Oak Street Health, Inc.

Good day, and thank you for standing by. Welcome to the Oak Street Health Third Quarter 2021 Earnings Conference. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, press star 0. I would now like to hand the conference over to your speaker today, Sarah Kluck. Please go ahead.

Good morning, and thank you for joining us today. With me today are Mike Peikos, Chief Executive Officer, and Tim Cook, Chief Financial Officer. Please be advised that today's conference call is being recorded and that 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 November 9th, 2021, reflect management's view and expectation at this time and are subject to various risks, uncertainties, and assumptions. This call contains forward-looking statements, that is, statements related to future, not past events. In this context, forward-looking statements often address our expected future business performance and often contain words such as anticipate, believe, contemplate, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, target, will and would, or similar expressions. Forward-looking statements by their nature address matters that are to different degrees uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include our ability to achieve or maintain profitability, our reliance on a limited number of customers for a substantial portion of our revenue, our expectation and management of future growth, our market opportunity, our ability to estimate the size of our target market, the effects of increased competition as well as innovation by new and existing competitors in our market, and our ability to retain our existing customers and to increase our number of customers. Please refer to our annual report for the year ended December 31st, 2020, filed on Form 10-K with the Securities and Exchange Commission, where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements. This call includes non-GAAP financial measures. These non-GAAP financial measures are in addition to and not 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 similarly titled non-GAAP financial measures differently. Refer to the appendix of our earnings release for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I'll turn the call over to our CEO, Mike Pecos. Mike?

Thank you, Sarah, and thank you to everyone for joining us this morning. Looking back at the third quarter, we believe our results demonstrate strong operating performance along with significant accomplishments to advance our platform. I want to first thank our team for the continued dedication and focus on our patients, our communities, and our mission necessary to make that happen. Our team had to navigate through a challenging operating environment, including the Delta COVID surge and a historically tight labor market. Despite these tight wounds, operationally we achieved strong results across all the major drivers of performance for the third quarter. We have strong revenue growth driven by new patient ads in both new and existing centers. We're on pace to exceed our center opening projections. Third-party medical costs, which we'll cover in more detail, as well as direct cost of care and corporate costs, were all in line with expectations despite an increase in COVID hospitalizations driven by the Delta variant. The net result is a quarter in which we exceeded the top end of our guidance range in revenue, membership, and adjusted EBITDA. Additionally, as we continue to gain more insight in 2022, we remain confident that the COVID-driven headwinds in 2021 will begin to subside and will return to a level of performance in line with what we experienced pre-pandemic. Strategically, we were thrilled to be selected by AARP as the only primary care provider to carry the AARP name. We're also extremely excited about our recently announced acquisition of Rubicon MD to advance specialty care delivery in the Oak Street model. In the third quarter, we generated a record revenue of $388.7 million in the quarter, exceeding the high end of the guidance and representing 78% growth compared to Q3 2020. 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. Our community-based team has continued to improve month over month despite having to navigate COVID surges in our communities. We are excited about the continued progress considering our teams were expecting significantly less COVID restrictions and hesitancy in the community when Q3 began. This improvement solidifies our confidence we can grow through any future peaks and valleys from COVID. We are excited to see our results from this COVID wave hopefully subsides, and we have the power of the AARP brand behind us. Now across the trend to in line with the revised expectations we share following Q2, This, combined with direct cost of care, sales and marketing corporate costs, all in line with expectations, and higher than projected revenue growth, resulted in adjusted EBITDA of negative 64.3 million, which is higher than the top end of our Q3 guidance. Specifically on metal costs, we highlighted three areas of increases in costs that exceeded prior expectations in our Q2 earnings call. These areas continue to be a headwind in 2021. But we also remain confident that they are largely temporary in nature as direct results of the pandemic and can be mitigated in 2022 and beyond. First, costs from COVID admissions. In our Q2 earnings call, we share that in the first half of the year, Oak Street experienced $15 million of costs directly from COVID admissions. In Q3, we estimated we experienced $10 million of additional COVID costs from COVID admissions. These costs were highest in August and declined slightly in