NeueHealth Inc (NEUE) 2022 Q3 法說會逐字稿

Hello and welcome to today's Bright Health Group Third Quarter 2022 Earnings Call. My name is Bailey and I'll be your moderator for today's call. (Operator Instructions)

I would now like to pass the conference over to our host, Stephen Hagan, Investor Relations Director. Please go ahead when you're ready.

Good morning and welcome to Bright Health Group's Third Quarter 2022 Earnings Conference Call. The 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 Spin. 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 risk 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 third 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 November 9th, 2022, which may be accessed from the Investor Relations page of the company's website.

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 Third Quarter 2022 Earnings Call. I'll open my remarks with comments on our business, provide additional detail on the strategic update we announced last month. And then I'll turn the call over to Cathy to go over our third quarter results. As an organization, Bright Health Group is going through a significant evolution. However, one that at its core, keeps us focused on our mission. At Bright Health Group, we are focused on making health care right together. Our model continues to be 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. Our evolved value-driven business model allows us to continue to do so in a more capital efficient way for our customers and shareholders.

On our call last month we announced that we will be focused on delivering affordable health care for aging and underserved populations in the largest health care markets in the country and continuing to leverage our fully aligned care model with external payer partners and affiliate care providers. We will continue to build on the value-driven care model that we've been advancing since the start of the company. We are well underway in taking steps to move to this more focused model, while continuing to keep front and center the commitment to delivering on our financial targets for 2022.

Our overall performance so far this year has been in line with our expectations and that continued in the third quarter across our businesses. Our medical cost management efforts continue to achieve our cost saving target and utilization remained stable in the third quarter. Our risk adjusted medical expense remains in line with our forecast, as lower medical costs are balanced with revisions to our risk adjustment forecast.

Based on our performance year-to-date and our expectations for a strong finish to the remainder of the year, we are lowering the top end of the guidance range for our full year medical cost ratio. We have also positively revised our adjusted EBITDA guidance range based on the narrower MCR forecast. And as Cathy will discuss in greater detail, the strong results in our Medicare Advantage and NeueHealth businesses gives us confidence in our target for 2023 profitability on an adjusted EBITDA basis.

For anyone that couldn't join our strategic update call last month, we announced a more focused business model and a capital raise from existing shareholders, strengthening our capital position. We expect that our more focused business model and our strengthened capital position will support the business through profitability. Our more focused business model means that Bright HealthCare will no longer offer individual and family health plans for 2023 or Medicare Advantage health plans outside of California and we will be focusing our NeueHealth business on continuing to grow our partnerships with external payers and the government through the ACO REACH Program.

We have a scaled Medicare Advantage business in California, the largest market for aging and underserved populations and we have built a high-performing, fully aligned care model with our care partners across the State. In Florida and Texas, our NeueHealth risk-bearing care delivery and provider affiliate management business continues to deliver differentiated results and we expect to expand our footprint over time, serving the aging and underserved consumers in Medicare and the consumer marketplace together with our key health plan partners. We will also continue to grow our ACO REACH business, which remains on track with our expectations for the year.

We have begun implementing the restructuring plans to adjust our cost structure in order to achieve our 2023 gross margin and operating expense targets, including impacts to many of our employees. We will continue to take steps to adjust our expenses in line with milestones in the marketplace business through the end of the year and over the course of the runout period. While we are exiting the ACA marketplace insurance business at our core, we are focused on serving aging and underserved populations through our fully aligned care model.

We have demonstrated and continue to believe that when you connect and align the best local resources in health care delivery with the financing of care, you get the best outcomes. This is at the heart of our value-driven business model and we see significant growth opportunities for our Medicare Advantage and NeueHealth businesses serving this population. Both businesses are in attractive markets with strong tailwinds where we have demonstrated differentiated performance and are expanding our payer and aligned provider relationships. We expect to manage both businesses as well as the enterprise to reach adjusted EBITDA profitability next year, while building for long-term capital efficient growth.

