Innovage Holding Corp. (INNV) Q4 2026 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2026 Fourth Quarter and Fiscal Year-end Earnings Call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Jen Browne, 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 2026 fiscal fourth quarter and year-end 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, September 8, 2026, 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 2027 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, the impact of ongoing macroeconomic, geopolitical and industry-related challenges, reductions in PACE reimbursement rates and changes in risk adjustment methodologies, legal proceedings, enforcement actions and litigation and disputes, including civil investigative demands 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 annual report on Form 10-K for fiscal year 2026 and any 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 CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I'd like to begin by thanking our InnovAge colleagues, our participants and their families, our government partners and our shareholders for their continued trust and support. As we close fiscal 2026 and begin fiscal 2027, I want to spend a little more time than usual today putting our results and our outlook into a broader context. Fiscal 2026 was an exceptional year for InnovAge and a key milestone in the transformation of the company. We entered the year with clear objectives: deliver high-quality care for our participants, grow census, continue strengthening the operating foundation of the business, maintain a strong culture of compliance and translate the investments we've made over the last several years into improved financial performance. We delivered against those objectives. Adjusted EBITDA increased approximately 175% compared with fiscal 2025, and we believe we are ahead of schedule to achieve our 10-plus percent long-term adjusted EBITDA margin target. Importantly, we would have generated strong net income for the year, which was ultimately impacted by onetime legal accruals. The rate environment also developed somewhat more favorably than we anticipated during the year, which contributed to our performance. But the larger story of fiscal 2026 is the continued improvement and growing durability in the underlying business. We're operating with stronger leadership, better technology and data and substantially more discipline around how we manage medical costs, operating costs and performance. I've said for some time that the best measure for the health of our company is when employee engagement, participant satisfaction, quality outcomes, census growth and financial performance, our 5 pillars, all improve together. We believe they can and fiscal 2026 provides evidence of that. I'm incredibly proud of what our team accomplished, but I'm even more focused on what the progress of the last several years now enables us to achieve. Internally, we have begun describing the evolution of the company in 3 chapters. InnovAge 1.0 was about building the platform. The organization transitioned from its not-for-profit roots to become a for-profit and ultimately a publicly traded company. We expanded geographically, opened and acquired centers, invested significant capital and established a national PACE platform capable of serving thousands of seniors. InnovAge 2.0 was about strengthening that platform. It began during a difficult period for the company when operational compliance needed to be strengthened. Over the last 4 years, we have worked to address those issues, executed operational improvement opportunities, improved relationships with our regulatory partners, strengthened clinical and operational leadership, implemented a PACE-specific Epic EMR across the enterprise, standardized processes, invested in our people and infrastructure and developed substantially greater visibility into the performance of the business. At the same time, we returned to growth and significantly improved our financial performance. Much of that progress occurred faster and created more value in a shorter period than we anticipated when we began the work. We're now entering what we think of as InnovAge 3.0. If 1.0 is about building the platform and 2.0 is about strengthening it, 3.0 is about scaling its capabilities and capitalizing on the opportunity in front of us. Our objective is to build an increasingly sophisticated value-based care platform capable of serving meaningfully more seniors while delivering strong, sustainable performance that allows us to reinvest in the business and earn an appropriate return. This starts with our core PACE business. There remains considerable opportunity to grow census within our existing footprint, expand the capacity of our centers and diversify the channels through which eligible seniors learn about and access PACE. But 3.0 also means looking across a longer time horizon. We're strengthening our capabilities as both a payer and a provider so that we can better manage quality, total cost of care and participant outcomes. We're investing in technology and AI to improve clinical decision-making, productivity and the participant experience. We're evaluating opportunities to increase the physical and operating capacity of our existing centers. We're beginning to more actively evaluate de novo markets, M&A opportunities, joint ventures and other partnership models that could expand our reach over time. And we intend to remain energetically engaged with policymakers as they consider ways to expand PACE and potentially apply some of the capabilities of the model more broadly. Not every opportunity we evaluate will become part of our strategy, and we will continue to be disciplined about where we invest our time and capital. What has changed is our ability to look further ahead at a broader set of opportunities while continuing to execute within the core business. There's an essential point I want to emphasize as we talk about this next chapter. Our ambitions for InnovAge 3.0 do not change the foundation on which we operate. Quality of care and compliance remain nonnegotiable. PACE participants are among the most medically and socially complex individuals in the health care system. Our participants, their families, CMS and other state partners place extraordinary trust in us. We take this responsibility very seriously. The lessons of the last several years