Hello, everyone, and welcome to the agilon health First Quarter 2024 Earnings Conference. My name is Seth, and I'll be the operator for your call today. [Operator Instructions] I will now hand the floor over to Matthew Gillmor to begin the call. Please go ahead.

Thank you, operator. Good afternoon, and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. And with that let me turn things over to Steve.

Thanks Matt. Good afternoon and thank you for joining us. On today's call, I’d like to walk you through the following elements. Our Q1 '24 results and forward guidance. The tangible and rapid progress we’re making against our performance action plan, in particular with strengthened payer relationships an update on our CFO and CMO search, and finally our perspective that against the backdrop of a constrained Medicare program funding environment. The demand for value and the value proposition our company offers, has further accelerated among physician groups and payers, including MA plans and CMS. Starting with our quarterly performance. MA membership grew 43% to 523,000 members, while revenue grew 52% to $1.604 billion. Both metrics were towards the low-end of our guidance ranges. This was primarily due to timing differences in signing new payer contracts as we work with our health plan partners to refine key terms. Additionally, our updated guidance for membership and revenue reflects our decision to exit certain unprofitable payer contracts which I’ll discuss in a few moments. Medical margin grew 1% to $157 million and reflects an in-quarter medical cost trend of 9.1% which is above the trends we observed in Q4 of 2023. Given the current environment we believe the assumption of continued elevated utilization is a prudent approach. We also recognized $8.7 million of net prior year claims development. Consistent with our approach to first quarter cost trend recognition, we have taken a cautious stance in closing out 2023, given the uncertain environment. Absent prior year development, medical margin would have been towards the high end of our outlook for the quarter. Adjusted EBITDA grew 21% to $29 million which was above our guidance. This stronger performance reflects better flow-through of medical margin to gross profit and favorable timing of geographic entry costs. During…

Thanks, Steve and good afternoon. I will cover three items before we go into Q&A. First, additional details on the prior year development we booked in the first quarter; second, balance sheet and cash flow; and third some additional details on our updated guidance. Starting with the prior year development. As Steve noted our results included $8.7 million in net prior claims development. In our 10-Q Filing you will see we booked $16.5 million in total claims development. This includes $7.8 million from retroactive membership, which comes with offsetting revenue that has very limited impact on our medical margins or adjusted EBITDA. The unfavorable development incurred during the quarter reflects our decision to adopt a cautious approach to our 2023 claims runout. As we discussed with you last call, we applied additional judgment incremental to the claims triangles in setting our 2023 IBNR reserves. Since then, we have observed some higher paid claims in several regions. During the quarter, we maintained the same level of judgment associated with the 2023 and prior dates of service. As a result, the unfavorable development was recognized as incremental expense during the quarter. One important data point -- for the class of 2022 and older partners, which represented our same geography partners and payers in 2023 our estimated completion factor for 2023 claims is 93.5%. This is approximately 150 basis points below the actual and known completion factor for these same geographies and payers at this point last year. We believe this is a positive data point as you think about the adequacy of our reserves for 2023. Turning to our balance sheet and cash flow, agilon ended the quarter with balance sheet cash and marketable securities of $426 million and another $26 million of off-balance sheet cash associated with our ACO REACH entities.…

Thanks, Tim. Before opening the lines for Q&A, I wanted to emphasize three key points. First, we are maintaining our full year guidance for medical margin and adjusted EBITDA, and we continue to take a cautious posture with respect to medical cost trends. Second, we are making tangible progress executing our performance action plan, most notably with our payer relationships and operating efficiency. We expect to make additional progress during 2024 and we'll update you as we move forward. Third, the demand for value is accelerating among physician groups and payers, including MA plans and CMS. Our value proposition to primary care doctors and payers is even more important in a constrained funding environment and will serve as the foundation to accelerate our future performance. With that, why don't we move to Q&A.

Thank you. [Operator Instructions] Our first question comes from Ryan Daniels at William Blair. Please go ahead.

Yeah, guys. Thanks for taking the questions. Maybe one big-picture one to start. Interesting commentary there about the need for more value-based care given the cost pressures in the market. So I can see that accelerating the pipeline. But on the other hand, if there is lower shared savings due to higher utilization and perhaps lower payments to the providers, I'm wondering if that somewhat dilutes their enthusiasm. So how do you think about how those two divergent market aspects could impact the pipeline over the next year or two?

