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spk05: 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?
spk08: 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.
spk09: 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?
spk05: Thank you. As a reminder, to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press the pound key. In the interest of time and to allow as many participants as possible, Please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Your first question comes from Ricky Goldweiser from Morgan Stanley. Your line is open.
spk00: Yeah, hi. Good morning. I'm trying to understand the higher acuity of the new patients. So how do you measure higher acuity? Are there any problems? patterns or disease categories that you're seeing? And then also, when you think about these new members that are just onboarded, what's the vaccination rate among the new members? And is this a population that is now at a higher risk of contracting COVID that might impact second half?
spk08: Yeah, thanks, Ricky. This is Mike's voice. On the new patient question, I think you look at the acuity in really two ways. One is the utilization, both acute and non-acute, that those patients are doing. And as I referenced, that's 50% higher than we've seen in the past. So they're obviously going to the hospital a lot more. They're using a lot more medical resources. So that obviously impacts costs. Today, the other way to look at it, or the other way we do look at it, is what's the underlying disease burden of the population? And that's really driven by what are the chronic disease codes that we're capturing as we're doing our really intensive onboarding approach for those patients. And on that dimension, we're capturing a lot more patients with PSF, diabetes complications, COPD, et cetera, et cetera. So I think that it's really both on our new patients. They're using the system a lot more because we're building higher costs today. We're capturing a much higher disease burden on them than we captured kind of in an equivalent new patient period in years past, which is going to drive higher revenue next year, but that won't flow through until 2022. On the vaccination status, you know, our average model generally pulls patients from the communities we serve, albeit usually patients who are slightly less engaged in healthcare than the average patient in those communities. You know, keep in mind, our communities we serve are generally moderate to lower income. The majority of our patients are people of color. And so the vaccination rates of our patients we're pulling in generally are you know, generally directionally what the communities that we serve are maybe a little bit lower. So Medicare on average is 80% of Medicare recipients are vaccinated. The patients we're pointing to are certainly lower than that. That said, we're very effective at overcoming vaccine hesitancy and getting patients vaccinated. And that's obviously a, you know, a core part of every visit, right? If the patient is vaccinated, it's having that conversation. I do believe that will get our new patients up to kind of that same level of Medicare and hopefully higher where we see our new patients as well with the understanding that the challenge I think we're facing is higher than you'd face if you had a different patient demographic.
spk00: Okay. And then my follow-up is on the marketing campaign. If you think about the surge of the Delta variant, what is the contingency marketing plan if you have to scale back on the community events?
spk08: Yeah, I think the contingency will be doing something like we did really prior to the vaccines, right? We did grow in the second half of 2020 and the first part of 2021 at a fine pace. So a lot of those same channels that we leverage, that we'll continue to leverage. That said, I think we've found ways to safely and effectively run our community-based marketing approach. Given the vaccine status of our team members now lowers the risk of being in the communities, finding alternative venues of outside events and things of that nature. So again, I don't expect us to go back to kind of where we were in the second half of 2020 or even early 2021. where you're really trying to avoid those types of events. I just think that's not what we're trying to do. I think you find ways to run them safely. And what safely means, I think, differs based on where the Delta variant's at, et cetera. But I think it is important that the mental health and the different components there are also really important. So I think it is important just overall that we're getting people out, socialized, kind of enjoying life, but doing it in a very safe manner.
spk00: Thank you.
spk05: Your next question comes from Shan Weiland from Piper Sandlin.
spk02: Hi, thanks so much, and good morning. So I appreciate the breakout of the excess medical expense into the three categories, and I understand how you get out of the box with the COVID and with the higher disease burden, but less certain, or I don't understand really the path forward on excess utilization of non-acute care. You know, you run in an open network. These new patients are used to going to the doctor or specialist anytime they want. How do you get that back in the box?