are deeply embedded in how we operate the company today. As we grow, we intend to continue investing in operations and clinical leadership, compliance infrastructure, data and monitoring and the systems necessary to identify risk and variation earlier. We will not compromise those standards. An important part of preparing for this next chapter was strengthening the operating leadership of the company. Earlier this summer, Jen Browne joined us as President and Chief Operating Officer. Jen brings significant experience leading complex multisite health care and value-based care organizations, including senior leadership roles at Optum and Strive Health. She has experience across clinical operations, quality, growth and performance improvement and understands what it takes to build scalable operating systems. Although Jen has only been with us for a few months, she has moved quickly to understand our centers, our people, our opportunities and the areas where we can continue to improve. Her addition gives us significantly greater leadership capacity at precisely the time we're asking the organization to take another step forward. Her immediate priorities include driving greater consistency across centers, strengthening center-level accountability, improving our use of Epic across the entire interdisciplinary care team, improving the participant experience and building the operating and analytical capabilities necessary to support our next phase of growth. There are several investments underway in fiscal 2027 that illustrate how we're thinking about InnovAge 3.0. Let's start with participant experience. We're investing in a more connected participant experience across the entire journey, including how participants and families communicate with us, receive information, schedule care and understand what to expect. Our participant 360 and voice of the customer initiatives, along with investments in omnichannel communication technology, enhanced integration of inbound calls, scheduling and transportation are aimed at creating a more consistent and seamless experience across our centers. Next, our technology and data infrastructure. Over the last few years, we've made substantial investments in systems, including Epic, Oracle and Salesforce. The opportunity is to make those systems work more effectively together and make the information they contain more useful to the people delivering care. At the center of the PACE model is the interdisciplinary care team. These teams continuously evaluate participants and identify opportunities for small proactive interventions that can prevent much larger clinical events. We have an opportunity to surface better information and insights directly into their workflows so our teams can make more informed decisions earlier. We also have an opportunity to get significantly more value from Epic. During fiscal 2027, we're working to expand and standardize scheduling, visit types and documentation across interdisciplinary teams. This should give us greater visibility into capacity, productivity and care delivery patterns while also strengthening the clinical and compliance oversight. The third area is artificial intelligence. We're approaching AI pragmatically and with discipline, with appropriate human oversight and accountability built into how these tools are developed, tested and used. Every use case must answer a basic question: can it help us improve care, improve the participant experience, reduce administrative burden or help operate our centers more efficiently. If it can, we test it, we measure it. And if the results justify it, we scale it. We're particularly encouraged about the potential for AI-enabled physician decision support. We recently completed pilots of 2 capabilities designed to give our clinicians better information and insights directly within their existing workflows while keeping clinical judgment and decision-making firmly with the provider. The first is an AI-enabled consultation agent designed specifically around the complexities of frailty and geriatric care. It is intended to provide our primary care physicians with on-demand clinical information and specialist-level perspectives to inform thexpect our eir evaluation of a participant. In our pilot, the tool helped physicians manage a broader range of clinical needs within the interdisciplinary care team and was associated with fewer external specialist referrals. We also piloted a medication optimization agent that reviews a participant's medication regimen in the context of their broader clinical information and surfaces potential opportunities for medication and dosing optimization for the clinician to consider. Both pilots demonstrated the concepts in a controlled environment, and we are now beginning to scale these capabilities more broadly across the organization. It's still too early to quantify their impact on quality, utilization or economics, but we're encouraged by what we've seen to date. We also have several additional AI use cases in development that we expect to pilot over time. Scheduling and transportation are other good examples. Transportation is fundamental to PACE and extraordinarily complex operationally. We coordinate thousands of trips for participants with different clinical needs across large geographic areas while simultaneously coordinating center schedules, outside medical appointments and care team capacity. We believe AI and better analytics can help us anticipate demand, improve routing and scheduling, reduce cancellations and make better use of the capacity we already have. Taken together, we expect these investments to translate into measurable improvements in the performance of the business, not just new capabilities. A better and more consistent participant experience should improve satisfaction and retention, reduce voluntary disenrollment and support stronger net census growth. Better data, analytics and clinical decision support should help our care teams intervene earlier, limit unnecessary utilization and more effectively manage the total cost of care. There's also something occurring outside of InnovAge that I believe is valuable to the long-term story. The level of federal interest in PACE feels as strong as it has been at any point in recent years. We see this developing along 2 parallel tracks. The first is the existing PACE program. There is meaningful work underway with CMS, CMMI, the