InnovAge Holding Corp.
Q4 2022 Earnings Call Transcript

Published: 13 Sep 2022

[Operator:]

Good day and thank you for standing by. Welcome to the InnovAge Fourth Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Kubota, Director, Investor Relations. Please go ahead.

[Ryan Kubota:]

Thank you, operator. Good afternoon and thank you all for joining InnovAge's fiscal 2022 fourth earnings call. With me today is Patrick Blair, President and CEO; and Barbara Gutierrez, CFO. Dr. Rich Feifer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market closed, we issued a press release containing detailed information on our quarterly and annual results. You may access the release on our company website, innovage.com. For those listening to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Tuesday, September 13, 2022, and have not been updated subsequent to the initial earnings call. During this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fiscal fourth quarter 2022 press release, which is posted on the Investor Relations section of our website. We will also be making forward-looking statements, including statements related to our remediation measures, including scaling our capabilities as a provider, expanding our payer capabilities and strengthening our enterprise functions, future growth prospects, the status of current and future regulatory actions and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for fiscal year 2022 and our subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

[Patrick Blair:]

Good afternoon. Thank you, Ryan, and thank you everyone for joining us this afternoon. I want to start by expressing my continued appreciation for our InnovAge employees across the country for everything they are doing to support our participants, each other in our business during these challenging times, and our federal and state partners for their ongoing collaboration and support, and to our shareholders for their ongoing interest in the company. This quarter represents a continuation of the transformational journey in InnovAge. I remain confident that we're pursuing the right foundational actions to keep the business strong and healthy, while navigating this difficult moment. Our primary focus continues to be resolving the issues that led to the enrollment sanctions in Sacramento and Colorado. This includes following the lead of our regulators, ensuring they are completely satisfied with our improvements we're making and the quality of healthcare we're delivering. We're tackling these opportunities across every InnovAge center, whether in the audit process or not. I'm genuinely encouraged by our progress in the last 90 days. By some measures, we are at it, even ahead of our expected timeline for near-term operational improvements and medium term capability development. The financial results for the quarter highlight needed investments in the core, which we've made, and the economic realities of frozen enrollment across roughly half our business. While some of these costs are temporary, some will be permanent, as we believe they're critical to ensuring a highly compliant and effective care delivery model going forward. The results also served to crystallize the opportunity and importance of accelerating the development of our payer capabilities to effectively manage total cost of care. While disappointing, we do not believe the results reflect the strategic and operational progress made across the enterprise. I will go into detail later in my prepared remarks. Last quarter, I introduced the three key dimensions of our transformational work

[Barbara Gutierrez:]

Thank you, Patrick. I will provide some highlights from our fourth quarter and fiscal year-end financial performance for 2022, and update on Medicare and Medicaid rates for fiscal year 2023 and some insights into the trends we are seeing as we head into the new fiscal year. As with our previous earnings calls, I will refer to sequential comparisons relative to the third quarter in order to provide a more meaningful picture of our performance. We ended the fourth quarter and fiscal year 2022 with 18 centers and a census of just over 6,650 participants as of June 30, 2022. Compared to the prior year, this represents an ending census decrease of 2.8% compared to the fiscal third quarter census declined 4.4%. We recorded over 82,800 member months in fiscal year 2022, a 3.9% increase compared to the prior year after including the Sacramento census, which was not consolidated until the second half of fiscal year 2021. Revenue grew 9.5% to $698.6 million for fiscal year 2022, primarily driven by member month growth and a mid-single-digit increase in both Medicare and Medicaid rates. Medicaid rates in fiscal year 2022 include a temporary rate increase from the American Rescue Plan Act or ARPA in Colorado and Virginia. Fourth quarter revenue decreased by 2.5% to $172.9 million compared to the previous quarter, primarily due to decreased member months as a result of the ongoing enrollment sanctions in Colorado and Sacramento. External provider costs for the full year were $383 million, 23.8% higher than the prior year, and $98.7 million for the fourth quarter, a decrease of 4.4% compared to the fiscal third quarter of 2022. The year-over-year increase was primarily due to an increase in member months, coupled with higher cost per participant. The cost per participant drivers include

[Patrick Blair:]

Thank you, Barb. My ongoing commitment to all stakeholders continues to be doing everything in our power to proactively strengthen our operations organization wide, in order to earn the right to be released from sanctions, to avoid future issues, and to be a sustainably high performing PACE provider, able to serve participants for years to come even in more locations across the country. While I'm pleased with our strategic and operational progress over the last three months, I'm correspondingly disappointed with the quarter financially, but remain resolute. I'm confident that we're on the right path, are working hard on it across the organization, and are making bona fide progress on all the important fronts. I'm particularly pleased with our great team, including our new center based and enterprise leaders. As with all significant transformations, solid outcomes are always preceded by a compelling strategy, laser focus, effective execution, and a team with the right attitude and perseverance. It may take time. But thanks to the efforts and support of our internal team and partners, my conviction that we will succeed grows every day. Operator, with that, we can now open the line for Q&A.