Yes. Thanks for the question, Ryan. I think what we are seeing is the current environment is really only accelerating the value that we provide both to payers and to our physician partners. I think what you are seeing in some of the payer outcomes we talked about really reflects the desire to have a sustainable value-based care network that they can grow and add additional members into. I think when you look at our class of 2025 you can see that our value prop to them is really significant. We are adding groups in existing states where we built infrastructure like Kentucky and Minnesota and North Carolina. And these are groups that are leaders in their community and have outstanding reputations. And so they see a real opportunity to drive additional value through a value-based partnership with us. And I think, it just tells us that fee-for-service is really not sustainable. So the reality of fee-for-service is getting more challenging, our ability to be able to navigate and drive additional value in this environment is that much greater and additional physician groups are wanting to join us.

Okay. That's perfect color. And then as a follow-up, maybe a little bit of a double-click down on some of the contract renegotiations as you look to redefine some terms there. Can you speak to how far along you are as a percentage of your book of business or in-markets that are seeing pressure? And then I'm curious if that progress that you expect over the next few quarters could be seen in 2024? Is that more likely setting up for a more favorable '25? Thanks.

Ryan, thanks for that follow-up. I think we have worked really hard to build a network and a platform that delivers substantial value. I think, the conversations that we've had to-date with payers really has been focused on a long-term relationship and the ability to have a sustainable network they can add more members into. The focus to date has largely been on in 2024, and I itemized the benefits that have been there, whether it's retroactive relief from 2023 medical margin losses or mutually working with our partners on contracts that were not sustainable. All of those involve payers that we're going to continue to work with on a go-forward basis. We are now pivoting really to focus on 2025. We are very early in that process -- but we are going to be renewing over one-third of our book as we move for 2025, and we are looking very broadly in terms of terms that can give us benefits around that. So I would say there is an opportunity for further improvement within '24, but we really have moved to focus on 2025.

Okay, perfect color. Thank you so much.

Our next question is from Justin Lake of Wolfe Research. Please go ahead.

Hi, this is Dean Rosales for Justin. In last quarter's call, you answered some questions on the older cohorts, specifically classes 2018 to 2020 and their progression to $150 to $200 PMPM Med margin range. Is there any update there as well as their progression speed relative to expectations? Thank you. A – Steve Sell: So Dean, it's very early in the year. I think we continue to see good work with our partners around reducing variability and driving medical margin improvement. So I think we would say we are on track with what we communicated on that last call.

Awesome. Thanks so much. And just as a quick follow-up, how are you guys thinking about pending TBC changes? How are payer partners speaking to this topic with you guys, obviously really popular right now? Thank you.

We are in the early stages of talking with our payer partners about their filings for 2025. Obviously, TBC limits is one of the constraints that they've got as they look at their filings. What we are hearing is that payers are looking to adjust benefits down that would flow through directly to us. But obviously, we are going to know a lot more in the next couple of months as you look at that. But it is an extensive part of our dialogue with them particularly as we turn to 2025.

Our next question comes from Jailendra Singh from Truist. Please go ahead.

Thank you. And thanks for taking my question. I want to go back to your agreement with certain payers to exit unprofitable contracts effective second quarter. How are you making sure that these decisions are not impacting your relationship with these payers and future contract opportunity given these exit decisions?

Yes. Thanks, Jailendra. I mean the -- all of these decisions are done in concert with our partners and with the payers. Every single payer that we have an updated economic relationship with that I talked about, we are continuing to work with them. And so it was arrived at mutually. It was really looking at the elements within this year two market as an example, that included some of those payer benefit changes, higher utilization, the final notice for 2025. And so together with our partner and that payer we made the decision to exit out of that arrangement. But these payers also want to work with us in other markets. And so we have active dialogue around that.

Okay. And then my follow-up, maybe if you can provide a little bit more color on pockets of spend or utilization, you saw in the quarter. Is it the same buckets we have seen in the last few quarters in terms of high spending like Part B drug costs, supplemental benefit, outpatient surgeries. When you say trends, recent trends have been better, was that improvement across the board? Or are there any particular buckets we are seeing improving trends?

So Jailendra, we continue to operate in a very dynamic utilization environment. I think you can see we've taken a cautious approach in terms of the trend that we've recorded for Q1 at 9.1% that’s up sequentially over Q4 at 8.7%. When we look at our utilization data points across a variety of categories for paid claims from our most complete payers in January and February, we saw those trends elevated. They began to step down into February. When we looked at our census data which is specific to inpatient, obviously, we saw a similar progression coming down January, February, March into April. And so I think, your question is from an inpatient perspective, we are seeing that trend come down. We did see outpatient and Part B drugs elevated in that claims data in January and February. So it is really a mix.

