Oak Street Health, Inc.

Good morning and welcome to the Oak Street Health Fiscal Second Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. In the interest of time, and to allow as many participants as possible, please limit your questions and won't follow. Please be advised that this conference call is being recorded. Hosting today's call are Mike Picos, Chief Executive Officer, and Tim Cook, Chief Financial Officer. The Oak Street Health Press Release webcast link and the other related materials are available on the Investor Relations section of Oak Street Health's website. These statements are made as of August 10, 2021, and reflect management views and expectations at this time and are subject to value risk. uncertainties and assumptions. This call contains forward-looking statements and data 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, good, estimate, expect, intend, may, plan, potential, predict, project, should, target, will, and would are 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 our maintained profitably. Our reliance on the limited number of customers for a substantial portion of our revenue, our expectation and management of future growth, our market opportunity, and our ability to estimate the size of our target market. The effects of increased competitions as well as innovations by new and existing competitors in our market. and our ability to retain our existing customer and to increase our numbers of customers. Please refer to our annual report for the year ended December 31st, 2020. File the form of 10-K 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 the statements. These goals include non-GAAP financial measures These non-GAAP financial measures are in addition to and not as a substitute, 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 reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure. With that, I'll turn the call over to Mr. Mike Pikus, CEO of Oak Street. Mr. Pikus?

Thank you, Operator, and thank you to everyone that is joining us this morning. Joining me today 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. Our team has continued to adapt to changing conditions around them, and we've settled into operating all aspects of our model with COVID remaining part of our lives. We are encouraged by strong results across majority of the drivers of Oak Street's performance. We have strong revenue growth during the second quarter, driven by patient growth in center and corporate costs were in line with expectations, resulting in increased operating leverage for the business. We are ahead of pace on center openings, and our growth outlook remains encouraging on both the patient and center level. Despite this performance, medical clinic expense was higher than projected in the first half of the year, leading to a higher than expected adjusted EBIT loss in Q2. Looking forward, due to the increase in cases driven by the Delta variant, as well as unknowns around the shape of the COVID recovery, we are projecting similar levels of medical costs for the remainder of the year. However, based on the results year-to-date on patient growth and the disease burden of our patients we are capturing, we are confident our patient and center-level economics will return to historic levels in 2022, even at this level of medical costs. When medical costs return in whole or in part to pre-pandemic levels, we expect to see a step-up in those economics. For that reason, we remain confident in our unit economics and are planning to increase the basic center expansion in 2021, raising our new center guidance to 46 to 48 new centers. The second quarter was a time of transitioning back to focusing on our core model for Oak Street. The quarter opened in the midst of an all-hands-on-deck approach to vaccinate our patients and communities. We delivered over 108,000 vaccine doses, and when the vaccine was in short supply earlier in the year, we took a resource-intensive approach to ensure doses were going to residents of the communities we serve, many of which were disproportionately impacted by COVID. As the second quarter continued, and we were able to vaccinate the vast majority of our patients and teams, the all-hands-on-deck approach was wound down, and we refocused our efforts on the core of what we do, keeping patients happy, healthy, and out of the hospital. At this time at Oak Street, COVID is still a factor that is not the factor that consumes the primary focus of our teams. As the country has returned to normal, we've been rolling out the community marketing approach that was the foundation of our sales and marketing results pre-pandemic. We're in the midst of our Meet Me at Oak Street campaign, in which we are hosting flagship events at all 100 of our centers. These events are generally held in the parking lots of our centers and have themes chosen by our local teams, such as a Welcome Back America Jazz Jam at one of our Philadelphia centers, a Taste of Avalon Park at one of our Chicago centers, and a Senior Resource Expo at a center in Dallas. We've averaged over 150 senior attendees per event so far and are on pace to host over 15,000 seniors. In addition to being a great way for us to meet older adults in our communities, as we give them an opportunity to get out and socialize, the event also gives us an opportunity to introduce or reintroduce ourselves to chambers of commerce, community groups, local politicians, and other community partners, setting up the opportunity to schedule smaller events over the months and years to come. We are excited to build back to the volume of events we had in 2019, when we conducted an average of 400 events per center. While the meet-me-at-ostitute events and ramp of our community marketing approach will not impact our financial performance until Q3 to some extent, and even more so in Q4, we did see the early returns of our outreach team being able to return to the community, as well as continual execution of central growth channels in our Q2 performance, as evidenced by the higher than projected revenue and patient growth. We generated a record revenue of $353 million in the quarter, exceeding the high end of the guidance and representing 65% growth compared to Q2 2020. bringing our growth for the first half of 2021 compared to the first half of 2020 up 56%. We expect a 47% pace of growth from Q1 2020 to Q1 2021 to represent a low point for the next several years. The first half of the year showed a large increase in third-party metal costs compared with prior experience and was