spk09: Yeah. Hey, Sean. This is Tim. Good morning. Thanks for the question. It's across a number of fronts. Our teams, as Mike mentioned, have been working very hard to execute the vaccination plan that we put in place. And while we talk about vaccinations as if they're relatively easy, you know, a shot in the arm, it's actually incredibly complex and it's very distracting for our team. So part of it, I think, is just refocusing our efforts and moving beyond vaccination efforts to, I'd say, more core care model execution. These things are not always mutually exclusive, but the reality is that there's only so much bandwidth within a center. So I do think we'd benefit from moving more, getting back to basics on our care model. Not that the vaccination efforts will entirely cease because, of course, we're going to continue to push our patients to be vaccinated, and hopefully we'll get to as close to 100% as we can here over the coming months. The additional thing I'd say is it's hard to put data points around this, but I think we're also seeing other market forces at play today, which is more volume flowing into fee-for-service medicine as the system rebounds from a tough 2020 particularly the middle part of the year and so i think we're seeing elevated levels of utilization now we typically see and part of that i think is the nice point of patients coming in sicker and being heavier users of the system i think it's also more of the system uh playing a little bit of catch-up and by and large we've experienced in her from health plans is you know historical processes they may have in place to limit those or more active network management, a lot of those activities have either been put on hold or have been dialed back. And so we're seeing this stage in the market where utilization is coming back online and there's less management in managed care right now. And so I think the combination of us getting back to where we had been from a care model perspective as well as the market return to normal should over time, you know, exactly how long is a question, but should over time serve to drive down that nonacute utilization that you mentioned.
spk02: And how many patients in total are we talking about driving these excess costs?
spk09: So we've seen, I think as Mike mentioned, we've seen an increase in disease burden across all of our patients. It is most pronounced for our newer patients. You can get a sense for how many patients we've added since 12-31 to June 30. And then on top of that, obviously that's a net number. We've obviously had a lot of patients, and depending upon what you assume for Oak Street attrition, it's a reasonable number of patients that are new patients to Oak Street that are driving those costs.
spk08: I mean, Sean, the thing I'd add to both those questions quickly is on the non-acute costs, the factors you mentioned around kind of acts of special effects have been present for the history of Oak Street, right? And so we have a very good baseline. What we observed in 2019, 2018, other years, and even the second half of 2020 is all pretty consistent. In March, it really spiked. And again, that could be some kind of ongoing change in, you know, health plan or provider or patient behavior that will be, you know, kind of part of what we do at Oak Street long-term. That is, I guess, possible. And, you know, again, even that persists, we're confident the economics will return in 2022. I do believe that a lot of it was driven by the fact that, you know, when I don't make a coincidence, that that's exactly when all of our patients, you know, kind of became vaccinated, right? And so I think there was a you know, like we're going back into the community, going back into healthcare, getting back into the healthcare system. I think healthcare workers that were also vaccinated and also, I think, ready to make up for lost income. So I think that's part of it. So, you know, certainly our hope is that we kind of eventually over time revert back to what normal was prior. If there is some phase shift in how, you know, patients and providers are behaving, obviously we'll try to impact that, but we also feel like we can absorb that cost in 2022 and beyond. So, yeah, hopefully that helps give some more context.
spk02: Okay, thanks so much.
spk05: Your next question comes from Lisa Gill from JPMorgan.
spk01: Thanks very much, and good morning. Mike, can you talk about the percentage of the assessments that are done at this point for 2022? You talked about revenue being better in 2022. That would be my first question. And then as a follow-up, is there any geographic area to call out when you think about some of these higher costs?
spk08: Yeah, on the first question, obviously we aim to have our annual wellness visit complete for 100% of our patients. Usually we complete it in kind of the mid to high 80s is what will actually get done on our patients. Right now, we're, I think, in kind of the mid to high 60s is where we're at on percentage of our patients who've got their annual wellnesses complete. So we feel like we're trending kind of towards those upper 80s, and we'll obviously work hard to push that into the 90s as percentage complete. So the data points we have as far as the disease burden we're capturing in our annual wellnesses, it's a large portion of our patients at this point. So we feel like pretty accurate data at this point. I'm sorry, what was your second question? I apologize.
spk01: Yeah, the second question just is, is there any geographic area that you'd call out from any of this utilization?
spk08: You know, no, that's actually one of the, I would say, trends that has given us probably increased confidence to continue to grow. We're really seeing this across the board. We're seeing this in new geographies and old geographies. We're seeing this in older centers, older care teams, newer centers. And actually, the reason why that gives us comfort is we don't think this is some problem of, you know, the quality is going down as we scale or we're not actually finding the same success in new markets, et cetera. I think it's just, you know, we really believe it's the external factors that we just need to manage through versus, you know, difference in Oak Street performance as we grow.
spk01: That's helpful. Thank you.
spk05: Your next question comes from Justin Lee from Wolf Research.
