Good day, ladies and gentlemen, and thank you for standing by. Welcome to the InnovAge First Quarter 2023 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ryan Kubota, Director of Investor Relations. Please begin, sir.

Thank you, operator. Good afternoon, and thank you all for joining InnovAge's fiscal 2023 first quarter earnings call. With me today is Patrick Blair, President and CEO; and Bar 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 results. You may access the release on our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, November 8, 2022, and have not been updated subsequent to this call. During this call, we'll refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our first quarter 2023 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 that 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, including our quarterly report on Form 10-Q for our fiscal first quarter of 2023. After the completion of our prepared remarks, we'll open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I wanted to start by thanking our employees for their dedication to the care of our participants and perseverance during these challenging times. Our government partners for their ongoing collaboration and our investors for their continued support. While it has only been two months since our last call, we have continued to make solid progress over the past 60 days. On the regulatory front, we are at a critical inflection point in our section markets and now have greater visibility into the timing and next steps of the validation audits, which is the final step in the audit process before sanctions can be released by our agency partners. At the same time, our operational excellence initiatives have also progressed well, and we remain on track to have these largely complete by the calendar year-end. We continue to make critical center level hires to drive these improvements, which have infused new energy and momentum. We are also beginning to see the impact of our clinical value initiatives, or CVIs, on our external provider costs. As I previously discussed, we have been singularly focused on strengthening our operations to earn the right to be released from sanctions and to position the company to serve a growing number of participants for years to come. As a result of the investments in people, process and technology, we believe we're consistently delivering high-quality and compliant care. As we look out over the rise in post-sanctions, building on this strengthened foundation, responsible growth will become our top priority. Our company's mission is to provide more nursing home eligible seniors access to independent living solutions under the PACE model of care. To deliver on this mission, we need to ensure we can expand access to care within our existing and…

Thank you, Patrick. I will provide some highlights from our first quarter fiscal year 2023 performance and some insights into the trends we are seeing through the first quarter of fiscal year 2023. As with our previous earnings calls, I will refer to sequential comparisons relative to the fourth quarter in order to provide a more meaningful picture of our performance. As of September 30, 2022, we served approximately 6,540 participants across 18 centers. Compared to the prior year period, this represents an ending census decrease of 6.4%. Compared to the fourth quarter of fiscal year 2022, this is a decrease of 1.8%. We reported approximately 19,740 member months for the first quarter, a 5.6% decrease over the prior year and a decrease of 1.8% over the fourth quarter of fiscal 2022. Compared to the first quarter of fiscal 2022 and sequentially, the enrollment freeze in Colorado has the greatest impact on member months and census in the first quarter. Revenue declined by 1.1% to $171.2 million compared to the first quarter of fiscal year 2022 and declined by 1% compared to the fourth quarter of fiscal year 2022. The decrease in both periods is due to lower member months because of the ongoing sanctions, the impact of reinstating sequestration at 2% and when compared sequentially to the fourth quarter, the impact of the fiscal year ending Medicare risk score true-up. Medicaid rate increases effective July 1, partially offset the decrease in revenue in the first quarter of 2023 compared to the fourth quarter and when compared to the first quarter of 2022. Additionally, when compared to the first quarter of fiscal year 2022, the revenue decrease was further offset by increased Medicare capitation rates as a result of increased risk score and county rates. The combined capitation rate increase…

[Operator Instructions] Our first question or comment comes from the line of Calvin Sternick from JPMorgan. Mr. Sternick, your line is open.

Yes, hi, good evening. Just a quick question about some of the additional investments you've made at the center level, and you also talked about some efficiencies going forward. I mean how should we think about the level of both the investments and offsets -- potential offsets going forward from the first quarter?

We’ll have Barb answer that.

Hi Calvin, it's Barb. Thanks for the question. So the nature of those investments are in a couple of areas, primarily as it relates to staffing in the -- at the center level, as we've made great progress, great progress and been successful reducing our vacancy rate over the past several months. So that's one of our very big investments. Another would be as it relates to compliance resources, audit, remediation and compliance resources, both internally and from a third-party perspective. And then additionally, as we mentioned in the prepared remarks, we're investing in EPIC, which is a very big investment for us, which will help us in a lot of ways, from a lot of respects from an efficiency standpoint as well as from a lot of other provider standpoint. So those would be the main investment.

And I know you talked about some of those labor costs being temporary at this point, going into some of like the readiness discussions with CMS in the state, do you have visibility on how much of the labor cost you've incurred so far could be temporary versus how much could be permanent? Or is it still too early to tell?

I would just -- hi, Calvin, this is Patrick. I would just add, that some of that's labor market dependent. We're certainly moving as quickly as possible to convert some of the higher-cost temp labor to permanent labor. And we're making great progress on that in a number of areas. But I think the timing for how quickly we can convert that labor to a lower cost is a little bit dependent on the market itself. But we're doing everything in our power and making great progress. Barb, anything to add?

Yes. The only thing I would add to that is, as I mentioned, we've made great progress in closing those vacancies. And at the same time, in our sanctioned markets, there's been a natural census decline. So this is where we were speaking about the fact that we've got capacity in those centers in order to resume growth when the time comes.

Okay. Great. Thank you.

Our next question or comment comes from the line of Matt Larew from William Blair. Mr. Larew, your line is now open.

Hi, this is actually Madeline Mollman on for Matt Larew. Just thinking about your patient mix, and I know this is something you mentioned last quarter. Is there any way you can quantify or give us just sort of a sense of relatively how much more expensive or how much higher the costs are for the kind of legacy patients versus the cost would be for like newer, less frail patients?

I'll ask Barb to take that?

