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spk05: Good morning. My name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oak Street Health First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw a question, press the pound key. We ask that you limit yourself to one question and one follow-up. Thank you. I would now like to hand the call over to Sarah Cook, Head of Investor Relations. Please go ahead.
spk06: Good morning, and thank you for joining us. With me today are Mike Typos, Chief Executive Officer, and Tim Cook, Chief Financial Officer. Please be advised that today's conference call is being recorded And at 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. Today's statements are made as of May 4th, reflect management's view and expectation at this time, and are subject to various risks, uncertainties, and assumptions. In addition to historical information, certain statements made during today's call are forward-looking statements. please refer to our 2021 annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission, where you will see a discussion of certain risks, uncertainties, and other important factors that could cause the company's actual results to differ materially from these statements. Certain statements made during this call 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. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I'll turn the call over to our CEO, Mike Pecos. Mike?
spk13: Thank you, Sarah. And thank you to everyone for joining us this morning. Joining me on today's call, in addition to Sarah, is Tim Cook, our Chief Financial Officer. I want to first thank our team for the continued dedication and focus on our patients, our communities, and our mission. I feel privileged to work with such a dedicated group of individuals and I'm impressed with the stories I hear every day of Oak Street team members going above and beyond for our patients. We are pleased with the start of the year and both the positive momentum we feel across our organizational objectives and the operational results from the quarter itself. with performance above the top end of our guidance range for revenue, at-risk patients, and adjusted EBITDA. It remains a difficult operating environment in healthcare more broadly and is a testament to our team that we are able to continue to drive strong results. At Oak Street, it is an exciting time across the organization. We are focused on the programs and services that our patients need to stay healthy and out of the hospital, and that will transform the way care is delivered for older adults over the next decade and beyond. This is a welcome change from the past two years, when we often need to react to in-the-moment COVID-driven needs of our patients and communities. For example, today we're investing in Canopy, a proprietary technology platform, using our deep set of patient data to provide actionable decision support to our care teams through applications that are both easy to use and improve workflow adherence. A specific example is our technology integration work with RubiconMD. After completing the first phase of the integration of RubiconMD into our referrals module, we have seen an increase in e-consult volume over 200% over the last several weeks. As we complete phase two and phase three of the integration, we expect to see an even larger jump in volume. I'm confident that the investments we are making today will drive higher quality care and lower costs for the long term. We continue to focus on our team, our culture, and our mission to rebuild healthcare as it should be. We believe our deliberate approach to building and reinforcing our culture, combined with our team's focus on our mission, is a key driver of Oath Street's success and will continue to be a differentiator. Today's operating environment is not without its challenges. We are watching the current COVID wave closely, making sure our patients are protected by vaccines and receive therapeutics if they do contract COVID. It remains a difficult labor market. We continue to navigate this environment without seeing a negative impact on our financial or operational results. We have not and do not expect to experience delays in opening centers due to labor shortages. Today, we have not experienced higher labor costs than forecasted coming into the year.
spk14: We have been able to leverage our culture, mission, and the advantage of working in Oak Street and team members. Inflationary pressures have a different impact on our business than traditional healthcare providers.
spk13: First, our labor costs at our centers are relatively low on a comparative basis, representing a little over 10% of revenue versus hospital systems and home health companies that are more in the 50% range. So, if there are future increases in labor costs, the overall impact on the business will be much less than traditional healthcare providers. Second, In future years, increases in the cost of health care labor will impact Medicare rates, which will increase Medicare benchmarks and therefore Oak Street revenue, making Oak Street largely insulated from inflation in the medium and long term. If there is a sustained increase in labor costs in health care, our revenue will rise alongside the increases in labor costs, allowing us to maintain our margin on higher revenue. Said differently, if the cost of health care labor increases across the board, that will increase the cost of hospitalizations. and therefore increase the value of the hospitalizations we are reducing, increasing the savings we are capturing, and more than offsetting any change to our cost structure. More tactically, at our centers we continue to see a return to normalcy, with our focus on patient experience, care model execution, and making Oak Street the best place to work in healthcare for our team. Our outreach teams are ramping up events in the community, allowing us to meet thousands of older adults who can benefit from our care model. And we are bringing back events in our community rooms. In April, We partnered with AARP's Wish of a Lifetime program to do events in all of our centers, and next month we are bringing back open houses for prospective patients in our community rooms across the organization. We remain hopeful that bringing back the in-center and community-based events that were a core part of our marketing approach pre-pandemic will allow us to return our field-based outreach teams to the level of success they achieved pre-pandemic. And we believe we are just scratching the surface on the potential of our AARP partnership. One of the greatest aspects of being part of Oak Street is a tight alignment between our mission, the impact we make, and our financial performance. We make an impact by providing meaningfully higher quality care and an unmatched patient experience to a growing number of older adults. We recently published our first-ever social impact report detailing out the impact we make on our patients, our communities, and the healthcare system, and I'm incredibly proud of the impact our teams have made. The full report can be found on our website. And if we continue to make a greater and greater impact by providing high quality care to an increasing number of patients and communities, we'll continue to drive strong financial performance. We are pleased with the impact we have made and the resulting financial performance so far in 2022. In the first quarter, we generated record revenue of $513.8 million in the quarter, exceeding the high end of guidance and representing 73% growth compared to Q1 2021. Our revenue growth continues to be driven by our organic B2C marketing approach. This includes both central channels, such as digital marketing and our core community-based outreach team. We also open 11 additional centers, including our first centers in Arizona, and remain on pace to open 40 centers in 2022, bringing our total at the end of the year to 169 centers. Medical claims expenses have trended in line with our expectations coming into the year. Cost of care, which includes care team labor, marketing, and corporate costs were all in line with expectations. Higher than projected revenue, combined with costs in line with original projections, resulted in an adjusted EBITDA loss of $42.4 million for the quarter, which is favorable to the top end of our Q1 guidance. Tim will cover the specifics around medical costs and other trends shortly. Taking a step back, we shared projected center ramps for 2022 by cohort earlier this year, most recently at our investor day in March. Continual performance along these ramps creates an outstanding financial return on the capital invested in new center development. Our guidance this year is based on center-level performance within that range. Performing favorably to our guidance for the first quarter means we are on our way to achieving the center-level performance we set out. By continuing this level of performance, just the 169 centers we will open by the end of this year will generate over $1 billion in EBITDA when they are scaled.
