Cano Health Inc (CANO) 2021 Q4 法說會逐字稿

Good afternoon, and welcome to Cano Health's Fourth Quarter 2021 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. Hosting today's call are Dr. Marlow Hernandez, Chairman and Chief Executive Officer; and Brian Koppy, Chief Financial Officer.

The Cano Health press release webcast link and audio-related materials are available on the Investor Relations section of Cano Health's website. These statements are made as of March 14, 2022, and reflect management's views and expectations at this time and are subject to various risks, uncertainties and assumptions.

As a reminder, this call contains forward-looking statements regarding future events and financial performance, including our guidance for the fiscal year 2022. We intend that these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. We caution you that the following forward-looking statements reflect our best judgment as of today based on factors that are currently known to us, and actual future events or results could differ materially.

During the call, we'll also discuss non-GAAP financial measures. The nonrevenue 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 are on the website at the Investor Relations section.

With that, I'll turn the call over to Dr. Marlow Hernandez, Chairman and Chief Executive Officer of Cano Health. Please go ahead.

Thank you, and welcome to the call. We appreciate you joining us this afternoon on short notice. Cano Health reached important milestones and delivered strong results during the fourth quarter and throughout 2021. I want to start by thanking the entire Cano Health team. Together, we've continued to make great strides in the company's growth while improving quality during the worst pandemic of the last 100 years. Yield it up to our values, what we call Cano Strong.

Over the course of 2021, we more than doubled the size of Cano Health, both in terms of revenue and membership. This expansion brought the Cano Health model to 5 new states and added more than 100,000 new patients. We did all of this while adhering to Cano Health's core mission to provide patients with high-quality, high-touch care while producing better outcomes at lower cost.

I'm particularly proud of how our model benefits underserved patients, those who would otherwise not be able to receive high-quality care. We are saving lives and transforming communities. And with each passing day, we are reaching more patients through our differentiated approach to growth. And as a product of our mission, we are creating value for all of our stakeholders.

In 2021, we expanded our owned medical center footprint substantially, adding 50 (inaudible) centers across the country, ending the year with 130 owned medical centers and over 1,000 affiliates in 8 states and Puerto Rico. We are growing fast in markets outside of Florida. In Texas, for example, we now have 11 medical centers located in San Antonio, Corpus Christi and Rio Grande Valley. In Nevada, we ended the year with 8 centers in Las Vegas. By employing our unique build, buy, manage strategy, we are quickly achieving scale and density in these communities and positively impacting the health of our patients, improving access, quality and wellness.

In Las Vegas, where we've been operating for approximately 1 year, we have reduced admissions per 1,000 APTs from 287 in the first quarter of 2021 to 209 in the fourth quarter with a readmission rate below 11%. We have become an integral part of the community where the staff comprised entirely of local professionals who reflect the population we serve, powered by CanoPanorama, our population health platform. These providers and clinical support staff members are transforming health care and redefining primary care in their community.

Our strong financial performance is a result of core fundamentals of providing better patient experience and health care quality. We measure patient experience using Net Promoter Score or NPS, which is 83, and we measure quality by our average star rating, which is 4.7. In our Texas and Nevada markets, our early results show NPS scores at or above our company average, solid quality ratings and better-than-expected medical cost optimization. This early success demonstrates the scalability of our model.

At the end of 2021, we proudly served approximately 227,000 members across 8 states and Puerto Rico, a 115% increase from our membership at the end of 2020. Further, we are already seeing strong membership growth across our markets in 2022. We expect to have a total membership at the end of March '22 of 265,000, up from 253,000 members as of January 1. That expected increase in membership at the end of March represents approximately 127% year-over-year growth, including 59% organic growth.

I should note that acquisitions were an important source of growth for us in 2021. These included the acquisitions of University Health Care in June and Doctor's Medical Centers in July. Performance of these acquisitions has so far exceeded our expectations and we expect even stronger contributions to revenue and earnings in 2022.