I'll now hand it over to Cathy to go over our third quarter performance and our updated outlook.

Thank you, Mike and good morning, everyone. I'll start with a review of our third quarter and year-to-date results, provide a balance sheet update and then go over our 2022 and 2023 outlook. We ended the third quarter with over 1 million commercial consumers, a modest increase from the second quarter on in-year ISP enrollment and more than 120,000 Medicare Advantage consumers, as well as approximately 520,000 NeueHealth value-based lives.

Bright Health Group consolidated revenue increased 51% year-over-year to $1.6 billion in Q3. Bright HealthCare commercial revenue grew 57% year-over-year to $983 million and Bright HealthCare Medicare Advantage revenue grew a 11% year-over-year to $409 million, which was entirely organic in Q3. NeueHealth segment revenue of $502 million compared to $223 million in the prior year. Consolidated and Bright HealthCare commercial revenues were negatively impacted by $88 million due to a year-to-date risk adjustment payable true-up across our marketplace states. The increased risk-adjusted payable forecast in the quarter reflects continued solid performance on medical cost, which more than offset the risk adjustment payable forecast revision on a year-to-date basis.

Our third quarter 2022 GAAP medical cost ratio at the enterprise level was 90.6%, down from 103% in the third quarter of 2021. The impact to our third quarter MCR from year-to-date risk adjustment payable true-up added 320 basis points to our enterprise MCR in Q3 of 2022 and approximately 800 basis points in Q3 2021. Underlying utilization and medical costs remained in line with our expectations and we saw the expected increase from the second quarter to the third quarter due to typical seasonality.

Our third quarter adjusted EBITDA was a loss of $82.9 million, which excludes among other things, mark-to-market investment gains and losses on equity securities we hold, a $12.2 million loss in the quarter. Adjusted EBITDA also exclude the $74.2 million goodwill impairment and $42.6 million impairment of intangible assets recognized in Q3 2022, which were primarily driven by macro and strategic factors.

Our adjusted EBITDA and operating expenses in the quarter saw a benefit from a $79 million release of the premium deficiency reserve we previously booked. And we now have a $61 million remaining balance on the PDR going into the fourth quarter.

Given the moving pieces within a year, I would point to the year-to-date results for medical cost ratio as the best indication of the medical cost and risk adjustment trends. Our year-to-date MCR of 87.9% reflects strong performance in our medical cost management initiatives and improved operational performance, as well as the success of our fully aligned care model. The year-to-date MCR also includes the impact of the 2021 risk adjustment true-up recognized in the second quarter this year, partially offset by a favorable true-up of 2021 medical cost, which increased the reported MCR by a net 40 basis point.

When comparing our MCR performance to 2021, we believe that the 240 basis point year-over-year improvement in our year-to-date MCR continues to understate the improvement we're driving in the business given the risk adjustment and medical cost impacts we recognized in Q4 last year and additional 2021 impacts recognized earlier this year.

I would also remind you that in looking at a comparison to 2021, our 2022 MCR is impacted by DCE revenue booked at a 98% MCR. Without DCE, third quarter and year-to-date enterprise MCR would each be 100 basis points lower. Third quarter COVID cost of $23 million were up $3 million from Q2, contributing approximately 140 basis points to the third quarter MCR, up 10 basis points from the impact in the second quarter. The $101 million year-to-date COVID cost remained approximately in line with our expectations and create a favorable impact given the pricing adjustments we made for COVID in 2022.

The Medicare Advantage MCR was 88.7% in the third quarter and 92% year-to-date, representing year-over-year improvement of 500 and 550 basis points respectively. This is a meaningful improvement in performance, which gives us confidence in the future outlook for the business and our forecast that the business will be adjusted EBITDA profitable next year. The commercial MCR in the third quarter was 91.8% which including net positive contribution of 100 basis points from prior period premium and medical cost adjustments. The year-to-date commercial MCR of 85.8% is more reflective of the performance of the business and includes prudent assumption on risk adjustment and solid performance in medical cost management. The net impact of the 2021 risk adjusted true up from Q2 and the lower 2021 medical costs, added 50 basis points to the year-to-date commercial MCR.

