agilon health, inc. (NYSE:AGL) Q1 2024 Earnings Call Transcript May 8, 2024
agilon health, inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, everyone, and welcome to the agilon health First Quarter 2024 Earnings Conference. My name is Seth, and I’ll be the operator for your call today. [Operator Instructions] I will now hand the floor over to Matthew Gillmor to begin the call. Please go ahead.
Matthew Gillmor: Thank you, operator. Good afternoon, and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I’d like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results.
A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. And with that let me turn things over to Steve.
Steve Sell: Thanks Matt. Good afternoon and thank you for joining us. On today’s call, I’d like to walk you through the following elements. Our Q1 ’24 results and forward guidance. The tangible and rapid progress we’re making against our performance action plan, in particular with strengthened payer relationships an update on our CFO and CMO search, and finally our perspective that against the backdrop of a constrained Medicare program funding environment. The demand for value and the value proposition our company offers, has further accelerated among physician groups and payers, including MA plans and CMS. Starting with our quarterly performance. MA membership grew 43% to 523,000 members, while revenue grew 52% to $1.604 billion.
Both metrics were towards the low-end of our guidance ranges. This was primarily due to timing differences in signing new payer contracts as we work with our health plan partners to refine key terms. Additionally, our updated guidance for membership and revenue reflects our decision to exit certain unprofitable payer contracts which I’ll discuss in a few moments. Medical margin grew 1% to $157 million and reflects an in-quarter medical cost trend of 9.1% which is above the trends we observed in Q4 of 2023. Given the current environment we believe the assumption of continued elevated utilization is a prudent approach. We also recognized $8.7 million of net prior year claims development. Consistent with our approach to first quarter cost trend recognition, we have taken a cautious stance in closing out 2023, given the uncertain environment.
Absent prior year development, medical margin would have been towards the high end of our outlook for the quarter. Adjusted EBITDA grew 21% to $29 million which was above our guidance. This stronger performance reflects better flow-through of medical margin to gross profit and favorable timing of geographic entry costs. During the quarter, we also began ramping our implementation work with five new physician groups that comprise our class of 2025 new partners. Despite the challenging macro dynamics for MA and our measured approach to growth the health care system continues to accelerate towards value and the demand for our platform among high-quality physician groups like the Class of 25 new partners remain strong. Turning to our guidance. We are maintaining our full year medical margin and adjusted EBITDA outlook, with the prior year development we booked in the first quarter being offset by favorable payer contract updates.
Our Q2 and full year guidance assumes that medical cost trends remain at elevated levels. Our paid claims data for some of our largest payers which are relatively complete for January and February, indicates cost trends for our members were elevated in January and began moderating during February. This is also consistent with our real-time indicators, including our expanded use of payer census data which indicates that inpatient utilization moderated throughout the quarter and versus the prior year was relatively flat during the month of March and declined in April. While these indicators are early, we view these data points as encouraging relative to where we booked Q1 and our guidance assumptions. Turning to our performance action plan. We’re making tangible progress executing our plan, which positions us to accelerate performance and profitability.
As a reminder, our plan includes the following four elements; refining our strong payer relationships, expanding support for our primary care doctors to narrow variability, improving data visibility and analytics, and accelerating our operating efficiency. Let me provide a few updates. Starting with payer relationships. As discussed on our last call, our physician partnerships are critically important to payers as a key part of their network and value-based care strategies. Ongoing changes in the environment are driving productive discussions with payers around key terms and several recent successes reinforce this point. First, we’ve negotiated off-cycle percentage of premium rate increases in multiple markets to reflect higher costs associated with payer bids, including supplemental benefit filings.
These improvements were captured in our initial 2024 guidance. Second with a focus on sustaining the long-term relationships with our value-based care network, multiple-regional and national-payers have provided agilon and our partners with a series of adjusted favorable economic terms, including retroactive relief on prior year medical margin losses in a couple of markets, the June 30 exit of an unprofitable group Medicare Advantage contract in a mature market and the Q2 exit of several payer contracts in a year-two market. All of these payer contract changes were made in close collaboration with our local physician partners. The dynamics in the year-two market, including payer benefit changes during 2023 and 2024, elongated the path to sustainable profitability for our partnership, and will result in agilon exiting this market.
Given the tight alignment in our partnerships in the rare circumstance where agilon and our physician partners are not winning together, we have the flexibility to mutually wind down our operations. Overall, we are pleased with our recent progress with payers and we may execute additional contract enhancements for 2024 and 2025 as appropriate. Turning to PCP support. The expanded support for the newest PCPs in our model is on track. In addition to robust training sessions in our mature markets, local medical directors are reinforcing these learnings with an active quarterly review of a PCP’s patient panel to ensure high-risk patients are receiving appropriate interventions, including proactive visits and appropriate enrollment into our clinical programs.
Over time, we believe these efforts will improve and narrow the variability in physician performance across our network, and our partners are already seeing benefits in patient care and consistency of care delivery. For data visibility and analytics, we are making rapid progress standing up our financial data pipeline and leveraging additional data sources. As we have discussed this will enable our internal teams to process and analyze data faster and improve our forecasting and operations. We have now onboarded greater than 55% of member data from our large national plans and CMS into our pipeline. And we are on track to onboard greater than 75% of member data, as we move through Q2. We have also made advances leveraging our expanded use of payer census data and HIE feeds to monitor our inpatient activity.
