Skylight Health Group Inc.
Q2 2021 Earnings Call Transcript

Published: 17 Aug 2021

[Operator:]

Thank you, everyone, for standing by. This is the conference operator. We would like to welcome you to the Skylight Health’s Second Quarter 2021 Financial Results Conference Call, the Results for the Period Ending June 30, 2021. As a reminder, all participants are in listen-only mode. After today’s speakers conclude the presentation portion of the call, should time permit, they will move to a question-and-answer period. . As always, I would like to remind you that listeners are cautioned that today’s call and the responses to any questions may contain forward-looking statements, including certain statements which concern long-term earnings objectives. These should be considered in conjunction with the cautionary statement contained in the Skylight Health’s earnings release and in the company’s MD&A and other filings. Forward-looking statements are subject to risks and uncertainties and assumptions; accordingly, our actual performance could differ materially and undue reliance should not be placed on such statements. Skylight Health does not undertake to update any forward-looking statements except as required. All currencies discussed on the call will be in Canadian dollars unless otherwise stated. This conference call is being recorded today, Tuesday, August 17, 2021 at 8

[Pradyum Sekar:]

Thank you, Bailey, and a good morning to everyone, and thank you for joining us today for our second quarter conference call for the period ending June 30, 2021. I’m happy to announce with me this morning is our Chief Financial Officer, Andrew Elinesky, who will provide you with a more detailed overview of our financial performance in a moment. After the close of market yesterday, we released our second quarter 2021 results. The news release for these results, financial statements and the Management’s Discussion and Analysis for this period are available on our website, skylighthealthgroup.com, and have been filed on SEDAR and EDGAR. I'm going to go over a quick description of our business and some of the operational highlights from the quarter. I'll then turn it over to Andrew to review the financials. And then I'll be back to talk about some of the opportunities that lie ahead for us. Skylight Health Group is a healthcare services and technology company working to positively impact patient health outcomes. Skylight operates a U.S. multistate primary care health network comprised of clinics, providing a range of services from primary care, subspecialty, allied health and laboratory diagnostic testing. We are focused on helping small and independent practices shift from a traditional fee-for-service model to a value-based care model using proprietary technology, data analytics and infrastructure. Value-based care leads to improved patient outcomes, reduced costs of care and drives stronger financial performance from existing practices. We're all extremely proud of our results this quarter. Revenue was up 184% year-over-year, and 103% sequentially. We saw both top line revenue growth from acquisitions made during the first quarter and second quarters in 2021 and from those in Q4 2020. We continue to grow the operational level with each new acquisition being accretive to our growth. Over the quarter, we saw organic growth from Q1 of approximately 13% resulting from the improvements to provider and patient access, revenue cycle management and leadership to the clinical level. We closed on two acquisitions during the quarter, including Rocky Mountain in early April and Doctors Center in late June. Based on expected calendar year contribution, we will be increasing revenue guidance for 2021 to $41 million from $40 million. Our focus in the second quarter was both continuing to validate the acquisition model and strengthening our infrastructure for rapid growth. This included investments in human capital, technology and operations. We bolstered our management team and operations teams to support all functional and subject matter areas relevant to our future growth. We are pleased that we stand today as stronger and disciplined operating team led by experienced management in the U.S. primary care market. From a corporate perspective, the second quarter was a major milestone for us as we commenced trading on the NASDAQ in June, which will expand our visibility in the marketplace, improve liquidity, broaden and diversify our shareholder base and enhance long-term shareholder value. We made several investments in the second quarter that were relevant to corporate activities outside operations. These included professional fees tied to the NASDAQ listing and acquisitions made, as well as in the marketing and business development costs, most of these are tied to one time initiatives, primarily around building a national Skylight brand. While we may see some of this continue into the third quarter, most of these as well as professional fees will begin to normalize in the following quarters. We ended the quarter strong with the addition of new clinics, providers and patient panels. As at the end of the second quarter, we had approximately 88,000 lives versus 21,000 lives in the first quarter of the 88,000 lives, qualified managed care patients were approximately 15%. We expect that a percentage of these lives will begin participation in the Medicare Shared Savings Program starting 2022 with the acquisition of the ACO we did in Q3 this year. We continue to be in active conversations with commercial payors for other managed care programs, including Medicare Advantage and Managed Medicaid. I will cover more of this later in the call. I'd now like to turn the call over to Andrew to review our financial results in more detail.

