NeueHealth Inc (NEUE) 2021 Q4 法說會逐字稿

Hello, and welcome to today's Bright Health Group's Fourth Quarter 2021 Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. (Operator Instructions)

I would now like to hand over to our host, Stephen Hagan, Director of Investor Relations. Please go ahead.

Good morning, and welcome to Bright Health Group's Fourth Quarter 2021 Earnings Conference Call. A question-and-answer session will follow Bright Health Group's prepared remarks. As a reminder, this call is being recorded.

Leading the call today are Bright Health Group's President and CEO, Mike Mikan, and CFO and Chief Administrative Officer, Cathy Smith.

Before we begin, we want to remind you that this call may contain forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the risk factors in our current and periodic reports we file with the SEC. Except as required by law, we undertake no obligation to revise or update any forward-looking statements or information.

This call will also reference non-GAAP amounts and measures. A reconciliation of the non-GAAP to GAAP measures is available in the company's fourth quarter press release available on the company's Investor Relations page at investors.brighthealthgroup.com.

Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated March 2, 2022, which may be accessed from the Investor Relations page of the company's website.

Before we start the call, I'd like to note that Bright Health Group will be participating in 2 upcoming investor conferences. Management will be presenting at the Cowen Healthcare Conference on Monday, March 7, and hosting investor meetings at the Barclays Healthcare Conference the following week.

With that, I will now turn the conference over to Bright Health Group Chief Executive Officer, Mike Mikan.

Thank you, Stephen. Good morning, everyone, and thank you for joining Bright Health Group's Fourth Quarter Earnings Call. I'll provide some brief introductory comments and then turn the call over to Cathy Smith to discuss our fourth quarter and full year 2021 results. I'll then conclude our prepared remarks by going over the specific actions we are taking to improve near-term performance and best position Bright Health Group to drive sustainable profitability and long-term success.

We always start with our mission, which is central to what we do at Bright Health Group: Making health care right together. It's built on the belief that, by connecting and aligning the best local resources in health care delivery with the financing of care, we can deliver better outcomes at a lower cost for all consumers.

Bright Health Group is building a truly unique model that we believe will transform how health care is delivered. We believe, when health care is delivered in a fully aligned and integrated care model, we can bend the cost curve and, most importantly, enhance value for both consumers and providers.

Bright Health Group achieved substantial growth in 2021, reaching over $4 billion in revenue, and we are enthusiastic about our positioning for 2022. Having reached the milestone of over 1 million health plan members, we now expect enterprise revenue for 2022 of $6.8 billion to $7.1 billion due to the strength of our member growth in OEP and AEP as well as external payer growth at NeueHealth.

We have always expected some variability in our results. As we executed on our strategy to quickly gain scale in the business and as we closed out 2021, we saw that play out. The meaningful growth we delivered in 2021, which was a combination of higher-than-anticipated growth to start the year and additional growth from the special enrollment period, outpaced our operational and system capabilities. In addition, unique factors in 2021 that we have previously highlighted, including a once in a century pandemic, and our large group of new members without risk scores, combined with scaling up our organizational capabilities and emerging technologies, impacted our results into the fourth quarter more significantly than anticipated. As Cathy will discuss in more detail, these factors impacted our ability to engage with our members in order to accurately capture their underlying health conditions and impacted prior period medical costs as we caught up on claims processing.

Despite a challenging 2021, our larger base of business, along with continued growth in 2022, affords us a tremendous platform to continue executing on our strategy and driving long-term shareholder value. We have conviction on the differentiated results that we can drive through a fully aligned care model and are taking specific actions to focus the company, improve our systems and processes and drive profitable growth. We are continuing to invest in building out our NeueHealth business and have successfully expanded NeueHealth-owned clinics outside of the Florida market while also continuing to build our affiliated care partner network across the country.

All of the challenges we encountered this past year can be attributed to specific areas that were already on our list for improvement. But the growth we experienced exasperated the gaps in performance. We made significant progress correcting these issues in our operational capabilities in 2021, which will help drive improved 2022 performance. And we see opportunities for substantial further improvement over the course of 2022. Bright Health Group's differentiated model continues to attract members and drive strong growth.

We remain on the path we outlined at our Investor Day in December, and our core strategy hasn't changed as we look to serve consumers with a fully aligned care model that drives better care and lower medical costs. Within this strategy, we are refining our model and we are taking actions to drive better performance in 2022 and beyond as we continue to target breakeven adjusted EBITDA in 2024. Our 2022 guidance reflects the pricing actions and medical cost initiatives we took and the improvements that we've made to our business, balanced with the work that is still outstanding for this year.

While we appreciate the team that got us here, as we move to the next phase in our growth and strategy, we need different talent and skills and have taken action accordingly. Consistent with this evolution, we were pleased to announce yesterday that Matt Manders joined our Board as an Independent Director. Matt recently retired from Cigna as the President of their Government and Solutions segment and is an experienced health care operator. We expect Bright Health will benefit from his experience in the consumer-directed health care space and in health care solutions given his deep expertise in both areas.

