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spk01: Good morning and welcome to Oak Street Health third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. In order to ask a question, please press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. Hosting today's call are Mike Pajkowski, Chief Executive Officer, and Tim Cook, Chief Financial Officer. The Oak Street Press Release webcast link and other related materials are available on the Investor Relations section of Oak Street's website. These statements are made as of November 10, 2020, and reflect management's views and expectations at this time and are subject to various risks, uncertainties, and assumptions. This call contains forward-looking statements, that is, statements related to future, not past events, In this context, forward-looking statements often address our expected future business and financial performance and financial conditions and often contain words such as anticipate, believe, contemplate, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, target, will, or would, or similar expressions. Forward-looking statements, by their nature, address matters that are to be different degrees. Uncertain for us, Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include our ability to achieve or maintain profitability, our reliance on limited number of customers for a substantial portion of our revenue, our expectations and management of future growth, our market opportunity, and our ability to estimate the size of our target market. The effects of increased competition as well as innovations by new and existing competitions in our market, and our ability to retain our existing customers and to increase our number of customers. Please refer to our quarterly report where the quarter ended September 30, 2020, filed on Form 10-Q with the Securities and Exchange Commission, where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements. This call includes non GAAP financial measures. These non GAAP financial measures are in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non GAAP financial measures. For example, other companies may calculate similar titled non GAAP financial measures differently. refer to the appendix of our earnings release for the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I will now turn the call over to Mike Peikos, CEO of Oak Street. Mr. Peikos?
spk03: Mike Peikos Thank you, operator, and thank you to everyone that is joining us this morning. On the call with me is Tim Cook, our Chief Financial Officer. Before we review our operational and financial performance for the quarter, I want to start by once again thanking our Oak Street team for their exceptional dedication to patient care during COVID-19. It starts with our care teams and center-based staff, which work diligently every day to engage our patients and ensure we are properly executing our care model while maintaining strict safety protocols to minimize any transmission risks to our team, our patients, and our communities. I'm proud to report that our centers have remained open throughout all of 2020, and our infection control protocols have proven to be exceptionally effective at preventing the spread of the virus. Given the effectiveness of our protocols and our performance this year, we are confident that, regardless of the duration we extend the pandemic, we'll continue to be able to operate successfully and provide outstanding care to our patients. I also want to acknowledge and thank our outreach teams that are working to bring more patients to our platform in these unprecedented times. By engaging patients in their care and ensuring they have access to the care they need, they are making an impact on our communities and chipping away at health disparities every day. Finally, I want to thank our corporate teams which has now been remote for seven months, yet still managed to help achieve all that we will discuss today. Over the last several months, either as part of the IPO process or since, we've had an opportunity to describe our care model and its success to the investment community, including many on this call. As some of you have heard me say, what we do is hard and requires tremendous focus across all of our team members. There is no silver bullet when it comes to improving the health and well-being of our patients. Instead, it's about consistently applying a focused and differentiated approach every day across all of our centers for all of our patients. I always find that stories from our centers can be helpful in bringing our care model to life. We have a patient at one of our Chicago centers who first came to Oak Street about a year ago. Prior to being engaged by our community outreach team and deciding to give Oak Street a chance, he hadn't been to the doctor in over 40 years. As part of our screenings and vaccination program, he was given a fit test. and had a positive result. Our provider recommended he get a colonoscopy, but the patient was very resistant to getting one. However, because of the relationship he had with his provider, Oak Street, as well as her persistent follow-up, he finally completed one. A large malignant mass was found, but caught just in time before it spread. The patient is currently cancer-free. This is just one of thousands of stories about how our team failed to provide patients the care they need to improve their overall well-being. Pushing gears, We are pleased with our third quarter performance, which demonstrated the financial and operational strength of Oak Street's business model. We generated record revenue of $217.9 million, exceeding the top end of the guidance range we had communicated to investors. This represents an increase of 57% from third quarter 2019. We cared for roughly 59,500 at-risk patients, up 38% from third quarter 2019. We generated this patient growth despite essentially putting a halt on our community outreach and marketing efforts from early spring through mid-summer due to uncertainties around COVID. As I'll discuss in more detail, we ramped up these activities over the course of Q3. As we mentioned on our last call, while we had temporarily halted new center openings, we restarted our center expansion in August, opening 13 centers in the third quarter and finishing the quarter with 57 centers. This represents the greatest number of centers we have opened in a quarter in the company's history. I'm incredibly proud of our team for delivering this level of center growth amidst both the operational challenges prompted by COVID-19 and the effort required to complete our IPO on August 6th. I will now touch briefly upon a few of our key initiatives that will position us for sustainable long-term growth. First, as I mentioned earlier, we continue to look to scale our network with de novo centers. As we discussed, we proactively chose to halt new center openings earlier this year as we learned more about how to effectively operate during the COVID pandemic. However, in addition to the 16 we opened in the first nine months of 2020, we expect to open an additional six to eight standalone centers in the fourth quarter, bringing us to 22 to 24 openings for the year, excluding our Walmart centers. In October, we also opened our first center in the state of New York, in Brooklyn, and we expect to expand into additional states over the next several months, which will bring our innovative care model to even more communities. Second, I want to provide a brief update on