[Andrew Elinesky:]

Thank you, Prad. And thank you again to our attendees for joining us today. As Prad mentioned, we are very pleased with the company's performance continue the year. The second quarter financial results reflected the impact of the acquisitions that we've made during the last nine months. The health of our balance sheet remains strong. And we continue with our plan of acquisitions and integrations. Starting with the income statement, our revenue came in at $10.5 million for the quarter, which was Prad said was a 184% increase when compared to the $3.7 million reported in the same period of 2020. And when we compare that to the first quarter of '21, our revenue was up 103%. These significant increases were the result of the acquisitions of our primary care clinics made during the last three quarters. In addition to our revenues growing from acquisitions, Prad mentioned, over the last nine months, we have also seen quarter-over-quarter growth of 13% for the clinics that we acquired in Q4 2020, in Q1 '21 i.e. this excludes the acquisition of Rocky Mountain and the Doctors Center made in Q2 of this year. As a result of our most recent acquisition of the Doctors Center, we are raising our revenue guidance to $41 million for the rest of this year. In addition to this full year fiscal guidance we plan on exiting 2021 at an annualized revenue run rate of $50 million. This projection accounts for the closed acquisitions, but excludes any potential future transactions for which we currently have LOIs in place. Moving to gross profit, our margin came in at 64% for the second quarter compared to 71% in Q2 of last year, and 69% for the previous quarter. This is within our historical margin range of approximately 60% to 70%. With the continued focus on acquiring primary care businesses, we’d expect our margin to decrease slightly, as this line of business has a slightly lower margin than our legacy business. However, we also expect to counter this reduction with our transition to value-based care. With higher economic contracts from payors in value-based care, we expect to keep gross margins strong as we shift into those agreements in the coming years. Moving to EBITDA, our adjusted EBITDA loss was a result of the continued investments in corporate activities that Prad mentioned earlier. And these increased costs are primarily related to salaries and wages, marketing and business development and professional fees. All of these are reflective of the current growth stage of our company and I'll go through the outlook for each of them now. Salary costs increased as expected in Q2. And while we expect that these costs would increase with any further acquisitions, we also expect to see this rate of organic growth continue in Q3 as we invest in human capital to support the ACO that we acquired earlier this quarter. We now have a strong leadership team in place and the expertise that we feel -- that we believe will ensure our growth aligns with the value that we expect to earn from future contracts. With regards to professional fees, they contain a number of one-time items, such as our exchange listing costs, and the large acquisition of Rocky Mountain made earlier in the quarter, which accounted for the increase over the prior quarter. And this was the reason that we were moving from our EBITDA, the result of their one-time nature. The remaining balance of professional themes are reflective of the larger size of our company, and our current U.S. listing as well as the continued smaller acquisition of the Doctors Center, and the diligence that we continue to deploy while evaluating other potential transactions. As these fees are driven by our acquisitions, we would expect these costs to be reflective of the volume of this work. But we would also expect for them to improve going forward as we continue to refine our acquisition activities. And lastly, with regards to our marketing and development costs, these costs decreased in the second quarter as expected, and we expect them to decrease again in Q3 at which point they would be at normalized levels onwards. Regarding our balance sheet, we ended the quarter with just under $12 million in total cash, compared to a cash balance of just over $20 million as at the end of 2020. This slight reduction in cash in the quarter was primarily due to purchase consideration paid in the quarter, just over $16 million in working capital adjustments, offset by gross proceeds raised just under $14 million from a bought deal. And we continue to have a strong working capital surplus of just over $7 million. Subsequent to the quarter a portion of this cash was used to settle deferred payments from prior acquisitions and to sell the cost of current investments. And our current cash position is still strong at just under $9 million. The remaining large increases on our balance sheet with regards to our assets and liabilities were the result of acquisitions made since late 2020. And with that, I will turn the call back to Prad.

[Pradyum Sekar:]