Great. Thanks a lot.

Our next question is from Adam Ron at Bank of America. Please go ahead.

Hi, thanks for the question. You've talked in the past about how your claims visibility is lower than some of the managed care companies and they came out a couple of your larger competitors, which make up a large percentage of your membership and they had varying degrees of views on what utilization was and what their margin expectations for 2024 were versus their initial expectations. And so have you looked at that? And for example, CBS revised down their margin [expectation] (ph). But they looked at that and looked at your own book of business with them and kind of like run and outs on why, like what the downside scenario would be if they're right about potentially having margin compression. Like just how do you look at whatever data they had given you when you comprise your 2024 guidance, then the margin commentary that they're getting now? And how can you be confident in your outlook if they're kind of losing visibility on theirs? Thanks.

Yes, thanks for the question, Adam. So as I outlined sort of -- for Jailendra, we are looking at a series of utilization data points that give us comfort as it relates to where we landed on Q1 at a 9.1% trend. We do receive updated real-time indicators in terms of census data from all of our payers. And so we can see what that has looked like as we progress from January even through April. We do have claims data for our most complete payers through January and February that gives us data points around that. And then we have ongoing dialogue. What we're sharing with you is a composite across all of those payers and booking a trend that's up above 9%, which gives us comfort even given some of the encouragement from those indicators.

I'm sorry, that 9% number. Like how does that compare to what you put into the guidance you gave like some numbers when you initially gave the 2024 guidance. But can you remind us what those assumptions were and how the 9.1% is tracking against it? Thanks.

So in terms of our guide for the year, we had a 6.6% full year trend. We had our Q1 trend that was in the upper 9% range. And so 9.1% is below that. That is reflected on some of the improvements we've seen from the payer results that have helped to drive that. So that's really the difference that we've seen across that time.

And I think, Steve, as you said before, we do have probably a little bit better data right now to drive that number. So obviously, as we close the books we are looking at, as Steve said. And Adam, I think this gets to your primary question, too. We have relatively complete data for the first 1.5 months to 2 months for our two largest payers. So that helps us understand exactly where their costs are going and as Steve said, we have significantly improved coverage on both third-party data around in-patient utilization as well as a really good sense of data that we get from the payers themselves. And the last thing is, I think certainly where we've booked Q1 where we have essentially closed Q1 from a utilization standpoint, I think it's pretty much in-line with what we've heard kind of balanced across all the large payers that have reported. So we feel like that 9.1% right in-line.

Our next question comes from Sean Dodge at RBC. Please go ahead.

Yeah, thanks. Steve, the strategic exit you mentioned in Q2, how -- mechanically, how do those work? Does your financial responsibility for those members end at Q2? Or is there a longer unwind period? And then -- can you quantify how much those exits are expected to benefit medical margin or EBITDA for the full year?

So sure, Sean. Thanks for the question. So both of the exits that I talked about, whether it is from the group MA contract is effective June 30, and that ends our responsibility from an expense perspective for that. And then the payer contracts in this year two market are effective in Q2 and will be completed by the time that we end the quarter. So there is no further run out from those. We've worked very closely with the payers and with our physician partners to make sure that there is continuity of care. The totality of the economic benefits across the series of payer arrangements that I talked about is north of $10 million. So it more than offsets the negative PYD that we talked about in Q1.

Yes, Steve. Just to make sure Sean understand the question is. The only thing I would add is our -- we're responsible for the performance up through those dates, right? So there is of course, we won't have complete visibility to claim data, et cetera, through that date, and we'll go through the normal runout period and the normal ultimate settlement for our performance during those days, but we're not responsible for performance in any way after the dates of the exit.

Okay. That's good. And just to make sure I'm clear. I know you said the renegotiations of the payer contracts were included in guidance or originally contemplated in the guidance. Are these exits were these also included? Or would these be incremental to that?

So the only piece, Sean that was included in the initial guidance was the increase as a percentage of premium for those markets we talked about on the last call. The retroactive relief and then the group MA contract in this year two market, contract exits are incremental. And so those have been added into the guidance that we provided for the year, the updated guide.

All right. Thank you again. Operator The next question comes from Jack Slevin from Jefferies. Please go ahead.

