Oak Street Health, Inc.

At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. We note that today's call will be approximately 60 minutes in length. 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 Oak Street's website. These statements are made as of May 11th, 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 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 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 the 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 please refer to the annual report for the year ended december 31st 2020 filed on form 10k 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 a reconsolidation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I'll turn the call over to Mike Peikus, CEO of Oak Street. Please go ahead.

Thank you, Operator. And thank you to everyone that is joining us this morning. Joining me on today's call is Tim Cook, our Chief Financial Officer. I'd like to start my comments this morning by once again thanking our team members who continue to work tirelessly to support our patients and communities. Like most of the country, it is a time of transition and an exciting time at Oak Street. As vaccination numbers rise, COVID case counts drop, and society continues on a path back to normalcy. Oak Street has fully vaccinated over 105,000 people and administered over 150,000 vaccine doses. This vaccination effort was an all-hands-on-deck effort. In addition to vaccinating our patients during visits, we opened up our community rooms to older adults in the neighborhoods we serve, and in early spring, when the demand was peaking, we kept our facilities open on nights and weekends to improve access and positively impact the communities we serve. Given the majority of our centers serve lower-income communities with large minority populations, our vaccination efforts, just like our primary care model, help reduce inequities in the communities most impacted by COVID. Looking forward, we are transitioning back to normalcy on the operations front. We have moved most of our team members that were remote back into our centers and are beginning that process for our call centers. While obviously an adjustment for some team members after over a year of working remotely, we are excited for the relationship building and development opportunities being in person will enable for our teams. We believe being in person will create a positive talent from an efficiency and quality perspective across our teams for the remainder of the year. We are also beginning to cautiously resume community marketing events. While those are largely consisting of outdoor and socially distanced events at this time, we are hopeful that if we continue the current trends of vaccinations and declining cases, we will be able to execute a greater number and variety of events over the coming months. We are seeing progress on patient acquisition as our communities continue to reopen, and we are hopeful that it is a trend that will continue as the year progresses. As many of you heard me say, we believe our care model. which we develop internally and are continuously refining, is best in class in the market today. A key to the effectiveness and scalability of our model is Canopy, our proprietary data and technology system that powers our providers' workflows every day. Canopy enables us to aggregate massive amounts of disparate data to develop customized care plans. Since we only serve Medicare patients, we are able to execute the same care model across all of our patients. This, in turn, allows us to embed Canopy across all of our teams and use the system to help us care for every single patient in every center every day. We also hear from clinicians new to Oak Street who are working other value-based care models how refreshing it is to have the technology provide the necessary information in real time versus having to periodically review gap reports after patients have been seen. Our use of statistics are a great indicator of Canopy's importance to our team. In Q1, our providers activated Canopy on average four hours per day. I want to share two external data points from the past couple months on the impact of Canopy. First, the New England Journal of Medicine's Catalyst published a study showing the accuracy of our proprietary patient risk algorithms compared to just physician judgment. Our algorithms, which incorporate over 1,000 data fields, many unique to Oak Street, were developed using machine learning technology. Compared to provider judgment alone, Canopy's algorithms improve the accuracy of emissions and mortality prediction by 2x and 3.5x, respectively. Second, our Canopy application was recently awarded MedTech Breakthroughs EHR Innovation Award. In addition to our continued investment in Canopy, we also continued expanding our center base in the first quarter, opening seven new centers in four new markets across Louisiana and South Carolina, and we remain on track to open 38 to 42 centers this year. We've announced future centers in Georgia, Kentucky, and Alabama, and will likely also expand to several additional states over the remainder of 2021. We continue to feel confident in our ability to, at a minimum, maintain the effectiveness of our care model, as well as our ability to sustain the unit economics we have historically generated as we increase the pace of expansion. So long as we continue to maintain and improve our clinical results and patient experience and meet or exceed our historical unit economics, we will increase our new center opening pace each year as the white space in our market is vast. As a reminder, our market is comprised of over 27 million Medicare beneficiaries and can support nearly 10,000 Oak Street centers. Given the significant capital we raised during the quarter as part of our $920 million convertible note offering, we have ample capital to support our growth strategy. On April 1st, we officially began participating in the CMMI direct contracting model. As a reminder, the direct contracting program will enable Oak Street Health to assume financial risk for the cost of care for patients covered by traditional Medicare. Prior to direct contracting, we're only able to assume risk with patients covered by Medicare Advantage. We expect to serve approximately 6,500 patients in Q2 2021, and we would expect those patients to grow in Q3 and Q4 of 2021 and beyond as we grow our patient families. CMS recently announced a moratorium on new applicants. That moratorium does not prevent us from adding new markets to our current direct contracting footprint. Early data that we have received related to patient revenue and historical medical costs suggests that the per-patient economics will potentially be better than we initially estimated. This reinforced our confidence in our ability to benefit from the investment we make in our traditional