Thanks, Andrew. The closing of Rocky Mountain and Doctors Center acquisitions continue to support our model for growth both in building density in existing markets, as well as opportunities in new markets. Rocky Mountain expanded our reach in Colorado to over 40 providers now in network and access to a large share of the primary care market in Denver and Boulder. Further, it strengthens our financial performance contributing over $20 million in annualized revenues and positive EBITDA. With Rocky Mountain now in network, we are in a strengthened position to advance payor conversations on enabling value-based care plans within the group and expanding these to national relationships over time. Doctors Center represented our second acquisition in Jacksonville, similarly strengthening our position in Northeast Florida adding an additional 4 locations, 5 providers and over 6,000 patient lives. We continue to be met with strong demand from practices that are seeking a qualified buyer that aligns with their patients, providers and administrative teams. While we continue to improve our targeting of these practices, we will continue to focus on practices with a healthy Medicare and Medicaid population. We present these practices with our value add that establishes a greater confidence in accountability, resources, technology and technology-enabled solutions and improved payor contracts. In addition to growth by acquisition, we will also be focusing on de novo sites. Organically setting up practices will allow us to further accelerate our growth in markets, patient panels and scale. Because we have a strong infrastructure and national resources, we can leverage these assets to meet the demand from patients in our existing markets. We expect to double our current patient count as we exit 2022, as well as target practices and practice opportunities with a greater managed care patient population. This will significantly grow our patient panels that qualify for managed care programs and health care plans. Thanks to the tireless efforts of our team and the acquisition of the ACO Partners in Q3 this year, we are now positioned to begin participating in the Medicare Shared Savings Program directly with the Center for Medicare and Medicaid or CMS. As we work to enroll our providers in our network today and add new providers in the future, both via acquisition and de novo sites, their traditional Medicare patients will automatically qualify in the program, and these practices will begin realizing the improved economics by way of a shared savings and other ACO opportunities. As a result, patients will expect to see a broader set of services and access to their primary care provider. This is the beginning of the journey for these providers and patients in value-based care and in realizing improved health outcomes and a lower cost of care delivery. We are strengthening our infrastructure, which includes all three layers, operations, clinical and technology to meet the needs under the MSSP program and other managed care programs in the future. As we begin year one in a single-sided risk model where we benefit from shared savings, but not the downside risk, we fully intend to shift into a full risk model and ultimately, where we at Skylight are managing the total cost of care. The shift from single-sided risk to full-risk and total cost of care means dramatically improved patient economics, but brings with it the need to properly manage care, quality and costs. We are confident in our team's experience, capacity and willingness to build a structure within Skylight to see these practices shift to total cost of care in the next few years and parallel that opportunity with continued growth in acquisitions and de novo sites. We also continue to have discussions with payors, both regionally and nationally as we explore other managed care programs. We have made several key hires over the quarter and subsequently that deepened our bench strength and clinical operations, value and performance. This included Dr. Kit Brekhus, who joined us as our new Chief Medical Officer and brings with him over 25 years of clinical experience in building large health networks and value-based care models. Along with Dr. Brekhus, we added significant capacity to our leadership and management team to help them to shift of value and total cost of care management. We will continue to keep our efforts in recruiting into space and leveraging unique approach to attract and retain strong talents that are aligned with our mission and core values. Some operational goals that we will look forward to recognizing long-term benefits over the coming months will include the deployment of shared services amongst our existing network of clinics. As most practices are managed in a rather independent fashion, we have already begun efforts to centralize major cost centers, including revenue cycle management, electronic health records and we'll look to create further synergies and expand branding efforts to unite all practices under a single Skylight banner. We will be able to share more on this in the coming month. Our pipeline for acquisitions remains robust and continues to grow, as we build a reputation in existing markets, creating many inbound opportunities. We have built a scalable and repeatable model that allows us to manage multiple deals at the same time, ensuring that we will continue to be highly acquisitive and benefit from our unique acquisition strategy. The foundation we laid early on as an organization in clinical research trials, along with our partnership with CliniEdge has started to generate a parallel opportunity for Skylight to recognize additional revenues and growth. We have already announced two trials in Massachusetts and recently in Colorado, that we believe will bring in meaningful revenue and serve as a platform for future trial expansion and new trials. We expect this to be a growing feature element of our business, while we stay focused on our core today. Our focus over the next three to six months will remain steadfast and focused on 4 key areas

[Operator:]

Thank you. We will now begin the question-and-answer session. . Our first question is from Frank Takkinen with Lake Street Capital. Please go ahead.

[Frank Takkinen:]

Thanks for taking my questions, congrats on a solid Q2 results. Wanted to start with the transition to value based care. Can you just walk us through the steps between now and January 2022 before the ACO contracts could go into effect. Importantly, just talk through how the recently acquired ACO platform is so important to the transition, but just give us a little bit more clarity how that's going to look over the next four or so months once that goes into effect?

[Pradyum Sekar:]

