Oak Street Health, Inc.

Good morning and welcome to the Oak Street Health fiscal fourth 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. Please be advised that today's conference is being recorded. Hosting today's call are Mike Peikos, 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 the Oak Street website. These statements are made as of March 10, 2021 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. It often contains words such as anticipate, believe, contemplate, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, target, will or would, or similar expectations. Forward-looking statements by their nature address matters that are, to 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 a 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 competitors in our market, and our ability to retain our existing customers and to increase our number of customers. CLE refers to our annual report for the year ended December 31st, 2020, filed on Form 10-K with the Securities and Exchange Commission. where you will see 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 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 similarly titled non-GAAP financial measures differently. Refer to the appendix of our earnings release for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I'll turn the call over to Mike Peikos, CEO of Oak Street. Mr. Peikos?

Thank you, operator. Thank you to everyone that is joining us this morning. Joining me on today's call is Tim Cook, our Chief Financial Officer. Before we dive into our fourth quarter results, I would like to thank our team at Oak Street for their extraordinary dedication to and support for the patients and communities we serve. Our teams adapted to and excelled in challenging circumstances over the course of the year to continue to provide outstanding care. When the COVID pandemic hit the U.S. a year ago, we knew it was imperative for Oak Street to continue to be there for our patients and our communities. Over the course of the last 12 months, That meant standing up telehealth offerings and providing 90% of our visits virtually last spring to ensure our patients continued access to primary care. It meant leveraging our green band to deliver shelf-stable meals to patients facing food insecurity. It meant standing up community testing sites in the fall to help communities navigate the surging cases, all while continuing to run an Oak Street care model and providing outstanding care quality and patient experience. Since the holidays, our team has taken up the additional challenge of vaccinating our patients as well as the older adults in our communities. I cannot be prouder of how our team had stepped up to lead our communities out of the pandemic. We have transformed the community rooms in the majority of our centers to be mini vaccination clinics. We have mobile vaccination teams traveling to senior living facilities as well as sitting on vaccination days at community organizations. We are running a weekend mass vaccination center as part of the City of Chicago's effort to close gaps in vaccine access. Since we started the center, the neighborhood our mass vaccination center is in has experienced the fastest growth in vaccination rates of any community in Chicago. We are currently giving over 11,000 vaccine doses per week and have given 75,000 since the beginning of the year. And that number is accelerating as we are able to access supply in additional states. We have a capacity to administer 80,000 doses per week across Oak Street. What makes Oak Street's efforts incredibly impactful is not just the number of doses we are giving, but the targeted way we are ensuring vaccine access to the patients and communities who need them most. At a time when equitable vaccine access is a national story, Oak Street has leveraged our community outreach team to proactively engage older adults in our communities to help overcome vaccine hesitancy and ensure that challenges using technology or finding limited slots aren't barriers to access. I've had the opportunity to volunteer at our vaccine centers, and it's one of the most rewarding experiences I've had at Oak Street. The excitement at time combined with apprehension from patients receiving the vaccine coupled with the positivity and sense of purpose from the team as we work our way toward the light at the end of the COVID tunnel is something I will never forget. I'd like to share a representative story of two of our patients, Mr. and Mrs. J, husband and wife, who we recently vaccinated. Mr. J was excited to get the vaccine. His wife, not so much. Mr. J scheduled a visit to their doctor at Oak Street for two of them, hopeful to use the trust Mrs. J had for her doctor to get her over the hump to get the vaccine. While Mrs. J was nervous, she was able to get her questions answered by her Oak Street doctor, who had earned her trust over time, and decided to get the vaccine along with her husband. Mr. J left grinning ear to ear, and even Mrs. J had a smile on her face knowing she had taken the first step in relieving the fear and anxiety that COVID had brought. In addition to the impact we were able to make on our existing patients and communities, we were able to continue to bring our model to new communities in 2020 as well. We successfully opened up 28 new locations in 2020. This represents more centers than we opened in the first five years of our existence. Because our care model focused on keeping our patients healthy and improving their outcomes, it's completely aligned with our financial incentives. This outstanding performance by our team in 2020 led to our strong full year and fourth quarter results. We generated record revenue of $248.7 million in Q4, exceeding the top end of the guidance range we communicated to investors. This represents an increase of 43% from the fourth quarter of 2019. Our full-year revenue growth increased 59% in 2020. We achieved this growth despite essentially turning off our sales and marketing function for much of the spring and summer and needing to replace our community event-based marketing approach with new central channels. We finished the year with 79 