Yes. Hi, Madeline, it's Barb. Yes, just in terms of magnitude, I'm not -- I'm going to try to give a good estimate in terms of magnitude. But definitely, those lower -- the newer participants have a lower cost and depending on the tenure of their cohort over time, the costs are much higher. So I think in terms of magnitude, I would say roughly 20% or less, somewhere in that neighborhood in terms of the cost differential on average with the newer participants.

Great. That's super helpful. And then just one follow-up...

Sorry, one other thing I forgot. We do mention that because of COVID and the prolonged effect on our participants, the analysis that we performed some time ago would indicate that the costs are quite high for the participants who have COVID. And the analysis actually indicated in the year post COVID, they're still about 88% higher than average.

Yes. One last thought I might make, Madeline is also we like to look at the risk scores of people have turned longer-tenure patients against our overall risk score. And we see about a 2.82% on risk scores of our term members and then our risk score overall is about 2.3% or so. So it gives you a sense of just risk or differential between the two as well.

Yes, that's super helpful. Very interesting. One other question just regarding the Florida De Novo. I know you mentioned that you'd spent $30 million building them out. Can you give sort of an update on what the status of those would be? Is it they're fully built and you're just waiting for CMS? Or is there going to be like more investment required? Just curious what those -- how those are looking right now?

I would characterize the two facilities is nearly complete, especially our Tampa facility. And in terms of how to think about the process from here going forward, we really do believe our progress on the sanctions becomes the catalyst to restart the application process. And -- if you think about some of the major steps in the process that we will have remaining, we'll have a state readiness review. There's an application for an adult daycare license. We need to get both CMS and state approvals and then signed a 3-way agreement. So there are still steps in the process. We have a lot of experience with the process, and we've got great relationships in our considered view with the state. So I think we're all very eager to have the opportunity to proceed.

Great. Thank you. That's all for me.

[Operator Instructions] Our next question comment comes from the line of Jason Cassorla from Citi. Mr. Cassorla your line is open.

Great. Thanks. good evening guys. Just considering the significant investments you've made to remediate audits across the organization, maybe Patrick, I'd be interested in your thoughts around if these investments better position the company from a competitive perspective. And then perhaps if you think these investments could help accelerate the penetration of just PACE out right across your current state footprint? Or how would you frame that construct?

Well, thanks for the question. In terms of our competitive positioning following the work we've done on the audits, I think that it is contributing a great deal to our ability not only to manage the quality and the cost of the care. But as we know, PACE is a very complex model. that requires us to be able to manage a lot of different services for the participants. And the audits themselves and the deficiencies that were identified really got to the heart of how to operate a PACE business effectively. And we've just improved month-over-month in all the areas of operations. It's compelled us to bring new technology and new automation into our normal operating rhythms. We've gotten, I think, much better at driving accountability for the work that's happening at the center level. We mentioned the Triad operating model, which ensures we're operating as one cohesive team on a local basis. And I think all of those things are going to allow us to scale more quickly if we pursue inorganic acquisitive efforts, I think it's going to create an opportunity for us to get to profitability quicker than the company may have in the past. So I think there's been a lot of advantages in some ways from what we've been through. And I think going forward, there's still a lot that we're going to implement and a lot that we're going to continue to make progress on.

Got it. Great. Thanks. And then I want to go back to your commentary, Patrick, around the risk-bearing payer capabilities. It sounds like the benefits at the early stages are helping a bit on the margin side so far, and you've noted it's a complex runway to determine the total run rate benefit. But maybe can you help frame how you see these capabilities and the offsets there against perhaps a higher cost structure, just the mid-audit remediation investments just -- that would be helpful?

Well, I think overall, like any risk-bearing entity, we believe there's always opportunity to improve access and enhance the care and the appropriate utilization of care and to address inefficiencies in the system. I think we really do believe there's a material opportunity. If you look at those external provider costs, roughly 50% of our local costs relative to say, our salaries, wages and benefits and the cost of care, which is, say, roughly 30% of our cost. So it's a very powerful lever to our business, and we're making progress every day, getting better and better at managing all the dimensions of being a great player. So I have a lot of confidence that it's going to be a really important part to our future and aspect of our future. And I think it is definitely going to contribute to offsetting some of the costs that we've incurred and to our sort of cost structure as a result of the audits. I think there's a real opportunity here, and we're going to pursue it harder.

Okay. Got it. Thanks. And then just my last question. I just wanted to ask about managing costs, I guess, with the elevated levels of flu nationwide. I guess, first, are you seeing an uptick in flu activity within your patient and employee population currently? And then just thinking about the upcoming winter months, are there ways you'll be able to help mitigate pressures that perhaps a difficult flu season could incur? Just any color around how you see flu impacting next quarter and beyond?

Sure. Well, I'm going to pass that off to Dr. Rich Feifer.

Sure. Jason, it's a great question. And of course, we are seeing the emergence of flu in our population, just like society sing in general. But at this point, we're only seeing sporadic cases. We have not seen a surge among our population at this point, but the season is early. And what we need to do right now is to prepare and protect our population through maximizing vaccination rates. And actually, we're doing a really good job at that. At this point in the season, we already have a vaccination rate of about 60% for our participants. That's going up week by week as we continue to really push and promote vaccination. And likewise, for our staff as it's required, we have very high vaccination rates. So protecting our population right now is the area of focus. It might be a tough flu season just as we've heard about from the Southern Hemisphere, we're doing everything we can to prepare.

Awesome. Great. Thanks.

I'm showing no additional questions in the comment at this queue. Ladies and gentlemen, thank you for participating in today's program. This concludes the conference. You may now disconnect. Everyone, have a wonderful day.