And now Cathy Smith, our CFO and Chief Administrative Officer, will take us through our results. And then I'll provide some additional comments on the actions we have taken to drive improved results in 2022 and position us for long-term success. Cathy.

Thank you, Mike, and good morning, everyone. I'll begin by going over our fourth quarter and year-to-date results and will then provide updated guidance for our 2022 full year outlook.

In many aspects, we accomplished a lot in 2021. However, we did not deliver the financial results we had planned. Let me be clear, we are very disciplined in our financial results and are swiftly working to improve and provide more predictability into our results.

Our fourth quarter top line results continue to reflect the strength of our 2021 member and revenue growth. Bright Health Group consolidated revenue increased 157% year-over-year to $962.3 million in Q4. Bright HealthCare segment revenue for Q4 grew 169% year-over-year to $949.8 million. And NeueHealth fourth quarter segment revenue of $107.5 million compares to just under $10 million in the prior year. Our fourth quarter gross margin was a loss of $351.2 million and our adjusted EBITDA was a loss of $790.1 million, with both items impacted by our increased risk adjustment and IBNR estimates, continued COVID costs and a noncash $103 million 2022 premium deficiency reserve.

The significant deterioration in our results since our guidance was due to specific identifiable issues, including COVID costs, catching up on claims payments and resolving resubmitted claims. This was compounded by our lack of visibility into lagging medical claims on our legacy operational systems which require manual processing. We have improved our claims processing operations and procedures, and as we started 2022, we were operationally in a significantly stronger position. A key driver of improvement is the move to our new claims management and administrative platform for our new markets and improved processes and workflows for all of our markets.

The increases in medical costs due to COVID and the top line headwinds associated with risk adjustments are reflected in our medical cost ratio in the quarter. On a reported basis, our fourth quarter 2021 MCR at the enterprise level was 134.1%, up from 105.4% in the fourth quarter of 2020. COVID had a negative impact on our MCR in the fourth quarter of 860 basis points compared to 650 basis points in Q4 of 2020. The fourth quarter 2021 COVID impact to our MCR included $56.5 million of COVID costs related to prior quarters which contributed 580 basis points of the MCR impact recognized in the quarter.

Our risk adjustment performance in the fourth quarter also reflected the claims processing issue, where our challenges in capturing the risk of the population was in part due to the lack of timely insight into data which drove the insufficient engagement in care management. We increased our risk adjustment payable estimate by $148 million, reducing fourth quarter revenue, of which, $111 million relates to prior quarters. We also recognized $139 million in prior period medical costs in Q4. The combined impact of the prior period risk adjustment estimate changes and the prior period medical cost was 26.4 percentage points to our medical cost ratio in Q4. Our expense ratios were also impacted by the noncash GAAP premium deficiency reserve of $103 million we booked in anticipation of future loss contracts in certain markets in 2022.

Turning to our full year 2021 results compared to the full year 2020. Our revenue increase of 234% reflects strong membership growth, including the contribution from SEP. Full year 2021 Bright Health Group revenue was over $4 billion. Our membership growth throughout the year, the inability to capture the risk of the population we serve and direct COVID costs drove substantial MCR deterioration in 2021. Our full year adjusted EBITDA declined to a loss of $1.08 billion, including the $103 million PDR booked in the fourth quarter versus an adjusted EBITDA loss of $239 million in 2020.

As I laid out at our Investor Day, we expect to drive improvement in our operating cost ratio each year. We made significant progress on our operating cost ratio in 2021, with a full year ratio of 30.7% reflecting a 320 basis point improvement compared to 2020. But it was above our target for our operating cost ratio due to higher expenses, including the PDR, and the pressure on revenue from risk adjustment.

We continue to view 2021 as the peak of inefficiency as we consolidate our systems and processing. And as Mike will discuss, we are taking actions to drive our operating cost ratio meaningfully lower in 2022. The 2021 MCR performance in both of our businesses was impacted by the confluence of COVID, unprecedented growth and the extended 2021 special enrollment period with a 2021 MCR of 101.3% compared to the 88.7% in 2020. COVID costs in 2021 impacted our MCR by 530 basis points compared to 400 basis points in 2020.

I want to spend a minute unpacking the 2021 medical cost ratio in a bit more detail given the magnitude of the variance to our previous guidance. While we are overall pleased with our book of business, we are disappointed in the operating results and can point to specific areas that drove the variance, most of which, we believe are onetime in nature and won't reflect the run rate MCR of our business. I will speak to our forward expectations for these items and the implications for our 2022 adjusted EBITDA in a minute.

For 2021, the challenges we had in risk-coding accuracy drove 650 basis points of MCR pressure compared to 2020. This was related to our delays in attributing members, in part due to our rapid growth in 2021, as well as the impact of the unique 2021 special enrollment period. Operational inefficiencies contributed 310 basis points to the year-over-year MCR increase through higher-than-expected medical cost and other medical cost management issues. Medical costs related to the SEP population and other mix changes contributed 180 basis points to the increase. Finally, there was an incremental 130 basis points of year-over-year COVID cost in our GAAP MCR, resulting in a total COVID contribution to 2021 MCR up by 130 basis points.