our pilot collaboration with Walmart that we announced in September. I'm pleased to report that we recently opened our first Walmart location and remain on track to open up all three pilot locations by year's end. The partnership remains in its early days, but we look forward to communicating our progress as we gain experience with the collaboration. Third, in addition to opening new locations, we are also squarely focused on driving growth within our existing infrastructure. As a reminder, a typical Oak Street Center can serve approximately 3,500 patients at full capacity. implying that our quarter-ending portfolio of 67 standalone centers has the capacity to care for approximately 235,000 patients, which is over two and a half times the actual patients on our platform in Q3. We are constantly refining, expanding, and improving our outreach processes, embedding lessons learned throughout our history. We have continued to deliver strong patient growth, despite being forced by COVID to limit many of our core community events-based patient acquisition channels. To do this, we've developed alternative engagement channels that can be effective despite the limitations caused by COVID. We are confident that we can continue to be successful and drive strong patient growth in the current environment. When community events return, we believe we can leverage our broadened portfolio of patient acquisition channels to take our patient growth to yet another level. Lastly, I'm delighted to announce that in October, we began enrolling patients on traditional Medicare in the Medicare Direct Contracting Program which is a new, voluntary, risk-based program that allows CMS to directly contract with eligible providers for traditional Medicare patients. We are very excited this program will allow us to capture risk-based economics similar to what we receive on our Medicaid-managed patients on our traditional Medicare patients, allowing us to benefit financially from the investment we are making in our patients' care. Yesterday evening, we posted an updated investor presentation to our investor relations website that includes several slides detailing how we are participating in the program and our initial thoughts on both membership and patient economics. For those less familiar with the direct contracting program, it is part of CMS's strategy to use the redesign of primary care to reduce expenditures and improve quality for Medicare beneficiaries. Through this program, Oak Street and other participants will contract directly with CMS in a similar fashion to how Oak Street currently contracts with MA plans. We are currently operating our care model for our traditional Medicare patients in a similar manner to our Medicare Advantage patients. When we move from the fee-for-service payments we are currently receiving for our traditional Medicare patients to an adverse model similar to how we are paid for our MA patients, we believe we are well-positioned to generate similar patient economics for our traditional Medicare patients as we achieve for our MA patients today. If this expectation is correct, it will significantly improve patient economics for our traditional Medicare patients. The slides, which begin on page 23 of our current investor presentation, detail how we were participating in the program. I want to voice over the fly as related to membership and patient economics. There are two ways in which CMS can align beneficiaries to direct contracting entities. The first is claims-based alignment, whereby CMS will assign beneficiaries to providers based on historical claims data. Second is volunteer alignment, where beneficiaries choose to align with a direct contracting entity by designating a specific provider. We've been offering eligible patients the option to voluntarily align with Oak Street over the past month, and the vast majority of patients we have seen have filled out the required paperwork for voluntary alignment. It's still early, and we don't have full visibility to how many of our current traditional Medicare patients will end up choosing Medicare Advantage or how CMS will treat patients that are aligned to multiple CMS programs, so it remains premature for us to communicate any firm estimates on precisely how many patients will ultimately flow through the program beginning in April 2021. Per patient revenue will vary based upon how a patient is enrolled. For voluntarily aligned patients, per patient revenue will be determined by applying the risk adjustment model using Medicare Advantage to a county-level benchmark. This methodology is similar to the way per patient revenue is determined for MA patients at Oak Street. For claims-aligned patients, the primary differences from voluntary-aligned patients are, one, benchmarks for claims-aligned patients incorporate the patient's specific historical costs and risk scores. first, only a regional baseline rate for voluntary aligned, and two, there's a cap on the annual growth for risk scores of claims-based patients. Because we do not know which patients will be aligned to the DCE at this time, it is not possible to calculate per patient revenue. Based on our understanding of the program and our expectations around which patients will be aligned, we would expect per patient revenue for voluntary aligned patients to be greater in direct contracting than it is in MA, assuming the same documented patient risk level. primarily because there are no supplemental benefits provided if there are in MA, and we do not have to share a larger portion of the surplus with CMS as we do with MA plans. For claims-aligned patients, we expect the per-patient revenue to be lower than voluntary-aligned patients, as our historical work with these patients results in lower healthcare expenditures, which are incorporated into their historical benchmark. Due to the lack of traditional health plan functions, such as network design, prioritization, and utilization management, We expect the medical costs of direct contrasting patients to be greater than our average MA patients for both alignment methods. We expect the net profitability of voluntary aligned patients to be roughly comparable to our MA economics, assuming comparable risk in the population. We expect claims aligned patients to have worse economics than voluntary aligned patients driven by lower revenue and comparable medical costs, although still significantly better than what we are reimbursing fee-for-service today to care for our traditional Medicare patients. I want to stress that we are still working with CMS to make sure we understand the nuance of the program, and our economics will ultimately depend upon the underlying factors of the specific patients that enroll with Oak Street. In summary, we are pleased with our third quarter results. As I said in the beginning, I could not be prouder of the way our teams have navigated through incredibly challenging circumstances to make a massive impact on our patients and our communities. Despite these challenges, our teams continue to provide outstanding care for our patients and therefore drive strong results through our organization. As we navigate through the remainder of the year, we'll continue to focus on positively impacting our patients and communities at a time when they greatly need our support and delivering on our mission to rebuild healthcare that should be. I will now turn it over to Tim Cook, who will walk you through our financial results in Margisa. Tim?
