Good day, and thank you for standing by, and welcome to the InnovAge Third Quarter 2023 Earnings Conference Call [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge Fiscal 2023 Third Quarter Earnings Call. With me today is Patrick Blair, President and CEO; and Barbara Gutierrez, CFO. Dr. Rich Feifer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market closed, we issued a press release containing detailed information on our quarterly 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, May 9, 2023, have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our fiscal third quarter 2023 earnings 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, Florida De Dovo centers and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for fiscal year 2022 and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for our fiscal third quarter 2023. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I want to start by expressing my ongoing gratitude to our InnovAge colleagues, participants, government partners and the investor community who support our organization. Let me begin by humbly sharing what the InnovAge team has accomplished in the last 19 months. We resolved audit deficiencies across half our centers while simultaneously building trust with our federal and state regulatory partners. We closed mission-critical people, process and technology gaps, identified as causes of the audit deficiencies, and strengthened our operations. We implemented Epic at half our centers and have a path to being fully operational at every center by year-end. We made a healthy down payment on a set of essential payer capabilities that we believe will better position us to manage medical costs going forward, and we reversed the negative trends of financial performance and are now in the phase of growth and margin recapture. These accomplishments were made possible by the efforts of literally thousands of InnovAge employees. Thank you all for what you have done to make this happen. As many of you know, 1 week ago, we reached an important milestone in our transformation by being released from enrollment sanctions in Sacramento, California by the Department of Healthcare Services, which was the last remaining sanction. With the support of CMS and the State of California and our unwavering commitment to sustainable improvement, we're now able to enroll new participants across all 17 InnovAge centers as well as responsibly pursue opportunities in new markets. This moment can be viewed as the end of one chapter in the beginning of a new one. Our centers have been focused on closing compliance gaps and building the infrastructure, business processes, talent and culture to consistently achieve operational excellence. The chapter in front of us…

Thank you, Patrick, and good afternoon, everyone. Today, I will provide some highlights from our third quarter fiscal year 2023 performance and some insights into the trends we are seeing through the end of the fiscal year. As with our previous earnings calls, I will refer to sequential comparisons relative to the second quarter in order to provide a more meaningful picture of our performance. At the end of the quarter, we served approximately 6,310 participants. Compared to the prior year, this represents an ending census's decline of 7.1% and a 2.2% decline compared to the second quarter of fiscal year 2023. We reported approximately 19,060 member months for the third quarter, a 7.6% decrease over the prior year and a decrease of 2.1% over the second quarter of fiscal 2023. The enrollment freeze in Colorado had the greatest impact on member months and census compared to the third quarter of fiscal 2022 and sequentially. However, we are pleased that we are now ramping up the enrollment of new participants following our release from sanctions in Colorado in late January and have begun to ramp up the enrollment process in Sacramento as well following our release from sanctions on May 1. The timing of our Colorado sanction release in late January, coupled with the typical enrollment processing time line of 30 to 60 days as well as the enrollment cycle for new participants starting at the beginning of each month, translates into limited enrollment during the quarter. However, we are steadily gaining momentum as the process continues to mature and we anticipate returning to a more normalized growth run rate in the next few quarters. We also expect Sacramento to follow a similar time line with respect to the ramp-up of new participant enrollment as we reengage with the local…

[Operator Instructions] And our first question comes from Lisa Gill from JPMorgan.

Congratulations on getting everything back up online. But let me just first start with -- you've given us a lot of information but really not quantifying anything. I'm just curious as to when you think you'll be in a position to maybe give us some incremental numbers and when you'll bring back guidance, would be my first kind of overarching question. And then secondly, maybe if you can just also help us to think about the speed at which you'll be able to backfill your capacity in your center. Like how quickly can you start to ramp back up again?

Let me just kind of jump in on the guidance question and then I'll hand it off to Barb to fill in anything I missed. Clearly, it's our intention to provide guidance on a go-forward basis. But I think the question is, we're not ready today to say exactly when that will be. We do believe it's appropriate to take a bit of a conservative posture on the timing for that. And there's sort of a few reasons that I think we hit in the script, but just sort of come to mind, for one, it's still a pretty dynamic business as we just exit the sanctions and begin to grow again in our largest market, which has really had a pretty significant impact on the company. And then there's still a number of drivers that we just like a bit more clarity on before providing guidance. I think one which we touched on is we're making great progress in Florida, but it's still a question of exactly when is Florida going to start generating revenue. And I think that's something we want to have a better read on. Barb mentioned our participant mix. And there's still a question just how quickly is that risk pool going to rebalance and normalize as a result of the growth? And so we're trying to get as much of a read on that as quickly as we can. And then we talk about the staffing ratios in Colorado. It's a big market, there's a lot of people. And so the growth rate in Colorado following a year of not growing can have real impact on those ratios. We have to understand that. And we also -- I also mentioned, I think, in my prepared remarks, just this notion of the post monitoring oversight by the regulators continues to be pretty resource intensive. And so we're going to work hard over the next few months to dial all these things in. But I don't think we're ready to say today exactly what date guidance will be reinstituted but we're very committed to getting there as quickly as possible. Barb, anything you'd add?

