Cano Health Inc (CANO) 2022 Q3 法說會逐字稿

Or a holding for Cano Health Third Quarter 2022 Earnings Call. The call will be going live momentarily. Thank you for your patience, and please remain on the line. Good afternoon, and welcome to Cano's Health's Third Quarter 2022 Earnings Call. Currently, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. Hosting today's call are Dr. Marlow Hernandez Cano Chairman and Chief Executive Officer; and Brian Koppy, Chief Financial Officer. The Cano's Health press release, webcast link and other related materials are available on the Investor Relations section of Cano's Health's website. As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the 2022 fiscal year. Investors are cautioned not to unduly rely on forward-looking statements, and such statements should not be read or understood as a guarantee of future performance or results. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contain Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. We caution you that the forward-looking statements reflect our best judgment as of today based on the factors currently known to us, and such statements are subject to risks, uncertainties and assumptions that could cause actual future events or results to differ materially from those discussed as a result of various factors, including, but not limited to, risks and uncertainties discussed in our SEC filings. We do not undertake or intend to update any forward-looking statements after this call as a result of new information. During this call, we will also discuss non-GAAP financial measures. The non-GAAP financial measures we will discuss today are not prepared in accordance with GAAP. A reconciliation of the GAAP and non-GAAP results is provided in today's press release and on the Investor Relations section of our website. And with that, I'll turn the call over to Dr. Marlow Hernandez, Chairman and CEO of Cano Health. Please go ahead.