Medicare patients' care by taking risks through the direct contracting program, similar to our demonstrated success taking risks working with Medicare Advantage plans. Finally, turning to Q1 results, we generated record revenue of $297 million in the quarter, exceeding the high end of the guidance we communicated to investors and representing 47% growth compared to Q1 2020. We cared for 75,500 at-risk patients as of March 31st. We'd like to point out that the 47% revenue growth is off a pre-COVID comparison quarter in Q1 2020 compared to a COVID-affected quarter in Q1 2021, and the growth in Q1 2021 is in spite of low growth for the spring and summer of 2020. We are confident that we will exceed 50% quarter-over-quarter growth for the foreseeable future. In summary, we continue to be very excited and encouraged by our clinical results, our center expansion opportunities, our patient acquisition momentum, and our patient economics for both MA patients and direct contracting patients. It's a very, very exciting time at Oak Street. I will 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 first quarter as we delivered results above the high end of the guidance we had provided in March. In terms of membership, our at-risk patient base, which drives our financial performance, grew by 37% to 75,500 patients. At the end of the first quarter, we operated 86 centers, an increase of seven centers compared to December 31, 2020, and representing 32 more centers than the 54 we operated at the end of the first quarter of 2020. Capitated revenue of $291.2 million grew 48% year-over-year, driven by growth in our at-risk patient base. Total revenue grew 47% year-over-year to $296.6 million. Our strong revenue growth was primarily driven by the increase in our at-risk patient base. I will note that $6.9 million of capitated revenue in the first quarter of 2021 was related to 2020 patient retroactivity, where payers paid Oak Street a catch-up for patients managed in 2020 but not previously included on our rosters. Our medical claims expense for the first quarter of 2021 of $199.7 million represented growth of 51% compared to first quarter of 2020. $6.6 million of our first quarter medical claims expense was related to 2020, primarily related to the previously mentioned patient retroactivity. Our cost of care, excluding depreciation and amortization, was $60.3 million for the first quarter, an increase of 38% versus the prior year, driven by growth in the number of centers we operate and our more team members to support our larger patient base. Sales and marketing expense was $24.1 million during the first quarter, representing an increase of approximately 103% year-over-year as we continue to invest in this area to support patient growth and a much larger footprint of centers. Corporate general and administrative expense was $72.9 million in the first quarter, an increase of 200% year over year. The majority of this year over year increase is related to an increase in stock-based compensation expense, which represented $41.2 million of G&A expense in the first quarter of 2021 compared to $1.7 million in the first quarter of 2020. As a reminder, the increase in stock-based compensation is primarily related to 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 and administrative expense was $31.7 million in the first quarter of 2021, an increase of 40% compared to the first quarter of 2020, driven by costs necessary to support the continued growth of our business. 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 42% year-over-year to $91.5 million during the first quarter. 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 the sum of medical claims expense and cost of care excluding depreciation and amortization, was $36.7 million, an increase of 43% year-over-year. As an individual center matures, we would expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers, as well as improving our appropriation economics over time. Adjusted EBITDA, which we calculate by adding depreciation and amortization, transaction offering-related costs, and stock-based compensation but excluding other income to net loss, was a loss of $17.4 million in the first quarter of 2021 compared to a loss of $8.7 million in the first quarter of 2020. We finished the first quarter with a strong balance sheet and liquidity position. During the quarter, we completed a successful convertible debt offering, issuing $920 million in aggregate principal notes due in 2026 at a 0% interest rate with an initial conversion price of $79.16 per share. Our net proceeds after issuance costs were $898 million. We used a portion of these proceeds to purchase a cap call, which increased the effective conversion price to $138.88 per share. As of March 31st, we held approximately $1.15 billion in unrestricted cash. Our liquidity position will support our continued growth initiatives, primarily our de novo center expansion. Cash used by operating activities was $8.8 million in the first quarter of 2021, while our capital expenditures were $7.8 million for the quarter. Now I'll provide an update to our 2021 financial outlook. For fiscal 2021, we are increasing our guidance for total at-risk patients to a range of 107,000 to 112,000 patients, including our direct contracting patients. We are increasing our full-year revenue guidance to a range of $1.3 billion to $1.34 billion from our prior outlook of $1.275 to $1.325 billion. while our adjusted EBITDA guidance has been tightened to a loss of $205 million to a loss of $165 million. We continue to expect to have 117 to 121 centers open by December 31, 2021. For the second quarter of 2021, we are forecasting revenue in a range of $315 to $320 million and an adjusted EBITDA loss of $40 million to $35 million. We anticipate having 93 to 94 centers in an at-risk patient count of 86,000 to 87,500 patients, including direct contracting patients, at June 30, 2021. We'd like to make one final comment regarding stock-based compensation expense, as we have received a number of questions on this topic. As I mentioned earlier, the vast majority of the increase in stock-based compensation was driven by the accounting treatment for pre-IPO awards dating as far back as 2016 that converted from an uncertain vesting timeline to a defined vesting timeline at IPO. These awards vest between August of 2022 and August 2023. Q4 2020 was our first quarter that reflected the full quarterly cost of this accounting treatment. We expect our stock-based compensation expense to remain at elevated levels until August of 2022, when the expense will begin to taper significantly as some of these awards are fully expensed. By August 2023, we would expect stock-based compensation expense to reflect market equity compensation. And with that, I'll turn the call back over to the operator, and we'll now take questions. Operator?