COVID costs in total were a major headwind to our 2021 results, with full year COVID costs of $208 million. While COVID costs for care delivered in the fourth quarter were better than our expectations, the $56.5 million of COVID costs in the fourth quarter of 2021 for care delivered in prior quarters is an example of the catch-up on the backlog in claims I mentioned earlier.

While not how we manage our business, it is worth noting, if you excluded COVID and other likely onetime impacts on performance, such as elevated risk adjustment, 2021 would have been closer to a 90% medical cost ratio, consistent with our expected MCR, given the growth and diversification of our book of business.

Looking at our NeueHealth business, we served over 175,000 patients under value-based arrangements at the end of Q4, reflecting strong organic growth and the closing of the Centrum acquisition at the start of Q3 2021. NeueHealth is well positioned for 2022 through the expansion of our owned clinics, growth of affiliate care partners and new external revenue streams.

2021 revenue for our NeueHealth business was $493.2 million, reflecting strong organic growth, 2 quarters of contribution from the Centrum Medical Holdings acquisition and the contribution from investment income. The year-to-date revenue represents growth of over 1,200% compared to the prior year. Our NeueHealth business in the fourth quarter experienced a headwind from investment income of approximately $29 million, resulting in full year investment income of $80 million. Excluding the contribution from investment income, the 2021 revenue growth rate for NeueHealth was over 1,000%. We will continue to grow and expand our NeueHealth footprint in 2022 as well as drive growth through multiple external revenue channels.

Turning to our balance sheet. As of December 31, 2021, we had approximately $198 million in nonregulated liquidity, including $78 million in highly liquid cash and investments and $120 million in a passive equity investment classified as short term. In January, we closed the sale of Series A preferred stock, which contributed $750 million in proceeds. The nonregulated liquidity figure does not include $1.7 billion of additional cash and equivalents held by our regulated insurance subsidiaries. Based on our 2022 plan, we believe we have sufficient liquidity to meet our near-term liquidity needs and support the continued growth of the business.

We are updating our full year 2022 outlook and we now expect enterprise revenue to be in the range of $6.8 billion to $7.1 billion, above our prior guidance range on external payer growth at NeueHealth and the strong Bright HealthCare membership growth in AEP and OEP, partially offset by a more conservative view on our estimated risk adjustment payable.

We expect our enterprise medical cost ratio to be above our prior guidance and are forecasting a reported MCR range of 90% to 94%. This upward revision reflects the higher medical cost trends in 2021, offset by the efforts we are taking to improve performance.

We are also updating our forecasted guidance on adjusted EBITDA for full year 2022 to a range of a loss of $500 million to $800 million. Included in 2022 guidance are cost savings actions we have already taken this year. And combined with our higher revenue expectation, we expect to outperform the 22% to 23% operating cost ratio outlined at Investor Day. We have widened the guidance range for medical cost ratio and adjusted EBITDA to reflect various scenarios for the remainder of the year.

On a segment basis, our revenue forecast reflects an estimate of approximately 1 million end-of-year members for Bright HealthCare, consistent with the positive enrollment update we provided in January. We are also forecasting full year 2022 NeueHealth revenue of $2.3 billion, with the increase to our NeueHealth forecast reflecting a modestly higher expected Bright HealthCare contribution, strong external payer growth and greater visibility on the direct contracting program. We now expect approximately 40% of the NeueHealth revenue will be generated from external sources. We are growing the pipeline of opportunities for NeueHealth external revenue, including bringing in new payers and expanding our existing payer relationships.

CMS recently announced the 2022 participants for the direct contracting program, with NeueHealth named as a participant through our Physicians Plus organization participating in 6 states. We expect to have approximately 50,000 lives under management in the DCE model and a total revenue contribution of approximately $700 million. We see the direct contracting program and the newly announced ACO REACH model as a great long-term opportunity for addressing the Medicare fee-for-service population and believe NeueHealth is well positioned for success in that program.

For 2022, we expect to drive a significant improvement in our adjusted EBITDA. We have provided a bridge in the slides posted to our Investor Relations page today to help show the impact of the actions we have taken and key tailwinds that we expect will support our 2022 EBITDA improvement. And Mike will provide further details on each but, first, I'll lay out the financial impacts.

We expect the benefit of increased IFP volume, net of the changes to PMPM revenue expectations, to drive $200 million in incremental gross margin and EBITDA benefit year-over-year. We expect the significant progress we have made in our efforts to better manage medical costs, combined with our expectations for COVID expenses relative to what we have included in our planned pricing, to contribute $325 million in gross margin and EBITDA benefit. We expect our risk adjustment efforts and the business tailwinds for 2022 to drive $175 million benefit to EBITDA.