Hi, thanks for taking my question. I wanted to take a look at some of the 2025 class and maybe just take a step back on that. So I guess a couple of levers you can pull there to make sure things come out nicely. Obviously, staying disciplined on the number of lives is one, and it seems to be the case in terms of how you're guiding the number of memberships that comes on for the year. Maybe looking at the markets, is there anything you can glean in terms of payer contract overlap with some of your existing large payers based on the geographies you're entering that, that will give you a better sense that visibility on cost trend and overall performance should track nicely for that 2025 class?

Yes. Thanks for the question, Jack. So we have been very conscious in our growth strategy to make sure that we are really bringing in very strong groups. These groups are comprising four states, three of which are ones where we have current infrastructure, existing payer contracts, existing teams that we can leverage around that. So in Kentucky, in Minnesota and North Carolina, we're going to be able to leverage that, which should help as these groups start out. I think we believe their performance is going to be in-line with kind of historically where we've started our year-one markets even given the environment in which we're operating around that. And then we are adding one new state, which is Illinois, in which we'd be standing up new infrastructure and new contracts. So from that perspective, I think three existing states should give us the ability and pattern recognition to have solid year one performance.

Got it. That's helpful color. And then one more follow-up. Just maybe bifurcating between the overall book of business you have and that 2025 class. Can you give some numbers around how AWV completion is tracking year-to-date versus prior years or versus historical trends? Thanks.

So our -- the work that we're doing in terms of supporting our PCPs, the orientation work, the work that I talked about with our medical directors has elevated our performance both around from an AWV perspective and an assessment perspective. Those are the fundamentals that really help us identify our most complex patients and enroll them in clinical programs. We have seen nice step-ups for instance, in our enrollment in our palliative programs as we started to progress, which ultimately should end up reducing inpatient expense and [ADK] (ph). So we've seen, as an example, in the markets in which we've executed that, we've seen about a 15% to 20% improvement in terms of enrollment within our palliative programs. We have 15,000 care plans that have been developed around complex patients as a result of this work. So I think we are progressing nicely, and we're seeing a step-up year-over-year.

Got it. Thanks again.

Our next question is from George Hill at Deutsche Bank. Please go ahead.

Yeah, hi. It's [indiscernible] on for George. Thanks for taking the question. Can you provide a little bit more color on the impact of the final [rate] (ph) versus your expectation, and what are the ways to offset the shortfall? Thank you.

So as I -- thanks for the question. As I said in my prepared remarks, we were obviously disappointed around the final notice. I think though, what it has done is sort of reinforced the value that we're providing, we are seeing it in terms of some of the payer economic arrangements that have drived improved performance in 2024. We believe that will carry into 2025. We've seen it in terms of the interest from groups who are wanting to join agilon as reflected in the class of 2025. So I think our focusing really on our fundamentals is what's going to help us drive our performance and be able to manage through well. We also are working very closely with our payer partners around what their final bids will look like because that obviously flows through to us as well. Operator Our next question comes from Andrew Mok at Barclays. Please go ahead.

This is [indiscernible] on for Andrew. Back on the topic of contract exits in the second quarter as well as any additional contract changes this year or in 2025. What are the key characteristics you're evaluating in making those changes? Other certain member or market types that aren't working? Or is it more a product of benefit structure?

So thanks for the question. I mean first, I'll say, any of these decisions we make, we are doing in concert and doing it together with our partners. As I laid out relative to this year two-plus market, the factors that we saw there that ultimately led us to this decision was higher utilization, payer benefit design changes, both in '23 and in '24. The final notice for '25 that, in particular, was particularly challenging for that geography, and then the TBC limits that are in place on a go-forward basis and what that looked like in terms of a multiyear progression for that market. And so all of that working in concert with our payer partners led us to make the decision that we did in terms of winding down those operations. We do not see that situation in any of our other markets today. And if anything, you're seeing additional groups want to join us, and we're growing within existing geographies, like I just laid out with the Class of 25 in Minnesota and Kentucky and North Carolina.

Great. That's helpful. And a quick follow-up. What percentage of your contracts today carve out supplemental benefits? Thank you.

So our current contracts today, we have supplemental benefit requirements for all of them for 2024. What we have been able to negotiate is additional percentage of premiums, like I talked about in terms of multiple markets and multiple payers where we've been able to do that. In other cases, we've been able to sort of capitate or cap our exposure in terms of what the total expense could be associated with those. That is part of what we are laying out for 2025 in these negotiations with our payer partners. So it is an element of that renewal strategy that I talked about.