Let me now turn to the technical accounting change we implemented over the last 2 weeks. This was related to a change in the timing of recognizing Medicare risk adjustment revenue. As a result, we have restated our quarterly financials for the first 3 quarters of 2021. Brian will provide more detail about this accounting change, but it's important for you to know that it had no impact on our cash position or the strong fundamentals of our business. Our long-term opportunities are truly exciting. Primary care and population health management are essential to providing the best quality of care while bending the cost curves.

These services are not wants. They are needs. Market demand is large and growing. The care we provide is primarily paid for by the federal government, state governments and employers, and they increasingly want to ensure that their funds are being spent effectively and equitably. Given the importance to national goals, the Centers for Medicare & Medicaid or CMS is working to further accelerate the shift to value-based care with an increasing focus on health equity.

As an example, CMS recently announced a redesign of the direct contracting entity, or DCE program, the new ACO REACH program will begin in January 2023. We are pleased with what we have learned about the new program, and we expect to participate in 2023 and beyond.

Despite the tremendous demand for value-based primary care, clinical capacity remains scarce, which means there is a large space to fill. We believe the companies who can step up to serve this demand at scale, improving quality while reducing cost, will become the largest and most influential health care companies in our country.

In short, our performance and growth prospects continue to reinforce our confidence in Cano Health's national care platform designed to improve access, quality and wellness and our growth strategy of building, buying and managing medical centers. We are proud of the critical role Cano Health plays in the care of underserved populations, and we are committed to becoming America's primary care provider.

Now I'll turn the call over to our CFO, Brian Koppy, who will walk you through additional details on our financial performance and the outlook as well as the impact of the recent accounting change.

Thank you, Marlow, and thanks, everyone, for joining us today. To start, I would like to express my appreciation to our team for their quick response in addressing the recent change in our revenue recognition accounting. I am proud of the diligent work they did to provide our shareholders with our restated results today.

As we have stated, our goal is to achieve consistent growth and operating results as we rapidly increase scale and density in new and existing markets. This quarter's results and our outlook for 2022 affirm our confidence in our ability to do just that. Membership increased 115% year-over-year to approximately 227,000 members in the fourth quarter. This represents an increase of more than 121,000 members from a year ago. In the fourth quarter, 56% of our members were Medicare, 29% were Medicaid and 15% were ACA. Additional information about our membership mix and our PMPM or per member per month revenue by line of business is available in our press release and updated financial supplement slides posted this afternoon on our website.

Let me briefly discuss the restatement results due to the change in revenue recognition. While we finalized our audit for fiscal year 2021, we and our independent auditor identified certain noncash adjustments to revenue under accounting standard ASC 606. Previously, the company recognized Medicare risk adjustment or MRA as a change to Medicare PMPM at the date of service, in other words, when we saw the patient. Under this approach, when identifying a member's chronic conditions such as diabetes, we would accrue the MRA revenue to match the timing of that revenue with the timing of the corresponding patient care costs.

With the accounting change, most of the MRA is now recognized as a change to Medicare PMPM in the period of collection, that is in the year after we documented their health condition. The adjustments only impact the timing of revenue recognition, delaying recognition of current year MRA to the subsequent year. Importantly, the adjustments do not impact Cano Health's cash from operations, cash position or the estimated collectibility of MRA receivables. The impact on 2019 and 2020 financial results were not material. The reason the change in revenue recognition was material in 2021 is the significant membership growth in 2021 and the deferred care due to COVID-19 in 2020 that artificially reduced MRA payments in 2021.

Our fourth quarter results are detailed in our press release and 10-K filed today. I'd like to spend time walking through what we think investors are most interested in learning about, that is the impact of the accounting change on our 2021 revenue and adjusted EBITDA and our 2022 guidance. So for this portion of the discussion, it may be helpful to refer to Slides 12 and 13 in our financial supplement available on our Investor Relations website where we illustrate the impact of these changes.