We have also taken targeted actions around operating expenses, combined with the 2021 impact of the $103 million noncash PDR, to drive an approximately $200 million EBITDA benefit. Operating expenses to support the continued growth of the business and other smaller items are expected to be negative to the 2022 adjusted EBITDA bridge by $470 million.

The combined approximately $430 million impact of the items I detailed results in a bridge to the $650 million loss, at the midpoint of our 2022 adjusted EBITDA guidance range.

Before I turn the call back to Mike, I want to appreciate our amazing Bright Health team across the country. Working together, we are changing health care. Additionally, I want to thank our shareholders for your continued support as we build a national integrated system of care.

Now here's Mike for additional insight on the strategic efforts we are making to drive better operating performance and improve profitability.

Thank you. As you heard from Cathy, 2021 was a year of both challenges and opportunities for Bright Health Group, and we expect results to be meaningfully better in 2022. Our strategy has always been focused on driving the business to scale, which we reached an important milestone on this year. This level of growth, however, created challenges for the business, compounded by the unique circumstances of an extended SEP and COVID. While important to reflect on those challenges, I wanted to spend a few minutes speaking to the specific actions we have taken as well as the tailwinds for the business that I believe will position us well for 2022 and beyond.

We have taken specific actions against several areas that will impact near-term performance. One, net pricing action in core markets. We took pricing action in excess of our expectation for underlying medical cost trends for the majority of our membership in legacy IFP markets while still being able to demonstrate meaningful growth. In addition, we priced in COVID at 2% across our book for 2022 to reflect the risk of future COVID-related expenses. We also are focusing on pricing as an important lever in 2023 as we continue our path to profitability.

Two, unit cost and medical management reduction initiatives. We identified several unit cost and medical management opportunities in 2021 across both our IFP and Medicare Advantage businesses that, candidly, we were unable to capitalize on in 2021. However, those efforts are demonstrating significant value in 2022. These medical cost efforts are in addition to the net pricing actions we have taken.

As we gained scale and optimized our processes, we were able to renegotiate ancillary and pharmacy contracts, reduced out-of-network rates, optimized existing contract structures, more closely managed high-cost cases and improved our specialty provider network. Optimizing the care network is an ongoing process that requires data on our members and volume, which we now have significantly more of each, and better systems to provide visibility.

Three, risk adjustment actions. Accurate risk adjustment was a challenge due to several structural issues in 2021, as I have discussed. However, those challenges drove us to make significant investments in our risk adjustment capabilities. It starts with faster attribution of our members to a larger network of owned and affiliate physicians that have better ability to engage with their members earlier in the year. Equally important are the tech and operational investments we have made in suspecting analytics, outreach and engagement teams and our end-to-end risk adjustment process to ensure we are accurately capturing the risk of the population we manage. We are also working to help members better manage and navigate their care, which we expect will drive better in-network trends.

Four, claims and clinical platform stabilization. As I have mentioned in 2021, our growth caused us to outkick our coverage, not only in the capacity of our fully aligned provider networks, but on our administrative, operational and clinical systems as well. This growth was taking place while we were building or transitioning from numerous vended solutions to BiOS, our end-state operating platform.

As we go into 2022, we have successfully transitioned to our new finance and people systems. 70% of our membership is on our proprietary clinical system, Panorama. And all of our new market membership is on our new claims administration platform, with the remainder of our IFP membership to migrate on 1/1/2023. Having our business on BiOS provides us greater visibility and efficiency, the benefits of which we are already seeing today with faster claims processing times, more accurate payments, industry standard denial rates and more timely and complete consumer data, just to name a few.

And five, we are addressing talent and cost structure. A high-performing team is critical to our ability to improve performance and drive sustainable results. We continue to evolve our team, adding expertise as needed, and have taken specific actions to reduce the cost structure, eliminate redundancies and drive efficiencies across the organization. While we appreciate the team that got us here, we have made some specific management changes to position us for the next chapter of profitable growth and performance.

Shifting to the company and industry tailwinds. I wanted to highlight 5 specific items that, alongside the actions we took, we believe will have a demonstrable impact on 2022 performance.

One, scale and diversification. We achieved solid growth in this year's annual and open enrollment periods, starting 2022 with significant scale at more than 1 million health plan members and 400,000 lives under risk-based contracts. This scale not only allows us to better manage population risk and reduce volatility, but our density in specific markets, such as California, Texas, Florida and North Carolina, allows us to better engage with providers and be a more meaningful portion of their overall business.

Two, higher retained membership. Inclusive of the impact of SEP, approximately 85% of our IFP membership was new to us in 2021; while new members to start 2022, including new markets, account for approximately 55% of our enrollment. We also benefit from strong renewal rates, with a retention rate of approximately 79% in our mature existing markets. This has numerous benefits to performance, including more data and information on our members to help us better manage the population and accurately capture member risk.

Three, normalized special enrollment period. The 2021 special enrollment period, while providing us with continued growth over the course of the year, came with it unique challenges with regards to performance. The shorter member duration and higher acute care costs for those members, all against the backdrop of COVID, made it very difficult to engage with this population and accurately capture their risk. We expect a much more normalized SEP this year.