Thank you, and welcome to the call. We appreciate your joining us today. The majority of our prepared remarks will focus on the quarterly results and our expectations going forward. However, I'd be remiss if I did not take the time to acknowledge the impact of hurricanes Fiona and Ian an on the communities in Puerto Rico and Florida. We can have a strong presence, as you know. When these events occur, we feel the impact and rebuild by alongside our community. I'm truly proud of the Cano Health family and its resiliency, determination and urgency to help people in need in communities where we operate. Within days after Hurricane Ian in May landfall, our teams delivered essential items, conducted mobile health exams and supported the most effective communities in Southwest Florida. All medical centers, except for 2, were open and operating under normal conditions shortly after the hurricane. The rest of the management team and I are extremely grateful of the commitment those in our organization display every day. Now on to the third quarter results. Cano Health continued to achieve steady organic growth in Q3. Total membership grew 4.6% from the second quarter to approximately 295,000 members, an increase of 40% year-over-year. Revenue came in at 665 million and adjusted EBITDA at 42.5 million, growing 33% and 200% approximately, respectively, year-over-year. Growth in new members continues to be robust. And importantly, we demonstrated ongoing medical cost ratio and adjusted EBITDA margin improvement. These results are notable achievements during a high-growth base of our company and a sign of our focus on profitability. Demand for primary care services at our medical centers is higher in that, and this momentum provides long-term value creation opportunity. However, this sizable organic growth creates a headwind to current calendar year revenues and profitability. Capitated revenues per member per month, or PMPM, was lower than expected, declining nearly 9% from the second quarter of 2022. This was primarily due to revenue pressures from new members who came in at lower revenue PMPM. We expect the revenue PMPM to normalize in future periods, in line with the existing member base as patients are integrated into Cano Health's national care platform. This was particularly true in Medicare Advantage, which faced a top line quarter-over-quarter PMPM headwind of approximately 30 million. The significant driver of the shortfall has been lower calendar year revenue from new patients with lower Medicare risk adjustment for MRA scores. Since June 1, 2021, we have added a net of 50,000 Medicare Advantage patients to our national care platform, growing from 79,000 patients to our current 128,000 patients. However, our new members came in at lower PMPM than expected, which decreased our consolidated PMPMs. Overall, the lag and reimbursements for these members is a headwind to the current year, but we expect to see incremental risk adjustment and higher revenue PMPM for these numbers beginning in January 2023. Medicare Direct Contracting, or ACO reach, also experienced lower capitated revenue PMPM and was negatively impacted by approximately 18 million in the third quarter of '22, reflecting potential benchmark reductions by the Center for Medicare and Medicaid Innovation, or CMMI. While we have had robust growth in this new service line, the intra-year rate adjustments from CMMI will impact our projections. The program is profitable for us today, and it provides us with the opportunity to measurably improve outcomes for tens of millions of Medicare beneficiaries that are not on Medicare Advantage. Nevertheless, I believe it's appropriate to optimize the network to improve margins. I will discuss this more in a moment. Even with our sustained growth over the last 2 years, which has seen us expand from 3 states plus Puerto Rico to 9 states plus Puerto Rico, we have achieved consistent operating metrics. Our total hospital and emergency room admissions per thousand generic dispensing rates and patient engagement metrics continue to perform very well, contributing to a decrease in third-party medical cost PMPM versus the second quarter of 2022. This demonstrates the portability and effectiveness of our population health management programs, which operate most efficiently with scale and density. As I've discussed before, our strategy has been to build scale and density to serve the most patients in the shortest amount of time with the best clinical and financial results. Over the course of 2022, we have added critical capacity that will enhance value in the coming years. However, the revenue headwinds resulting from new membership growth have slow calendar year earnings growth. As a result, we are prudently lowering our outlook for full year revenue to the range of 2.7 billion to 2.75 billion, and full year adjusted EBITDA to approximately 150 million to 160 million. Our new full year adjusted EBITDA guidance still represents a significant improvement over last year and includes the negative impact of investments we have made throughout 2022 in our tuck-in medical centers. Brian will walk you through the specifics of our guidance shortly. In light of current market environment and consistent with our goals of long-term profitable growth, we took 5 key steps during the quarter to make enhancements to our operating plan. Our near-term goal is to accelerate our path to free cash flow positivity and gain greater leverage from our existing assets. First, we have already begun to optimize our provider network by selectively trimming underperforming affiliates for Medicare Advantage and Medicaid service lines. This optimization will allow us to earn higher margins and share more upside with our better performing providers. We expect the margin profile to improve alongside a reduction in service cost to support them. Second, with the medical centers we have added, and we'll still add in 2022, we have significant capacity for continued growth. The medical centers we added over the prior 18 months have created significant untapped capacity. Our medical center membership can more than double without a single additional example. Consequently, we have delayed, in some cases, cancelled plans for de novos and tuck-in medical centers, which lowers our expected medical center count for year-end. Again, we view this as a prudent step to enhancing our operating leverage and improving our cash flow in the current market environment. Third, to improve overall performance in our ACO of each business, we have deactivated underperforming providers for 2023. As a result, we now expect ACO- of each membership will begin 2023 at approximately 70,000 members. Fourth, we have made important adjustments to payer contracts to improve profitability and cash flow by leveraging our differentiated care platform in key markets. Finally, we will consolidate certain operations and optimize our total cost structure. Although it's too early to give guidance for 2023 in detail, it's important for you to know that we have already begun to prioritize cash flow and self-funded growth, which is essential in the current market environment. Given our organic membership growth and the capacity available at our medical centers, we plan to grow without the need for additional investment while leveraging our capital-light affiliate model to supplement profitable growth. As always, we remain committed to enhancing long-term value for our shareholders. I want to take a moment to discuss our fundamental value creation. At Cano Health fundamental value is created as we help more patients with longer and healthier lives. Although revenue from new patient lags related to payment mechanisms, we have built a great deal of fundamental value, serving more patients than ever while improving clinical outcomes and financial performance. Importantly, this value accrues not just to us, but to share relationship with our providers and payers. It also feels greater innovation in value-based care. I'm proud of the economic and societal benefits that we're bringing to communities around the country, particularly to those who are underserved. As we all know, primary care is essential and scarce. Further, there is increasing demand for primary care because it's the bedrock of the health care system and a company that has the strongest presence in this critical area will be rewarded by the marketplace. Cano Health has built some of the finest primary care assets in key markets around the country and operates a proven population health too that measurably improves care while decreasing medical costs across service lines, models of care and geographies. Value-based care remains highly desirable and one of the most effective structures to improve the health care system, and we are confident that Cano Health will remain at the forefront of this paradigm shift, providing better access, quality and wellness to the communities we serve. Now I'll turn the call over to our CFO, Brian Koppy, who will walk you through our financial results and guidance.