Great. Thank you.

Our next question is from Elizabeth Anderson from Evercore ISI. Please go ahead.

This is Sameer Patel on for Elizabeth Anderson. Maybe just following up on that question. Could you talk about sort of the receptivity you're getting from payers regarding, let's call it, different arrangements around supplementals, whether it be a carve-out, whether it be like sort of a corridor cap on exposure. I know that's a 2025 thing, but sort of has there been appetite from your conversations with payers?

There has been receptivity. I think that it's not just a '25 thing. In '24, we've been able to get incremental percentage of premium associated with those supplemental benefits. So it's already started this year in a couple of markets. I think as you look to '25, there is receptivity around it. I think there's – it is a macro discussion with them on how do you grow into our network and how do we have a long-term sustainable value-based care partnership. And so there is multiple elements, supplement of benefits is one of them. Part D is another one of them, particularly with the impact of the IRA as you start in 2025. And so what their final bids look like in terms of the adjustments they are making as part of that factor back into it. So again, I think the value that we're providing and the interest from these payers in terms of expanding has only grown. And you can see in our results for '24, and that's reflected in the discussions for 2025.

Got it. Super helpful. And then just one follow-up. In terms of the retroactive relief you were mentioning, was there any benefit that flowed through in the first quarter? Or is this sort of like a 2Q or 3Q or 4Q sort of benefit? Or what are the mechanics around the relief as well, if you could explain.

Yes. No, we did have some payers that we were able to work with that gave us retroactive relief back to last year because it was prior year, all of that flowed through in the first quarter. It was basically just where we were able to go in and talk to payers about where there were significant changes in their benefits approach versus what we had established when we originally built the contracts and we're able to reach agreement with them that, that would require some relief to basically bring it back in line with what our expectations were. So yes, we had a couple of different payers that we had that situation for all of that rolled through in Q1.

Got it. Thank you.

Our next question comes from David Larsen from BTIG. Please go ahead.

This is [indiscernible] on for Dave Larsen. Congrats on the quarter. And thanks for taking questions. I just wanted to build off of a previous question on certain pockets of cost. Can you talk more about the type of utilization you're seeing? Is it higher costs in oncology and cardiology, were there some seasonal factors from a more intense cold and flu season, GLP-1? Just any color there would be helpful.

Sure, Jenny. Thanks for the question. I think when we look at sort of the pockets of spend, I referenced the census data related to inpatient that is reflecting higher levels in January and stepping down through March and into April. So that's really the inpatient side. I think we continue to see elevated levels from an outpatient perspective. You are seeing it in surgery centers in terms of the utilization there. In terms of Part B drug, you are seeing oncology, obviously, is a big part of that spend. So those are the areas in which we are seeing elevated utilization within the first quarter.

Got it. And then it was helpful to get some of those updates on your increased visibility with the new data and technology platform that you have. Can you just talk about some of the actual technology behind that new analytics platform? Is it completely built in-house? Or do you have some partnerships with third-party vendors? And just any more color on your technology? Do you have a data lake? Are you integrating AI in any way? Any color there would be helpful.

Yes. It is really a hybrid of all those things. We have transitioned our data management to a data lake format, which has been very successful for us. And by the way, to your point, that does allow us to use the data in some very innovative ways, including machine learning and AI that helps us drive the operations and performance of the market. So that's great. In terms of some of the things we talked about around increased visibility for our financial reporting and our financial data pipeline, I would describe it as sort of a hybrid between using a third party that has some software and that application that – we will be able to use to drive the overall new structure, in combination with the data ingestion and data utilization environment that we've already built internally. So the combination of those two things is going to give us a significantly improved and significantly improved structure to our financial data that we'll be able to use for everything from estimating revenue, claims expense and also using the data to help drive operations. And by the way, that new pipeline will also give us a much cleaner way to utilize third-party data in relation to how we're booking our financials and use that to influence our financial estimates as well, but it's sort of a hybrid between all the things we've been doing internally with now the utilization of a third-party application that we think is really well suited to our need.

Great. Thank you.

We have no further questions on the call. So I will hand the floor back to Steve to wrap up.

Thank you for your interest in agilon, and we look forward to continuing the dialogue with each of you. Thanks, everybody.

This concludes today's conference call. Thank you all very much for joining.