National PACE Association and PACE organizations to better understand the barriers that have historically limited the growth and adoption of PACE and could responsibly allow the existing program to serve more seniors. We believe this is an important conversation. PACE has demonstrated that a fully integrated full risk model can produce strong outcomes for highly complex seniors while helping them remain safe in their homes and communities? Yet PACE continues to serve only a small portion of the population that could potentially benefit from the program. So understanding barriers to growth, whether they involve awareness, enrollment, eligibility, program requirements, development time lines or other structural issues, is essential if the country wants more seniors to have access to the model. The second track is more exploratory. There are productive conversations occurring with CMS and CMMI, both directly with individual PACE organizations and through the National PACE Association about whether some of the capabilities and attributes that make PACE successful could potentially be applied to additional senior populations. These conversations are still early. We don't know where they will lead, whether they will result in a new model or on what time line. We're, therefore, being appropriately measured about it, but we're honored to be a part of the dialogue and to provide our experience, ideas and feedback. And I think the 2 tracks should be considered together. The first question is how we strengthen the existing PACE program and responsibly remove barriers that prevent it from serving more eligible seniors today. The second question is whether elements of PACE's core model could extend to other populations. Both reflect a broader question facing the U.S. health care system. How do we care for a rapidly growing senior population with increasingly complex medical and social needs in a way that produces better outcomes and allows more people to remain in their homes and communities. Our view is that PACE organizations have an important role to play in that conversation. Earlier this year, HHS' Office of the Assistant Secretary for Planning and Evaluation released a study examining outcomes across integrated care models for individuals eligible for both Medicare and Medicaid. Among its findings, PACE participants experienced fewer hospitalizations and emergency department visits and lower mortality than comparable beneficiaries in non-integrated Medicare Advantage plans. We also had the privilege of hosting HHS Secretary, Robert F. Kennedy, Jr., at our Thornton, Colorado center, where he was able to see firsthand how an interdisciplinary team brings medical care, long-term services and supports, transportation, nutrition and social services together around the participants. We don't know where any policy discussions may lead, and our outlook does not assume any changes to the PACE program or future opportunities. But the combination of growing evidence supporting the model, an aging population, increasing pressure on institutional care and a high level of engagement from federal policymakers makes this a key moment for PACE. Let me now turn to fiscal 2027. We're targeting ending census of approximately 8,625 to 8,850 participants, representing census growth of approximately 5% to 7.5%, total revenue of approximately $1.05 billion to $1.085 billion, and adjusted EBITDA of approximately $105 million to $115 million. I think it's important to put this guidance in context. On our last call, we discussed our expectation that the fiscal 2027 rate environment would be more tempered than we experienced during fiscal 2026. We now have better visibility, and overall, the rate environment has continued to trend better than we expected when we gave initial guidance. This provides some additional support to our top line outlook. Like many states across the country, some of our state government partners are navigating meaningful fiscal pressures and the implications of our rates are not yet fully known. California and Colorado are 2 markets where we have worked with our state partners in the PACE rate setting processes, which have yet to conclude. We've incorporated what we believe are responsible assumptions into our fiscal 2027 outlook based on the information available to us today, while recognizing that the ultimate rate outcomes are not yet final. Together, California and Colorado represent approximately 70% of our census. On Medicare, we currently expect our county rate increases adjusted for the continuing transition of the V28 risk adjustment model to result in a net rate increase of approximately 1.5% to 2.0%. Ben will provide more detail on the components of our guidance. From my perspective, the main point is that fiscal 2027 gives us an opportunity to demonstrate the increasing durability of the business. We will not have all the same rate increases that contributed to fiscal 2026. Our ability to continue growing earnings in fiscal 2027 will, therefore, depend increasingly on execution. That means growing enrollment and improving retention, tightening our management of utilization and total cost of care, reducing variation across our centers and using technology and AI with the goal of operating the company more efficiently and effectively. Before I turn the call over to Ben, I want to recognize the approximately 2,500 InnovAge colleagues who made fiscal 2026 possible. Behind every metric we report is a participant whose life is affected by the care we provide. It's a senior who can remain living in his or her home and community. It's a family with greater peace of mind. It's a caregiver who knows there is an interdisciplinary team managing the complexity of their loved one's care. That is our purpose. Today, we're operating from a very different position than we were 4 years ago. We have a stronger organization, a stronger leadership team, a more capable operating platform, greater financial capacity and considerably better visibility into the business. We have demonstrated an ability to execute consistently over several years. And throughout it all, quality, compliance and the well-being of our participants remain the foundation of everything we do. We're excited about fiscal 2027 and increasingly confident in the longer-term opportunity ahead of the company. With that, I'll turn it over to Ben for more detail on the financials.