Thank you, Marlow, and thanks, everyone, for joining us today. Total membership increased 40% year-over-year to approximately 295,000 members in the third quarter. This represents an increase of approximately 84,000 members from the third quarter of 2021. In the third quarter, 44% of our members were Medicare Advantage, 13% were Medicare DCE, 25% were Medicaid and 18% were ATA. Total revenue for the quarter was approximately $665 million, up from approximately $499 million a year ago, but down compared to $689 million in the second quarter. Total capitated revenue was approximately $626 million in the third quarter of 2022, down from approximately $655 million in the second quarter of 2022. This 5% sequential decrease was primarily driven by lower-than-expected capitated revenue PMPM from new patients. Our Medicare PMPM in the quarter was $1,148 compared to $1,238 in the second quarter of 2022 and reflects the impact of new patients and the change in the DCE benchmark. Additional information about our membership mix and our PMPM is available in our press release and updated financial supplement slides posted this evening on our website. Our MCR in the third quarter was 78.2% compared to 80.5% in the third quarter of 2021 as lower third-party medical costs PMPM more than offset the decline in capitated revenue PMPM. Excluding DCE, our MCR was approximately 73% in the quarter versus 79.3% in the third quarter of 2021. We still expect the full year GCE-MCR to be approximately 93%. For 2022, we are increasing our full year MCR guidance to 79.5% to 80.5%, an increase from our prior guidance range of 78% to 79%. In the fourth quarter, we largely expect third-party medical cost PMPM to stay flat compared to the third quarter of 2022, but we expect to see a lower capitated revenue PMPM for newer patients. We're also assuming utilization trends will remain stable with current levels and expect the impact from COVID to be immaterial in the fourth quarter. We're also closely monitoring trends in seasonal flu and although it's still early, we haven't seen anything to suggest an unusual impact of this flu season. Direct patient expense in the third quarter of 2022 was 9.6% of revenue. This was above the second quarter of 7.6% and includes incremental costs related to de novos. This metric was in line with our expectations for the quarter. SG&A expense in the third quarter of 2022 was 16.8% of revenue or approximately 15.1% excluding stock compensation. The third quarter included the impact of a onetime fee related to a professional services agreement in addition to the expected costs related to supporting new medical centers brought online during the third quarter and preparation for open enrollment. SG&A expenses incurred in the third quarter related to Hurricane Ian were de minimis, and we expect any repair costs that occur in the fourth quarter should be immaterial as well. Adjusted EBITDA in the quarter was $42.5 million, up from $13.6 million a year ago, producing an adjusted EBITDA margin of 6.4%. The third quarter adjusted EBITDA included higher add-backs related to de nova losses as we brought 9 de novo's during the quarter. Now let me turn to our cash flow and liquidity. We ended the third quarter with about $24 million in cash. Total debt at the end of the third quarter was $937 million and includes current and long-term debt, capital leases and payments due to sellers and our total net debt, defined as total debt less cash was $913 million as of September 30th. Through the third quarter of 2022, year-to-date cash used in operating activities was $84 million, meaning our operating cash flow in the third quarter was about neutral. For the full year of 2022, we now expect cash used in operating activities will be in the range of 130 million to 140 million. We are focused on strengthening our balance sheet, and as Marlow mentioned, our priority is improving cash flow and margins. We ended the quarter with 151 medical centers. As of November 9th, we have 162 medical centers and anticipate to end the year at 170. The lower count compared to our prior guidance reflects the fewer de novos and tuck-in acquisitions, given our focus on cash flow improvement. This reduction will yield slightly lower capital expenditures in the fourth quarter of this year and reduced use of cash in 2023. Now let me summarize our 2022 outlook since our last call in August. We still expect membership for 2022 to be in the range of 300,000 to 305,000. Total revenue is expected to be approximately 2.7 billion to 2.75 billion. This is approximately 5% lower than the midpoint of our prior guidance and reflects lower capitated revenue PMPM. For the full year 2022, we expect our MCR will be in the range of 79.5% to 80.5%, primarily due to the top line revenue pressure Marlow and I previously discussed. The second half of 2022 is still expected to be lower than the total MCR in the first half of the year and will include normal seasonality in medical cost and cost recoveries. We expect to operate 170 medical centers by the end of 2022, and our adjusted EBITDA is expected to be in the range of $150 million to $160 million, down from the prior estimate of approximately $200 million. Given the magnitude, let me walk through some of the items driving this change. Revenue is expected to be lower by approximately $150 million compared to the midpoint of our prior guidance and is offset by favorable third-party medical costs of approximately $85 million. These net to an adjusted EBITDA headwind of approximately $65 million, which is expected to be partially offset by favorable SG&A and direct patient expense. Additionally, we expect interest expense of approximately $60 million, stock-based compensation expense of approximately $60 million and De novo losses of approximately $85 million as well as capital expenditures of approximately $55 million. On our fourth quarter call, we will provide guidance on our expectations for 2023. We believe this year should set a strong foundation for robust organic growth in 2023, particularly as new members integrate into Cano Health's nationwide care platform. As Marlow mentioned, our focus is on prioritizing free cash flow and earnings contribution over growth. The initiatives we outlined are focused on improving profitability by generating greater leverage from our existing asset base, and we expect these initiatives to generate progress on improving our liquidity position and earnings profile. With that, I will ask the operator to open the call to your questions.