No.

And maybe her second question.

Yes -- and yes, glad to answer any other specific questions, Lisa. That was helpful.

And the second one was just really around the ramp. Now that Sacramento is back online, how quickly can you start to get new patients into your facilities?

So the sanctions were lifted in Colorado, I think it was January 23. It took us a bit of time to ramp up the enrollment process. So our March enrollment was, I'll say, good given the time that we had, but it was limited as you -- if you compare that to sort of historical run rates. But in April and May, we've had nice momentum. So I think we're tracking well with our internal targets, and we've got a solid pipeline of prospects who are interested in joining PACE. I think we're probably seeing a few more that need to get their Medicaid coverage, which can take 60 to 90 days, but that's not everyone in the pipeline. So we still have some -- we definitely have some folks that are ready to enroll now. I expect that we're going to get back to our historical run rate in Colorado in the first quarter of the new fiscal year. We're certainly challenging ourselves to pull that forward and improve productivity in every market. But I think that's -- and if I sort of zoom out and think about the full business, I would say, excluding de novos, we expect to be back at historical net monthly enrollment levels in the first quarter of 2024 of our fiscal year. We're certainly challenging ourselves to do it faster. But right now, that feels like the right trajectory to get back to those historical levels.

[Operator Instructions] And our next question comes from Matt Larew from William Blair.

This is actually Madeline on for Matt. I was just wondering, obviously, small sample size right now, but have you seen -- anything you can say about acuity trends in the population that you're enrolling in Colorado so far or like risk score trends there?

I think it's a bit too early before that. We're just a couple of months in here, and it takes a little time for the participant profile and the claims history to build. So it's just a little early to answer that.

And just thinking about the enrollment process in general. I think you mentioned that you're sort of learning to exercise that muscle again. Anything that you've learned from the Colorado process that you think would make Sacramento more smooth or make it easier to start on adding new patients in Sacramento?

No, I think one of the things that we focused on a lot is really spending time to build our referral engagement channels. So we have a variety of community-based organizations that we work with, everything from sort of benefits counseling to faith-based organization to food pantries, foster care, housing alternatives. I mean, the list goes on. I think we did a really nice job of building a game plan in Colorado for each of those channels. And we've gotten a jump-start on that in Sacramento. So I think just getting a great view of the landscape is really important. And I also think that Sacramento is just one center. So it's a lot less complex to sort of ramp up than the whole -- our largest market has been in Colorado. So I think we got our first enrollment already in Sacramento. So I think we're feeling good about the ramp up there, and we think it will kind of follow the shape of Colorado in terms of build-out.

And then just one more for me. Thinking about the Florida centers, I think you mentioned last quarter that you were leading on some licensures, like adult day care license and things like that. Is that still sort of what's holding up the process or can you talk a little bit about what more there is to do in Florida from a regulatory standpoint? .

Well, first thing I would say is we're very pleased with the progress. We've had great engagement with the state. I think we're sort of blessed to have them -- to have the state so interested in us entering the market as a PACE provider. We resumed as soon as the sanctions were lifted, in Colorado, we resumed the application process. We're pleased with the adult day care application. It's -- that's what we're executing on right now, is the adult day care application. And then there's a state readiness review and a CMS review and then there's the 3-way agreement. So overall, I think we're tracking nicely to get this done before the end of the calendar year, and we're going to do everything we can that's in our control to pull that forward even earlier in the year if possible. So I couldn't be more excited about Florida.

And our next question comes from Jamie Perse from Goldman Sachs.

This is [Najib] on for Jamie Perse. So I was just wondering about external provider costs, I mean, they were down this quarter. And I was just wondering if -- where do you expect it to trend going forward or past this quarter in terms of percentage?

I'll take that question. So the -- you're right, the trend is down this quarter. We did mention that in large part, that was due to a pharmacy rebate that we received during the quarter. So about 2/3 of that decrease relates to that. But there is definitely, we are seeing some improvement as it relates to some of our clinical value initiatives and other things we're focusing on. I think both Patrick and I in our prepared remarks, for example, mentioned some efforts related to the short-stay skilled nursing facility that we're seeing some nice trends. So embedded in that decrease are some nice trends related to the medical cost. But for this quarter, in particular, that was -- the bulk of it, 2/3 of it was related to the pharmacy rebate.

And thank you. And I am showing no further questions. I would now like to turn the call back over to Patrick Blair, President and CEO, for closing remarks.

Well, thank you very much. I appreciate everyone who joined the call. We continue to believe that the company is on the right track, and we're excited about our future and excited about closing one chapter and beginning a new chapter. And we look forward to the discussion on our incremental progress in another few months. So thank you for your time today.

This concludes today's conference call. Thank you for participating. You may disconnect. Thank you.