spk05: Thank you, Mike, and good morning, everyone. As Mike mentioned, we delivered record results in the third quarter, despite the challenges of the COVID-19 pandemic, highlighted by both our recurring revenue model as well as continued growth in the markets which we serve. As a reminder, we expand our network in two important ways. First, we seek to drive patient growth in our existing centers, and second, we strive to expand our network of centers across existing and new markets. In terms of membership, total patients grew roughly 28% year-over-year, while our at-risk patient base, which drives most of our financial performance, grew by 38%. At the end of the third quarter, we operated 67 centers, an increase of 13 centers from the second quarter of 2020, and an increase of 21 centers compared to the third quarter of 2019. We generated capitated revenue of $211.8 million, representing 59% year-over-year growth, driven by the aforementioned growth in our at-risk patient base. Total revenue grew 57% year-over-year to $217.9 million, driven entirely by growth in capitated revenue. Our medical claims expense for Q3 2020, $154.6 million, representing growth at 58% compared to Q3 2019. Q3 medical claims expense was not immediately impacted by prior period adjustments. We continue to assess the impact on medical claims expense related to COVID. However, it is still too early to determine the net effect, particularly as many of our markets are experiencing surging cases similar to national trends. Our cost of care excluding depreciation and amortization was $43.2 million in the third quarter, an increase of 17% versus the prior year due to the growth in the number of centers we operated, as well as growth in our total patients. I would note that the recognition of CMS provider relief funds favorably impacted cost of care by $3.9 million in the third quarter. Sales and marketing expense was $15.5 million during the third quarter, representing an increase of 29% year-over-year, but slightly below our expectations simply due to timing, which we expect to reverse in Q4. Corporate general and administrative expense was $57.1 million in the third quarter, an increase of 164% year-over-year. The majority of this year-over-year increases are related to an increase in stock-based compensation expense, which was $29.7 million in the third quarter of 2020, compared to $1.4 million in the third quarter of 2019. Excluding stock-based compensation, corporate general and administrative expense was $27.5 million in the third quarter of 2020, an increase of 36% compared to the third quarter of 2019, driven by increases in headcount support our organizational growth. The increase in stock-based compensation in the third quarter of 2020 compared to the second quarter of 2020 was related to primarily two items. First, awards granted to employees in June 2020 ahead of our then-planned IPO, which represented $5.7 million of stock-based compensation expense in the third quarter of 2020, was only partially reflected in our second quarter financial results due to the timing of their issuance. And second, the modification of the vesting terms of our equity incentive awards following our IPO, which represented $18.2 million of expense in the third quarter of 2020. This incremental expense is not related to new equity award issuances. Beyond those awards described in our prospectus dated August 5, 2020. I would note that less than $200,000 of our stock-based compensation expense in the third quarter of 2020 related to new equity awards issued since the IPO in August. I will now discuss three non-GAAP financial metrics that we find useful in evaluating our financial performance. Patient contribution, which we define as capitated revenue less than medical claims expense, grew 63% year-over-year to $57.2 million. We expect at-risk per patient economics to improve the longer that our patients are on the Oak Street platform. Platform contribution, which we define as total revenue less than some medical claims expense and cost of care excluding depreciation and amortization, was $20.1 million. an increase of 387% year-over-year. As an individual center matures, we would expect both platform contribution dollars and margins to expand as we leverage the fixed cost base associated with our centers, as well as improving patient economics over time. Adjusted EBITDA, which we calculate by adding depreciation and amortization and stock-based compensation by excluding other income to net loss, was a loss of $22.8 million in the third quarter of 2020 compared to a loss of $28.1 million in the third quarter of 2018. We finished the third quarter with $474.6 million in unrestricted cash. Cash used by operating activities totaled $22.4 million in the first nine months of 2020. Our capital expenditures totaled $12.6 million in the first nine months of 2020. I now want to talk about our 2020 financial outlook. We are increasing our expected revenue to a range of $854 to $858 million, up from our prior outlook of $843 million to $853 million. We are also forecasting an adjusted EBITDA loss of between $93 million and $99 million versus our prior outlook of a loss between $100 and $110 million. We anticipate having 73 to 75 standalone centers open by December 31st, 2020, slightly above our prior forecast of 72 to 74 centers. We are also narrowing our expected at-risk patient counts to a range of 61.5 to 63,000 patients. As a reminder, our standalone center outlook for 2020 does not include Walmart pilot locations, which would represent an incremental three centers. In summary, this was a strong quarter financially and operationally, and we anticipate a strong fourth quarter as well, while at the same time continuing to make the necessary investments required to maximize long-term shareholder value. And with that, we'll now take any questions you may have. Operator?
spk01: At this time, we'd like to take any questions you may have. To ask a question, please press star 1 on your telephone keypad. As a reminder, we ask that you limit yourself to one question and one follow-up. Your first question is from Robert Jones with Goldman Sachs.
spk05: mind is open uh great good morning thanks uh thanks for the questions i guess just a couple on on direct contracting you know appreciate the incremental thoughts here on the program and clearly you know based off the slides there's still some important elements that seem to need to be hammered out but i'm just curious if you could talk a little bit about how you're thinking about prioritizing eligible patients as you consider taking somebody from fee for service to either MA or trying to introduce the direct contract. Even just some of the qualitative considerations that would go into that type of decision would be helpful.
spk03: Yeah, absolutely. This is Mike's voice just to reorientate people. So for us, it's not really around directing people. It's around making sure that we're educating our patients on the choice and doing what's right for them. And it's not really an either or. So today, when any of our patients who are on traditional Medicare show up for a visit, we're having to fill out the paperwork for voluntary alignment. Some of those people that follow the paperwork may ultimately decide, since it is open enrollment, that Medicare Advantage is the right program for them. Historically, we have seen the majority of our traditional Medicare patients in a year end up choosing Medicare Advantage because it's not a perfect switch, right? It's not like you're comparing benefits one side or the other. If you join Medicare Advantage plans, You have a lot more supplemental benefits, often a three-part D program, et cetera. Now, obviously, you have the tradeoff of oftentimes being part of a network and some of those different aspects of being on a managed care plan. So it's not a perfect switch for our patients. So our job in the process is to really educate people and help them make the best choice for them. So I don't anticipate, because direct contract exists, any difference in the amount of patients who are choosing Medicare Advantage because they're choosing it because it's right for them. And frankly, our economics on them is something they don't know and is irrelevant to their decision-making as it should be. Practical perspective, what it means, though, is in the past, when patients either come to us after traditional Medicare and for whatever reason don't want to change to Medicare managed, we'll keep doing a great job caring for those patients but have lost money on all of them because we're not compensating for the investment we're making in their care. Going forward with this program, now for the patients who decide that traditional Medicare is the best program for them, those patients will be able to receive at-risk economics, which makes a big difference for us. I don't look at this as a choice for Oak Street at all. I look at it as our goal to make sure all of our programs are one of the two, that all of our patients are one of the two programs.
