers, give or take, under this strategy than there was when you originally gave it?
spk07: Perhaps, and it could be an upside, but at the same time, as we're talking in one of our affiliates and that provides that clinical capacity we're also making investments getting additional staff maybe making expansions in terms of service to that medical center and we may be at a break-even point or even at a slight loss you know, for that medical center. So it really does depend on the situation. But yeah, it does present an upside opportunity for the year.
spk02: All right. Thank you very much.
spk05: Your last question comes from the line of Jessica Tassan from Piper Sandler. Your line is now open.
spk00: Hi, thank you for taking the question. So I guess interested to know just when you acquire an affiliate, what kind of incremental control or incremental recruitment capabilities are you gaining in acquiring that affiliate versus just continuing the affiliate relationship if there's no incremental patient or EBITDA associated with the token? Thanks.
spk07: Yeah, for our affiliates, even though they're part of Canal Panorama and they get those real-time insights that are so essential for optimal management of a patient population, they still can have their own electronic health records. They'll still have their own clinical protocols. They may not have all of our in-house staff model or own medical center services such as wellness, such as physiotherapy, healthy heart, the kind of life program may not have critical service availability of optometry or dentistry. So all of these services would result in additional touch points, additional data points and certainly clinical protocol standardization that is impossible to do when you're managing affiliates, given that they each will have their own preferences, their own resources, in most cases their own electronic medical health record system, and there's an efficiency frontier, and why I've mentioned in the past that while there's a role for affiliates for management, for MSO-type services, for putting affiliates together and empowering physicians, there's also an efficiency frontier that goes along with that that is both technical and operational. So we gain what I just described by putting them into one of our staff model medical centers.
spk00: That makes sense. So I guess just if we think about the affiliate moving into an owned model, it would mean an incremental or a decline in the medical cost ratio of those same patients. Can you help us understand what the difference is for a mature patient MCR in an owned model versus in an affiliate model so we can understand what the potential improvement might be as you move? as you grow to own more of the affiliate providers?
spk07: Sure. What we've seen historically is that there is a few percentage points of improvement. But what I would point you to is the care management and what entails that care management and those called care margin is the direct cost, what you're doing within the medical center itself, plus what you're paying out to third parties. And that care margin, at least in the short term, is relatively equivalent, of course, with the long term, which I think is really the crux of your question, what you're going to get as a result of more preventive services, more care coordination is you're going to get, you know, better cost containment, patient outcomes over the years that could mean an incremental, call it a mid-single-digit upside to that care margin in whichever way it goes into the P&L, but is going to certainly involve improvements in the medical cost ratio.
spk00: Got it. And then just quickly, why wouldn't essentially 100% of the revenue revisions in 2021 and 2022 related to the accounting changes flow through to net impact to adjusted EBITDA in 21 and 22? So, for example, you've got $112 million net negative revenue revision in 21 converts to a $91 million negative net revision to adjusted EBITDA. What accounts for the difference? Thanks.
spk08: Yeah, great question. Thank you, because it's, you know, you can see that on slides 12 and 13. The primary driver there is the effect on provider payments. So as revenue changes one way or the other, the expense related to provider payments adjusts. So that's why it's not a complete drop through you're referencing.
spk00: Got it. Okay, got it. Thank you.
spk05: All right. And no further questions at this time. I would now like to turn the call back to Brian Coppe.
spk08: Very good. Thank you. I appreciate everyone taking the time this afternoon. We are available for additional follow-up calls or questions. And have a great night. Thank you.
spk05: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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