As a result of the restatement, approximately $122 million of MRA revenue related to care provided during 2021 that would have previously been recognized in 2021 is now expected to be recognized in 2022. This reduces revenue that would have been reported under our previous accounting methodology by approximately $122 million. This $122 million reduction is partially offset by $10 million in MRA revenue that was previously recognized in 2020 under the previous accounting methodology for a net negative impact to 2021 revenue of approximately $112 million. Importantly, absent the change in accounting, our $1.72 billion in revenue was in line with our November 2021 revenue guidance of approximately $1.7 billion.

Turning to 2021 adjusted EBITDA. As a result of the restatement, approximately $101 million of 2021 adjusted EBITDA related to the change in MRA revenue described above as well as other noncash items is now expected to be recognized in 2022. The $101 million reduction in 2021 is partially offset by $10 million that was previously recognized in 2020 under the prior accounting methodology for a negative impact to 2021 adjusted EBITDA of $91 million. Again, absent the change in accounting, our $118.2 million in adjusted EBITDA was in line with our November 2021 adjusted EBITDA guidance of approximately $118 million.

Now turning to the impact of the change on our 2022 guidance. For revenue, the net positive impact from the restatement is expected to add [$69 million] revenue to the midpoint of our prior guidance of $2.65 billion. The $69 million change consists of $122 million of MRA revenue related to care provided in 2021, net of $53 million of revenue included in previous 2022 guidance that is now expected to be recognized in 2023. This revenue recognition timing change has the impact of bringing our 2022 revenue guidance midpoint up from $2.65 billion to $2.72 billion. However, incremental to this accounting adjustment, we are now expecting an additional $80 million to $180 million of revenue related to improved organic growth. As such, we are further raising our full year 2022 revenue guidance to a range of $2.8 billion to $2.9 billion.

The accounting change also impacts the reported medical claims ratio or MCR in 2021 and our expectations for 2022. In 2021, the restated MCR was 80.5% and would have been 74.9% under the prior accounting methodology. This increase is driven by the change in MRA revenue recognition which reduced 2021 revenue by $112 million and increases 2022 revenue by $69 million. For 2022, we are projecting an MCR in the range of 76.0% to 76.5%, reflecting the MRA-related accounting change and operational improvements, partially offset by higher DCE membership. And seasonally, the MCR for the first half of the year should be higher than the second half of the year.

For 2022 adjusted EBITDA guidance, the net positive impact from the restatement is expected to add approximately $58 million to the midpoint of our prior guidance of $170 million to $175 million. The $58 million change consists of $100 million of adjusted EBITDA that will now be recognized in 2022, partially offset by $43 million in adjusted EBITDA included in previous 2022 guidance that is now expected to be recognized in 2023. Once again, this increase is related to the change in the accounting methodology. Also, because of the improved fundamentals of our business, we are further increasing our 2022 adjusted EBITDA guidance to a range of $230 million to $240 million. We view our updated 2022 adjusted EBITDA guidance as our new baseline, and we fully expect to further grow from this level in 2023.

Now let me turn to our cash flow and liquidity. We ended the fourth quarter with about $163 million in cash, and our $120 million revolving line of credit was undrawn. Total debt at the end of the fourth quarter was $953 million and includes long-term debt, capital leases and payments due to sellers. Our total net debt was $790 million, defined as total debt less cash. During 2021, cash used in operating activities was $129 million, an increase of $36 million sequentially due to working capital needs (inaudible) growth.

For the full year of 2022, we expect the strength of our existing operations and the recent acquisitions to generate positive operating cash flows that will continue to drive growth. We ended 2021 with 130 medical centers and more than 1,000 affiliates. This included 20 de novos completed during the year, in line with our guidance. In addition, we expanded our square footage at a number of our centers, expanding additional clinical capacity to serve our growing membership base.

Our strategy is to continue to build scale and density in our targeted markets. Creating capacity and taking market share in a timely and capital-efficient way is paramount to our growth plans. We utilize each of our 3 growth avenues, building, buying and managing, either individually or in combination, depending upon the opportunities available. This results in the most efficient use of capital, which we believe allows us to manage the greatest number of patients in the shortest amount of time with the least amount of risk. We believe this, in turn, ensures sustainable, profitable growth and market leadership.

