Hello, and welcome to InnovAge Fourth Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker, Ryan Kubota. Sir, you may begin.

Thank you operator. Good afternoon and thank you all for joining the InnovAge fiscal 2023 fourth quarter earnings call. With me today is Patrick Blair, President and CEO, and Ben Adams, CFO. Dr. Rich Feifer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market close, we issued a press release containing detailed information on our quarterly and annual results. You may access the release from 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, September 12th, 2023, and 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 fourth quarter 2023 earnings 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 guidance for fiscal year 2024, future growth prospects, Florida and Downey de novo centers, potential acquisitions, our payer capabilities and clinical value initiatives, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for fiscal year 2023 and our subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I want to begin by extending my deepest appreciation and gratitude to our InnovAge employees, participants, government partners, and investors who continue to support us. Today, we will provide several updates. Results for fiscal year 2023 and the fourth quarter, initial guidance for fiscal year 2024, a brief regulatory update, and progress in our key focus areas. Let me start with fiscal year 2023. For the full year, we reported revenue of $688.1 million, a decline of approximately 1.5% compared to fiscal year 2022, and center level contribution margin of $101.3 million, which represents a 14.7% margin. Consolidated adjusted EBITDA was negative $1.3 million for the fiscal year. While not reflective of our go-forward potential, these results were in line with our expectations in a period that was negatively impacted by enrollment restrictions in Colorado and Sacramento. Moving to fourth quarter, we reported revenue of $176.9 million, a sequential improvement of approximately 2.5% compared to the third quarter, and center level contribution of $28.5 million, which represents a 16.1% margin. Consolidated adjusted EBITDA was $700,000 for the quarter. Overall, the year demonstrated considerable progress in our core focus areas and positions us well to build on this momentum. Second half of fiscal year 2023 center level contribution margin was $57.3 million, an increase of approximately 30% relative to first half center level contribution margin of $44 million. Importantly, we still have approximately 50% center capacity across our portfolio, excluding the Florida de novos we are opening. Utilizing the slack center capacity in each of our centers to serve additional seniors is a top priority. But more broadly, I want to acknowledge what we accomplished in fiscal year 2023. We resolved compliance audit deficiencies and had all enrollment restrictions lifted. We improved the core…

Thank you, Patrick. I am excited to be here, and I look forward to speaking with all of you in the near future. Having been in the healthcare space for over 25 years what excites me the most about joining InnovAge is the opportunity we see in front of us and the population we have the privilege of serving each day. Today, I will provide some highlights from our fourth quarter and fiscal year-end 2023 financial performance. As you probably saw in our press release this afternoon, we are pleased to re-establish our practice of providing annual guidance. So I will also go through a few highlights on our fiscal 2024 outlook. We ended the fourth quarter and fiscal year 2023 with 17 centers and approximately 6,400 participants as of June 30, 2023. Compared to the prior year, this represents an ending census decline of 3.9% and a 1.4% increase compared to last quarter. We reported approximately 77,370 member months in fiscal year 2023, a 6.6% decrease compared to the prior year. Total revenue decreased by 1.5% to $688.1 million for fiscal year 2023. The decrease was primarily due to lower member months as a result of the sanctions, partially offset by the annual increase in Medicare and Medicaid capitation rates, which are net of the full reinstatement of sequestration in July 2022, and the ramp of up new enrollments in Colorado and Sacramento. Compared to the third quarter, revenue increased 2.5% primarily as a result of higher than anticipated Part C and Part D Medicare risk score true up payments coupled with a calendar year 2022 rate true up in California. We incurred $374.5 million of external provider costs during fiscal year 2023, a 2.2% decrease compared to the prior year. The decrease was driven by lower members months…

Thank you. [Operator Instructions] Our first question comes from the line of Jamie Perse with Goldman Sachs. Your line is open.