spk07: Thanks. Good morning. I wanted to talk about the second half guidance and specifically, and maybe you can help us understand in terms of the actual dollars and maybe even the MOR for the back half of the year. Maybe you can go through the three buckets and let us know what you're assuming. in terms of dollars above your typical trend and again like i said an mlr would be helpful as well in terms of the target for the back actions you can share that yeah so hey justin thanks for thanks for the question so with with respect to
spk09: friends in what we're assuming in the second half of the year. What we experienced in the first half, I think Q1 and Q2 were a different composition. So Q1, as Mike mentioned, more COVID-related as COVID volumes were relatively high in January and February and started to ebb as our vaccination efforts took hold and the vaccination rate increased. And therefore, about the time we got to the end of Q2, COVID expenses were relatively de minimis. Obviously, that's all pre-Delta, but I think We were seeing a lot of the benefits of that vaccination work. What happened in Q2, I'd say, was more of this non-acute utilization coming back online. And I'm sure there were a number of drivers, one of which is likely, you know, as our patients were vaccinated, they felt more emboldened or, you know, were more likely to go seek care because they were more confident about their ability to do so in a safe manner. As we look to the rest of the year and think about what we factor into guidance from a medical expense perspective, we haven't taken the peak of COVID plus the peak of non-acute utilization and combined the two of them. Essentially, we said, look, Q1 utilization over the first half of the year looked like this, again, with a bit of a different mix between Q1 and Q2. And those levels in aggregate represent higher levels than we've experienced and we're today to suggest otherwise, we will continue that high-level utilization through for the remainder of the year. That works out to MLRs plus or minus 80%. Justin?
spk07: Got it. So right around 80% for the back half of the year? Yeah.
spk09: Yeah, I think, I mean, obviously, as, you know, from our business, there's some seasonality. So, you know, Q, MLR will increase each quarter as new patients come in at a lower, and I'm speaking of higher MLR than tenured patients. So Q3 might be a little lower, Q4 might be a little bit higher, but you get the sense.
spk07: Got it. And then, Mike, I just wanted to follow up on the new patients. and make sure I understand it correctly in terms of the risk score change. So what you're saying is, if we just say the average patient came in typically at a 1.0, and now they're utilizing 50% more services, you're saying that the risk score of this patient that you're seeing right now, even though you're only getting paid for a 1.0 risk score, you actually are submitting enough claims to CMS where you would get paid for a 1.5 your revenue would also go up 50%, and therefore the profitability would return to normal, even at this level of utilization. That's the right way to think about it?
spk08: Yes. I mean, obviously those numbers are directional, but yes, that is the right way to think about it.
spk07: Okay, great. Thank you very much.
spk05: Your next question comes from Elizabeth Anderson from AmeriCorps.
spk04: Hi, guys. Thanks so much for the question. Maybe turning towards the new center guidance increase, can you talk about over the longer term, like are there certain dating factors that in terms of, you know, growth or profitability metrics that you use when sort of deciding like what the right pacing of center openings is?
spk08: Yeah, I think there's really two things we look at when we're determining the pace of center growth. You know, one is... How are all of the internal components performing that make a center successful? What is our pipelines of talent? Are we having trouble filling roles? Are we still bringing in phenomenal people to fill all of our roles? How are we doing from a leadership standpoint? kind of, you know, all different pieces that go into the pipeline of actually opening up a center of payer contracting, credentialing, kind of all those nuts and bolts. And do we feel like we're seeing any strains on the system? And, you know, probably the two biggest ones that I look at are, you know, kind of on the the provider hiring, the clinical leadership, and the P&L leadership. Do we feel really good across those dimensions? We're obviously key drivers and must-haves to be successful. One part of it is how do we fill in all those components? Right now, we're obviously finishing up with 2021 expansion and starting to turn to 2022 expansion. You think about how do I build the infrastructure to perform exceptionally on all those dimensions in advance of having to perform on them, right? And that's why we always think about titration up, right? We're not going to open up 150 tenders next year because we may find some of those components weren't able to succeed at that much higher level. So we always kind of raise the number of centers as long as we're, you know, we feel like we're able to do so, but do it in a more of a moderate way. So that's kind of one half of it. The second half of it is more on the financial performance and the leading indicators of the centers. So, you know, how are we doing on center costs, direct cost of care? How are we doing on patient growth? How are we doing on kind of the efficacy of our model? The reality for new centers especially, you don't have a ton of, you know, actually found data, you know, on 30-Party MedCop. A lot of your patients haven't entered risk plans yet, and if they have, you know, it's very new. So we do know from our past history that if we do the right things in the input side of caring for our patients, we're engaging that and we're following our care models to the T. et cetera, that will try a great result. And so the other thing we really look at is how are the new centers ramping from a patient growth perspective, and how are the new centers ramping from a cost, and how are the new centers ramping from a kind of execution of the care model perspective. And then as they get more mature, right, they get into year two, year three, year four, then we start looking at some more and more of the economic indicators to make sure they're kind of the center contributions still where it needs to be. So, you know, obviously this year, because of the increase in medical costs, obviously that impacts, you know, 2021 results for the centers. That's where I think looking at the, you know, the revenue that we're going to receive in 2022, that will be the indicators of what gives a lot of comfort that the economics of the centers will remain, you know, where we've seen them in the past and hopefully north of there.