spk05: got it no that's helpful mike i appreciate it i guess just maybe on the specific financial um options i know in the slides you have the risk sharing option and then you have the capitation mechanism um obviously that's a big decision i would imagine around you know the the economics back to oak street you know could you maybe just talk a bit about those two options and then you know on the capitation mechanism specifically the tbd i guess what what exactly are the factors that
spk03: you know would determine that uh that economic model versus the risk sharing option yeah so two things about that um one on the uh on the former how much risk we're taking that was an easy decision right um you know we invest a lot of money up front in our patients care we have a huge amount of confidence that we are keeping our patients healthy lowering consultations and ultimately saving a lot of money by keeping our patients healthy um and you know that that those interventions are expensive um so we want to we want to make sure we're sharing you know all the the savings we're generating. So being 100% up and down was an easy decision for us. On the second one, that's all about cash flow. And that's more technical about how we fit into the system. And so one of the options just gives you a monthly small payment and that you get a settlement in January or in July to come with the next year, right? So it's a delay to get your savings. You'll get all of it, but it's a cash flow delay. The other option has more upfront payments, but you also have to kind of have kind of side agreements with all your specialists and other providers to kind of pay the claims for them. So that one's TBD. I think we're leaning towards the former I talked through having made a final decision. I don't even need to. But again, that's not going to change the economics per patient. It's just a question of, you know, kind of when do you get the settlements and how the money flows as opposed to actually changing the economics.
spk05: Awesome. No, that's really helpful. I guess maybe just if I could sneak in one more. I know, you know, the COVID pandemic uh obviously situation has has you know impacted the ramp of enrollment in certain centers it sounds like you know things in some areas were back on track i know some of oak street's geographies might be you know being impacted by current spikes in covid just curious how you're thinking about you know the the general ramp in in uh patients in the centers as we look at 4q and then even just qualitatively as we look out the next year
spk03: Yeah, I mean, if we would have been sitting here a year ago talking, I'd be talking about how many community events we're doing and how we're leveraging our community centers a great way to introduce people to Oak Street and form relationships. And that was a real core part of our model. And a lot of it was real face-to-face, handshakes. form a relationship in the community. Obviously, in kind of mid-March, we had to shut all of that down. And so what we did is made a decision, again, if you go back to mid-March and you remember where we are as a country as far as understanding the virus and all the different projections, we obviously want to err on the side of caution, so we really essentially shut down all of our outreach activities, both central marketing and community marketing. you know, in order to kind of get a better sense operationally within COVID, you know, understand more about the virus, how it's transmitted, et cetera, et cetera, et cetera. Many, many things in society did at that time period. You know, over the last, you know, eight months, we've certainly learned a huge amount about how to kind of effectively navigate the pandemic and how to operate successfully. And so we just, you know, ramped up our care model and transitioned most of our visits back in person, we really made a lot of changes on our outreach model to let us be successful bringing in new patients in a world where some of our core channels we can't do right now. And so it's more digital marketing, a lot more kind of relationship-based selling with aggregators. We're not setting up events with aggregators, we're actually asking them for referrals and getting them to introduce us to people that need our care. There's a huge amount of need out there. I think the COVID-19 patient story I shared kind of illustrates how important it is to engage people in their healthcare and get them the care they need and how that can literally save lives. So I think we feel really good about the channels we've ramped up, and we're seeing results from them. We're seeing it at a favorable LCB to CAC ratio. So we feel really good about where we're at overall. It's been a lot of work to get to where we're at now, and it's been a lot of trial and error over the last, three, four months of CTO Rampant being back up again to kind of keep going. And so the good news is we generally improve every week and we have improved every week for the last, you know, couple months on our outreach performance. And I think we can continue to do that going forward. We are incredibly excited. And I know it's not going to come, you know, until sometime probably mid next year, but we are incredibly excited for the day that we can start doing community events again because The great news is all the things we learned to do during COVID will keep being channels, will keep being levers we can do, but we can add back to community base and I think take it to the next level. So again, you know, There are some businesses out there that I think COVID really became an accelerant for those businesses. We are not one of them. It's been a huge challenge, and everyone here just cannot wait until we're back to normal operations. But I think the team has done an amazing job of putting us in a position where regardless of the relative spread in the community, we can really effectively and safely operate our model. And we're seeing that in places like Illinois right now and Indiana, which are obviously – struggling with regards to the pandemic, but we're still operating at a high level, and I'm proud of our team for that.
spk05: Great. Thanks, Mike. I appreciate it.
spk01: Our next question is from Gary Taylor with J.P. Morgan. Your line is open.
spk04: Hi. Good morning, guys. Just a couple questions on direct contracting. The first is on the claims-aligned patients. You talked about the profitability being below um, traditional in a patient and above current fee for service. Um, but to be fair, that gap, you could drive a truck through that gap, but so wide. Um, so have you come to the termination or thought that those patients would be, um, would be profitable?
spk03: Yeah, I mean, look, you know, Gary, when you're talking about individual patients and individual risk scores and individual medical costs, as I said in kind of my prepared remarks, you know, we won't know exactly what the medical costs are until we know in the revenue. So, you know, medical costs we won't know until hindsight. Revenue we won't know until we actually know who the individual people are, which we don't know yet. You know, that said, I fully expect that the economics on claims-line patients will be much superior to what we're being paid in social Medicare. 35% of the benchmark is still set by regional benchmark. 65% is based on historical expenditures. And it also is risk-adjusted historically. And while there's a cap on risk-adjustment going forward, again, this is where I think Oak Street is pretty unique. You know, we have not – this is not a situation where we're suddenly saying, oh, great, we're going to be in this program where we can, you know, benefit from savings. Let's change our care model and take better care of people, right? We've been running our care model for years, which both means that we've done a nice job of controlling their medical costs and keeping our patients healthier, you know, regardless of how they're getting their Medicare. But we've also run all of our diagnostic processes. When we do those, because it's a way to understand our patients' conditions and make sure we are aligning them with the right programs and caring for them the right way, you know, a byproduct of that is actively documenting risk score. And so, again, I don't think we're not worried about the cap on our claims line patients because, you know, they should, because by definition, if they're claims line, we've had them for a while, we've seen them for a while, you know, we feel like their risk score is going to be, you know, in a place it should be or relatively close to So, you know, while I don't think they'll have the same revenue as our volunteer line patients, I do feel like, you know, we should have strong economics on them. Okay.
spk04: My follow would be, what's the pitch to a senior for voluntary enrollment? So, like, what would be the example of a senior where MA with a supplemental benefit offering isn't a better option, or is voluntarily enrollment primarily going to be for seniors who, for whatever reason, just aren't willing to go into a private plan, don't want to do MA, and then this is something that you're offering to them. But even as you do, what's the pitch to get them to sign up for it?