Yes, thanks, Frank. So, just to quickly summarize the acquisition of the ACO. So, this is unlike a typical clinical acquisition, where you're buying a practice with patients. The ACO really is a license to contract directly with CMS under the Medicare Shared Savings Program. And so there are a number of different managed care programs out there, you've got Medicare Advantage with commercial payors, Managed Medicaid. And the Medicare Shared Savings Program is one of these contracts that works directly with CMS. As the ACO is structured under the MSSP program, there's different levels of risks. So, there's usually single sided risk, which is where most first year participants will join. And that's where effectively you can benefit from any potential shared savings you can bring to the panel of patients that you have, but you're not responsible for downside risk. Typically, CMS requires that the ACO moves into a full risk model by the end of its term. And so we fully expect as aligned with our model that we shift from single to full, and then ultimately go beyond full risk and to total cost of care. So, the goal for us over the coming month is really on establishing the foundation to succeed both in the near-term in single sided risk, but recognizing that we are moving to a full risk model. And that kind of means leadership against sort of three different key verticals for us. One is operations. So, making sure that operations understand and are structured to support value based care treatments, whether that's from, the simplicity of scheduling to bookings to patient visits and patient access to clinical leadership. So, ensuring that our clinical teams, our providers, our support care teams, are all aligned on helping patients sort of receive the required access that they need and support that they need based on the various chronic disease states that they may have. And then lastly on the technology side, which is one of the most critical elements in the ability for us to import the data, in this case from CMS on our patient panel, and then effectively be able to transform that information into actionable insights, where we can now start to leverage that data on identifying opportunities for cost reduction, for quality improvements, et cetera. And so the combination of sort of technology, operations and clinical leadership is ultimately one of the most, probably the most important focus for us over the coming four months. The other thing to mention too, as well, with the ACO outside of just the Shared Savings Program, is it does open up the opportunities for waiver programs, by which we can create incentives for providers via the ACO, which typically is not done outside of an ACO framework. But again, it's a way for us to create further value with the existing network of practices, but also as a chance for us to leverage the ACO in the adoption of what we call as third party participants. And these third-party providers, while not owned by Skylight today, certainly start to become a funnel for future acquisition opportunities for us, as we build a pipeline.

[Frank Takkinen:]

And you talked about this briefly in your answer there, but just wanted to get a little bit more clarity on the different flavors of risk, obviously you're going to one sided first, then you talk to dual sided, and then eventually full cost of care. But share with us how you think about the balance of the upside that you can see. And then the costs that could be as a result of that for the downside risk. So just give us a little feel for the balance between capturing upside and protecting downside?

[Pradyum Sekar:]

Yes, absolutely. I mean, the upside increases, obviously, as you take on more risk, because the liability falls more on user provider group. So using the MSSP program as sort of an descriptor of a new single sided to full side risk, you're moving from anywhere from 40% of the shared savings in a single sided risk model to north of75% in a full risk enhanced truck. Now obviously, with the enhanced track here, responsible for the downside as well. And total cost of care, you are given the full healthcare dollar and effectively required to manage 100% of the cost of that patient care. And so the upside there is tremendously higher and typically where you see many far larger peers within the Medicare Advantage space, specifically playing within. The plan of management of these costs really falls down on again, your core competency from an infrastructure standpoint. But you're also going to expect that patient sort of provider panels will continue to increase as you support these patients. And so when you look at a typical doctor's office, today, you've got one maybe physician or nurse practitioner who sees the patient and that's pretty much your cost of care. As you look at a single sided model, you might have a provider and maybe one other support provider, a care team coordinator, a nurse case manager added on. And so your panel sort of grows from 1 to maybe a little bit more than 1 as you're scaling that person across multiple providers. As you move into full risk and total cost of care, you're adding in more providers, more specialists into that panel, which effectively are, think of it as, you've got a team of providers that are providing care to a single and group of patients based on the type of care and disease states that you're supporting within that marketing community. And so as we continue to see increased economics, there is an expectation that we'll see an increased cost. However, the margins as we've seen both in our models and that of our peers is that the margins that you'll receive under total cost of care and value based care frameworks once at scale are truly better than what you will see in fee-for-service. Now again, the effectiveness of the deployment of those panels in your infrastructure ultimately help you minimize the cost, the downside risk by being able to preempt and prevent a lot of the challenges you might see when it comes to sort of patient cost and take, let’s call it, waste costs, wastage costs in the market. But that ultimately come down to, again, the experience we expect to earn over the coming years as we're building towards total cost of care.

[Frank Takkinen:]

And then last one for me, when you think about acquisitions, just walk us through how you're balancing the admiration to acquire more clinics with the strategic capacity that you guys have at Skylight now without writing off too much, but obviously keeping the clip of acquisition growth going at a respectable pace as well?