Great. Thank you. At this time, if you'd like to ask a question, please press star followed by the number one on your touch tone phone. To withdraw your question, press the pound or hash sign. Also, in the interest of time, please limit yourself to one question and one follow up. Thank you. Your first question here comes from Robert Jones from Goldman Sachs. Please go ahead. Your line is now open.

Great, good morning. I wanted to ask on direct contracting, Tim made some comments in the prepared remarks, you know, around CMMI's decision to close the program for new applicants and wanted to just get a better sense of how you think that affects the opportunity as you view it for Oak Street, specifically, obviously, as an entity that was already approved for the program. And then you mentioned, you know, better economics potentially around the program. Just curious what specifically would... would drive or present those better economics for Oak Street?

Yeah, on the first one, as far as CMMI and then their decision to pause new applicants, we don't think that will have any impact on us since we're already in the program and our ability to continue to expand within the program. We're certainly not government relations experts here at Oak Street. But when you look at the program, take a step back, I think it is very much in line with kind of the, you know, kind of bipartisan and certainly even the kind of programs under the Obama administration of supporting providers and moving value-based care models deeper and deeper into traditional Medicare. So, you know, at least my understanding of what people have relayed to me is it's less of a around the support of the program. It's much more around just a new administration that I think inherited a program that was kind of just about to be implemented and really wanted to make sure they understood the program before they took another round of applicants. So again, I think at least from what we understand today, I think that we feel really good about our position within the program and the ongoing viability of the program moving forward. To your second question around the economics, I think it's less of anything that's unexpected as far as the economics go. I think there's just a question when there's a new program. You can do it on paper and in theory, but until you start seeing the real patients that are in the program and you start seeing more of the historical claims and the revenue flow through, you're not totally sure. We've talked about this a fair amount in prior calls around trying to triangulate around what this program will look like compared to Medicare Advantage. I think what I would say is our belief today is it'll look very similar to Medicare Advantage, which is obviously a program we're very successful in, but because the government's keeping a smaller portion of the premium, our revenue per patient will be higher, although we do expect a similar increase in uh costs because uh you won't have um and networking some of the lovers that help plants you know traditional medicare medic traditional managed care lovers that medicare advantage plans pull to uh to to try to lower costs and so you kind of think about it from a net perspective the patient contribution i think will vary somewhat of what we see you know across our medicare advantage population but higher revenue and higher patient costs along with it. But for us, that's a big win because we do very well on our Medicare Advantage patients. And until this program started, we obviously spent the same amount of care for our traditional Medicare patients, which I think is a really important point of why we're in such a strong position coming into the program is we've always provided our care models to these patients. But now we're finally able to kind of get the economic reward from the investment we make in their care.

Got it. And if I could just ask a follow-up around the centers and the plan for openings. I don't want to get too far down the road, but you made a comment that as long as you're able to continue as an organization to maintain and improve clinical results, patient experience, the unit economics, you'd consider new center openings each year, to increase new center openings each year. Just curious if you have any initial thoughts, just given how important that metric is to the forecast and the model, how you're thinking about new center opens, you know, in 2022 and beyond.

Yeah, I think we think about increasing new centers as almost a titration up. And so if we go through a year and we do continue to along the same trajectory or improving our unilateral economics, and as we've shared, I think, in prior episodes, Prior calls and in our annual call a couple months ago, we've actually seen our union level economics improve year over year with vintages, and we really want to keep that trajectory going. If we get out of the year and that happens, then we'll want to open up more the next year. But we're not going to open up four or five times as many centers, right? So we're giving you guys a range of 38 to 42 this year. So I certainly don't expect to open up 150 or 200 next year. Could we? Probably. But I think then you risk something unexpected becoming a bottleneck. So I think we'll think about it more like we saw the last couple of years where we've gone from 12 to 28 now to something around 40-plus. So I think similar levels of titration up every year where you're increasing the number, but you're not tripling or quadrupling the number. So I think something similar if you kind of just take out that trajectory in the next year and the year after and the year after, I think is how we think about it. That's super helpful. Thanks, Tim.

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley. Please go ahead. Your line is now open.

Hey, good morning and congrats on the quarter in the higher guide. I have one follow-up question on direct contracting. Specifically, we think about that move of voluntary aligned patients to claim aligned patients after a year. How do you see the impact on patient economics going forward for this population that you now manage? And then now, I have a follow-up on that.

Sure. Hey, Ricky. It's Tim. Good morning. Thanks for the question. As you mentioned, and folks aren't aware, as part of some updates in the program from CMMI over the last several weeks, they mentioned that patients that are voluntary aligned in one year will become claims aligned the next year. And there is a difference in methodology for how you calculate the revenue for each of those patients. And so as it pertains to that change, Ricky, We actually feel as though that change will not have a significant effect on the economics for our patient population. and I won't go into the technical details here, but essentially because of the way that the risk score is calculated for those patients based upon looking back to a reference year, so long as the patients that you were managing in that reference year, you were managing with the same level of intensity, by managing I mean engaging, right, seeing in the center, the same level of intensity that you do today, you shouldn't expect a significant impact on the overall risk score for the portfolio of patients you're serving. So from our perspective, since As Mike mentioned earlier, our care model has been consistent across our patient population over time. We feel as though as our patients move from voluntary to claims-aligned, and when they do so, this risk or cap comes into effect. It should have less of an impact on us given the fact that that cap is compared to a historical baseline that was on a well-managed population.

And then my follow-up question is on the activity and relationship with Walmart. I'd say in the last few weeks, Walmart has really upped its activity in healthcare, launching the buying a telehealth asset. and making some comments around sort of how they view their role in the overall healthcare system. Now that you have sort of the centers up and running, any sort of updates or observations you can share with us and overall how do you see the opportunity with Walmart playing out?