spk03: Yeah, you know, one thing to be clear about is I don't look at these as a trade-off. And operationally, how we put these products into place, it's not that we're saying to someone, okay, here's my advantage, you can do that, here's how this works, and here's, you know, voluntary alignment for a direct contract, you can do that, which is what you want. Like, that is 100% not the way the competition goes. When we're talking about direct contracting, Regardless of we're an AEP, SEP, one of the years, if a patient on traditional Medicare walks through the door who has not signed the paperwork, we're going to talk to them about it. We're going to talk to them about it when they're checking in and say, hey, here's a new government program we're part of. We're your PCP. We'd like you to sign this form that says, yes, Oak Street Health is my primary care provider. That's what the form says. Is Oak Street your primary care doctor? there's no downside for the patient to sign that, right? They can change their primary care doctor the next day. If they consult people who use their primary care doctor and go see a different doctor if they want to, they don't need prior authorizations, there's no network, right? There's zero downside for a patient to sign that form. And so what our goal is, and what we're talking to patients about, to make sure they understand that. This will help us get more data on you. This will help us take better care of you. But there's no limitation on you. Please sign this form. The same patient may sign the form when they walk in the door and they check in. And then later in the visit, they may hear about Medicare Advantage and decide they want to explore that option and meet with a broker and sign up for Medicare Advantage. And the Medicare Advantage conversation is all about a trade-off between benefits. Here's what I have in Social Medicare, here's what Medicare Advantage can offer me, what's right for me. The direct contracting alignment is just something that you should do, right? And if you align in the beginning of the visit for direct contracting and then later in the day choose Medicare Advantage, they'll just join Medicare Advantage and the alignment won't matter, right? So I just want to make sure that's very clear. When we think about this, it's not a tradeoff. Our economics don't play into this at all. It's really all about, you know, everyone who is on tertiary Medicare should sign the alignment form because there's no downside to them. And obviously that means we can take better care of them. And then on the MA front, we want to educate our patients so they make the right decision for them.
spk04: I appreciate that. Thank you.
spk01: As a reminder, we ask that you limit yourself to one question and one follow-up. Your next question is from Ricky Goldswasser with Morgan Stanley. Your line is open.
spk00: Yeah, thank you, and good morning. You know, you exclude from your guidance the three centers to be open as part of the Walmart collaboration. How should we think about the top line and margin trajectory opportunity for a Walmart side versus a de novo Oak Street center?
spk05: Hi, Reggie. This is Tim. Thanks for the question. With respect to Walmart, I think as we've discussed this on the last quarterly call, but what we would expect, generally speaking, given the footprint of the Walmart Center, which is about a third of the size of our traditional standalone centers, we expect the ultimate economics, at least from a revenue top line perspective, to be smaller than what we currently generate on our standalone centers. the ultimate contribution of those centers is that different equation, say at this point, you know, one of the purposes of the pilot is really to better assess what those numbers could be, and therefore how aggressively we want to expand that partnership or not, candidly. So at this point, it's too early for us to know. I'd say, you know, at three centers, it's relatively, it's a very small part of our business, and we'll share more information as we have it, but at this point, still What I would say, though, is the economics for a patient at a Walmart center, for an at-risk patient at a Walmart center, are going to be the same economics that we'd see in a standalone center. So from that perspective, if you were thinking about it, you know, it would just be from a revenue perspective, I'd say we'll be able to manage fewer patients because we just have less space to do it, but the economics we expect to generate on those patients would be the same as we otherwise would.
spk00: And then my follow-up question is around the COVID vaccine, clearly. We heard some really good news yesterday from Pfizer. As we think about the potential contribution to your PNL next year, should we think that it's kind of limited to your service patients? And just to apply the CMS established reimbursement, I think the reimbursement is $28 to $44 depending on the dosing. And then given that the government is paying for the cost of the vaccine, how should we think about the flow through the P&L? Thank you.
spk03: Yeah, so one, we were all thrilled with the news of the vaccine being very effective on early results. We know it's all early, but I think like everyone, we were really excited about that at Oak Street Health. When we think about The economics of the vaccine, honestly, is de minimis for us. You know, yes, we will get paid for administering the vaccine to our patients in theory, but as you rightly noted, not for our at-risk patients, right? And for our traditional Medicare patients, depending on the timing of that, they may be in the direct contract at the end of the year by the end of April, at-life, or worse, in which case it doesn't matter either for them, right? Hopefully, by the way, as soon as that for our patients, they're generally at-risk demographics, and hopefully they can get earlier um but again i don't i don't think the you know relative economics of administering the vaccine will you know i think it's gonna be rounding here in our in our overall p l for for the end of 2020 and 2021 um where i think it makes much much much more of a difference for oak street um you know is allowing us to open up some of the channels whether it's from a growth perspective or patient engagement perspective you know our patients love the community event so i think I think if and when those things come back, I think that will be helpful for our outreach model. I think also all of our care models will increase engagement for our patients. And probably look, it is also, as I think everyone knows, difficult to operate safely in a COVID environment. So that causes inefficiencies, you know, whether it's our team presenters or call centers. And so our team has done an amazing job managing through it. On the flip side, everything gets easier. So again, we are very excited for that day, but I think the impact of OX3Health will not be from the economics of the vaccine. I think that is the minimus, and frankly, that's the last thing on our minds. I think what the impact will be is really allowing us to kind of add additional channels of patient acquisition and add additional levers to engage patients, which should drive even more positive results from OX3Health.
spk00: Thank you.
spk01: Your next question is from Ryan Daniels with William Blair. Your line is open.
spk02: Yeah, good morning, guys. Thanks for the question. Another one on direct contracting. Mike, you mentioned the need to build out claims processing capabilities in the network for some of those individuals. Can you speak to what investments that might require if you use a TPA or one of your existing plan partners for claims administration and network management? Thanks.