Our growth strategy provides our market leaders with the necessary tools to grow their markets as efficiently as possible. What do I mean by this? As we discussed in the past, we do not have a one-size-fits-all strategy for growth. We allow the local market leadership to determine the best course of action to grow profitably. All health care is local, and our leadership in the markets have P&L responsibility. That means as market dynamics change, particularly in relation to the cost-benefit trade-off between building a medical center and purchasing small medical practices as tuck-ins, local leaders can make a business case for adapting their growth strategy and deploying capital in the most efficient manner.

As we executed on our strategy throughout 2021 and now into 2022, we are seeing interesting market dynamics as we analyze our build strategy compared to some of the many small tuck-in opportunities that come our way. As it relates to de novos built from the ground up, we are seeing higher construction costs and longer construction lead times due to labor and supply chain challenges. Conversely, more small medical practices are becoming available. And importantly, the valuations of these tuck-in medical practices are lower than a year ago.

As a result, when we look at the deployment of capital, in some areas, the risk/reward trade-off is skewing more favorably toward adding small tuck-in practices versus building de novos from scratch. The basic math we look at is that it typically costs approximately $1.5 million to $2 million to build out a medical center, and that center will lose approximately $1.5 million in the first 2 years for a net CapEx and OpEx cost of $3 million to $3.5 million.

However, we are finding many attractive tuck-in practices that we can officially add for less than this sum. Notably, these practices will come with physicians and staff who know and understand the patient population along with membership, revenue and adjusted EBITDA. In addition, we get greater speed to market and more rapid access to scarce clinical capacity and market intelligence.

So as we move into 2022, that more of our new medical centers will come from tuck-ins than we had previously anticipated. It's important to note that at the end of the year, we still expect to have approximately 184 to 189 medical centers. We believe that our flexible growth strategy of buying, building and managing will allow us to achieve the planned medical center count more efficiently.

Now let me summarize our 2022 outlook for you. We expect membership for 2022 to be in the range of 290,000 to 295,000 from the previous estimate of 280,000 to 285,000. Membership as of March 31, 2022, is expected to be approximately 265,000. Total revenue is expected to be approximately $2.8 billion to $2.9 billion. For the full year 2022, we expect our MCR will be in the range of 76% to 76.5%. Our adjusted EBITDA is expected to be $230 million to $240 million, which we view as our new baseline for expected growth in 2023. Our owned medical centers at the end of 2022 are expected to be in the range of 184 to 189, up from 130 at the end of 2021. Additionally, we expect interest expense of $65 million to $70 million, stock-based compensation expense of $60 million to $65 million and capital expenditures of $40 million to $60 million. And as noted in today's earnings release, we expect to be able to achieve our 2022 guidance without the need for additional financing.

With that, I'll ask the operator to open the call to your questions.

(Operator Instructions) Your first question comes from the line of Jason Cassorla from Citi.

Great. Just wanted to ask a question on '22 guidance. So putting aside the dynamics around the risk adjustment, the $80 million to $180 million on the incremental revenue growth, the flat to slightly positive EBITDA growth for '22, is that largely given the incremental DCE membership coming in at, call it, breakeven margins? Or how should we think about the puts and takes around the operational revenue and EBITDA updates for '22 guidance?

Yes. Thank you. And yes, a lot of -- certainly, the DCE membership is providing a nice lift in the revenue and as we take an early position of margin-neutral to slightly positive with that business. But we also are seeing some additional upside in our base business from incremental membership. So mainly DCE, but also some nice core business membership growth that we're expecting for 2022 to drive that revenue.

Got it. Okay. And then I just wanted to go to your prepared remarks around the risk/reward trade-off between M&A and de novos. So is this change in the de novo expectations kind of geographically concentrated or broad based in terms of the higher cost to build and a better argument for M&A? And then would the argument be that any incremental M&A around this front be upside the '22 guidance? Or how would you frame that?