Both our Medicare Advantage and commercial businesses are performing as expected year-to-date.

Turning to NeueHealth value-based care patients increased by 20,000 this quarter to approximately 520,000, including approximately 405,000 from Bright HealthCare, 46,000 from direct contracting and 69,000 from other value-based external payer relationships across marketplace and Medicare Advantage. Third quarter revenue for NeueHealth was $502 million, including the impact from the year-to-date true-up for risk adjustment estimate that flows through to the capitated NeueHealth life, as well as a smaller adjustment to the direct contracting benchmark recognized in Q3.

NeueHealth continues to perform well on care and utilization management, driving a solid medical cost ratio in the quarter at 94.5%, approximately in line with our expectations. In direct contracting, we now expect full-year 2022 adjusted EBITDA to be profitable. NeueHealth is performing across Bright HealthCare lives, external payer lives and direct contracting, positioning the business well for managing a growing number of external payer lives and the transition to ACO REACH in 2023.

Turning to our balance sheet, as of September 30, 2022, we had over $220 million in nonregulated liquidity, including $190 million in cash and equivalents and $30 million in passive equity investment classified as short-term. We have over $2.5 billion of additional cash and short or long-term investments held by our regulated insurance subsidiaries. Our $350 million credit facility was fully drawn as of the end of Q3, when factoring in the $46 million letter of credit committed to support our direct contracting business.

As we announced on October 18, 2022, we closed on the $175 million sale of Series B convertible perpetual preferred stock. The combined nearly $400 million from our nonregulated liquidity at the end of the quarter and the subsequent proceeds of the preferred stock issuance are expected to support our business through profitability.

Also, as noted on our strategic update call, we expect to release $250 million in risk-based capital currently in our regulated subsidiary from the exit of our marketplace insurance business, pending claims runout and regulatory approval. We expect to begin to release this capital starting in the middle of next year. The nearly $400 million in nonregulated liquidity at the parent, plus this $250 million in surplus capital has significantly strengthened our capital position and we believe that we are fully funded to profitability.

In our earnings release this morning, we positively revised our full year 2022 MCR and adjusted EBITDA outlook. We continue to work through how we will report fourth quarter results, which we expect will include discontinued operations, but are providing updated guidance consistent with our prior reporting for now. We expect to provide additional information when we report Q4 to bridge our performance to the guidance provided today.

We are revising our guidance for enterprise revenue to be approximately $6.8 billion, the low end of our prior range based on our current views on 2022 risk adjustments and the DCE benchmark. For our enterprise medical cost ratio, we have improved the high end of our guidance and now expect MCR to be in the range of 90% to 92%. We have also positively revised our full year 2022 adjusted EBITDA range and now expect a loss of between USD550 million and USD700 million, which consistent with our prior guidance excludes any impact from mark-to-market investment gains and losses, as well as the goodwill and intangible impairments recognized in Q3.

We would again point to the midpoint of the MCR and adjusted EBITDA guidance ranges based on the trends to this point in utilization and risk adjustment. We have increased visibility in our business this year and this greater predictability is allowing us to narrow our guidance range as we continue to deliver on the targets we set for the year.

For full-year 2022, we expect an operating cost ratio of approximately 22%, excluding restructuring cost and impairment charges, again a meaningful improvement year-over-year. On a segment basis, our end of year Bright HealthCare member forecast is for greater than 1 million members when combining commercial and Medicare Advantage segments. Similar to our enterprise MCR guidance, we would expect the midpoint of the full year MCR for Bright HealthCare to be lower that was the move to reporting commercial and Medicare Advantage segment where they're no longer providing Bright HealthCare MCR guidance range.