[Pradyum Sekar:]

Yes, we've done a lot in the last six months to really build teams that are capable of handling both the ingestion of new practices as well as the integration. And now we'll see the transition of these practices from fee-for-service to value. That allows us to be opportunistic with deal flow. One of the things we realized through the acquisition of Rocky Mountain, although a transformative acquisition and really an anchor acquisition for us in Colorado, it did obviously present us with a much longer transition time to what we typically see with smaller independent practices. More commonly in our acquisition pipeline will be the smallest independent practices largely because these are the ones that, number one, make up the total addressable market, we believe, is really not focused on by many of our peers and a larger TAM. But also, these are the providers that will struggle the most due to shifted value and the opportunities and have a deep, rich set of managed care population within. We're pretty confident that given our strategy today, we are focused on the growth of managed care lives, we are focused on the growth of patients that don't fall into that today, in the future, they will. And so density is key, as long as density is a focus for us, we can be a little bit faster and more opportunistic because we already have the infrastructure providers and teams in place. That said, there are some key markets where as we explore managed care population growth, as we explore conversations with payors, and identify their interests and opportunities to go into when we believe those will accelerate our opportunity to move into new markets as well and leverage some resources from both people and infrastructure to be able to handle some additional capacity there.

[Operator:]

Our next question is from Carl Byrnes with Northland Capital Markets.

[Carl Byrnes:]

I think in the release and the prepared comments rather you cited organic growth of 13%, which is fantastic amid the COVID pandemic. And referenced revenue cycle management, patient access and patient flow was being factors there. I'm wondering if you can elaborate that in your what drove patient access, and flow and where it was at pre-COVID levels?

[Pradyum Sekar:]

Yes, thanks, Carl. One of the things I want to maybe start by commenting on is we get asked a lot of questions generally, because of the typical price point we acquire these practices, or is there effectively something wrong with these practices that we're able to buy them at a lower discounted rate? The answer to that is no. We're getting them at a discounted rate, because they're just not participating in value-based contracts. And today, primary care acquisitions are happening at practices that are. So it's really rebind them earlier in their lifecycle and their conversion process. These clinics are fairly well operated. I mean, you're talking about providers who own these practices that have been taking distributions from the bottom line and so therefore very focused on how big that distribution potentially can be. So they run relatively lean. However, that said that when providers are still business operators, they only spend a portion of their time doing that, the rest of the time inpatient, that there are opportunities for improvement. And so, as we've seen with the practices we've acquired, oftentimes we see revenue cycle management, outsourced and farmed out to a third-party company, there is a lot of reliance on that relationship, which has gone well for the provider. However, when you start to look at some of the metrics behind that revenue cycle theme, there are ways that you can optimize and improve that process. And so, part of the strategy for centralization and shared services on revenue cycle is to further see enhancements in that space by being able to bring down AR, by being able to improve on documentation and coding. We start to see an improvement through that process in revenue cycle. As we look at patient access, again, because the capacity is limited within these practices, the ability to grow access for patients is also limited. So, where we've seen the ability to add organic growth here is basically meeting patient demand. And so, with some of these practices having additional demand, however, providers may not have the accessibility and availability for those patients, we're able to supplement that either through the addition of new providers or the reorganization of the existing provider, to really add more capacity into the existing clinic, to be met with patients already part of the practice. And so, these are some of the simple areas where we can focus on relatively quickly that doesn't require a whole lot of infrastructure change. But at the same time aligns with that provider’s need to want to see their practice enhance and grow.

[Operator:]

Our next question is from Rahul Sarugaser from Raymond James. Please go ahead.

[Rahul Sarugaser:]

So, you were talking about De NOVO sites and I believe, my first was to talk about, was around the balance between inorganic growth at de novo sites. So, -- and I'm not sure I caught sort of, how we should be thinking about that balance in terms of numbers going forward? And then the sort of a second part of that question, how should we be thinking about, the capital equipment, the CapEx and working capital costs of starting up, one of these de novos, the average de novo site and then what that revenue profile looks like for each of those de novo sites.

[Pradyum Sekar:]