Thanks, Rika. This is Mike. I think the same approach and kind of criteria that we talked about from Walmart since we announced it I think last fall remains, which is I think the hypothesis of why putting Oak Street centers in Walmart I think remains strong, but I think we have to test that hypothesis, and I think we're still doing that. And for us, it's not just about, you know, are these, you know, kind of equal to an Oak Street Health Center as far as the ramp goes. They've got to be better. And they can't just be better for the first couple months because there's, you know, hype and it's new. It's got to be sustainably better than an Oak Street Center. Otherwise, we'll just do centers ourselves, right? And so, you know, we're encouraged by the results so far. You know, we've liked the partnership with Walmart. I think our teams work really well together. So, you know, so far, so good. But, again, it's not supposed to be a, you know, I guess maybe said differently, there's such a huge opportunity to put up our de novo centers, and we feel like such a massive market. And we really, you know, as we just talked about, as far as the scaling goes, we really feel like we have the ability to both, continue to improve the results of every individual vintage as well as put up more and more centers every year. And so the nice thing is we can just keep doing that and have a very, very strong growth trajectory for a very, very long period of time. And while Walmart loves to go to some more rural markets and potentially grow a little faster, we don't need that to really, I think, be incredibly successful. So the bar is pretty high. We're not really chasing a business opportunity. I think we're being – opportunistic restaurants that could take it to another level. So we want to make sure we have a lot of conviction around that. So that's how we're looking at the opportunity today. And Walmart, as you know, is massive, right? Just the number of employees they have is a health plan in itself. And so I think they're going to keep investing in a number of different opportunities. And obviously, on the telehealth front, they just made an investment in But that obviously is also, you know, very different than what we do here at Oak Street. So I think there's plenty of opportunities to still work with them. And, you know, we are optimistic about those centers but, you know, haven't obviously made a decision of what we're going to do going forward.

Thank you.

Your next question comes from the line of Ryan Daniels from William Blair. Please go ahead. Your line is now open.

Yeah, guys, thanks for taking the question. Mike, I wanted to go back to your prepared comments. You talked a little bit about a resumption to normal with some of the community marketing events. And I'm curious, as we go through the back half of the year, assuming things continue to stabilize with the pandemic, will you reallocate dollars more towards community marketing, or will you continue with some of the digital initiatives you did last year and, along with the community, maybe hope that that amps up member acquisition into 2022?

Yeah, thanks, Ryan. Definitely the latter. If a channel is working and it's bringing in patients below kind of our cost acquisition threshold, then we're going to keep doing that channel because we have, you know, obviously a large amount of capacity within our centers that we can fill up. And, you know, again, as long as the cost acquisition has a strong ratio and when we look at kind of comps in other industries, you know, our CAC to LTV ratio is, really strong still, we want to keep doing those channels, right? We want to fill out centers faster. And if you fill out centers faster, you obviously kind of bring forward the positive economics that you see when centers get closer to full. So if something's working, and digital is certainly working and below our cap thresholds, we have no plans to lower the spend against it. You know, I think if we can find ways to put more sales and marketing dollars to work at positive caps, We will absolutely do that. And I'm hopeful we'll keep finding opportunities to do that. That said, we are incurring today the cost of our community marketing approach. We have our outreach executives, kind of our on-the-ground field team. They're at every center right now. They're out there working today. They're not as effective as they were in 2019 pre-pandemic. but they're getting better every month. And I think as society continues to reopen and they have more and more opportunities to meet people, I think they'll continue to get more and more effective. So I think both, as we see opportunities to invest more in sales and marketing, we will certainly do so. But I guess we can get the best of both worlds having our central and digital, all their central channels up and running and have our field base up and running without having actually a significant increase to our sales and marketing because we're already incurring a lot of that cost.

Okay, that's helpful, Collar. And then as my follow-up question, just wanted to get an update on some of the new clinical programs and initiatives that you're planning for this year. I know you spent some time talking about those investments last quarter, so I'd love to get an update on progress there, if any have rolled out, any early results, just any, Collar, you can offer. Thanks, guys.

They're in the process, and some of them around additional care in the home and some more updates to our behavioral health program and the kind of ESOD-focused program. They're all in various stages of piloting being rolled out. And just to give you a little bit more context on what that means, when we think about a new program at Oak Street, You know, we are constantly evaluating, you know, really dozens of great opportunities, but what we are really, really disciplined about at Oak Street is not throwing a bunch of stuff at the wall and seeing what sticks, but making sure when we do a program, we're very methodical about it. And so we'll kind of think through, hey, of the dozens of things we can do, what are the kind of three to five that we feel the most confident about? How do we then develop the program, pilot it? If the pilot works well, do a beta test. If that works out well, roll it out more broadly. And we roll it out more broadly, we need to make sure it's integrated into Canopy. We need to make sure we have the reports and data. We need to make sure we have incentives aligned across teams, that we're doing the change management work that's in the center, et cetera, et cetera. So it's a pretty thorough and comprehensive process. Again, I think that's one of the really important parts about Oak Street is not just we say we have all these different programs, but we run them every center every day until the patients need them. And it's really a very consistent application of the model, which drives in the consistency results across vintages and across markets. And so we are in that process right now, depending on which of those programs I said, you know, different stages, but none of them are in the stage where we're fully rolled them out, where we really have results against them. So I think we remain optimistic, and the ones that are in pilot mode, the initial pilot results are good, but it is still too early for us to declare victory, and they're certainly not kind of fully operational yet.

Your next question comes from the line of Sean Whelan from Piper Sandler. Please go ahead. Your line is now open.

Thanks very much. Good morning. My question is on the comments you made on Canopy, specifically its ability to improve accuracy of admission and mortality predictions. Just maybe if we can go into a little bit more detail on exactly, you know, what are the inputs there and what makes these algorithms unique in your ability to do that? And secondly, do these algorithms offer you the ability to predict economics of either new centers, new markets, or even down to the risk forecasting and risk scores of patients? Thank you.