Yes. I think we are seeing it more broad-based. Certainly, different geographies have higher construction costs and other costs, but we are certainly seeing a lift pretty much across all geographies on different levels, of course. So I think that's the way we're thinking of it. And then as far as your second point around M&A, it's certainly incremental to anything that we would do going forward. But generally, our guidance assumes that we can build the capacity we needed in order to hit the growth that expected within our business.

Your next question comes from the line of Gary Taylor from Cowen.

I wanted to go back to just a few things. One, just on the CapEx, Brian, that you just mentioned, the $40 million to $60 million. That would be inclusive of some de novo range, which if I kind of look at what '21 look like, I mean, would imply, I don't know, 20 to 25 de novos. Should we be thinking about it that way, just looking at the CapEx guide?

Yes. I think the way we're approaching the markets very uniquely in terms of allowing the market leaders to decide what is the best course of action. So we're not focused so much on the number of de novos. We're really focused on the company built within each one of those markets. What we've done is we have a budget that we're going to work within the markets, and that's how they're going to think about what their opportunities are and stay fiscally responsible, I'll put it.

And as I mentioned, the business cases are coming in from each of the markets to decide what's the best avenue for growth. So we're really trying to focus on the highest use and most efficient use of our capital to get that greatest return, not so much on a specific de novo count.

And Gary, this is Marlow. Let me add to what Brian just said. Historically, we have always had different types of new medical centers. And as you know, we acquire or build the boxes in different ways. And so they're going to be in different stages of development.

Historically, we tucked in approximately 10% of our membership from affiliates, and that's part of our organic growth. What we're seeing this year is a greater number of our total new center count is going to likely come from tuck-ins than we anticipated. And it's because we are seeing higher construction costs. We're seeing longer construction time lines. We're seeing supply chain disruptions and ultimately, less ROI than what we can get through having already built medical centers.

Sometimes they are our own affiliates. Sometimes they're as built medical centers that don't cost us as much, but give us the square footage that we need and we can get in there immediately and don't have lead time. And then, yes, sometimes we are building from scratch, ground up, but we're doing less of that than we initially anticipated because that is the responsible thing to do in the current environment.

It makes sense. Just as a quick follow on that tuck-in acquisition, is there CapEx that needs to be spent? Do you have to relocate and sort of create a bit of the retail concept? Can you work with the existing square footage? Or is that probably also just very much a market by market, case by case?

It is a market by market. The CapEx is generally really limited. What we've historically budgeted is somewhere around $30,000 to $50,000 to spruce up the place, if you will. But the way we look at it is in terms of what is the investment to get that medical center. And then what's the lead time to get that medical center and to get the staff in a tight labor market.

And so as you go from our history and our filings, we have acquisitions. But when we're referring to acquisitions or inorganic growth, we're talking about the University's and Doctor's Medical Center's platform or medium-sized company. We're not referring to the single practitioner -- single medical practice. And that is what we're seeing a lot more opportunity in terms of arriving at a greater clinical capacity.

In the past, what we would have done is generally relocate those into other centers, but we're seeing really good clinical capacity. We're seeing multiples in smaller practices and frankly, some medium (inaudible) of decreasing. And we certainly are going to be thoughtful about that. We are guiding to our total accounts as before. But a greater proportion will be those locally adjacent practice or affiliates that we have historically tucked in.

Just one more quick one, if I could. I'm pretty sure or I know your adjusted EBITDA guidance excludes de novo losses now that you're not guiding to a specific de novo number because it's a little bit change of a growth avenue than it probably means there's not a definitive de novo loss number to give us for the year. I assume that's right. You can correct me if I'm wrong. But just on the MLR guidance or the MCR guidance, those de novo losses were primarily contemplated coming out of G&A. So is there any impact on what you end up building versus buying de novo losses on that MCR guidance?