spk04: Got it. So as we think about 2022, you would expect that sort of number of centers to sort of increase perhaps from where we are in terms of the center guides for 2021, right? Yeah, of course. Okay.
spk05: Your next question comes from Kevin Fishbeck from Bank of America. Your line is open.
spk10: Great. Thanks. I want to go back to the cost issue. I guess it's interesting. You're seeing these cost dynamics happen across the country. It seems like a lot of the managed care companies are also seeing cost pressures across different books of business. I guess what you're saying makes some sense about vaccinations and higher utilization, but isn't this the type of thing that you would be seeing if trends were actually accelerating, that costs would be slowly getting back to normal faster or there'd be higher utilization in certain pockets? Why isn't this the first sign of a higher trend that might impact next year's profitability, too?
spk08: Well, I think if we look at the components of the mythos, obviously, COVID hospitalizations, we hope we don't have a significant headwind of COVID hospitalizations in 2022 for a huge number of reasons, right? um and so hopefully you know we were able to as a society you know navigate through the the delta variant and you know increase vaccination rates and get to a place where you know we're not talking about huge number of hospitalizations from covid in 2022 um the that's kind of one component the other component around the the non-acute care or elective care um i you know i think that it In my mind, there's no reason to believe that you're going to see some sea change of how people navigate the health care system and the amount of care they need in the health care system that goes on into perpetuity. So, again, my belief from what I know today is that that number will start to normalize over time, maybe a little bit of elevated levels, certainly not like we're seeing today. What you're seeing today is just the results of people feeling much more comfortable being part of the health care system, and I think a lot of providers who are kind of ready to, to get back to what they missed in 2020. So again, I think that those are some of the factors. Now, I think the second part we said is like, one of you will see in 2022. And I look at it slightly differently. What happens if we do see it in 2022, right? So I have reason to believe that these things will start reverting. If they don't revert, I think just because of the increase in the disease burden of our patient population, which I don't think is necessarily the same. I don't think you can translate that to the rest of Medicare, but for our kind of pretty you know, narrow demographic of patients we serve, because of the increased disease burden that we're seeing, the revenue will offset that level of medical growth if it does persist in 2022. So, you know, our hope is it reverts and we actually have to, you know, expand to the margins. If it maintains, you know, we're confident we'll still generate, you know, strong and comparable results to what we've seen historically in 2022 and beyond, even at this elevated level.
spk10: Okay. That's helpful, I guess. You're talking a lot about marginalization next year and rates being better next year because of coding. I guess, are you having any conversations with the managed care companies themselves about how they're pricing for next year or how they're treating, you know, your payments for next year to potentially adjust or reflect to, you know, what you're seeing?
spk08: On the second part of the question, our contracts are multi-year contracts at a percentage of premium. And so to the extent that revenue for a patient goes up, our revenue will go up lockstep. There's no discussions around adjusting that from either side, nor do we plan to have those. I think on the bid perspective, we talk to our health plans around how they're bidding, how they're thinking about it, obviously. you know we we have a large number of health plan partners across a large number of geographies so there are you know you know in the triple digits of uh you know kind of health plan bid combinations um so yeah and a lot of times those dynamics become you know local and health plan depending etc but you know we certainly we certainly talk to our health plan to make sure we understand what they're bidding and um kind of how the benefits are changing and how that impacts our economics and so again we feel comfortable with where they're coming out Generally, I'll be honest, we like when plans are putting great value propositions out for our patients because that will help get more of our patients on to managed care and help keep our patients in managed care and, frankly, make it easier for our patients to navigate the system appropriately without undue cost burden. So we generally lock step in what the plans are doing.