Full year 2022 NeueHealth revenue is expected to be approximately $2.2 billion, taking into account the changes to our risk adjustment forecast and the DCE benchmark. Our expected intercompany revenue elimination estimate is approximately $1.2 billion. We expect average NeueHealth value-based care patients to be over 500,000 during the year, including 45,000 to 50,000 from DCE. We continue to expect approximately 40% of NeueHealth revenue generated from external sources. This includes a revenue contribution from direct contracting of approximately $600 million.

On our strategic update call last month, we provided initial 2023 metrics and financial expectations. We are forecasting 2022 revenue to be greater than $3 billion and expect to see modest improvement in our enterprise medical cost ratio relative to our 2022 guidance, as continued progress in our Medicare Advantage business is offset by a mix impact.

This morning, we are adjusting our membership expectations for 2023. We continue to expect NeueHealth commercial value-based care patients to be between 85,000 and 90,000, while we now expect end of year 2023 ACO REACH members to be approximately 65,000, up 5,000 members from our prior forecast. Medicare Advantage end of year 2023 enrollment is now expected to be greater than 125,000, reflecting that our MA business will be focused exclusively on the California market for 2023 and early annual enrollment period results are ahead of expectations.

We expect an operating expense ratio in 2023 between 14.5% and 15.5% compared to our expectation for approximately 22% in 2022, reflecting our more focused business and other actions we are taking to reduce operating expenses. Our MCR forecast plus the contribution from services revenue and our operating expense forecast is expected to support our view that we will achieve adjusted EBITDA profitability.

We expect our more focused model will result in greater predictability in revenue and gross margin in 2023 and the business is well-positioned for capital efficient growth. We expect to provide more detailed guidance in January. Before I turn the call back to Mike, I appreciate our amazing Bright Health team across the country. And I want to thank our shareholders for their continued support.

Now, here's Mike for some final comments.

Thank you, Cathy. We're encouraged by the performance of the business so far this year, with stable utilization, supporting improved MCR and adjusted EBITDA results. We're delivering against the guidance we set back in March and are positive on the strategic actions we're taking to accelerate profitability into 2023. We are focusing on serving aging and underserved consumers that have unmet clinical needs through our fully aligned care model in Florida, Texas and California.

Some of the largest markets in healthcare where 26% of U.S. aging population call home. In NeueHealth, we are confident that the business's ability to manage cost in value-based arrangements will attract a growing number of external payer partners in Texas and Florida, large markets with significant growth opportunities. Our value-driven care model in NeueHealth is driving differentiated results with lower medical cost and strong performance on key utilization metrics for both Bright HealthCare members and for external payers.

We will continue to focus on serving consumers in the commercial marketplace, Medicaid, Medicare Advantage and ACO REACH, a differentiated model compared to competitors serving specific patient categories. Our growing ACO REACH business allows us to leverage our technology and value-based care expertise to support physician groups and taking on risk for traditional Medicare lives. We see a large long term opportunity in ACO REACH, as the U.S. government looks to shift more fee for service Medicare beneficiaries and new value-based care arrangements.

And our Medicare Advantage business is well-positioned working with our care partners in value-based arrangements already, serving seniors and underserved populations throughout California. We have made substantial operational improvements in the business in 2022, which have shown results in our year-to-date performance and we expect will combine with further operational improvements going forward to deliver continued progress in 2023.

We believe our Medicare Advantage business will have additional tailwinds from solid organic growth, early AEP growth ahead of expectations and pricing benefits into 2023. Our current cost structure for our MA business already supports adjusted EBITDA profitability and our forecasted MCR next year.

Looking out to 2023, we're excited about our balanced portfolio of differentiated offerings and its ability to drive value and serve as a platform for sustainable and profitable growth in the future. It's worth repeating that we have demonstrated and continue to believe that when you connect and align the best local resources in healthcare delivery, with the financing of care, you get the best outcomes. This is at the heart of our value driven business model. While we are excited for the future, I want to acknowledge that this is a very challenging time for our team, given the significant changes we are making. We are very fortunate to have a dedicated team of amazing professionals that I have the privilege to work with every day. To our amazing team, I want to thank you for what you've done to help build the foundation of this company. We continue to believe we will make healthcare right together.