Hey, thank you. Good afternoon. I just wanted to start with Colorado and the trends you're seeing there in terms of re-enrollment. And you talked about good progress in terms of restarting the various channels you have for finding those patients and converting them. And just give any more color on how that's tracking relative to expectations? It sounds like you're back to pre-sanctioned levels of enrollment. Do you think there is more progress there? Just given, you're at a lower base, can you accelerate that further? And then as it relates to guidance, I mean what's in your guidance assumptions, with regards to patient enrollment particularly in those markets that were previously sanctioned, as well as Florida, if there's any kind of estimation, you have in guidance for contribution for this year. And I have one follow-up.

Hey, Jamie, it's Patrick, I appreciate the questions. Maybe starting with Colorado. I would say we're very pleased with progress sort of out of the gate. We knew it would take some time to ramp up, up and I think we're tracking very closely with our expectations and -- Jamie, I don't think you got that, I might have gotten cut off there, but thanks for your question. Maybe I'll start with Colorado and just say that we're very pleased with the progress.

Are we still on mute?

No, we are not.

I can hear you just fine.

Thank you. We were struggling with that here in the room and apologize to the audience. Just starting with Colorado. We're really pleased with our progress. We're really focused on sustaining it, but overall, I think we're pleased with the fact that we've gotten back to sort of pre sanction gross monthly enrollment sort of targets, and that's happened, maybe a bit sooner than we thought we might get there. We're seeing a lot of interest in the program across the board. I did mention in my remarks some of the lead volumes in new channels, every enrollment starts with interest in the program. And I think we've done a really nice job of increasing our lead volume over the last couple of quarters, and we're looking at not only new channels, but we've taken the opportunity to just improve our marketing content, our creative campaigns, our media buys. So I think we're filling the top of the funnel very effectively. As you know in PACE, as things move through the funnel, there's a variety of sort of layers of qualification that have to occur. But I'm feeling very good about the work the team is doing to grow the interest in the program. And it's led to a great start post sanctions, and our expectation is that continues. I think it's a little too early to tell whether that growth rate increases substantially. And I think that's really factored into our range from a guidance perspective. So, I think all is good there. In Sacramento, it's a little different story because it was a new market to begin with and immature and so we're not as focused on getting back to where Sacramento was we're actually setting a higher bar for ourselves in Sacramento. And we're making good progress against that. In terms of the other markets, I would just say that all the non-sanctioned markets are growing as expected And New Mexico is probably a market where we're maybe a click behind where we want to be. But for the rest, we feel very good about it. And it's a bit early to share anything on Florida and I don't think we've broken out Florida enrollment targets quite yet, but as we pointed out, we've got a lot of capacity there between the two centers and are already starting to ramp up, already starting to hire, already making a lot of progress in the community and are excited about launching it.

Okay, great. And then I just wanted to go to external provider costs maybe near term and over the longer term. I know you mentioned a 1% improvement drives a $7 million improvement in profitability, which I kind of just simply the math, but how do you actually -- what's the path to achieving that, again just in the short-term, what do you think you can accomplish this year in terms of improvement against external provider costs as a percent of revenue, and then longer term, what are the longer-term initiatives and how much progress do you think you can make on that front? Thank you.

Yeah, in terms of timing this year, we've got a robust portfolio. I think our guidance is reflective of those initiatives are maturing over time, and having an impact over time, predominantly in the last part of the year and going into fiscal year '25. When you think of those that are going to have the largest impact as soon as it's really those around the provider unit costs. So, I think we said in the past, we've a lot of diagnostics on our provider network and our reimbursement rates to our providers and we found some areas across the country and provider types where we feel like there's opportunity to improve that. And so, we've got a broad range of, let's call them re-contracting initiatives that touch core areas of our external provider costs, hospitals as well as a broad array of ancillary vendors, DME, lab imaging, we're looking at every single driver of our medical cost. We're looking at our unit costs, and building initiatives to ensure that in every market, we are reimbursing providers at market rate. And over time, it's easy for those things to kind of inflate. And so you've got to be very diligent about it. And I think that sort of provider network side is around $4 million right now is kind of what we're targeting in sort of annual savings. It all depends, the impact to '24 is just going to depend on sort of limited contracts negotiated but overall feel very good about the unit cost initiatives. And then I might ask Dr. Feifer. Just to say a few words about utilization, which is sort of the other side of the cost and that's where we've made a lot improvement recently in. It just has sort of a longer timeline on it. You're changing behavior rather than renegotiating the contract and Dr. Feifer and his team are just doing a really great job of building that expertise within the company. So let me ask Rich just to comment on a few areas. Rich, that you feel like we're going to have an impact over time.