spk14: We are pleased with our performance in the first quarter and what it means for our standard level results.
spk13: We're optimistic about the investments we are making to continue to improve our platform, and we're excited to continue the journey to transform healthcare.
spk14: Now, I'll turn it over to Tim to cover some more details regarding our financial performance in the first quarter.
spk10: Thank you, Mike, and good morning, everyone. As Mike shared, we were pleased with our first quarter as we delivered results above the high end of the guidance we provided in February for at-risk patients, revenue, and adjusted EBITDA, and at the high end of the range for centers. In terms of membership, our at-risk patient base, the key driver of our financial performance, grew by 64% year-over-year to 124,000 patients, driven by our B2C marketing model, the introduction of direct contracting in Q2 2021, and growth in the number of centers. At the end of the first quarter, we operated 140 centers, an increase of 11 centers compared to December 31st, 2021, and representing growth of 54 centers, or 63%, versus the 86 we operated at the end of the first quarter of 2021. Capitated revenue of 506.1 million grew 74% year-over-year, driven by growth in our at-risk patient base. Excluding the favorable benefit of prior period development related to Q1 2021, capitated revenue grew 76% year-over-year. Total revenue grew 73% year-over-year to $513.8 million. Our medical claims expense, the first quarter 2022, of $379.4 million, represented growth of 90% compared to first quarter 2021. When adjusting for prior period medical claims expense related to Q1 2021, recorded in the first half of 2021, medical claims expense grew approximately 75% year over year, which is 100 basis points slower than our comparable capitated revenue growth over the same period. Recall, this year-over-year comparison includes direct contracting, which is reflected in our first quarter 2022 results, but not in our first quarter 2021 results, as the program went live on April 1, 2021. As we have previously described, direct contracting has higher per-member-per-month medical costs relative to its per-member-per-month revenue compared to Medicare Advantage, and therefore skews the year-over-year comparisons. Adjusting capitated revenue and medical claims expense for the prior period effects I just mentioned, as well as adjusting Q1 2022 for the direct contracting program, our capitated revenue growth rate was 350 basis points greater than our medical claims expense growth rate in the first quarter on a year-over-year basis. I want to briefly comment on the key headwinds we experienced in 2021 related to medical costs. Direct COVID costs, non-acute utilization, and new patient economics. We estimate that COVID costs in Q1 2022 were approximately $10 million, which is comparable to our Q1 2021 direct COVID costs. We estimate we incurred $40 million in total COVID costs in 2021 based upon claims received through March. It is too early to predict what COVID costs will be in 2022 given uncertainty around local prevention strategies and emerging variants. December 2021 and January 2022 represented some of the highest COVID-related hospitalization levels we have experienced during the entire pandemic. However, these hospitalization levels decreased dramatically in February and March to some of the lowest levels we've experienced. As we stated in our Q4 call, the non-acute utilization increase we experienced in the spring of 2021 dissipated as 2021 wore on. We estimate our non-acute utilization was within a historically normal range in Q1 2022 as it was in Q4 2021. Finally, for new patient economics, it remains early given the number of new patients we are caring for today relative to the total new patients we expect to add during the year. Early indicators are that we will not experience the same level of revenue degradation we did in 2021 on new patients, that we do not expect overall new patient economics to return to their 2019 levels this year, as was assumed in our guidance. Our cost of care, excluding depreciation and amortization, was $95.2 million the first quarter, an increase of 58% versus the prior year, driven by growth in the number of centers we operate and, accordingly, the number of team members supporting our significantly larger patient base. Sales and marketing expense was $33.8 million during the first quarter, representing an increase of 40% 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 $88.7 million in the first quarter, an increase of 21% year-over-year. The majority of this year-over-year increase is related to an increase in headcount to support our growth. Stock-based compensation expense included in corporate general and administrative expense represented $38.2 million in the first quarter of 2022 compared to $41.2 million in the first quarter of 2021. Excluding stock-based compensation, corporate general and administrative expense grew 54% year-over-year. We decreased our corporate general and administrative expense, excluding stock-based compensation, as a percent of total revenue by approximately 90 basis points in Q1 2022 compared to Q1 2021. I will now discuss three non-GAAP metrics that we find useful in evaluating our financial performance. Patient contribution, which we define as capitated revenue less than medical claims expense, grew 38% year over year to $126.7 million during the first quarter. Excluding the impact of prior period revenue and medical costs related to Q1 2021, patient contribution grew approximately 77% year over year. Platform contribution, which we define as total revenue less than some of medical claims expense and cost of care excluding depreciation and amortization, was $39.8 million, an increase of 8% year-over-year. Excluding the impact of prior period revenue and medical costs related to Q1 2021, platform contribution grew approximately 140% year-over-year. As an individual center matures, we expect both platform contribution dollars and margins to expand as we leverage the fixed costs associated with our centers, as well as improving our per-patient economics over time. Adjusted EBITDA, which we calculate by adding depreciation and amortization, transaction offering related costs, litigation costs, and stock-based compensation by excluding other income to net loss, was a loss of $42.4 million in the first quarter of 2022 compared to a loss of $17.4 million in the first quarter of 2021. We finished the first quarter with a strong balance sheet and liquidity position. As of March 31st, we held approximately $660 million in cash and marketable securities. As discussed in prior calls, we expect our liquidity position will support our continued growth initiatives, primarily our de novo center expansion. Cash used by operating activities was $91 million in the first quarter of 2022, while our capital expenditures were $20 million for the quarter, both in line with our expectations for the quarter and the year and our ability to fund the growth of the business in line with the center growth we previously outlined. Now I'll provide an update to our 2022 financial outlook. We are reiterating our full year 2022 guidance across all key metrics. And for the second quarter of 2021, we are forecasting revenue in a range of $517.5 to $522.5 million and an adjusted EBITDA loss of $62.5 million to $67.5 million. We anticipate having 144 to 145 centers and an at-risk patient count of 131,500 to 132,500, including direct contracting patients, at June 30, 2022. Regarding the shape of our full-year guidance, I would note that we expect around two-thirds of our remaining new centers in 2022 to open in Q3. We historically have seen greater new patient growth just in terms of the sheer number of patients in Q3 and Q4 due to seasonal trends such as weather in the annual enrollment process. In closing, we remain optimistic about the momentum and the underlying trends we are seeing in the business. With that, we will now open the call to questions. Operator?