spk10: Okay, thanks.
spk05: Your next question comes from Lance Watts from Brinsky. Your line is open.
spk07: Yeah, good morning. I've got two related questions on the customers and the new patients that are coming in. The first one is on the characteristics of those patients. I'm just trying to understand kind of their prior providers, prior plan experiences, if that's any different than it was maybe with prior year tranches of new patients. The other question is really related to, you know, retention strategies, what your outlook is for retention, what your normal churn is on those patients as well.
spk08: Yeah, on the first question, as far as percentage of patients who run a managed care plan, percentage of patients who were on traditional Medicare, engaged with providers previously, I think what we're bringing in is generally similar because the model is generally similar. As Medicare Advantage penetration grows across the country, and as we go to markets with higher Medicare Advantage penetration, the mix of people coming in on Medicare Advantage does go up a little bit. I would say all of the equal, we are seeing less engagement in the healthcare system previously from our patients than we've seen in the past. A lot of our patients haven't been to the doctor in years or they use the emergency room as their primary care provider. A lot of them go to federally qualified health centers where, yes, they have a doctor they can go to, but it's not a one-to-two-no relationship where a doctor has a panel. It's almost kind of a It's just a different level of care. And so I don't think there's a huge difference from where we're getting patients. The one kind of hypothesis I have, which I can't prove, is I think a lot of our patients previously, 2019 and before, came to us in a lot of really fun, energetic community events, which I think attract people who are kind of interested in that and in a position to go to those types of things. We did lots of that in 2020 for obvious reasons. But we met patients in a lot of other ways. But I do wonder if part of the reason we're seeing, you know, kind of a higher disease burden of incoming patients is, you know, you're meeting less of the people who are coming to a Zumba class. You're meeting more people who you're meeting at, you know, different places that are, you know, kind of referrals from healthcare providers. case managers, those types of things. So, again, I don't have any quantification, but I do wonder if that's part of it, which, if that's the case, we can do more of this community-based.
spk07: And on retention strategies, just, you know, what are you normally running for churn with these kind of patients, and do you have any particular insights into this population as far as NPS scores or customer satisfaction or things like that that might indicate that they're more or less likely to be a normal sort of retention.
spk08: Yeah, we haven't seen any differences in regards to retention or NPS. I mean, it still remains very strong on all those dimensions, as we've always seen. So again, I think the thing I'll make sure I do point out on the new patients, you know, while it's certainly a headwind of medical costs this year, having that higher disease burden and the associated medical costs coming in, you know, we're confident we'll keep the patients into 2022 and beyond, right? And we're also confident that once we get into that year and we're able to kind of get revenue to where it should be given their disease burden, that, you know, from an economic perspective, you know, they'll still be, you know, possible patients, et cetera. And frankly, you know, we'll work really hard to, you know, to bend the metal cross burden that they come in with because they've been cared for a while. And that's what our model does. And so, again, it was unexpected. It's diverse so much from what we've seen historically. But it's not something, you know, we're worried about or can't handle. Great. Thanks.
spk05: Again, to ask a question, please press star 1 on your telephone keypad. Your next question comes from David Larson from BTIG. Hi.
spk03: Can you talk a bit about your direct contracting program? How many lives do you have in that? And how is there sort of, how are the patient economics there with respect to both revenue collected per patient and also medical costs? Thanks. Hi, David. It's Tim.
spk09: Thanks for the question. Direct contracting, the direct contracting that you mentioned is largely consistent with what we, or entirely consistent with what we discussed in our prior call, which is we had about 6,500 patients enrolled in Q1, expecting to add about 2,000 to 3,000 patients per quarter. We're right on top of that for our performance right now. So we're In that range, from an economic perspective, those patients are performing as we expected. So the issues that we talked about here with respect to new patients is largely related to Medicare Advantage patients, not direct contracting patients. We have not broken out this financial specifics for our direct contracting patients relative to our MA patients.
spk03: Okay, great. And then just one more quick follow-up. With regards to your legacy patients, did you see a significant like 50% increase in utilization, or was it more limited to simply the new patients? And what I'm getting at is, are we just seeing sort of a catch-up in deferred and delayed care, which we kind of expected, and this should sort of dissipate over the next quarter or two? or is there something else? So the difference between your legacy patients and the new patients, and are you being conservative, really, in your guide is another sort of way of asking this. Thanks.
