Good day, and thank you for standing by. Welcome to the InnovAge Third Quarter 2025 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] 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 2025 Fiscal third quarter earnings call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Michael Scarbrough, President and COO, will also be joining the Q&A portion of the call. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal third 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, May 6, 2025, 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 may also make statements that are considered forward-looking, including those related to our 2025 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare rate increases, census headwinds, 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 annual report on Form 10-K for fiscal year 2024 and any subsequent reports filed with the SEC, including our most recently 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. Good afternoon, everyone. I'll begin by expressing my appreciation to our colleagues, our participants and their families, our government partners and the investment community, each of whom plays a vital role in supporting InnovAge's mission. We delivered third quarter results that met our expectations, and we are reaffirming our fiscal 2025 earnings guidance. Behind the numbers is a company operating with discipline, focus and growing confidence. In a health care environment clouded by policy uncertainty, we know what we need to do and we're doing it, steadily and consistently. That focus is translating into meaningful operational gains and financial improvement. InnovAge cares for the nation's most vulnerable seniors, individuals whose needs don't ebb and flow with economic cycles or shifting political priorities. Their care isn't optional. And as federal and state programs face growing scrutiny, we're not just participating in Medicare and Medicaid, we're helping make them stronger. We continue to see rising demand for care models that allow seniors to remain safely at home, and we believe PACE stands out as a proven, high-value solution for a population with the most complex needs. This quarter, we've stepped up our engagement with both state and federal policymakers to make clear PACE works for seniors, for the system, and for taxpayers. What sets InnovAge apart is who we serve as well as how we deliver and coordinate care. Turning to our third quarter financials. We reported revenue of $218.1 million, an approximate 13% increase on a year-over-year basis. Center-level contribution was $40.7 million, representing an 18.7% margin and an improvement of approximately 110 basis points year-over-year. Adjusted EBITDA was $10.8 million or a 4.9% margin, which represents an improvement of more than 3.5 times over third quarter 2024 adjusted EBITDA of $3 million. Census grew to approximately 7,530…

Thank you, Patrick. Today, I will provide some highlights from our third 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 7,530 participants across 20 centers as of March 31, 2025, which represents annual growth of 10.4% compared to the third quarter of fiscal year 2024 and sequential growth of 0.7%. We reported 22,550 member months in the third quarter, an increase of approximately 10.7% compared to the third quarter of fiscal year 2024 and an increase of approximately 1.6% over the second quarter. Total revenues of $218.1 million increased 13% compared to $193.1 million in the third quarter of fiscal year 2024, driven by an increase in member months and capitation rates. The increase in member months was primarily due to growth in our existing California and Colorado centers, and to a lesser extent, due to the addition of de novo centers in Florida and the acquired center from Concerto. The increase in capitation rates was primarily due to an increase in Medicaid and Medicare capitation rates, partially offset by a portion of what was recorded as bad debt in previous years, which is now recorded as revenue reserve and Medicare risk score true-up accrual timing. Compared to the second quarter of fiscal year 2025, total revenues increased 4.4% due to an increase in capitation rates and member months. The increase in capitation rates was driven by annual rate increases in California and Pennsylvania, partially offset by revenue reserve and an annual Medicare rate increase, all effective January 1, 2025. We incurred $107.9 million of external provider costs during the third quarter of fiscal year 2025, an increase of 7.9% compared to the third quarter of fiscal year 2024. The increase was…

Thank you. At this time, we’ll conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Benjamin Rossi of JPMorgan. Your line is now open.

Hey, thanks for questions, here. So, on initial 2026 guidance, I know it's early here, but just as you're putting together a guide, can you just walk us through how to think about Medicare and Medicaid rate development over the course of the calendar year? I believe last quarter, you mentioned the favorable rates in the mid-single-digits to high-single-digits range coming in through California and Pennsylvania. Just curious if those requisite catch-ups are coming through on Medicaid rates for those members for the remainder of the year?

Sure. Thanks. Ben, I'm going to kick that over to you.