Thank you, Patrick. We are pleased with our fiscal 2026 performance. Building on Patrick's comments, I'll focus on the financial results that demonstrate the progress we've made across the business. Starting off our fiscal 2026 highlights with census. We served approximately 8,230 participants across 20 centers as of June 30, 2026, which represents annual growth of 6.3% and sequential quarter growth of 2.2%. We reported 24,520 member months in the fourth quarter, an increase of approximately 6.6% compared to the fourth quarter of fiscal year 2025 and an increase of approximately 1.9% over the third quarter of fiscal year 2026. Total revenues increased by 15.9% to $989.7 million for fiscal year 2026. The increase was primarily driven by an increase in member months coupled with an increase in capitation rate. The increase in capitation rates includes rate increases for both Medicare and Medicaid, and the increase in member months was primarily due to growth in our California, Colorado and Florida centers. Compared to the third quarter, total revenues increased by 4.0% to $262.0 million in the fourth quarter, primarily driven by growth in member months and higher capitation rates. The capitation rate increase was largely attributable to Medicare risk adjustment reconciliation and a full year Colorado Medicaid rate true-up, both recognized in the fourth quarter. We incurred $449.8 million of external provider costs during the fiscal year, a 4.3% increase compared to fiscal year 2025. The increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility and short-stay nursing facility utilization and a decrease in pharmacy expenses associated with the transition to in-house pharmacy services. The decrease in external provider cost per participant was partially offset by an annual increase in assisted living and permanent nursing facility unit costs and an increase in assisted living utilization. During the fourth quarter, we incurred $115.7 million of external provider costs, an increase of 2.2% compared to the third quarter of fiscal year 2026. The increase was primarily driven by an increase in member months. Cost of care, excluding depreciation and amortization, was $312.1 million, an increase of 16.1% compared to fiscal year 2025. The increase was due to an increase in member months coupled with an increase in cost per participant. The overall increase was driven by higher salaries, wages and benefits associated with higher wage rates, an increase in third-party fees and shipping costs associated with in-house pharmacy services, an increase in contract services, an increase in supplies and administrative costs and higher fleet costs, inclusive of contract transportation. For the fourth quarter, cost of care, excluding depreciation and amortization, increased 7.7% compared to the third quarter. The overall increase was primarily due to an increase in fleet costs, including contract transportation, an increase in supplies and administrative costs and salaries, wages and benefits due to higher wage rates. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, increased 48.2% to $227.8 million in fiscal year 2026 compared to $153.6 million in fiscal year 2025. As a percentage of revenue, center-level contribution margin increased 500 basis points to 23.0% compared to 18.0% in fiscal year 2025. For the fourth quarter, center-level contribution margin was $62.6 million compared to $61.0 million for the third quarter of fiscal year 2026, an increase of 2.5%. As a percentage of revenue, center-level contribution margin of 23.9% decreased by approximately 30 basis points compared to 24.2% in the third quarter of fiscal year 2026. Sales and marketing expenses of $34.4 million increased 21.8% compared to fiscal year 2025, primarily due to increased headcount, wage rates and marketing spend to support growth. For the fourth quarter, sales and marketing expenses increased by 13.6% compared to the third quarter of 2026 as a result of additional marketing spend and consulting services. Corporate, general and administrative expenses increased 36.4% to $166.5 million compared to fiscal year 2025. The increase was primarily due to the $36.8 million net increase in our litigation and settlement expenses, primarily related to the accrual for various legal matters, higher employee compensation and benefits expense as a result of organizational restructuring activities, executive severance, increased headcount and higher wage rates, partially offset by lower variable compensation, the year-over-year increase of consulting services expense and software license fees. For the fourth quarter, corporate general and administrative expenses decreased 56.8% to $33.1 million compared to the third quarter of fiscal year 2026. The decrease was primarily due to litigation costs and settlements recorded in the third quarter. Net loss was $0.7 million compared to a net loss of $35.3 million in fiscal year 2025. We reported a net loss per share of $0.02 compared to a net loss per share of $0.22, each on both a basic and diluted basis. Our weighted average share count was approximately 135.7 million shares for the fiscal year on both a basic and fully diluted basis. For the fourth quarter, we reported net income of $9.8 million compared to a net loss of $29.9 million in the third quarter and net income per share of $0.06, each on both a basic and diluted basis. Adjusted EBITDA was $94.6 million for fiscal 2026 compared to $34.5 million in fiscal 2025 and $24.3 million for the quarter compared to $30.5 million in the third quarter of fiscal year 2026. Our adjusted EBITDA margin was 9.6% for fiscal 2026 and 9.3% for the fourth quarter. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. Accordingly, de novo losses have decreased in fiscal year 2026 as our Tampa, Orlando and Crenshaw centers have progressed beyond the initial 24-month de novo period. We incurred $10.6 million of de novo losses in fiscal year 2026. This compares to $15.3 million in fiscal year 2025. For the fourth quarter, de novo losses were $0.3 million associated with our planned centers in California. This compares to $3.9 million of de novo losses in the third quarter of fiscal year 2026. Turning to our balance sheet. We ended the quarter with $97.9 million in cash and cash equivalents plus $43.4 million in short-term investments. We had $63.3 million in total debt on the balance sheet, representing debt under our senior secured term loan and finance lease obligations. Turning to fiscal 2027 guidance, which we included in today's press release and based on information as of today, we expect our ending census for fiscal year 2027 to be between 8,625 and 8,850 participants and member months to be in the range of 101,000 to 102,500. We are projecting total revenue in the range of $1.05 billion to $1.085 billion and adjusted EBITDA in the range of $105 million to $115 million. And we anticipate that de novo losses for fiscal 2027 will be in the range of $0.4 million to $0.8 million. I will also provide some additional color on a few of the components that comprise our guidance assumptions. Starting with revenue. As we highlighted last quarter, we are expecting a Medicare rate increase of 1.5% to 2% and low single-digit rate increases for Medicaid. As a reminder, Medicare rates are based on county-specific rates established by CMS and updated each January as well as prospective risk score adjustments that occur in January and July. Effective January 1, we will move to a 50-50 blend of the V22 and V28 payment models as part of CMS' ongoing transition to V28. The anticipated impact of this change is reflected in the guidance we are providing today. We expect fiscal 2027 to be a year focused on preserving and expanding upon the progress we've made while navigating a more challenging rate environment and making disciplined margin management a key priority. Importantly, our focus on margin discipline is intended to ensure we have the flexibility to invest in future growth opportunities while maintaining the strong operating foundation Patrick described. To support this effort, we will continue to build on our clinical and operational value initiatives while pursuing additional efficiencies across the organization, while we remain committed to delivering high-quality care and outcomes for our participants. I also want to quickly mention that our 2 Florida centers and our Crenshaw center in California have transitioned out of their de novo status. And as a result, will not be included in the calculation of de novo losses in fiscal 2027. De novo losses in the upcoming fiscal year are primarily related to Bakersfield. Overall, we believe our guidance reflects a balanced outlook that is designed to protect margins, maintain quality and support continued sustainable growth across the business. In closing, fiscal 2026 marked a meaningful step forward for InnovAge. We improved profitability, strengthened center-level performance and ended the year with a strong balance sheet. Looking ahead to fiscal 2027, our focus will be on disciplined execution. While the rate environment is expected to be more moderated than fiscal 2026, we believe continued progress in utilization management, operating efficiency and enrollment growth could position us to preserve margins and continue building shareholder value. Operator, that concludes our prepared remarks. Please open the call for questions.