Operator, let's take the first question.

(Operator Instructions) Our first question today comes from the line of Nathan Rich from Goldman Sachs.

Maybe just starting with direct contracting and then moving into ACO REACH, you noted it was profitable this year and you expect it to remain profitable in 2023. Are there any considerations from a revenue or profitability standpoint, with respect to transition to ACO REACH especially with the cap fund risk or growth that we should keep in mind when thinking about the profitability of that program next year?

No, I wouldn't say any change for what we've discussed for 2022. Anything you're thinking?

Yes. No. And Nathan as we've shared before, we got great affiliate partners and providers that are performing very, very well ahead of benchmarks. We're running EBITDA profitable this year. And the team is very prepared for next year into that move ACO REACH. So I think we would say we're very excited about it.

And if I could just follow-up on your MLR expectations for next year, I think modest -- you got into modest improvement versus the 90% to 92% range for this year, I guess, how are you thinking about kind of a potential normalization of utilization as we move into next year? And are you seeing any signs of pent up demand or anything like that in the market? And then could you maybe also talk about your expectations around flu and COVID as we get into the fourth quarter of the year?

Well, let's start with just the expectation and we'll get much more into detail when we get our enrollment for expectation for the year set is, of course, we're in the middle of AEP and OEP, so I don't want to get too specific because mix does impact us. But with respect to the guidance on MCR, as you know, we've got really three kind of core components that build up the MCR, our senior managed care business in California, our DCE business, which is you know right after 2022 is booked at 98%. So as a higher medical care ratio, and then we've got our risk based arrangements within NeueHealth.

And so, depending on mix, that's going to vary, but when you look at the mix of business, without the ACA insurance business, which is lower than our enterprise ratio, when that goes away, coupled with the growth of DCE with the improved Medicare Advantage business, that's how you get to what we say is a modest improvement based on the enrollment targets that we put out there for 2023 year-to-date. We're optimistic on those, and believe we're going to be able to deliver on them, but that will impact our MCR for next year.

In terms of pent up demand, we really haven't seen it. We've seen utilization to be very stable throughout 2022, that was a big core driver of our improved performance year-over-year, our medical and cost initiatives have out -- have met our expectations or outperformed throughout the year. So we really haven't seen that Medicare Advantage as we've talked about as utilization is mid-to-high single-digits down year-over-year, IFP even higher than that. So our utilization has been down or stable, if you will, throughout the year. And we expect so far that to remain into the fourth quarter.

With respect to flu and COVID, we don't -- we know that there are reports of increased flu out there, but we expect a normal season and that's what's baked into our numbers for the fourth quarter.

Our next question today comes from the line of Joshua Raskin from Nephron Research.

I was wondering if you just give us some overview expectations for NeueHealth next year. I'd be curious if that's part of the EBITDA profitability, expectation and maybe in totality, we don't need the specifics on DCE versus the others. And then maybe sort of value-based care membership expectations, and how much of that change next year is Bright HealthCare exit related?

Well, I appreciate the question, Josh. So we put guidance out there early to make sure that your models are updated. We're targeting 85,000 to 90,000 value-based lives next year. That's a strong growth of our external book of business from this year. Obviously, with the ACA marketplace, insurance business for Bright HealthCare going away, that's the biggest degradation year-over-year. We're optimistic that we're going to recapture a fair amount of those lives. But at this point, we want to -- we think we've got a prudent outlook for now. We'll get more into that as we get out of OEP. AEP Josh, and give updated guidance in January. And then I can't remember the second question.

The profitability, our expectations there as we've shared before, Josh, our current DCE moving into ACO REACH is performing well. We expected to be profitable this year and into next. And then as Mike just shared all of that we -- and we shared earlier that third-party payer lies that NeueHealth serves are performing well. And we continue to -- expect to continue to grow that.