Yeah, thanks, Sean. So I think... I'm quite biased, but I think one of the things that makes Oak Street so impactful and so effective is the whole is much greater than some of the parts. And so it's not just about doing machine learning on a big data set. I mean, that's something that many organizations can do, but it's about the ability to really create a really differentiated data set and then do the machine learning on the data set and then apply what comes out of the algorithms to actually drive action and change trajectories for patients. And so if you think about the data elements, some are your basic healthcare data elements around claims and admissions and types of claims and things of that nature. Some are basics like demographics. But a lot of the data points are things that we are understanding about the patients because we spend a lot of time with them on an intake process. So we have a very thorough and systematic intake process that all of our patients go through. We spend six times as much time with new patients, like in their first month and a half, than we do kind of on an ongoing patient on average. And that allows us to really get to know the patient well and gather a huge amount of information on that. We have huge efforts to gather, you know, med records across the system, and we use kind of natural language processing and things like that to read the med records. And we, in some cases, have, you know, coders, nurse coders who will read through them and determine kind of here's the risk factors for the patients, here is why that patient has different chronic illnesses or different activity of living challenges, et cetera, et cetera, et cetera. So really, sponge is for all the information we can gather. And sometimes that's a health information exchange. In some states, those work pretty well. In some states, they don't. So, I mean, healthcare is the only industry I know of that still uses faxes. So, great, we'll get faxes in and we'll upload those and digitize them and go from there. So, what we're doing is really from all the kind of third-party information we can gather on our patients, plus all the information we are gathering, spending a lot of time with those patients in their first part of time at Oak Street. And then ongoing, we're spending, obviously, significantly more time with our patients than the average doctor. We're creating a really – differentiated data set. And part of that data set is the subjective judgment of our doctors. We want that, right? We want our doctors to use their judgment because they've seen a lot of patients and there's things that sometimes data can't pick up that a doctor just seeing the patient and spending time with them can't. So we'll put all that together, which creates a pretty unique data set. And that's the data set that we will do these You know, use this machine learning algorithms on. And then, yes, we use it certainly more than just the two data points I share. Those were just the two that got published in the New England Journal of Medicine Catalyst article. But, you know, there's other things we can predict and other things we can analyze about our patient population. It is much more focused on the patient level than kind of the center or market level today, because that's really where care is delivered, right? And so if we can better understand our patients and their risk of going to the hospital and obviously other risk factors we also look at, we have a readmissions risk model, for example, that's been highly predictive. If we can better identify who's at risk, then we can spend a lot more resources to get in front of those challenges before they happen. And the more you can pinpoint the patient at risk, the more you can intervene. And it's a positive cycle, right? Because then you intervene and you figure out, hey, some of them are false positives. That's okay because the ones that are real, then you can understand even more and more and more and keep investing in the right places. So that's kind of how we think about those models working. And, again, I think it's something that – the kind of machine learning and data science is an important component, but it's necessary but not sufficient to get this type of result. You also need the ability to pull in kind of more and different data types in the beginning, and then you need the ability to act upon that data. But if you have all three of those, you can really make a big difference.

thanks for that um so is it am i reading too much into this your your commentary around the the predictive elements of the algorithms and then you saying economics will be better than you thought in the direct contracting are those two statements related or no um

They're related in the fact that one of the reasons we can generate really strong patient surpluses is because we're able to identify our at-risk patients and we're able to act upon it to keep them healthier, right, which obviously is one of the reasons we are able to drive non-medical costs. One of the reasons we have improved over time in our care model effectiveness is we are much more effective at using data and identifying who's at risk, and Canopy allows us to act upon that in a more systematic manner. The Oak Street care model today is better than it was four or five years ago. It wasn't bad four or five years ago. It's actually really good, but it's even better today. I think to that extent, yes. We are not saying, hey, we have these great predictive algorithms and they are predicting the med cost for our traditional Medicare patients is X, therefore there's our direct contracting. The actual real improvement in patient outcomes that drives the surplus is in part driven by a lot of things, but in part driven by Canopy and the data algorithms. Those things aren't used for finance. Tim's not the customer of those data algorithms. It's really more of our doctors. Great.

Thanks for the clarification.

Your next question comes from the line of Kevin Fishbeck from Bank of America. Please go ahead. Your line is now open.

Hey, good morning. This is Adam on for Kevin. Quick question about the quarter, and then I have a follow-up question. With the guidance raised, how much of it was due to sequestration related to the revenue in EBITDA?

Yeah. Hey, I'm Tim. So, as folks know, the sequestration holiday was extended from just Q1 of 2021 through the remainder of the year. That is a bit of a pickup from a revenue perspective. Typically speaking, our The revenue we received from plans is reduced by that 2%. So there is a bit of a pickup for the last three quarters of the year relative to what we had before. So it's included in there to a degree. And it also increased our medical costs for the year. So I think from a net impact. The benefit of sequestration is relatively small. It's essentially our MLR applied against the incremental revenue for the year. So sequestration is in there to the degree that it impacts our business. So X that, it was things we're kind of tracking in line. Yes. I mean, I think we are, like at this point, it's only May, right, so early May at that. So we continue to be very optimistic about the prospects for the remainder of the year, as you can tell by the increase in pretty much all the metrics from a guidance perspective. But I think we'll continue to see how things develop for the remainder of the year and update you all as we learn more.

Okay, and then my actual question is, there was a million-dollar acquisition in the cash flow statement. It's obviously really small, but with all the new cash on the balance sheet, just kind of wondering what the latest thinking was around M&A and if we're going to see more of these kind of – I mean, that's a really small deal, but that's kind of a signal of more to come.