September, bringing the estimated total year-to-date direct cost of COVID to $25 million. Looking forward, our COVID hospitalization costs generally rise and fall proportionally with the hospitalization rates in our communities. We are hopeful with the rollout of boosters and vaccines for children 5 to 12 that we will continue to see declining spread in the communities we serve and declining hospitalizations for our patients. That said, we recognize the majority of patients we serve are in northern markets that have historically experienced surges as the weather turned cold and people spend more time indoors. Second, non-acute utilization. In our Q2 earnings call, we discussed that non-acute utilization, including special visits, diagnostics, and outpatient procedures, increased $80 p.m. p.m. compared to the historical average in March, following the vaccine roll for older adults. These costs have decreased by roughly $15 p.m. p.m. in the subsequent months, but have remained elevated compared to historic averages. Roughly a third of this increase would be expected for medical cost trend from 2019 until this year. The net result is an estimated $35 million of increased costs across the first three quarters of the year above what we would have expected from increased trend. We believe this increase is driven in part by increased comfort with patients to access medical care following vaccination, relaxed payer standards due to the public health emergency, and specialist and hospital system behavior. Additionally, based on the higher prevalence of chronic illnesses we are seeing in our patients, especially those who have joined us over the past 18 months, we believe part of this increase in non-acute utilization is driven by greater patient disease burden requiring more care. Based on the diagnosis codes we've captured for our patients here today, We will be able to offset the cost with additional revenue to compensate for the increased disease burden, as we'll discuss in more detail shortly. This is also the cost category where we feel the acquisition of Rubicon MD will have the greatest impact. Third, new patient medical costs. In our Q2 earnings call, we shared that new patient medical costs were 50% higher than what we have historically seen and drove $20 million in higher costs in the first half of the year. New patient medical costs have remained elevated compared to historic levels, but not to the magnitude we saw earlier in the year. However, new patient revenues have further declined to a level less than what we received for new patients in 2019 on an absolute basis and significantly less than what we would have expected when considering trend. The net result is a decline of new patient economics driven by a combination of higher costs and lower revenue than what we have experienced historically. This resulted in an estimated $36 million in lower patient contribution in the first three quarters. We have looked at new patients by geography, center of interest, provider tenure, and marketing channel, and we see a similar decrease of patient contribution across all cuts of the data. For that reason, we do not believe that new patient economics are being negatively impacted by new centers or markets, but instead, we continue to believe the primary driver of lower new patient economics is lower engagement of older adults, especially those in low-income communities, by the healthcare system in 2020. lower engagement results in higher medical costs because of undressed medical conditions, and lower revenue because those conditions went undocumented. As a reminder, risk scores lag by 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. When we consider the disease burden we are capturing for our new patients here today, we believe that their economics will revert back to what we normally see for a second-year patient in 2022. We are optimistic that increased engagement across the healthcare system for patients will lead to new patient economics more in line with what we have seen historically, although it remains to be seen how long it will take for new patient economics to revert to previous levels. A smaller factor impacting new patient economics was a lower mix of patients coming from community-based marketing channels compared to historic performance. While patients from community marketing channels had similarly lower patient contribution in 2021 compared to 2019 as new patients overall, patients from community marketing channels tend to be our most profitable channel in their first year at Oak Street. So as Nick shifts back to community channels, this should improve new patient economics overall. We continue to focus on operating our care model to keep our patients healthy and out of the hospital. Because of these efforts, we've seen a decrease in non-COVID acute care for our tenured patients compared to the same period in 2019. This decrease has largely offset the increase in COVID and non-acute costs for these patients, resulting in equivalent patient contribution for our existing patients this year compared to 2019. Because of this, the overall decrease in patient contribution in 2021 is largely driven by the decrease of new patient contribution, which, as we discussed above, we believe is mainly caused by lower engagement with the healthcare system in 2020. As we discussed in Key 2, 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, which we believe is a trend that began in 2020, both masked by less effective patient assessments due to more care being delivered virtually. The data we've captured here today is more representative of our patient's actual disease burden, and