spk08: So I think what I think about the new patients, I mean, to say the obvious, we don't know who the new patient is that's going to join us in a month. And so our expectations Projection in our guide is that the incoming disease burden we're seeing and the socioeconomic disease burden will be similar for the remainder of the year on new patients. And then obviously, when we get into 2022, we'll get the benefit of the appropriate risk score for those patients. On existing patients, again, I think the two trends we're seeing and can discuss are, one, kind of in the very early part of the year, you know, higher than expected COVID admissions, and in the latter part of the year, kind of a bounce back of elective and non-acute care. And obviously, the mix of that, because it kind of happened in different parts of the first half of the year, the mix of that created elevated medical costs. And again, we're assuming that level of elevated mental health costs will continue through the second half of the year. But we think that is appropriate, just given some of the unknowns around how the pandemic will progress, payer, provider behavior, and really just some pretty unprecedented circumstances to navigate. Certainly our hope is that some of the non-acute care, the elective care, starts to go down because people have kind of gone back to the doctor, they've gotten the tests they're going to get, and that kind of winds itself down. We hope that happens. We're certainly not faking it from a guidance perspective.
spk03: Okay, thank you.
spk05: Your next question comes from Richard Gloos from Canterbury. Your line is open.
spk06: Yeah, thanks for the question. I think you guys sort of answered this with respect to increasing the number of new centers, and you talked about feeling comfortable hiring. I'm just curious, as you think about going forward, our second half of 21 and 22, Given COVID has really strained health systems and whatnot, are you guys finding it easier to attract people to the primary care side of healthcare in terms of nurses and doctors and whatnot, just maybe being burnt out from health systems and whatnot?
spk08: I wouldn't say easier. I think that, you know, frankly, a lot of people who are burnt out from health systems, what we've seen is they're, you know, burnt out of healthcare and, you know, you have to try to convince them the difference between, you know, outpatient primary care and inpatient health systems. I have not heard from our team a huge inflow of people that don't want to be foreign nurses at a hospital and want to work at Oak Street. So I hear the theory. I don't have any data to prove it, but I haven't heard anecdotally that happening. When we think about hiring at Oak Street Health, I think the big thing we really focus on is why Oak Street is an amazing place to work. And obviously I'm biased, but I think Oak Street is an amazing place to work. And the surveys of our team members certainly support that. And so, you know, we talk about the job environment being really tough right now. It is very tough. I remember 2014 when you put a job opening out there, you have, you know, 100 applicants within an hour. That's certainly not the case anymore. And so one of the things we've really focused on is, hey, we have an amazing team. You know, our team really believes in our mission, believes in Oak Street. How do we leverage that team to be the team that drives referrals and drives new hires, right? And that has really, I think, been a huge part of why we've been successful in hiring so far in the year is referrals from our team, especially on the provider side, right? Very satisfied doctors who love the mission and love the support and feel great about being able to actually have the resources to keep their patients healthy and do what they want to do. They'll tell friends from residency and friends from medical school and former colleagues about it, and that's a great way to grow. And that kind of goes all the way down to our associates and receptionists. So, yes, we have central recruiting. They do a great job. But while that might have been enough to meet all of our hiring needs three, four, five years ago, That's not the case now. And so, again, I think that's an opportunity for us to really be even more successful and further differentiate ourselves because we have invested a lot of time in the culture and making Oak Street a phenomenal place to work. And I think you're right. Places that don't have that foundation will probably have a harder time retaining their employees and attracting new ones. But, you know, we feel really good about our position there because we built Oak Street the right way. Okay. Thank you.
spk05: Your next question comes from Josh Raskin from Nikon Research. You'll answer it.