And our first question for today comes from the line of Benjamin Rossi from JPMorgan.

When we think about PMPM trends for next year, you mentioned net rates being up 1.5% to 2%, Medicare up in a similar range and then Medicaid in the low single digits. Can you just walk us through some of the variables going into your PMPM assumptions and how you're factoring things like county level rates, risk adjustments and other puts and takes? And then with the potential policy-driven areas, you mentioned the V28 shift? How are you factoring those changes into your assumptions regarding risk adjustment calculations?

Yes, sure. Ben, so we can -- let me give you some highlights. So we obviously look at -- we get the Medicare county rates, and then they're adjusted for the phase-in of V28. This year, we're 10% -- well, excuse me, 10% V28, 90% the old model. Next year, it's going to be 50-50, and I believe it kicks off in January when it phases in. So we get basically half a year of the 50-50 phasing. So we've gone through and looked at the calculation about how that's going to affect us. And obviously, for PACE plans, we're impacted differently than MA plans. One of the things that we've spoken about before is what happens with dementia coding, which obviously is treated favorably under V28. And so we get a boost there because of the high prevalence of dementia among our participants. So all of that sort of factors in together to go to that 1.5% to 2% increase in the Medicare side that we've talked about. On the state rates, it's been -- it's a little bit more complicated because 2 of our states, California and Colorado, are very important to us. And the rates of California don't get finalized until a little bit later in the year. And we've got some working assumptions internally about how we think about those that factored into our budget and into our guidance. Same thing for Colorado, where really we're waiting for the final public policy adjustments there to know what the net impact is going to be like. So we've rolled all of that into our assumption about rates going forward for next year. And we think based on what we've seen so far and all the intelligence that we have today that, obviously, the rates aren't going to be as robust as they were last year. But if you think about the rate environment we're going to have this year, we think it's one that we can operate within effectively. So we look at it as being sort of a manageable rate environment for 2027, if not as robust as it was last year.