we expect that the increase in revenue per patient in 2022 will drive significant improvement to the patient economics we have seen this year. If COVID-related medical costs recede, causing medical costs to revert to a level more in line with what we witnessed prior to the first half of the 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 the continued strong results on patient growth and operating costs, gives us confidence in the continued strength of our center economics and center ramps. We plan to share additional details around 2021 and forecast the 2022 Center Economics in comparison to historical performance in our year-end call following Q4. Looking forward, our mission at Oak Street is to rebuild healthcare as it should be. For us, that means redesigning the way older adults are cared for across the healthcare continuum. This includes how older adults are engaged by the healthcare system, the composition and operating model of the team that provides them care, the resources available to them beyond traditional primary care, and the data and technology that bring it all together. We believe Oak Street has driven transformational change across all of these dimensions. That said, we continue to innovate across all parts of our model and will continue to do so long in the future to advance our position at the forefront of value-based care. I am proud of our performance to date and the impact our team makes on our patients and communities every day, and I am confident we'll continue to improve along all dimensions as we build out our model. To that end, Q3 is an exciting quarter for Oak Street as we announce our relationship with AARP and the acquisition of RubiconBee. Both have been in works for a long time before Q3 began and were made possible by hard work and perseverance from our team. Being the only primary care provider selected by AARP is an exciting milestone for Oak Street and a testament to the quality of care and outstanding patient experience we deliver. We're the only senior-focused primary care provider nationally to carry the AARP name, and we believe it will enhance our ability to attract and engage patients. We often face the challenge when engaging with potential patients of getting them comfortable trying something that sounds too new to be true. AARP is the most trusted brand for older adults, and by going to market with AARP in a co-branded manner, over time we believe we can more quickly build trust, lead to faster patient growth and deeper patient engagement. AARP has a long track record of helping organizations grow across a range of industries, including within healthcare. Additionally, we are collaborating with AARP on ways to bring wellness activities, enhance patient education, and other benefits to Oaks Street patients and AARP members. A few weeks ago, we closed our acquisition of RubiconMD, the largest virtual specialist network of its kind. Our acquisition of RubiconMD will allow us to include specialty expertise in the primary care setting. It will also give us the ability to provide needed specialty care quickly and be tightly coordinated while reducing unneeded specialist visits. We believe this is the way specialty care should be delivered. In a similar manner to how we resigned primary care for older adults from the ground up, the RubiconMD acquisition will also be the same for specialist care for our patients. The result will be better access, lower costs, superior outcomes, and improved experience. We believe both our exclusive AARP relationship and the Rubicon MD acquisition further differentiate Oak Street, both from the traditional primary care providers and will continue to drive our long-term success. One additional item to comment upon. We disclosed in our 10-Q file yesterday that on November 1st, we received an inquiry from the Department of Justice seeking information related to our relationships with third-party agents or entities and also regarding any advertisement or promotion of our transportation services. At this point, we've had no meaningful conversations with the department and do not possess any additional details beyond the information requested in the inquiry. Since the early days of Oak Street Health, we've aimed to create a compliance-focused culture and maintain what we believe to be an effective compliance program. including utilizing both internal and external compliance advisors. Oak Street strives, in all of our business operations, to operate compliantly and transparently. Our team is currently working on responding to the Department of Justice inquiry, and we intend to cooperate with the department's requests. At this point, we do not possess enough information to speculate on the precise reasons for, the outcome of, or the duration of the Department of Justice's inquiry, although we understand that it is not unusual, particularly in the healthcare industry, for these inquiries to take months or even years to be fully resolved. While we respond to the Department's inquiries, we intend to remain focused on our mission of providing high-quality care to adults on Medicare. In summary, we are encouraged by the performance across the quarter on our key operating metrics. We're also thrilled with the strategic additions of our AARP relationship and Rubicon MD acquisition. Over the last quarter, our team has navigated through a COVID surge, challenging labor markets, driving near-term results while at the same time setting the platform up for differentiated long-term success, transforming healthcare for older adults. I'll now turn it over to Tim Cook, who will walk you through our financial results in more detail.