Four, reduced operational backlog. The operational challenges we saw because of our 2021 growth caused us to spend significant time and effort last year working through an operational backlog. Like our challenges with risk adjustment, we made significant investments in the team and systems I mentioned, and we're far better prepared for the growth we saw this year. This will allow us to better engage and respond to issues and more effectively manage performance within our population.

And last, five, endemic COVID. Finally, while I believe COVID will be with us in some capacity for the foreseeable future, we don't expect it to be nearly as acute as it was last year. With the increase in vaccination rates, while cases of COVID may continue, the direct COVID costs, we expect, will be more manageable.

We also continue to explore ways that we can work with Cigna and have identified several opportunities with work streams and process on these. While we are just a few months into the relationship, we are excited about the potential of our 2 companies working together and the ways that can help strengthen our business and enhance Bright Health's capabilities. We are looking to the future and are confident that near-term steps that we are taking to improve our performance will optimize the business for long-term success.

In closing, we remain convicted on our strategy for Bright Health Group and the strength of our fully aligned care model in the face of substantial growth and a uniquely challenging year in 2021. We are confident that the combination of our Bright HealthCare and NeueHealth businesses are built for where the health care industry is going. We are targeted at the growing consumer retail health care market and are leaning into serving this market through a fully aligned and integrated care model that combines the financing and delivery of care. We are strengthening our foundational capabilities for sustainable and durable results with greater visibility that will drive improved forecasting.

As I look to the future, I want to conclude the prepared remarks for why my team and I are so excited about the future. We have a scaled and diversified platform that is purpose-built to integrate the financing and delivery of care. We have a market model that is flexible to meet local market needs, one that drives differentiation through our care partner relationships. We're developing a proprietary suite of technology that is specifically built to enable the fully aligned care model. And finally, we're seeing both performance and, most exciting, external growth and interest in our NeueHealth business, whether new external payer contracts that are looking to NeueHealth to manage their populations, or new programs such as direct contracting, which we believe is at the leading edge of where Medicare is going, NeueHealth is developing a robust pipeline of future opportunities.

I'd like to thank the more than 3,000 Bright Health employees who are hard at work executing on our strategic priorities and making health care right by working together. I believe we have the team to execute on our model that is built for the future of health care.

Operator, now let's open it up to questions.

(Operator Instructions) Our first question today comes from Lisa Gill from JPMorgan.

I just want to go back to really understand a little bit better what happened between the Investor Day in December, our conference in January, and today, where your risk adjustment accruals came in much different than expected.

So a few things. One, are you making any changes to the accrual process itself?

And then secondly, you did raise price, right, when we think about the individual market. What gives you confidence that you are able to price correctly as you think about going into 2023?

Lisa, so with respect to what changed between the time period that you referred to is it's a confluence of factors, as you can imagine. The different areas that we talk about in terms of challenges with compounding effect, but it starts with operational limitations. And we were in the -- from the beginning of the year, with all the growth that we had gotten from 2021, we had to build out more network. To coverage from access standpoint, loading our contracts, we made errors in loading. Until early in the year, we had a challenge with processing claims.

And so the later part of the year, particularly in the fourth quarter, we processed somewhere around 40% to 50% of our underlying claim expense during that time period. Obviously, with that amount of claim processing, we didn't have the data or the insights to really understand how we were capturing the risk codes and what other underlying medical trends were we seeing? And so as that came to fruition through January as we closed out our books, obviously, we determined our estimates and -- were impacted by an increase in risk adjustment as well as claim processing.

When you look at risk adjustment, unfortunately for us, there were many different factors that impacted us in the year. It had to do with, obviously, starting with a new member base, 85% of members being new to us and substantial growth, but then SEP kicked in and we got new lives, and we were late to attribute them to our owned medical centers and our affiliate network. And so engaging with them didn't occur until later part in the year, which is too late, which we talked about in Q3, we talked about that at Investor Day and onward.

What we didn't really understand was the impact of not having the data from all the claims that we had denied early in the year. And that impacted our understanding of the diagnoses versus the claims that we were paying. So there are cases, many cases, where we have now identified that we paid for certain services, but we don't have the original medical diagnosis because it happened prior to our watch and we can't code for that effectively.

So there are things like that, that have been happening -- that happened to us in 2021 that we believe we're much better positioned for in 2022. And those are some of the actions that we've talked about. It starts with, we got to get on a new platform, which we made the decision to do. The good news is all new markets are on a new platform. The other good news is, starting in the later part of the third quarter, into the fourth quarter, with our outside vendor on our legacy system, we were able to build our own team or put our own team into that system so we can improve performance.

So it all comes down to attributing earlier in the year to providers, getting that -- giving them the data to engage with those that have higher chronicity and then better data to manage them going forward. And we're starting the year in a much better position than we were, obviously, in 2021.