Okay, this is Mike. I think we'll continue to be opportunistic on the M&A front. And I think that can take a lot of different shapes. So in that case, it was a very small practice that we just closed on and we're beginning to integrate. And when we think about M&A on a practice front, The key is we're not going to buy things and kind of be an overlay business, right? There are people doing that. That's not what Oak Street does. We believe the effectiveness of our care model is having it focus only on Medicare patients and having it be kind of run in its full, right? And I truly believe what I said in the last question where the whole is much, much greater than some of the parts. We have a lot of parts. We need to run all those parts. And so that means we can't just have a normal physician's group that sees all different age of patients and kind of with normal staffing and just kind of put our model on top of it. That doesn't work. And so in the case where we do acquisitions, we will, for lack of a better word, break the practice apart and, you know, in some cases keep running a practice that sees commercial patients. and younger patients, but then take the Medicare patients and see them separately. Sometimes we will wind down the practice and see the Medicare patients out of our center. So there's a couple different ways we can execute upon this. But the key is really the doctors and the practice. And if they believe in the way Oak Street practices medicine, they want to see patients within as part of Oak Street, we can try to find a way to compensate them for what they've built as independent practitioners, but then bring them onto our model. They're just looking for a check for what they built. That's not going to be a great fit with us because we practice medicine differently and it works very effectively, but we need to keep that from a culture and a patient-focused perspective. In the case of the one that you're referring to, which obviously was a very small practice, it was a couple of doctors who were We're relatively far along in their careers. Their panel was mostly Medicare patients already, just naturally, and they love what we're doing. They actually found us and said, you know, is there a way to work together? And so we were able to make it work out, and their number of patients won't look different than ours. the rest of the patients we care for. So that will be something we do. But again, we're talking about a million dollars in the big scheme of things for an expenditure on that one. And so I think there'll be some small ones like that that are much more opportunistic. Will we do bigger M&A? I mean, that's not a core part of our strategy. So if obviously something presents itself that we feel very strongly about, we can always We'll look at it, but right now, DeGenova has remained the biggest approach, and I think the – I almost think about these small tuck-in acquisitions as almost an extension of our sales and marketing activity.

Makes sense. Appreciate it.

Your next question comes from the line of Lisa Gill from J.P. Morgan. Please go ahead. Your line is now open.

Great. Thanks very much and good morning. Mike, I just wanted to start with your initial comments around vaccinations. You said 105,000 people have been vaccinated. Can you talk about how many of those are your existing patients? And is this a potential recruitment tool? So, you know, bring people in, see the opportunities of an Oak Street vaccine. So that would be my first question. And then secondly, I just really want to understand your telehealth strategy and how that fits into Canopy. I know we've talked in the past about longitudinal care, but how do you see your telehealth offering over time?

Yeah, on the first question around the vaccinations, I mean, first and foremost and most importantly, we're really proud of our vaccination effort because it really helped positively impact the communities we serve, many of them some of the hardest communities hit by COVID. And so we were really glad to step up, and we were very early on, we were doing 1A, you know, healthcare workers in the city of Chicago and Cook County and other places asked us to help them vaccinate, you know, healthcare providers who weren't familiar with big hospital systems. They were having trouble finding places for them to get in. So we gladly took that stuff on and did it nights and weekends. So it was a broad effort. The vast majority, obviously, of those 105,000 people were older adults, given who we serve. And, you know, I do think historically the more people spend time with Oak Street and get to know Oak Street, the more excited they are about it and the higher percentage of them that become patients. And so one of the reasons why our community marketing efforts in 2019 and prior were so effective is because you really are taking something that sounds too good to be true and you're making it real. You are taking something that people aren't really shopping for as a consumer, and you're helping them understand why there's something better out there. So many times our patients are just going to the ER for their care prior to becoming part of Oak Street, waiting until they're sick. They have a doctor's office, but it's generally a federally qualified health center, kind of a standard doctor's office as part of a hospital system. It's hard to get appointments, right? four-week wait to get appointments, and the appointments are short, and they can't get follow-up. They may have a doctor. That's not the type of care that they need. The challenge for us is that people don't realize there's something better. Their expectations are so low that they accept them. The more we can meet people, the more we can educate them about what Oak Street does, and really educate them, most importantly, about what they need and what they should expect from care and how that will improve their overall well-being. People are pretty likely to join us as patients. So I'm hopeful we'll see the same thing and optimistic. And we're starting to see for people that met us from the vaccination standpoint, You know, I grew up in the Chicago area, and so not too far from one of our centers in the suburbs. And, you know, when people who were, you know, people I knew or, you know, old neighbors, things like that, some of them got vaccinated at Oak Street. And, you know, they were really impressed, right? Now, this affects the question of why they weren't patients already at Oak Street, but... They came back and said, wow, your center is really nice, and I didn't realize how great it was. And I was like, guys, what have I been saying to you guys? What's my mom been telling you for the last seven years? Jess is bragging about her son, right? This is real. But I think that was a – it kind of opens your eyes about how much – how much of an opportunity we have to continue to reinforce, you know, our message, our brand, what we do, because, you know, even people that really should know about Oak Street and why it's special still really surprised when they visited the centers for the first time. And so I think a long-winded way to say, yes, I would hope that this will become a tailwind for growth, but I think it's just the tip of the iceberg around what we can get back to as far as working in the community and educating people about Oak Street now that, you know, side. That's your first question. On telehealth, You know, I think we look at telehealth as really for two purposes, right? You know, purpose number one is to have a option for our patients that is more convenient for them when they want it. And that telehealth is not just kind of a longitudinal wellness check. It's also kind of on-demand telehealth if they have urgent needs. And so it does allow us to kind of add more – kind of tools in our toolkit, so to speak, to meet our patients where they are to improve their experience and improve their quality of care. The second thing I think it lets us do is kind of more efficiently open up kind of more touch points, right? So maybe not a full visit, right? But it's just a quick telehealth interaction, right? And I think one of the things that we are breaking at Oak Street, because we're not encumbered by fee-for-service economics, is kind of this idea of what a visit is with a doctor, right? I mean, there's kind of a very well-defined interaction as a provider visit, and a lot of that's driven by what you need to do to build that visit, right? And even on the telehealth front, there's some of that still. I know the telehealth is billable. We really don't care about that, right? We care about interacting with our patients and intervening when it's necessary or kind of want to manage them and get ahead of things. And so when you think about that way, you can blur the lines a bit between what's a visit and what's not. And I think telehealth is great there because it allows you for a more personal interaction between a phone call and actually bringing someone in person. So, you know, right now telehealth is a small fraction of our visits, not because we don't want to do more telehealth, but because that's what our patients want, right? Our patients so far have strongly preferred coming in to see us in person. You know, part of that's due to the demographic we serve. I think part of that is due to the, you know, relative clinical complexity of our patients. But I do think as telehealth becomes more prevalent and as people age in who are now using telehealth for the first time younger, I think it will continue to be a larger portion of of what we do. But I think it gives us a really nice complement to our model. And we really aim to have, and I feel very strongly about this, if you have kind of a telehealth option that's separate from the primary care option, you are creating issues of coordination, you're creating more fragmented care. And we need to do the opposite. We need more coordination and less fragmentation in patients' care. And so that's why we aim to have a longitudinal telehealth option, which is by the same provider that provides them care in person. On top of that, we're going to have the more urgent telehealth option that we'll likely be a different central nurse practitioner, but we'll have the same records, same care plan, same access to canopy, et cetera. And so by doing that, we can really create a seamless experience, but more importantly, a coordinated, non-fragmented care environment for our patients across all these channels.