spk05: Thank you. At this time, I would like to remind everyone, in order to ask a question, press the star, then the number one on your telephone keypad. We ask that you limit yourself to one question and one follow-up. Thank you. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Lisa Hill from J.P. Morgan. The line is open.
spk03: Good morning, and thanks for all the detail. Mike, I just really want to go back to what we saw in the quarter around MLR and then what you're talking about going forward. So it sounds like things are starting to normalize, talking about Omicron here at the beginning of the year, like many of the other managed care companies. But as we think about trends going forward, maybe just give us some color. And I know you feel like things have gotten more boring and normalized, but anything that you would call out as we think about trends going into the second quarter.
spk13: Please appreciate the question. I think from our perspective, our company exists to take better care of older adults. to improve the quality of care and lower acute hospitalizations and therefore save costs. And obviously, over the last two years, the kind of ebbs and flows of the pandemic and some of the kind of secondary implications of that have kind of had a big impact on our third-party medical costs. And, you know, what we're seeing today and I think what we're excited about, knock on wood, for the remainder of this year and beyond is that we're kind of really back to our care model and the quality of care we're providing our patients, driving a reduction in hospital admissions and therefore driving savings, and that's driving our MLR. And so, yeah, I certainly think, you know, January, as we talked about, had a high amount of COVID costs due to Omicron. That dropped very quickly into February and March. And, you know, again, now we're feeling like our performance is really being driven by our care model efficacy. And that's always going to be a focus at Oak Street Health and always something we want to control. So, you know, we think we're back to a place of kind of really driving the med cost performance and, you know, more predictability around that, similar to what we saw pre-pandemic. And, you know, obviously, you know, there can be another variant and that can change things. But, you know, at least right now, it feels like a much more normal time and that should drive, you know, more normal performance on the MR front.
spk03: And then, you know, just as we think about the sales and marketing aspect of that, you did talk about, you know, more of a normalized people coming back to the community, coming into your centers. Your sales and marketing expense was better than what we had modeled. I know last night you told me that it was in line with your expectations, but do you think that as people come back in, you're going to have more of an opportunity to leverage some of your costs as we move throughout the year?
spk13: Yeah, I think our costs from a sales and marketing sector are really kind of two pieces. One and the largest chunk of that is the labor costs for our outreach executives in our centers. So there is a number of team members. Think about them as a cross between a community health worker and a salesperson at all of our centers whose job it is to be in the community, meeting older adults, and helping them become patients. And so that cost is relatively consistent month over month, quarter over quarter. and and obviously rises in proportion to the number of centers we have and i think that's the the cost we hope to leverage more you know more effectively as as we get back in the community they're meeting more people um you know their their their cost doesn't go up a whole lot they add a lot more patients which can give us more leverage so i think we're pretty we're pretty excited about the opportunity as the year goes on uh the other part of our our cost is um more uh marketing expense think you know digital advertising things of that nature uh, commercials. Um, we do a little, so not a lot, but a little television and that actually, we did lower a bit in January just because of the, the kind of magnitude of the Omicron wave. And, um, you know, just even things like staffing out sick things of that nature. Um, so that might be a little bit why Q1 was a little bit lighter on, on, on, uh, on markets. I reflect, although, um, again, I think that, you know, we do expect it to rise over the course of the year in proportion with the number of centers, but, um, Again, our goal is to really better leverage the kind of community sales force to drive more patients, and I think that's a big opportunity for us.
spk03: Great. Well, thanks for the comments, and congrats on the first quarter.
spk05: Our next question comes from the line of Kevin Fishbeck from Bank of America. Your line is open.
spk11: Hey, thanks. This is Adam Ron. I'm for Kevin. Going to the membership guidance for the full year, and I guess now that you've reiterated it, when you initially guided to that membership at the beginning of the year, did you assume a relatively normal ability to run in-person events? You know, you said COVID was deteriorating, the levels were deteriorating exiting March, and so if it were to continue at these levels, would that be upside as you're able to do more in-person events? And at the same time, the upper end of the guidance was based on cohort performance from 2019 before direct contracting. And since, you know, the largest input into ramping a center is filling capacity, and now that you have, you know, a lot more ability to add at-risk patients with direct contracting, just wondering how those two dynamics would play out as, you know, if COVID levels were to persist at these levels.