Yes. And Josh, this year, I mean, our external NeueHealth book of business is a strong -- we're performing well for our external payers and partnerships. So we're excited about the profitability outlook of that business, not only for 2022, but for continued into 2023.

Okay. And then could you just remind me fourth quarter MLR expectation, the guidance implies an increase in for 4Q relative to what you've got year-to-date? Can you just remind me the seasonal reasons for that? Because I'm thinking of the exchanges as high deductible health plans and I'm assuming maybe that's it.

Yes. It's really the seasonality of the fourth quarter for the deductible wear off that we see every year. So that's really the reason for it. And I would say somewhere in the mid-90s, is what we're expecting for Q4 which again, when you look at it on a year-over-year, year-to-date, Josh when you normalize our medical loss ratio for risk adjustments and medical costs to put them in the right periods, we continue to track year-over-year on a year-to-date basis and expect this in the fourth quarter to be somewhere between 1,000 basis points to 1,200 basis points improved year-over-year.

And that's the three major factors that we talked about last year -- coming into this year was driving medical cost initiatives, the fact that COVID, reprice for COVID and COVID was a much meaning -- more bigger impact for us last year. And then the improvement year-over-year and risk adjustments that we've seen, especially in Florida 20%, North Carolina 20%, improved year-over-year, when you take those three factors into consideration, that's what's driving the normalized year-over-year improvement of that around 1,000 basis points to 1,200 basis points which is in line with the guidance that we provided earlier today.

So really just at adoptables, nothing else to think about in terms of uptick there.

No.

The next question today comes from the line of Steven Valiquette from Barclays.

So I guess I'm curious, is it too early to talk about the quarterly cadence of EBITDA for '23, just in light of your target for 2023 profitability and adjusted EBITDA basis? And we're talking about profitability just in the fourth quarter. And then still losses in the first half just trying to sort of parse out how many of the quarters of next year will be profitable EBITDA. It may be too early but just any preliminary thoughts might help us just try to pattern out the quarters for next year?

Steven, it's a little early for us to get that specific. So if you would indulge us and we'll be prepared to update you in January on that. So it's too preliminary for that today, but I do appreciate the question.

Maybe I will add on to that.

Fine. Go ahead.

Sorry Steven. Just going to add on to that question or to that responses. As you can imagine, we've got a pretty significant change in our cost structure as we exit the ACA insurance business and the MA business in the other states other than California. We are well underway in the plans for that business cost structure change year-over-year, which will help that cost come down pretty quickly.

Okay. And just maybe a quick follow-up sort of on Josh's question, as well. But the NeueHealth segment continues to be somewhat tricky to model on a quarterly basis. There are a lot of swings from quarter-to-quarter. But just kind of taken ahead for '23, are there always going to be certain quarters that are not going to be profitable within NeueHealth? Maybe just remind us to what's the long-term margin target for NeueHealth as well, notwithstanding the quarterly volatility.

Well, the quarterly volatility is impacted by the same things that are impacted by the Bright HealthCare book principally, and that is, as we've entered into Florida last year, the volatility in there is given the fact that it's on a risk basis or a capitated basis that the impact of Bright HealthCare flows through to NeueHealth. And so, the volatility that we saw in Bright HealthCare, we saw in NeueHealth in '21, and '22. And that really comes from the adjustments that we're making through risk adjustment.

As we become more mature, as we understand the book of business over time, I expect that volatility to go down. And of course, you don't see that same impact in our Medicare book of business, which is performing really well for us. So over time, we won't see that level of volatility and we'll get more into targets and -- long-term profit targets and all of that, as we roll out in January Steven. So we will be more -- we'll update you more at that time.

The next question today comes from the line of Lisa Gill from J.P. Morgan Chase.

Just really wanted to start with one on Medicare Advantage. Mike, I think you've talked about that, that early numbers look good as far as enrollment goes in California. Do you have any idea around one dis-enrollment? And then secondly, as we think about stars for 2024, what are some of the things that you plan to do to mitigate some of the decelerating through '24?

Lisa, can me go back to the first, did you ask about dis-enrollments for MA. Is that what you were asking?