Thank you. (Operator Instructions) Our first question will come from Jailenda with Truist Securities.

This is Edward on for Jailenda. Just curious on the revenue PMPM impact. I mean, you're saying that's focused on new members. Are you seeing higher-than-expected churn and thus, your mix of new members is higher than you would have anticipated or is it just actually lower revenue PMPM from new members driving the shortfall in the quarter? And is any of this dynamic coming from any of your new markets?

Yes, hello Edward, this is Marlow. No, we have stable churn. And as I mentioned in my prepared remarks, excellent patient engagement, our NPS scores, Paymetric, all operating metrics are performing very well for us. This is lower-than-expected revenue for new members. And we've had significant new membership growth. As you recall last year, we had a revenue lag of approximately 122 million in MRA. We have received that amount on track to receive slightly more 125 million this year herefore, existing members are performing as expected. The lower PMPMs are coming from the impact of new members and the consolidated PMPM is thus being diluted until it is related, as you know, with the documentation and care management associated with a value-based platform like our own. The reasons are multi factorial, and it may include the 2021 impact from COVID and corresponding lower encounter rates in understripp communities, where we have most of our members. There are also reasons that are outside of the new membership and does impact more broadly, so as sequestration, as you know, starting earlier this year and the DCE benchmark potential adjustment that we have done over the course of the year, first and second quarters that we felt was proven to further adjust based on population specific data that we have received.

Our next question will come from Andrew Mok with USB Investments.

I just want to follow up on Eduardo's question. I'm still a little confused about the sources of MLR pressure. So you called out Medicare Advantage in your prepared remarks. Is that all MA members in clinics that you own?

So when I'm talking Medicare Advantage, I'm talking broadly for our own medical centers as well as our affiliates. And as you know, for direct contracting, Medicare service line, we serve it at our medical centers, but also through our affiliates. Therefore, Andrew, it's for both.

So it's for both. So this pressure is more broad across like the clinic and the affiliate business. I guess if we're trying to bridge the revised guidance, is it falling mostly on the in-center business or the own center business or the affiliate business.

So it's both, Andrew. But of course, you know we have a larger Medicare Advantage footprint in our medical centers and a larger DCE Medicare service line for our affiliates. And therefore, it depends on the service line, but it is impacting both.

