Good day and thank you for standing by. Welcome to the InnovAge First Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you all for joining the InnovAge 2024 Fiscal First Quarter Earnings Call. With me today is Patrick Blair, CEO, and Ben Adams, CFO. Dr. Rich Feifer, Chief Medical Officer, will also be joining the Q&A portion of this call. Today, after the market close, we issued an earnings press release containing detailed information on our fiscal first quarter results. You may access the release on the Investor Relations section of 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 5, 2024, 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 earnings press release posted on our website. We will also be making forward-looking statements, including statements related to our 2025 fiscal year projections, future growth prospects, and growth strategy, our clinical and operational initiatives, Medicare rate increases, executive leadership transition, 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 2024 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan. And good afternoon, everyone. I want to begin by expressing my continued appreciation to our colleagues, participants, government partners, and the investor community who support InnovAge. Today, I will discuss several topics, financial results for our first fiscal quarter, an update on our organic growth and drivers, a California regulatory compliance update, recent progress in our clinical and operational value initiatives, and affirmation of our annual targets. Let me start with our first quarter performance. Earlier today, we reported total revenues of $205.1 million, center level contribution margin of $34.5 million, and adjusted EBITDA of $6.5 million for the first fiscal quarter. When compared to the first quarter of fiscal 2024, revenues have increased by approximately 12% from $182.5 million and adjusted EBITDA has increased by approximately 500% from adjusted EBITDA of $1.3 million. When you compare to the fourth quarter of fiscal 2024, revenues increased by approximately 3% and adjusted EBITDA increased by approximately 25%. Census increased to approximately 7,210, which represents a quarter-over-quarter improvement of approximately 3%. Building on our strong fiscal year 2024 performance, our first quarter reflects continued momentum and execution of our strategy to deliver high quality care with strong stewardship of internal and external costs while continuing to enhance our margins. On the leadership front, we welcome Michael Scarbrough this week as our new President and Chief Operating Officer. Michael comes with three decades of experience building, scaling, and managing government healthcare programs. Most recently, he served as the CEO of Optum at Home following the acquisition of Prospero, a physician-led home-based medical care model that Michael co-founded and sold to UnitedHealthcare in 2022. In approximately three years, Prospero grew to serve 50,000 members in 28 states. Prior to that, Michael served as a senior vice president at both Anthem and…

Thank you, Patrick. Today, I will provide some highlights from our first quarter fiscal year 2025 financial performance and insight into some of the trends we are seeing in the current quarter. Starting with census, we served approximately 7,210 participants across 20 centers as of September 30, 2024 which represents annual growth of 9.4% and sequential quarter growth of 2.7%. We reported 21,380 member months in the first quarter, an increase of approximately 9.4% compared to the first quarter of fiscal year 2024 and 2.8% over the fourth quarter, representing a strong start to fiscal year 2025. Total revenues of $205.1 million increased 12.4% compared to $182.5 million in the first quarter of fiscal year 2024, primarily driven by an increase in member months and capitation rates. The increase in capitation rates was primarily driven by higher Medicaid rates in connection with our annual state contract increases and higher Medicare rates as a result of increased risk score in county rates. Compared to the fourth quarter, total revenues increased 2.9%, primarily due to the sequential increase in member months as rates were flat. Rate activity included an annual increase in Medicaid capitation rates effective July 1. This was offset by a Medicare Part C risk or true up recorded in the fourth quarter, coupled with a change to our reporting methodology addressed on the last call, where effective July 1st, a portion of what was recorded as bad debt in previous years is now recorded as a revenue reserve or contra revenue. We incurred $107.2 million of external provider costs during the first quarter of fiscal 2025, an increase of approximately 7.9% compared to the first quarter of fiscal year 2024. The increase was primarily driven by an increase in member months, partially offset by a decrease in cost per…

[Operator Instructions]. Our first question comes from Jamie Perse of Goldman Sachs.