What I would tell you, Gary, is that, first of all, the losses that are add-backs, as you know, is 12 months post and there are some that are coming from 2021. As you know, we opened quite a number of de novos at the end of 2021, and still, we'll be opening a significant number from scratch, ground-up de novos. The specific mix, the specific amount of add-back, that may be a bit difficult for us to comment on right now, but confident that our EBITDA guidance of $230 million, $240 million, and jumping from there into 2023.

From a medical cost perspective or the MCR, we will generally see a headwind from those new members, whether they're in our de novos or new affiliates. So the add-backs don't affect medical loss in any way. They will give us a P&L adjustment so that you can compare base business to base business from a cash flow and EBITDA basis, but your MLR will not be impacted in any way by add-backs, understanding, of course, that MLR will have an impact, a headwind from new membership.

And now in particular with the technical accounting change, that means we're having costs this year and those premium rates, that acuity, we won't collect until the following. However, all that has now been calculated into our guidance, as Brian went into detail. And I would encourage you and everyone listening to visit our website, go through the investor materials. I think they did a great job in describing detail around all of those components.

Your next question comes from the line of Jailendra Singh from Credit Suisse.

Just following up on the comment on the MLR, Dr. Marlow, you just made about expectations for '22. I know there are some more puts and takes here in this year versus last year. Just maybe flesh out a little bit about the quarterly cadence. Do you guys still expect Q1 to be like highest MLR, Q4 to be lowest MLR? Clearly, Jan data on COVID cases might push MLR higher, but just curious about the quarterly cadence, how you think about the MLR trends this year.

Yes. So Jaile, that is exactly the same, although the absolute number is a bit different. The trend is the same in which we will see a higher utilization than towards -- in the first half of the year than towards the second half of the year because of the holidays, but also because of members' stop-loss, where you'll see a lower MLR. And thus, for the year, we're giving you that 76%, 76.5% MCR guidance. But we do expect to be slightly higher in the first half than in the second half as per our historical averages.

Okay. And then I wanted to follow up on your thoughts around the implications of recent -- essentially a redesign of the direct contracting program, maybe talk a little bit more about the implication from your perspective and the company's positioning this (inaudible) REACH model. I was looking at the slide you have here, you're not expecting any impact on your Medicare PMPM in 2023 from any changes around this program. Just curious around some additional thoughts around some changes being implemented there.

Yes. DCE to become now ACO REACH is a big opportunity for us and for the country, really, applauding CMS efforts to make health care quality more equitable and to do that while controlling cost. So what we have seen, albeit early, is that it presents upside opportunity beyond what we were already bullish on.

To give specifics, I think it's hard and premature at this moment. The program will start in '23, but very much looking forward to participating. As you know, there are changes and those have different puts and takes, but we believe that on par, they are very positive. And again, we applaud CMS for their efforts.

Your next question comes from the line of Josh Raskin from Nephron Research.

First question, just on the 29 centers that you opened outside of Florida in 2021. I'm curious how those MLRs were progressing. I'm assuming just higher than what you've seen for your existing, but maybe directionally and sort of in terms of improvement. And I'd be even more specifically interested on the 10 that were in the new states of California, Illinois, New Mexico.

Yes. Well, I appreciate the question, Josh. And I would point you to our VIE or variable interest entities, in which you can get a snapshot of performance in Texas and Nevada rolled up there. I wouldn't be able to give you specifics on Illinois, California. We just started there, just a few months ago, but definitely something that we'll be talking about in the future.

We have been very pleased with our medical cost optimization in our new markets. Approximately, as I mentioned during my remarks, in Vegas, we've been there for a year. And I made specific references to the reductions in APTs or admissions per 1,000. Admissions per 1,000, how that trends, that's generally how your medical loss or medical cost will trend. And we've been doing very well there. We've been doing very well in Texas. And overall, our expectations have been exceeded in terms of our medical cost management in those new markets being effectively at or better than our averages in our home states and our original markets of Florida and Puerto Rico.