Yeah, sure. I guess what I would say is, it is early, obviously, for '26. We're just going through our budgeting process right now. I think what we're seeing is, I expect we're going to have reasonable Medicare rates going into 2026. And on a state basis, I would say that we also, at this point, based on what we know about the states that set their rates earlier in the year, sort of for July 1, we think they're looking okay. In some cases, we've got some indications about headline numbers, but we don't really know what the policy changes are going to be. So we haven't yet been able to understand what the full net impact is going to be. There are other states like California, which are important states to us, which don't set their rates until later in the year. And for those ones, we don't have a lot of visibility right now. And obviously, with some of the changes in play in Washington, it's probably going to be a little bit of a while before we do. So, I guess what I would say is, Medicare, we think will be okay. What we've seen so far on the Medicaid rates may be okay, but there's obviously a lot going on in Washington, so it's very hard to predict at this point.

Got it. Appreciate the details there. And then, just as a follow-up on pharmacy services, you mentioned integrating some of those services in your clinical model. Just thinking about pharmacy spend on your member base with the Part D out-of-pocket maximum now down to $2,000, and now with the first calendar quarter under our belt, did you notice any changes in pharmacy utilization trend across your member base between last quarter and this most recent quarter?

This is Patrick. No, we haven't noticed any changes in trend. And I would just remind you that out-of-pocket costs and things of that nature that are hallmarks of the MA Part D program really don't apply to us. We've got kind of a different reimbursement model. We still follow a Part D bid process, but the mechanics of our revenue and costs and how they play through ultimately in our PMPM payments are different than Medicare Advantage and out-of-pocket costs are zero.

Great. Thanks for clarification.

One moment for our next question. Our next question comes from the line of Jared Haase of William Blair & Company. Your line is now open.

Hey, everyone. Good afternoon. Congrats on a nice result here. Patrick, appreciate your comments about stepping up the engagement and advocacy efforts with regulators and policymakers to sort of communicate the value of PACE. Would love to hear a little bit more just about the nature of those conversations, how they've been going? And I guess really the main question is, do you feel like the value of PACE is well understood as you are kind of having that dialogue with people?

Yeah. Thanks for the question. It's a great question. Yeah, we really have stepped up our efforts to engage in direct discussions, not only with state regulators and policymakers, but also at the federal level. And we have additional engagements and meetings planned here over the next several months. I would say you're correct in that the questions we most commonly get about PACE are related to, why isn't it bigger? What would it take in order to allow this program to serve more seniors? I think underlying that initial kind of set of questions is a real interest in the populations we serve. I think people certainly understand and are beginning to understand, I think, even more broadly that we serve a very frail and elderly population. And I'm not sure all policymakers really understood that. When you think about Medicaid, it covers a lot of different populations, and we're on the end of that spectrum. And so I think we're getting a lot of questions about what are some changes that could be made that could help PACE serve more individuals. And we're getting a lot of interest, I think, in sort of what we do. Clearly, we're following the daily dynamics that exist on a regulatory and policy front, and it's difficult for us to sort of form a point of view. But when we think about the risks in our business, I think we think about direct risk and indirect risk. On the direct side, it's really a question that maybe other organizations face, which is, are there going to be changes to who's eligible for services? And of course, anything that could directly impact who's eligible for PACE and ultimately our growth in our census, we can just kind of consider that a direct risk. We're not hearing or seeing anything to suggest that PACE is a target of reductions of any sort. I think where we're hearing sort of most of the rhetoric, and I'm sure you do as well is things that could be more of an indirect risk. So whether it was an FMAP reduction or changes to provider tax mechanics or block grants or work requirements, you name it, all of those things could put some pressure on state budgets. And anyone working with the state is then exposed to some indirect risks. But I think for us, we're kind of in the business of cyclical periods with states and we've got a great team that's created a business model that we feel like can adapt to whatever volatility we face. But we're very heartened by the fact that PACE is something that states and CMS are very interested in during this period of transition that's happening. That's a little more than you asked for, but certainly want you to have a perspective.

No, that's great. I really appreciate all the color. And then maybe I'll ask a follow-up just on the guidance. And specifically, obviously reaffirming the outlook, and maybe I'll ask it on the census guide, leaving the low end intact. And I think you're already at the midpoint after the third quarter results. So, I'm wondering just how should we think about -- is that largely leaving conservatism here or anything else you would call out that we should be aware of for the last quarter of the year?

