Cano Health, Inc.

Good afternoon and welcome to Cano Health's second quarter 2022 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 Cano Health Press release, webcast link, and other related materials are available on the Investor Relations section of Cano Health's website. As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the 2022 fiscal year. Investors are cautioned not to unduly rely on forward-looking statements, and such statements should not be read or understood as a guarantee of future performance or results. 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 forward-looking statements reflect our best judgment as of today based on factors that are currently known to us, and such statements are subject to risks, uncertainties, and assumptions that could cause actual future events or results to differ materially from those discussed as a result of various factors including but not limited to risks and uncertainties discussed in our SEC filings. We do not undertake or intend to update any forward-looking statements after this call or as a result of new information. During the call, we will also discuss non-GAAP financial measures. The non-GAAP 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 on the investor relations section of our website. With that, I'll turn the conference over to Dr. Marlo Hernandez, Chairman and CEO of Kano Health.

Please go ahead.

Thank you and welcome to the call. We appreciate your joining us today. To start, I'd like to recognize the entire Kano Health team for their hard work and dedication to our mission. When you enter our Kano Health Center and speak to our patients, you can immediately appreciate just how special our services are because of the people who treat them like family. Our team is dedicated to transforming patient care by delivering superior primary care services while forging lifelong bonds with our members. Canon Health delivered another quarter of strong membership growth and is now caring for over 280,000 members. Patients and providers continue to join Canon Health across the country in large numbers. Due to this strong membership growth, we're now on pace to end the year with 10,000 more members than we included in our most recent guidance for 2022. Year to date, we have added nearly 55,000 members, all organic. For context, we ended 2020 and 2021 with approximately 106,000 and 227,000 members, respectively. This accelerated membership growth came with higher utilization than we expected, putting pressure on our Consolidated Medical Cost Ratio, or MCR, which was 82.6% in the second quarter. This was due to a higher proportion of new members who came in with higher acuity than our historical experience. Third-party medical expense from these new members was higher than expected due to higher costs for hospital admissions and outpatient procedures and branded prescription medications. Importantly, our core utilization management programs are performing well, as demonstrated by stable admissions per thousand across our membership base, stable generic prescription drug dispensing rates, high patient engagement, and industry-leading quality metrics. Moreover, we continue to observe the historical trend of decreasing MCR the longer a member is with counterhealth. Therefore, we expect the MCR for these new patients to decrease over the next 12 months as we diagnose and manage the conditions of these new members. For 2022, we're increasing our estimated MCR range to 78% to 79% up from the previous guidance range of 76% to 76.5%. This increase is driven primarily by incremental third-party medical expenses from new Medicare Advantage and Medicaid members, which we estimate at approximately $60 million for the full year. This is partially offset by approximately $40 million in lower provider payments and higher fee-for-service revenue for a net impact to adjusted EBITDA of $20 million for the calendar year. While DCE performed well during the quarter, we realized a 6 million unfavorable prior year development, primarily due to higher than anticipated delayed claims for 2021 third party medical expenses. And given periodic benchmark updates, we're decreasing our expected 2022 contribution from DCE by approximately 9 million. The combined impact from these items is expected to reduce our full year adjusted EBITDA by 15 million. Overall, the combined impact from new member growth and DCE resulted in approximately $35 million reduction to our 2022 adjusted EBITDA guidance. Nevertheless, we view these factors as investments which affect 2022 only, and we expect proportionally better revenue per member per month in earnings in 2023 as we diagnose and manage the health of these members. We believe the clinical capacity we have built, the natural maturation of the new member cohort, and the accelerated growth result in density position us very well for the near and long term. The momentum of our business can be best observed by looking at our care margin. The care margin is the gross profit we generate from operations, and it's defined as our total revenue minus our third-party medical expenses and our direct patient expenses. Year-to-date, our care margin is $203 million. which is already more than what we generated in the full year 2021. And this is despite the new patient and DCE headwinds I just discussed. Turning now to new positions we created within our executive team, it has been over a year since we went public, and we have grown significantly while expanding our operational infrastructure and management team. To support future growth and ensure operational excellence in new and existing markets, we announced Bob Camerling as Chief Operating Officer. Bob previously served as our President of Healthy Partners Medical Centers and Affiliates. He is now overseeing our daily business operations and will work closely with the rest of our executive team to implement KanoHealth's strategy and drive sustained performance. We also announced that Amy Charlie has joined the company as Chief Administrative Officer. Amy comes to KanoHealth from Altion Health, where she served as Chief Legal and Administrative Officer. She is responsible for the management of administrative functions and oversees strategy development, organizational governance, and change management. Both leaders bring an impressive record of building comprehensive business solutions, and we believe they will be invaluable in helping us to achieve the highest operational standards and strengthen the execution of KanoHealth's unique national care platform. This is an exciting time at KanoHealth. Our total membership grew 80% from the prior year, But what is more encouraging is that we continue to see strong year-over-year and sequential organic growth, particularly in our Medicare population. We ended the quarter with approximately 164,000 total capitated Medicare patients, which included over 124,000 Medicare Advantage members and over 40,000 Medicare DCE members. Further, we continue to expect the total Medicare membership to represent about 60% of total members throughout 2022 due to continued growth in Medicare Advantage. During the quarter, County Health realized revenue growth of 101% year-over-year, which reflects the ongoing execution of our build, buy, and manage growth strategy. We are encouraged by the growth we have seen so far and are raising our membership and revenue guidance for 2022. Brian will provide more detail on our second quarter performance and updated 2022 guidance. I'm very proud of our expanding national care platform. We ended the quarter with 143 medical centers, up from 137 at the end of Q1, and expect to achieve our guidance of 184 to 49 medical centers for the full year. As we look forward, we expect to end the year with over 300,000 members And by January 1st, 2023, we expect to have over 340,000 members, which includes an incremental 40,000 Medicare DCE members. CounterHealth's national care platform continues to improve access, quality, and wellness in the communities we serve. The role we play in the U.S. healthcare system positions us well to transform and redefine how America delivers primary care, which is critical for all Americans, and in particular for those in underserved communities. We will continue to capitalize on our momentum, our leading market position, and the societal tailwinds that underpin why our model is in such demand. And I'll turn the call over to our CFO, Brian Coppe, who will walk you through our financial performance and guidance.