Sure. And some of them are going to have an impact sooner and some later. But of course the areas we need to focus the most on to impact utilization are the main drivers of low value, high cost impacts. So we're looking at ER utilization, inpatient utilization hospitalizations. We're looking at skilled nursing facility, short-stay or skilled days and hospice costs, those are four big buckets ones where we can have a significant impact not only in reducing avoidable costs, but in many cases improving participant and patient safety care and their overall experience. And so, one example of how we're tackling that is ensuring that our clinics are available and accessible to our participants even longer in the day, and frankly throughout the week. So that they're accessible nights and weekends, and we have after hour coverage, so that we can reduce the chance that participant might seek to go to the emergency room on their own. As we know, about 40% of emergency room visits from our population get admitted. So that's just an example of how we're tackling utilization and we have a whole bunch of other initiatives to get at that.

Thank you, Rich.

Thank you. One moment for our next question. And that will come from the line of Jason Cassorla with Citi. Your line is open.

Great, thanks. Wanted to ask about revenue PMPM development, '24 revenue and census guidance ranges are pretty wide, but just directionally what you expect a continued quarterly step up in PMPM in the first half of the fiscal year, then maybe some rollover in the back half as the average acuity of your census decreases, the lower ‘24 MA rate kicks in, those January 1 kind of rate increases kick in for Medicaid or can you just give us a sense of how PMPM development should trend moving through fiscal 2024?

Sure. Great, great to meet you virtually over the phone. I think in terms of revenue PMPM, there'll be some variability from quarter to quarter, over the course of the year. So I think if you take a look at what we've given in terms of revenue guidance and in terms of member months you can figure out where we expect to get over the course of this year. We are expecting some reasonable rate increases from various states over the course of the year. And so I think if you look at the progression, it should be relatively logical over the year.

Okay, got it, thanks. And then I just wanted to go back to your comments on Medicaid redetermination. I would think the higher acuity nature of census population in the PACE process would sort of insulate from perhaps procedural redeterminations, but it sounds like there could be pressure more on the enrollment side, I guess, just any incremental color on the redeterminations impact within the outlook would be helpful. Thanks.

Sure. I think you've got the, you've got it right. Just generally speaking, we don't expect our population to be impacted much by redetermination relative to say other Medicaid managed-care programs. I think the point that we're making is that it's a big initiative across all of our states and are actively pursuing redetermination. And sometimes, the resource constraints can be felt in the PACE program. So, as we said before, enrollment in PACE is sort of a partnership with our states, there's various steps in the enrollment process and in various areas where we showed data. And if there are constraints from a resource perspective driven by redetermination, we can feel that in a bit of a slowdown. Thus far, we've been able to work through it, and sort of every state through our relationships. We just pointed out, because it is sort of an overarching macro initiative happening within Medicaid, that can have a resource constraint within the enrollment processing, but not impact eligibility of our members, or result in our members not being enrolled, it can simply be a timing question.

Okay, got it. Thanks for the clarity. And maybe just one last one here, just headlines over the past month or two indicating a new COVID variant and an uptick in COVID admissions I guess throughout the US. Have you started to see an increase in COVID incidents across your census population. And I guess last one, it was a tough flu and RSV season. I'm just curious on what's embedded in guidance around kind of this upcoming winter, COVID and perhaps flu season. Just any thoughts there would be helpful. Thanks.