centers, and from August until Thanksgiving, we opened 23 new centers for an average of two centers per week. We also saw strong center-level performance that continues to reinforce our confidence in our ability to scale the organization. We have previously shared our 2015 vintage as an example of center-level ramps. We have shown the incredibly strong unit-level economics of the DeNovo Oak Street Center, With less than $5 million total capital invested, including CapEx, operating losses, sales and marketing, and overhead, our center's nearest capacity now has a contribution of $9 million annually and growing. We are pleased to share that our subsequent vintages have continued to improve off of our already strong base, with our larger 2018 and 2019 vintages both having higher percent of revenue and higher percent of contribution than 2015 vintages at the same point in its development. We set a goal for ourselves every year to both improve the center of the ramp from previous vintages, as well as put more new centers up than previous years. We were clearly successful in both in 2020 and are confident in our ability to continue hitting both goals in 2021 and beyond. In order to improve center economic ramps, we will focus on investing in our care model and patient acquisition approach while leveraging the new direct contracting program to increase the percentage of our patients we receive risk-based economics on. We will continue to invest in our care model in Canopy, our technology and data platform. We believe the best patient experience and care quality comes from availability of in-center, in-home, and virtual visits for both longitudinal and on-demand care. Having this suite of options from the same organization allows both access to the preferred and clinically appropriate care venues, along with coordinated care across venues. Additionally, as we gain scale in Oak Street, we are able to invest in the development of programs for more specific patient conditions. For example, we will be implementing a new program focused on our patients with end-stage renal disease this year, and we're excited to invest to improve health outcomes and lower costs for the small but complex group of patients. Along the same lines, we will continue to invest in our chemistry applications and data science capabilities to drive insights from our growing patient data sets and deliver those insights to our teams in the field with easy-to-use tools to ultimately drive better patient care. We're excited to see the results of these investments on our quality of care and financial metrics in 2021 and beyond. Along with investing to improve our care model, we will also look to accelerate our outreach model to increase the pace of patient acquisition. This will include continuing the expansion of our digital and telehealth channels. While we are proud of the results we have achieved as we ramped these channels in order of magnitude over the second half of 2020, we believe they are still in their infancy and we continue to expand and optimize both, allowing us to increase the number of patients brought in through them without increasing the cost of acquisition. Additionally, we'll continue to invest in training for our field-based outreach team so we're prepared to successfully relaunch our community-based channels in the back half of this year. If we're able to maintain our central marketing performance while returning our field outreach team performance to 2019 levels, we'll see an increase of patient growth of over 50% percent from where we're at today. And our team believes there's ample opportunity to improve performance from there. Finally, We believe the direct contracting program has the ability to meaningfully improve our center of the room. We expect to have between 6,000 and 7,000 direct contracting members on April 1st. We continue to volunteer line patients to the program every day and expect that number to increase by 2,000 to 3,000 per quarter, depending on flow through an MA enrollment, leading to 10,000 to 13,000 direct contracting patients by October. We're confident that over the next year, This number will continue to increase, leading to a significant increase in the percentage of our patients that are on risk-based contracts. Because we are already incurring the cost of care for our traditional Medicare patients at Oak Street, moving them to a risk-based contract will allow the expected patient contribution to improve 10x and drop straight to the bottom line, leading to an improvement in center-level revenue and proportionally larger improvement in center-level patient contribution over time. In parallel to improving our center-level economics, We will also look to leverage our platform to accelerate the pace of our expansion. We plan to continue to increase the pace of de novo center openings. We are targeting 38 to 42 new centers in 2021, up from the target time of our IPO of between 25 and 30 de novus. With a similar level of performance as historic vintages, we expect our 2021 vintage alone to generate $1.3 billion of revenue and $250 million of center contribution in 2026. We believe we have the infrastructure and talent pipelines in place to support this pace of expansion and more, consistently ensuring strong center-level performance and ultimately providing the same return on the investment in early center ramps that we've seen in our mature vintages. With continual strong center-level performance, we'll look to continue to increase the number of new centers per year next year and beyond. In summary, we are thankful for the strong contributions from our street team, leading to a strong finish to a challenging year. and we are pleased with the results from our fourth quarter. Looking to 2021, we believe we have the team, technology, culture, and mission to truly transform how care is delivered for the patients who need it most. In doing so, we believe we can create the new standard for primary care for older adults and are excited to take the next steps on our mission to rebuild how it should be. I'll now turn it over to Tim Cook, who will walk you through our financial results in more detail. Tim?