Okay. And then I'm still a little confused why year 1 revenue is coming in so much lower than expected. Like do these members not have the risk scores that you expected? And I'm just wondering what were you expecting? It seems like it would be prudent to assume maybe a one or lower for all new members. So how are you seeing this much of a delta in year 1 members?

We have seen a lower delta compared to 2021 and in total net funding. And as you know, Andrew, there was a benchmark adjustment upward for Medicare events as an example, from 2021 to 2022. And yet we are seeing lower overall. And then for DCE, these are changes that are in CMMIs control complex calculations, won't be finalized into some point next year, but we've got to make the prudent assumptions here as to where ultimately, revenue will end.

Got it. Okay. And are you able to share how many new members you have? It just seems like it can't be by my estimates, it's probably not more than 10% of your total membership. So can you help us understand the magnitude of this bucket of new members that you're experiencing issues with?

Yes. So we don't specifically disclose new members. But you can see the kind of net growth rates that we have as well as what is the natural type attrition and then so it's going to be larger than the net so yes, it's having an impact that is diluting our consolidated PMPMs to an amount that is lower than our forecast. And we have to make that adjustment and flowed that through to the end of this year.

Got it. And on the new members to the system, are you seeing similar patterns of new members to your system and churned members?

So our retention rates, engagement scores, Net Promoters all about performing very well and consistent with our historicals. And as it relates to the remainder of the year, we have to assume a sequential decline as would be customary because of the natural attrition of members as well as further impacts from new members until we have that rerating Gen 1 of next year. And then as a result of that step up are able to realize for those new members a higher PMPM.

Got it, thank you.

Our next question comes from Adam Ron with Bank of America, please go ahead.

I think last quarter, you said you saw higher acuity and utilization on new membership due to hospital admissions, outpatient and branded medications. But now I think you're saying you're seeing medical cost favorability. So is that all subsided back towards the expected trend line? Is there anything else that remains elevated?

Yes. So as expected, our medical costs have gone down and we're really happy to see that, in fact, going down the 2 levels that we expect as members are managed in our care platform. And given our emissions per thousand or dispensing rates and all of those, let me call them, utilization metrics that continue to perform very well, the cost of care is down and down quite significantly. Unfortunately, as the midyear reconciliations are completed, and you see the risk scores for this year and net funding related to new patients that is dragging down the overall funding rate that goes beyond the cost improvements, and that is the intra-year pressure that we are seeing.

And then if we could talk about cash, I think I missed some of the moving pieces in your prepared remarks, but where does the current guidance assumes cash I guess, inclusive of any extra liquidity ends up for the year. I want to make sure I'm modeling and understanding this correctly because just the cash and cash equivalent line of 24 million. And I think the cash flow from operations guidance implies negative 50 million next quarter. So I just want to make sure I have a handle on it.

Yes and we haven't put a specific ending balance, but certainly, as we think about where we're going to end the year, we'll be in a net borrowing position. But as Marlow discussed, there's a series of operating improvements that we're implementing that's going to support and enhance some additional cash and operating earnings potential within the operations. And those are the things that we talked about operating our affiliate network, utilizing our capacity to support the growth, improving the overall DC by deactivating some of those underperforming providers some enhancements to our payer contracts for better economics and then certainly consolidating and optimizing our cost structure are going to help improve the overall outlook for that.

And on that net borrowing position, what exactly is the mechanism for that is that like a revolver or just curious like how much room you have on that and what the terms are.

Yes, that's right. I mean we have a large capacity revolver that we have access to, to support fluctuations in our working capital. So we'll leverage that as needed.

Okay. Great. And my last question, you previously were targeting free cash flow breakeven next year. And a lot of the dynamics you were describing like lower risk scores this year and potentially higher utilization on new patients this year should all normalize by 2023 alongside the fact that you're growing slower. So is there any reason why we shouldn't expect free cash flow breakeven next year?

Yes. I mean right now, we're not providing any 2023 guidance or outlook. We're committed to improving our cash flow and liquidity as we turn into next year. And I think you hit it, we do expect these adjustments to normalize as we move into next year, which will support our performance. But as of now, we're not providing any 2023 outlook. We'll certainly provide that in greater detail and full detail on our fourth quarter earnings call.