spk13: Yeah, when we created our guidance on membership and similar to what we reiterated in our guidance this quarter, we didn't and have not baked in or assumed a bump in our outreach performance driven by in-center events, I think, and out-of-center events. I think we are hopeful that that can occur, but obviously there's been so many ebbs and flows across the last couple of years that we don't want to rely on it. in our numbers. And number two, it's always going to take time to get back to where we were in 2019. You know, there's both getting back on the community, completing the events. There is, you know, getting older adults back to getting used to meeting in person, which obviously is, you know, happening at different rates in different parts of the country. Then once you're meeting people, there's forming relationships, which takes time, getting them to try visits and getting them to move on to risk rosters. So it is a, you know, it's a process, even if the community events were at the exact same place they were in 2019 today, it would be a month before we saw that flow through at our at-risk rosters. And so, again, we're hopeful that as the year progresses, we kind of see the benefits of that not baked into our numbers. And it may be a situation where we really don't see the benefits for a couple of periods out when they occur. So that's kind of the first part around how we thought about kind of the return to normalcy in our guidance. On the second question, you know, we did not actually look at 2019 performance across the board for centers as the basis of kind of the top end of the range we shared in Investor Day on our center ramps. We actually looked at 2019 level performance across just two dimensions, one being COVID, which obviously 2019 performance of COVID was $0 of COVID costs. I think we know at this point in the year, we're not going to see zero dollars of COVID costs, although our hope is that it continues to remain low like it is today versus where it was in January. Number two, the other thing we looked at that was really impacted by COVID last year was our economics on new patients. And as we talked about, the kind of patient contribution was very different in 2021 than it had been historically on new patients. And we believe that was driven by a variety of pandemic-related factors impacting both the revenue costs of those patients. And so we did assume kind of in the top end of that range that that was back to kind of a more of a steady normal state. And so it wasn't full 2019 level performance as the basis for the top end of the range. It was just kind of those two pandemic-related measures, and everything else was driven off of kind of the current performance and, frankly, the current guidance performance.
spk11: Great. Appreciate it.
spk05: Our next question comes from the line of Justin Lee from Wolf Research. Your line is open.
spk15: Hi, this is Harrison on for Justin. Maybe if we could just get an update in terms of DCE membership, just, you know, what that's trending like and maybe what you expect for that to be, you know, within the membership composition by, you know, year end or end of 2023. You know, I guess we're just a little curious, you know, you know, more of the fee-for-services and, you know, converting over. You know, I think it was our understanding that, you know, as some of these other CMI payment models kind of sunset, you know, there'd be more opportunities to align under DCE. Just, you know, want to get the latest on that. Thanks.
spk10: Hey, Harrison. It's Tim. Thanks for the question. You know, on direct contracting, I think we've described this once or twice, We're excited about the program, even with the changes made as part of the transition to ACO REACH. The challenge that we've had in direct contracting is related to the attribution logic that CMS uses for patients that are going to be voluntarily aligned. And so, our organization is different than many other healthcare providers that are participating in the program because We're growing very rapidly in new markets and bringing in new providers to Oak Street. And when those new providers join Oak Street, by and large, they do not bring any patient panel with them. So the net patients we're adding to the program are really voluntarily aligned, by and large. And what happens within the logic of direct contracting is that patients, when they come in, they're voluntarily aligned. CMS checks to see whether that patient could be claims aligned to any participant in other CMS programs, particularly the ACO programs like MSSP. We don't have visibility to know when a patient walks into an Oak Street center whether or not that patient is aligned to an ACO. And I can promise you that no patient knows whether or not he or she is aligned to an ACO. So that is where we've had a challenge, which is we have had great success as patients coming to Oak Street, you know, join our platform, become part of our program, signing those forms. In aligning to Oak Street, the problem is that when we ultimately see who flows through from CMS, that number ends up being much lower than we would have originally thought when the program started because of this attribution logic. Now, as we fast forward over the course of the next couple of years and we continue to care for those patients, at some point those patients will be claims aligned to Oak Street, and that will be a tailwind of growth, but that's going to take at least a year, if not two years, for us to represent the plurality of that patient's claims and therefore for them to be claims aligned. So that has been a challenge. So I'd say growth has been at the lower end of the range that we had outlined last year. I think we had said 2,000 to 3,000 patients per quarter. I'd say even more in the lower end of that just because of this dynamic where it's been more pronounced than we had expected. And again, at some point that will reverse a bit as the patients we've added last year that weren't able to be voluntary line become claims line, but that's just going to take time.
spk15: Got it. That's really helpful. And then, you know, maybe really quickly just on in terms of the guidance, you know, kind of maintain for the full year, I think you beat the street by maybe 7 million this quarter, and then you guided maybe 7 million below. So maybe just for the back half, is there something we're not, you know, contemplating in our numbers is there maybe some stranded costs um with the you know centers that you're no longer opening this year that kind of land in the back half that drag a little bit um i think that was previously sized around 5 million i just want to make sure we're not missing anything here yes harrison so i'm i apologize i'm not uh
spk10: familiar with your specific assumptions, but I know I think what you're describing is probably true for a number of others. And I'd say the biggest thing is perhaps just the assumptions around the pace of new center openings over the course of 2022. I think generally speaking, the street had a relatively evenly distributed across the year where, you know, we obviously had 11 in Q1. We've guided to four to five in Q2, which leaves, you know, roughly, you know, more than half, 24 in the second half of the year. And just generally speaking, what that shape would typically look like is typically speaking Q2 and Q3 would be the busiest months from new center opening perspective. Q1 would be busier than Q4. This year was a little bit different. We came into the year with the expectation of opening 70. We obviously had a number of centers ready for Q1 in order to achieve that pace. You know, as we got, you know, as January and February were on, we had the centers ready to open. We had the teams hired. It didn't make sense to defer opening because they were ready to go. In a more typical year, if we had gone into the year expecting 40, I would have expected more in Q2 and less in Q1. So I say all that because as I think about the shape, I think generally speaking, you know, the full year, I think the street is aligned with our full year guidance. The composition across quarters looks a little different. My guess is Q2 folks were a little more conservative. My assumption, and again, this is an outsider looking in, is that that is driven by a student center count growth in Q2 and Q3. And then, you know, Q4 folks are probably better than we are from an EBITDA perspective. When you net all that out, it nets to zero, right, because from an annual perspective, we're in the same place.