Yes, I'll flip that to --

Yeah, I was going to jump in here, Patrick. I think what I'd say is, we guide on, I think four or five different metrics. And so I would think about that collectively as guidance. And the other thing I would say is, Q4 can sometimes be a little tricky for us because we get our risk score true-ups right at the end of the year. So, given the fact that there can be some variability associated with those and given that we're sort of approaching the low end of the range kind of three quarters of the way through the year on average, I think we're sort of happy with where guidance is, and we're going to let it stand for the rest of the year. But we will come out, obviously, with new guidance after the fiscal year end.

Great. That’s helpful. Thanks, guys.

One moment for our next question. Our next question comes from the line of Matthew Gillmore of KeyBanc. Your line is now open.

Hey, thanks for the question. I wanted to ask about the decline in the external cost PMPMs. And I know there's probably a little bit of noise with some of the in-sourcing efforts, but it did seem like one area of real success was around lower utilization with assisted living and SNF, which is really great to see, and you could kind of argue that's the point of PACE. But I was curious if you could unpack that a little bit? Is that driven by any particular clinical initiatives that you've talked about in the past? And sort of any details on what you think is driving the lower utilization for ALFs and SNFs this quarter?

Well, a great question. And I think you answered some of the question yourself for sure. But as you recall, we've talked about this notion of CVIs or Clinical Value Initiatives, which is a portfolio of work that we undertake each year and each quarter. And I think as Ben has done a good job explaining in the past, some of those initiatives just take longer to bear fruit. There's a lot of work that goes upfront. Sometimes they require policy changes, sometimes they require system changes, sometimes they require business process changes. And so I think what we're starting to see now, and I'm really proud of all the work that's been happening is that, we've really laid a foundation over the last couple of years as it relates to medical expense management. And we've done a great job on our inpatient utilization. We've done, I think, an outstanding job on our short stay skilled nursing care. That's a very common service if someone gets discharged from an acute setting. And so we've built robust components around that. We've also built programs related to in-home nursing care for people at the highest risk. We've built after-hours nursing programs that allow us to address after-hours issues more effectively. And ultimately, that can help us with ER admissions, which then impacts inpatient admissions. So, in some ways, if you think about all the major categories of cost for us, we've built initiatives around those the last year plus. And now we're starting to see the benefits of those sort of flow through in terms of utilization. And then I think as we've mentioned before, we've got a -- this is something that we've got to continuously add new initiatives to the mix. And as we look forward to the more transformative stages of our growth and development, we've got a lot of great ideas to further deliver great quality, great outcomes and efficient care. But I'm going to ask our COO, Michael, just to maybe say a few words because he's spending a lot of time with our clinical teams in this area.

Yeah. So, Matthew, I would just add, in addition to everything Patrick said. As you think about our continued growth and as we continue to grow our census, it's also having a significant positive impact in just our overall mix of participants. And so, obviously, as we add new participants to our program, most of them are living independently at enrollment. And so fewer and fewer of them are in a nursing facility or in an ALF when they join InnovAge. And so, that's also having a significant impact in addition to all the other clinical programming that we're doing.

Great. That's very helpful. One of the initiatives, I believe I heard you talk about in prior calls was around provider network management. That was an area that was just of interest to me, and I presume that, that has to do with how you're contracting with third-party providers and perhaps how you're paying claims and making sure that the claims are valid. I was hoping you could sort of update us where you stand there and what you think the future state might look like with that initiative?

You bet. Michael, would you take that?

Yes, I'll take it. So, I would just say, absolutely, Matthew. Our contracting -- we contract with a network of providers, just like Medicare Advantage or managed Medicaid plans do. And so it's both how we contract, the rate that we pay, but also, to your point, how we administer the claims, conduct payment integrity efforts, utilization management, case management, care management activities, all of that work. And so, as a part of our transformation efforts, we continue to make efforts to and investments in our payer capabilities to continue to grow our capability in that space, the impact that we're having. And as we look ahead to fiscal year '26, we continue to make significant strides to improve in that area.

Got it. Appreciate the comments.

One moment for our next question. Our next question comes from the line of Jamie Perse of Goldman Sachs. Your line is now open.

Thanks, good afternoon. Can you talk about the new centers just for a moment? Obviously, you've had those open a couple of quarters now. The de novo losses have come down about $500,000 per quarter to $3.5 million in this quarter. Can you just speak to the enrollment trends and how you're progressing operationally? And then how should we think about the de novo losses over the next few quarters and time to profitability or at least break even on the new centers?