Patrick, maybe you can start just giving us a little bit of color on what you're seeing in some of the different states with respect to enrollment. Colorado and Sacramento in particular, would be interested to hear what the enrollment trends look like in those markets, how much you're still being held back by some of the enrollment delays that you discussed. And then more broadly in the rest of your markets and new states, how are the Florida markets contributing to that? Just some color on enrollment trends by state would be great.

I would start with, we're pleased with the momentum we're seeing in every market. When it comes to the demand for our services, we're feeling very good about the demand. As you mentioned, we have had a handful of situations in our states where we're encountering some bottlenecks as it relates to enrollment processing. Oftentimes, that's related to getting a level of care assessment complete before the enrollment can kind of move through the process. That's typically the primary issue that we deal with. As I said in the remarks, I think where we are starting to see some progress, we're working with the states and the state – third party partners very closely. And we're starting to see small signs of reduced backlog and faster throughput. That's true in each of the states. So you mentioned Colorado and that is a market we've been working closely with the state and we've started to see some signs of improvement. California, same situation, slightly different underlying issues, but similar impact. And then in Florida, the same and some of the maybe the channels in Florida are more linked to some of the disaster activities we've been facing down there. But I think overall, we're seeing signs of improvement. I don't think we have seen the consistency that we want to see before we can claim to have this in our rear view mirror. So there's still work to do. I think we've got to string together a couple of quarters of consistent progress in each state and then we'll feel more like we're kind of back to a run rate. But even with the setbacks, the demand is strong and we're still pleased with the progress that we're making from an enrollment perspective. I think that's the key message, is that we're staying vigilant and, despite the delays, we're turning around net enrollment numbers that I think meet our expectations.

Maybe two for Ben on the P&L. I'll sneak them in together here. First, just what's your assessment on where we are in the rebalancing of the risk pool across the patients that you serve, and as that progresses, how should we think about that impacting margins? And then secondly, just on the de novo losses in the two Florida facilities. What's your latest perspective on just timing to profitability, how those should progress over the course of the year? And then obviously, the California ones are a little bit behind, and I'd love any color on the breakdown between the California, which I think are going to take a little bit more time given the audit situation versus the Florida ones that can probably ramp some this year.

On the first question about sort of the mix in the portfolio, I would say that's something that's going to change gradually over time. And so, while we are seeing some mixed shift in the right direction you probably won't see that really begin to ripple through the income statement for a bit longer, but we are making progress on that. The changes are sort of subtle period to period. When we think about the de novo centers, I guess what I would probably say just in general is when you think about Florida, they're new, they've been up and running for a relatively short period of time. They're tracking kind of as we thought they were going to track, maybe a little bit slower than we'd originally hoped, but certainly in line with what we thought when we put together our internal budgets. So I think we feel pretty good about what's going on in Florida. I think it was a little bit encouraging that we didn't see a big disruption to our business when the hurricane rolled through Tampa. And so, even though the center was relatively young and it seemed to have made it through there okay. So I think we're feeling pretty good about how those businesses are progressing.

Jamie, I might just punctuate, I think he said it accurately that we're probably in the gradual stages of impact on risk because we enrolled maybe 200 net in Q1 and on a 7,000 member book of business, plus maybe what we grew net last year. It's still early for net new growth to have a material impact on mix. I think the progress we're seeing from a medical cost perspective, I think, is very much expected and a testament to the good work our clinical operation teams are doing to manage medical cost trends, to make sure our CVIs are beginning to kind of take shape and have the impact that we anticipated. And the team is just doing a much better job at, I think, managing controllable utilization. And we've got a lot of different initiatives focused on that. And we're feeling really good about the impact we're having, especially in this inflationary environment that I think others are feeling.

And our next question will be coming from Jared Haase of William Blair.

