Good day, and welcome to P3 Health Partners Third Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ryan Halsted. Please go ahead.

Thank you, operator, and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward-looking statements under the U.S. federal securities laws, including statements regarding our financial outlook and long-term targets. These forward-looking statements are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward-looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise these forward-looking statements. We will refer to certain non-GAAP financial measures on this call, including adjusted operating expense, adjusted EBITDA, adjusted EBITDA per member per month, medical margin, medical margin per member per month, medical margin per member per month for persistent lives and cash used. These non-GAAP financial measures are in addition to and not a substitute for or superior to the measures or financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Information presented on this call is contained in the press release that we issued today and in our SEC filings, which may be accessed from the Investors page of the P3 Health Partners website. I will now turn the call over to Aric Coffman, CEO of P3 Health Partners.

Thanks, Ryan. Good afternoon, and thank you for joining us. Today, I'll cover several key topics: the broader Medicare Advantage landscape, our third quarter 2024 results and why I'm excited for 2025. We'll go through the tangible steps we are taking to advance the initiatives we outlined in August, and this will set up P3 for success going forward. Before addressing this quarter's results, I want to provide some perspective. As you have heard from our peers and MCOs, we are in a unique time. It won't persist forever, and it will pass. What we do now to set up P3 for success coming out of this environment is a key focus of mine and our leadership team. We have a plan in place and are executing on it now. It includes $130 million plus of initiatives that will positively impact EBITDA and cash flow. The benefits will begin to be seen in Q4 and more prominently in 2025 as it is phased in. The overall sector is facing pent-up demand post COVID for health care services. It is in this type of environment that value-based care is in most need by our health plan partners. The demand for P3's value-based care platform is there, and I'm a strong believer that value-based care is the answer to bending the cost curve long term in solving our societal issues. Our Q3 report includes updated insights from our payers and a fresh perspective from our new CFO, Leif Pedersen. Regarding elevated medical utilization, we haven't seen it across the board, whether at the provider or health plan level. It's isolated whether in Part B or certain health plans that experience adverse selection via benefit design. During the quarter, we actually saw improvements in Part A costs, but like our peers in the…

Thanks, Aric. Before diving into third quarter results, a few thoughts on my transition into the organization. First and foremost, I'm thrilled to be part of the P3 leadership team. P3 is a great company with extraordinary people and tremendous upside. I was drawn to P3's affiliate model because I've seen it work well. It's a proven model to bend the cost curve. The company's smaller size and entrepreneurial culture, along with the chance to make a significant impact in transforming health care delivery, were extremely compelling. Additionally, my previous experience working with Aric and Bill and knowing the deep experience of Amir and the rest of the P3 leadership team have helped to facilitate the move. I've now been in this role for just over 2 months, and my focus over that time has been centered around 3 areas: one, gaining the comprehensive understanding of P3's financials; two, ensuring continuity across operations; and three, identifying opportunities for efficiencies. Moving to the financial information. Our third quarter top line performance was in line with our expectations, with capitated revenue of $357.7 million and total revenue of $362.1 million, representing a 26% year-over-year growth. This growth was primarily driven by 2 factors. First, our member base expanded significantly, growing by 22% compared to last year and now exceeding 128,900 members. Second, we saw a notable increase in our funding, which rose by approximately 6% year-over-year. Our medical margin was $540,000 or $1 on a PMPM basis while our adjusted operating expenses were flat on a year-over-year basis. Adjusted EBITDA loss for the quarter was $71 million or $184 on a PMPM basis. Our third quarter medical margin adjusted EBITDA results were driven by an incremental $5 million to $10 million in medical claims costs and approximately $35 million of retroactive adjustments.…

Thanks, Leif. As Aric alluded to, in many ways, we have been seeing a perfect storm of overall medical costs and utilization increases, whether due to increased demand of clinical services post COVID, plan benefit changes leading to higher costs, significant increased usage of Part B medications and CMS rule changes making it harder to manage costs. With this as a backdrop, let me spend a little more time discussing some of the main cost drivers and corresponding metrics. Over this last quarter, we have indeed seen an increase in medical expenses, especially around Part B utilization. This was driven by many factors: increased Part B drug utilization; increased outpatient specialty costs, oncology and ophthalmology to name just 2; pockets of increased emergency room use and observation utilization, especially in rural Arizona; and higher unit cost for observation status seen in all markets due to the reimbursement changes related to overnight stays, commonly referred to as the two-midnight rule. In fact, we've seen a 40% increase in emergency department costs related to the two-midnight rule while also seeing higher pass-through costs from our health plan partners for supplemental benefits like dental. Despite the pockets of increased utilization, both emergency department admits per 1,000 numbers and observation per 1,000 numbers have remained relatively flat through the first half of 2024 at approximately 380 per 1,000 and 44 per 1,000, respectively. Part A utilization has also been flat, with an admit per 1,000 rate of 153 for the first half of 2024 versus 159 for 2023. High-cost claims greater than $50,000 rose 23% year-over-year, with Part B oncological medications and treatment leading the way. Part D expenses have increased 13% during the first half of 2024, but this is in part is due to the delay in receiving Part D rebates from…