Got it. Thank you.

Our next question will come from Jeremy Allen, please go ahead.

Just maybe continuing in the vein of talking about 23 or pushing for a little bit of color. Can you say at this point if you'll open any de novos in '23?

Yes, Gary, it's Marlow. We've got a great deal of fun capacity as I said in my prepared remarks. And we can easily double our membership without an additional exam, an additional square foot. The priority for us in the current environment is to emphasize cash generation earnings growth. We've got the assets that we can leverage for that. We will opportunistically as necessary look at building additional scale and density, which you know has always been part of our strategy. But in the current market environment, our focus for the time being is that accelerated path to free cash flows and earnings growth.

And I know you're not providing 23 guidance. But given the initiatives you laid out, I mean, should our expectation be that EBITDA grows next year?

So we will give you the specifics on 2023 for our Q4. But certainly, the emphasis is on EBITDA, earnings and cash flow. And we will get back to you with specifics as was asked on a previous question and remind just understanding the dynamics of our business and the normalization in funding rates or revenue per member as well as natural cohort maturation and filling capacity that results in a significant in degree of earnings contribution beyond fixed cost, you can have an idea there as to how we're thinking about 23 and would expect. And nevertheless, I want to get back to you with details not only associated by the operating initiatives we described but also as to what we can expect as it relates to growth and the specific markets and service lines that we operate. Needless to say, as Brian and I both mentioned, we are committed to robust self-funded growth and the emphasis today is to accelerate path to cash flow and get greater earnings over growth. Of course, we have a significant capacity with embedded additional growth and EBITDA generation that we will leverage. What we see that today by the investments we have made throughout '22 positions us very well for short- and long-term value creation.

Can I just get in one more maybe this might help to bridge Andrew's question a little bit. But when we look at the per member per month for MA for Medicaid, for DCE, even for ACA, all down a fair amount sequentially, certainly, it looks like it's more than just this quarter. It looks like it's sort of truing up the year for the right place. And I guess I just want to understand if that's correct. And if so, does that mean sequentially, the 4Q per member per month would be a little bit higher or is this the run rate on those PMPMs for 4Q?

Yes. I mean, first I'll take the DC, for example, the way they do it, it is for the most part, a year-to-date catch up. So some of that is catching up for the full year. So that's going to impact the quarter a little disproportionately then when you think about the run rate so that's going to help. And then as far as the rest of the business, it's we'll continue to monitor it. And I think you can kind of get there based on the MCR projections and the overall revenue guidance. We'll put you on today.

Okay. Thanks.

Our next question will come from Brian Tanquilut with Jefferies, please go ahead.

Hey good afternoon. Just circling back on the guidance. As I think about the guidance adjustment for the year and the mix that you had for the quarter, I know there's typical seasonality from Q3 to Q4. But is there a worsening in the business that you're baking in or is that we should be thinking about and maybe that carries over into next year as well as we think about your outlook for next year. Like what is it that drives seemingly a worsening outcome or outlook for Q4 versus Q3 other than seasonality?

Yes. So categorically, no worsening on the business. Fundamentally, as I mentioned, from an operating perspective and serving more members and helping them live longer, healthier lives while achieving greater margins as a result of those clinical outcomes improvement. None of that has changed it has only strengthened this year as we have been discussing, and as a result of the latest reconciliation, we were surprised to see the lower revenue rates for new patients. And then to a lesser extent, although we have been doing some adjustments you have like the BCE, the benchmark adjustment and overall, for everyone, like the impact of sequestration. But what and we're seeing now is a typical intra-year performance in which you will see on the revenue side, some funding declines because of the natural attrition and the impact of new members. We saw a lot more of that than anticipated. And as Brian mentioned, still expecting a better second half medical cost ratio than the first half. And you can understand by our guidance, what we're seeing in terms of the fourth quarter, even as we bring in additional medical centers online, make additional investments in tuck-in medical centers and lapsed some sensors that from last year, we no longer add back yet continue to ramp up in new and existing markets. So this has been a year where we have built scale and density, where we have brought online remarkable medical centers that are positioning us very well for '23 and beyond to serve the large and growing demand for primary care in our recurring revenue model that is funded by governments and something that the market is demanding an ever-increasing levels. So one way of saying that the business operations by every single metric and then that includes the comparison to last year and last quarter. And the industry as a whole is performing very well from a forecasting perspective. We have lower PMPMs from new members that will rate come next year and given the dynamics of our business and the continued growth of our existing centers, we are very well positioned for 2023 and beyond.