Great. Thank you very much.

Your next question comes from the line of Justin Lake with Wolfe Research. Please go ahead. Your line is now open.

Thanks. Good morning. A lot being covered here, but I have a few follow-ups. One, just want to make sure I heard correctly, Mike, you said that all things being equal, I think it was a response to Bob's question around center growth. we could think about a similar increase in centers over the next couple of years relative to what you increased from 20 to 21, as long as things are kind of going similarly in terms of improving economics.

Yeah, that is what I said. And after hearing it read back to me, I agree with it still. So I think, yes.

Good, good. And then I wanted to follow up on the direct contracting. Specifically, I think what you had said previously was that you expected the claims-aligned members to have economics that were materially lower than an uncertain relative to Medicare Advantage. And now it sounds like you expect the entirety of direct contracting to be kind of in line with Medicare Advantage economics. So is that what you're kind of seeing out there? So the revenue's that much better? That's you know, we expect it all to be kind of similar to MA?

I mean, with a bunch of asterisks on it, you know, we're a month into the program and we're getting early data, et cetera, et cetera. I mean, yes, from both the more detailed methodology that we've now understood, we've gotten more into the program, as well as what we're seeing from the initial revenue and kind of historical cost data. Yes, we feel like kind of across the book it will look a lot similar to MA.

Okay, and especially on those claims to line members, I wouldn't expect there to be much of a ramp to the extent you've been seeing them for a year or two. You know they're kind of medical issues, all that. Is this something where, you know, in the next couple quarters, you should be able to tell us kind of what's going on with those members and, you know, we should be seeing them kind of running a real meaningful margin?

Yeah, Justin, I think it's a good question. I think we are undecided at this point, and I hear the request, but as far as how much we're going to break out, you know, kind of our different patient components and different patient groups. And so, you know, I hear the question. Again, my expectation is the contribution will look very similar from a to kind of our MA book overall on our direct contracting book. But, again, I think we're still figuring out exactly how we're going to report what. And we don't want to break out too granular things because, you know, 6,500 patients, like three months and 6,500 patients is not actually sound either, right? So, you know, we know revenue, we know historical costs, and that will give us a good sense. But, you know, that small of a book will be some movement that's just driven by small numbers. Okay.

Maybe, Justin, if I could just add to that to Tim. You know, Mike mentioned this earlier. We have a lot of data on our patients, but until we see what specific patients flow through on the actual direct conference rosters, it's hard to know exactly what all the data will look like and, therefore, what you get paid. And I think as we've gotten more data and it's confirmed what we had hoped to see, we've been more positive on what the economic opportunity could be, to Mike's point. And then one of the benefits, as folks know, you know, when we take on, take Medicare Advantage, new Medicare Advantage patients onto our platform, take some time for us to document and understand their health conditions. And that blows through in the form of higher reimbursement in future years, but those are annual cycles, like I said. And direct contracting, since we've been seeing these patients, some of these patients for a number of years, that we've already gone through that period of time, and therefore as patients, as we convert into direct contracting, we'll be able to have more tenure-type economics in some patients that we've been seeing for a while. And I think that dynamic was entirely well understood when we first started talking about this program a few months ago.

Makes perfect sense. Thanks for all the callers.

Your next question comes from the line of Elizabeth Anderson from Evercore. Please go ahead. Your line is now open.

Hi, guys. Thanks so much for the question. My first question is in terms of the cost of care as we sort of move through the year, I think you talked about some of the reopening and that kind of thing, but is there anything else you would point to in terms of the pacing of that cost of care as we move through the year?

No, I'd say, Elizabeth, this is Tim. Good morning. It's going to follow the timing of new center openings. So, you know, as we open new centers, obviously, we're going to incur the costs associated with opening those centers. And so we would expect that the cost of care dollars to increase commensurately with the acceleration of new center openings in the latter half of the year.