With respect to pricing, we -- as I mentioned, we look to many different initiatives to improve underlying gross margin. Pricing is one lever Pricing is a consideration for us. We're going to look at markets that we believe we've got opportunity to take pricing up.

And then we're also going to look potentially some markets, Lisa, that don't necessarily fit our long-term plans. And so where we can't see differentiation or a path to get the gross margin contribution we want to, we'll consider those for potential exits.

So I recognize that's a long-winded answer, but there's a lot in that to answer that. So I appreciate the question.

Our next question comes from Kevin Fischbeck from Bank of America.

Great. I guess I wanted to drill into 2 of the issues that I think you cited as kind of problems in 2021 that should large -- or some degree be addressed in 2022.

I guess, first, the systems issue. Is it -- was there any part of the business in 2021 that was on the current system that you're on? And if so, did that perform differently or better than the rest of the business?

And then two, your model is about getting people into high-performing networks, either third-party or through NeueHealth. And is there -- it sounds like the rapid growth kind of meant that you needed to kind of pull together a broader network than normal. Is there some way to kind of bifurcate the performance of membership that was kind of more within that normal network that you would have seen versus the membership that kind of ended up being outside? So we can kind of see and give some proof points that the core model is performing better.

Yes. With respect to the go-forward system, 1/1/22 was the first time we put new markets on that. And we made a specific decision to not migrate other markets to make sure that we were starting anew and make -- that we've had all our kinks worked out in 2022 so we can migrate for '23.

So we are looking at early activity. We're very pleased with our so-far performance. And so we're looking forward to that migration in '23. But no, we don't really have any other experience on our go-forward system other than what we put on it, which is about 30% of our membership today.

With respect to the performance of -- our own care centers and affiliate network versus the broader curated network, we believe that managing our underlying medical costs in our own care centers, as demonstrated with external customers that we've had, not just Bright HealthCare, that we can provide care at a lower cost. The risk adjustment impact to both our own care centers and our affiliate network was pervasive, regardless of whether it was in the curated network versus our affiliate or owned medical centers.

And that skews the results from a gross margin perspective, but underlying medical costs, we see in advantage. And we do believe, over time, we're going to see greater engagement and better integration with data with our specialist network, our care partner systems and what have you. And we're going to do a better job of accurate coding with the integrated model.

Unfortunately, it is -- 2021 was a challenge for us for the same reasons I talked about earlier on risk adjustment, and that's no different within the Bright HealthCare business versus NeueHealth or Bright HealthCare business. If you look at our external customers, we've seen the proof points that they perform better than the average. And that's what gives us conviction that our model is sound going forward.

We now turn to Steve Valiquette from Barclays.

This is Eric Glynn on for Steve. So in January, you gave an update that you had a little over 1 million members at the end of the annual enrollment period and I think you confirmed that today. And the guidance is calling for about 1 million at the end of the year. So is the current assumption that you'll have like the normal monthly attrition in IFP business, like partially offset by gains in MA throughout the year?

And is there any assumption baked in for Medicaid members that like are being redetermined starting in, call it, 2Q and then rolling into your IFP book? Or is that just pure upside to the guidance?

Yes. Enrollment, you're right. We're assuming normal attrition. We don't expect the SEP activity that we saw last year. So that's what gets us to around end the year approximately 1 million lives. And we don't have anything in our assumptions for redetermination. It's -- we don't understand the timing yet and how the states would roll it out or what impact it would have in 2021, so we didn't put anything in our forecast -- or 2022, sorry.

And I would add, too, you're right on Medicare Advantage, that we do assume in-year growth in Medicare Advantage as well.

We now turn to Ricky Goldwasser from Morgan Stanley.

This is Michael Ha on for Ricky. So in terms of capital position, I know you mentioned you have sufficient liquidity. But most of the $1.7 billion you mentioned, you can't really touch because of statutory capital reserve.

So if I'm looking at your current liquidity correctly, if you can confirm on that, you have about $200 million in nonregulated current cash, which includes short-term investments. You add the $750 million capital raise on top, that's about $950 million. But you've already used about $150 million to pay down credit facility borrowings. A few hundred infused into your regulated insurance entities. That's about $600 million. And then you add on $300 million under your current facility -- credit facility, that's about $900 million.

Is that correct? Am I missing something? And if so, you may have just enough to fund growth through '23, but how do you view capital position cash burn heading into '24 and '25? And with 70% growth, how should we think about the balance of investment and cash conservation going forward?

Yes. Michael. Yes, largely, your math is in the right direction. What I would say is we feel, based on our plans for 2022, we've got sufficient liquidity to meet our near-term needs. And with our path to breakeven more clear, obviously, that will start to lessen our dependence on our -- on capital needs as well. And then growth and mix of the business are going to clearly have a big impact on what that capital needs.

As you know, we have many levers we can pull. Additional cost structure. We can continue to look at regulatory capital quota share arrangement, which we have some of. Pricing is always a lever. Growth is a lever. And then as Mike mentioned earlier, we can think about potential exits in non-differentiated markets.

Our next question comes from Jeff Garro from Piper Sandler.