[Operator:]

Thank you. And our first question comes from the line of Jason Cassorla from Citi.

[Jason Cassorla:]

Just on the census front, I mean the breakdown of the -- excuse me 6% decline in sanctioned markets versus the 3% call it net growth in non-sanctioned markets if I heard that right, was definitely helpful. And you highlighted investing in resources in those non-sanctioned markets to grow census. So maybe in that context, can you just delve a little bit deeper into the investments in those non-sanctioned markets? And if those investments can be made in sanctioned markets, once those are lifted? As well as what kind of capacity you have in those non-sanctioned centers that to continue to grow at that level? And then if we should think about that 2% level of sequential decline in a steady state environment until the audits are remedied, or any color around forward census trends that we should consider will be helpful?

[Patrick Blair:]

Thank you, Jason. Great question to get us started. I'll start with some of the investments we've made in our non-sanctioned markets to help drive growth, while we're under sanctions in a couple of our key buckets. The first I'd point to is we've been very selective in adding a few sales leaders to the organization. We added a new Chief Sales and Marketing Officer that comes with a long track record of driving growth in senior programs. And he's done a great job of really sizing up the sales organization, and making changes where appropriate, as well as building a much stronger accountability model as it relates to making sure we're out in the market, and we're doing everything we can to make seniors in the community aware of PACE. We've also made a number of investments in our CRM system, which just again, helps with accountability helps with throughput and the acceleration of sales activity from building awareness all the way through to enrollment. And I'm also really excited about the work that our sales team is doing now with our clinical leaders to make sure that we are very focused on making sure that every individual that joins InnovAge is a good fit for the program. So a lot of great work and a lot of great investment in that area. I think these are investments that we've also started to make and apply to other markets. So while we're still under sanctioned in Colorado and Sacramento, we still begin to roll out these changes. And ensure that once the sanctions are lifted, we're really committed to us faster ramp up back to historical levels of productivity than we've seen in the past. So there's a very focused effort to get to ramming speed, so to speak, for our sanctioned markets once they're released from concession. So let me ask Barb to comment as well.

[Barbara Gutierrez:]

Yes. Hi, Jason, it's Barb. So a couple of things, if I make sure I caught all your questions. But if I didn't, please let me know. So I think one of your questions was around the disenrollment rate. And maybe just reading between the lines does that that differ between the sanctioned and non-sanctioned locations? And it doesn't. So that 2% on average -- 2% per month on average, is just pretty typical across all of our all of our centers, regardless if they're on sanction or not. And then I think your second part of your question was a little bit about capacity in our centers. And so, generally speaking, we have said for -- since we went public that we do have capacity in our existing centers. So part of our growth strategy is around that organic growth. And we do have capacity in our existing centers. It kind of ranges depending on the center and the size, but generally, we've got about 50% capacity across the enterprise in order to grow. So we do have a lot of organic growth capacity,

[Jason Cassorla:]

And then just really quickly, on a follow-up there, just the 2% level of sequential decline in aggregate, is that a fair way to think about the steady state kind of declines as until we kind of get on the other side of these sanctions at this point? Or are there other nuances that we should be thinking about, just as we think about the go forward?

[Barbara Gutierrez:]

Yes, I think it’s in that range, it's in that range to a little bit more neutral. So I think to really bifurcate what's going on, right, is that we have natural disenrollment in every center, and in about half of our business, we're not enrolling new participants, but we are growing in the other half of our business. So, I think, Patrick, referred to those low single digit kind of increases net-net. So it's kind of in that range going forward.

[Jason Cassorla:]

And then just as my follow-up here, just on your balance sheet, and cash position. Maybe just a star, it looks like CapEx spending in the fourth quarter almost doubled compared to what you've done in the previous nine months leading up to the fourth quarter. So maybe just to start, where was that CapEx allocated? It was generally just related to the audit remediation activities, or was it for other areas? And then, just as a follow up, obviously, your remediation is a top of mind, but you're hanging out right now with over $180 million in cash, only about $86 million of debt on the balance sheet. Are there ways you can leverage that cash position for investments or otherwise? Or will you kind of be taking more of a wait and see approach perhaps until the audits are completely remedied at this point? Just any color on spending priorities just given your pretty hefty cash position and the audit remediation considerations? Anything there would be helpful. Thanks.