Maybe just another one on the guidance here. Appreciate you affirming the outlook. So I'm going to give some additional color just on how we should be thinking about the assumptions for the balance of the year. And I'm thinking specifically about the low end of the census guidance, which I think would reflect very little sequential growth from Q1 over the rest of the year. And obviously, I think you typically run maybe 2% to 3% would be more normalized. So how should we think about that? Is that sort of more conservatism or anything else you call out relative to the assumptions there?

I would say, look, I think we're happy with the guidance where it stands right now. When you think about the top line progression for our business, the way I tend to think about it is the first and second quarters have pretty good growth. The third quarter is sort of seasonally slow growth because of some of the competitive factors we've talked about before. And the fourth quarter is pretty good. We expect essentially sort of linear progression over the course of the year, with albeit slightly slower growth in the third quarter. But I think the progression that we have this year will be hopefully more indicative of what a normal progression looks like for the business and a little bit more consistent than what we had in the prior year.

Obviously, the financial impact of those compounding member months, we'll see that pull through in the back half of the year. So the financial impact's a little weighted towards the end of the year.

Maybe just a follow up from the prepared remarks. Nice to hear the improvement both in employee and engagement, employee and member engagement surveys and the satisfaction there. I was just hoping to hear a little bit more about what factors you think have been, I guess, the most impactful in driving that, whether that's on the employee side or on the member side. Obviously there's been a lot of investments in workflows and operations and different technology tools and things like that, but just curious if there's anything that you call out specifically in terms of the improvement there.

I think it starts with ensuring every employee in the company has a clear view of what we're trying to accomplish and what's most important to the organization. I think I've talked about the notion of our five pillar performance model before, where we start with people, service, quality, growth, and financials. And it's in that order for a reason. We're a big believer that, especially in this healthcare business, if you can attract and engage really caring people, they're going to deliver great service and great quality. And if you do those three things right, the company is going to grow heavily by word of mouth. And we're a big believer in just the core unit economics of PACE. And so, financially, you should do well also. So I think we put a lot of effort into making sure all of our employees feel heard, they feel engaged, they understand what the company's objectives are at a local level as well as the enterprise level. And we do our very best to recognize employees that are going above and beyond. I think some of my remarks around the Florida centers, just the miraculous job they've done to keep the business open, serving patients while at the same time serving their community. We have that happening every day in every center. I think all of our employees just have a deep passion for the work that they do and for the impact that we can have. We're quick to highlight these heroic efforts. We're quick to recognize and share that across the company. And I think that the organization really wants to grow and serve more people. And I think that's a big driver to keeping people engaged. And then from a participant satisfaction perspective, we use NPS as our primary sort of proxy to get at that loyalty and enthusiasm. And we just are seeing it go up every quarter. We're seeing caregiver satisfaction go up every quarter. So I think we just got a fantastic employee base who really cares about our patients and participants and feel recognized and rewarded for their work. And it's really showing in those. But I really appreciate you asking that question because it sometimes gets lost in an earnings call, but it's at the heart of what we believe will impact our financials is a great workforce.

Our next question will be coming from Matt Gilmore of KeyBanc.

Patrick had mentioned the portfolio of clinical value initiatives and operational value initiatives with some progressing faster, some progressing slower, but it sounds like good overall progress. Can you just give us the flavors for the things that are progressing faster and having an impact versus the things that will have an impact in future periods?

I think that's maybe a great one for Dr. Pfeiffer to take. He spends his every waking moment on providing leadership to the teams that are executing the CVIs. And maybe I'll have Ben say a little bit about the OVIs.