And I would point you to the consistency across the enterprise in terms of APTs. And we have those for you as well on the website in which you can see the admissions per 1,000 over the months in total and for COVID specifically. And that consistency is a result sure of our base of operations in Florida that continues to grow, but also a very good performance outside of Florida that has resulted in us being able to contain cost and continue to deliver value.

And the last thing I'll say on this is that throughout this very tough period, we have been able to maintain very high NPS scores, which you see both in and outside of Florida, very comparable as well as quality scores, star metrics and a lower mortality rate, which we're particularly proud of, given that the majority of our patients are underserved or ethnic minorities, low-income individuals. And we have gone through a terrible time as a country and as a world, but in particular, underserved communities have spiked their mortality rates, and we're very proud to have lowered not only those specific groups' mortality rate, but mortality rate overall compared to any group.

Yes. That's perfect. And then just a follow-up question, I guess, an opportunity on a public call here to respond to recent letter that you guys received suggesting it's -- a sale is in the best interest of shareholders. I'm curious in your response and maybe how you think about your long-term plan and what that provides to shareholders versus the relatively obvious benefits of a short-term sale.

Josh, we have a robust and active dialogue with our shareholders, and we thoroughly evaluate and consider suggestions. Not going to comment on any particular conversations or engagement. But as you heard during my remarks, we're incredibly proud of kind of success during 2021 and how well the company is positioned for continued long-term success. We believe we are the best independent operator in the sector, both financially and clinically. Never been more excited about the future of Cano Health than I am right now. So we, management of the Board, remain focused on delivering long-term value for our shareholders.

(Operator Instructions) Your question next question comes from the line of Justin Lake from Wolfe Research.

First question, I just want to confirm the -- you're talking about doing less de novos, more tuck-in acquisitions. None of those tuck-in acquisitions are in your guidance right now? Is that correct?

No, no. That's -- no, what we refer to is a trade-off between a de novo or a tuck-in. We kind of think of them as more, call it, sort of purchases, our transactions versus a true M&A. As Marlow was saying, we think of M&A as much larger deals, more transformational or providing larger scale and size in a particular market.

When we look at a tuck-in, the de novo, we're talking the same ZIP code street even often when we're looking at opportunities. And so we're trying to make that trade-off from a use of capital within the organization. So that's in our center count that we provided the guidance on, that 184 to 189. It's kind of thinking through growth in centers of that 54 to 59. It will either be through a ground-up de novo or it's through some of these 1 center, 2 center tuck-ins that we can do.

And the best part about it, as I mentioned, it's a better use of our capital. It's more efficient, lowers the cash usage, but also comes with that clinical capacity as we've talked a lot to the investment -- to you guys in the phone and others about the need to rapidly get clinical capacity. And that's a quick and easy way to do it. And with valuations coming down, that speed to market that enhances our scale and density is the right strategy. And we're not so hyper-focused on 1 strategy that we're going to ignore what's happening around us. So that's the focus that our market leaders have on how to drive their business, which I think is the right way to do it.

Okay. And I understand you don't have a specific number to share with us, but some kind of ballpark would really be helpful. Like if we assumed that it was 50-50, would we be very far off for now?

Justin, we're going to do what makes the most sense market by market. And if 80% from scratch, ground up makes sense, and that's what we would do if it's 50-50, that's what we would do as well. And we will continue to do what we've always done and as you see in our filings for our organic growth, which is the growth of base business plus our locally adjacent practices.

And what we anticipated to do in '22 is perhaps build more from scratch-type centers, but with plenty of real estate capacity, attractive pricing in light of everything that we all know about that is going on in the marketplace and the labor shortages. We're just grabbing more of that opportunity coming from our affiliates or just from adjacent practices given that Cano Health is an employer of choice, and we see so much opportunity in our markets to do just that. But it is market by market.

Okay. I mean I guess maybe one way to look at this is you're basically through the first quarter, give or take. Can you tell us what you've done year-to-date in terms of acquisition versus de novo on your way to getting to that 55 or so?