I want to talk about the FY '24 breakeven target. It seems like that now implies a steeper ramp of MCR improvements from FY '22 to FY '24. So what gives you confidence that you can approach your long-term MCR targets by FY '24?

Thanks, Jeff. Yes, I mean it's -- scale matters, and that drives significant opportunities for us to improve underlying medical costs. We know the community better that we serve, that's going to have better risk coding opportunities. And then also just our ability to price to our underlying capabilities.

So now that we've got the scale, obviously, we've been in heavy growth mode up until this point. But by strategy, we wanted to get to scale. Obviously, we are hoping not to have the magnitude of the challenges we had in 2021. But between scale, knowing the community better, ability to capture code, medical cost initiatives by recontracting the network, underlying medical management capabilities and then getting on one system so we have one record for the consumer overall that we can manage the population holistically and help through care navigation, we believe by those different levers, it's going to be a big contribution to that FY '24 profitability.

I'd also say our integrated model on NeueHealth, the growth in external business and what have you, provides another profit stream for us and another contribution to that driver -- or that end goal or I guess next major milestone, 2024 breakeven.

So those areas plus NeueHealth give us confidence that we're on path to get to breakeven adjusted EBITDA for 2024.

We now turn to Justin Lake from Wolfe Research.

Just a few follow-ups here quick. First, Mike, I appreciate the comments on repricing and maybe some market exits. So as you think about that path to 2024, given the repricing could cost you some membership market exits, what do you think the top line growth is? I assume it moderates, but where do you think kind of top line shakes out, just from a broad perspective? Do you think it could be flat next year, for instance?

Well, Justin, I appreciate the question. And we are evaluating. Jay Matushak, our interim CEO, and his team, are evaluating all our markets as we're going into pricing, our underlying cost structure, our care partner network that we have and just really how we're positioned for differentiation.

So we haven't made those decisions, although we're close to making those decisions. So I don't want to get ahead of that, Justin. But we still believe growth -- I mean, we're a growth company. We believe in scale. We believe we'll grow in our core markets at this stage. And so -- but you're not going to see the level of growth that we've shown get to this point. And then I do -- that's on the Bright HealthCare side.

We do see growth opportunities, what we consider to be more capital-efficient growth, with NeueHealth. And we think that's a real differentiator. And you've seen that business, we just put out guidance at $2.3 billion. And opportunities with external payers in our existing markets, new market potential that we're considering, the DCE or ACO REACH program that we think is right in line with our model, care partner model around physician-owned practices. So all of that, we believe, is going to continue to drive growth.

But the key is we need to drive the profitability. We need to get our underlying cost structure in line. We need to get to one system. And then we need to drive other growth, profitable or capital-efficient growth opportunities within NeueHealth, and we think that bodes well for us.

Okay. And then, Cathy, you mentioned along the lines of capital, that you felt like you had sufficient liquidity for the near term. Can you just talk about the -- does that -- when you say near term, does that get us through at least the end of the year? Or are you talking about over the next quarter or 2?

Yes. No, through the end of the year, to your point, 12 months or so. That's obviously always what we look at and focused on.

I would mention, Justin, just we do -- I would just note the levers that Cathy talked about. We're managing to optimize capital. We understand its importance. Obviously, 2021 didn't turn out the way we wanted it to, but we've been taking action all along. We didn't just start in January. We've been managing to a better cost structure, to improve medical cost management, all of those things, in addition to the quota shares that Cathy talked about, potentially exiting noncore markets that have a capital impact.

And our cost structure. We took a strong action to reduce not just forecast costs but underlying costs, and we're going to continue to do that. And as we migrate more to one system, we're going to see significant opportunities there, Justin. And that's imminent. That's coming as we get there because we have a ton of redundancies. We had to add a lot of cost last year because we had to do a lot of manual processing. And we start the year in a much better position. So for all those reasons, they're going to help contribute, hopefully, to a better capital position.

And then I would just note this as well. Entering into the biggest markets in health care, Texas, Florida and what have you, is taking a lot of capital. We're in those markets. We've got a strong capital position. So as we've talked about before, once you get to scale, you don't have the capital burn rate that you do leading up to it. So we also feel favorable about the position there as well.

And let me just squeeze in one more. The $103 million PDR, can you give us a ballpark estimate of how much of your 2022 revenue premium is associated with that?

Yes. I guess, Justin, I'm not sure how to answer that question. PDR, as you know, obviously, the PDR is a requirement when you have written in a loss contract. So for 2022, we evaluate in aggregate the entire book, so all of IFP versus all of MA. And we have to look at what our expectations are for gross margin versus a limited amount of the operating expenses, and that sets up the requirement. So we actually look at it in aggregate for all of the IFP business versus all of the MA business.

My understanding is that you would have to look at that business by business, right? If you were to take a loss, you take a PDR and stuff, you expect to lose. So I guess all I'm asking is, what percentage of your membership or premium you had to take a PDR?