Yeah. I might let Ben comment on these de novo losses. But I'd say, overall, everything is tracking with our expectations. The census is sort of consistent with the expectations we set. Took us a little longer to get out of the gate and kind of get to ramming speed, but I feel like that we're starting to see nice momentum in all of our markets, both Florida and the Crenshaw market in L.A. Some variability on the cost side of the ledger. We've probably had some more transportation costs than we anticipated in Florida, as an example. So we've had to sort of manage through some sort of volatility on that front. But I'd say consistent with everything that we've laid out before and the teams are starting to come together become more integrated in the community. They're building referral sources and I think are doing a great job managing the care and delivering great quality. Orlando Health has been a great hospital partner. I think you know we're involved in a joint venture there. And they're doing a great job working closely with us to make sure seniors are getting the best possible care there in Orlando. So, I think it's a great example of the ability to bring up new centers and get them on the right track. And in case of Crenshaw, I think it's a great example of being able to find an opportunity to bring a center into the InnovAge family and quickly demonstrate that we can grow it and we're really pleased with that.

Yeah. I'm not sure I have a whole lot to add to that. I think Patrick sort of encapsulated what's going on with the centers right now. I think that the trend you identified in de novo losses is probably a reasonable one to keep your eye on. And as we get through the end of the year, we'll have some updated guidance for the following year, and we'll put out some guidance around de novo losses as well.

Okay. And then just on cost of care, that stepped up about $5.5 million sequentially. Your revenue growth is 12% year-to-date. Cost of care is up 17%. So you're obviously investing in capacity both within new centers and more broadly operationally. But can you speak to some of the investments you're making? And at what point should we start to see maybe some leverage on the cost of care line?

Yeah. I mean -- sorry, go ahead, Patrick.

Okay. Yeah, I'll get you started, Ben, maybe you can dive in. But as I mentioned, there's been a couple of programs that we've put in place over the last year. One, we've in-sourced a great deal of hospice care and there were investments that we made in order to do that. But I think that's reduced our end-of-life care liability from a cost perspective going forward. We also have the visiting nurses program, kind of the after-hours nursing program, the Comfort Care program. Those are also investments we made that we either weren't doing before or we're now in-sourcing services that we were subcontracting to someone else. And all of those things are starting to show up, I think, in our P&L, but there were costs associated with getting them off the ground. Ben, anything to add to that?

Yeah. I mean, I think you hit all the big points there. I think a lot of it has to do with in-sourcing certain activities. So, if you actually were to go and sort of strip out some of the activities that we've taken or we've brought in-house and sort of looked at kind of the core trend in cost of care, I think you'd find it's actually in the low single digits. So I think what you've seen here is kind of a one-time step-up in costs from in-sourcing certain activities, and you'll see a more normalized growth rate going forward.

It's really a good question. I might just add one more thought there, because one of the things that we sometimes grapple with internally as we evaluate a business case for something is that we'll see the cost hit different components of the P&L. So, in this example, we're seeing the medical costs go down because of the impact we're having from the investments we're making, but we could be seeing the investment cost hit another portion of the P&L, maybe through cost of care, maybe through SG&A, but it's not all happening in the medical expense line item. And so that's sometimes you got to tease that out to really understand the full benefit.

Okay, that's helpful. And I'll take one more crack at the guidance question from earlier. Obviously, just with 1 quarter left, the EBITDA guidance midpoint would imply like $4.5 million in EBITDA. That would be the lowest performance of the year. Just to make sure we're clear on what the message is coming off the call, is there any reason why you'd be at the midpoint or low end of the range? Just any color on how we should think about the EBITDA guidance range in implied 4Q? Thank you.

Yeah. I'm not going to give any sort of indication of how we're going to land versus guidance at this point other than to say we think the guidance is good guidance at this point. And again, not to -- I'm not trying to be coy about it, but when you do come into Q4 and you deal with some of these risk or true-up numbers, there tends to be a fair amount of variability in those. And so I think given the variability in those numbers and where we are relative to guidance, we're happy to let guidance stand where it is.

Got it. Thank you.

I'm showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.