Yes. Thanks, Rahul. Appreciate that. Look, I certainly, I'm not intending to state that, we're shifting focus in any way from acquisitions to de novo. It's actually quite the opposite. Our goal is actually increase growth by way of adding de novo to an already robust acquisition pipeline. So, the acquisition nature doesn't change or slow down in our opinion. In fact, we only see that increasing and things will operate in parallel with de novo. What really sparks the opportunity for improving de novo growth is that, this is a needs requirement as opposed to a want requirement. So, if you think about markets that we're in, for example, we look at Colorado, we look at Florida, these are markets where you have a number of fast-growing Medicare and managed care population. You've got providers that aren't able or necessarily able to meet that demand. You've got patients within the existing networks. You've got brands that have built reputation over 15 to 20 years. And so, the ability for these providers to attract patients organically within their market has always been there. They just never leveraged that ability to open up another site or another two or three sites. And so, by bringing in both capacity, but also resources financially, we're able to help these providers recognize that opportunity. And so, as we look forward to some of these markets, we haven’t outlined some of these de novo sites, and we will look to do that this year is now starting to capitalize on patient demand outside of just provider demand looking to sell or exit their practice by focusing on de novo sites and having an opportunity to, alongside acquisitions grow through an inorganic opportunity -- on sorry, an organic opportunity. In terms of the costs required, the CapEx, again, isn't something that's too heavy upfront. It's one of the things to recognize, though. And this is the difference between de novo and acquisitions is what we call the time to patient panel maturity. And so when you're buying a practice, that's already established, you're getting a practice with maybe a few 1000 patient lives, they may have a few 100 managed care lives or more, when you're establishing a new practice, it could take you anywhere from 6 months to 18 months to 24 months potentially, to build that same level of patient panel maturity. And that's largely because you're recruiting patient one-by-one as opposed to buying a practice that's fully established. So, as we will expect, and very similar to experience that we have had in owning and operating primary care clinics, is that there's a gradual ramp-up towards profitability with the heaviest of costs usually being within the first 6 to 12 months. But you're not talking about major CapEx expenses, either, physician offices that aren't establishing a lot of equipment and supplies, your costs are primarily to beds and some supplies and tools that you'll need, but the most of the -- most of the costs will be put towards the providers, and the staff and potentially, the rent, for the first 6 to 12 months is just starting to build credibility in that space. However, given that opportunities are within market, so we're already in, we sort of have a step ahead in terms of marketing and getting patient awareness. It's not like you're moving into a brand new market and trying to create that from scratch. So again, this comes down to the overall concept of the Skylight branding approach, and why we think sort of a single umbrella brand will really help us accelerate existing, but also new clinical sites.

[Rahul Sarugaser:]

So, maybe a follow on then looking at the cost side. So, while we have seen a material increase in OpEx, of course, that's commensurate with your increase in revenue. And if anything, from a margin perspective, it's actually improved relative to last quarter at 31% versus 85%. So, how should we be thinking about OpEx going forward based on the current inorganic growth, but also, how should we be holding in organic, the sort of de novo OpEx as a general profile of revenue going forward?

[Andrew Elinesky:]

Yes, Rahul, it’s Andrew here. So as mentioned, kind of, my general guidance with regards to salaries and wages, that's going to be your primary driver with regards to the growth, it's going to be coming with the acquisitions and the organic growth as well. The provider gross profit -- provider costs like that show up in the COGS and give us our gross profit. Again, that comes back to our overall percentage and we would think that, that percentage should be standard across the sites, whether it's de novo or not. There's obviously a ramp-up period, as Prad mentioned, which will -- we will get better at kind of modeling and providing guidance on. But in the meantime, obviously, that is the gross profit margin is what we're targeting. So, you can see any de novo sites, and acquisitions kind of be in that range. And then the ops, and admin and overhead that comes with that OpEx should be reflected in the salaries and wages and opes and admin. So I would expect those costs to continue to increase generally along the rate that they have, and where we have is the corporate expenses, which should, as we've gone through this period, to build. They'll continue to grow slightly but not at the same rate. And so that's what's driving kind of the general guidance of talking about costs and marketing and professional fees and kind of, when those will kind of normalize whereas ops and admin, and salaries and wages should continue to grow at a percentage and take that overall percentage downward as you noted, for the second quarter.

[Rahul Sarugaser:]

Thanks, Andrew. One last quick question. With the acquisition of the ACO and maybe you said this, pardon, maybe I missed it. But one thing that's important, of course, is to qualify patients in order to be able to capture the benefits. So given the number of patients that are eligible, have you begun qualifying these patients, if not, what do those timelines look like?

[Pradyum Sekar:]

Yes. So we've already we've already gone through the first pass Rahul, the first submission deadline for your providers. So it's not the patients, it will be the providers. Essentially, you submit to CMS your listed providers and participants. And CMS already has the data on their attributed -- in the case of ACO and MSSP program, their attributed traditional Medicare patients. So that has already been submitted at the start of August, that was a deadline and a deadline that we met, we're fairly confident that we should see ourselves through there successfully. We'll know probably in the next 30 to 60 days, the final count on those numbers. But that, again, that's a snapshot in time for participating starting January. So effectively, we can continue to keep acquiring, practices keep acquiring, provider networks and panels, and therefore traditional Medicare allies, they will start to qualify into 2022 Shared Savings Program, it'll just start as of the next quarter. So think of that as Q2 start as opposed to Q1 start in 2022. So we still fully expect to continue to fill more patients into 2020's participation here. But as of the January 1st start date, we've already been through the first pass now of submission. So that process is well underway.

[Operator:]

The next question is from Rob Goff with Echelon Wealth Partners.