spk14: But my sense is that's probably what the driver is. Okay, that's helpful. I appreciate it. Thanks.
spk05: Our next question comes from the line of Ryan Daniels from William Blair. Your line is open.
spk12: Yeah, guys. Good morning. Thanks for taking the questions. A couple on the growth outlook. Mike, very helpful commentary on the labor front. Obviously, key concern, big issue for healthcare, so good to hear that it's not impacting you on the cost front. But What's unique about your growth model is that you're not acquiring practices. You're not dependent on trying to find affiliates. You kind of control your own growth with center openings, but that does mean you're hiring a lot. So can you just comment on that portion of the growth, and are you having any challenges finding the right staff, whether it's outreach coordinators or clinicians, as you continue your growth pattern? Thanks.
spk13: Thanks, Ron. I appreciate the question, and I think you're right. I think... Being a de novo organization, it means we're hiring great team members for all of our new center openings. We have not seen any issues so far this year on having to delay centers or not having them staffed where they need to be to open. We don't anticipate those issues going forward. I think what it really nets down to for us is, as I mentioned before, the mission and the culture of Oak Street Health and the atmosphere we can create for our teams. So we've had a lot of success bringing people into our model, whether that be community outreach associates or providers or nurses or medicalists and everything in between who really believe in our model and believe in the way we're backing healthcare, get to know our culture. We have a great team now that does a great job of providing referrals of their network to join Oak Street, and that's our favorite way to recruit and hire. And so I think we've been able to leverage those aspects of what we do. We've been able to leverage the fact that it's from a healthcare professional, we can provide a lot more consistency in hours and days of the week than, say, a hospital system could. So, again, I think we need to be able to really navigate those things to date, and I think we'll expect to for the rest of the year. Certainly, it's hard to hire people in a lot of different roles than it was five or seven years ago, but, again, it's something that we've been able to successfully navigate through so far, and we expect to continue to do so.
spk12: Great. I appreciate that. And then maybe one for Tim. You know, I think an important part of the thesis is just the implied EBITDA at scale of a billion dollars just in the current footprint at year end. I'm wondering if you can just remind us what some of the key considerations are in getting there, meaning, you know, how long would it take for that footprint to scale to that level and any assumptions that could, you know, move the needle one way or the other to get you above or below that billion dollars. Thanks.
spk10: Thanks, Ryan. Yeah, I'd say, first, it's just an assumption. It is an extrapolation of the center-level results that we outlined at our Investor Day and then earlier this year at the Jake Morgan Conference. As folks may remember, we have 10 centers this year that we expect to generate over $8 million of a four-wall margin. So if you take the centers that we'd expect to open by the end of the year and use it as a proxy and then apply some normalized level sales and marketing and G&A to that. That's how you arrive at the billion, Ryan. So from today, I'd say based upon that performance, you're talking about six to seven years. Our goal, obviously, is to shorten that time frame to the best of our ability. But I think that's what's applied in the logic.
spk05: Our next question comes from the line of Jamie Purse from Goldman Sachs. Your line is open.
spk02: Hey, good morning, guys. I wanted to follow up on some of the questions around MLR experience in the quarter. And I'm looking at this versus 2019 and 2018 trends. Things have obviously changed since then, just in terms of COVID and some of the new patient economics. But I was wondering if you could help us bridge and how to think about the rest of the year. So you're 800 or so basis points above where you were in 2019. How should we think about that spread progressing throughout the rest of the year as COVID costs hopefully come down and you get a handle on some of these non-acute costs. And any comments on how Rubicon MD integration helps with that?
spk10: Hey, Jamie. It's Tim. I'll start. Mike, feel free to jump in if you'd like. But I'd say there's a couple of key drivers that have changed since Q1 of 2019. The first is just direct contracting, as I described. Direct contracting has a higher MLR than our MA business, and it's a relatively meaningful part of our business in Q1 of 2022, and it was not any part of the business in Q1 of 2019, obviously. So that's one of the drivers. Second is the COVID costs that I mentioned. That's $10 million in Q1 of 2022 that we didn't have in Q1 of 2019. That's roughly 2% right there. Those are the two largest drivers. um and i'd say that the last thing is is as we describe patient economics improve the longer patients are with oak street if we think about the center growth that we've experienced over the last two years and they're and you know correspondingly the number of new patients we have is a percent of our total that number has grown a lot that is going to all else equal blend up the medical loss ratio it doesn't change our expectations where those patients will be when they've been with us for the same period of time but the weighted average tenure of our patients just like the weighted average tenure of our centers is less today than it was in Q1 of 2019.
spk02: Okay, that's helpful. And that's just a question on cash flow from operations, negative $91 million in the quarter. You said that was in line with your expectations, and it looks like there was some development around accounts receivable. Just can you walk us through that specific dynamic and how we should be thinking about modeling cash flow for the rest of the year?