Super helpful. And I guess as a follow-up, Patrick, I appreciate your commentary on the 3 chapters for InnovAge and some of the scaling efforts as part of this third chapter. When we think about strategic growth priorities as you head into 2027, at a high level, how are you prioritizing efforts to fill and add to existing centers versus adding new centers via M&A, de novos or JV partnerships? And can you just give us an update on how you're thinking about your M&A pipeline as well?

Yes. Thanks a lot for the question. I think our focus continues to be the capacity in our existing centers. We certainly have capacity, and we're working hard to explore ways to create more operational capacity in our existing centers as well. I think when we think about de novos, I think in general, we are establishing a pretty high bar for what's an effective and appropriate de novo for us. I think -- we think the right acquisitions over a 3- to 5-year period could deliver a better return on invested capital than de novos. We certainly have a couple of markets that over the next few years, we'd like to enter. But we're also coming off a period where we had a pretty heavy de novo thrust with both centers in Florida. The Crenshaw market was essentially a de novo in many ways and then our Sacramento center. So I think we've got a pretty high bar for de novos. On the M&A side, I think that's probably where we'd be more interested in finding the right opportunity. I think we -- I think Crenshaw is a good example of buying a business that was sort of in the early stages of its growth and sort of wasn't meeting expectations. And by virtue of sort of connecting it to our platform, we've been able to control -- excuse me, grow the market significantly, and the business is performing real well. And so I think there's more there. The team is proactively approaching and reviewing everything coming to market. I'd like to believe that when a PACE program is considering a sale, we're a likely call -- as Ben mentioned, the business now is producing strong cash flows and cash conversion, and we've got a lot of opportunity on the balance sheet. But at the same time, we're going to keep a pretty high bar related to M&A as well, just given the strength of our core business and the business that we see there. So we're going to be very disciplined. But we're looking at all of the avenues as it relates to growth. And I think that's one of the things that distinguishes sort of this next chapter from the last 2 is we have the capacity, the time, the leadership expertise and capacity to really start looking more aggressively into sort of the growth side of the equation. And the better the platform, the more of a competitive advantage that, that should provide us as we explore new opportunities.

And our next question comes from the line of Matthew Gillmor from KeyBanc.