Many of us spend our waking hours on this. The CVIs that are progressing faster are the ones that you would expect because they're reflected directly in some of the utilization results that Ben reviewed earlier during the prepared remarks. These are the CVIs that focused on inpatient reduction and that focus on short stay, skilled nursing facility utilization, finding other better ways to provide care for people, safer ways to provide care, in many cases at a lower cost. So we have a lot of work around that. They've been remarkably successful this year, in some cases, surpassing expectations. Areas where we're challenged on the other side are getting all of our participants to call us for care before seeking care in an emergency room when they don't need to be an emergency room and they don't need to be admitted. So we continue to work on that, but the portfolio itself is right now very successful and we continue to look for opportunities to add to our CVIs during the year. For example, right now, we're considering one around dental care, which is not something that's often in the spotlight. But every opportunity is worth considering and adding to the portfolio. A - Benjamin Adams On the OVIs, I guess I would say this is a new initiative that we undertook this year to sort of mimic the success that we had on the CVI side. And a lot of these are things that are really focused on just improving the core operations of the business. So these are things that are focused on things like improving our fleet because we actually have a large fleet of vehicles. That's an important part of our business, making sure we're optimized from a fleet perspective. Focusing on food service contracts and things like that basically cater the needs of our participants and our centers to make sure we're getting them the best quality nourishment at the most reasonable cost, and then other things around contact centers and scheduling. So there's a whole portfolio of them. They're relatively new initiatives. I think we're sort of one quarter into it. I think we feel like they're tracking pretty well. A lot of these things tend to be back-end loaded in the back of the year as the impact becomes more significant as you flow through the back of the year. So something we're encouraged about, we're watching carefully, and we think it's going to have a meaningful impact on the business.

I might just add on to what Ben said. I just mentioned that Michael Scarbrough, as you know, has joined the company as the president and chief operating officer. And I know Michael firsthand from working both at Amerigroup and at Anthem. And there's no doubt he's a leader who's got a proven track record of scaling large cost containment initiatives, whether they relate to medical cost or they relate to operating cost. And so, he's going to bring, I think, a fresh perspective to both the CVIs and the OVIs. And I think really position us well to scale very efficiently, effectively as we go forward and make sure that we've got the right mix of services at the right unit cost and delivering the right value. And so, really excited about the impact that he's going to have in that regard.

As a follow up on the EMR implementation and the opportunity to improve documentation and accurately capture risk scoring, can you just update us where you are on that journey? And then with your business, is there an offset in terms of the activity you're doing now, impacts future periods like it does in MA and just sort of what that cadence looks like?

I'll let Rich start and then Ben or I will punctuate his points.

We are well on our way in leveraging EPIC, leveraging our electronic health record to optimize and improve our chronic condition recapture rate. The chronic conditions that year over year need to be recoded in order to ensure an appropriate risk score for Medicare. And we've seen chronic condition recapture rates improve period over period, and that's in a large part because we have alerts that are being triggered within the electronic health record at the point of care for our providers, asking them whether or not a condition is still accurate if it hadn't been coded in the prior year to ensure that they consider coding it again if it's appropriate. We have a number of other initiatives also to address risk adjustment appropriately, but EPIC is being leveraged in a very meaningful way in that regard. There still are future opportunities for data mining, for example, for un-coded information, free text, but right now we're already seeing a lot of the value coming out of that. And then I'll pass along to Dan.

Well, I might just add to what Rich said by saying, in addition, that the importance of the chronic condition capture is not only important for revenue accuracy, it also becomes a really important input to our quality programs, to our care management programs, to our high risk kind of cost management programs. In some ways, it allows us to better segment our population and tailor our interventions to meet this. So EPIC's really, I think, giving us a multifaceted kind of positive impact in this regard, because, yes, it helps to make sure we're paid appropriately for the risk that we bear, but it's also, I think, feeding our clinical programs and helping us target populations and individuals and conditions where we can have the greatest impact on their lives. I think that this is just one area where EPIC has the potential to bring a lot of value to the company. Again, I'll just refer back to one of Michael's key objectives as he joins the company is to really look at EPIC at sort of this sort of phase that we're in and ensure we're getting the most from our investment and helping our employees operate more efficiently, help make their jobs easier from a documentation perspective, make sure that everything's being documented appropriately for our compliance audits. It really is a multifaceted system that's going to help us in a number of ways. And we're excited about the potential.

Thank you. This does conclude today's Q&A session. And thank you for all of your questions. You may all now disconnect. Thank you for participating in today's conference call.