Thanks, Amir. We acknowledge that 2024 has presented significant challenges across our sector, including P3. Many of our health plan partners have emphasized more than ever before the demand for value-based care alignment with providers in order to better control medical costs and preserve margin. I am a strong believer that value-based care is the answer to bending the cost curve long term in solving our societal issues. Underpinning our near- and long-term success will rest in our ability to seamlessly serve our physician partners and their patients by focusing our investments through stratification of the opportunities. Our partners will experience a refreshed approach to executing on the model across people, process and technology. As we covered today, we are making the tough decisions and taking the necessary steps to address these issues. Our team has implemented decisive measures this quarter, and we are continuing to execute in our key areas of focus. We are confident that these efforts will lead to improved performance versus our 2024 jumping off point, and we look forward to sharing updates on our progress as we finalize and implement these actions over the coming quarters. With that, let's turn to Q&A.

[Operator Instructions] And our first question comes from Brooks O'Neil with Lake Street Capital Markets.

I guess I just have 1 basic question, which is I heard Leif describe $63 million of cash at the end of the quarter and about a $20 million cash flow deficit from operations. Can you just talk to us about how you see your capital availability to execute some of the things you've talked about doing on this call?

Yes, Brooks, thanks for the question. And just to reiterate, we did end the quarter with $63 million of cash, which supports our core operations and our strategic growth initiatives. And as you mentioned, we did experience negative operating cash flow for the quarter of about $20 million, which is consistent with kind of our 2024 run rate. We're continuing to actively monitor our cash burn rate and really focusing on optimizing working capital and driving towards that cash flow positivity. As we think about the initiatives we laid out, that will play an impact into how we look at cash moving forward and when the realization of some of those initiatives actually turn to cash. We're confident in our ability to maintain liquidity and with access to potential credit facilities and/or strategic financing options, if required.

Next question comes from Josh Raskin with Nephron Research.

I'm going to ask a similar question to Brooks there. Just I heard at the end, you're confident in your ability to maintain liquidity, including strategic financing options. Are you pursuing additional capital raise in the fourth quarter? Is this an immediate need?

No. Right now, we are not pursuing that immediately. And we are in the process of just evaluating our overall cash position in light of some of the initiatives that I just spoke about earlier.

Okay. And then second question, I heard an improvement in EBITDA off of the 2024 stepping-off point, which I believe you defined as $30 million a quarter, so something better than a loss of $120 million next year. Could you just talk a little bit more about the top line. I heard a lot of conversation around reducing risk exposure, maybe even revenues. Do you think 2025 revenues are down next year? Is that the direction that we should be thinking about?

There's going to be a few puts and takes next year as we think about revenue, as you think about kind of how we laid out our opportunities for 2025 across our payer and provider rationalization. So there will be, as we rationalize that, a slight reduction of membership that will come associated with the reduction of revenue. But to correspond and to offset that will be increases from an operating perspective and our ability to execute on our chronic condition coding and documentation.

Yes. Josh, this is Aric.

Okay. So net-net...

I would just say, I would expect there to be some revenue decrement from where we are today in aggregate because of the network and payer changes that we've made. We will further quantify that. And we won't have full numbers, obviously, until we get through open enrollment to see what growth we had in the practices that we're -- and the payers we're continuing with. But ballpark, we're looking at probably 20,000 members have been impacted by network rationalization, some of the changes we made with payers, if that helps.

Yes. No, that's super helpful. I just -- that makes more sense that you've got 130,000-ish, maybe 20,000 are going to go away. It seems sort of impossible to make that up in terms of care management coding and things like that. And then just lastly, I heard the $130 million of these potential improvement opportunities and maybe 60% enhanced chronic disease and then 25% is just kind of getting rid of bad provider rationalization and the operating efficiency. But can we just get some more specifics, maybe even on that 60% that relates to the chronic disease? Can you give us some examples of how you feel like you're bending the cost curve with immediate improvements? How much of that gets realized in 2025, just on the chronic disease, a big chunk of it?

Yes. Josh, this is Amir. So a number of things that we're looking to do and implement as we move forward, and a lot of it is when we're talking about operational efficiency is to put more boots on the ground to directly work with those providers that are driving value. So when we look at the majority of our providers that are driving value, we know they need some more tools and/or information, whether it's from a care management standpoint, education from documentation and coding. Since you already know, our coding, as we've seen it, in P3 today is decent, but has a lot of opportunity to continue to grow. As you knew from the beginning of last year, we ran overall numbers of just slightly over 1.0, 1.02, things like that, that we have significant upside on that number. In addition to that, we have opportunity to look at other people we're working with to launch information directly into the patient's charts. And that will happen in about 15% of our population with the scaling we're looking to do. So all those things should bring that value in that 60%.