Maybe following up on the 2027 guidance discussion and particularly in the margin expansion. I think the guidance implies 10.3% adjusted EBITDA margins versus the 9.6% you reported for fiscal '26. So nice expansion there even with some of the investments you mentioned. Ben had mentioned sort of a disciplined approach towards margin management as a priority. I was hoping you could give us some flavor for what that entails. And ultimately, what is driving the margin upside in 2027, even on top of some of the investments that you've highlighted for us?

Yes. Matt, I think -- well, sort of going back to philosophically how we're approaching it, we said a couple of years ago at our Investor Day that we really thought that sort of 10% plus was what we think of as the long-term sustainable margin. And when we think what that means, it really means that, first of all, it allows our state and federal partners to get good value for the dollars that they are investing in the PACE program and it allows us to earn a good margin and give our shareholders a very good return on their investment. And most importantly, it provides more than enough funds for us to invest in the quality of our participant care and ensuring that our participants really have a top-notch experience with us. And so that philosophy that we really laid out 2.5 years ago has remained unchanged. And so when we think about what we're seeing this year, without commenting specifically on margins because the guidance sort of is what the guidance is, I think we've sort of looked at the business and said, going forward, we're getting some efficiencies out of third-party care by being mindful of what our utilization rates are. In terms of our internal cost of care, we are getting some efficiencies out of that business. And Jen Browne, who joined us recently, is really spearheading the effort to put a lot of data analytics down into the centers so we can really monitor closely the utilization and the efficiency that comes out of that area. And so we think that's going to be very beneficial to margins this year going forward. And then also, you've probably seen over the last 3 years or so, us becoming more efficient on the general and administrative line item, and we expect that trend will continue this year as well. So when you sort of think about the goal of defending to slightly improving margins and getting towards that long-term sustainable margin, it's really all 3 of those components working in concert together that will get us there.

Great. Very helpful. And then on the policy discussions that you mentioned with CMS, I think there was 2 areas that sort of stood out to me. One was reducing barriers and then also looking at adjacent populations. I appreciate these discussions sound pretty early, but I was hoping you could give us some flavor for where the opportunities are from where you stand, for example. So what are the barriers that could be removed that would make a big difference? What are the types of adjacent populations that would benefit from PACE, that sort of thing? Any details would be helpful.

Yes. Thanks for the question. I think the second part first, which is sort of the barriers to PACE. Most of the barriers center around making it easier to enroll in PACE as well as making it easier to expand and enter new markets. Those are sort of at its core, those are the -- there's variations of specific regulations that we provided feedback on that we think could be very helpful. But it's really about making it easier to enroll in PACE, building awareness of PACE, making it easier to market and build awareness to the program as well as the ability to apply and expand into new territories much more easily. So that's sort of the core. When you think about sort of the market adjacencies, I think there's just a recognition that there's a large and growing population of Medicare-only adults. So they're not dual eligible. They're Medicare only. Many of them are adults with functional impairment, and they sit upstream of PACE today. And they're not yet eligible for Medicaid, but they're already on kind of this measurable trajectory toward institutional care. And if you think about many of the models today, they're not really designed for the population that sort of sits upstream of PACE, the Medicare beneficiaries. They're not designed to manage this combination of functional needs and clinical needs in a really coordinated way. And I think what we believe and what other PACE programs believe that what is missing at sort of at scale is a model that can consistently deliver that center-based care supported by an interdisciplinary team that's accountable for outcomes, that's seeing the patients with high frequency. There's a lot of in-person engagement. So the conversations that are happening at various nodes in the policymaking and regulatory market are really asking sort of this overarching question, is there a population upstream of PACE where one could test whether an earlier center-based interdisciplinary model for these Medicare beneficiaries with functional limitations, could you change the trajectory of that functional decline, reduce acute and post-acute utilization, which benefits Medicare, reduce long-term nursing facility care, which would reduce -- would benefit Medicaid would lower the total cost of care, could slow the spin down of these populations to Medicaid, which saves both the federal government and the state government money based on how the program would be funded. So as I said, these are early conversations. We're not privy to or involved in all of the conversations that we understand are occurring. But we think there's real interest and curiosity among the policymakers about how could the PACE model of care serve a population upstream of PACE. And so we're just kind of honored to be a part of it and honored to be able to share our thoughts and ideas, but there's also great work being done by the National PACE Association and other PACE organizations on the same topics. So it is kind of an exciting time to be thinking about how the PACE model could be used to serve new populations.