Yes. That's -- what's your anticipation of dis-enrollment for MA. You said initial numbers are coming in good as far as enrollments go, but just curious in California, what's your initial expectations for dis-enrollments?

Yes. The net number is -- what we believe it's net-net favorable. But while as you know, Lisa, over the last couple of years, we've grown our Medicare Advantage book of business in California, about 40% in total. So it's significantly grown over the last several years. I would characterize 2023 as, will continue to grow and take share, but it'll be nowhere near the growth that we've seen in years past. And that's part of the work that we're doing, because we're really focused on integrating the business, which we started earlier this year.

And we're well along the way in 2022. But that will continue into 2023, as we prepare the business for continued growth. We see significant opportunities throughout the state of California with our care partners. So we're really excited about that. So -- but as a respected dis-enrollment, with that growth, over the last couple of years, came pretty high levels of dis-enrollment compared to a stable book of business.

In 2023 so far, AEP, we've seen less dis-enrollment. While I won't break it out separately, I can tell you net, we expect net growth. And we're not seeing the level of dis-enrollment we've seen over the last couple of years, just given the first year impact of that heavy growth. Hopefully that answers your question.

It does. And then my other question was -- this was around how to think about 2024 stars? I mean, are there things that you can do to mitigate that going into 2024?

Yes. So there is -- of course our whole company is focused on stars. We understand the importance of it, and we were impacted just like others were with some of the change of the focus on caps and what have you. But a lot of our star, call it performance has been the significant growth that we've seen. And while we don't want to use that as an excuse, it's a reality, the first year or two with that level of growth we were impacted on some of our scores that rolled up to our stars rating.

But as we mature, as we understand the book of business and serve consumers longer and build deeper relationships, and really focus, we've done a lot of work on our front-end communication and technology with our consumers. So we really believe we're going to see improved performance and our target is to be a 4 star plus at least 4 star. And we believe with that -- that's in line of sight to be achieved in the future.

The next question today comes from the line of Michael Hall from Morgan Stanley.

Maybe a quick question to Cathy first. Just on capital position, the $221 million in non-regulated cash include the fully drawn $350 million credit facility?

Yes. We are fully drawn on our facility. But remember, we had the $220 million on the balance sheet at the end of the third quarter, Michael. And then we closed shortly thereafter on the $175 million Series B. So in aggregate $400 million, we are fully drawn on the facility. But remember, we also expect $250 million-plus coming back from risk based capital starting obviously after working with regulators early into next year and beyond.

Got it. So then the $250 million cash for capital release, I think last quarter or the last update call you mentioned six to 18 months beginning middle of next year. So it [took me months till] the -- like a wide range for claims run out. How does that work? I know claims lag is generally three months, I believe. But how much longer does it typically take to pay out claims inventory run out?

That's going to vary by state. And of course, we're working with the state regulators as we wind down serve the continued membership that we have today. And then by the end of the first quarter we'll be 90%-ish complete on claim, so we'll be engaged with regulators on release of that capital will be staged over time. Some -- we believe that some states will be more proactive early and some will tail on for a period of time. But that's why we give the broader range, because every state has different policy with respect to the wind down or exit of insurance business, if you will.

Got it. And then if I may one more different technology platform just in light of the strategic update, restructuring, push for profitability next year. Has your plans changed on the rebuild that you started earlier this year or just any thought there?

Well, the core of our technology, which is really the what enables our fully aligned care model, which is connecting the patients to their doctor and have a whole patient record. And then having the tools to be able to manage population for our affiliate providers, whether we own and operate or employ the doctor, we affiliate like we do in DCE, that technology has not changed.

In terms of our core claim platform and how we're thinking about that going forward, especially Medicare Advantage, we continue to evolve that, but that's not what I consider to be our differentiation. Our differentiation is really what is enabling our fully aligned care model and that has not changed. And we'll again get more in detail with that in January as we update all of you on our go-forward business.