spk10: Yeah, so it was within our expectation. I'd say Q1... When we think about Q1 operating cash flow, there's a few drivers. One is, I just say, depending on when health plans settle with us, that will drive the working capital balances at the end of any given period. Depending upon the plan, we settle more or less frequently. But to the extent that you settle on the last week in March versus the first week in April, that can change, obviously, what you reflect in the balance sheet. And just for folks' recollection, For over half our plans, the way our contracts work is we are paid an upfront payment that is meant to help defray some of the costs that we incur to support our care model, which are obviously more expensive than what you'd receive in a fee-for-service environment. And then we settle with plans on a monthly or quarterly basis, depending upon the plan, where they true up that upfront payment to what we were actually owed. And because of our performance, typically speaking, we're owed a lot more than what was paid upfront. until we've actually settled with the plan for that period, we carry the full amount of the revenue in AR, and we carry the full medical claims expense and our liability for unpaid claims. So you're going to see that build. I mention that only because, again, depending upon the timing of those settlements, we saw some settlements slip in a Q2 that would have otherwise closed in Q1. That balance probably looks higher than it would have. The other thing I'd mention is we accrue for what we expect our risk scores to be in our patients. As folks know, we have risk score adjusted on an annual basis, but you don't have an update until the mid-year sweeps over the course of the summer. Based upon all the work that we do to care for our patients, we document about 85% of all the codes associated with our patients. So we have a very good understanding of where our risk score will ultimately be once risk scores are settled and they take this year's reimbursement won't be settled until next summer, right? Summer of 2023, just the way the risk adjustment process works. We're making an estimate today for what that risk score will ultimately be and what will be paid on. And that number is highest in the first half of the year because we're waiting for that mid-year settlement where it trues up the payment for the part of the year that has transpired. So, said another way, for the first two quarters, that balance will grow more significantly than it would in Q3 and Q4. So what you're seeing in operating cash flow in Q1, which I take the question, is a combination of the timing of settlements as well as this risk adjustment. The last thing is direct contracting, which plays a little bit in with settlements. Direct contracting settles on an annual basis, so it's actually the least preferable of all the contracting settlement timelines. But the combination of those three things led to operating cash flow being where you outlined, I'd say that's by and large timing related from our perspective, and that's why I mentioned it was expected.
spk02: Okay, thanks for the call.
spk05: Our next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.
spk04: Hi, guys. Thanks so much for the question today. I think I heard you say earlier in the call that e-consults are up about 200% in the last couple of weeks. I guess I would be curious, sort of, how do you think about the penetration of RubiconMD into your current base versus sort of where you expect it to be over the longer term, just as sort of we think about that ability to help with the cost line there? Thanks.
spk13: Yeah, thanks for the question. The reason, if you go back to when we first announced the acquisition, that we felt it was important you know, purchase Rubicon MD versus partner with them is we really believe that making it kind of easy and embedded in the workflows for our provider teams would allow us to get the full benefit of what the potential of the e-consults to really drive better patient care, better quality, lower costs. And we're one of kind of our three phases of kind of the first set of integrations we're doing. And the good news is it's become a lot easier for our team. You can now kind of choose the e-consult option within our broader referral module. You don't have to go to a separate portal to do it. And again, that really makes it easier. So we've seen a huge percentage, almost all of our providers at least do one or a couple of e-consults and try it and get a sense to understand why it works. We've had some early adopters who are doing kind of a much larger portion of their kind of eligible referrals in e-consult. So we like the direction we're moving because, again, it's both the technology and also kind of the culture of the buy-in and the understanding of our provider teams around the value of it. I think when we get to phase two and phase three of the tech integration we're going to have across the year, it'll just keep making it easier and easier and do kind of more and more of the kind of preparing the e-consult and sending it out, doing more and more of that automatically. which I think would drive higher and higher adoption of the of the program. And so I think we have, you know, two or three X more that we will get by the end of the year in econ cell volume from where we are today. We're already obviously way out from where we were before we made the acquisition. So we feel like we're where we wanted to be kind of. in realizing our underwriting case and kind of getting to a place where this is just a, you know, just a core part and the vast majority of eligible referrals are leveraging an e-consult. And again, if we're leveraging e-consults, that means we're going to save costs because some percentage of the referrals we would have made, we find out we don't need to make because, you know, an expert and a specialist kind of reaffirms the care plan or helps adjust it without having to actually go see the specialist, provides better patient experience so they don't have to go see the specialist and don't have to pay the co-pays. And I think it also benefits of just getting faster and better coordinated specialist opinions integrated into our model. So again, we're really excited for it. I don't think you're seeing much of any cost impact in Q1 so far from it. But again, that's one of the things that we've obviously made an investment in the company and even bigger, a very time-intensive investment in the integration work. And we're excited to see the results play out at the end of this year and then in next year.
spk04: Got it. That's super helpful. And then how do we think about the GNA spend either on a per center basis or total sort of scaling across the year, given what you said about the pacing of center openings?
spk10: Sorry, Elizabeth. Was that just the amount of GNA we expect over the year, how that will follow center openings? Yeah. I'd say there, as I think we mentioned on the the call several weeks ago. One is there are investments that we had made that we're already going to make coming into the year that were to support.
spk05: Excuse me, this is the operator. Please remain on the line. The conference will resume shortly. Excuse me, presenters. You may now continue your conference.
spk10: Thank you.
spk05: Our next question comes from the line of Richard Close from Canaccord. The line is open.
spk01: Thanks for the questions. Question for you, Tim, maybe. So good progress, I guess, on COVID and non-acute care trends. Can you talk a little bit about geography? Is there any geographic comments that you can talk about? Are you seeing those trends over, you know, the whole center base?
spk10: Richard, I'd say by and large, from a financial performance perspective, We're seeing trends across the whole business. I'd say generally speaking, COVID has been more of a factor in the northern geographies of our business than the southern. But by and large, I'd say it's been pretty consistent. Growth has been better in southern geographies only because they've been more open and the weather is just frankly better. But other than that, I'd say everything's pretty normal and pretty consistent across the business. Okay, that's helpful.
spk05: Our next question comes from the line of Jessica Passant from Piper Sanders. Your line is open. Thank you.
spk08: So I just want to ask one on the 2017 cohort or the year five centers in 2022. How long post-exclusivity, I guess, does it take for those centers to catch up with the their peers in that particular year? Or how long will it take for the 2017 centers to match the historical performance of other cohorts?