[Rob Goff:]

My question would be on the revenue side. So within the context of your full year guidance moving from 40 million to 41 million and an exit rate of 50 million, can you talk to the give and takes of organic growth as a give and as a take or a sacrifice, the impact of focusing on primary care ahead of fee-for-service for sometimes to get higher yields?

[Pradyum Sekar:]

Yes. That’s a great question Rob. I'm happy to start with that and Andrew wants to jump in. When we look at these practices, Rob, you're buying them traditional fee-for-service, which means these clinics have been brought up on the idea that more services, more billings, more volume equals more revenue. And that's not to say one is right or wrong or the other. But moving to value-based care, obviously that focus is on outcomes. And so you would assume then that outcomes, it requires that providers will at times spend more time with their patients that might minimize their total patient visits per day. And this is something we're factoring in. So I think one of the first questions that Frank asked me earlier was how we expect cost increase along the side of shifting to total cost of care is that we are building into the model the need to have additional providers or additional support on panels. So that if you look at one provider, effectively having a patient panel of 2,000 patients in a fee-for-service model that might come down to a 1,000 or 1,200 patients and then maybe even lower in total cost of care. And so that cost is offset again with the increased revenue from the economic contracts that you have under those health plans. The idea though, in the near-term is that if you look at January and obviously we want to be as successful as we can, ensure savings in year one is that we will start to make some changes to the way that our providers are looking and treating patients today which means that we might see some level of fee-for-service volume reduction over the next coming months as we gear up for January. But revenue starting January although reduction will be offset by the shared savings and other programs that the ACO delivers. And so we have to be mindful that while the transition is happening, there's always an opportunity for fee for service revenues. It's not the practices are decreasing revenues, it's just that you're shifting the providers’ focus from volume to quality. And that we expect and we're already seen now through these contracts that, that shift to quality will yield higher revenues and offset the fee for service reduction that they're typically used to see. And, again, Rob, this is one of the concerns that most providers have, right? They're a highly cash flow star business, they need to shift the value, they know that’s the future, they know that they have to wait a certain period of time to recoup that capital. And for most of them, they just struggle with that period of time to manage cash flow. And so coming into the resources that we have both financially and operationally, we're able to help mitigate this for them. And that's really a big component of this confidence to shift into risk with these with these providers.

[Rob Goff:]

This is also perhaps a -- diving deeper on Frank's question to start things off. Could you talk to the ACO migration scheduling? Would it be fair to say that 2020 would be a single sided 2023 would be full risk and 2024 would be total cost? And in conjunction with that scheduling, could talk to revenue recognition associated with the value based care?

[Pradyum Sekar:]

Yes. So to start with the second point first, on the revenue recognition side of value based care, traditional shared - or not traditional I should say, shared savings models are usually recognized the calendar year after the actual deployment of services. So for example, if you look at '22, CMS will use full year calendar year to calculate the shared savings, which they will typically get all the data in sort of three to six months post the calendar year. So, we would expect to know through the course of the year how we're performing and have some forecasts in terms of what we expect to return. But the actual cash paid on that bonus will be in '23. And that's typically how most shared savings programs work. In a capitation model, you're receiving all that upfront but of course your caps, if you had anything greater than that, you don't see it. So there's a give and take between capitation for cash flow versus being able to hold out for the shared savings opportunities. On the model that you talked about with regards to the first part which is the transition into value based care, you’re right. The way to think about this, we have a three to five year model where we see ourselves in total cost of care within that period of time. Year one will be single sided, just because again, this allows us to sort of bring the economics and bring the metrics forward, that allow us the confidence to move into full risk without now that we're responsible for downside. And then the next step after that would be total cost of care. There are active conversations that we're having that will potentially look to accelerate that, perhaps at some capacity, but I think for the time being having that sort of outlook that you've walked through Rob would be a fairly accurate walkthrough as to how we're thinking about it today, as well.

[Rob Goff:]

And if I may one more, and another follow-up in terms of your M&A pipeline, could you talk a bit towards the profile within that pipeline, and the priorities, density in your value based care or technology and valuations?

[Pradyum Sekar:]

Yes, we're obviously now focused on -- I mean, primary care has always been the focus, it still remains to be the focus. We have a, let's call it a preference for density versus new market, although new markets are something that are in the pipeline and it's not to say that we're not looking at that. But again, when we look at new markets, it's going to come because we believe that this is a market that's going to be

[Operator:]

. Our next question is from Yue Ma with Research Capital Corporation. Please go ahead.

[Yue Ma:]

Hi, Prad and Andrew. Thanks for taking my questions. I have 3 here. So, first for the sales of primary care lives, can you please remind us the current average per patient revenue and to how would the revenue improve under ACO in the first year under maybe as best case, base case, and worst case scenarios?