The next question today comes from the line of Kevin Fischbeck from Bank of America.

I just wanted to go to your operating cost guidance for next year. Obviously, it's a nice improvement year-over-year. But my guess is that the operating costs numbers are just different by segment. Do you have like what that number would look like this year if you were only operating an MA in NeueHealth, just to see how much progress needs to happen within the ongoing businesses going forward?

Well, in aggregate, I don't want to get into that because the cohorts mix will, it will impact it. But I would say, if you look at the core of MA and DCE, yes, we know what they are. And as I said, if we believe with our MCR targets that we price to and that we believe we'll manage to in both DCE and MA, we will be profitable with the cost structure that we have today. NeueHealth is of course evolving, because of the shift away from the ACA, insurance business from Bright HealthCare. And so there are moving parts depending on -- if you're managing the Medicare business versus the consumer marketplace or Medicaid. So I don't want to get too far along into that. But today the core part of our premium revenue is at the cost structure that we had today would be profitable at our MCR targets next year.

Okay. And then I guess, just to that point about how much membership you get to keep from the external, the internal business that's going to move to external next year. Is there some way to think about that like as far as what percentage of health plans in those markets you are in networked in? Or are you only in network with 10% or 20% of them? Or are you in network with 60% of them? Is there some way to think about how that looks?

Yes. Of course, we'll be much more explicit with this in January. Again, it's a little early, because we have been -- given our announcement last month, we've been signing and adding new external payer partners, which we're really excited about the interest level. So we've got a strong core set of partners that we're aligning with. And we're ahead of ourselves in terms of how much we think we will recapture, but we think it's a significant opportunity.

And here is why, if you look at our performance within our integrated model, we perform better than the general fee for service marketplace. Today, Florida, as we talked about, we believe long-term, we can perform 15% to 20% better than the marketplace in terms of risk adjusted medical costs. We're doing that today in our Florida book of business, and we're seeing strong results in Texas as well.

So we've got a great value proposition for our partnership with our payers, that was a great consumer experience with a high NPS. So we're really excited about it. But of course, it's early and just given the recency of our announcement, I don't want to get too far ahead of that. But we will be talking about that in more detail, Kevin, but just be rest assured, we have a core setup here, partners that we're working with and we're excited about our prospects going forward.

The final question today comes from the line of Gary Taylor from Cowen.

Two quick things. One, Cathy, I just wanted to catch that PDR release in the quarter, again, I didn't catch that when you ran through it. And then my other question is, can you update us on claims inventory, claims processing? I know you've been working on your systems, but there were quite some delays in the 3Q last year. So is there any way to give us a stat like in the third quarter medical expense this year, x amount of those dollars are yet unprocessed at the end of the quarter versus the prior year? Just some way to give us some update on kind of how you're moving through the claims inventories?

Yes, maybe later on, we can get into the detail of Cathy, and then Stephen can follow you up on specifics. But I'll give you more of the highlights of it. This is obviously a core focus of the business. Last year, as you know, Gary, we started off the year behind operationally. It took us till at least mid-year to get going and we had a significant amount of claim activity in the fourth quarter. I think between kind of the beginning of the fourth quarter in January, we processed about 50% of our claims last year.

We don't need -- we're not even close to that this year. We're back, we were caught up at the beginning of the year. And we process claims consistently in a stable way environment throughout the year. So our claim process -- our claim receipts, our claim process and our claim inventory have been stable all year, which obviously improves our predictability for the year end. So, we're really pleased with the outcomes of that. That work really began, late last year into the beginning of this year and that's been a big contributor to our improved performance. And then, Cathy do you want to talk about PDR?

Yes. And then so our PDR as you would expect when you set up that last contract, we did at the end of last year, we had $79 million come through this quarter, and we said that we have $61 million remaining going into the fourth quarter.

Thanks, Gary. I believe that was the last question. So I want to thank everyone for your time today and your interest in Bright Health Group. We look forward to updating you again in the January-February timeframe. Thanks.

Thank you. This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.