Let us follow up with you on that question specific. We appreciate it. We'll follow up with you on that, Justin.

Our next question comes from Jason Cassorla from Citi.

I just wanted to go back to the previous question around Medicaid redeterminations. And I know you noted that there's nothing there in guidance yet. But maybe can you just help describe past experience for when individuals have rolled off of Medicaid and you picked them up in your IFP business, and the ability to match payment to health status of those individuals? I'm just trying to understand how the capture of the redeterminations could differ from the 2021 SEP experience around the risk adjustment capture argument.

I think it's best that maybe I'd answer it this way. Put SEP last year aside, if you look at just typical life events that occurred during the year and enrollees come in, we're able to do a really good job in normal run rate to be able to capture the risk and manage the population.

Obviously, with the way SEP occurred last year, where we got a significant influx, capturing the data posed to be a challenge. So we would be managing it very closely on how we would pay commissions, how we would design our benefits for those type programs. And we're going to manage it very closely because we don't want to incur the same situation that we dealt with in 2021. So I think that's the best way I can answer it at this point.

We now move to Sarah Conrad from Goldman Sachs.

This is actually Lindsay on for Nate. The new MLR guidance implies 900 basis points of improvement in MLR. Could you help us bridge from the 2021 MLR to the new guidance for 2022?

Yes. I'm happy to start. And we did provide a slide in our materials that were posted to the IR website. You'll see it in there. Slide 13 provides a pretty good bridge between 2021 and 2022. And Mike walked through each of those pieces as well.

But first and foremost, you'll see some gross margin impact of volume and rate for a couple of hundred million dollars. Some additional medical cost management initiatives that we've already outlined and taken or are taking as well as the differences in COVID costs year-over-year is another $325 million. You would see it in our estimates around risk adjustment in there. And then some operating expenses to support the volume offset by the actions that Mike said we'd already taken. And then obviously, the PDR is in there, too, in '21, but doesn't expect to repeat. So the combination of all of those help us to get year-over-year.

I think last question...

Our next question comes from Gary Taylor from Cowen.

Just wanted to ask one more about the liquidity position given you've got a $931 million risk adjustment accrual, which I believe you have to pay to CMS in 2000 -- or in July. And then -- so one, I want to confirm that.

And two, when you show on Slide 13 that risk adjustment is $175 million good guy from '22 into '23, are you suggesting that you'll accrue $175 million less for risk adjustment? So even though you're making this $900 million payment in July, you ought to have about $750 million of current year accruals that are noncash during '22, if that makes sense.

Yes. Gary, I wouldn't -- I don't know that, that's exactly the way I think about it. So we think about risk adjustment, as you know, based on every single market. So a second-year market does expect to improve as we understand those members better and better. And so that. But then new markets, obviously, we have -- we start at a higher expectation of a risk transfer, based on our position. So I don't know that I would have said that the year-over-year percentage goes -- or the dollars went like you just said.

With regards to liquidity though, we contemplated that all in our estimates of capital for the year. And so when we say that we feel like we've got sufficient liquidity to meet our near-term needs, then we've obviously already taken that into account.

Yes. I think the way you were looking at it on a net-net degradation in terms of the risk payable, we did grow our book of business. So the risk payable will go up. What we're really talking about is specific initiatives where we know that we undercoded or weren't able to accurately capture the risk, that we've got plans for to address, that would take our underlying apples-to-apples risk adjustment down -- payable down as a result of those actions.

And a lot of it is what I was talking about earlier, where we've got the data to demonstrate that we provided a service, but we don't have the underlying diagnosis. And this year, we're going to capture those a lot earlier because we're already engaged with the membership that we have. We've attributed our lives to our care partner network, to our affiliates and our own centers and we're already outreaching to them. So we know we're going to be much better at it this year. So that's the net improvement year-over-year that we expect. And we hope to do more, candidly.

Well, so thank you all for your time today -- go ahead. Go ahead.

I'm sorry, I was just going to say one follow-on on that. Since ACA risk adjustment is a zero-sum game, I mean, do you have data from actuarial firms at this point in '22 that are affirming that how you're accruing that risk adjustment for '22 is in better shape or more accurate? Anything to point to there?

Yes. Well, we use -- obviously, we use actuaries to price our business, and we're closing out using our actuarial teams, inside and outside team, and then how we're booking going forward based on what we know and the data that we capture internally. Obviously, we'll get CMS data later in the spring. But we have the data coming through now. And between what we ended the year at and how we were trending, we take that data, the actuaries look at it, and then we bake in initiatives where we've got proof points to show that we can improve. All that is taken into consideration.

And as Cathy mentioned, part of the increase in guidance vis-a-vis the Investor Day conference, we took a more conservative approach from that time period to now based on what we saw closing out Q4. Of course, we want to be optimistic. We want to improve this, but right now, that's the approach we're taking, and it's actuarial-supported. Thanks for the question.

So with that, thanks folks, for the interest, and we look forward to talking to all of you again soon.

This concludes today's call. We thank you for joining. You may now disconnect your lines.