spk13: Thanks, Jess. Appreciate the question. Two things to keep in mind on the 2017 cohort. One, I believe it's five centers. And so it's actually a very small number of centers, especially given the whole number of centers we have today. And so that's why kind of the uniqueness of a couple exclusive centers can really kind of move the average on the whole cohort. And when you think about catching up to results, it's really more of a cumulative membership catch-up. And so if you are a couple years behind in growth, you're going to continue to be a couple years behind in until you get to kind of more the near capacity level, and then you will catch up. So I would think about it more of a, you know, they'll remain behind every year, but they'll have improvements longer than a more normal center would, right? So they'll have a larger growth in kind of the latter years of the center from a contribution perspective as they start to catch up on membership. Because at some point, you know, your near capacity centers start slowing down their membership growth as they're reaching capacity. And these centers are just going to reach capacity a couple years later. Therefore, they'll get to the same economics long-term. It'll just take a little longer for them to get there.
spk08: That actually makes a lot of sense. And then I guess just I think the consistency repeatability of the model is one of our favorite things about Oak Street. But just if you have to isolate kind of one factor that does vary the most between centers or between markets, what would it be? Just like marketing responsiveness, specialty care management, chronic condition prevalence, what is it and how do you guys manage it?
spk13: Yeah, I think the probably if I had to pick two, I think one, kind of the kind of density of the market, the types of community organizations, that will obviously impact your approach from a community outreach perspective. And so, you know, some of the communities, your dense urban markets, your New York, your Chicago, those types of places, Obviously, you're working with large senior living buildings. You're working with pretty dense community groups. And some of your other markets that are more your Rockford's and your Fort Wayne's, it's a more spread out community. So you're looking for kind of more hyper-local groups, things of that nature. So, again, I think there's kind of a difference in how the team on the ground needs to kind of figure out who are the key aggregators for older adults, who are the groups to work with. And look, we've had a lot of success in the Rockbirds and the Fort Waynes. We've had a lot of successes in the Chicago. So I don't, I don't know if I said one is definitely better than the other. It's just kind of finding the, the right way to, to get in front of older adults. And when we get in front of older adults, we're very good at helping them understand why Oak Street Health is a great place for them to get their care. And then the second one, I think, I think some of the aspects, especially on like post acute care and some of those, I mean, the, the, aspect in Medicare where the most geographic variation is kind of post-acute costs and post-acute kind of practice patterns. And so that's one I think that as we go to a market, we really try to figure out, you know, what are the referral patterns for discharge coordinators at hospitals? What are the preferred skilled nursing facilities? Those types of things. Because that's the place where you can see a lot of variation, not necessarily by patient need, but just by kind of patterns in the community.
spk05: Got it. Thank you. Our next question comes from the line of Ricky Goldwasser from Morgan Stanley. Your line is open.
spk16: Hey, guys. This is Mike on for Ricky. So a question on incidental COVID admissions. So last week, Humana mentioned seeing higher incidental COVID admissions, which shows unfavorable PPD. Wondering, did you see this occurrence where just a greater percentage of your admissions turned out to be COVID than was initially tagged as non-COVID? Curious in your visibility, and you didn't disclose TBD, so I was wondering if it was an unfavorable guy, or could this potentially be a negative item come 2Q?
spk10: Thanks for the question. We have been experiencing that headwind related to COVID being a secondary diagnosis or even a tertiary diagnosis for hospital admissions. It has been relatively small for us. It has stayed small. So we had no material prior period development in Q1. There's always some truing up investments, of course, but nothing material. As it pertains to this specific issue, I'd say our Q4 or 2021 MedCost accruals are still in line with all the data that we've received since the end of the year. And I don't expect that this issue to create – the issue that you may have mentioned to create any incremental headwinds to what we've already reported. That's been – relatively prevalent in the market over the course of the time that incremental payments to health hospitals has been around.
spk16: Got it. And just one more question. With your AARP partnership, I think Mike mentioned we're just scratching the surface of what's possible. I fully understand the power of marketing, the co-branding, but Could you talk more specifically about how you view the membership opportunity? Like, how should we think about this benefiting membership growth near term and long term? And, you know, how does a partnership work outside of the co-branding element? How should we think about the economics of the arrangement as well?
spk13: Yeah, I mean, I think when you think about VAARP, it's the most trusted brand for older adults. The reach of the brand is massive. I believe that the AARP kind of magazines are the number one and number two most distributed magazines in the country, just as an example of the scale they have. And so I think from our perspective, there's just a large number of ways that we can tap into the scale and the trust and the breadth of what they do. And When we come back to what drives growth at Oak Street, again, we're not buying or partnering with practices as our source of growth. We're a consumer organization where we're educating older adults of why they can get a better patient experience and better quality care at Oak Street. What we find is if we get in front of people, we get them to believe us and try us, that's they'll be very uh happy with oak street and stay as long-term patients um and so i think there's really two ways in that framework that that we can really benefit from the relationship with the arp um you know way number one is it allows us to get in front of more people um and it'll be another channel to meet people um we can invite arp members into open houses and and health education events and some of the things we do um and you know again we find uh you know a very large percentage of people we meet and certainly a large number of people that come to visit a center end up becoming patients. So I think that's kind of piece one is a way to meet more people and get more people engaged. And then number two, I think, is a way to engender more trust early on. I think one of the challenges we have is rising above kind of the noise in healthcare where everyone's saying the same thing and, you know, people are used to things that are too good to be true, you know, being that way. And so it's a situation where if we can leverage the fact that's the most trusted brand and they have selected us as their sole primary care partner nationally, I think that's a great way to, you know, to kind of overcome the fear of the unknown for people. And, again, if people try us, they're really going to be satisfied. So that's really a huge opportunity. It's kind of hard to quantify exactly at this time. But, again, we remain optimistic over the coming years. It's going to be a nice driver of our growth. Got it. Thanks, Chester.
spk05: Our next question comes from the line of Brian Tankelot from Jefferies. Your line is open. Hello, excuse me, Brian Tankelot from Jefferies. Your line is open. Our next question comes from the line of Sarah James from Barclays. Your line is open.