Okay, that's very helpful. And then as we move through the pandemic, is there any changes in your thoughts about providing specialty care in any kind of specific areas, whether, you know, mental health or, you know, cardiology or any other kinds of areas or any kind of mix shift on that front?

Yeah, so we actually already provide a large amount of care for our patients on the mental health front. We have an integrated behavioral health program, including – licensed clinical social workers as a specialist on the ground, and we have a team of psychiatrists who kind of support them and will provide kind of in-person psychiatry for patients who need it. So that is something we are really kind of already doing, and it's a pretty core pillar of our care model. The things like cardiology and things are things we're assessing. you know i talked earlier about how we have you know dozens of things we could do every year and certainly one of those is cardiology i think if we the next specialist we're adding i guess would be cardiology because i think it is pretty pretty close into primary care um we're able to get some of the benefits of having our own cardiology group by by working with um uh e-consults with specialists there's a there's a um a great company called Rubicon who we work with who does a very nice job of kind of providing our doctors the ability to kind of have a consult with a specialist, cardiology being one of them. And so cardiology is a good example of something where, you know, oftentimes it's not that the person needs to be seen by the cardiologist, but you really want to have the person's test results and kind of condition run by someone who's got a bit more expertise, especially for newer primary care doctors who are, you know, less experienced. have less at-bats with these conditions. And so that's a great way to leverage kind of the e-consult business. I think over time, non-interventional cardiology could be a good candidate, something to bring on for Oak Street. But again, if we do it, it's certainly not to generate volume or revenue. It's really to lower our costs by providing better coordinated and focused care for those conditions.

Got it. That makes a lot of sense. And do you use Rubicon for anything besides cardiology? Or is it sort of more focused in that area?

No, no. It's across specialties. And, again, if you think about the type of specialists, it's the ones that are, you know, much more like a, you know, a specialized primary care visit are great candidates for e-consult. So, yeah, we use it across specialists. You know, some specialists you actually need to get certain testing or procedures that only a specialist can do. But when it's more just the consultations, it's a great tool.

Yeah, that makes sense. Thank you.

Your next question comes from the line of John Ransom from Raymond James. Please go ahead. Your line is now open.

Hi. Good morning. How should we think about, you know, if an MA plan, for example, has a good loss ratio quarter in March, you know, what is the lag in terms of how you recognize either higher or lower costs? you know, with your population, just kind of based on your true ups and some of the natural lag in your, you know?

Hey, John, it's Tim. What I would say on that is that obviously we were receiving plans, data from plans on a bit of a delayed basis, right? So a plan is going to receive the claims, process those claims, and send us a file. And so there's just some natural latency in that process. So it can be, you know, roughly a month to two months depending upon the plan and the quality of the data flow. That being said, with respect to your question as it pertains to accruing from medical costs, there's also a factor of just How do we accrue for our patients versus what work or how do the plans accrue? Methodologies might be slightly different. At the end of the day, we're looking at the same type of data, but the approach to that might be different. And I'd say one of the challenges that we have with a population size of 75,000 at-risk patients is very different than taking a large national MA plan that has millions of patients. They're going to see far more. smaller amounts of variability in their data because they're looking at basically national-level trends, whereas we're going to see greater volatility given the fact that we're looking at a smaller data set across more specific markets. So I would say all of this work is more art than science, of course, but when it comes to Oak Street compared to a national health plan, it's going to be even more so that. The last thing I'd say is just remember our patients are Medicare Advantage patients. on the at-risk side, and therefore, you know, what we're going to experience is going to be far more related to that specific population versus a more diversified payer that might have a large commercial book that might be seeing other trends in the market that might be different than what we experience for seniors.

Okay, and thank you. And just a follow-up question, you know, you're, you know, given your pace of openings, you're in a war for talent with respect to some scarce assets like primary care physicians and psych, you know, psych people in behavioral health. Just, you know, what's your kind of state of the world in terms of being able to staff this opportunity relative to any point in the past?

Yeah, I think actually in a lot of ways it's very similar to how we think about patient acquisition. You know, we need a really strong value prop for our team, and I believe we have one. And we regularly survey our provider group, and 95% of them say they'd recommend Oak Street to a friend or family member as a place to work, and 99% of them say Oak Street allows them to do their best work. So we believe we have a really strong value proposition for our clinicians because we Most clinicians didn't go into medicine to generate fee-for-service volume. They went into medicine because they want to help people, they want to keep people healthier, and at Oak Street Health, we give them the time and the resources to do that, and we compensate them for keeping people healthier. And so I think a lot of our clinicians really, really appreciate that. And we certainly, you know, have had success in the past and continue to have success hiring great clinicians to our platform. I would say some of the best clinicians because they want to practice medicine differently, they understand the Oak Street model, and they really want to be part of it. So I think that's one of the, I think, frankly, advantages we have is we're not we're not relying on trying to, you know, purchase or partner with an existing practice and kind of whatever kind of clinicians and their attitudes and their talents and their culture that exists in the independent physician world we're kind of encumbered by. We can really pick and choose who we want, and we think we can attract the best because of our model. And just like, you know, from a patient standpoint, we're out there every day and our team's out there every day, really, helping to get more awareness in the physician and the nurse practitioner community about Oak Street and why we're a great place to work. And the more people learn about us, the more we're able to hire. So we feel really good. I don't know if I would call it a talent war, but we feel great about our ability to hire outstanding clinicians. I think we have an amazing clinician team, and I think we'll keep adding to that because the value prop for them is phenomenal.