[Pradyum Sekar:]

Yes. So I can give you numbers that are more sort of industry generic, as opposed to Skylight generic. Again, you have to keep in mind these contracts continue to evolve over time. But, there's data today, that's more publicly available. You look at a traditional, if you look at the ACO model, for example, if you modeled it out today, you'll see that a traditional fee for service patients, who is potentially costing the system about $10,000 a year, roughly around 300 of that, or so goes to the primary care doctor. And so, the revenue generated from a primary care physician on a Medicare patient under those parameters is usually around $300 per year. In a single-sided risk, if you're successful with a certain percentage of shared savings, and other potential program opportunities, you might see that $300 a year grow to somewhere closer to $400 to $500 a year, in a full risk model that might increase closer to $700 to $1,000 a year. And then in a total cost of care model, as you're seeing today with peers like Cano and Oak Street, they're generating on average somewhere about $1,000 per month or $12,000 a year. So, the transition to total cost of care is truly where the explosive growth really seems to lie. And today that's where the programs are built around. It's also notable to say that, there are changes over the healthcare models that are happening. We're starting to see the evolution of the direct contracting entities, which is CMS's new model for Medicare patients. And so, if we look at the direction we see from our peers, their contracts still remain aligned with the type of revenue recognition that they're looking for from a total cost of care, managed-care patient life on Medicare Advantage. So, I think it's an interesting -- it's a good way to think about it from that perspective, Toby, and maybe give some outlook into how we can see the growth of economics within the current patient base and growing patient base in Skylight.

[Yue Ma:]

Okay. Thank you. My second question is also on the 18,000 patients. So 15% are eligible for Medicare or managed care. So, how would the eligibility rates develop during the first year and the second year under ACO?

[Pradyum Sekar:]

Yes, so the 15%, so it'll be -- represents managed care patient lives. Now keep in mind that includes for us today, Medicare, Medicare Advantage and Medicaid. Today, the -- we have under the ACO’s MSSP program will be the traditional Medicare patients. And so the reason we talk about managed care lives is because as an organization, we're looking at KPIs under which future plans will affect. And so when we're in conversations with payors, we're talking about managed care, Medicare Advantage, Managed Medicaid. And as well as traditional Medicare, even though our ACO does provide traditional Medicare coverage in value based agreements. So, that's a metric we will use moving forward, because again, it reflects patients under our population today, the qualify into contracts that are relatively self-described and are out there. Commercialized or what we'll call the patients in between, commercial risks are not necessarily as common, however, are practiced. And there are opportunities in commercial risk, again, where we can talk to in the future. The benefit in knowing what we're building, though, is that part of the difference in our model from just focusing on Medicare and Medicaid alone is that you open yourself up to a patient population where every year we're organically having patients moving into Medicare, you've got patients who are 64 today, who will turn 65 next year, and then likewise every year after that. And so we have a model whereby we're seeing a continued growth of Medicare within the existing network. But then also, we know that payors are looking at commercial risk plans and ways to mitigate risk in population of patients today that are not Medicare and Medicaid. And having those patients in our network today will allow us the opportunity to participate in those programs as well. So, I think it's a metric that we will use, but in terms of description is the Medicare Shared Savings Program today for '22.

[Yue Ma:]

Okay. And my last question is that historically the company has a roster of over 2,000 patients. I was wondering if this is an area the company can explore to get some patients to value based care?

[Pradyum Sekar:]

Sorry, Toby, can you repeat that last question?

[Yue Ma:]

Yes. So historically, the company has a roster of over 200,000 patients, I was wondering if this is an area that the company can explore to get some patients in transition to value based care?

[Pradyum Sekar:]

Yes, absolutely. And keeping in mind that those patients that you're talking about include a number of the legacy patients from the previous focus, not necessarily primary care insurable service patients. Now a number of those patients are under that criteria. And as we've seen some of our organic clinical sites that we previously announced in Massachusetts and in Colorado, the focus of these practices is the conversion of these patients along with the growth of new patients. And so we are starting to see that in some of our, let’s call it, traditionally non-primary care patients starting to look to become primary care. But again, the opportunity for us goes beyond just that network and something that we will always be mindful of.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Sekar for concluding remarks.

[Pradyum Sekar:]

Thank you, everyone, for participating in today's call. I hope we've been able to convey some of the excitement we feel about Skylight Health and its prospects. I invite you also visit our website skylighthealthgroup.com where you can find more information about our company, but also contact details should you wish to reach out to us. As always, thank you for listening and we look forward to speaking to you again soon.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.