Got it. And then I guess for Marlow and Brian, as the cash balance has declined, right, with the cash balance is there a concern within the management team or I'm not sure this is rational. But as a risk-bearing entity, do your clients, do your Manline bring that up as an area of possible concern that you have a fairly tight cash position at this point?

No. I think most people understand at least our customers and our payers understand the dynamics of the market and the payment cycle, the revenue cycle process. And there is this lag in the revenue receipts versus the services incurred. So generally, they understand these, I'll call it, seasonal or year-to-year fluctuations, particularly in a business like ours that's growing very rapidly.

Got it, thnk you.

Our next question will come from Jason Cassorla with Citibank, pease go ahead.

Yes. Great. I'm just going to ask a question from the line of questioning you've heard before, but you've grown membership pretty significantly in '22, but you also had happy membership growth in '21. Maybe can you just talk about the risk adjustment capture that you got this year on the new members that came on in '21 and then if that could help inform how you think about risk adjustment capture on this 2022 new member population, I guess, for 2023? So just how historical can imply for next year and making up these EBITDA pressures?

Yes. No, that's an interesting question and the right way to look at it because second half of a given year, you have less opportunity to get the clinical encounters required in order to have the right risk adjustment. We had a very significant growth at the end of 2021. That was also coincided with (inaudible) Amacom Wave. And you have encounters and we've got excellent patient engagement scores, but there's still work to do there as we get those patients fully integrated into our platform and care management programs. So that's why I highlighted in my remarks that the net of new patients of 50 plus thousands in Medicare Advantage is June of 2021. And while new patients this year has certainly put a significant pressure coming in at lower PMPMs, you do have some additional opportunity in second half of 21 new patients, new centers, bolting-on patients from acquisitions that we did in the summer of '21. So yes, we've got a lot of tailwinds going into '23.

Okay. Thanks. And then just as a follow-up, I guess, Marlow going back to your 5 steps and looking to enhance performance here. Interesting on the payer contract adjustments. So can you give us a flavor of what you're looking at their sustainability of those adjustments and what you're hoping and expecting to achieve out of those on a run rate basis, that would be helpful.

Sure. Well, we need to have the right funding, the right incentives, the right components here in any contract where we are fairly compensated for the quality of care that we provide members. We've got scale and density in key markets, combined with the unique delivery system that has proven performance, whether at medical centers or affiliates, whether Medicare or Medicaid or ACA in various geographies. And that is something that we work with our payer partners on because we provide a measurable quality benefit literal quality stars benefit as well as growth significantly beyond the market and the utilization management or the risk management that everyone is looking for. So those 3 factors are trifecta are what we are known for, and it's scarce across the country, particularly those which can do it across service lines or across models of care and those who can do it for underserved communities. But yes, it's about having the right contracts in place where the win-wins are created.

Sorry, just quickly to follow up on that. Is there a big disparity between high-performing type of contracts that you feel are good at this point versus those that really need attention? Is there a large disparity or is it just working around those and just pushing your value? I'm just trying to understand from that perspective

We continue to evaluate our payer partners, the associated contracts and capabilities and can vary market by market, even with the same payer and that's part of what we do in the orderly course of business. But given the market environment, we prioritized those changes alongside the other initiatives that I discussed.

Okay. Great, thanks.

And our next question will come from Josh Raskin with Nephron Research LLC.