Frankly, I don't even have those numbers exactly because I look at it as just adding clinical capacity. We're investing effectively the same amount of money. I just want to make sure that we're able to serve more patients, grow the bottom line and continue to create shareholder value.

Okay. Last question then. Like these acquisitions that you would be doing would theoretically come with patients and I assume some EBITDA. Would that be correct?

That's right. Some of them do because some of them are new to Cano, whereas a significant portion, and again, I can't give you a specific, are coming from our own affiliate base for patients that were already counting revenue that we're already counting. So again, different ways of getting to a de novo. Sometimes you just relocate that practice and put them into a medical center. Sometimes you expand practice rather than building one from scratch. And again, you look at the current market dynamics to make a call as to what makes the most sense.

Okay. I guess what I'm getting at is, wouldn't there be more EBITDA and more patients coming from -- of that 55 centers, give or take, under the strategy than it was when you originally gave it?

Perhaps. And it could be an upside, but at this -- as we're talking in 1 of our affiliates, and that provides that clinical capacity, we're also making investments, getting additional staff, maybe making expansions in terms of service to that medical center. And we may be at a breakeven point or even at a slight loss for that medical center. So it really does depend on the situation. But yes, it does present an upside opportunity for the year.

Your last question comes from the line of Jessica Tassan from Piper Sandler.

So I guess interested to know just when you acquire an affiliate, what kind of incremental control or incremental recruitment capabilities are you gaining in acquiring that affiliate versus just continuing the affiliate relationship if there's no incremental patient or EBITDA associated with the tuck-in?

Yes. For our affiliates, even though they're part of CanoPanorama and thus they get those real-time insights that are so essential for optimal management of a patient population, they still can have their own electronic health records. They'll still have their own clinical protocols. They may not have all of our in-house staff model or owned medical center services such as wellness, such as physiotherapy, healthy heart, the Cano life program, may not have critical service availability of optometry or dentistry.

So all of these services would result in additional touch points, additional data points and certainly clinical protocol standardization that is impossible to do when you're managing affiliates, given that they each will have their own preferences, their own resources, in most cases, their own electronic medical health record system, and there's an efficiency frontier.

And why I've mentioned in the past that while there is a role for management, for MSO-type services, for putting affiliates together and powering physicians, there's also an efficiency frontier that goes along with that, that is both technical and operational. So we gained what I just described by putting them into one of our staff model medical centers.

That makes sense. So I guess just if we think about the affiliate moving into an owned model, it would mean incremental or a decline in the medical cost ratio of those same patients. Can you help us understand what the difference is for a mature patient MCR in an owned model versus an affiliate model so we can understand what the potential improvement might be as you grow to own more of the affiliate providers?

Sure. What we've seen historically is that there is a few percentage points of improvement. But what I would point you to is the care management. And what entailed the care management and those called care margin is the direct cost, what you're doing within the medical center itself, plus what you're paying out to third parties. And that care margin, at least in the short term, is relatively equivalent. Of course, with the long term, which I think is really the crutch of your question.

What you're going to get as a result of more preventive services, more care coordination is you're going to get better cost containment, better patient outcomes over the years that could mean an incremental, call it, mid-single-digit upside to that care margin in whichever way it goes into the P&L but is going to certainly involve improvements in the medical cost ratio.

Got it. And then just quickly, why wouldn't essentially 100% of the revenue revisions in 2021 and 2022 related to the accounting changes flow through to net impact to adjusted EBITDA in '21 and '22? So for example, you've got $112 million net negative revenue revision in '21, converts to a $91 million negative net provision to adjusted EBITDA. What accounts for the difference?

Yes. Great question. Thank you. Because it's -- you can see that on Slides 12 and 13. The primary driver there is the effect on provider payments. So as revenue changes one way or the other, the expense related to provider payment adjusts. So that's why it's not a complete drop-through you're referencing.

There are no further questions at this time. I would now like to turn the call back to Brian Koppy.

Very good. Thank you. I appreciate everyone taking the time this afternoon. We are available for additional follow-up calls or questions. And have a great night. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.