Thank you, Mike, and good morning, everyone. We were pleased with our fourth quarter results with our key metrics coming in ahead of the guidance we communicated in November. In terms of our membership, total patients grew roughly 23% year over year, while our at-risk patient base, which drives our financial performance, grew by 34% to 64,500 patients. At the end of 2020, we operated 79 centers, an increase of 28 centers compared to December 31, 2019. Note that our year-end 2022 will now include our three Walmart locations. Capitated revenue of $234.9 million for the year grew 39% year-over-year, driven by the growth in our at-risk patient base. Total revenue grew 43% year-over-year to $248.7 million. I note that in the fourth quarter, we recognized capitated revenue of $3 million from one-time events related to settlements with health plans, and $9 million from capitated revenue that was booked in the fourth quarter but related to full-year performance. Additionally, we recognized approximately $4.2 million of other revenue from one-time events, of which approximately $2.2 million was related to HHS provider relief funds. And we recognized $2.4 million of other revenue that was booked in the fourth quarter but related to full-year performance. Even when adjusting for these amounts, we still finished Q4 comfortably ahead of the guidance provided in November. Our medical claims expense for fourth quarter 2020 of $175.5 million represented growth of 39% compared to fourth quarter 2019. Fourth quarter medical claims expense included $6.5 million in one-time medical claims expenses associated with settlements with health plans and a potential reserve against potential incurred but not reported COVID-19 claims relating to 2020 dates of service. Our cost of care, excluding depreciation and amortization, was $61 million for the fourth quarter, an increase of 36% versus the prior year due to the growth in the number of centers we operated as well as growth in our patient panel. Sales and marketing expense was $26.8 million during the fourth quarter, representing an increase of 88% year-over-year. We saw the benefit of a greater investment in sales and marketing in 2020, be it greater at-risk patients at year-end and greater expectations for Q1 2020 membership, which I'll discuss at the moment. Corporate general and administrative expense was $72.9 million in the fourth quarter, an increase of 143% year-over-year. The majority of this year-over-year increase is related to an increase in stock-based compensation expense, which was $41.7 million in the fourth quarter of 2020 compared to $1.9 million in the fourth quarter of 2019. This growth in stock-based compensation expense was driven by an accounting change related to awards issued prior to our IPO in August 2020 and is not a function of stock awards issued since our IPO. Excluding stock-based compensation, corporate general administrative expense was $29.9 million in the fourth quarter of 2020, an increase of 7% during the fourth quarter of 2019, driven by increases in headcounts as part of our organizational growth. I will now discuss three non-GAAP financial metrics that we find useful in evaluating our financial performance. Patient contribution, which redefines capitated revenue plus the medical claims expense, grew 41% year-over-year in the fourth quarter to $59.4 million, faster than capsulated revenue growth at 39% for the period. We expect at-risk per-patient economics to improve the longer that our patients are part of the Oak Street platform. Platform contribution, which we define as total revenue less than the sum of medical claims expense and cost of care, excluding depreciation and amortization, was $12.1 million, an increase of 397% year-over-year. As an individual center matures, we expect both platform contribution dollars and margins to expand as we leverage a fixed cost base associated with our centers, as well as improving our patient economics over time. Adjusted EBITDA, which we calculate by adding depreciation and amortization, transaction and offering-related costs, and stock-based compensation, but excluding other income to net loss, was a loss of $43.5 million in the fourth quarter of 2020, compared to a loss of $36.2 million in the fourth quarter of 2019. We finished the fourth quarter with $409.3 million in unrestricted cash. Cash used by operating activities totaled $77.2 million in 2020, and our capital expenditures totaled $21 million. I want to talk for a moment about direct contracting and expand on Mike's figures. We received a file from CMS last week that identified approximately 13,500 Medicare beneficiaries aligned to Oak Street via our direct contracting entity. However, this file did not include exceptions, which account for the delta between this figure and Mike's range of 6,000 to 7,000 patients. These exceptions include patients that have since enrolled in Medicare Advantage, patients that are aligned to other government programs such as ACOs, and patients that are disqualified either due to prior MA enrollment or lack of Part A and B Medicare coverage or other reasons. For those patients currently enrolled in Medicare Advantage, we are indifferent as those patients are helping to drive our MA at-risk patient base, which is growing more quickly than we originally anticipated. For patients aligned to other programs, those patients remain with that program regardless of their voluntary alignment preferences for the first year of the direct contracting program, given the direct contracting program is starting mid-year in April. We are hopeful that as we move to performance year two in January 2022, CMS will give priority