spk11: Hi, thanks. Appreciate you guys taking the questions. So two questions, really. Firstly, just process on third-party medical expense notification and kind of when do you find out that your members or your patients have sought care outside of your four walls? and then the second is is it potentially just the new the new member issue is it potentially just a short-term issue of adverse selection right i know we see that on the insurance side but i could imagine a scenario where uh these patients haven't had access to care as you mentioned they've used the ed and community centers and then they see this oak street opportunity to get you know particularly high quality care in these great big clean centers and is it just simply maybe in the short term you're attracting those members that that have been out of the system uh most recently
spk08: Yeah, to your second question, I think that's exactly right, right? I think there are more people who are not getting the preventative and primary care they needed who weren't engaged in the healthcare system in 2020, you know, and so there's already access problems in a lot of the neighborhoods we serve. very much evaporated during the pandemic. And I think you are seeing the issue there. And I think, you know, we are out there in the community. Some of them new communities we've never been in. Some are communities we've been in for a while. We are out there every day trying to meet people and trying to get them engaged in their healthcare. And, you know, what we're telling them is, guys, come to Oak Street Health. We can take great care of you. Here's our, you know, beautiful center. Our doctors have tons of time with you. We'll listen to you, you know, all the reasons why patients love being part of Oak Street. We're, we're going to communicate that. So yeah, we are bringing those people in. And so to the extent that, you know, more people have, you know, more issues, um, and untreated issues coming into Oak Street that, yeah, that does, that does impact us. Right. And so certainly I hope that that starts to normalize now that there are vaccines, now that the provider community outside of Oak Street is back to kind of back up, back up and running. Right. Um, The other thing I think I touched upon in an earlier question, but I do think I'm hopeful that if we get kind of more of the fun events and those types of things, you kind of can attract some of the patients who, you know, are going to be attending, again, Zumba classes and nutrition healthy eating classes and things like that, that I think just will, by definition, kind of attract a more active, healthier mix of patients. Final point on the new patients is, again, even if we don't, even if this becomes the new normal, we're very comfortable operating in this new normal. These are not patients who will be, I think from an insurance perspective, you get kind of bad risk in quotes and that's something that you don't want. It's not that we don't want these patients. We really do want these patients. These patients are exactly why we exist is to take people that are not being cared for and have unnecessary hospitalizations and costs, take great care of them, and that's why our model works. That's the great thing about risk adjustment is you don't have to worry about you know, kind of population poaching, right? You can just take the patients who need your care, and the risk-deficit model is set up for that reason. It just lags by a year. So I can not long answer the new question, new patient question. I'll sort of assume and talk about kind of the visibility of data, et cetera.
spk09: Yeah. Morning, Josh. On the data flow for new patients and what their claims might look like, I'd say in limited instances we do get claims filed for new patients. More typically speaking, the claims that we get begins once that patient becomes a patient at Oak Street. So we're not always privy to that patient's historical medical expense. There are, particularly if that patient came over to us already on a Medicare Advantage plan, if the patient came from traditional Medicare, obviously there's information available through the through Blue Button or Blue Book, probably get the term wrong there, where we can access the claims through CMS. But by and large, the data flow begins predominantly when that patient joins Oak Street. So for the new patients we're talking about, as Mike mentioned, there's relatively limited information. That being said, because of the way Medicare Advantage is structured, those things work themselves out over time, albeit with a lag around how risk score works.
spk11: Yeah, I was thinking more of just, you know, someone goes to the hospital for a COVID inpatient stay. How long does it take for you guys to find that out, and what's the process? Sorry, I apologize.
spk09: Yes. So when it comes to, it varies based upon setting of care, but typically speaking, if a patient's going to the hospital, usually one of the first things the hospital does is contact the insurer to make sure that the patient's covered and they understand the obviously want to have certainty of being paid for the visit. So as part of that process, we're typically notified that a patient's in the hospital. And that, one, alerts us from a utilization management or prior authorization perspective, but two, also activates our transition nurses teams and other aspects of our care models that we're ensuring that we take care of those patients. But typically speaking, when it comes to hospitalizations, we find that out nearly in real time. When it comes to referrals to specialists, that's That can vary. Obviously, we know when we make the referrals because that's all entered through our system. The question ultimately there is what's the flow through. So for every referral you make, how many actual visits are received, and that number can move around over time. But we have better insight into leading indicators because we're the ones actually driving that volume.
spk05: There is no further question this time. I would now like to turn the call over back to Mr. Mike Peterson.
spk08: Yeah, thank you, operator. Thank you, everyone, for all the questions and engagement. We appreciate it. You know, I'd probably leave you with, you know, just the – certainly the core beliefs on our team that, you know, we seem to make a huge difference in our patients' care, and that will translate to really strong results from Oak Street across all dimensions, you know, really in 2022 and beyond, right? And I think – Our goal is to build a transformative organization, and based on all the data we have, we feel great about the kind of continual evolution of the union economics and the continual evolution of the business. And so we remain really engaged and excited for the second half of the year and beyond. Thank you.
spk05: There is no further questions at this time. Again, this concludes today's conference call. Thank you all for joining. You may now disconnect.
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