[Barbara Gutierrez:]

Yes, sure. So one thing on the de novo is, just to clarify, I use the wrong preposition. So the 2.7 should have been through the fourth quarter, not in the fourth quarter. So that 2.7 million related to de novo, the senior related to most primarily in Tampa and Orlando. So that's where the investments are being made. In terms of the cash position, yes, you're right. We're fortunate we have a fair bit of cash on the balance sheet. We are always looking to optimize how we invest that. And we definitely are looking at ways how to optimize that investment. But I think in terms of what we do long-term, it is a little bit more of that wait and see. We're really, really trying to be focused on investing in the business and stabilizing the business so we can turn around and grow. And so it is a little bit more of that wait and see in terms of the cash approach.

[Operator:]

Our next question comes from Sarah James from Barclays.

[Sarah James:]

So it sounds like you guys are having a lot of productive conversations with regulators at the state and federal level. And I'm wondering if they're giving you have a sense of what went on? How much of it was really across the industry in COVID versus what was company specific?

[Patrick Blair:]

Thank you, Sarah. This is Patrick. Our conversations with our regulators, most CMS in the states are very focused on InnovAge, and very focused on the work we're doing and the work we're collaborating on to address the deficiencies identified in the audit. The notion of what's happening in the broader industry related PACE and impact of COVID or anything related to similar deficiencies is just not a conversation that we're focused on. We've really stayed focused on our own work with regulators, and are really pleased -- as you said, really pleased with the progress that our teams are making, and can't say enough about the collaboration that we're getting from our regulators.

[Sarah James:]

And then it sounds like you guys are making a number of changes that are going to have a long-term impact. There's some on the staffing and wage side. That could be a longer term headwind, but then it sounds like there's a lot of efficiency and cost of care initiatives that can be a tailwind. How do you think about your long-term margin evolving?

[Patrick Blair:]

Maybe I'll start, and hand over to Barb. Well, I think we still hold a lot of confidence that we can achieve a very attractive margin profile for the company going forward. As we discussed before, our center level costs are a smaller percentage of our total cost than our external provider cost. And so the notion is, yes, it may require more investment in our centers than we've made in the past. But we feel very confident that there's a significant opportunity for us to get an ROI from those investments by doing a much better job on managing our external provider costs. And so we feel very confident that that's a formula that we can execute on. And we're already starting to see some wonderful progress on the part of our teams. Barb, anything you'd like to add?

[Barbara Gutierrez:]

No, I think just to sum up, Patrick. I think Sarah that we did have some -- we've had some headwinds in FY '22 really related to some COVID expense, expense related to labor market challenges, no different than the broader industry. And so we're really focused on these other initiatives, the payer initiatives and the operational initiatives to turn the tide here and to be accretive to our overall margin profile going forward. So a little early to tell. We've really been in the assessment phase and the planning phase, if you will, and we're moving into the execution phase. So little early to tell about will quantify how much of that, will have an impact on our margin, but we're margin.

[Sarah James:]

Great. And last question is just on the contract labor you guys talked about. Could you give us an idea of what percent of your clinical staff is contract labor now versus pre-COVID? And is there any way to size the dollar impact from that?

[Barbara Gutierrez:]

I'll make some just real high level estimation. So I think that we don't think that it's any higher now than I think it was previously. I mean, I think it's just proportional to the overall labor market. I think as a percent, it's probably about under 10% of our overall force. So I think it's just one -- it's one component, obviously, it's a more expensive component. And we've obviously used that to backfill in places for critical roles.

[Operator:]

Our next question of line of Jamie Perse from Goldman Sachs.

[Jamie Perse:]

I was hoping we could start with Sacramento and some of your comments there. First, the five months of being on target with performance. What specifically are you tracking there and maybe incremental color you can give on what the metrics you're tracking and how the key ones are faring versus your targets?

[Patrick Blair:]

Sure. Thank you, Jamie. I would start with my opening remarks that we are using a set of measures that we jointly developed with CMS and our state partners. The sorts of things that you would see in those measures are things related to ensuring service orders are scheduled and provided timely, that participant or caregiver requests are identified and appropriately documented. There's measures related to care plan timeliness, and completion. There's measures related to the frequency of our assessments, consistent with our care plan development with our members. And then things related to just the responsiveness of our interdisciplinary team overall. So it's a variety of measures that we jointly developed with our regulatory partners that really have formed the foundation for understanding our progress in a common language between InnovAge and our partners. And as you mentioned, in Sacramento in particular, we've had some very strong and consistent performance over the last several months, and that progress has been acknowledged by our regulatory partners. And we're in close conversations to determine what are the next steps necessary to enter the validation phase, which is the final phase before sanctions can be released. But the timing of that, as we've said many times, still resides with the regulators.