higher than our previous projections. We believe this increase was driven by the direct and indirect impact of COVID across three primary categories. First, cost from emissions. In the first half of the year, Oak Street experienced $15 million of direct costs from COVID admissions. COVID admissions were highest in January, began to drop in February, and were reduced by 97% by June from the January peak, which we believe was driven by both the efforts of our team to get our patients vaccinated as well as lower community infection rates. Second, an increase in non-acute utilization. Non-acute utilization, including special visits, diagnostics, and outpatient procedures, significantly increased in March following the vaccine roll-off for older adults. Non-acute utilization was $80 p.m. p.m. higher in March than our average monthly non-acute utilization in the second half of 2020, and a similar amount higher than our non-acute utilization in 2019. Our April results, while not as complete as March, suggest a similar level of non-acute utilization. We booked Q2, assuming this increase in utilization will continue, leading to an increase of $24 million of medical costs from March through June. We believe this is driven in part by increased comfort with patients to access medical care following vaccination, relaxed payer standards due to public health emergency, and specialist and hospital system behavior. Third, significantly higher new patient medical costs compared to what we've seen in the past. New patient medical costs were 50% higher than what we've seen historically for new patients. This increase in new patient costs drew up $20 million in higher costs for the first half of the year. Despite the increase in notice costs, we only saw a small increase in the risk score for these new patients compared to the new patients in prior years, which we believe is driven by lower engagement by the healthcare system in 2020, which flowed through to 2021 revenue. As a reminder, risk scores lag a year and depend on diagnosis captured during provider visits. Thus, the lack of engagement likely had a double effect of reducing the incoming risk score, but also likely increasing disease burden of the patient. The total result of the above is an additional $59 million in third-party medical costs for the first half of the year, driven by the lingering impacts of the COVID pandemic. While we did project a portion of the above costs, the magnitude was higher than expectations. The higher-than-projected COVID-related costs offset improvements in other medical cost components, favorable prior period adjustments, and strong performance in other business drivers. The net result is an adjusted EBITDA loss of $53.5 million for Q2. Our increase in medical costs was concentrated in our D-SNP and MA-HMO patients. Our PPO patient medical costs were essentially flat, which, given that our PPO patients as a whole are higher income than our HMO and D-SNP patients, leads us to believe the results we are experiencing are being exacerbated by social factors and their impact on lower-income older adults during the pandemic. Because of the payment lags, we have the best data availability through April of this year. We booked May and June with an equivalent PMP and medical costs to what we experienced in the first four months of the year. Looking forward, our updated guidance reflects the med cost increase observed in the first half of the year continuing throughout the year, given uncertainty around the impact of the Delta variant on COVID hospitalizations for older adults, lack of precedence around elective utilization on the tail end of a pandemic, and our expectation that new patients will continue to have a higher disease burden compared to past experience. Our care teams are laser focused on continuing to elevate the care provided to our patients, and we aim to reverse the trend observed from that across the second half of the year, although we've not concluded the potential for this improvement into our guidance. Based on the data collected year-to-date, we have seen that the disease burden of our patient population is substantially increasing compared to prior years. This is true both for new patients, as discussed, as well as for existing patients. This leads us to believe that despite capturing similar overall disease burden on our patients in 2020 as we did in 2019, the challenge with caring for patients in the early days of COVID resulted in us not capturing the increased disease burden of our patients that we are observing this year. The disease burden we are capturing on our patients today will not translate in the corresponding increase in revenue until 2022. From our results to date, we expect the increase in revenue per patient in 2022 to offset the increase in medical costs per patient we have witnessed this year. Said another way, even if the elevated medical costs witnessed in the first half of the year continue going forward into 2022 and beyond, with the increased revenue per patient associated with the increased disease burden of our patients, we'll actually have a similar patient contribution in 2022 compared to 2019. If COVID-related medical costs recede, causing medical costs to revert to a level more in line with what we have witnessed prior to the first half of this year, and or our care model is able to further impact the cost trend, we will see significant improvement in per-patient contribution compared to 2019. This, combined with a strong result on patient growth and operating costs, give us confidence in the continued strength of our center economics and center ramp. Additionally, despite the medical cost headwinds, we are still seeing our immature centers performing ahead of our de novo ramps. For these reasons, we are raising the guidance around the number of new center openings from 38 to 42 to 46 to 48, as we are confident in the durability of our core economic model and believe the additional centers will drive increased profitability in 2023 and beyond as they mature. In summary, we are encouraged by the performance across the majority of our results in the quarter, including strong patient revenue growth and increasing operating leverage. The lingering impact of the pandemic led to increased medical costs and to lower than expected adjusted EBITDA, but we believe the medical cost impact is temporary in nature, and our financial performance will be boosted by the expected increase in per patient revenue in 2022. Our confidence in the future strength of our unit economics gives us the confidence to continue to increase the patient-centered expansion, and we're enthusiastic to continue to build a transformative organization. 