And our final question for today comes from the line of Jared Haase from William Blair.

It's Christine Rains on for Jared. I'm hoping you can give some color on the pacing of census and revenues contemplated in your guidance?

I'm sorry, you broke up a little bit there, part of the question. If you wouldn't mind repeating it again.

I apologize. Just about the cadence of census and revenues that is contemplated in your 2027 guidance.

Yes. Yes. So got it, the cadence. Okay. So I guess what I would say is the thing about the business, I think we've seen over the last 2 or 3 years is when you think about census, it's become relatively predictable for us. If you go back and you take a look at the census increase over the last couple of years and you go back and make an adjustment for some of the [ LOMI ] issues we discussed last year in the first 6 months of the year, you'll see a pretty steady increase in census kind of quarter-by-quarter. And just to remind everybody, when we go through the census build or the enrollment build over the course of the year, we usually have a very good first quarter, which for us is kind of like the September quarter. The second quarter is usually pretty good. It's the third quarter where we typically see some softness, and that's related to some of the competition associated with open enrollment during that period of time. And then we sort of return to a more normalized rate of enrollment in Q4. So the way I think about it is, if I were you guys building a model or things like that, I would go back and look at the last few years, make a little bit of an adjustment for the first 6 months of last year related to the [ LOMI ] issue that we've talked about and then think about 3 quarters of relatively steady growth with a pause in the middle during our third quarter.

Got it. That makes a lot of sense. And then you've previously talked about seeing some cost benefit this year from bringing in-house certain functionalities like pharmacy. So wondering if you can put any numbers to this incremental benefit? And also if you see any other areas of care that you think it would make sense to bring in-house as of now?

We don't break out specific dollars associated with those initiatives. But I think what you've seen is you've seen a general step-up in margins in the business over the last couple of years, and that really reflects the fact that we've brought in-house things like DME and palliative care and behavioral and other things as well as our own in-house pharmacy. So I think all of those have done a couple of things for us. First of all, and probably most importantly, they've given us much more operational control over the business. So we can ensure much higher quality for our participants, and we have much more control over our operations than if we were to delegate some of those activities to contracted third parties. And then obviously, the benefit to us is we recapture some of the margin that we would have otherwise ceded to folks. So it's really showed up for us in 2 different ways. I think going forward, I think a lot of the core activities that we wanted to in-house, we probably in-house at this point. And Patrick talked about in his comments the fact that in this 3.0 version, we're sort of a little bit more of a forward-leaning organization. So we're going to be looking towards growth opportunities in the future, recognizing that a lot of the turnaround or the turnaround is complete, a lot of the operational things that we have to do, we've really satisfied over the last 8 quarters or so.

I might add to that, Ben, just the notion of we do feel that AI is one of the tools that we feel can help us get more out of the platform that we already have. So all the areas Ben mentioned, the opportunity now that we're approaching very pragmatically with a lot of discipline is how can we use AI, not for the sake of saying we're doing AI, but really through the lens of solving specific problems where we believe that technology can improve care, can improve the participant experience or just make us more efficient. And I think the clinical side of the business, all of the clinical disciplines that go into an interdisciplinary team, we're seeing a real opportunity to address variation that you can find from a distributed multisite business. There's lots of variation on what services are provided, how much of those services are authorized and ordered by our providers. And so using AI in sort of this world of clinical decision support where we're developing tools that can bring -- I think about it as sort of a specialist level of insights directly into the physician workflow and creating the opportunity to help our physicians manage more conditions within the interdisciplinary team. And when a specialist is needed, make a more precise referral to the right provider. I mean these are tools that we think could be particularly powerful in helping us manage the total cost of care. And Ben mentioned pharmacy. We've already implemented a pilot that uses AI to help identify polypharmacy issues, drug interactions and participants who might benefit from having the pharmacist more engaged. We're talking about scheduling and transportation back to the comment about growth, how can we create additional capacity inside our core business, so that we can achieve our growth targets without needing to be reliant on a de novo market entry or M&A. And we see using AI to help us in our scheduling and transportation in particular, that is going to be a big opportunity for us. So I'll just add that on a lot of what we're trying to do, what we've done in the past around bringing third-party clinical disciplines into our portfolio. Now we're going to go back behind those and ask the question, how can AI create more value? And that's sort of the path we're on right now.

This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.