to the voluntary alignment preferences of those patients, which would result in them moving to the Oak Street direct contracting entity. For the disqualified patients, we will continue to work with these patients and expect them to be added to our direct contracting patient base in future periods. In summary, there are significant buckets of patients not included in our 6,000 to 7,000 estimate that we believe will flow through in future periods, and those patients are incremental to the 2,000 to 3,000 patients we expect to add per quarter that Mike mentioned. I'll now turn to our 2021 financial outlook. As of December 31, 2021, we expect to have 105,000 to 110,000 total at-risk patients, including direct contracting patients. For the full year 2021, we are establishing an expected revenue range of $1.275 to $1.325 billion in an adjusted EBITDA loss of between $215 million and $165 million. We anticipate having 117 to 121 standalone centers opened by December 31st, 2021, including our Walmart centers. Our 2021 EBITDA guidance includes the impact of several factors. The first factor is related to our accelerated growth rate. As discussed, We are increasing the pace of new center expansion, and the startup expenses tied to these dinobos will lay upon near-term profitability. As Mike discussed, we expect to continue making these investments, provided we continue to see recent cohorts operating at levels that further validate the unit-level economics of our operating model, which they currently are. When you consider the impact of center contribution and sales and marketing in G&A dollars associated with accelerated growth, We will invest approximately $50 million in these new centers above what we would have expected at the time of our IPO in August 2020, given the 73 and 98 centers we initially estimated we would be operating as of year end 2020 and 2021, respectively. The second factor is related to investments in our care model programs in 2021, as we believe these programs can drive improvements in patient outcomes and medical claims expenses in future periods. As we continue to grow our patient base, we are reaching a scale where it is economical to invest in certain programs that we believe will improve our patients' well-being and result in lower per-patient medical costs in the future. We expect the investments in these programs to be approximately $20 million, and we expect that we will recoup these investments in the future period through improved MLR. We have not assumed any benefit in 2021. The third and final factor pertains to patient contribution and impacts both per-patient revenue and per-patient medical costs. We estimate our per-patient revenue will be lower than we would ordinarily expect due to lower risk scores. Consistent with recent commentary we have heard from Medicare Advantage payers, we expect the low utilization experience in 2020 due to COVID will result in lower risk scores for new at-risk patients who join Oak Street in 2021, creating a headwind as we grow this year. On the medical cost impact, 2021 is a challenging year to estimate our medical costs. In a typical year, we would evaluate the prior year's experience and make an estimate of trend based upon a number of input factors. Given the impact of COVID-19 on 2020 medical costs, the baseline is harder to establish. Furthermore, it is unclear what impact, if any, COVID-19 will have in 2021 medical costs, as we did see an increase in COVID-19 cases in Q4 2020, and new variants of the virus represent a risk to the efficacy of the current vaccines, making it difficult to predict what Q2 2021 and beyond will look like from a medical cost standpoint. Additionally, the Consolidated Appropriations Act passed in December 2020 included an increase in the Medicare physician fee schedule for 2021 and suspended sequestration for Medicare payments for the first quarter of 2021. We expect the net combination of these two factors will result in an increase in per-patient medical costs related to specialist care provided to our patients. Lately, offsetting these headwinds is the impact of direct contracting. When we met all of these factors, patient contributions can be approximately $40 million or lower than we would have otherwise expected. It is important to note that we are basing these assumptions on very preliminary data, and we believe this impact to be a function of COVID-19 and limited only to 2021 results. For the first quarter of 2021, we are forecasting revenue in a range of $280 to $285 million. We are forecasting an adjusted EBITDA loss of $25 to $20 million. We anticipate having 84 to 85 centers in at-risk patient count of 74,000 to 75,000 by March 31st. I'll make one final point regarding growth and seasonality of our business. 2020 was an unusual year in that at-risk patient panel grew by 9,000 patients, or 17% from the end of Q1 2020 to year-end 2020. As a point of comparison, for the same period as in 2019, we grew our at-risk patients by approximately 15,000, or 42%. This was driven by the decision to lower sales and marketing during the spring and summer of 2021 as we learned to operate during the pandemic, and something we do not plan to repeat. We expect our growth in 2021 to be more consistent with pre-2020 periods, with at-risk patients growing 47% from the end of Q1 2021 to year-end 2021 based upon the guidance I just provided. As we had new patients over the course of the year, we expected our aggregate per-at-risk patient economics to decline as our newer patients are less profitable than our tenured patients. And with that, we will now take any questions you may have. I'll turn it back to the operator.