[Jamie Perse:]

One other quick one, just on the comments related to higher costs associated with longer tenured patients on the platform. My sense is that the revenue associated with those patients is also higher. So can you talk to what the margin profile or patient contribution profiles of patient looks the first couple years on the platform versus as they are more tenured on the platform? Any color on that would be great.

[Barbara Gutierrez:]

Yes. Hey, Jamie. It’s Barb. So just to jump on it. So, really, this is really nothing different than analyze over time. And that is as the participants age in the program, they become more frail for services and often are in a different higher cost setting. So, that's really what we're referring to. I think without putting any numbers to it, I think you get the concept that those higher cost settings, obviously, are -- erode our margin on those because of that. Now, to your point about, do we get more revenue related to that? To some degree. On the Medicare aspect, their risk scores are increasing. So to some degree, we get more revenue, but on the Medicaid aspect, which really pays for those alpha SNF costs, that's not necessarily risk adjusted. And in fact, it's not risk adjusted. So we get some revenue to some degree, but not commensurate with necessarily the needs of that population.

[Operator:]

Our last question comes from the line of Madeline Mollman from William Blair.

[Madeline Mollman:]

I just have two things. One is, we're curious about the impact of inflation on your costs, particularly related to fuel and transportation. And I know that you said the 2023 rate is pretty much set. But going forward with inflation remains elevated, is there any room for you to negotiate rates or to work with CMS to take inflation into account?

[Patrick Blair:]

Yes, this is an important part of our discussions with our state partners, actually throughout the year. And certainly as we're in the midst of a rate setting cycle is to ensure that the discretion that states have to address the cost that we're experiencing, inflationary costs as you refer to, is a critical part of all those conversation. It's something we pushed very hard for. I think, Colorado was probably a good example of very successful discussions with our partners on what's driving our cost. But with that, let me ask Barb to punctuate.

[Barbara Gutierrez:]

Yes. And I think in addition to what Patrick just said, some of the things that the states have actually done, certain states, we've received those ARPA funds. And in fact, that is meant to help us cover those inflationary costs, whether it's wage rates, or whatever it might be, the states have some discretion on how they allocate those funds. But we have received ARPA funds from both -- from a number of states, Colorado in particular that Patrick was just referring to really folded that into our rates effective July. So I think that's one of the ways we cover it.

[Patrick Blair:]

I might just add one closing thought on that is that it's important to recognize there can be some lag between when we're experiencing those costs and reporting those costs and when they're actually recognized in our rates. So sometimes we will have a tight matching between our inflation and the state's rates. So just wanted to add that as well.

[Madeline Mollman:]

One other quick question. I know you said that you voluntarily sort of paused progress on your centers in Florida, but I was curious if you are -- when you decide to continue pursuing de novos, will you try to regain approval in states such as Indiana, California and Kentucky that you previously had planned to? Or are you going to pursue new states?

[Patrick Blair:]

Well, I’d like to separate those into different buckets. California being an existing state, I would just reinforce, there are several markets in California that are very attractive to us. And we've made inroads and progress in a handful of markets. And when we're in a position to be released from sanctions, we'll certainly be pushing to move quickly on opportunities that may exist. Still work to do, but we'll certainly -- California is a priority that they're looking to accomplish with long term care type services, and we're going to be a great partner to them. Kentucky and Indiana are also a bit different, though Kentucky is a market where we've actually already invested in the center there. And we're beginning to see, think through what are our options, and what is the timing in Kentucky but still a very attractive center for us. And then Indiana is another market that’s certainly attractive, but we've not made final decisions about how to proceed in Indiana. And we're working through that as we speak now. But very much interested in de novo expansion when the time is right, and when we feel confident we have the support of our regulatory partners.

[Operator:]

Now I'd like to turn the call back over to Patrick Blair for any closing remarks.

[Patrick Blair:]

Well, thank you very much, operator. And before we close, I just wanted to take a minute to just reinforce how much we've accomplished as an organization over the last seven to nine months. I'm just extraordinarily proud of our team and their unwavering commitment to the company that continues today. I believe our future is very bright and the path forward is clear. It's our commitment to continue to bring clarity during this transitional period to all of our stakeholders as we have relevant updates to share. And with that I'll close and thank everyone for their continued interest in InnovAge. Have a good evening.

[Operator:]

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.