As I mentioned earlier, our real time payer census data indicates that inpatient activity for our members, which accounts for about 25% of our medical costs, moderated over the course of the first quarter and into April. And finally, for operating efficiency. Earlier this year, we accelerated centralization and better use of technology to reduce our platform support to 3% of revenues in 2024. I am pleased to share that we are ahead of schedule for our targets, and our platform support was just 2.8% of revenue during the quarter. We have made significant investments in our platform in recent years, and we’re starting to recognize the efficiency benefits from these investments. We continue to maintain a very disciplined approach in managing our controllable costs and are assessing additional opportunities to improve internal efficiency.
With respect to the funding environment for Medicare Advantage, like others we were disappointed the final notes for 2025 didn’t reflect the rising costs that have been observed across the industry. Despite this, we believe this environment is reinforcing agilon’s unique role in important ways, especially because the demand for value continues to accelerate among payers and physicians. Payers recognize the value agilon delivers in terms of patient experience, accurate documentation and quality. Our partnerships consistently achieve 4+ star quality ratings and expand access to preventative primary care services. Our value delivery and deep connectivity with PCPs is even more important for payers in a challenging funding environment. We believe this dynamic is supporting our ability to proactively refine our payer contracting, which I discussed earlier.
For primary care doctors, the need for an alternative to fee-for-service, payer demands for value-based care and the strength of our platform continues to drive a robust demand backdrop. Our class of 2025 new physician partners include five leading physician groups with a long history in their communities. More leading physician organizations want to join the agilon network and platform to be part of the movement towards value-based care. Our new partnerships with these five groups demonstrate the power of our growing network, especially in communities where we operate today, like Kentucky, Minnesota and North Carolina. Lastly, let me address the CFO and CMO transition and the ongoing search process. We continue to run a robust process and are impressed by the quality of candidates we have seen and their appreciation and interest in agilon.
Our primary focus is identifying the right candidates for our organization. And we expect to provide a more definitive update on or before our next earnings call. With that, let me turn the call over to Tim.
Tim Bensley: Thanks, Steve and good afternoon. I will cover three items before we go into Q&A. First, additional details on the prior year development we booked in the first quarter; second, balance sheet and cash flow; and third some additional details on our updated guidance. Starting with the prior year development. As Steve noted our results included $8.7 million in net prior claims development. In our 10-Q Filing you will see we booked $16.5 million in total claims development. This includes $7.8 million from retroactive membership, which comes with offsetting revenue that has very limited impact on our medical margins or adjusted EBITDA. The unfavorable development incurred during the quarter reflects our decision to adopt a cautious approach to our 2023 claims runout.
As we discussed with you last call, we applied additional judgment incremental to the claims triangles in setting our 2023 IBNR reserves. Since then, we have observed some higher paid claims in several regions. During the quarter, we maintained the same level of judgment associated with the 2023 and prior dates of service. As a result, the unfavorable development was recognized as incremental expense during the quarter. One important data point — for the class of 2022 and older partners, which represented our same geography partners and payers in 2023 our estimated completion factor for 2023 claims is 93.5%. This is approximately 150 basis points below the actual and known completion factor for these same geographies and payers at this point last year.
We believe this is a positive data point as you think about the adequacy of our reserves for 2023. Turning to our balance sheet and cash flow, agilon ended the quarter with balance sheet cash and marketable securities of $426 million and another $26 million of off-balance sheet cash associated with our ACO REACH entities. We used $69 million of cash during the first quarter, which was consistent with our expectations and reflects the seasonality of our distributions to physician partners and settlements with payers. After considering cash received from the majority of marketable securities, we continue to expect to use $125 million to $150 million of cash during 2024. As we have discussed previously, our cash flow from operations improved during the back half of the year as we settle with payers for performance from the prior year.
Our 2024 guidance would result in a 2025 use of cash of about $25 million with an expectation of positive cash flow in 2026 and beyond which is consistent with the outlook we previously shared with you. Turning to our guidance. We have updated our membership and revenue outlook to reflect the exiting of payer contracts Steve referenced. These contract exits are effective during the second quarter and will be completed by June 30. We’re maintaining our medical margin guidance of $400 million to $450 million and adjusted EBITDA guidance of negative $60 million to negative $15 million. The primary changes in our guidance include the negative prior year development we booked in Q1 being offset by the payer contract updates. With that, let me turn the call back to Steve for some brief closing comments.
Steve Sell: Thanks, Tim. Before opening the lines for Q&A, I wanted to emphasize three key points. First, we are maintaining our full year guidance for medical margin and adjusted EBITDA, and we continue to take a cautious posture with respect to medical cost trends. Second, we are making tangible progress executing our performance action plan, most notably with our payer relationships and operating efficiency. We expect to make additional progress during 2024 and we’ll update you as we move forward. Third, the demand for value is accelerating among physician groups and payers, including MA plans and CMS. Our value proposition to primary care doctors and payers is even more important in a constrained funding environment and will serve as the foundation to accelerate our future performance. With that, why don’t we move to Q&A.
Operator: Thank you. [Operator Instructions] Our first question comes from Ryan Daniels at William Blair. Please go ahead.
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