spk07: Thank you. I wanted to go back to the comment on new member economics. the expectation that it's not going to look like 2019. Is that primarily because of COVID or other dynamics going on there, and when would you expect that to get to 2019 levels?
spk10: Thanks, Sarah. It's Tim. I'd say for COVID has been the primary driver, and that is impacting. It's impacting the dynamic through a few different angles. The first is just patients accessing the healthcare system in a way that's consistent with how they did in 2019 and prior. It's hard to predict when the world will look more normal, particularly when we've got new variants every three to four months creating different levels of responses across the country. If we think about Generally speaking, the northern geographies, they've reacted more strongly towards COVID versus our southern geography. So it's a challenge to put a specific time as to when the world might look more normal from a healthcare utilization perspective. But that would be the biggest driver of that and a combination of just lower COVID costs in the system more generally. But it's a combination of both revenue and med costs. And unfortunately, it's it's almost akin to predicting when COVID will be less of a driver in the market than it is today. And I think that's, or, you know, look more endemic a la the flu. And I think that's just hard to predict at this point.
spk07: Got it. And then on DCE, you commented that structurally it's got a higher medical cost ratio, but are you still thinking of it as an EBITDA margin profile similar to to your other business, or how should we think about the profit contribution?
spk10: Yes. So the MLR, or the medical cost ratio, is higher, but the revenue is higher. Therefore, the net PMPM dollars to us from managing those patients is fairly comparable to our average MA patient. That has remained unchanged. Okay.
spk05: Thank you. Our next question comes from the line of Andrew Mock from UBS. Your line is open.
spk09: Hi. Good morning. Given the increases in input costs even outside of labor, can you help us understand how the startup cost of a new clinic today compares to 18 months ago? Is that $5 million of cash investment over a two-year period still a good number to anchor to, or are you starting to see that number drift upward? Thanks.
spk13: Yeah, I don't – Apologize if we misspoke. I don't think we mentioned our input costs being higher. I think we're seeing similar cost structures to what we saw, have seen in the past, whether that be labor or other inputs to our model. So I don't anticipate or see any changes to kind of, you know, from what we shared in Invest Today and what we shared previously to kind of the cost to start off the center and kind of the return profile of those centers.
spk09: Got it. So you're not seeing any inflation on either, you know, construction costs or raw materials on the de novo side? No, not in a real way, no. Okay, that's helpful. And then independent of clinic opening, is there a natural component to elevated SG&A in Q4 related to the Medicare open enrollment period that we should consider?
spk10: No, there's nothing specific related to AAP that would create Higher levels of G&A seasonality as it exists is more tied to the pace of investments that we're making in the business and our center growth. And there's nothing really, there aren't really one-time costs related to G&A. I would say from a sales and marketing perspective, we would expect heavier investment in Q4 just to support that time of year when there's a lot of seniors focused on their healthcare for the following year. And correspondingly, lower investment in sales and marketing in Q1 generally speaking, but from a GNA perspective, nothing that AEP is going to drive. Got it. Okay. Thanks for the call.
spk05: Our last question comes from the line of David Larson from BTIG. Your line is open.
spk00: Hi. Can you talk a little bit about the capitated revenue per at-risk patient, like the dollars you're bringing in from the MA plans? how do you expect that to trend over 2022? It looks like it was up around 6% year over year this quarter. And then related to that, how do you expect the patient contribution margin to trend over the course of 2022? It looks like it was, you know, down over 600 basis points year over year, but up sequentially. Thanks a lot.
spk10: Yeah. Dave, it's Tim. So from a From a revenue PMPM perspective, I would say your question, I believe, was how is that going to trend over 2022 or over the longer term? Sorry, just to clarify.
spk00: Well, since you brought it up, over the course of 2022 and then the MA rate increases for 2023 look very healthy, up anywhere from 4% to 8% or more. Any thoughts there would be helpful as well. Thanks.
spk10: Sure. So for 2022, I'd say I'd expect, you know, last year we had the benefit from Q1 to Q2 of direct contracting entering the mix. So that was a little bit anomalous in 2021. But I think generally speaking, you can look at our historical financials and I wouldn't expect anything tremendously different from an intra-year seasonality on revenue PMPM perspective. The one caveat being that, you know, to the extent that we have faster new patients that will tend to lower that rate because new patients are going to come in at a lower revenue level. Over the longer term, it's hard to know exactly how those rate increases, what those rate increases from the government to the plans, the benchmark increases will be. And it's also hard to know how those rate increases will work themselves into the MA plan bids and then ultimately flow down to Oak Street. So I think it's difficult. You can look at kind of where we're at year over year and make some suppositions. I'd say over the course of time, I wouldn't expect for MA rates to increase 6% annually into perpetuity, of course. From a patient contribution perspective over the course of the year, you know, generally speaking, Q1 is always going to be the most profitable quarter on a margin perspective and Q4 the least. And back to this dynamic on new patients. In Q1, the average patient tenure is the highest because, you know, we have most more of our patients were patients in 20 in the prior year than will be the case at the end of the year, right? Over the course of the year, we'll let trip patient, we'll have attrition of patients. Much of that attrition will be for patients who have joined us in the prior year. And those patients again, uh, are more profitable. So you're replacing more profitable tenured patients with less profitable, newer patients. And you're also growing the business of course. So the combination, the effects of that new patient growth are going to blend down that patient contribution over the year. And then you'd expect to step up from Q4 to Q1, as you mentioned.
spk00: Okay, very helpful. Thanks a lot, Tim.
spk05: There are no further questions at this time. Now I turn the call back over to the presenters.
spk10: That is all. Thank you. Apologies, everyone, for the technical difficulties and happy to follow up with other additional questions. So thank you very much for your time this morning.
spk05: This concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.
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