spk03: Yeah, Ryan, that would only be relevant if we choose the – I'm blanking on the term now, but if we choose the option where we get kind of the majority of the premium out front and then have to go pay the claims and set the network up ourselves. Total care is the name I can think of. I think that if we go that option, you know, there's some cash flow benefits to it. It's something we can change over time. My suspicion right now, and like I said, we don't make decisions yet, nor have we, but my suspicion is we will not go that direction, actually, for exactly the reasons you talked about, which is, you know, just creates more administrative issues. challenges and more complexity, I just don't know if that trade-off is worth it. So my suspicion today, or if you said I had issues right now, which, again, I don't because I reserve the right to change this, but I think we will go with the former because then we don't have to worry about any of that stuff.
spk02: Okay. That's helpful. And then a different topic. Can you speak to kind of center expansions? I'm curious what your philosophy is. in regards to building out existing markets where you kind of already have a brand and your customer acquisition costs may be a bit cheaper versus entering new markets like New York and Mississippi. How do you internally kind of balance those two from a growth standpoint and investment standpoint? Thanks.
spk03: Yeah, I think balance is the right word. And I think if you open up new centers in existing markets, obviously it has lots of operational complexity. You do benefit from the brand. You benefit from relationships, et cetera, et cetera. On the flip side, you obviously need to be growing in new markets to create those beachheads so that you have more places where it is easier to grow. So when we think about whether it's how we agree in 2020 or how we're planning to grow in 2021, et cetera, it will be a combination of both for sure. When we first go to a market, one thing we want to do in the first, you know, call it year or two you have in the market is get good coverage over the neighborhoods we want to serve. Primary care is local. And so if you're more than, call it a 15-minute drive time, you're probably not going to get someone to join your center. So when we look at our algorithms that predict where we'll be successful, we look at where there's need in the community, we try to essentially draw 15-minute drive-time circles around a portfolio of centers to get us great coverage. And that's kind of step one when you go to a market is getting that coverage. What we've seen in our more mature markets, whether it be Chicago, Indianapolis, Detroit, et cetera, you see that the demand in any 15-minute drive-time catchment is larger than any center can serve by itself. And so over time, when you have centers that are flowing quickly, then you put more centers around there to make sure you have enough capacity to meet that demand. So that's what we've done in Chicago. We added a couple more in Detroit just recently. We've added more in Indianapolis over time, et cetera. So that's how we think about the growth is go to new markets, get that reach head, and create good coverage over the market so we can serve all the older adults that need our help in the market. And then over time, as those centers start flowing up, keep looking for more infills.
spk06: your next question is from stephen tanel with spp lyrinc can you run this open hey good morning guys thanks for taking the question i'm going to ask a couple on direct contracting as well a lot of really helpful color today so i appreciate that i guess in the deck uh we noticed that there's a 5 000 patient minimum to participate in performance year one And I wasn't aware of that. And I guess you'd written there that you expect slightly more voluntary-aligned patients than claims-based aligned. So I guess the first question in this is, is it reasonable to assume that that comment is relative to, say, 2,500 of each kind of patient to start? And then just doing some math on that, With calculated PPPM revenue around $1,200 today, and you mentioned voluntary alignment should be above that threshold, I guess it's probably safe to assume about $1,000 for the blended PPPM revenue on the program, which would imply potentially high $800 to $900 above current fee-for-service revenue PPPM. which comes up to about 10,000 patients per year. That math suggests sort of the bare minimum to start with 5,000 patients would produce over 50 million of incremental revenue annually. So is that reasonable to start and the way we're thinking about that?
spk03: Well, on the 5,000 number, I mean, that's a floor from CMS on the program. We're confident we'll see the floor. So I wouldn't look at that as, I mean, if you want to sort of map around the floor, that is the floor. But again, I don't think that has any direct relation to how many patients we do expect. On the question of voluntary versus claims-aligned patients, the reason why we expect more voluntary-aligned patients is twofold. One, because we do see the majority of our patients that are on traditional Medicare, eventually move to Medicare Advantage, you don't have as many 10-year traditional Medicare patients that would be claims-aligned. If you remember claims-aligned, it looked at multiple years of claims. If you think about the rate of Oak Street growth and how many markets and how many patients are relatively new to Oak Street, and you think about the time period in which they're looking for claims alignment, we'll get claims aligned patients, but our model is much more predicated on growth and people kind of proactively choosing Oak Street, which is very different than if more of your traditional hospital system or doctor had patients for a longer period of time. And then going forward, every patient we sign up, every patient can start kind of complete visits in his new patient health you know we will introduce the voluntary alignment we will have an involved forms and so they will be voluntary line before they can be claimed one right because you know the patient walks in uh today for their visit right their first visit and we you know they thought the uh the voluntary alignment forms will be voluntary line it may take you know two years for them to be claimed for right um and so You know, for that reason, we just expect a lot of, you know, voluntary alignment patients. And obviously, in two years from now, when all the patients we're signing today start becoming, flipping to claims alignment, we'll have, you know, we'll have grown a lot more, right? And there'll be a lot more voluntary alignment patients. So that's why we expect voluntary alignment to be higher. It's much more around kind of that flow of new patients coming in. And voluntary alignment happens, you know, a lot faster than claims alignment, right? And so I think what you'll see is a mix on April 1st of claims aligned and voluntary aligned, and then the mix every single quarter as more patients are enrolled will go more and more towards voluntary alignment over time. Yeah, as far as the revenue, you know, again, I would kind of, you know, just kind of point you towards our kind of PM-PM MA revenue. And I think, as I said in my remarks, you know, we expect just based on, you know, some of what we're looking for, probably higher for voluntary line revenue per patient. For a voluntary line, probably lower than a voluntary line for a claims-aligned patient. So again, I think directionally, you can probably look at the, and again, we don't know which patients and what their risk score is, so I can't give you any exact numbers, but I think probably, Tim, you tell me directionally around MA, if you kind of look at that, probably gets you pretty close.
spk05: Yes, I think the logic of your math is obviously accurate. I think from a PMPM revenue perspective, my guess is $1,000 is probably conservative. But either way, that would be the revenue upside on 5,000 patients. And to Mike's point, the 50-50 split is probably conservative as well, just given the amount of new patients we have joining the industry platform, that have joined the platform over the last year.