And Josh, this is Aric. Just to add to that, some of these things are already in motion. And so the 15% of the population that Amir was referring to there, those are patients that we've actually gotten through with a new tool, with a point of care solution that's actually integrated into the EMR and taking data from claims as well as through an algorithm to help those clinicians, not only on chronic conditions, but also closing additional gaps in care and quality measures. So that's live, and that launched a couple of months ago. We're now up to 13 clinics that we've launched that through, and we have a scaling plan with the partner that's helping us with that work to get out into the broader marketplace. And that's ongoing. That will be through 2025. But we feel confident with their support and what we're doing here that we'll hit a substantial proportion of the patients.

And the next question comes from David Larsen with BTIG.

It's Jenny Shen on for Dave. First, just looking at the MCR, we have seen it start to come down sequentially since 4Q of last year. Just -- some of the higher costs that you mentioned for Part B makes sense to us. But why was there such a huge spike in the quarter? Why wasn't it more gradual? Just what you're seeing out there would be helpful.

Yes. So Jenny, I think some of it's just delayed information that we saw from -- especially end of quarter 1 through quarter 2, and the delay came from getting information from our plans. So when we did not have the information necessary for our plans, we were a little bit blind in seeing how some of those costs were actually escalating. So some of it is being caught a little bit behind in not knowing some of those numbers and primarily then speaking of our non-delegated plans. Obviously, where we're delegated, we have some of that information. But we did not see in our delegated lives nearly the increase that we saw in the nondelegated. So that's what kind of explains why that MCR rapidly got worse over that period of time versus what we were expecting as we were moving through from the end of first quarter.

Okay. Got it. And then just on 4Q. So we're about 1.5 months into it. And I think you also mentioned your expectation that plan benefits will be less extensive in '25, which will lead to less utilization. Just on the MCR, I'm assuming that you'll expect it to remain elevated in 4Q. But in 1Q of '25, will there be a sudden step down that we should expect?

So thanks, this is Aric. Thanks, Jenny. So the way we look at this, we have information from the plans on how they bid and what the impacts are on a PMPM basis, and that's complete for nearly every plan that we work with. Now what we don't know yet, to be able to give you specificity as to exactly what we see in terms of the numbers, is where those patients ultimately end up after open enrollment when they have a chance to make the choice every year about what plan to join. So we'll have a lot more clarity about exactly where and to the magnitude that we expect that to have an impact. However, we do expect those benefit design changes to have immediate effect, writ large across the industry from the benefit design changes that would begin in January.

[Operator Instructions] Our next question comes from Ryan Daniels with William Blair.

This is Jack Senft on for Ryan Daniels. You mentioned that you plan to enhance payer contracts and provider contracts. I'm just wondering, can you talk about this a bit more? I'm curious if this is a large percentage of your book that you plan to negotiate with? Or is it kind of a select few that make up 80% of the book. Just kind of curious if you can talk about the portion there that will kind of go through the repricing here. And then just as a quick second part. Would you look to exit relationships with payers that really weren't working with you during negotiations? Or is your kind of -- is your mind like basically made up already when you kind of enter into some of those negotiations?

Thanks so much for the question. This is Aric. And so a couple of things that I would address here. One is that, in terms of the payers themselves, there's a lot of movement around Part D. And so we are looking to change our position in Part D across the majority of our contracts and have good traction to do so. So that's number one. Secondly, we've had good responses from the plans on some of the changes that we want to make. And it's a combination of things from changes in percent of premium as an example of how we're getting better terms. We reduced the overall number of contracts that we have on the payer side. We had subscale contracts that we have with payers, and so those have already been exited. And then we had some plan partners that were exiting particular markets. Again, these were small plans overall, but they weren't necessarily strong performers, and those plans exited as well.

Okay. Perfect. Understood. And then just to follow up here, just given the shortfall this quarter and higher utilization trends, and I think you maybe just noted it in the previous answer here, but are you looking to exit certain markets? I know you said that you're looking to exit certain relationships with providers and payers. But would you look to exit a market in its entirety? Or is it kind of like a one-off basis? I'm just kind of curious on your approach there.

Yes. I think the example I'd bring up here is Florida. And Florida, for us, was a very small -- the smallest market by far. And it was in a place where everything else is on the left part of the United States, and it wasn't a place based on the scale there that we felt it was a good place to invest for our business today. And so that's an example of one where we do plan to back out of the Florida market.

No further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Aric Coffman for any closing remarks.

Yes. I just want to thank everyone for their participation today. We certainly look forward to follow-up calls and getting together with you again sometime soon. Thank you very much.

The conference has now been concluded. Thank you for attending today's presentation. You may now disconnect.