Sure. I am going to ask Rich to weigh in on that.

Yes. We already are seeing an increasing number of cases, whereas for the last few months before this month, things have been really quiet. We have a couple of outbreaks that are relatively minor, just clusters of cases involving participants and staff. But so far, we're not seeing severe cases. Remember we have generally, a highly vaccinated population of participants and staff they likely have residual immunity. And we will be focusing on giving them the new monovalent vaccine, which was just recommended today by the CDC. We'll be focusing on giving them boosters this fall, to ensure that that level of immunity continue. So, yes, it's an issue, but no, it's not adversely affecting our population or our economics much at this point.

Anything in your guidance or expectations around that or would you just kind of assume that goes forward?

There's nothing specific in guidance included about that. I think we've looked at the totality of our costs going forward. And then we've used those to look at guidance. We obviously look at and consider these types of scenarios in conjunction with Dr. Feifer and others, but there's nothing specific guidance related to that item.

Fair enough. Thank you for all the color today.

Thank you. [Operator Instructions] That will come from the line of Matt Larew with William Blair. Your line is open.

Hi, this is Madeline Mollman on for Matt. I just wanted to say, I think you said that the Sacramento post audit monitoring period have been lifted earlier than expected. But just to clarify, are you still in the post monitoring period in Colorado? And what do you anticipate the sort of impact on total cost to be from that in 2024?

Yes, just -- this is Patrick.

Hi, Patrick.

So in Sacramento both CMS and the state have released us for monitoring and we're just sort of going through the remaining steps to sort of close that out. In Colorado, I don't want to try to predict what the outcome will be there, but what I can say is we are having consistent month over month positive results in Colorado, but we're expecting that to continue through the end of the year. It would be a surprise if it's shortened and we welcome that. But the team is doing a great job in Colorado. So feeling really good about that. In terms of cost, it's still a bit early to tell. The fact that Sacramento ended early really hasn't had much of an impact in terms of our costs associated with the audits, because we just pivoted a small team of people to the Colorado site. But I think once Colorado ends, there definitely are going to be areas where we expect some improvements in our staffing costs. We use a lot of third parties just to support and augment our team when it comes to audits and those will cease once the monitoring is done, and then we'll be looking for other areas to sort of pick up some cost savings as a result of the monetary slowdown, but I don't know that we have a target number quite yet.

Great, thank you. And then with the new enrollment, the patients that are being enrolled in the sort of unfrozen centers, have you seen any initial trends in terms of age, acuity et cetera, compared to the existing patient population that you had?

In the non-sanctioned markets I would say that we've seen any significant differences from what we've experienced historically. Our goal is always to have our population reflect the population in the community and the community is made up of -- has a mix of people that are living independently and those that are receiving some type of supportive housing and so that continues, I think in all of our markets. So there is nothing remarkable that I would point out in terms of that, but I think the key is, we will have more sanctioned centers and we are growing everywhere now.

Great, thank you so much.

Thank you. I am showing no further questions in the queue at this time, I would now like to turn the call back over to Patrick Blair for any closing remarks.

Thank you for your continued interest in the company. We are excited to be unencumbered by the sanctions, we worked hard to address those in the last fiscal year. We're growing our top line consistent with historical standards. We're getting reasonably good rates from our states and CMS and improving risk adjustment. We have some de novos that are coming online and with more in later years. And we're really pleased with our progress. I think I would sum it up is, it's a question of not when or should be, not if, but when. We're really confident in the profile of the company going forward. It's just a question of timing on a lot of fronts. And that's what we're doing our best to predict each quarter and we look forward to bringing folks into our Investor Day sometime after second quarter and we'll will take people through the drivers of the business. So really appreciate everyone's support and look forward to the future.

Thank you all for participating. This concludes today's program. You may now disconnect.