spk03: And the one thing I'd ask you, there's April 1st, which is the first time patients can be in there, but that's not... That's not the sense of the program, right? Every quarter you get more people aligned, so I certainly expect more to be aligned on July 1st, April 1st, and more on October 1st, and more on January 1st next year. Again, I'm excited about the program, but I think I'm most excited about it as a long-term opportunity to get the vast majority of our patients to risk-based economics. I'm also trying to temper my expectations on the, you know, it's a new program, and so therefore it's probably going to be some pickups just as we figure out how it works. I think CMS also figures out how to administer it. So I'm very excited about it for the, you know, the medium and long term, and also the short term. But, you know, it's not just a one-shot deal.
spk06: Yeah, no, it's all really ample color. And I guess just in the follow-up, I mean, you know, I think at this stage, there's nothing in the model, nothing in my model. I don't think there's anything in consensus. And, you know, we're five months away from this thing kicking off. And so... I think it probably makes sense to take a more conservative talk, given there probably will be hiccups. But to follow up on some of your comments, Mike, you also mentioned sort of a large majority of Medicare patients aligning on the voluntary side. Obviously, you have over 30,000 fee-for-service patients today, but the program minimum is 5,000. i i don't want to put you in a corner and give us numbers you're not comfortable with but but you did mention 5 000 probably very conservative relative to that 30 and then the 5 000 is worth 50 million like yeah you can run away with this and paint the upside case so maybe a little bit of context just on uh something or in the order of how many uh patients are actually or what percentage are actually aligning on that side and And whether you think that $30,000 is possible in year one at all, or maybe half of that's possible, any context there would be pretty helpful too, just to keep it all in check.
spk03: You know, Steve, it's just hard to give. I understand the question. I understand why you're asking the question. Trust me, I'm asking the same question. What is really challenging is not just like how many people were signing up, but how many of those people actually will choose Medicare Advantage. And how many of those people may get crossed into a different CMS program and not flow through. In reality, we just don't know. If the patient's on Medicare Advantage for one month in the year, then they're not eligible to be on direct contracting. We may have traditional Medicare patients who try MA, try it for two months, don't like it, drop back to traditional Medicare. So they're on traditional Medicare, but they're not going to be eligible for the program. And that does happen. We will have patients who, you know, get aligned to a next-gen ACO, for example, and, you know, what we've been told is voluntary alignment will trump kind of path alignment to a different program over time, but what over time means and how exactly that works is something we don't know. I think CMS is still determining all those details. And so, again, it's both a question of, like, what is the aggregate number of patients who, you know, our claims align with the aggregate number of patients who sign the volunteer enrollment form. And then of that group, how many choose MA and then now move to MA instead, which probably is a great outcome for us if they choose MA. And then how many of the ones that don't choose MA end up finally flowing through our rosters. And it's just, like, there is – without more experience there's no way to know it. So I don't want to give tighter ranges or imply everything. I would say 5,000 to 30,000 is probably a fair range.
spk08: But I know that's the only proportion of that.
spk05: Yeah, and Steve, just one thing. On that 30,000 at risk, or excuse me, fee-for-service patient base today, some portion of that fee-for-service patient base, they are on MA just for whatever reason that MA plan is not at risk for us. There are some rare instances where that's the case. And also that 30,000 is comprised of a fluid number of traditional Medicare patients. Many of them are on their traditional Medicare patients for a month or two months and ultimately enroll in MA. So it isn't the same patients period to period necessarily. So I think that denominator, at least as we sit here today, is probably not the most appropriate one. Now, between now and April 1st, as we continue to grow our patient panel, maybe 30,000 becomes more of a number. I don't know. But just to make sure we're kind of talking, we're seeing it. eye to eye on what is really in that number today.
spk06: That's helpful. All right. Thanks a lot, Tim. Thanks, Michael. I appreciate the call.
spk01: Your next question is from Sean Wineland with Piper Sandler. Your line is open.
spk07: Hi. Thank you and good morning. I also was looking to get a realistic assumption on the percent of patients going into the direct contracting program. But maybe, you know, in a quarter from now when we're guiding on, when you're guiding on 2021, what are the factors that you're going to include in your 21 guidance as it relates to the direct contracting program?
spk05: Thanks, Sean. As we get closer to when we would issue 2020 results, we'll probably be better able to answer that. I'd say we would love to be able to provide we feel better about the economics based upon the map that's been outlined by CMS. The patient number is just a challenge. Now, come Q1 of next year, we'll have better alignment. So I'd say if we had our druthers, we'd be able to provide better specificity around what membership will look like on our next call. I say that with a caveat that I don't know what we'll learn from CMS between now and then and what the moving pieces will be. So I think we spoke about seven or eight weeks ago, I know this is a bit of a topic, but obviously the market didn't have as much information as we have today. So we'll continually provide more information as we learn it and are confident in sharing and committing to it. I think from our perspective, while we obviously love the opportunity in direct contracting, we want to just make sure that we're giving folks our best look and not making changes in the fly as we continue to learn more.
spk07: Okay. Do you see any risk of any channel conflict with your existing MA partners as you migrate some of your fee-for-service patients over to direct contracting?
spk03: I don't see any risk at all of channel conflict. Like I said before, this is not us advising patients to join one or the other. We're going to run the same processes we've always run on educating people how Medicare works. And we're going to do that because having the right benefits and the right support and maximizing what you get for Medicare is critical to our patients actually increasing their well-being and staying healthy. And the reality is for the patient demographic we serve, the vast majority cannot afford a MedSelf plan. That's going to run hundreds of dollars a month. And so for a lot of our patients, Medicare Advantage is the right program for them to join. And we're going to keep educating people on how the program works. And then if they want to learn more, they have to meet with an insurance advisor. We can't sell insurance. We don't talk about specific benefits, et cetera. So I don't think that's going to change. And if a patient wants to stay in tertiary Medicare because that's right for them, then obviously, you know, we hope they align to the direct contracting program. And I do expect a lot of, you know, movement in and out of the program, as I alluded to earlier, based on what patients want. So, again, from our perspective, I don't see the mix changing at all across the patient's point. It's been historically when we didn't have the program.