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 produced another strong quarter with $353 million of revenue, up 65% from a year ago, and exceeding the high end of our guidance range by over 10%. Patient demand for Oak Street remains high, as we provided care to 122,000 total patients during the second quarter, and our at-risk patient base, which now includes our direct contracting patients, grew by 54% to 88,500. At the end of the second quarter, we operated 95 centers, to an increase of nine centers compared to March 31, 2021, and 41 more centers than we operated at the end of the second quarter of 2020. Capitated revenue for the second quarter of $346.7 million represented growth of 67% year-over-year, driven by a 54% increase in our at-risk patient base and an increase of approximately 9% in our capitated rates attributable to increased premiums from higher acuity patients. Total revenue grew 65% year-over-year to $353 million, primarily driven by the increase in our at-risk patient base. Additionally, $14.5 million of cap-stated revenue in the second quarter of 2021 was related to prior periods. $10.7 million of this amount pertained to our 2020 financial results, primarily related to the full-year payment for 2020 risk adjustments and patient retroactivity. And the $3.1 million balance was related to Q1 2021 patient retroactivity. As a reminder, patient retroactivity is typical and occurs when health plans pay Oak Street retroactively for patients managed in prior periods but not previously included in our rosters and therefore not previously recognized in revenue or medical claims expense. Our medical claims expense for second quarter 2021 of $281.4 million, representing growth of 81% compared to second quarter 2020, driven by the 54% increase in patients under capitated arrangements and an 18% increase in cost per patient. Mike already walked the key drivers of this increase, but I would add that our second quarter results included $19 million of negative prior period development, $24 million of which was related to Q1 2020, offset by $5 million of prior period favorability related to fiscal year 2020. The negative prior period development related to Q1 2021 was due to us having relatively limited claims data when we closed the first quarter and claims volumes ultimately being greater than we estimated at that time. Upon receiving incremental data in the latter half of the second quarter, we better understand the drivers Mike walked through a minute ago. Our cost of care excluding depreciation and amortization was $67 million increase driven by increases in salaries and benefits, occupancy costs, as well as higher medical supplies and patient transportation costs related to a 76% increase in the number of centers we operate and growth in our patient base. Sales and marketing expense was $25.9 million during the second quarter, representing an increase of approximately 156% year over year. It was driven by greater advertising spend to drive new patients to our clinics and net headcount growth. As a reminder, sales and marketing expenses artificially inflated on a year-over-year basis, as it was partially depressed during Q2 2020 due to the COVID pandemic, which included a temporary suspension of community outreach activities, the furlough of our local outreach teams, and other marketing missions. This increase also reflects an investment to support our significant year-over-year growth in new centers and new markets. Corporate general administrative expense was $74.2 million in the second quarter, an increase of 139% year-over-year. Stock-based compensation expense was the largest driver of the increase, representing $39.7 million in expense in the second quarter of 2021, compared to $4.2 million in the second quarter of 2020. As a reminder, the increase in stock-based compensation is primarily 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 $34.5 million in the second quarter of 2021, an increase of 28% compared to the second quarter of 2020, driven by primarily headcount 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 medical claims expense, grew 24% year-over-year to $65.3 million during the second quarter. Platform contribution, which we define as total revenue less the sum of medical claims expense and cost of care excluding depreciation and amortization, was $4.7 million, a 76% decrease year-over-year, driven by the previously discussed increase in medical claims expense, as well as a significant growth in our center base and therefore the portion of our centers which are immature. Adjusted EBITDA, which we calculated by adding depreciation and amortization, transaction offering-related costs, and stock and unit-based compensation, but excluding other income to net loss, was a loss of $53.5 million in the second quarter of 2021, compared to a loss of $17.5 million in the second quarter of 2020. We finished the second quarter with a strong balance sheet and liquidity position. As of June 30th, we held approximately $1.8 billion in unrestricted cash and marketable securities. Our liquidity position will support our continued growth initiatives, primarily our de novo center-based expansion. For the second quarter of 2021, cash used by operating activities was $53 million, while our capital expenditures were $10.7 million. Now I'll provide an update to our 2021 financial outlook. For fiscal 2021, we are increasing our guidance for total centers to a range of 125 to 127 from our prior outlook of 117 to 121 centers. Total at-risk patients to a range of 109,000 to 113,000 from our prior outlook of 107,000 to 112,000. And our revenue guidance to a range of 1.37 billion to 1.4 billion from our prior outlook of 1.3 to 1.34 billion. We are reducing our adjusted EBITDA guidance loss to a loss of $240 million to $220 million. As Mike mentioned, our EBITDA guidance assumes a continuation of the medical cost trends that we experienced in the first half of the year and also includes losses from the incremental new center growth. For the third quarter of 2021, we are forecasting revenue in a range of $355 to $360 million and an adjusted EBITDA loss of $65 to $70 million. We anticipate having 109 to 110 centers and an adverse patient count of 98,500 to 100,000, including direct contracting patients at September 30th, 2021. With that, we'll now open the call to questions. Operator?