So I'm just trying to understand the mechanics here, right? So last quarter were new members coming in at higher costs. And then this quarter, these new members are coming in at lower revenues. I'm assuming these are the same human beings. So that's the first question. Second is, what was the catalyst for the revenue recognition or revenue reduction, I should say, what information other than the DC, I mean on the MA side? And then I thought you were booking revenues on a cash basis. I thought we had this whole conversion done earlier. And so I'm just trying to understand the mechanics of what happened here.

Yes, Josh. So last quarter, we had seen kind of higher acuity that we're driving up NCR, and we expected the medical costs to come down. The medical costs came down. I said last time that the early evidence suggested that our IBNR reserves were perhaps high, but we didn't have enough information to adjust them downward as we got the reconcile data, we got the reconciliations that proved that to be the case. And those are the lower cost, more consistent, still a higher overall MCR, but more consistent with what we expected is what we are seeing. But then you have at the end of the third quarter. So in August, September, the midyear reconciliations for MRA or Medicare risk adjustment that is effectively a cash basis, as you would call it, once they're there that's what you're getting for the year. You have a small amount in final MRA. But for the most part, you have that revenue set and those reconciliations going through October as we were seeing those, we were surprised to see that the MRA for the entire population was reduced. Remember on the last call, we've got 3 months of reconcile service funds, correct? And so now we've got materially more than that, more like 6, 7 months of reconciliations. And what we have seen in the first 3 months, effectively of the year that we had in all that reconciliation is at high cost pressure, high MCR. Now you get through the rest of the year, an additional 6 months or so of new membership and the lower revenues are what is below expectations, costs going in line, lower revenues is what is called an intra-year pressure. And as we know, that has a mechanism for correction. Last year, we saw that in the form of, as I mentioned, approximately $120 million of MRA. We are on track to receive more than that this year related to patients last year. So while we're not going to give specifics on '23, I'm still going to complete the year. We would expect the similar associated adjustment as we are serving the patients and also just the entire population. And once we've completed those calculations along with our full outlook, we'll share that with you.

Okay. Got you. How much of the $55 million this year in CapEx guidance for the full year is from building out new centers or kind of growth capital discretionary versus what you think you need to maintain?

Yes. Sure, Josh, this is Brian. A significant majority of the maintenance CapEx is very minimal. So when we looked at our CapEx this year, you can think of it essentially nearly all of it or a significant majority of it is going to be driven by new builds, expansion of existing centers to create that additional capacity. So that's the focus of the spending on the CapEx is all around primarily enhanced capacity, not necessarily just ongoing maintenance. And as we said, going into 2023, we have enough capacity that we can continue to grow. So that CapEx spending will be significantly reduced as a result of that, which is part of our overall efforts to improve financial outcomes and improve cash flows as we go into 2023.

Yes, that's what I'm getting at. If you model in no center growth, you model in CapEx that's down, as you said, a significant majority.

That's right. You would think a maintenance CapEx is roughly $50,000 per site

Is maintenance?

That is maintenance that's correct.

Okay. Got you. And then last one, and I don't know how much you want to say on this one, but you guys have been public now for a couple of years. It's lots of fits and starts, which talks to the nature of the business and the environment you see it across your peers. Does it make sense now just based on where the balance sheet is and the need to borrow funds in the fourth quarter on a short-term basis at least. Does it make sense to be part of a better funded entity, something that someone that can more easily enable the goals of national primary care to get you sort of back on track for what you were trying to do.

What I would say to that, Josh, is that we are focused on improving our earnings and accelerating cash flow positivity. We've got a great deal of momentum and tailwinds into 2023. We remain open to opportunities that allow us to capitalize further on that. It makes sense for our shareholders. The focus of our company, as I said, is in accelerating free cash flows and adding significantly to the bottom line.

Thanks.

And that will conclude today's question-and-answer session. I would now like to turn the call back to Brian Koppy for any closing remarks.

Thank you very much. I appreciate everyone taking the time this evening and talk to you soon.

Thank you. And this will conclude today's conference. Thank you for your participation, and you may now disconnect.