spk07: Okay.
spk03: Thank you.
spk01: Your next question is for Matthew Gilmore with Baird. Your line is open.
spk05: Hey, thanks. Let me try one follow-up on direct contracting. Is it just given kind of the natural flow of patients that get introduced to Oak Street and then eventually shift over to Medicare Advantage because it tends to be a better deal for them? Is it fair to think about direct contracting as improving the patient economics for patients that you may see in the first one to two years, and then they naturally shift over to Medicare Advantage, and then you capture that economics? Or do you have a portion of fee-for-service patients that are longer term in nature? Just wanted to, if you could sort of help us think through that.
spk03: Yeah, it's both. So I think you're absolutely right on kind of that flow of patients. And that's very real. But I think on the flip side, there are a set of patients. Think about someone who's got, you know, is a retired union member and the union, you know, the retiree benefits paid for their MedCell program. So that person may be, you know, really in our core target demographic, yet in this case, actually, they tend to afford their MedSelf plan that's paid for them, right? And so if that patient, if they have a free MedSelf plan, that's probably going to be the right option for them. And we're going to be very supportive of that, right? And so this program then for that person allows us to also get kind of adverse economics to benefit from the investment we're making and keep them healthy, where prior to direct contracting, you know, we just have to move this money on that patient in perpetuity. We're obviously not going to differentiate our model or offer less high-quality care, and so... That's where the programming is also really powerful is that profile of patient. And, you know, again, and there's also obviously rare instances where, you know, children are paying for the med stop or, you know, some of our patients are higher income, right? It's not like all of them can't afford it. So, again, there's a tale of people for a variety of reasons who actually don't want to move to Medicare Advantage and, you know, sometimes for good reason. And in that case, this program will allow them to be successful. But I do think there will be a fair number, as you described, to kind of migrate through the program.
spk05: Got it. That's helpful. And then, you know, Mike, you talked about some of the alternative engagement channels, you know, digital and then with brokers. I was hoping you could unpack that a little in terms of, you know, what you're doing different today versus a year ago. And as you're thinking about that week over week improvement, are either one of those approaches, you know, yielding more benefit than the other?
spk03: Yeah, so one thing to always keep in mind at Oak Street Health is, you know, we're not a static organization. Our care model is not static. Our outreach model is not static. You know, while I sometimes can't remember life before Oak Street, you know, we've only been around for, you know, we only have been operating centers for seven years and obviously have, you know, grown a lot and improved along the way. The reason I say that is something like digital marketing, you know, two years ago we did zero of it. Why didn't we do it? We hadn't built that capability yet. We hadn't invested against it. And so as some of these channels come on, you could argue we should be doing data marketing four or five years ago. We said, you're right, we should have. There's only so much you can do and so much you can add over time and so much investments you can make as you grow. One of the great things about having the level of scale we have, and frankly, having level of scale we're going to have over the next couple of years to grow, is it gives us more and more resources to build out additional channels, build out additional caramel programs, et cetera. And so, you know, some of the channels we're doing, whether it's the two you talked about, you know, digital or, you know, working more in the insurance box and trying more programs there, it's not a question of, like, oh, something has changed, now this works. I mean, obviously, more people are, you know, are engaging digitally and, you know, as David Moore's agent, that's helping. But generally, the answer is, hey, like, there's just a lot of opportunity out there, right? And, you know, we'll keep experimenting, we'll keep innovating, we'll keep trying new things. and keep investing to improve. And a lot of those improvements will pay off. And I think digital is an example of that where we're really happy with the results so far. And I think we'll continue to get better as we try more and learn more. Okay, thanks a lot.
spk01: Your final question is from Jerry Taylor with JP Morgan. Your line is open.
spk04: Sorry, guys. Thanks for just a quick follow-up. I was just going to ask on just back to the topic of the day, direct contracting, on the voluntary enrollment, do you expect that to have the above average or above national average skew towards dual eligibles like you have in your MA patients just because of your physical locations? Is that also part of how you've kind of given us the revenue guidance for voluntary versus your average MA per member per month?
spk03: Yes. With what I know today, I don't know if it will be higher or lower dual penetration in direct contracting versus MA. But I think it will be similar from what I know today. And just not to, you know, Gary, you asked the question, so you're going to take, you know, you guys want to go down direct contact with Abbott Gold, but, you know, we're happy to talk about it because it's a really exciting program. If you remember, you know, for a dual eligible patient, they're a little bit different than what I described around the economics because for a dual eligible patient, Medicaid and the Medicaid RAP actually covers their co-pays and, you know, their out-of-pocket costs, right? It covers their Part D. So in their case, it's actually... There's so many reasons to join Medicare to Manager on supplemental benefits, but for them, actually, economically, in some cases, they can stay in terms of Medicare. So there's also that aspect of it as well for people who really are dual eligible and just don't want to be part of a managed care plan. I think they do benefit from managed care plans for the supplementals, but I think direct contracting will be valuable for those patients as well.
spk04: They're insulated from the fee-for-service cost-sharing.
spk01: already exactly yeah okay thank you all right no further questions i turn the call back to presenters for closing remarks well look i appreciate all the questions um
spk03: And, you know, hopefully it was helpful. I know there's a, and I appreciate the desire to learn more and to, you know, continue to understand the opportunity for all these programs. What I'll probably end with is a little bit where I started, which is could not be prouder of our team. for really executing incredibly high level. And what that means is being there for our patients, being there for our communities and making a huge impact. And regardless of what happens with vaccines, although we're obviously, we're as members of the society and in the world, we're very excited about them. And regardless of half of the programs like direct contracting, we feel really great about our future. And I think it shows the resiliency and effectiveness of the model that kind of regardless of different trajectories and different government programs and different futures, we feel really great about our ability to continue to grow and continue to provide great care and really make an impact. And that is a testament to our team. And so we appreciate all the interest in Oak Street. And thank you.
spk01: This concludes today's conference. You may now disconnect.
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